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: Civil Appeal No. 260 of 1953

Decision Date: 24 March 1955

Coram: Bose J.

In the matter titled Seth Thawardas Pherumal versus The Union of India, the Supreme Court of India delivered its judgment on 24 March 1955. The petitioner was Seth Thawardas Pherumal and the respondent was the Union of India, together with a connected appeal. The case was heard before a bench of the Supreme Court and involved the application of the Arbitration Act, 1940, specifically section 16(1)(c). The issues presented for determination included the legality of an arbitral award, the circumstances under which such an award could be challenged, and the conditions that must exist for an arbitrator to acquire jurisdiction. The court examined whether an award was final, whether both parties had expressly referred a question of law to the arbitrator, and the distinction between questions of law that were specifically referred and those that were incidentally material to the resolution of the dispute. Additional matters considered were the consequences of a wrong construction of a contract, the award of interest where the contract did not provide for it, and the requirements of the Interest Act, 1839 (Act XXXII of 1839) that were not satisfied. The court also addressed situations where the parties had expressly stipulated that no damages would be payable for a particular type of loss, the effect of implied terms under section 9 of the Indian Contract Act, 1872, and whether a matter fell outside the scope of an arbitration clause. Finally, the court considered whether an error of law apparent on the face of the award could be a ground for interference.

The headnote of the judgment explained that the appellant, a contractor, had entered into a contract with the Dominion of India for the supply of bricks, a contract containing a clause that mandated arbitration of any disputes arising from or relating to the agreement. When disputes subsequently arose, the parties referred the matter to arbitration, and the arbitrator rendered an award in favour of the contractor. The Union Government, which had succeeded the Dominion of India, challenged the award on several grounds. The Court held that merely providing for arbitration in a contract was insufficient; an arbitrator obtained jurisdiction only when both parties expressly agreed to refer the specific matters to arbitration, or when a court compelled arbitration under the clause if the dispute fell within its scope. The Court further clarified that the legality of an award could not be questioned on factual grounds, but could be challenged on a question of law if the illegality was evident on the face of the award, pursuant to section 16(1)(c) of the Arbitration Act. An exception existed where both parties expressly referred a question of law to the arbitrator, binding them to the arbitrator’s decision on that question as well as on the facts. The Court distinguished between cases where a question of law was specifically referred and those where a legal question was only incidentally material to deciding the referred issue, citing English authorities such as 1923 A.C. 395 and 1933 A.C. 592, and Indian authorities including 54 C.W.N. 74 at 79, 50 I.A. 324 at 330-331, 54 I.A. 427 at 430, 29 I.A. 51 at 60, 1942 A.C. 356 at 368 and 1950 S.C.R. 792 at 798. The Court also ruled that a wrong construction of a contract constituted an error of law that could be challenged if apparent on the award, and that awarding interest without contractual provision and without compliance with the Interest Act was likewise an error of law. Moreover, when parties expressly stipulated that no damages would be payable for a specific loss contemplated by them, they were bound by that stipulation and any claim for such damages had to be dismissed. Lastly, the Court noted that an agreement not found in a written contract could be implied under section 9 of the Indian Contract Act, 1872, and that matters not covered by the arbitration clause fell outside the arbitrator’s jurisdiction.

The Court explained that when a question of law was expressly referred to the arbitrator, the award could be challenged if the arbitrator acted illegally in deciding that question. Such illegal acts included deciding on evidence that was not admissible or applying principles of construction that the law does not support, as noted in the report of 1923 A.C. 395 at page 409. The Court further observed that a mistaken construction of a contract constituted an error of law and could be attacked provided the mistake was apparent on the face of the award. In the same vein, the Court held that awarding interest where the contract itself did not provide for interest and the requirements of the Interest Act were not satisfied also represented an error of law; this point was referenced to the decision reported at 65 I.A. 66. The Court posed the question whether the provisions of the Interest Act were applicable to arbitrations. Moreover, the Court stated that when the parties to a contract expressly agreed that no damages would be payable for a particular type of loss that was directly contemplated by the contract, they were bound by that agreement and any claim for damages relating to that loss had to be dismissed. Finally, the Court addressed situations where the dispute arose from an agreement that was not embodied in a written contract but had to be implied under section 9 of the Contract Act. In such cases, the dispute did not fall within the scope of an arbitration clause of the type previously discussed because the controversy related to the implied agreement rather than to the written contract, as held in the judgment reported at 1942 A.C. 356 at page 371.

The judgment was issued in the civil appellate jurisdiction concerning Civil Appeal No. 260 of 1953 and the connected appeal, Civil Appeal No. 12 of 1954. Both appeals arose from the judgment and decree dated 11 May 1951 rendered by the High Court of Judicature at Patna in Miscellaneous Appeal No. 253 of 1950, and from an appeal from Original Order No. 252 of 1950 that stemmed from the order dated 11 May 1951 of the Court of Subordinate Judge, Dhanbad, in Suit No. 34 of 1949 and Title Suit No. 27 of 1949. The appellant was represented by counsel for the State of Bihar, while the respondent was represented by counsel for the Union of India. The judgment was delivered on 24 March 1955 by Justice Bose. The Court noted that this appeal and Civil Appeal No. 12 of 1954, which would also be governed by the present judgment, raised identical legal points though there were factual differences. The Court indicated that it would first consider Civil Appeal No. 260 of 1953. The suit involved in that appeal concerned an arbitration matter. The appellant, referred to by the Court as “the contractor,” had entered into a contract with the Dominion of India through an Additional Chief Engineer of the Central Public Works Department on 1 November 1945 for the supply of bricks to that department.

In the present arbitration, the parties had agreed that any dispute arising out of or relating to the contract would be referred to the Superintending Engineer of the Circle, as stipulated in clause 14 of the agreement. Consequently, a reference was made on 21-1-1949, and an award was rendered on 8-5-1949. The award was then filed before the Subordinate Judge at Dhanbad, where the contractor sought its acceptance and requested that a decree be issued in accordance with the award. The Dominion of India responded by raising objections under section 30 of the Arbitration Act, 1940, and prayed that the award be set aside, or alternatively, that it be modified or corrected. The contractor’s application was entered as a suit under section 20(2) of the same Act, and a decree giving effect to the award was passed on 18-3-1950. By the time this decree was pronounced, the Constitution had come into force, and the Union of India had succeeded the Dominion of India as the respondent. The Union of India subsequently appealed to the High Court, which allowed the appeal in part, leading the contractor to bring the matter before the Supreme Court.

The arbitration originally comprised seventeen distinct heads of claim, but the present proceedings focused only on three of those heads, namely items 5, 8 and 17. Under the fifth head of claim, the contractor sought a sum of Rs 75,900, representing the price of eighty-eight lakh katcha (unbaked) bricks that were destroyed by rain. Although those katcha bricks were not expressly covered by the contract, the contractor nonetheless presented the claim in this form. The contract itself required the supply of two and a half crore pucca (baked) bricks, to be delivered according to a detailed schedule: thirty lakh bricks by 25-1-46, fifty lakh by 25-2-46, fifty-five lakh by 25-3-46, fifty-five lakh by 25-4-46, and sixty lakh by 25-5-46, with delivery to take place at the kiln site.

To adhere to this schedule, the contractor had to plan ahead and maintain a continuous production timetable. This required first preparing katcha bricks, loading them into the kilns for baking, and, while a batch was undergoing the baking process, preparing and stockpiling a fresh batch of katcha bricks ready to replace the baked ones as soon as they were removed. The responsibility of removing the baked bricks promptly rested with the Central Public Works Department (C.P.W.D.), which was expected to take the bricks away as soon as they were fully baked. 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, preventing the contractor from loading a new stock of unburnt bricks, while simultaneously the stockpile of katcha bricks awaiting baking continued to increase. Had everything been done to time, the two and a half crore bricks would have been delivered before the rains set in. But owing to the default of the C.P.W.D. in not removing the burnt bricks which

Because the baked bricks that were ready for removal were not taken away by the department, the schedule of work was delayed and the monsoon rains arrived, resulting in the loss of eighty-eight lakh unbaked bricks due to water damage. The contractor argued that this loss arose from the default of the Central Public Works Department and therefore the government should compensate him for the value of the destroyed bricks. The Union Government responded with two main arguments. First, it asserted that the unbaked bricks were not included in the contract; consequently, even if the department was at fault for failing to accept the burnt bricks on time, its liability could be limited only to a breach of that specific contract, and the loss of the unbaked bricks, which were outside the contract, was too remote to attract compensation. Second, the government contended that any claim for compensation was barred because the parties, at the time of forming the contract, had expressly contemplated such a situation and had stipulated that the Dominion Government would not be responsible for it. To support this position, the government relied on clause 6 of the agreement, which states: “The department will not entertain any claim for idle labour or for damage to unburnt bricks due to any cause whatsoever.” The arbitrator, however, interpreted the clause as not intended to relieve the department of its contractual duty to remove the burnt bricks and therefore awarded the contractor a sum of Rs 64,075 for the loss of the unbaked bricks. The Court found that the arbitrator’s construction was legally erroneous. It observed that government departments face difficulties comparable to those of contractors, including labour problems, equipment breakdowns in remote locations, and the risk of thunderstorms and heavy rains in May, noting that the final delivery date was 25-May-1946. The Court held that when both the government and the contractor expressly agreed that the government would not be liable for any loss arising from such a remote consequence, that provision became an express term of the contract, binding the contractor. Having voluntarily entered into the contract on those absolute terms, the contractor could not later repudiate the agreement simply because the outcome proved unfavorable. Nevertheless, the Court clarified that the government was not completely exempt from liability; it could be held liable only for damages caused by its breach of the specific obligation to remove the burnt bricks. Under section 73 of the Contract Act, the contractor had a duty to mitigate his loss, which would have permitted him to remove the bricks himself, store them elsewhere, and claim compensation for any ensuing loss. The Court noted that two of the contractor’s claims, which were uncontested, related to such mitigation measures, and that he had already been awarded Rs 11,744-11-0 for those aspects.

In this case, the award granted the claimant Rs 11,744-11-0 under claim No 4 for the extra load associated with stacking one crore seven lakh bricks that had accumulated at the kiln site because the department failed to perform its part of the timetable. In addition, the award allotted Rs 15,500 under claim 13 for the expense of levelling and dressing the land so that the additional bricks could be stacked there. The claimant could alternatively have sold the bricks on the market and claimed the price difference, but ordinarily he could not recover compensation for damage to the katcha bricks unless he could demonstrate that such damage, which is usually considered too remote, was expressly contemplated by the parties at the time the contract was executed; this requirement is found in section 73 of the Contract Act. The Court observed that the parties had indeed expressly contemplated this contingency, as they had incorporated clause 6 as an express provision in their contract to provide for such a situation. Consequently, there can be no doubt that the arbitrator erred in his legal interpretation, and his construction of the contract terms was faulty. The next issue was whether the arbitrator’s erroneous decision was final despite being legally wrong. Under Indian law, this question is governed by section 16(1)(c) of the Arbitration Act of 1940, which authorises a Court to remit an award for reconsideration when an objection to the legality of the award is apparent on its face. This provision covers situations where an error of law is evident on the face of the award. In determining the presence of such an error, a distinction must be drawn between cases where a question of law is specifically referred to the arbitrator and cases where a decision on a question of law is merely incidentally material to resolve the question that was actually referred. When a question of law is specifically referred and the parties clearly seek an arbitral decision on that point rather than a judicial one, the Courts will ordinarily refrain from interference, although authority exists that the Courts may intervene if it is apparent that the arbitrator acted illegally in reaching his decision—for example, by relying on inadmissible evidence or on a principle of construction that the law does not support. The Court cited the speech of Viscount Cave in Kelantan Government v. Duff Development Co. (1) at page 409. However, that particular issue does not arise in the present case. The Court noted that the law on this matter is, in its view, the same in England as in India, and the governing principles have been thoroughly reviewed and clearly set out by the House of Lords in F. B. Absalom Ltd. v. Great Western (London) Garden Village Society (1) and in Kelantan Government v. Duff Development Co. (1). The Court also referred to the Privy Council decision in Durga Prasad v. Sewkishendas (3), where the same law was applied.

The Court referred to the authority in Absalom’s case (2) as applied in India and also cited Champsey Bhara & Co. v. Jivraj Balloo Spinning and Weaving Co. (4) together with Saleh Mahomed Umer Dossal v. Nathoomal Kessamal (5). It observed that the broader language employed by Lord Macnaghten in Ghulam Jilani v. Muhammad Hassan (1) concerned the revisional powers of the High Court under the Civil Procedure Code and therefore must be limited to the facts of that case, where the sole question of law involved was the issue of limitation. The Court stressed that an arbitrator is not a conciliator and cannot disregard or misapply the law in pursuit of what he believes to be just or reasonable. An arbitrator is a tribunal chosen by the parties to decide their disputes in accordance with law; consequently, he is bound to follow and apply the law, and where his error appears on the face of the award the Courts may correct it. The only exception to this principle, the Court explained, occurs when the parties expressly refer a question of law as a separate and distinct matter. The Court listed the relevant authorities, namely [1923] A.C. 395 (1), [1933] A.C. 592 (2), 54 C.W.N. 74 (3), 50 I.A. 324, 330 & 331 (4), 54 I.A. 427, 430 (5), and 29 I.A. 51, 60 (6). In A.M. Mair & Co. v. Gordhandass Sagarmull (1), Justice Fazl Ali quoted a passage from Viscount Simon’s speech in Heyman v. Darwins Ltd., wherein the learned Lord Chancellor subsequently quoted Lord Dunedin from another case. It was argued that when a party must rely on the contract to establish his case, the dispute must fall within the arbitration clause; however, the Court said that merely falling within the clause was insufficient. The parties also had to define the dispute and agree to refer that defined dispute to arbitration, or, if they failed to do so, the Court should compel such a referral, as noted by Lord Macmillan in Heyman’s case (1) at pages 369-370. Accordingly, where no specific question of law was referred either by agreement or by court compulsion, the arbitrator’s decision on that point was not final, even if it lay within his jurisdiction, and it remained essential for the arbitrator to decide the question incidentally. The Court observed that Lord Russell of Killowen and Lord Wright had sat in the earlier case of F.R. Absalom Ltd. v. Great Western (London) Garden Village Society (1) as well as in Heyman’s case (2); they would have highlighted any distinction had a conflict arisen, but none existed, and the Court did not read Justice Fazl Ali’s judgment as contrary to that principle. The Court then indicated that it must examine whether the arbitrator had been specifically asked to construe clause 6 of the contract or any other part of the contract, or whether any question of law had been expressly referred, and it emphasized the importance of the word “specifically.”

The Court explained that the term “specifically” acquires significance because any party that refers a dispute to arbitration retains the right to demand that the arbitrator they have chosen resolve the dispute in accordance with the law. Consequently, before a party’s entitlement to an arbitral determination on a particular issue can be denied, the Court must be convinced beyond doubt that both parties intended the arbitrator to decide a question of law, rather than leaving the determination to the courts, and that they also intended the arbitrator’s decision on that legal point to be final and binding. The Court cited precedents to support this principle, namely the judgments reported in 1950 S.C.R. 792 at page 798, 1942 A.C. 356 at page 368, and 1933 A.C. 592.

The agreement between the parties contains a clause, identified as clause 14, which obliges the parties to refer all disputes concerning the contract to arbitration. Clause 14 reads as follows: “Except where otherwise provided in the contract, all questions and disputes relating to the meaning of the specification and instructions mentioned herein, as well as any matters concerning the quality of materials or any other question, claim, right, matter or thing whatsoever arising out of or relating to the contract, specification, instructions, orders or these conditions, or otherwise concerning the supplies, whether arising during the progress of delivery or after the completion or abandonment thereof, shall be referred to the arbitration of the Superintending Engineer of the Circle for the time being in the manner provided by law relating to arbitration for the time being in force, who after such investigation as he may think proper shall deliver his award which shall be final, conclusive and binding on all parties to the contract.” The controversy originated from a series of claims made by the contractor in several letters addressed to the Additional Chief Engineer of the Central Public Works Department (C.P.W.D.). These letters culminated in a petition, exhibited as Ex B(1), wherein the contractor summarized his claims; this petition is undated. Upon receipt of the petition, a representative of the C.P.W.D. invoked the jurisdiction of the arbitrator, although the letter effecting that invocation has not been filed in the record. The arbitrator subsequently wrote to the contractor requesting a statement of claim; that correspondence also remains unfurnished, but it is referred to in Exhibit C(1), which contains the contractor’s statement of claim filed in response.

Because the original documents setting out the precise terms of reference are missing, both parties asked the Court to infer the scope of the arbitration from the contractor’s statement of claim and from the recitals contained in the award. The contractor’s counsel relied on the following passage from the statement of claim: “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 argument of the department that they are not liable to compensate us on this account because of clause 6 of the agreement is not correct. Clause 6 refers only to such cases over which the department has no control. But if the department had lifted the bricks (this was entirely under their control) then no such loss would have occurred. Also it is noted that clause 6 refers only to ‘damage’ and not to ‘destruction’. Damage means only partial loss; it cannot mean total destruction.” This excerpt was presented to illustrate the contractor’s position that clause 6 should not shield the department from liability where the department’s own failure caused total loss of the bricks.

In the contractor’s statement of claim the fifth item sought compensation for the loss of katcha bricks amounting to Rs 75,900. The contractor contended that the loss occurred because the department failed to lift the monthly quota of bricks, an act that was within the department’s control. Consequently, the contractor argued that the loss would not have happened if the department had performed its duty. The contractor further asserted that clause 6 of the agreement covered only “damage,” which the contractor interpreted as a partial loss, and not “destruction,” which implied a total loss. Therefore, the contractor maintained that clause 6 could not be invoked to exempt the department from liability for the total destruction of the bricks.

The award recorded that the contractor’s statement of claim comprised seventeen separate items, the aggregate value of which was Rs 4,76,138-12-0, plus interest, bringing the approximate total claim to Rs 5,03,803-12-0. Item 5, as listed in the award, specifically related to “Payment for katcha bricks destroyed by rain” and quantified the amount sought at Rs 75,900. In the substantive portion of the award the arbitrator examined this claim in detail. The contractor argued that the department’s failure to remove the bricks, thereby preventing accumulation beyond sixty lakh bricks, constituted a breach of an implied contractual obligation of the Central Public Works Department (C.P.W.D.). The Executive Engineer testified, and the department relied on clause 6 of the contract as a defence. The arbitrator rejected the department’s reliance on clause 6, observing that the clause was intended to cover contingencies that were not caused by the department’s own actions. The arbitrator held that the removal of the bricks was an implied duty and that the department could not hide behind clause 6 to escape responsibility. The arbitrator further emphasized that refusing to recognise this duty would contravene common-sense reasoning and the fundamental principles of contractual performance.

The court subsequently examined whether the matter had been properly referred to arbitration under the applicable law. It observed that the documents placed before it did not contain a specific reference to a point of law that the parties had mutually agreed to submit to arbitration, which is a prerequisite under the arbitration law. The only reference to the legal issue was an incidental argument raised by the Dominion Government to oppose the contractor’s claim under item 5, and the contractor’s sole submission. Since a proper reference requires the assent of both parties, the court held that, in the absence of such agreement, the matter could not be deemed arbitrated. Consequently, where a dispute over law arises and the parties have not expressly consented to refer that issue to the arbitrator, the court retains jurisdiction to intervene. The court noted that under section 20 of the Arbitration Act, a recalcitrant party may be compelled by a court order, under sub-section 4, to submit the disputed issue to arbitration. However, without either a bilateral agreement on the terms of reference or a court order invoking section 20(4), the arbitrator lacks the exclusive jurisdiction required to decide the legal question. Therefore, the court affirmed that the jurisdiction of the courts to set aside an arbitral award on the basis of an apparent error on its face is not ousted merely because the parties raised incidental arguments concerning a point of law during the arbitral proceedings.

The Court observed that the mere fact that both parties raise incidental arguments concerning a point of law does not, by itself, confer exclusive jurisdiction on the arbitrator to decide that point. The Court referred to the language of Lord Wright in F. R. Absalom Ltd. v. Great Western (London) Garden Village Society (1933) A.C. 592, 616, a decision that is comparable to the present matter on this issue. Lord Wright had explained that there was no submission of any specific question of law as such, nor was there a specific question of law as a separate matter. Although, of course, the arbitrator would inevitably have to decide some questions concerning the construction of the building contract, the two matters that had been submitted were composite questions of law and fact. There was no express submission of the true effect of the contract based on undisputed facts, as was the approach in the Kelantan case, nor was there a distinct and separate factual determination as in In re King and Duveen (1913) 2 KB 32. The arbitrator was not being asked simply and specifically to determine, on an agreed or assumed factual basis, the true interpretation of clause 26 or clause 30 of the conditions, or of both together; rather, the arbitrator was required to make an award on the two submitted matters, addressing whatever questions of fact and law might arise.

The Court then turned to the contractual provision that was analogous to the one relied upon in the House of Lords case. Clause 32 of that contract corresponded to clause 14 in the present contract and provided: “Provided always that in case any dispute or difference shall arise … as to the construction of the contract or as to any matter or thing arising thereunder … such dispute shall be and is hereby referred to the arbitration and final decision of …”. The arbitrator in the present case invoked 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 regarding the construction of the contract, the jurisdiction of the Courts was not removed. Lord Russell of Killowen, at page 610, explained that no specific question of construction or of law had been submitted. The parties had been ordered to deliver pleadings, and by the contractor’s statement of claim the contractor asserted that the arbitrator should, under his powers, revise the last certificate issued. It was at that point that the question of the construction of condition 30 arose as a question of law—not a specifically submitted issue, but a material question in deciding the matters that had been submitted. The arbitrator decided that question of law, but the Court held that if, on the face of the award, the arbitrator had decided it wrongly, the decision was open to review by the Court. The Court concluded that the present situation mirrors that precedent: the incidental reference to a point of law in pleadings and arguments concerning the broader issue of liability for damages is insufficient to vest the arbitrator with exclusive jurisdiction over that point of law. The next question, therefore, is whether the error is apparent on the face of the award.

In determining whether the award contains an error that is apparent on its face, the Court examined the language of clause 6. The Court found that the passages quoted from the award clearly demonstrate that clause 6 expressly relieves the Union Government of any liability relating to the claim in question. Accordingly, the Court concluded that the arbitrator erred in awarding any sum against the Government under that head of claim. The error was therefore apparent from the face of the award, and the award must be set aside with respect to that portion.

The next disputed head of claim was item No 8 in the contractor’s statement of claim, which sought “Cost of additional wages paid to the coolies on account of non-supply of ration and cloth-Rs 51,495.” No specific question of law had been referred to this issue, so the Court’s task was again to see whether the award exhibited an error of law apparent on its face. The contractor’s claim rested on a narrative that, at the time the work was allotted, a local rationing system existed and, under the contract conditions, the contractor was prohibited from employing local labour and therefore had to bring in about 1,800 coolies from distant areas. The contractor asserted that it was impossible to obtain rations for these coolies from the open market and that it had informed the authorities concerned, who then promised to supply the required rations. The contractor argued that the letters from the department showing this promise created a mutual understanding and that, even on a basis of circumstantial evidence, the promise was legally enforceable. The contractor further contended that any breach of the promise made the department liable to compensate for the loss, and that, in addition to legal liability, the department bore a moral responsibility to supply the rations.

The Court noted that this claim was not founded on any express clause of the contract, nor was it claimed to be implied in the contract. Instead, the contractor relied on collateral promises evidenced by two letters from the department and a promise by the authorities concerned, which the contractor later framed as a mutual understanding and a moral duty. The arbitrator addressed the matter by first stating that the contractor had submitted its tender on 25-September-1945 in the bona-fide belief that the department would make the necessary arrangements. The arbitrator then set out a chronology: on 1-November-1945 the contractor was informed that its tender had been accepted; on 9-November-1945 the contractor warned the Executive Engineer of its immediate requirements for rations; and finally the contract was accepted and signed on 22-November-1945. The Court observed that it was admitted that the contract contained no clause dealing with rations and that the issue had not been raised when the tender was accepted on behalf of the Dominion Government. The question of rations was only raised later in a letter to the Executive Engineer, after the contract had already been signed. Because the contract itself did not provide for a duty to supply rations, the Court found that there was no contractual basis for the claim, and consequently the arbitrator’s finding of liability was not supported by the award.

In this case the contractor wrote to the Executive Engineer and then signed the contract without waiting for any reply. It is well established that a government can be bound only by contracts that are entered into in the prescribed manner and that are signed by the authority empowered to do so. Reference to the agreement exhibited as Ex A(1) shows that the acceptance on behalf of the Dominion Government was made by the Additional Chief Engineer and not by an Executive Engineer. Consequently a letter addressed to the Executive Engineer could not have any legal effect; even if the letter were forwarded to the Additional Chief Engineer for consideration, it would amount to nothing because the proper authority had already accepted the tender.

The tender, containing certain terms, was submitted and was accepted on 1-11-45. Both the contractor and the Government were in agreement on all the matters contained in the tender and their conduct demonstrated that each side intended the contract to be reduced to writing. Before the agreement was signed, one party sought to introduce an additional condition. Assuming that the request was made to the other contracting party, the parties nevertheless proceeded to accept and sign the contract as it stood before the new suggestion was made, without awaiting the other side’s assent. The law does not permit the inference that the fresh proposal was accepted; rather, the correct legal conclusion is that the new suggestion was abandoned and the contractor was satisfied to accept the contract without that condition. A person cannot be bound by a one-sided offer that is never accepted, especially where the parties intend that the contract be documented in writing. The written document excludes speculation about what was or was not agreed, even if a matter was raised during negotiations.

The arbitrator noted that the contractor had stated that Sindri was a rationed area, that the CPWD supplied rations at controlled rates through arrangements with the local Civil Supply Authorities, and that nobody employed by the CPWD was permitted to make independent arrangements with the Civil Supply Authorities. The contractor argued that the low rates tendered in his bid demonstrated his expectation that his labourers would receive rations at the controlled rates. After considering further contentions, the arbitrator concluded that there was an implied contractual obligation on the part of the CPWD to make controlled rations available to the contractor and that this obligation had not been performed with due diligence and care. Accordingly, the arbitrator awarded compensation of Rs 40,000. The Court observed that this conclusion was erroneous because factual findings must be based on evidence or admissions; they cannot be derived merely from one side’s contention, particularly when the opposite party expressly denies the allegation.

In this case the Court observed that the contractor had entered into the agreement fully aware of its terms, and despite any unilateral hopes he maintained, he proceeded without obligating the other party to new conditions or awaiting the other party’s response to his subsequent proposals. It was also noted that the matter of rationing did not fall under the authority or direction of the Dominion Government; rather, it was a local issue managed by the Provincial authorities at that time and subject to their contracts. Consequently, the C.P.W.D., being a department of the Dominion Government, was not involved in rationing except that its employees, like all persons in the Sindri area, were required to comply with the local rationing system. The Court pointed out that the arbitrator had conflated the Dominion Government with the Provincial Government in the opening sentence of that head, where the arbitrator reproduced the contractor’s claim that “commodities such as rations and cloth which were absolutely essential for the maintenance of his labourers and which were under Government control.” By basing his reasoning solely on the contractor’s assertions, the arbitrator failed to recognize that the Dominion Government and the Provincial rationing authorities were distinct and separate entities. The situation, therefore, reduced to the following: two individuals, neither belonging to the Provincial Government nor possessing any control over rationing, entered into an agreement to perform work in a rationed area. They insisted that the contract be reduced to writing, a requirement that was essential because the contract was with the Dominion Government, which could not contract otherwise; they agreed on and finalized all terms, and then, at the last minute, one side raised a point concerning rationing without waiting for a reply and without incorporating the term into the contract, signing the agreement as it stood before that point was even raised during the negotiations. The Court held that it was an error in law to infer or imply any contractual obligation from these circumstances. Moreover, the Court identified a further error: if the alleged agreement concerning rations and cloth did not arise from the written contract but was to be inferred as a separate, subsidiary contract—especially when reference was made to section 9 of the Contract Act—such a contract would not be subject to the arbitration clause. Although clause 14 was broadly worded, it was confined to matters relating to the written contract, and if rations and cloth were not covered by that contract, they were not matters that related to it. Should the parties choose to add a fresh contract in addition to or in substitution for the old one, the arbitration clause could not extend to the new contract, as explained by Lord Macmillan in Heyman v. Darwins Ltd. The last item in

In this appeal the dispute concerned claim number seventeen, which related to interest. The statement of claims set out that the claimant sought interest on the monetary amount involved in the claim at a rate of six percent, amounting to Rs 27,665. The work had been completed in May 1946 and the claimant argued that it was proper for the department to have decided all of the claimant’s claims by at the latest 31 December 1947, a step that had not been taken. Because of the department’s failure, a large sum remained blocked, forcing the claimant to obtain money from bankers on which interest was payable, and the claimant therefore prayed for interest for a period of sixteen 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; consequently the arbitrator awarded interest at six percent for sixteen months on the total amount of the awards, namely Rs 17,363. The arbitrator then listed the amounts awarded under each head of claim, each of which related to a claim for an unliquidated sum. The court noted that the Interest Act of 1839 applied, as interest was not otherwise payable by law in such a case, citing Bengal Nagpur Ry. Co. v. Ruttanji Ramji. However, even assuming that an arbitrator could be considered a “court” within the meaning of that Act—a premise that did not appear to be correct—certain conditions must be satisfied before interest can be awarded under the Act: there must be a debt or a sum certain; it must be payable at a certain time; the debt must arise from a written contract specifying a time for payment; and there must have been a written demand stating that interest would be claimed from the date of that demand. None of these elements were present, and therefore the arbitrator was held to have erred in law by thinking he possessed the authority to allow interest merely because the demand seemed reasonable. A suggestion was made that interest could be awarded from the date of the suit by analogy with section 34 of the Civil Procedure Code, 1908, but the court observed that section 34 did not apply because an arbitrator is not a “court” within the meaning of the Code, and the Code does not apply to arbitrators. Moreover, even a court would lack the power to grant interest after the filing of a suit absent section 34. Consequently, the award of interest was rightly struck out. The court also noted that the overall delay was only five days. The final date for removal of the last installment of bricks was 25 May 1946, and the contractor claimed that the entire contract had been completed by the end of May 1946. It was difficult to see how eighty-eight lakh bricks could have been damaged by rain in the last five days of May, and the court found the claim of damage implausible.

The Court observed that the alleged damage to the bricks would have taken place even without the alleged delay, because the contractor needed to keep a large stock of unbaked bricks ready for entry into the kilns in order to adhere to his schedule. The Court noted that this particular question fell within the jurisdiction of the arbitrator, identified as matter (1) 65 I.A. 66, and therefore it was not a matter on which the courts could intervene. With that conclusion, the Court marked the end of Civil Appeal No. 260 of 1953 and turned its attention to the next matter, Civil Appeal No. 12 of 1954. In this appeal only two items were contested, namely heads four and seventeen of the claim. The overall structure of the claim was the same as in the earlier case. A contractor had entered into an agreement that contained identical terms and conditions, differing only in the details of supply. The agreement had been signed on the same day as the earlier contract and by the same authority acting on behalf of the Dominion Government. The dispute was again placed before the same arbitrator, whose award in this case was rendered on 1-5-1949, a week earlier than the award in the previous case. No specific question of law was raised for consideration, and the Court therefore did not need to revisit the same legal principles. The Court applied the same decision as before. Head four dealt with cloth and rations; the claimant’s case and the Dominion Government’s response were identical to those in the earlier proceeding, but the award in the present case was based not on an implied contractual duty but on a “moral and implied obligation.” The Court held that this error was even more serious than the earlier one. The claimant had sought Rs 51,495, while the arbitrator had awarded only Rs 30,000. Head seventeen concerned interest; the contractor claimed Rs 27,665, but the arbitrator awarded Rs 9,954. The Court found the same error of law apparent on the face of the award. It affirmed that the High Court was correct in dismissing the claims under the disputed heads. Consequently, both appeals failed and were dismissed with costs awarded in this Court.