(1) This is an appeal by the Union of India against the order of a Sub Judge at Delhi rejecting the Government's application for setting aside an arbitration award and making the award delivered by the Umpire after a difference between the arbitrators for the payment of Rs. 3,26,251-6-3 with costs and further interest at the rate of 41/2 per cent per annum in favour of the claimant, Mr. A. L. Rallia Ram, a rule of the Court.
(2) The history of the case is as follows: In August 1946 the Chief Director of Purchases (Disposals) of the Food Department of the Government of India invited tenders for the purchase of the entire stock of American cigarettes lying with the Government. The claimant's tender for the purchase of the whole stock at Rs. 0-8-3 per packet of 20 cigarettes was accepted by the acceptance note Ex. P. 9 dated the 9th of September, 1946, the total purchase price being Rs. 38,93,933-7-9.
The stocks were lying in Assam and Calcutta and delivery was to be taken at Calcutta in five in stalemates against payment of instalments, and there is no doubt that the claimant actually paid a sum of over Rs. 17,70,000 to the Government. He actually took delivery of a large quantity of the cigarettes but owing to the peculiar conditions at Calcutta at that time when there were communal disturbances and proper arrangements were difficult he had to take delivery somewhat hurriedly and without having the opportunity for even the limited inspection which he was allowed under the terms of the contract.
He claimed in fact that the stock of cigarettes should have been properly surveyed by the Government before any deliveries were taken and that on a proper inspection of the cigarettes he found that a very large quantity of them were mildewed or in fact infected with insect or otherwise in a poor condition.
(3) His protests led to the holding of a survey by a Board appointed by the Government of the undelivered cigarettes, the result of this survey being a report to the effect that cigarettes amounting to Rs. 6,58,453-2-0 were wholly unfit for issue at all, these being classified under the heading 'A' while a quantity of the cigarettes fell into the category 'B' on which a reduction of 37 1/2 per cent in price was recommended, and a further quantity in category 'C' was recommended to be sold at 25 per cent reduction. This, however, was not acceptable to the claimant who suggested to the Food Member on the 19th of February, 1947 that a flat reduction of 50 per cent should be allowed on the stocks already taken by him as well as those still lying with the Government, or in the alternative the Government should take back from him the cigarettes of which he had already taken delivery at cost.
The Government decided to cancel the contract altogether in respect of the undelivered cigarettes and to take back from him such delivered cigarettes as were in the original packing and could be identified, and even in the case of unidentifiable stocks the contract was also to be cancelled provided that the claimant was not responsible for the deterioration during their custody with him and subject to the condition that no claim would be made by the claimant in respect of freight, storage, and landing charges incurred by him in connection with the stock taken back by the Government. These terms were accepted by the claimant except that he reserved his right to claim incidental expenses.
This led to the referring of the dispute between the parties to arbitration. The arbitration proceedings culminated in the award by the Umpire to whom the disputes were referred after the disagreement between the arbitrators dated the 30th of January 1950. The award contains a detailed discussion covering 14 pages and by it the Government was ordered to pay the contractor a sum of Rs. 3,26,251-6-3, (1) Rs. 68,833-12-3 on account of interest, (2) Rs. 1,32,417-10-0 on account of loss suffered by the purchaser with respect to 6,34,270 packets and (30 Rs. 1,25,000 on account of incidental expenses together with Rs. 4,000 as costs of the arbitration proceedings and future interest at the rate of Rs. 4 1/2 per cent from the 1st of April 1950.
(4) The Government opposed the filing of the award on grounds which gave rise to the following issues:
1. Is there any valid contract or a valid agreement of reference to arbitration between the parties?
2. Is not the defendant entitled to raise the pleas given in issue No.1?
3. Has the Umpire misconducted himself and or the proceedings?
4. Is the award void and in excess of the jurisdiction of the Umpire?
All these issues were decided in favour of the claimant and the Government's objections were overruled.
(5) The learned Solicitor General first attacked the award on the ground that it contained errors of law patent on the fact of the record. In particular it was contended that the Umpire had clearly made a mistake in respect of his interpretation of the combined effect of clause 4 of the general conditions of contract and clause 6 of the terms contained in the letter of acceptance of the tender, and also that the Umpire had clearly erred in allowing interest, which actually was not allowed as interest but as damages on the principle that after the cancellation of the contract by the Government the claimant was entitled to be indemnified for all the expenses incurred by him in connection with the contract, and these included the interest which he himself had to pay to the Bank from whom he borrowed Rs. 17,00,000 which he actually deposited with the Government, and part of which was ultimately refunded to him.
(6) It is, however, contended on behalf of the claimant that where a point of law is referred to an arbitrator for his decision the court cannot interfere even if it considers that the point has been wrongly decided. The learned Solicitor General relied on the decision of the Supreme Court in Thawardas Pherumal v. Union of India, (1955) 2 SCR 48: ((S) AIR 1955 SC 468). That was a case in which a contractor had entered into a contract with the Dominion of India for the supply of bricks and the contract contained the usual clause for referring all disputes arising out of or relating to the contract to arbitration. Disputes arose and the matter was referred to an arbitrator who gave an award in the contractor's favour. The Supreme Court found that the arbitrator in that case had in fact erred in law, and the question arose as to whether the court should interfere to set aside the award. The matter was dealt with as follows:
'In India this question is governed by section 16(1)(c) of the Arbitration Act of 1940 which empowers a Court to emit 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 specifically refereed and it is evident that the parties desire to have a decision from the arbitrator about that 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 nature. See the speech of Viscount Cave in Kelantan Government v. Duff Development Co. Ltd., 1923 A. C. 395 at p. 409. But that is not a matter which arises in this case.
The law about this is, in our opinion, the same in England as here and the principles that govern this class of case have been reviewed at length and set out with clarity by the House of Lords in Absalom Ltd., v. Great Western (London) Garden Village Society Ltd., 1933 AC 592 and in 1923 AC 395. In Durga Prasad v. Sewkishendas, 54 Cal, WN 74: (AIR 1949 PC 334) the Privy Council applied the law expounded in Absalom's case, 1933 AC 592 to India. See also Champsey Bhara and Co. v. Jivraj Balloo Spinning and Weaving Co., Ltd., 50 Ind App 324: (AIR 1923 PC 66) and Saleh Mahomed Umar Dossal v. Nathoomal Kessamal, 54 Ind App 427: (AIR 1927 PC 164).
The wider language used by Lord Macnaghten in Ghulam Jilani v. Mahammad Hassan, 29 Ind App 51 had reference to the revisional powers of the High Court under the Civil Procedure Code and must be confined to the facts of that case where the question of law involved there, namely limitation, was specifically referred. 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 if he does not he can be set right by the Courts provided his error appears on the fact of the award. The single exception to this is when the parties choose specifically to refer a question of law as a separate and distinct matter.
Reference was made to a decision of this Court in A. M. Mair and Co. v. Gordhandas Sagarmull, 1950 S. C. R. 792 at p. 798: (AIR 1951 SC 9 at p. 11) where Fazl Ali. J. quoted a passage from Viscount Simon's speech in Heyman v. Darwins Ltd., 1942 AC 356 at p. 368 where the learned Chancellor (Viscount Simon) in turn quoted from Lord Dunedin in another case. It was argued on the basis of this that if you have to have recourse to the contract to establish your case, then the dispute must fall within the arbitration clause. That is undeniable but it is not enough that the dispute should fall within the clause.
It is also necessary that the parties should define what the dispute is and agree to refer the dispute so set out and defined to arbitration, or, if they do not, that the Court should compel them to do so: See Lord Macmillan in Heyman's case, 1942 AC 356 at pp. 369 and 370. If, therefore, no specific question of law is referred, either by agreement or by compulsion, the decision 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.'
One of the cases referred to in this judgment, the decision of the Privy Council in 54 Cal WN 74: (AIR 1949 PC 334) was relied on by the lower court as a ground for refusing to interfere. The view expressed therein was that where a question of law is specifically referred to the arbitrator for decision and he decides it, it would be contrary to well-established principles for a Court of law to interfere with the award even if the Court itself would have taken a different view of the point of law had it been before it, and it is clear that this view has been accepted by the Supreme Court.
(7-8) The question therefore that arises in the present case is whether the question of law on which the Umpire Court be said to have gone wrong had been specifically referred to him. It is clear that when the contract was cancelled by the Government the claimant reserved his right to recover damages for the amount by which he was out of pocket at the time of the cancellation of the contract, and this led to the appointment of arbitrators by the respective parties.
The record of the arbitration proceedings shows that the parties treated the reference more or less as a suit in which the claimant put in a statement of claim stating facts and the legal grounds on which he based his claim and on behalf of the Government a written statement was filed in which the various points raised were replied to. This in turn was followed by a replication filed by the claimant to meet the points raised by the Government. On this, when the arbitrators met on the 1st of November 1948 the order passed on that date shows that certain issues were proposed by the counsel for the claimant and the parties agreed that the dispute should be tried on those issues which are-
1. Whether the stocks of cigarettes to be delivered were surveyed before delivery by the survey board appointed by the Government? If so, with what effect?
2. If not, how does it effect the claimant's case?
3. Whether the claimant had sufficient opportunity to inspect the goods before delivery? If not, what is its effect on the case?
4. Whether the department was competent to cancel the contract partially, that is, only with respect to goods not yet delivered but still in original packs? If not, what is the effect.
5. Is the claimant entitled to damages for breach of agreement of reasons mentioned in para 17 of the petition? If so, to what extent.
6. Is the department debarred from relying on clause 11 of the sales letter for reasons mentioned in para 18?
7. Is not clause 4 of F. D. M. 70 repugnant to clause 6 of the sales letter? If so, can the Government rely on it?
8. If issues 6 and 7 are found against the claimant, what is the effect of clause 4 of F. D. M. 70 and clause 11 of the sales letter on the case?
9. Is the claimant entitled to damages.
(a) for the stocks left with him.
(b) for the stock received by him and returned to the depot after cancellation of the contract? If so, to what extent?
10. Is the claimant entitled to damages for the Government's failure to give him delivery in time of the goods sold to him at Lahore on 11-9-47 so as to enable him to remove the goods to a safe area? If so to what extent?
It will be seen that out of these issues No.5 of to 8 clearly covered the question of interpreting the conditions contained in the acceptance letter along with clause 4 of the general conditions of the contract and the effect of any inconsistencies which appear to exist between them on which it is alleged that the Umpire has gone wrong.
The question thus arises whether, when immediately on entering on the reference the arbitrators required the parties to file formal pleadings on matters of fact and law, and then proceeded to frame issues themselves, or to adopt issues framed by agreement between the parties involving purely legal issues, the points of law raised in these legal issues could be said to be specifically referred to the arbitrators, or whether in such circumstances these legal points could be said only to arise incidentally and on this point the judgment of the Supreme Court in Pherumal's case, 1955-2 SCR 48: ((S) AIR 1955 SC 468), is not very much, enlightening, since I have been unable to discover from it what was the course of the proceedings before the arbitrator and whether at the outset formal issues were struck including issues purely on points of law.
In Champsey's case, 50 Ind App 324: (AIR 1923 PC 66), the arbitration proceedings arose out of a pending suit in which are parties filed an agreement to refer to arbitration the outstanding matters in the suit and so there can be no doubt in that case that the matters of law and fact already raised in the suit were referred to arbitration. This case certainly appears to be an authority for the proposition that for a point of law to be referred to an arbitrator it is not necessary that the point of law must be specifically mentioned in the reference itself, which in that case was by an ad hoc agreement arrived at by the parties to the suit.
(9) It appears to be a matter of difficulty to decide in exactly what form a point of law has to be referred to arbitration for the award to be binding on the parties and not liable to be upset by the Court on the ground of error. In Hitchins v. British Coal Refining Processes, Ltd., (1936) 2 All E. R. 191, a firm of consulting engineers entered into an agreement with the firm, British Coal Refining Processes, Ltd., to act as consulting engineers in connection with a certain coal refining process.
A dispute arose on account of the fact that the coal refiners considered that the consulting engineers should attend every day at the site where the plant was being created, and the consulting engineers considered that this was no part of their duties, and the coal refiners terminated the contract. The consulting engineers contended that the termination of the contract was unjustified and under an arbitration clause in the agreement between the parties the matter was referred to arbitration. In the arbitration proceedings pleadings were delivered.
The consulting engineers claimed damages for the termination of the agreement which they alleged was unjustified while the coal refiners justified the termination of the agreement on the ground that it was the duty of the consulting engineers to attend the site every day and they had refused to do so and also on the ground that they had been negligent. There was also a counter claim for damages by the coal refiners for alleged losses sustained by reason of this negligence.
The arbitrator by his award decided that the agreement had been terminated on insufficient grounds and the consulting engineers were entitled to damages on this account, but at the same time he held that they had been guilty of negligence in respect of certain matters and that the Coal Refiners were entitled to an unspecified sum as damages in respect of this without specifying the damages due to either party he awarded the consulting engineers a sum of 1,316,17s.0d.
(10) The Coal Refiners sought to have the award set aside on the ground of error of law apparent on the face of the record. It was held by Talbot and Macnaghten, JJ, that the right to terminate the agreement because the applicants refused to attend daily was a question specifically submitted to the arbitrator and the court could not interfere with his decision, even if the question was a question of law. This decision certainly appears to support the view that a question of law is referred to an arbitrator as such when it arises out of the pleadings submitted by the parties to the arbitrator.
(11) In 1933 AC 592, the House of Lords set aside an arbitration award on the ground of an error of law appearing on the ground of an error of law appearing on the face of it and emphasized that the decision of an arbitrator on the point of law was only final if the point had been specifically referred to him for his decision, but it was held that in that case a point of law on which the arbitrator had erred had not been specifically referred to the arbitrator and only arose incidentally in connection with one of the points referred.
It is, however, clear even in this case that it is not always easy to decide whether a point of law has been specifically referred or not, since the decision of their Lordships reversed the decision of the Court of Appeal, which had held that the award was not liable to be set aside on this ground. On the whole I am of the opinion that where disputes arise out of the contract and the parties refer these disputes to arbitration it must be held that specific points of law have been referred for decision by the Arbitrator in a case where the parties appear before him arrayed more or less as plaintiff and defendant and then, after pleadings have been filed by the parties as if it were a suit, specific issues are struck any of which embody pure points of law. I am therefore of the opinion that in the present case even if it could be shown that the Umpire had not interpreted the conditions of the contract between the parties correctly his award is not liable to be set aside on this ground.
(12) The other main point argued before us was that the award could not stand because the whole of the arbitration proceedings were without jurisdiction. The argument which was based on the plea that the original contract between the parties was not entered into in accordance with the relevant provisions of section 175 of the Government of India Act of 1935 and consequently there was not valid contract between the parties in the first instance from which it followed that there was no valid agreement to refer any disputes between the parties to arbitration. Section 175(3) of the Government of India Act reads-
'All contracts made in the excise of the executive authority of the Federation or of a Province shall be expressed to be made by the Governor General, or by the Governor of the Province as the case may be, and all such contracts and all assurances of property made in the exercise of that authority shall be executed on behalf of the Governor-General or Governor by such persons and in such manner as he may direct or authority.'
(13) The contract in the present case was entered into in the usual way for a contract of this kind, namely the appropriate department of the Government of India, in this case the Food Department, invited tender for the purchase of the stock of American cigarettes through the Chief Director (Disposals) by means of advertisements, and then, after it had been decided to accept the tender of the present claimant, the contract was concluded by a letter of acceptance from the Chief Director of Purchases (Disposals) containing certain conditions and also referring to the general conditions of contract contained in the document described as F. D. M. 70.
It is not contended that the Chief Director of Purchases (Disposals) was not authorised to enter into the contract on behalf of the Governor-General but it would seem that in the letter of acceptance it was not specifically stated that the contract was being entered into the name of the Governor-General.
(14) Apart from any legal technicalities I cannot allow the raising of this point to pass without observing but I think it is deplorable on the part of the Government to fall back on a technical plea of this kind in a case like the present one. Here the Government invited offers for the purchase of a quantity of cigarettes which evidently were almost entirely unfit for subsequent resale or consumption. It must be presumed that these offers were invited in ignorance of the state of the stock of cigarettes which were to be sold, though such ignorance is hard to condone.
Be that as it may, the resulting state of affairs proved so unsatisfactory that with very little pressure the Government itself cancelled the contract and returned a large sum of money to the claimant which had been paid by him, and took back goods already delivered to him. The question still remains whether he was entitled to recover damages for the losses sustained by him on the part of the contract which was actually carried out, and the disputes on this point were referred to arbitration. The arbitration proceedings and the subsequent proceedings before the umpire last until the end of January 1950.
Only, however, after the claimant had applied to the Court for an award in his favour to be made a rule of this Court did the Government fall back upon the technical plea of a defect in the contract which rendered the contract and consequently the agreement to refer any dispute arising out of the contract to arbitration invalid. Even the Solicitor-General did not appear to me to be too happy in advancing this plea on behalf of the Government, and I doubt whether he would have done so if the matter had not been raised and discussed in the lower court.
(15) One way in which the lower court has met the point is that it has held that it is even doubtful whether there is any technical defect in the form of the contract. The letter of acceptance was addressed from the Department of Food, Government of India in the name of the Director General of Purchases and Disposals, and as I have said the letter also referred to the general conditions of contract contained in F. D. M. 70. On page two of this document the term 'Government' is defined as follows:
'The term 'Government' means the Governor-General for India in Council and when the context so admits his successors and assigns and the Government of India and any officers acting for him or them.'
It can therefore be argued with some plausibility that the acceptance letter was issued in the name of the Governor-General.
(16) Apart from this however a more or less similar point arose before Khosla J., and myself in M/s. Meerut Niwar and Metal Works, Delhi v. Union of India, F. A. O. No. 87-D of 1955, D/- 4-11957. In that case also a contract relating to the sale of disposal goods was entered into in 1946 and after disputes had arisen there was a reference to arbitration in October 1947. The arbitration proceedings dragged on until 1952, when the arbitrators disagreed, and the matter was referred to the Umpire appointed by the arbitrators being the proceedings started.
After a number of hearings had taken place before the Umpire a similar point was raised on behalf of the Government to the effect that the contract and consequently the arbitration clause was void and unenforceable. The contract had been entered into by a similar acceptance letter and in the circumstances Khosla J. and I were not prepared to hold that the contract as a whole, and consequently the arbitration clause, were void simply because the letter of acceptance of the tender did not contain the words printed or rubber-stamped, 'On behalf of the Governor-General', below the signature of the competent offices, and in any case we held that after the Government had allowed the protracted proceedings to go on before the arbitrators and had appeared some times before the Umpire the Government was estopped from raising an objection of this kind. I still consider that this view is correct and I accordingly dismiss the present appeal with costs. Counsel's s fee Rs. 500.
Mehar Singh, J.
(17) I agree.
(18) Appeal dismissed.