Seth Thawardas Pherumal vs The Union Of India

Rewritten Version Notice: This is a rewritten version of the original judgment.

Court: Supreme Court of India

Case Number: Not extracted

Decision Date: 24 March, 1955

Coram: Vivian Bose

Seth Thawardas Pherumal versus The Union of India, decided on 24 March 1955, was reported as a judgment of the Supreme Court of India authored by Justice Vivian Bose, who also sat on the bench. Justice Bose observed that the present appeal and Civil Appeal No 12 of 1954, which will be decided by the same judgment, presented identical legal questions although the factual matrices differed slightly; consequently the Court first addressed Civil Appeal No 260 of 1953. The suit underlying that appeal concerned an arbitration dispute. The appellant, hereinafter referred to as the contractor, had entered into a contract with the Dominion of India on 1 November 1945 through the Additional Chief Engineer of the Central Public Works Department (C.P.W.D.) for the supply of bricks to the C.P.W.D., a department of the Dominion Government. A number of disagreements subsequently arose. Clause 14 of the agreement stipulated that any dispute arising out of or relating to the contract should be referred to the Superintending Engineer of the relevant Circle. Accordingly, a reference was made on 21 January 1949 and an arbitral award was rendered on 8 May 1949. The contractor filed the award in the Court of the Subordinate Judge at Dhanbad, praying that the award be accepted and that a decree be passed in accordance with it. The Dominion of India opposed the award under section 30 of the Arbitration Act 1940, seeking its setting aside or, alternatively, its modification or correction. The contractor’s filing was treated as a suit under section 20(2) of the Act and a decree giving effect to the award was entered on 18 March 1950. By that date the Constitution of India had come into force and the Union of India had succeeded the Dominion of India as the respondent. The Union appealed to the High Court, which allowed the appeal in part, and the contractor then appealed to this Court. The arbitral reference had comprised seventeen heads of claim, of which only three – items 5, 8 and 17 – were contested before the Court. In the fifth head the contractor claimed a sum of Rs 75,900 as the price of eighty-eight lakh katcha (unbaked) bricks that had been destroyed by rain; although those bricks were not part of the original contract, the contractor framed the claim in that manner. The contract itself required the supply of two and a half crore pucca (baked) bricks to be delivered according to the following schedule: thirty lakh bricks by 25 January 1946, fifty lakh by 25 February 1946, fifty-five lakh by 25 March 1946, fifty-five lakh by 25 April 1946 and sixty lakh by 25 May 1946. Delivery was to take place at the kiln site. To adhere to this timetable the contractor had to plan ahead, first preparing katcha bricks and loading them into his kilns for baking, and while that batch was in the kiln he had to prepare and stock an additional lot of katcha bricks ready for the next baking cycle.

In this case the contractor was obligated to supply a total of two and a half crore pucca bricks and to deliver them according to a fixed timetable that required successive deliveries of thirty lakh, fifty lakh, fifty-five lakh, fifty-five lakh and sixty lakh bricks by the dates 25-January-46, 25-February-46, 25-March-46, 25-April-46 and 25-May-46 respectively. To meet this timetable the contractor had to first prepare unbaked, or katcha, bricks, place them in his kilns for baking, and, while a batch was undergoing the baking process, keep a fresh supply of unbaked bricks ready to be introduced into the kilns as soon as the previous batch was completed. It was therefore the duty of the Central Public Works Department (C.P.W.D.) to remove the baked bricks from the kilns as soon as they were fully backed and ready for delivery, so that the contractor could introduce another load of unbaked bricks without interruption. At a certain point during performance of the contract the C.P.W.D. failed to remove the baked bricks that were ready for delivery. This failure created a blockage in the kilns, prevented the contractor from placing a fresh stock of unburnt bricks into the kilns, and caused his inventory of katcha bricks awaiting baking to accumulate continuously. Had the department performed its removal obligation in a timely manner, the entire schedule of two and a half crore bricks would have been completed before the onset of the monsoon. Because of the department’s default in not removing the ready-to-be-delivered burnt bricks, the schedule was delayed, the rains arrived, and as a consequence eighty-eight lakh unbaked bricks were destroyed by the rain. The contractor asserted that this loss was caused by the department’s default and therefore the price of the destroyed bricks should be payable to him.

The Union Government responded on two grounds. First, it argued that the unbaked bricks were not part of the contractual supply and that, even if it admitted a breach for failing to remove the baked bricks on time, its liability could be limited only to breach of that specific contractual obligation; it further maintained that the loss of the katcha bricks was too remote to give rise to compensation. Second, the Government contended that compensation for such loss could not be claimed at all because the parties, at the time of contracting, had expressly provided for this eventuality and had stipulated that the Dominion Government would not be responsible. To support this position the Government relied upon clause six of the agreement, which reads: “The department will not entertain any claim for idle labour or for damage to unburnt bricks due to any cause whatsoever.”

The arbitrator, however, held that clause six was not intended to excuse the department from performing its contractual duty to remove the baked bricks, and consequently awarded the contractor Rs 64,075 under the head of claim relating to the destroyed katcha bricks. The Court then examined that award and concluded that the arbitrator was wrong in law. While acknowledging that government departments, like contractors, face difficulties such as labour problems, machinery breakdowns and the risk of adverse weather—including the heavy thunderstorms and showers that occur in May, the month of the final delivery deadline of 25-May-46—the Court emphasized that the parties had expressly agreed that the Government would not be liable for any loss arising from such remote consequences. Because that stipulation formed an express term of the contract, the contractor was bound by it and could not later claim compensation on a basis that the contract had not anticipated. The Court therefore held that the contractor’s claim for payment for the destroyed katcha bricks could not succeed under the contract as written.

The Court observed that the contractor was bound by the express terms of the contract and could not renounce his obligations merely because the performance of those terms proved inconvenient. While the contractor might have chosen to contract on an absolute basis, once the contract was executed he could not revert to his original position simply because the conditions were unfavorable. The Court clarified that this limitation did not absolve the Government of all responsibility; rather, the Government could be held liable only for damages arising from its breach of the specific obligation to remove the pucca bricks that it had undertaken to remove. The Court explained that a breach of that obligation would involve the contractor being forced to manage the bricks himself. Under section 73 of the Contract Act, the contractor had a duty to mitigate loss and therefore possessed the right to remove the bricks, stack them at another location, and claim compensation for the loss caused by the Government’s failure to perform its part of the timetable. The Court noted that the contractor had already been awarded Rs 11,744-11-0 under claim 4 for the extra load incurred in stacking one crore seven lakh bricks that accumulated at the kiln site because the Department did not meet its schedule, and additionally Rs 15,500 under claim 13 for the cost of leveling and dressing the land to enable the stacking of those extra bricks.

The Court further explained that the contractor could alternatively have sold the bricks in the market and claimed the price differential, but ordinarily he could not recover compensation for damage to the katcha bricks unless such damage, though ordinarily too remote, was expressly contemplated by the parties at the time of contracting, as required by section 73 of the Contract Act. The Court found that the parties had indeed contemplated such a contingency and had expressly provided for it by incorporating clause 6 as an express term of the contract. Consequently, the Court concluded that the arbitrator had erred in law by misinterpreting the contractual terms. The Court then considered whether the arbitrator’s erroneous decision was final despite the legal mistake. It held that, under section 16(1)(c) of the Arbitration Act of 1940, a Court was empowered to remit an award for reconsideration when an objection to the legality of the award was apparent on its face. The Court explained that this provision covered cases where an error of law was evident on the face of the award. In determining such an error, the Court distinguished between situations where a question of law was specifically referred to the arbitrator and those where a question of law was only incidentally material to the decision on the principal issue. If a question of law was specifically referred and the parties clearly intended an arbitral determination on that point, the Courts would ordinarily refrain from interference, although the Court noted that even in such cases the Courts retained authority to intervene if the arbitrator had acted illegally, such as by relying on inadmissible evidence or applying a principle of construction that the law did not support.

There is authority for the view that the Courts will interfere when it is clear that an arbitrator has acted illegally in reaching the award, meaning that the arbitrator has based the decision on evidence that is not admissible or on principles of construction that the law does not support, or on any similar improper basis. The Court referred to the speech of Viscount Cave in Kelantan Government v. Duff Development Co. ([1923] A.C. 395) at page 409 for this proposition. The present case, however, does not raise that particular circumstance. The Court then observed that, in its opinion, the law governing this issue is the same in England as it is in India. The principles that regulate this category of dispute have been examined in detail and expressed with clarity by the House of Lords in F. R. Absalom Ltd. v. Great Western (London) Garden Village Society ([1933] A.C. 592) and also in Kelantan Government v. Duff Development Co. ([1923] A.C. 395). In the decision Durga Prasad v. Sewkishendas (54 C.W.N. 74, 79) the Privy Council applied the law set out in the Absalom case to the Indian context; the Court also cited Champsey Bhara & Co. v. Jivraj Balloo Spinning and Weaving Co. (50 I.A. 324, 330 & 331) and Saleh Mahomed Umer Dossal v. Nathoomal Kessamal (54 I.A. 427, 430) as further authorities. The Court noted that the broader language employed by Lord Macnaghten in Ghulam Jilani v. Muhammad Hassan (29 I.A. 51, 60), which referred to the revisional powers of the High Court under the Civil Procedure Code, must be limited to the particular facts of that case, where the question of law involved a specific reference to limitation. The Court emphasized that an arbitrator is not a conciliator and cannot disregard the law or misapply it simply because the arbitrator believes the outcome to be just or reasonable. An arbitrator functions as a tribunal chosen by the parties to decide their disputes according to the law, and therefore the arbitrator is bound to follow and apply the law. If the arbitrator fails to do so, the Courts may correct the error, provided that the error is evident on the face of the award. The only exception to this rule occurs when the parties expressly agree to refer a question of law as a separate and distinct matter. The Court further referred to a decision of this Court in A. M. Mair & Co. v. Gordhandass Sagaramull (1950 S.C.R. 792 at 798), where Justice Fazl Ali quoted a passage from Viscount Simons's speech in Heyman v. Darwins Ltd. (1942 A.C. 356 at 368). In that passage the learned Lord Chancellor (Viscount Simon) himself quoted Lord Dunedin from another case. It was argued, based on that quotation, that whenever a party must rely on the contract to prove its case, the dispute must fall within the arbitration clause. While that observation is undisputed, the Court stressed that merely falling within the clause is insufficient. The parties must also identify the precise nature of the dispute and agree to refer that identified dispute to arbitration; if the parties do not accomplish that, the Court has the power to compel them to do so.

In this passage the Court referred to Lord Macmillan’s observations in Heyman’s case reported in 1933 A.C. 592, specifically pages 369 and 370. The Court explained that when the parties did not refer a specific question of law to the arbitrator, either by mutual agreement or by a court order, the arbitrator’s decision on that question could not be considered final, even if the arbitrator acted within his jurisdiction. The Court emphasized that it was essential for the arbitrator to decide such a question only incidentally, rather than as a final determination. The Court noted that Lord Russell of Killowen and Lord Wright had participated in the earlier decision of F. R. Absalom Ltd. v. Great Western (London) Garden Village Society reported in 1933 A.C. 592, as well as in Heyman’s case cited in 1942 S.C.R. 792 at page 798. Those judges would have highlighted any distinction if a conflict between arbitration and judicial authority had been likely. However, the Court found that no such conflict existed in the present matter, and therefore it did not interpret Fazl Ali J.’s judgment as reaching the opposite conclusion. The Court then turned to examine whether the arbitrator had been expressly asked to interpret clause 6 of the contract or any other contractual provision, or whether any question of law had been specifically referred to him. The Court stressed the importance of the term “specifically,” because parties that refer a dispute to arbitration retain the right to require the chosen tribunal to decide the dispute in accordance with law. Consequently, before a party’s right to a legal determination by a court could be denied, the Court must be absolutely certain that both parties intended the arbitrator’s decision on a point of law to be final, rather than a decision by the courts.

The contractual clause that mandated arbitration of disputes was clause 14, and the Court reproduced its wording in full. Clause 14 stipulated that, except as otherwise provided in the contract, all questions and disputes concerning the meaning of specifications, instructions, quality of materials, or any other matter arising out of or relating to the construction, specifications, instructions, orders, or conditions, whether occurring during delivery or after completion, must be referred to the arbitration of the Superintending Engineer of the Circle. The arbitration was to be conducted in accordance with the prevailing law relating to arbitration, and the award rendered after investigation by the arbitrator would be final, conclusive, and binding on all parties to the contract. The Court described the factual background of the dispute. It stated that the dispute originated from a series of claims made in several letters that the contractor had sent to the Additional Chief Engineer of the CPWD. These letters culminated in a petition, marked as Exhibit B(1), in which the contractor summarized his claims; the petition was undated. Upon receipt of the petition, a representative of the CPWD invoked the jurisdiction of the arbitrator. The letter that invoked the arbitrator’s jurisdiction had not been filed in the record. The arbitrator subsequently wrote to the contractor requesting a statement of claim. That request letter had also not been filed in the record.

The Court observed that the only document referring to the claim was Exhibit C-1, which comprised the statement of claim filed by the contractor in answer to the arbitrator’s letter. Because the original material setting out the formal terms of reference was not produced, both parties asked the Court to deduce the scope of the reference from the contractor’s statement of claim and from the recitals contained in the arbitrator’s award. Counsel for the contractor relied heavily on the wording of Item 5 in that claim. The claim read: “Item 5 – Loss of katcha bricks … Rs 75,900. The chief reason for the destruction of these bricks was the failure of the department to lift the monthly quota of bricks. The arguments of the department that they are not liable to compensate us on this account because of clause 6 of the agreement are not correct. Clause 6 refers only to such cases over which the department has no control. But if the department had lifted the bricks – which was entirely within its control – no loss would have occurred. Moreover, clause 6 refers only to ‘damage’ and not to ‘destruction’. Damage means only partial loss; it cannot denote total destruction.” The contractor therefore asserted that the department could not rely on clause 6 to avoid liability for the total loss of the bricks.

The Court then turned to the language of the award. The award stated that the contractor’s statement of claims comprised seventeen separate items for which the contractor claimed a total of Rs 4,76,138-12-0 plus interest, amounting approximately to Rs 5,03,803-12-0. Item 5 was listed as “Payment for katcha bricks destroyed by rain: Rs 75,900.” In the body of the award, Claim No 5 was addressed as follows: the contractor sought payment for eighty-eight lacs of katcha bricks destroyed by rain and contended that the Executive Engineer’s statement and the Department’s reliance on clause 6 were untenable. The contractor maintained that clause 6 was intended to cover contingencies not caused by the department, and therefore could not be invoked where the department’s own failure led to the loss. The arbitrator held that the removal of the bricks, or at least the prevention of their accumulation beyond sixty lacs, was an implied contractual obligation of the Central Public Works Department. The arbitrator further held that the department could not hide behind clause 6, emphasizing that the clause was not meant to absolve the department from performing its contractual duties and that rejecting this view would contradict common-sense reasoning. Finally, the Court expressed the opinion that the matter did not constitute a specific reference on a point of law as required by arbitration law. The Court noted that what was presented was not a proper reference at all but merely an incidental argument introduced by the Dominion Government to counter the contractor’s claim under Claim 5, and that such a submission, made solely by the contractor, could not satisfy the requirement of a mutually agreed reference.

In this case the Court explained that a reference to arbitration is effective only when both parties give their assent. When one party, for example the contractor, is unwilling to submit a particular matter to arbitration even though the parties have agreed that the matter should be referred, the appropriate remedy is to approach the Court under section 20 of the Arbitration Act. The Court may then, pursuant to sub-section (4) of that provision, compel the recalcitrant party to submit the disputed issue to arbitration. Conversely, if there is no mutual agreement by both sides on the terms of reference and no order from the Court under section 20(4) directing a reference, the arbitrator does not acquire the exclusive jurisdiction that would be necessary to decide the matter. Accordingly, when the point in dispute involves a question of law, the arbitrator’s jurisdiction is not established unless both parties expressly agree to refer that legal question to arbitration and also consent to be bound by the arbitrator’s award. The Court further held that the mere fact that the parties raise incidental arguments concerning a legal issue during the arbitration proceedings does not, by itself, confer exclusive jurisdiction on the arbitrator. The Court cited the observations of Lord Wright in F. R. Absalom Ltd. v. Great Western (London) Garden Village Society ([1933] A.C. 592, 616), noting that there was no specific submission of a pure question of law. Although the arbitrator would inevitably have to address questions arising from the construction of the building contract, the two matters presented were composite questions of both law and fact, and there was no express submission to determine the true effect of the contract on undisputed facts, as was required in Kelantan ([1923] A.C. 395) or as a separate matter on facts to be assumed or found, as in In re King and Duveen ([1913] 2 K.B. 32, 36). The Court emphasized that the arbitrator was not asked simply to interpret, on an agreed factual basis, clause 26 or clause 30 of the conditions, but was required to render an award on the two matters, addressing any questions of fact and law that might arise. The Court then turned to Clause 32 of the contract relied upon in the House of Lords decision, which corresponded to Clause 14 of the present contract. That clause provided that any dispute or difference arising as to the construction of the contract or any matter arising thereunder shall be referred to arbitration and decided finally by the arbitrator. The arbitrator in that case relied on this clause to claim jurisdiction to determine, as a matter of law, the construction of clauses 26-30 of the contract. However, the House of Lords held that, in the absence of a specific reference concerning the construction of the contract, the jurisdiction of the Courts was not displaced. Lord Russell’s judgment affirmed that without a clear, mutual reference to a legal question, the Courts retain their supervisory jurisdiction over the arbitration process.

Lord Killowen observed at page 610 that “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 ….” He continued that at that stage the issue of interpreting condition 30 became a question of law, although it had not been expressly submitted, because it was material to the resolution of the matters that had been presented. Lord Killowen held that the arbitrator had decided that question of law, but that if the award, when examined on its face, showed a wrong decision on the point of law, the decision was open to judicial review. The Court applied the same principle to the present case, concluding that merely referring to the issue incidentally in pleadings or arguments, whether in support of or against the broader question of liability for damages, did not confer on the arbitrator exclusive jurisdiction to determine a point of law. The Court then examined whether any error was apparent on the face of the award. After reviewing the portions of the award that had been quoted, the Court found that clause 6 of the contract unequivocally discharged the Union Government from any liability under the claim in question, and therefore the arbitrator’s award of a sum on that basis was erroneous.

The next disputed head in the statement of claim was item No. 8, which sought “Cost of additional wages paid to the coolies on account of non-supply of ration and cloth – Rs. 51,495.” Again, no specific question of law had been referred to the arbitrator, so the Court’s task was limited to determining whether there was an apparent error of law in the award. The contractor’s statement of claim set out his case: he alleged that when the work was allotted, a local rationing system existed and, under the contract conditions, he was prohibited from employing local labour and was required to import approximately 1,800 coolies from distant locations. He argued that arranging rations for these coolies from the open market was impossible, and that he had notified the concerned authorities, who promised to supply the rations. He contended that the agreement was signed only after receiving that promise. The contractor relied on letters from the department as evidence of the promise, asserting that the circumstantial evidence established a mutual understanding that rations would be supplied. He further maintained that, under law, circumstantial evidence could substantiate such a promise, and that any breach made the department legally liable to compensate for the loss, in addition to a moral responsibility to supply the rations. The Court noted that this claim was not based on any express clause of the contract, nor on any implied term, and therefore required the Court to assess whether the award contained a clear legal error on its face.

In the present case the claim was not founded on any express clause of the contract, nor on any term that could be said to be implied therein. The claim rested instead upon a collateral promise that was recorded not in the contract but in two letters issued by “the department” and by “the authorities concerned.” Those letters were later described as forming a “mutual understanding” and as creating, in addition to a legal liability, a moral responsibility on the part of the department. The arbitrator addressed the matter by first noting the contractor’s statement that, when he submitted his tender on 25-9-45, he did so in the bona-fide belief that the department would make the necessary arrangements for the supply of rations. The arbitrator then set out a chronology of events. On 1-11-45 the contractor was informed that his tender had been accepted. On 9-11-45 the contractor warned the Executive Engineer of his immediate requirements concerning rations. Finally, the contract was formally accepted and signed on 22-11-45. The arbitrator observed that the contract, as it stood, contained no clause dealing with the provision of rations and that the issue had not been raised at the time the tender was accepted on behalf of the Dominion Government. The question of rations was raised only in a letter addressed to the Executive Engineer, and the contractor proceeded to sign the contract without awaiting a reply to that letter.

The arbitrator then explained that the law is clear that a government can be bound only by contracts entered into in the prescribed manner and signed by the proper authority. The acceptance of the agreement, shown by Exhibit A(1), was effected on behalf of the Dominion Government by the Additional Chief Engineer, not by the Executive Engineer. Consequently, a letter sent to the Executive Engineer could not alter the contractual position, and even if the letter had been forwarded to the Additional Chief Engineer, it would not have created any binding obligation. The arbitrator illustrated the principle with a hypothetical scenario: a tender containing certain terms is submitted and accepted on 1-11-45, with both parties agreeing on all the terms and indicating that the contract should be reduced to writing. If, before the written agreement is finalized, one party proposes an additional condition, the contract must still reflect the parties’ assent to that condition. In the present case, the parties signed the contract as it existed prior to the new suggestion, indicating that the fresh condition was not accepted. It is therefore an error in law to infer that the contract incorporated the new proposal. The correct legal conclusion is that the fresh suggestion was abandoned, the contractor accepted the contract as originally drafted, and no party can be bound by a unilateral offer that has not been accepted, especially when the parties intend that the contract be memorialized in a written document. This reinforces the purpose of requiring a written contract to exclude speculation about what was or was not agreed.

The arbitrator noted that the contractor had asserted that it was a well-known and established fact that the locality of Sindri was a rationed area and that the Central Public Works Department (C.P.W.D.) supplied rations at controlled rates to its employees and contractors through arrangements with the local Civil Supply Authorities. He further recorded the contractor’s claim that nobody employed by the C.P.W.D. was permitted to make independent arrangements or to approach the Civil Supply Authorities directly. According to the contractor, the very fact that he had tendered his bids at unusually low rates demonstrated that he expected to provide his labourers with rations at the controlled rates fixed by the authorities. The arbitrator then set out additional contentions raised by the contractor and, on the basis of those contentions, concluded that an implied contractual obligation existed on the part of the C.P.W.D. to make controlled rations available to the contractor and that this implied duty had not been performed with the required diligence and care. Acting on that conclusion, the arbitrator awarded a sum of Rs. 40,000 as compensation for the alleged breach of the implied obligation.

The Court observed that the arbitrator’s reasoning contained a manifest error because factual findings must be based on evidence or on admissions, not on mere allegations advanced by one party and expressly denied by the other. From the material placed before the Court, the inference was that the contractor entered into the agreement fully aware of the terms that were on the face of the contract and, notwithstanding any unilateral hopes he may have harboured, he was prepared to be bound by the contract as it stood without insisting that the other party accept any new condition. He did not wait to ascertain the reaction of the other side to his additional proposals before signing. The Court further clarified that the issue of rationing was not within the purview of the Dominion Government but was a matter administered by the Provincial authorities of the time. The C.P.W.D., being a department of the Dominion Government, was not responsible for the administration of rationing; its employees, like all persons in the Sindri area, were merely subject to the prevailing rationing regime. The arbitrator’s opening statement had confused the Dominion Government with the Provincial Government by suggesting that commodities such as rations and cloth, essential for the maintenance of the contractor’s labourers, were under “Government control” without distinguishing between the two levels of government. By basing his findings solely on the parties’ contractual contentions, the arbitrator failed to appreciate that the Dominion Government and the Provincial rationing authorities were separate and distinct entities. Consequently, the situation reduced to the following: two private parties, neither of which were part of the Provincial Government nor possessed any control over rationing, entered into an agreement for work in a rationed area. They insisted that their contract be reduced to writing, a requirement that was essential because the contract was with the Dominion Government, which could not contract in any other form. They agreed upon and concluded all material terms, and only at the very last moment did one side raise a fresh point regarding rationing without awaiting a response or incorporating that point into the written contract.

In the course of the negotiations the contractor raised, without waiting for a reply and without the term being entered in the written contract, an objection concerning rationing and the supply of cloth, which were essential for the maintenance of his labourers. Nevertheless, the contractor signed the contract as it stood at that moment, even though the objection had been raised during the negotiation process. The Court observed that it was a mistake in law to hold that a contractual obligation could be inferred or implied merely from those circumstances. Moreover, the Court identified a further error. It held that even if an implied agreement concerning rations and cloth were to be read as a separate and subsidiary contract, rather than as part of the written contract, that implied agreement could not be brought within the scope of the arbitration clause. Clause 14, although wide in its language, was limited to matters relating to the written contract. Consequently, if the matters of rations and cloth were not covered by the written contract, they could not be said to relate to it. The Court further explained that when the parties choose to add a fresh contract or to substitute a new agreement for the old one, the arbitration clause in the original contract cannot be applied to the new agreement. In support of this proposition, the Court referred to the observations of Lord Macmillan in Heyman v. Darwins Ltd. ([1942] A.C. 356 at 371).

The final point of dispute in the appeal concerned claim number 17, which sought interest on the sums claimed. The statement of claims set out the following: “Item 17 – Interest on the amount of money involved in this claim at the rate of Rs. 6 per cent, Rs. 27,665. This work was finished in May 1946 and it was proper for the department to have decided all our claims at least by 31 December 1947. But this was not done. Due to this a heavy amount remained blocked up and we were compelled to take money from our bankers at interest. We therefore pray for interest for 16 months from 1 January 1948 to 31 April 1949.” The arbitrator held that the contractor’s contention that his claims should have been settled by January 1948 was reasonable, and consequently awarded interest at six per cent for sixteen months on the total amount of the awards, which amounted to Rs. 17,363. The arbitrator then listed the amounts awarded under each head of claim, and a review of those headings showed that each corresponded to a claim for an unliquidated sum. The Court noted that the Interest Act, 1839 applied, as interest was not otherwise payable by law in such cases (see Bengal Nagpur Ry. Co. v. Ruttanji Ramji (65 I.A. 66)). However, even if an arbitrator were to be considered a “court” within the meaning of that Act—a proposition the Court found untenable—certain conditions would still have to be satisfied before interest could be awarded under the Act. Those conditions required: (1) the existence of a debt or a sum certain; (2) the debt or sum being payable at a certain time or otherwise; (3) the debt or sum being payable by virtue of some written contract at a specified time; and (4) a demand in writing stating that interest would be claimed from the date of the demand. None of these elements were present in the present case, leading the Court to conclude that the arbitrator had erred in law by granting interest solely on the basis that the demand was reasonable.

In this case, the Court observed that interest could be demanded only from the date on which a written demand was actually made. The Court then held that none of the statutory conditions required for the award of interest under the Interest Act, 1839 were satisfied. Consequently, the arbitrator had erred in law by assuming he possessed the authority to allow interest merely because he considered the demand to be reasonable. The Court noted that a suggestion had been made that interest might be awarded from the date of filing the suit by analogously applying section 34 of the Civil Procedure Code, 1908. However, the Court explained that section 34 does not apply to an arbitrator because an arbitrator is not a “court” within the meaning of that Code, and the Code itself does not govern arbitrators. Moreover, even if section 34 were applicable, a court would still lack the power to award interest after the suit had been filed. For these reasons, the Court affirmed that the award of interest in the arbitration award was rightly struck out. The Court further pointed out that the alleged delay in performance was minimal – only five days in the overall context. The last instalment of bricks was scheduled to be removed on 25-May-1946, and the contractor claimed that the entire contract was completed by the end of May 1946. The Court found it difficult to accept that a quantity of eighty-eight lakh bricks could have been damaged by rain in the final five days of May, and even if damage had occurred earlier, it would have occurred regardless, because the contractor needed a large stock of unbaked bricks ready for kiln firing to meet his timetable. The Court noted that this factual issue fell within the arbitrator’s jurisdiction and was not a matter for judicial interference. Having resolved these points, the Court declared that Civil Appeal No. 260 of 1953 was concluded and turned to consider the second appeal, Civil Appeal No. 12 of 1954. In the latter appeal only two heads of claim were contested, namely heads 4 and 17. The Court observed that the overall structure of the claim mirrored that of the earlier case: a contractor had entered into an agreement containing identical terms and conditions except for the details of supply, the agreement had been signed on the same day by the same authority of the Dominion Government, the same arbitrator had heard the matter, and the award in this case was dated 1-May-1949, a week before the award in the earlier case. No specific question of law was referred, and therefore the Court need not repeat its earlier analysis, and it reached the same conclusion as previously. Regarding the fourth head of claim, which dealt with cloth and rations, the Court noted that the claim and the Government’s response were identical to those in the earlier case, but the award was based not on a contractual obligation but on a “moral and implied obligation.” The Court found this reasoning to be an even greater error. The amount claimed was Rs 51,495, whereas the arbitrator had awarded only Rs 30,000. Concerning the seventeenth head of claim, which concerned interest, the contractor had claimed Rs 27,665 and the arbitrator had awarded Rs 9,954. The Court held that the same legal error evident in the earlier award was present here as well.

The Court observed that the same mistake of law was plainly visible on the face of the award. It noted that the High Court had correctly rejected the claims that were raised under the various heads that were in dispute in the present proceedings. Accordingly, the Court affirmed that the High Court’s dismissal of those claims was proper and justified. In the light of this assessment, the Court held that the two appeals could not succeed. Consequently, each of the appeals was rejected and the parties were ordered to bear the costs of the proceeding in this Court. The judgment therefore concluded that the appeals were dismissed.