UNION OF INDIA versus A. L. RALLIA RAM

196J Clllllr•I Bo.k •f l•diis Ltd, •• P. S. · Rajogopalan Gajmdratatkat J,

1969 .dpil 19.

. SUPREME COURT REPORTS [1964]VOL.

accordance with law. There would be no order as to costs.

Appeals allowed. Cases remanded.

UNION OF INDIA

A. L. RALLIA RAM (B. P. SINHA C. J., J.C. SHAH and . N. RAJAGOPALA AYYANGAR JJ.)

Arbitration-Tender for purchase of goods-Acceptance of -0.lause for reference to arbitration-If binding on Government -Reference of specific question of law-Arbitrator framing $1$Ues-Parties agreeing to iasuea being decided-If amounts to reference of specific question of law-Setting aside of award-Brror on the face of the award-Government of India Act, 1935, (<ho. 5 Oh. 2.), a.175 (3). .

In 1946, the Chief Director of Purchases (Disposals), Food Department, Government .of India, invited tenders for purc!iasing war surplus Amedcan Cigarettes. The respondent submitted tender offering to purchase the entire stock. This tender was accepted by letter with which was enclosed Form containing the general conditions of contract including clause for arbitration. The respondent took delivery of29,93, 597 packets and paid Rs. 17,78,573/6/4 for them. On inspection some of the cigarettes were found to be mildewed and unfit for use. Ultimately, the Government decided to cancel the contract with respect to the undelivered cigarettes and. offered to take back from the respondent cigarettes which "wei:e in their original packing and could be identified, subject to the condition that no claim will be made by the respondent in respect of freight, storage, rents, charges or any other expenses incurred by him in respect of the cigarettes taken back.". The respondent accepted this offer reserving his right to claim incidental expenses. He returned 24,13,500 packets and Government refunded Rs. 14,54,215/7/- to him. Thereafter, each party, in accordance with the arbitration clause, appointed an arbitrator

and the arbitrators entered upon the reference. The parties filed their statements of claim and written state-ments. Issues were framed and the parties ogreed that the di;pute between them be tried on those issues. As the arbitra· tors were unable to agree upon the decision they appointed an umpire. The umpire gave an award awarding to the rc,pon-dent Rs. 1,32,417/10/· for loss suffered in respect of cigarettes not returned, Rs. 1,25,000/· for incidental expenses and Rs. 68,833/12/3 as interest. The respondent applied to the Subordinate Judge for filing the award and the appellant applied for setting aside the award. The Judge ordered that decree be issued in terms of the award. In appeal the High Court confirmed the order. The appellant contended that there was no arbitration agreement as the contract was not executed in accordance with s. 175 (3) of the Government of India Act, 1955, and that there was error of law apparent on the face of the award. The respondent contended that the agreeing by the parties to trial of the issues raised amounted to reference of specific questions and the ward on such reference could not be set aside even if there was error apparent on the face thereof.Held that there was binding arbitration agreement between the parties and the arbitrators had jurisdiction to enter upon the reference. The letter of acceptance of the tender signed by the Dfrector of Purchases fulfilled all the requirements of s. 175 (3)· of the Government of India Act. Section 175 (3) did not require the execution of any formal document nor was there any such direction by the Governor-General in respect of sale of disposals goo.ds. The goods offered to be sold belonged to the Government oflndia and all the action in respect thereof wa., taken by the Government and in the name of the Government. There was thus binding contract between the . parties which contained an arbitration clause, Further, the appellant was not precluded from challenging the existence of binding arbitration agreement on account of its h.1ving submitted to the jurisdfctbn of the arbitrators and on account ,,fits not having raised the objection before t.hem, •s the jurisdic· tion of the arbitrators depended upon the existence of such an agreement.

Seth Bikhraj Jaipuria v. Union of India, (1962] 2 S.C.R. 880, referred to.

Held further, that agreeing to trial of the dispute on the issues raised by the arbitrators ·could not be regarded as reference of specific questions of law implying an agreement b<twem the partie• that they intenc ~d to give up their right to challenge the award before the court even if the aw~rd w4s

Union of lndi• v. A. L. Ralli• Ram

1963 .-Un.iffll •J lniia ... L. RtJl/ia

A. L. RtJl/ia Ram

vitiated cm account of an error apparent on ·the face thereof. The parties merely agreed to have their differences adjudicated on the issues raised, and not to submit the i"ues raised for adjudication. Besides, the agreement before the arbitrators could not amount to fresh arbitration agreement independent of· the criginal agreement, for to be valid and binding the agreement had to satisfy the requirements of s. 175 (3) of the Government of India Act, 1935. The appellant was entitled lo attack the award on the ground of error apparent on the face thereof.

Champuy Bhara and Company v. Jivraj Ballqo Spinning and Weaving Company Ltd., (1923) L.R. 50 I.A. 32+, Seth 1'/iawarda• Pherumal v. Unio11 of India; [1955] 2 S.C.R. +8, F.R. Absalon& Ltd. v. Great Wultm (London) Gardon Village Socit.ty, [1933] A.C. 592, M/1. Alopi Perahad & Sona Ltd. v; Union of India, [1960] 2 S.C.R. 793 and Durga Pro1ad Ohamllria v, Sewkiiliendlll Blsalt•r, A.I.R. ( 1949) P.C. 334, referred to.

Held further that there was error of law on the face of the award in so far as it awarded incidental exprnsesand interest to the respondent and this part of the award had to be set aside. Incidental expenses were awarded in respect of expenditure by the respondent on advertisement, publicity, storage, agency commission and other overhead expcnse11 incurred after the respondent took delivery of the cigarettes, i.e. when he had become owner of the good•. The expenditure was in respect of his own goods and the re1pondent could not claim it as compensation for breach of warranty in respect of the goods retained. Interest was awarded on all the moneys paid by the respondent to the Government with respect to the goods returned from the date of payment to the date of return. Such interest was payable neither under s. 61 (2) of tlie Sale of goods Act as it was not claim for refund of sale price nor under the Interest Act. In the absence of any usage, contract, express or implied, or of any provision of Jaw to j11stify the award of interest, interest cannot be awarded by way of damages. In respect of that part of the contract which was abandoned, if any liability to pay interest had arisen it was for the respondent to claim it in settling the terms of cancellation of the contract. Interest could not be awarded on equitable grounds.

Bengal Nagp'Ur Railway Company Ltd. v. Ruttanii Ramji, (1937) L.R. 65 I.A. 66 and Maine and New Brunswick Electri-cal Pou:er Company v. Hart, [1929] A.C. 631, referred to.

Civil.

CIVIL APPELLATE jURISDTCTfON : Appeal No. 414 of 1961.

3 S.C.R. SUPREME COURT REPORTS 107

Appeal from the judgment and decree dated

April 17, 1958 of the Punjab High Court in F.A.O. No. 75of1951.

Bishan Narain, Naunit Lal and R.N. Sachthe11, for the appellant.

G.S. Pathak, Anant Ram Whig, B. Datta and Grnn Singh Vohra, for the respondent.

1963. April 19. The Judgment of the Court wu delivered by

SHAH J.-This is an appeal with certificate under Art. 133 (l) (c) of the Constitution against the order of the High Court of Punjab in First Appeal No. 75 of 1951 confirming the order of the Subordi-nate judge, Delhi, refusing motion to set aside ar award directing payment by the Union of India ol Rs. 3,26,251/6/3 with costs and future interest 4~ per cent to the respondent.

In August, 1946, the Chief Director of Pur-chases (Disposals), Food Department, Government of India, invited tenders for purchasing the stock of American cigarettes lying in Calcutta, Karachi, Delhi and Agra. The respondent submitted his tender offering to purchase the entire stock at uni-form rate of Re. -/8/3 per packet of 20 cigarettes. The total value of the stock offered at that rate amounted approximately to Rs. 39 lakhs. The Government of India accepted the tender. The acceptance letter (with which was enclosed Form F. D. (M) 70 setting out the general conditions of contract) was signed by the Chief Director of Purchases. Condition No. 13 in Form F. D. (M) 70 contained an arbitration clause :

"In the event of any question or dispute ari-sing under thtse conditions or any specii1l

Unio111j I1tiia y, A. L. Ro/Ii• /!am

.;,.,,, '.

I9G3 Unien •.. of India ,f L. !141/ia R•m Shah J.

HlS SUPREME COURT REPORTS [1964'] VOL.

Conditions of Contract or in connection with. this contract (except as to any matters the decision of which is specially provided for by these conditions) the same shall be referred to the award of an arbitrator to be nominated by the Chief Director and an arbitrator to be nominated by th.e Contractor or in the case of the said arbitrators not agreeing, then to the award of an Umpire to be appointed by the arbitrators in writing before proceeding on the reference and the decision of the arbitrators, or in the event of their not agreeing of the Umpire appointed by them shall be final and conclu-sive x x x x."

The respondeRt took delivery of 29,S3,597 packets of cigarettes and paid Rs. 17,78,573/6/4 but on inspection he found that some cigarettes were mildewed and unfit for use. Board of Survev appointed by the Government of India to inspect the undelivered stock reported that cigarettes of the value of Rs. 6,58,453/- were wholly "unfit for issue," for the remaining cigarettes the Board recom-mended reduction in price at certain rates. The respondent did not agree to accept the goods on the revised terms reported by the Board and requested the Government of India to agree to uniform reduction of 50 per cent in price on the cigarettes delivered to him as well as those still lying with the Government. The Government of India thereafter decided to cancel the contract in respect of the undelivered cigarettes, and offered to take back from the respondent, out of the stock of cigarettes delivered such as "were in their original packing and could be identified," subject to the condition that no claim will be made by the respondent in respect of freight, storage, rents, charges or any other expenses incurred by the respondent in connection with the cigarettes taken back by the Government. The· respondent accepted the offer made by the

Government, reserving his right "to claim incidental expenses." 24,13,500 packets of cigarettes in the original packing were then returned by the respon-dent and between June 13, 1947 and February 8, 1948, Rs. 14,54,215/7/- were refunded to him by the Government of India.

On June 26, · 1948 the respondent addressed

letter to the Director General of Disposals intima-ting that he had appointed M. W. Lewis as arbi-trator on his behalf in accordance with cl. 13 of the general conditions of F. D. (M) 70 and called upon the Director General of Disposals to appoint his arbitrator. By his letter dated July 7, 1948 the Director General informed the respondent that the Government of India had appointed Bakshi Shiv Charan Singh as their arbitrator, reserving fu II liberty to take all pleas before the arbitrator inclu-ding the plea that no dispute between the parties which could be referred to arbitration survived.

The arbitrators entered upon the reference but could not agree upon decision, and the dispute was referred to an umpire. The umpire by his award dated January 30, 1950 awarded to the respondent Rs. 1,32,417 /I 0/-for loss suffered in r'espect of the 6.34,270 packets of cigarettes not returned by him; Rs. 1,25,000/-for incidental expenses; and Rs. 68,833/12/3 as interest. The umpire accordingly awarded against the Union of In::lia Rs. 3,26,251/6/3 and future interest and costs of the arbitration. The respondent applied to the Subordinate Judge, Delhi for filing the award under s. 14 of the Arbitration Act, and the Union of India applied for an order setting aside the award. It was contended, inter alia, by the Union of India that there was no legally binding contract between the Union and the respondent, for the acceptance note was not

u.w. " lnii• v. A. L, l!lillic l!.m Sio.i. J.

Utjion of. India v. A. L. Rallia Ram Shah J,

signed on behalf of the Governor-General of India, and the entire proceeding· including the appoint-ment of the arbitrators and the umpire was vitiated for want of compliance with s. 175 (3) of the Goyc:rnment of India Act, and that io any event the award contained errors of law apparent on its face. The Subordinate Judge, refused the motion for setting aside the award and ordered that decree be issued in terms of the award. In appeal against the order refusing to set aside the award, the High Court of Punjab confirmed the order.

Two questions arise for determinatio'l in this :-·

appeal :-

(I) Whether the award is liable to be set aside on the ground that there was in existence no valid arbitration agreement in confor-mity with s. l 7-~ (3) of the Government of India Act, 1 \135 which authorised the umpire to make his award ; and

(2) whether the award is liable to be set aside on the ground that it is erroneous on the face thereof.

The letter accepting the tender dated Septem;;

ber \l, I 941i issued under the signature of the Direc• tor of Purchases recited that the tender submitted by . ·the respondent was accepted to the extent shown in the schedule attached to the letter and subject to the special terms and conditions in the letter from the Chief Director of Purchases, and the' general condi· tions of contract in Form F. D. {:If) 70 which ac-companied that letter. The general conditions of contract by the first clause defined •Government' as meaning "the Governor-General for India in Council and when the context so admit•; his succes-sors and assigns and the Government of India and officers acting for him or them:" By cl. 2 it waa

tor of Purchases recited that the tender submitted by .

provided that the Governor-General for India in Council was not bound to accept the highest or any tender or to assign reasons for non-acceptance. The other clauses prescribed conditions for payment of price, state of goods, risk, delivery, liability, failure to pay price and failure to take delivery after pay-ment, recovery of sums due, etc. By cl. 13, the arbitration clause was incorporated as term of the contract. Acceptance of the tender was therefore subject to the special conditions in the letter of the Chief Director of Purchases and the ger:eral condi-tions in F. D. (M) 70, and in case of conflict special conditions were to prevail over the general conditions.

Did the terms of the acceptance letter which formed the contract between the parties comply with the requirements of the Government of India Act, 1935? Section 175 (3) provided :

"All contracts made in the exercise of the executive authority of the Dominion or of 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 exe-cuted on behalf of the Governor·General or Governor by such persons and in such manner as he may direct or authorise." ·

The section was in terms mandatory. Before liability binding the Dominion of India could arise, the contract had to be expressed to be made by the Governor·General, if it was made in exercise of the executive authority of the Dominion, and it had to be executed on behalf of the Governor· General, and by such persons and in such manner as he directed or authorised. This Court in Seth Bikhraj Jaipuria v. Union of India ('), held in dealing with the validity of contract which did not conform to

(I) [1962) 2 S, C. R, 880;

lffiJ

lt•i111 •I Iltii•

y, .t. L. R•lli< R.., Slid J.

Ulliun of 'India •• '4. L. Ifalli• l!am Shah J.

the requirements of s. 175 (3) of the Government of India Act, that the provisions of s. 175 (3) were mandatory and not directory and if the contract did not conform to the requirements prescribed by s. 175 (3), no obligation enforceable at law flowed therefrom.

The authority of an arbitrator depends upon the authority conferred by the parties by agreement to refer their differences to arbitration. By s. 2 (a) of the Arbitration Act, 1940 "arbitration agree· ment" means "a written agreement to submit present or future differences to arbitration, whether an arbitrator is named therein or not." writing incorporating valid agreement to submit differences to arbitration is therefore requisite : it is however not c0ndition of an effective arbitration agreement that it must be incorporated in formal agreement executed by both the parties thereto, nor is it ·required to be signed by the parties; There ·must be. an agreement to submit present or future differences to arbitration, this agreement must be in writing, ·and m·ust be accepted by the parties. Clause 13 in Form F.D. ( M) 70 fulfils all these requirements. But the Dominion of India being party to the arbitration agreement, to be binding the agreement had also to conform to the requirements of s. 175 (3) of the Government of India Act, 1935, for an a~bitration agreement is contract within the meaning of the Government of India Act and it must, to bind the Dominion of India, be made in the form prescribed by that section. The question which then falls to be determined is whether the letter accepting the tender of the respondent conformed to the requirements of s. 175 (3) of the Government of India Act.

Section 175 (3) does not in terms require that

· formal document executed on behalf of the -Dominion of India, and the other contracting party,

s:c.R.. SUPREME COURT REPORTS -

- -----~- ~--.-~· -

.· ' '. ' ' -' -\ . alone is effective. In the absence of any direction by the Governor-General under s. 175 (3) of the · Government of India Act prescribing the manner valid contract may resu It from correspondence if the requisite conditions are· fulfilled. The contraets for sale of "W ar·disposal"-goods were not directed by the Governor-General to . be made by formal document· executed on behalf ·of · the Governor· General as well as by the~ purchasing. party .•. Itis true thats. 175 (3) uses the expression . "execfrted" but that does not by itself contemplate executi6n0fa formal contract by the contracting parties: tender for purchase of goods in pursuance of- an invitation issued by or on behalf of the . Governor-General c)f India and acceptance in writing which is expressed to be made in the name of the Governor-General and is executed on his behalf by person .authorised in that behalf would conform to the requirements ofs. 175 (3). ; · · . . "

· ~um·~~·o11~,~.

:v• .. ~ ;

A. L, R•lli• /lam

· . The goods offered to be sold. belonged . to the Gcivernment of India. The tender notice ·was also issued by the Government of India, .Depai-tment'of· Food. _ The title of the notice was "Tender Notki: issued by the Gcivernment of India, Department of Food (Division .III), New 'Delhi." The name of the authority issuing the tender notice was "Govern· rnent of India, Department of Food (Division III), office of the Chief. Director of Purchases, Jamnagar House, New Delhi." By cl. 9. delivery was to be [made, ei site the Government agreeing to afford - r assistance for movement to the. extenffeasible, and :·by cl .. 11 import· duty on the . cigarettes was to be . paid by . the Government. Clause 6 provided . that the stock. of cigarettes to be delivered 'will be surveyed by the Survey Board .· appointed hy. the · Government of India and the , decision of the.Board. shall be binding. on _ the tenderer.. In the letter dated August · 21, 1946, submitting his tender the respondent stated th'at he . 'was ·williirg - tO offer_ .

(htiorJ •/ In.Ji• •• .4 L. Rallin Ram Shh J.

rate of Re.·/8/3 per packet only on the. condition that the Government gave "a guarantee not to undersell the cigarettes at any stage." It appears that the' respondent had discussion with the Chief Director on September 3, 1946, and certain terms were agreed upon, which were to be incorporated in the acceptance letter.· In his letter dated September 4, 1946, the respondent set nut these terms. These terms clearly show that the Govern-ment undertook certain obligations, such as appoint-ment of Survey Board, if the goods were rejected on the ground that they were unfit for consumption, issue of separate delivery letters for each Depot to facilitate delivery, and an assurance that the Government shall tender help in getting railway priority and other transport facilities in the dispatch of goods lying at the various depots, undertaking transportation from the Assam Depot to Calcutta at the risk and cost of the Government. These conditions were incorporated in the acceptance note issued by the Chief Director of Purchases. The acceptance note is also headed "Government of India, Department of Food. (Div. III) New Delhi" and refers to the obligations of the Dominion in els. 6, 9, 10 and by cl. 13 made the special conditions prevail over the general conditions which were mcorporated in the contract. The correspondence between the parties ultimately resulting in the acceptance note, in our judgment, amounts to contract expressed to be made by the Government and therefore by the Governor-General, because it was the Governor-General who had invited the tender . through the Director of Purchases, and it was the Governor·General who through the . Chief Director of Purchases accepted the tender of the respondent subject to the conditions prescr.ibed therein. The authority of the Chief Director of Purchases to con· tract for sale of "War-disposal" goods and sign the contract is not denied. The Chief Director of Pur-chases has subscribed his signature in his official

designation and he has not stated in the description that the contract was executed on behalf of the Governor-General, but on fair reading of the contents of the letter, in the light of the obligations undertaken thereunder, it would be reasonable to hold that the contract was executed on behalf of the Governor-General. No rules made by the Governor-General have been placed Qefore the Court showing that in executing contract for the sale of "War-disposal" goods, the officer authorised in that behalf must describe himself as signing on behalf of the Governor-General of India.

The High Court held that the Government of India having agreed to refer differences to arbitration and having taken part in the proceeding before the arbitrators and the umpire, had waived the objection as to the illegality of the contract and could not therefore raise any such objection in an application for setting aside the award. We are unable to agree with that view. The requirements of s. 175 (3) of the Government of India Act are mandatory, and the fact that the Government of India did not contend before the arbitrator that there was in law no arbitration agreement on which the arbitrator was competent to act would not invest the arbitration agreement with any validity. It i~ from the terms of the arbitration agreement that the arbitrator derives his authority to arbitrate: if in law there is no valid arbitration agreement, the proceedings of the arbitrator could be unauthorised. Every contract to bind the Government must comply with the requirements of s. 175 (3) of the Government of India Act, 1935, and waiver will not preclude the Government from pleading absence of contract in consonance with the law. An award being decision of an arbitrator whether lawyer or layman chosen by the parties, and entrusted with power to decide dispute submitted to him is ordinarily not liable to be challenged on the ground that it is

U ninn of !Ult v. A. l. llallic I• n ---. $ha\ J

Vni~11 of Indi1 v. A. L. Rsllia H•m .S:As/i J.

i 76 StJi>RE?\1E COURT REPORTS [1964] vet.

erro11eous.

In order te make ar1'itration ei'~ctive

and the awards enforceable, machinery is devised for lending the . assistance of the ordinary coutts. The Court is also entrusted with power to modify or correct the award on the ground or-imperfect form or clerical errors, or decision on questions not referred, which are severable from those referred. The Court has also power to remit the award when.it has left some matters referred undetermined, or when the award is· indefinite, where the objection to the legality of the award is apparent on the face of the award. The Court may also set aside an award on the ground of corruption or misconduct of the arbit-rator, or that party has been guilty of fraudulent concealment or wilful deception. But the Court cannot interfere with the ward if otherwise proper on the ground that the decision appears to it to be erroneous. The award of the arbitrator is ordinarily final and conclusive, unless contrary intention is disclosed by the agreement. The ward is the . decision of domestic tribunal chosen by the parties, and the civil courts· which are entrusted with the power to facilitate arbitration and to effectuate the awards, cannot exercise appellate powers ov.er the decision.. Wrong or right the decision is binding, if it be reached fairly a(ter giving adequate opportunity to the parties to place their grievances in the manner provided by the arbitration agreement. But it is now firmly established that an ward is bad on the ground of error of law on the face of it, when in the award itself or in document actually incorporated in it, there is found some legal proposition which is the basis of the award and which is erroneous. An error in law on the face of the award means : "you can find in the award or document actually incorporat-ed thereto, as for instance, note appended by the arbitrator stating the reasons for his judgment, some legal proposition which is the basis of the award :and which you can then say is erroneous. It does not mean that if in narrative 'reference is made to

3 S.C.R.

contention of one party, that ·opens the door to setting first what that contention is, and then going to the contract on which the parties' rights depend to see if that contention is sound" Champsey Bhara and Company v. Jivraj Balloo Spinning and Weaving Company Ltd. (' ). But this rule does not apply where questions of law are specifically referred to the arbitrator for his decision ; the award of the arbitra-tor on those questions is binding upon the parties, for by referring specific questions the parties desire to have dechion from the arbitrator on those questions rather than from the Court, and the Court will not, unlest it is satisfied that the arbitrator had proceeded illegally interfere with the decision.The argument advanced by the respondent that in the present case specific questions were referred to the umpire, and his decision on those questions must be regarded as binding and not liable to be re-opened, even assuming that !here is some error on the face of the award, must therefore be examined. The arbitrators on July 16, 194S called upon the parties to file their respective statements of claim and written statement. The respondent filed on August 16, 1948, an argumentative claim petition setting out in paragraph-22 the three heads under which he made total claim of Rs. 5,95,518/13/-. To this claim, the Dominion of India filed written statement denying the claims made by the respondent. replication was filed by the respondent to the written statement. The arbitrators recorded that the parties had complied with the order, that issues had been proposed by counsel for the respondent, and that the parties were agreed that the dispute between them be tried on those issues. Then they set out ten substantive issues, and evidence was led before the arbitrators. The arbitrators recorded that they were unable to agree upon the decision, and therefore they submitted the case to the umpire R.B. Nathoo Ram. The umpire entered upon the reference, the (I) (1932) L. R. 50 J, A; 32i,

UnW. ef lnii• •• ~. L. R.Jli• Rom Shoh J,

JJ69 -·-Union of lndi• •• "· L. Rallia Ram SW/.

evidence which was recorded before the arbitraton was accepted as evidence before the umpire, and the umpire proceeded to pronounce his award after recording reasons in support of his conclusions-on the diverse issues which were raised before the arbitrators. But filing of pleadings pursuant to the directions of the arbitrators and agreeing to trial of the dispute on the issues raised by the arbitrators cannot be regarded as reference of specific questions implying an _agreement between the parties that they intended to give up their right to resort to the Courts even if the award was vitiated on account of an error apparent on the face thereof. The cinly permissible inference from the agreement recorded by the arbitrators was that the parties agreed to have the disputes adjiidicated on the issues raised, and not to submit the issues raised for adjudication. The terms of cl. 13 of the contract F. D.· (M) 70 which incor-porated the arbitration agreement are general. By his letter dated.June 26, 1946 the respondent intimated the Director of Purchases that he had appointed an arbitrator on his behalf "in accordance with clause No.13 of the general conditions of the contract" and the appointment of an arbitrator by the Union by their letter dated .July 7, 1948 (subject to the reserva-tion of right to contend that there was no dispute) for adjudication of the claim made by the respondent. In these two letters there is no reference to any speci-fic questions to be referred to the arbitrators: nor can the filing of pleadings in support of their respective cases by the parties pursuant to the direction given by the arbitrator.1, and the framing of issues arising thereon with the object of focussing the attrntion of the parties on the question to be decided for adju· dicating upon the dispute amount to reference on specific questions, rendering the award binding upon the parties. In Seth Thawardas Pherumal v. The Union of India ('), Bose, J, delivering the judgment of the Court observed in dealing with the contention that there was reference of specific question, and (I) [1955) 2 S. C.R. 48.

3 8.C.R.

the award was not liable to be questioned even on the ground that it disclosed an error on its face :

"Therefore, when question of law is the point at issue, unless both sides specifically agree to refer it and agree to be bound by the arbitrator's decision, the jurisdictfon 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 1ub· mit incidental arguments about point o( law in the course of the proceedings is not enough."

The learned Judge also observed at p. 59 after refer-ring to F. R. Absalom Ltd. v. Great Western (London) Garden Village Society (') :

"Simply because the matter was referred to

incidentally in the pleadings and agruments in support of, or against, the general issue about liability for damages, that i1 not enough to clothe the arbitrator with exclusive jurisdiction on point of law."

In dealing with similar question in M /a. lopi Parshad &: Sons Ltd. v. The Union of India ('), the Court observed :

"Issues were undoubtedly raised by the arbi-

trators, but that was presumably to focus the attention of the parties on the points arising for adjudication. The Agents had made their claim before the arbitrators, and the claim and the jurisdiction of the arbitrators to adjudicate upon the claim, were denied. The arbitrators were by the terms of reference only authorized to adjudicate upon the disputes raised. There is no foundation for the view that specific

(21 (lSi0] 2 S. C.R. 791.

u.u.n rl """' •• A• '- &Ui<I R.,,, Shala/.

· /96' Union of Indio •• L. Ral/ia Ren

~- L. Ral/ia Ren Shah/.

180 SUPREMB COURT REPORTS [1964] VOL,

reference, submitting question of Jaw for the adjudication of the arbitrators, was made."

In Durga Prosad Ohamria v. Sewkishendas

Bhattar ('), the Judicial Committee held that ques-tions of law were specifically referred to arbitration where in pending suit after issues were raised with the consent of parties "the outstanding matters" in the suit were referred to three named arbitrators, conferring upon them special enumerated powers. But the decision was reached in the special circums-tances of the case, and not on the view that where agreed issues are raised before ihe arbitrator on the pleadings filed before him, the reference must be regarded as reference on the specific questions incorporated in the issues. •

Undoubtedly, under an arbitration agreement

which is initially in terms gene~al the parties may after disputes have actually arisen, refer specific questions to arbitration. But ·each case must depend upon its facts. Filing of pleadings before the arbitra-tors, or even an agreement that certain issues arise on the pleadings will not always yield the inference that the parties agreed to refer_ specifically the ques-tions incorporated in the issues to the arbitrator, so as to preclude themselves from challenging the award on the ground of error of law on the face of the award.

The test indicated by Lord Russell of Killowen

in F. R. -Absalom Ltd. v. Great Western (London) Garden Village Society Ltd. (') adequately brings out the distinction between specific refrrence of ques-tion of law, and question of law arising for determi-nation by the arbitrator in-the decision of the dispute. It was observed at p. 607 :

it is, I think, essential to keep the

case where disputes are referred to an arbitra-tor in the decision of which question of law (I) A.I.R. (1949) P.C SSf. ('l r19ss1A.c.592,616

. 3 s.c.R. SUPREME COURT REPORTS

· becomes material distinct from the case in which specific question of law has been refer-red to him 'for decision. x x . x x The · authorities m·ake clear distinction: between these two cases, and, as they appear to me, they decide that in the former case the Court can · interfere if and. when_ any error of law appears --on the face of the award, but that in the latter , case no such. interference is possible upon the ground that it so appears that the decision upon · the question of law is an erroneous one." ·

~ Then after referring· to the authorities it was ob~er~_ ved at p. 610 :

" x x x The primary quarrel between the parties was whether, ·if the value of work executed and materials on site up to and includ-ing .l\farch 11, 1929, had been _truly assessed, . the net value available for certification on that date was in excess of (as the contractor alleged) _or less than- (as the employer contended) the amount which. had actually been certified up to and including that date x : · x x - x. Those · were the disputes 'in regard· to the issue ·or certificates and the validity of the notice' which were in general terms submitted to the arbitra-tor. No specific question of construction or ·of law was submitted. The parties had, however been ordered to deliver pleadings, and by their statement of claim the contractor had claimed ·that the arbitrator should under his powers revise the last certificate issued so as to include · therein the excess net value -which they had alleged and which the arbitrator has found (though for reduced amount) to have existed -on March 11, 1929. It is at this pointthat the question of the construction of condition 30 arose as question of law,· not specifically · submitted, but material in the decision of the

Unio11of lntis

v. -.d • . L. RaUja Ram Sh2h J,

196J Union of lnii• •• .A.. L. R•ll;. R.,,. lili•• J.

matters which had been submitted. This ques-

tion of law the arbitrator has decided; but if upon the face of the award he has . decided it wrongly his decision is in my opinion open to review by th.: Court."

In the present case the respondent had claimed . from the Dominion of India, compensation in res-pect of the goods delivered to him under the contract, interest on the amounts raised by him for carrying out the contract and for incidental expenses incurred by him after deli very of the goods. That dispute was referred to arbitration pursuant to clause 13 of Form F. D. (~1)70. Pleadings were filed by the parties pursuant to the direction of the arbitrators, but therepy the parties did nothing more than state in writing their respective cases. The parties also agreed that certain issues arose on those pleadings but the function of the issues was to focus the attention of the parties to the points · on the decision of which the adjudication of the dispute between the parties depended. The issues of law may be material for the determination of the dis-pute, but they are not issues of law specifically referred to the arbitrators.

·There is one. more.·,, aspect which must be

considered: :· Assuming that d1,1ring:.,the course of arbitration proceedings, the parties m~Y. enter into fresh agreement 'an,d modify the original, terms of reference, and extend or restrict their scope. But such an agreement must, to be effective, amount to an arbitration agreement. The respondent has not relied and could not rely upon any subsequent agreement modifying the agreement of reference , for any subsequent contract . between him and the Union of India had also to satisfy the requirements of s. 175 (3) of the Government of India, Act, 1935 or Art. 299 of the Constitution if such an agreement took placc•after the Constitution came iuto force and

3 S.C.R.

such an agreement can only be in the form pres-cribed by these constitutional provisions. By merely assenting to the issues raised before the arbitrators the advocate appearing on behalf of the Govern-ment of India could not assume to himself autho-rity to bind the Dominion or the Union to specific reference on question of law, because reference on specific question may be effective only if there be an agreement express or implied that the arbi-trator will decide the question specifically referred to him and that his decision will be binding upon the parties. In the absence of any such contract in the form prescribed, plea of an agreement subsequent to the reference would be futile. We are therefore unable to agree with the High Court that specific questions of law were referred to the arbitrators, the decision whereof is binding upon the parties.

The question then remaining to be decided ia

'l\hether the award of the umpire was in law erro-neous on the face of it. The umpire has awarded Rs. 1,32,417/10/- uudcr the head loss suffered by the re,pondent in respect of the packets of cigarettes delivered to him. He has awarded Rs. 1,25,000/- in respect of the incidental expenses and R_s. 6~,~3:J/12/3 as interests. The Loss sufferred in respect of the packets of cigarettes is computed in this manner : the contract rate of cigarettes was l<e. -/8/3 per packet, the respondent was able to sell the packets supplied to him at the rate of Re. -/4/9 per packet. That part of the stock of cigarettes supplied to the respondent was mildewed and unfit for consump-tion i1 not denied. The respondent was therefore entitled to claim compensation for breach of contract on the ground that the Government of India had ·committed breach of warranty. It appears that the Government disposed of some stock of cigarettes at the rate of Re.-/1/9 per packet. The respondent had claimed that the goods supplied to him were only

Uni•n of lxdi• •• L. Ralli•

A. L. Ralli• Ram Sh.h I.

1~ Union of lntli• v • .A. L. Ralli• Ra11 --. Sllah J

worth Re.-/1/9 per packet because that was the price which the Government recovered by sale of similar goods and he was entitled to get from the Govern-ment as compensation the difference at the rate of Re.-/6/6 prr each packN. The umpire held that the respondent was not entitled to compensation at the rate claimed by him but to get the difference between the price paid and price received by him on sale. In our view no error apparent on the face on this part of the ward is disclosed and the award in so far as it awards Rs. 1,32,417/10/- to the respondent under this head is not open to challenge. But on the second head the claim for Rs. l,25,000/- for inciden-tal expenses cannot be sustained. The umpire in paragraph (xi) of his award observed :

"While the 'Government sold the stocks of cigarettes taken back by it at Re. -/l /9 the purchaser was able to get very substantial higher price. This undoubtedly resulted from the efforts which he put in, advertisement, publicity, storge, transport, payment of agency commission and other overhead expenses. It appears to me that to all such expenses the purchaser is clearly entitled, in addition to the expenses incurred by him with respect to the cigarettes taken by the Government. The law of compensation compels me to hold that all expenses incurred by the purchaser with respect to the cigarettes taken back by the Government must be paid to him."

must be paid to him." This observation proceeds upon clear fallacy. The respondent had purchased and taken delivery of 29, 74, 270 packets, out of which he sold 6,34,270 packets and returned 23,40,000 packets under an Iarrangement whereby the Government of India was to take back the goods found with the respondent in · their original packing. The respondent had purcha-sed the goods under the acceptance of tender dated

3 S.C.R. SUPREME COURT REPORTS

September 9, 1946 which provided by cl. 11 that

"All sales will be conducted on the distinct under-standing that the goods sold are on 'said to contain' basis. No responsibility for quality will be accepted whatsoever after the deli very is made at the depot". When he took delivery of the goods, he became owner of the goods by the express intendment of the contract. The expenditure incurred for advertise-ment, publicity, storage, agency commission and other overhead expenses since the respondent took delivery was therefore in respect of his own goods and he cannot claim these expenses as part of compensation payable for breach of warrant in respect of goods retained by him. The respondent was undoubtedly entitled to the difference between the contract price and the market price of the goods which he retained, and that compensation has been awarded to him. Transport and storage charges after the Government agreed to take back the goods, properly attributable to the goods, may also be awarded to the respondent as expenses incurred on behalf of the Government of India. But' no such claim was made. For the goods returned the respondent could not maintain claim for damages, because the contract was by mutual arrangement cancelled. For his claim for incidental expenses in respect of goods appropriated by him the respondent's claim could not be, apart from the damages, awarded. The amount of Rs. 1,25,000f-awarded by the umpire to the respondent, on the head of incidental expenses could not therefore be awarded as. compensation, on any view of the case. The amount has been awarded on an erroneous assump-tion of law, which is on the face of it erroneous. We are, therefore, of the view that the ward on that part cannot be sustained.

The claim for interest was discussed by the umpire in paragraph (ix) of his award :

"Applying the principles on which compensa-

tion is assessed, I have come to the conclusion

1963 U•iMI of Ioii• •• A. L. R•lli• Rom Shah J.

Uniori of lntlia v.

A. L. Ral/ia Ram ~'hah J.

that the purchaser was entitled to be paid interest on all the moneys paid by him to the Government, with respect to stores taken back by the Government, right from the date of pay-ment up to the date on which moneys were retur-ned. The rate of such interest has to be the same as the rate at which the purchaser paid interest to his bankers. This I find on the evidence to be 6 per cent per annum. Irre1pec-tive of the rate at which the Government usually borrows money, the law of compensa-tion compels me to award interest at the rate of 6 per cent per annum." ..It is again difficult to appreciate on what ground, interest could be awarded to the respondent. The contract did not provide for payment of interest in respect of amounts paid by the respondent if the contract fell through. Nor could interest be awarded untler s. 61 of the Sale of Goods Act. The right of the seller or the. buyer to recover interest or special damages in any case where by law interest or special damages may be recoverable, or to recover the money paid where the consideration for the payment of it has failed, is undoubtedly not affected by the Sale of Goods Act, and by sub·s. (2) of s. 61 in the absence of contract to the contrary, the Court may award interest at such rate as it thinks fit on the amount of the price to the buyer in suit for refund of the price in case of breach of the contract on the part of the seller. But the claim made by the respondent was not for refund of price. In respect of that part of the contract which was cancelled, by mutual agreement, price paid was refunded. In respect of the goods sold by the respondent his claim was for damages, and damages have been awarded. The respondent claimed before the umpire (and that claim was upheld) that he had to borrow from his bankers large amount of money for meeting his obligation under the contract with the Government

3 S.C.R.

and he was entitled to recover from the Dominion of India interest paid by him to his bankers, for the period during which his moneys remained with the Dominion of India. Mr. Pathak for the respondent submits that the umpire was in this state of affair11 competent to award interest on the amount which was detained by the Dominion by way of damages. But as held by the Judicial Committee in Bengal Nagpur Railway Company Ltd. v. Ruttanji Ramji ('), in the absence of any usage or contract, express or implied, or of any provision of law to justify the award of interest, interest cannot be allowed by way of dama_ges caused to the respondents for wrongful deten-tion of their money. In that case in an action against the Railway Company for remuneration for work done by the contractor not covered by the contract Rs. 67,000/- were found due by the Railway Company to the contractor on the basis of fair and reasonable rates. The contractor claimed interest on that amount for the period prior to the date of the suit. The Judicial Committee held that interest on the amount awarded as compensation could not be awarded by way of damages, and there being no contract, nor statute, nor usage in support of such claim, the claim for interest had to be disallowed.

. In dealing with the claim for interest on the principle incorporated in illustration (n) of s. 73 of the l,ndian Contract Act which is as follows :

(n) , "A, contracts to pay sum of money to B, on day specified. A, does not pay the money on that day; B, in consequence of not receiving the money on that day, is unable to pay his debts, and is totally ruined. A, is not liable to make 1ood to

B, anything except the principal sum he

(I) (1937) L, R. 6U. A. 66,

t!nitm •f lniia •• A. L. Rollio Rom ~hah J.

Vn10n •f India

A. L. Ratlia Ram

contracted to pay, together with interest up to the day of payment."

The Judicial Committee observed at p. 72 :

"The illustration, however, does not deal with the right of creditor to recover interest from his debtor on loan advanced to the latter by the former. It only shows that if any person breaks his contract to pay to another person sum of money on specific date, and in consequence of that breach the latter is unable to pay his debts and is ruined, the former is not liable to make good to the latter anything except the principal sum which he promised to pay, together with interest up to the date of payment. The illustration does not confer . upon creditor right to recover interest upon debt which is due to him, when he is not entitled to such interest under any provision of the law. Nor can an illustration have the effect of modifying the language of the section which alone forms the enactment. "

Ilhmration (n) therefore does not aid the respondent.

Mr. Pathak submitted that interest may be

awarded on grounds of equity, and placed reliance upon the Interest Act, 32 of 1839. Under that Act the Court may allow interest to the plaintiff if the amount claimed i' sum certain which is payable at certain time by virtue of written instrument. The Act, however, contains proviso that interest shall be payable in all cases in which it is now payable by law. This proviso applies to cases in which the Court of Equity exercises jurisdiction to allow interest. As observed by the the Judicial Committee in Bengal Nagpur Railwgy Oompany'tJ case (') after referring to the observation made by Lord Tomlin in Maine and New Brunswick Electrical Power Oompan11 v. Hart ('), observed :

Ul (192111A.O.631, HO,

(I) tl9S7) L,R, 651.A, 16.

3 S.C.R.

"In order to invoke rule of equity it is neces-sary in the first instance to establish the existe-nce of state of circumstances which attracts the equitable jurisdiction, as, for example, the non-performance of contract which equity can give specific performance. The present case does not, however, attract the equitable jurisdiction of the court and cannot come with· in the purview of the proviso.

The judgment of Their Lordships of the Privy Coun-cil in Bengal Nagpur Railway Oompany'B case (') was relied upon in Beth Thr:iwerdas Pherumal's oase (') in negativing claim for interest. In that case contractor had entered into contract with the Dominion of India for supply of bricks. Under clause which required that all disputes between the parties to the contract should be referred to arbitra-tion, dispute having arisen, the matter was referred to 'lrbitration and the arbitrator gave award in the contractor's favour. The Union of India which had succeeded to the rights and obligations of the Domin-ion contested the award on numerous grounds one of which was the liability to pay interest on the amount awarded. Bose, J, in delivering judgment of the Court observed that the interest awarded to the con-tractor could not in law be awarded. He pointed out that an arbitrator is not court within the mean-ing of the Interest Act of 1839: in any event interest could only be awarded if there was debt or sum certain, payable at certain time or otherwise, by virtue of some written contract at certain time and there must have been demand in writing stating that interest will be claimed from the date of the damand. In the view of' Bose, J, none of the ele-ments wa! present and the arbitrator erred in law in thinking that he had the power to allow interest simply because he thought the demand was reasonable.

(I) (1937) L.R. 651.A. 66.

(2) [ 1955] 2 S.C.R. 48.

Union oj lndfo

A. l. Rallia Ram Jh•h J.

Un1'011 of India v. A. L. Ra//ia Ram Shaa, J.

The umpire has awarded interest to the respon-dent on the footing that for the purpose of carrying out his contract with the Government of India, the respondent was required to make arrangements by borrowing moneys from his bankers and he had to pay interest in that behalf, and when the contract was abandoned after it was partially performed, the Government of India became liable to make good the loss of interest which the respondent suffered. We know of no principle on which the Government of India could be rendered liable for payment of interest in the circumstances relied upon. In respect of that part of the contract which was abandoned, if any liability to pay interest had arisen it was for tbe res-pondent to claim it in settling the terms on which cancellation of the contract was to be made. In respect of the goods which had been returned by him, he could claim compensation for breach of warranty, but such compensation could not include interest as damages for detention of money. Interest was there-fore allowed on view of the law which appeared on the face of the ward to be erroneous.

This appeal must be partially allowed and the award of the umpire set aside in so far as it awards interest amounting to Rs. 68,833/12/3 and incidental expenses amounting to Rs. 1,25,000/-. The award in so far as it awards Rs. 1,32,417/10/· for loss suffe-red by the respondent in the matter of 6,34,270 packets of cigarettes is not liable to be set aside. In view of the partial success, there will be no order as to costs throughout.

Appeal allowed in part.