Judgment

CHANDRACHUD, J. :- The respondents Rampur Distillery & Chemical Co. Ltd. - supplied to the appellants - Union of India - a large quantity of rum (presumably, for the use of Defence personnel), The rum was found not to conform to the quality stipulated and was therefore rejected by the appellants. The appellants then cancelled the contract and forfeited the entire security deposit of Rs. 18,332/- which was kept by the respondents for the due performance of the contract. On the respondents disputing the right of the appellants to forfeit the security deposit, the dispute was referred to an arbitrator who held that the appellants were entitled under Section 74 of the Indian Contract Act to the award of reasonable compensation only, which the arbitrator fixed at Rs. 7,332/-. He directed the appellants to refund the balance viz. Rs. 11,000/- to the respondents.

2. The respondents filed a petition under the Arbitration Act, 1940 for making the award a rule of the court. The appellants filed their objections thereto contending that there was an error of law apparent on the face of the award as they were entitled to forfeit the entire amount of the security deposit. This contention