1955 Supreme(SC) 30

SUPREME COURT OF INDIA
B.Jagannath Das : B.P.Sinha : Vivian Bose
Thawardas Fherumal
Versus
Union Of India
Case No. : 260 of 1953, 12 of 1954
Date of Decision : 3/24/55

Headnote:Arbitration Act, 1940, Ss. 16(1) (c) and 30--Whether arbitrators decision final despite it being wrong in law- Error apparent on the face of the award-Jurisdiction of Courts to set arbitration right-Cases in which question of law specifically referred distinguished from cases in which decision on question of law is incidentally material-What is error apparent on face of award.

       Arbitrtion Act. 1940, S. 13-Arbitration clause confined to matter covered by written contract-Award concerning distinct and subsidiary contract-Error apparent on the face of the award.

       Conditions of S, I, proviso of the Interest Act, 1939 not fulfilled-interest awarded on ground of reasonableness of demand -error in law.

       Arbitrator not a "Court" within the meaning of the Civil Proceedure Code, 1908-8. 34 of the Code does not apply and arbitrator has no power to award interest after suit on analogy of S. 34 of the Code.

       A entered into a contract with the Dominion of India for supply of crores of pucca bricks according to a schedule. Delivery was to be at the site of the kiln. Owing to the default of the Government in not removing the burnt bricks which were ready for delivery and removal from the kilns according to the contract delay occurred with the result that several lakhs kachcha bricks were destroyed by rains. The agreement between the parties contained an express stipulation that the Government "will not entertain any claim for damages to unburnt bricks due to any cause whatsoever."

       Disputes arose about a number of matters. Clause 14 of the agreement provided that all disputes arising out of or relating to the contract should be referred to the Superintending Engineer of the Circle for the time being. There was a reference followed by an award. It was filed in the Court of a Subordinate Judge, and the contractor prayed that it be accepted and that a decree be passed in terms of it. The Dominion of India filed objections under section 30 of the Arbitration Act, 1940, and prayed that the award be set aside and alternatively that it be modified or corrected. The contractors application was registered as a suit under section 20 (2) of the Act and a decree was passed in terms of the award on 18-3-1950. The appeal to the High Court by the Union of India was allowed in part. Thereupon the contractor appealed to the Supreme Court.

       Held (dismissing the appeal}l: (1) In the face of the express stipulation Government was not liable for the loss; all it could be held

       1. From A.I.R. 1951 Pat. 201

       responsible for was for damages occasioned by the breach of its contract to remove the pucca bricks which it had undertaken to remove, that a contractor had a duty under S. 73 of the Contract Act to minimise the loss and accordingly he would have had the right to remove the bricks himself and stock them elsewhere and claim compensation for the loss so occasioned, and that, alternatively, he could have sold the bricks in the market and claimed the difference in the price.

       (2) Section 16 (1) (c) of the Arbitration Act, 1940, empowers a Court to remit an award for reconsideration "where an objection to the legality of the award is apparent upon the fact of it." This covers cases in which an error of law appears on the face of the award. But in determining what such an error is, a distinction must be drawn between cases in which a question of law is specifically referred and those in which a decision on a question of law is incidentally material (however necessary) in order to decide the question actually referred.

       If a question of law is specially referred and it is evident that the parties desire to have a decision from the arbitrator about that question rather than one from the Courts, then the Courts will not interfere, though even there, there is authority for the view that the Courts will interfere, if it is apparent that the arbitrator has acted illegally in reaching his decision, that is to say, if he has decided on inadmissible evidence or on principles of construction that the law does not countenance or something of that naturel But that is not a matter which arises in this case.

       (3) An arbitrator is not a conciliator and cannot ignore the law or misapply it in order to do what he thinks is just and reasonable. He is a tribunal selected by the parties to decide their disputes according to law and so is bound to follow and apply the law, and if he does not, he can be set right by the Courts provided his error appears on the face of the record. The single exception to this is when the parties choose specifically to refer a question of law as a separate and distinct matter. If, therefore, no specific question of law is referred, either by agreement or by compulsion, the dccision of the arbitrator on that is not final however much it may be within his jurisdiction; and indeed essential, for him to decide the question incidentally.2

       (4) Parties who make a reference to arbitration have the right to insist that the tribunal of their choice 8hall decide their dispute according to law; so before the right can be denied to them in any particular matter, the Court must be very sure that both sides wanted the decision of the arbitrator on a point of law rather than that of the Courts and that they wanted his decision on that point to be final.

       (5) A reference requires the assent of both sides. If one side is not prepared to submit a given matter to arbitration when there is an agreement between them that it should be referred, then recourse must be had to the Court under section 20 of the Act and the recalcitrant party can then be compelled to submit the matter under sub-section (4). In the absence of either, agreement by both sides about the terms of reference, or an order of the Court under section 20 (4) compelling a

       1. Speech of Viscount Cave in Kelantan Government v, Duff Development Co., 1923 A.C. 395 at p. 409 referred to.

       2. A.M. Muir & Co. v. Gordhandass Sagarmull, A.I R. 1951 S. C. 9; Heyman v.

       Darwins Ltd., 1942 A.C. 356 at p. 368 and F. R. Absalom Ltd. v. Great Western (London) Garden Village Society, 1933 A. C. 592 referred to.

       reference, the arbitrator is not vested with the necessary exclusive jurisdiction. Therefore, when a question of law is the point at issue, unless both sides specially agree to refer it and agree to be bound by the arbitrators decision, the jurisdiction of the Courts to set an arbitration right when the error is apparent on the face of the award is not ousted. The mere fact that both parties submit incidental arguments about a point of law in the course of the proceeding, is not enough.1

       Simply because the matter was referred to incidentally in the pleadings and arguments in support of, or against, the general issue about liability for damages, that is not enough to clothe the arbitrator with exclusive jurisdiction on a point of law.

       (6) Clause 6 of the agreement refers to only such cases over which the department has no control. But if the department would have lifted the bricks (this was entirely under their control) then no such loss would have occurred. Moreover, clause 6 refers only to damage and not to destruction. Damage means only partial loss; it cannot mean total destruction. The arbitrator, therefore, had no exclusive jurisdiction to award payment for katcha bricks destroyed by rain, as claimed by the contractor. The error is apparent on the face of the award. Clause 6 expressly relieves the Union Government of all liability under this head of claim and the arbitrator was wrong in awarding any sum on that account.

       (7) The same applies to the claim under the item "cost of additional wages paid to the coolies on account of non-supply of ration and cloth Rs. 51,495." Here again no specific question of law was referred. There is an error of law apparent on the face of the award. The contract contains no clause about rations and the question was not raised when the tender was accepted on behalf of the Dominion Government. It is well settled that governments can only be bound by contracts that are entered into a particular way and which are signed by the proper authority. A reference to the agreement will show that it was accepted on behalf of the Dominion Government by the Additional Chief Engineer. Any correspondence with the Executive Engineer on this point will not affect the agreement. A person cannot be bound by a one-sided offer which is never accepted, particularly when the parties intend that the contract should be reduced to writing. That is the whole point of insisting on a document. It excludes speculation as to what was and what was not agreed to however much the matter might have been raised by one of the parties during the stage of negotiation.

       The error is apparent. Facts must be based either on evidence or on admission; they cannot be found to exist from a mere intention by one side especially when they are expressly denied by the other. The inference from the facts stated above is that the contractor entered into the agreement with his eyes open and whatever his one-sided hopes may have been he was content to enter into the agreement as it stood without binding the other side to the new conditions and without even waiting to ascertain the reaction of the other side to his further proposals.

       (8) As the contractor bases solely on the contractors contentions it is evident that he failed to appreciate the fact that the Dominion Government and the Provincial rationing authorities were separate

       1. 1933 A.C.592 p. 616 relied upon.

        entitles distinct from one another. The position accordingly reduces itself to this: two persons, neither of which is a part of the Provincial Government or has any control over rationing, chose to enter into an agreement for work ill a rationed area. They insisted that their contract should be reduced to writing, and this indeed was essential, this being a contract with the Dominion Government which was incapable of contracting in any other way; they agreed upon and concluded all their terms, then at the last minute, one side raised a point about rationing but without waiting for a reply and without having the term entered in the contract, he signed the contract as it stood before the point was raised even during the negotiation. It is an error in law to hold that any contractual obligation can be inferred or implied from these circumstances.

       (9) There is still another error. If this implied agreement about rations and cloth does not spring out of the written contract but is to be inferred collaterally as a distinct and subsidiary contract, then that is not a contract to which the arbitration clause can apply. If parties choose to add a fresh contract in addition to or in substitution for the old, then the arbitration clause cannot cover the new contract.1

       (10) The following among other conditions must be fulfilled before interest can be awarded under the Interest Act, 1939: (1) there must be a debt or a sum certain; (2) it must be payable at a certain time or otherwise; (3) these debts of sums must be payable by virtue of some written contract at a certain time; (4) there must have been a demand in writing stating that interest will be demanded from the date of demand. Not one of these elements is present; so that arbitrator erred in law in thinking that he had the power to allow interest simply because he thought the demand was reasonable.

       (11) An arbitrator is not a "Court" within the meaning of the Code. Hence, no arbitrator can award interest after suit on the analogy of S. 34, Civil Procedure Code, which does not apply. Nor does the Code apply to arbitrators, and, but for section 34, even a Court would not have the power to give interest after the suit.