Union of India vs A.L. Rallia Ram

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

Court: Supreme Court of India

Case Number: Not extracted

Decision Date: 19 April 1963

Coram: B.P. Sinha, J.C. Shah, N. Rajagopala Ayyangar

In this matter, the Supreme Court heard an appeal that was filed with a certificate of appeal under article one hundred thirty‑three clause one sub‑clause c of the Constitution. The appeal was directed against the judgment of the High Court of Punjab in First Appeal number seventy‑five of nineteen fifty‑one, which had affirmed the decision of the Subordinate Judge of Delhi. The subordinate judge had declined to set aside an arbitration award. That award required the Union of India to pay the respondent the sum of rupees three lakh twenty‑six thousand two hundred and fifty‑one and six annas three paise, together with costs and future interest calculated at four and one half per cent. The appellant therefore sought to overturn the award and to obtain relief from the financial liability imposed by it.

In August of nineteen forty‑six, the Chief Director of Purchases (Disposals) in the Food Department of the Government of India issued a public invitation for tenders to purchase a stock of American cigarettes that were stored in the cities of Calcutta, Karachi, Delhi and Agra. The respondent submitted a tender proposing to buy the entire stock at a uniform price of eight annas and three paise per packet of twenty cigarettes. The aggregate value of the stock at the offered rate was approximately thirty‑nine lakh rupees. The Government of India accepted the respondent’s tender and conveyed its acceptance in a letter that was signed by the Chief Director of Purchases. The acceptance letter was accompanied by Form F.D. (M) seventy, which set out the general conditions of the contract. Clause number thirteen of that form contained an arbitration clause stating that any question or dispute arising under the general conditions, any special conditions of the contract, or in connection with the contract, except where the contract itself expressly provided for a decision, would be referred to an arbitrator to be nominated by the Chief Director and an arbitrator to be nominated by the contractor. If the two arbitrators could not agree, the clause provided that they would together appoint an umpire in writing before proceeding with the reference, and the decision of the arbitrators or, failing their agreement, the decision of the appointed umpire, would be final and conclusive.

The respondent received delivery of twenty‑nine lakh ninety‑three thousand five hundred ninety‑seven packets of cigarettes and made a payment of rupees seventeen lakh seventy‑eight thousand five hundred seventy‑three and six annas four paise. Upon inspection, the respondent discovered that a portion of the cigarettes were mildewed and therefore unfit for use. The Government of India constituted a Board of Survey to examine the undelivered portion of the stock. The Board reported that cigarettes valued at six lakh fifty‑eight thousand four hundred fifty‑three rupees were wholly unfit for issue. For the remaining cigarettes, the Board recommended a reduction in price at specified rates. The respondent rejected the Board’s revised terms and asked the Government to agree to a uniform reduction of fifty per cent in the price of both the cigarettes that had already been delivered to him and those that were still in the Government’s possession. Subsequently, the Government of India decided to cancel the contract with respect to the undelivered cigarettes and offered to take back from the respondent, out of the stock that had been delivered, those packets that were still in their original packaging and could be identified, subject to the condition that the respondent would not claim any expenses such as freight, storage, rent, charges or any other costs incurred in connection with the return of the cigarettes. The respondent accepted this offer while reserving his right to claim incidental expenses.

The Government agreed to take back the stock of cigarettes on the condition that the cigarettes were in their original packaging and could be identified, and that the respondent would not make any claim for freight, storage, rent, charges or any other expenses incurred in connection with the cigarettes that were returned. The respondent accepted this offer, while expressly reserving the right to claim any incidental expenses that might arise. Consequently, the respondent returned twenty‑four lakh thirteen thousand five hundred packets of cigarettes that were still in their original packing. Between 13 June 1947 and 8 February 1948 the Government of India refunded the respondent the sum of Rs 14,54,215⁄7.

On 26 June 1948 the respondent wrote to the Director General of Disposals informing that, pursuant to clause 13 of the general condition of Form F.D. (M) 70, he had appointed M W Lewis as his arbitrator and requested that the Director General also appoint an arbitrator on the Government’s behalf. In a letter dated 7 July 1948 the Director General replied that the Government of India had appointed Bakshi Shiv Charan Singh as its arbitrator and that the parties were free to raise any pleas before the arbitrators, including the plea that no dispute existed that could be referred to arbitration. The two arbitrators proceeded to consider the reference but were unable to reach a unanimous decision, and therefore the matter was referred to an umpire. The umpire, in an award dated 30 January 1950, granted the respondent Rs 1,32,417⁄10 for the loss suffered on account of six lakh thirty‑four thousand two hundred seventy packets of cigarettes that the respondent had not returned, Rs 1,25,000 for incidental expenses, and interest of Rs 68,833⁄12⁄3. In total the umpire awarded against the Union of India the sum of Rs 3,26,251⁄6⁄3 together with future interest and the costs of the arbitration.

Following the award, the respondent applied to the Subordinate Judge of Delhi for the award to be filed under section 14 of the Arbitration Act. The Union of India moved for an order setting aside the award. In its submission the Union argued, inter alia, that there was no legally binding contract between it and the respondent because the acceptance note had not been signed on behalf of the Governor‑General of India. It further contended that the entire arbitration process, including the appointment of the arbitrators and the umpire, was invalid for failure to comply with section 175(3) of the Government of India Act, 1935, and that, even assuming procedural validity, the award contained apparent errors of law. The Subordinate Judge rejected the Union’s motion to set aside the award and directed that a decree be issued in accordance with the umpire’s award. The Union appealed this decision, but the High Court of Punjab upheld the Subordinate Judge’s order. The appeal before this Court therefore raised two questions: first, whether the award should be set aside on the ground that there was no valid arbitration agreement in conformity with section 175(3) of the Government of India Act, 1935 authorising the umpire to make the award; and second, whether the award is liable to be set aside on the ground that it is erroneous on its face.

In this case the Court identified two issues that required determination. The first issue concerned whether the award could be set aside because there was no valid arbitration agreement in accordance with section 175(3) of the Government of India Act, 1935. The second issue was whether the award could be set aside because it was erroneous on its face. The Court then examined the letter that accepted the tender dated 9 September 1946. That letter, which bore the signature of the Director of Purchases, stated that the tender submitted by the respondent was accepted to the extent shown in the schedule annexed to the letter and that the acceptance was subject to the special terms and conditions set out in a separate letter from the Chief Director of Purchases. The acceptance was also subject to the general conditions of contract contained in Form F.D. (M) 70, which accompanied the acceptance letter. The first clause of these general conditions defined the term “Government” to mean “the Governor‑General for India in Council and when the context so admits his successors and assigns and the Government of India and officers acting for him or them.” Clause 2 provided that the Governor‑General for India in Council was not bound to accept the highest bid or any bid at all, nor was it required to give reasons for refusing a tender. Subsequent clauses set out provisions relating to the payment of price, the condition of goods, risk, delivery, liability, failure to pay price, failure to take delivery after payment, recovery of sums due and other matters. Clause 13 incorporated an arbitration clause as a term of the contract. Consequently, acceptance of the tender was subject to the special conditions contained in the Chief Director’s letter and to the general conditions in Form F.D. (M) 70, with the special conditions prevailing over the general conditions whenever there was any conflict between them.

The Court then asked whether the terms of the acceptance letter, which formed the contract between the parties, complied with the requirements of the Government of India Act, 1935. Section 175(3) of that Act provides that “All contracts made in the exercise of the executive authority of the Dominion or of a Province shall be expressed to be made by the Governor‑General, or by the Governor of the Province, as the case may be, and all such contracts and all assurances of property made in the exercise of that authority shall be executed on behalf of the Governor‑General or Governor by such persons and in such manner as he may direct or authorise.” The Court noted that the language of the section is mandatory. Before any liability could bind the Dominion of India, a contract had to be expressed as being made by the Governor‑General when it was executed in the exercise of the Dominion’s executive authority, and it had to be executed on the Governor‑General’s behalf by persons and in the manner authorised by him. The Court referred to the decision in Seth Bikhraj Jaipuria v. Union of India, where it was held that the provisions of section 175(3) are mandatory rather than directory, and that a contract which does not conform to the requirements of that section creates no enforceable legal obligation. Applying that principle, the Court observed that if the acceptance letter and the contract it created did not satisfy the mandatory requirements of section 175(3), then the contract could not give rise to any enforceable legal obligation. The judgment concluded with the observation that the authority of an

The Court explained that an arbitrator’s power originates from the parties’ mutual decision to refer their disputes to arbitration. Under section 2(a) of the Arbitration Act, 1940, an “arbitration agreement” is defined as a written instrument in which the parties agree to submit present or future differences to arbitration, irrespective of whether the agreement names an arbitrator. Consequently, a written document embodying a valid agreement to refer differences to arbitration is indispensable. However, the Court emphasized that the written agreement does not have to be a formal contract signed by both parties, nor is a signature a prerequisite for a valid arbitration agreement. What is essential is that the parties have reached an accord to submit their present or future differences to arbitration, that this accord is documented in writing, and that the parties accept that writing. The Court observed that Clause 13 of Form F.D. (M) 70 satisfies all of these conditions.

The Court then turned to the fact that the Dominion of India was itself a party to the arbitration agreement. Because the agreement was a contract within the meaning of the Government of India Act, 1935, the Court held that, to be enforceable against the Dominion, the agreement had to comply with the formalities prescribed in section 175(3) of that Act. The remaining issue for determination therefore was whether the letter in which the respondent accepted the tender complied with the requirements of section 175(3).

In addressing this issue, the Court noted that section 175(3) does not expressly demand that a contract be executed as a formal document signed by both the Dominion of India and the other contracting party in order to be effective. The Court observed that, in the absence of any specific direction issued by the Governor‑General under section 175(3) prescribing the manner in which a contract could be validly concluded by correspondence, the requisite conditions for a valid contract could be satisfied through written correspondence. The Court pointed out that the contracts for the sale of “War‑disposal” goods were not mandated by the Governor‑General to be executed as formal documents signed by the Governor‑General and the purchasing party. While section 175(3) employs the term “executed,” the Court clarified that this term does not by itself require a formal contract signed by the parties. Rather, a tender for the purchase of goods issued in response to an invitation that was made by or on behalf of the Governor‑General of India, together with an acceptance expressed in writing as being made in the name of the Governor‑General and signed by a person authorized to act on his behalf, would satisfy the statutory requirements of section 175(3).

The Court further described the nature of the goods and the tender process. The goods that were to be sold were property of the Government of India, and the tender notice itself had been issued by the Government of India, Department of Food. The notice bore the title “Tender Notice issued by the Government of India, Department of Food (Division III), New Delhi,” and the authority identified as the issuer was the “Government of India, Department of Food (Division III), office of the Chief Director of Purchases, Jamnagar House, New Delhi.” According to Clause 9 of the tender document, delivery of the goods was to be made ex.

In the tender documents, clause ten required the Government to provide assistance for the movement of the goods to the extent feasible, and clause eleven stipulated that the Government would pay the import duty on the cigarettes. Clause six further provided that the stock of cigarettes to be delivered would be examined by a Survey Board appointed by the Government of India, and that the Board’s decision would be binding on the tenderer. In the tender submission dated 21 August 1946, the respondent indicated that he would offer a price of Rs. −8⁄3 per packet only on the condition that the Government gave a guarantee that it would not undersell the cigarettes at any stage. Subsequent discussions between the respondent and the Chief Director of Purchases took place on 3 September 1946, during which certain terms were agreed to be incorporated into the acceptance letter. In a letter dated 4 September 1946, the respondent set out those terms, which clearly showed that the Government undertook several obligations. These obligations included the appointment of a Survey Board, the issuance of separate delivery letters for each depot to facilitate delivery, an assurance that the Government would obtain railway priority and other transport facilities for the dispatch of goods stored at the various depots, and the undertaking to transport the goods from the Assam depot to Calcutta at the Government’s risk and cost.

All of these conditions were incorporated into the acceptance note issued by the Chief Director of Purchases. The acceptance note bore the heading “Government of India, Department of Food (Div. III) New Delhi” and referred to the obligations of the Dominion in clauses six, nine and ten. By clause thirteen, the special conditions were declared to prevail over the general conditions that had been incorporated into the contract. The Court considered that the correspondence between the parties, which ultimately resulted in the acceptance note, amounted to a contract expressed to be made by the Government and, therefore, by the Governor‑General, because the Governor‑General had invited the tender through the Director of Purchases and had, through the Chief Director of Purchases, accepted the respondent’s tender subject to the prescribed conditions. The authority of the Chief Director of Purchases to contract for the sale of “War‑disposal” goods and to sign the contract was not denied. The Chief Director signed the document in his official capacity and did not expressly state that he was signing on behalf of the Governor‑General; however, a fair reading of the letter’s contents, in light of the obligations undertaken, leads to the reasonable conclusion that the contract was executed on behalf of the Governor‑General. No rules issued by the Governor‑General were presented before the Court showing that an officer authorized to execute a contract for the sale of “War‑disposal” goods must describe himself as signing on behalf of the Governor‑General of India.

In this case the High Court had concluded that because the Government of India had agreed to refer its disputes to arbitration and had participated in the proceedings before both the arbitrators and the umpire, it had thereby waived any objection based on the alleged illegality of the contract and therefore could not raise such an objection in an application seeking to set aside the award. The Supreme Court did not accept that reasoning. It observed that the provisions of section 175(3) of the Government of India Act were mandatory, and the mere fact that the Government had not argued before the arbitrator that no valid arbitration agreement existed did not give the arbitration agreement any legal validity. The Court explained that the arbitrator’s authority to hear the case derived exclusively from the terms of the arbitration agreement; if, in law, the agreement was not valid, the arbitrator’s proceedings were unauthorised. Consequently, every contract that bound the Government was required to satisfy the conditions of section 175(3) of the 1935 Act, and a waiver could not prevent the Government from pleading that a contract was absent in accordance with the law.

The Court further described the nature of an arbitral award. It noted that an award, whether rendered by a lawyer or a layperson chosen by the parties, was ordinarily not open to challenge on the ground that it was erroneous. To give effect to arbitration and to render awards enforceable, a system of assistance by the ordinary courts had been created. The Court held that it possessed the power to modify or correct an award when there were imperfections of form, clerical mistakes, or decisions on issues that were not part of the reference and could be severed from the matters that were referred. The Court could also remit an award if it left certain referred matters undetermined, if the award was indefinite, or if the legality of the award was plainly questionable on its face. Additionally, the Court could set aside an award on grounds of corruption or misconduct by the arbitrator, or where a party had engaged in fraudulent concealment or wilful deception. However, the Court could not interfere with an award that was otherwise proper merely because it appeared erroneous. The Court emphasized that an award was ordinarily final and conclusive unless the arbitration agreement expressly provided otherwise. As a domestic tribunal chosen by the parties, the arbitrator’s decision was not subject to appellate review by the civil courts, which were tasked only with facilitating arbitration and enforcing awards. The Court affirmed that a decision, whether correct or not, was binding once it was reached fairly after giving the parties adequate opportunity to present their grievances in the manner prescribed by the arbitration agreement.

In this case the Court explained that a mistake of law apparent on the face of an arbitral award occurs when the award itself, or a document that is formally incorporated into it, contains a legal proposition that forms the basis of the award and that proposition is erroneous. The Court illustrated the point by stating, “you can find in the award or a document actually incorporated thereto, as for instance, a 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.” The Court further clarified that such an error does not arise merely because a narrative mentions a party’s contention; the mere reference does not permit the Court to first set out what that contention is and then examine the contract on which the parties’ rights depend to determine whether the contention is sound. The Court cited the authority Champsey Bhara and Company v. Jivraj Balloo Spinning and Weaving Company Ltd. ((1932) L.R. 50 I.A. 324.) to support this view. However, the Court observed that the rule does not apply where the parties have specifically referred questions of law to the arbitrator for decision; in such circumstances the arbitrator’s award on those particular questions is binding because the parties, by referring those questions, intended to obtain a decision from the arbitrator rather than from the Court, and the Court will not interfere unless it is satisfied that the arbitrator acted illegally.

The respondent’s contention that, in the present proceedings, specific questions were referred to the umpire and that his decisions on those questions must be deemed binding and not subject to reopening even if an error appeared on the face of the award, required examination. The procedural record showed that the arbitrators, on 16 July 1948, directed the parties to file their respective statements of claim and written statement. The respondent filed, on 16 August 1948, a detailed claim petition setting out in paragraph 22 three heads of claim amounting to a total of Rs 5,95,518/13/‑. The Dominion of India responded with a written statement denying the respondent’s claims, and the respondent subsequently filed a replication to that statement. The arbitrators noted that both parties had complied with the order, that the respondent’s counsel had proposed issues, and that the parties had agreed that the dispute would be tried on those issues. The arbitrators then listed ten substantive issues and proceeded to hear evidence on those points. Because the arbitrators could not reach a consensus, they referred the matter to the umpire, R. B. Nathoo Ram. The umpire accepted the evidence previously recorded before the arbitrators, treated it as evidence before him, and thereafter issued his award, providing reasons for his conclusions on the various issues raised. The parties had filed pleadings in accordance with the arbitrators’ directions and had consented to a trial of the dispute limited to the issues that had been raised.

The Court observed that the arbitrators could not be regarded as a reference of specific questions, and that such a characterization could not imply that the parties had agreed to surrender their right to approach the Courts, even if the award later turned out to be defective because of an error obvious on its face. The only conclusion that could be drawn from the agreement recorded by the arbitrators was that the parties had consented to have their disputes decided on the issues that had been raised, and not that they had submitted those issues for adjudication in a manner that would make the award final and binding without recourse to judicial review. The provision contained in clause 13 of contract F.D. (M) 70, which incorporated the arbitration agreement, was described as being of a general nature. By a letter dated 26 June 1946, the respondent informed the Director of Purchases that he had appointed an arbitrator on his own behalf “in accordance with clause No 13 of the general conditions of the contract”. Subsequently, the Union, by a letter dated 7 July 1948, appointed its own arbitrator, expressly reserving the right to contend that no dispute existed, for the purpose of adjudicating the claim advanced by the respondent. Neither of these two letters referred to any particular questions that were to be referred to the arbitrators. Accordingly, the Court held that the mere filing of pleadings by the parties, as directed by the arbitrators, and the subsequent framing of issues with the objective of focusing the parties’ attention on the questions to be decided, did not amount to a reference on specific questions that would render the award binding upon the parties without the possibility of judicial scrutiny.

The Court then referred to the decision in Seth Thawardas Pherumal v. The Union of India, where Justice Bose, delivering the judgment, examined the contention that a specific question had been referred and that, therefore, the award could not be challenged even on the ground of a patent error. Justice Bose explained that when a point of law is the issue, the courts retain jurisdiction to set aside an arbitration award if the error is apparent on its face, unless both parties have expressly agreed to refer that point of law and to be bound by the arbitrator’s decision. He stressed that merely presenting incidental arguments on a point of law during the proceedings does not suffice to bar judicial review. The learned Judge further cited F. R. Absalom Ltd. v. Great Western (London) Garden Village Society ([1933] A.C. 592, 616) and observed that the incidental reference to a matter in pleadings or arguments, even when it concerns liability for damages, is insufficient to confer exclusive jurisdiction on the arbitrator over a question of law. In a later case, M/s. Alopi Parshad & Sons Ltd. v. The Union of India, the Court noted that although the arbitrators had indeed raised issues, that action was intended only to draw the parties’ attention to the matters for adjudication and did not create a specific reference of a legal question that would preclude court intervention.

The Court noted that the matters presented for adjudication concerned the claims made by the Agents before the arbitrators. The Court observed that both the claim itself and the jurisdiction of the arbitrators to decide that claim were expressly denied. According to the terms of reference, the arbitrators were empowered solely to decide the disputes that had been expressly raised, and there was no basis for concluding that a specific reference had been made that would submit a question of law to the arbitrators for determination. Turning to the decision in Durga Prosad Chamria v. Sewkishendas Bhattar (A.I.R. (1949) P.C. 334.), the Court explained that the Judicial Committee had held that questions of law were specifically referred to arbitration when, in a pending suit, the parties, after raising issues, consented to refer “the outstanding matters” to three named arbitrators, thereby granting them specially enumerated powers. However, that decision was arrived at in the special circumstances of that case and was not intended to create a general rule that any agreed issue raised before an arbitrator, merely by reference to pleadings, would constitute a specific legal reference. The Court further stated that, although parties to a generally worded arbitration agreement may, after a dispute has arisen, refer particular questions to arbitration, each situation must be judged on its own facts. The mere filing of pleadings before the arbitrators, or an agreement that certain issues appear in those pleadings, does not inevitably lead to the inference that the parties have agreed to refer the specific questions embedded in the issues to the arbitrator, thereby barring themselves from challenging the award on the ground of a legal error apparent on its face. The Court then referred to the test articulated by Lord Russell of Killowen in F. R. Absalom Ltd. v. Great Western (London) Garden Village Society Ltd. ([1933] A.C. 592, 616.). That test draws a clear distinction between a specific reference of a question of law and a question of law that arises for the arbitrator to resolve in the course of deciding the dispute. At page 607 the Court quoted, “it is, I think, essential to keep the case where disputes are referred to an arbitrator in the decision of which a question of law becomes material distinct from the case in which a specific question of law has been referred to him for decision.” The authorities, the Court explained, make a clear separation between the two situations and, in the former, the Court may intervene when an error of law appears on the face of the award, whereas in the latter no such inference of judicial interference is permissible merely because the decision on the question of law appears erroneous. Finally, after citing the authorities, the Court observed at page 610 that the primary dispute between the parties was whether, if the value of work executed and materials on site up to and including 11 March 1929 had been truly …

In this case the central dispute concerned how the work performed and the materials on site up to and including 11 March 1929 had been valued. The contractor contended that the net value available for certification on that date exceeded the amount that had actually been certified, whereas the employer argued that the certified amount was higher than the net value. These disagreements related to the issue of certificates and to the validity of the notice, and they were generally presented to the arbitrator without any specific question of construction or law being formally raised. Nevertheless, the parties were ordered to file pleadings, and in its statement of claim the contractor asked the arbitrator to use his authority to revise the last certificate so that it would incorporate the excess net value claimed by the contractor. The arbitrator, after examination, concluded that such excess net value did exist on 11 March 1929, although he reduced the amount claimed. At this stage the interpretation of condition 30 became a question of law. Although this question was not expressly submitted, it was material to the decision of the matters that had been referred. The arbitrator decided the question of law, and the Court held that if the arbitrator’s decision on the face of the award was erroneous, the decision was open to judicial review.

The respondent also claimed compensation from the Dominion of India for goods delivered under the contract, together with interest on the amounts claimed for performing the contract and for incidental expenses incurred after delivery. That dispute had been referred to arbitration under clause 13 of Form F.D. (M) 70. Both parties filed pleadings as directed by the arbitrators, which merely set out their respective cases in writing. The parties further agreed that certain issues arose from those pleadings, but the purpose of those issues was to focus attention on the points whose determination was essential to resolve the dispute. While such legal issues might be material to the determination, they were not specific questions of law expressly referred to the arbitrators. An additional consideration was that, during arbitration, the parties could potentially enter a new agreement that modified the original reference and altered its scope. However, for such a modification to be effective it must constitute an arbitration agreement. The respondent could not rely on any subsequent agreement because any later contract with the Union of India would have to satisfy the requirements of section 175(3) of the Government of India Act, 1935, or Article 299 of the Constitution if the agreement was made after the Constitution came into force, and it would have to be in the form prescribed by those provisions. By merely

In this proceeding, the Court observed that the lawyer representing the Government of India could not, by merely assenting to the issues presented before the arbitrators, assume authority to bind either the Dominion or the Union to a specific reference on a point of law. The Court explained that a reference to a particular legal question can become effective only when there exists either an express or an implied agreement that the arbitrator will decide that specific question and that the arbitrator’s decision will be binding on the parties. Because no contract in the prescribed form was produced to demonstrate such an agreement, the Court held that any claim that a later agreement altered the original reference would be futile. Consequently, the Court could not agree with the view of the High Court that specific questions of law had been referred to the arbitrators and that the arbitrators’ decisions on those questions were binding upon the parties.

The remaining issue for determination was whether the award rendered by the umpire was legally erroneous on its face. The umpire’s award granted the respondent Rs. 1,32,417/10/- as compensation for loss suffered with respect to the packets of cigarettes that had been delivered to him. In addition, the umpire awarded Rs. 1,25,000/- for incidental expenses and Rs. 68,833/12/3 as interest. The Court detailed the calculation of the loss: the contract price for each packet of cigarettes was Re. -/8/3, while the respondent was able to sell the supplied packets at Re. -/4/9 per packet. The Court noted that it was not contested that a portion of the cigarette stock supplied to the respondent was mildewed and therefore unfit for consumption, giving the respondent a right to claim compensation for breach of contract on the basis that the Government of India had breached a warranty. The Court further recorded that the Government had disposed of some of its cigarette stock at Re. -/1/9 per packet. The respondent contended that the goods supplied to him were worth only Re. -/1/9 per packet because that reflected the price recovered by the Government from the sale of similar goods, and therefore he claimed compensation equal to the difference of Rs. -/6/6 per packet. The umpire, however, rejected this claim and held that the respondent was entitled only to the difference between the price he had paid and the price he actually received on resale. The Court found no apparent error on the face of this portion of the award and concluded that the award of Rs. 1,32,417/10/- for loss could not be challenged. By contrast, the Court held that the claim for Rs. 1,25,000/- as incidental expenses could not be sustained. In support of this view, the Court quoted paragraph (xi) of the umpire’s award, which stated: “While the Government sold the stocks of cigarettes taken back by it at Re. -/1/9 the purchaser was able to get a very substantial higher price. This undoubtedly resulted from the efforts which he put in, advertisement, publicity, storage, transport, payment of agency.”

The umpire had observed that the purchaser was clearly entitled to commission and other overhead expenses and that, in the Court’s view, the law of compensation required payment of all expenses incurred by the purchaser in connection with the cigarettes that were taken back by the Government. The Court found that this observation rested on a clear fallacy. The respondent had bought and taken delivery of twenty‑nine lakh seventy‑four thousand two hundred seventy packets of cigarettes. Of these, six lakh thirty‑four thousand two hundred seventy packets were sold by the respondent and twenty‑three lakh forty thousand packets were returned to the Government of India under an arrangement that required the Government to take back the goods in their original packing. The purchase had been made under the acceptance of a tender dated 9 September 1946, which contained a clause stating that all sales were to be conducted on the understanding that the goods were sold “as is” and that no responsibility for quality would be accepted after delivery at the depot. When the respondent received delivery, the contract expressly made him the owner of the goods. Consequently, the expenses that he incurred for advertisement, publicity, storage, agency commission and other overhead after taking delivery were expenditures on his own property and could not be treated as compensation for a breach of warranty concerning goods that he retained. The Court recognized that the respondent was rightfully entitled to the difference between the contract price and the market price of the goods he kept, and that this amount had been awarded to him. Expenses such as transport and storage incurred after the Government agreed to take back the goods, which were properly attributable to those goods, could also be awarded as costs borne on behalf of the Government, although the respondent had made no claim for them. For the goods that were returned, the respondent could not maintain a claim for damages because the contract had been mutually cancelled. Accordingly, his claim for incidental expenses on the goods he had appropriated could not be awarded in addition to the damages. The umpire’s award of Rs 1,25,000 as incidental expenses was therefore not a valid compensation award. The Court held that this portion of the award was based on an erroneous legal assumption and could not be sustained.

The umpire also addressed the respondent’s claim for interest in paragraph (ix) of his award, stating that, applying the principles of compensation assessment, the purchaser was entitled to interest on all monies paid to the Government for stores taken back, from the date of payment until the monies were returned, and that the rate of

In this case, the Court observed that the rate of interest which could be awarded to the respondent had to be identical to the rate that the purchaser had actually paid to his bankers. The evidence placed that rate at six per cent per year. The Court further held that, regardless of the rate at which the Government ordinarily borrows money, the law of compensation required that interest be awarded at the six per cent rate. The Court then expressed difficulty in identifying any basis on which interest could be granted to the respondent. It noted that the contract contained no provision for the payment of interest on amounts that the respondent had paid if the contract failed, and that interest could not be awarded under section 61 of the Sale of Goods Act. The Court explained that the right of either seller or buyer to recover interest or special damages, where such recovery is permissible by law, is not affected by the Sale of Goods Act. Moreover, under subsection (2) of section 61, in the absence of a contrary contract, a court may award interest at any rate it deems appropriate on the price amount to a buyer who seeks a refund of the price because the seller has breached the contract. However, the Court pointed out that the respondent’s claim was not for a refund of the price. For the portion of the contract that was mutually cancelled, the price that had been paid was already refunded. For the goods that the respondent had sold, his claim was for damages, and such damages had been awarded. The respondent had further contended before the umpire, and the umpire had upheld that contention, that he was forced to borrow a substantial sum from his bankers to meet his obligations under the contract with the Government. Consequently, he argued that he was entitled to recover from the Dominion of India the interest he had paid to his bankers for the period during which his money was held by the Dominion. Counsel for the respondent submitted that, under those circumstances, the umpire was competent to award interest on the amount detained by the Dominion as damages. The Court, however, referenced the decision of the Judicial Committee in Bengal Nagpur Railway Company Ltd. v. Ruttanji Ramji ((1937) L.R. 65 I.A. 66.), observing that in the absence of any usage, express or implied contract, or statutory provision justifying the award of interest, interest could not be granted as part of damages for the wrongful detention of the respondent’s money.

The Court explained that interest could not be granted on an amount awarded as compensation because interest is not a component of damages, and there was no contract, statute or recognised usage that would support a claim for interest; consequently the claim for interest was dismissed. The Court then turned to the question of interest on the principal described in illustration (n) of section 73 of the Indian Contract Act, which reads: “A contracts to pay a sum of money to B on a specified day. A does not pay the money on that day; B, because he does not receive the money on that day, cannot meet his debts and is completely ruined. A is liable to B only for the principal sum he promised to pay, together with interest up to the day of payment.” The Judicial Committee, in its observation on page 72, clarified that this illustration does not create a right for a creditor to recover interest on a loan advanced by the creditor to the debtor. It merely illustrates that if a party breaches a contract to pay a sum on a particular date and, as a result, the other party cannot meet his obligations and is ruined, the breaching party is liable only for the principal amount promised and for interest that accrues only up to the date when payment should have been made. The illustration does not grant a creditor the right to claim interest on a debt that is due when no legal provision gives such a right, nor does it alter the wording of the statute itself. Accordingly, illustration (n) offered no support to the respondent’s claim for interest. Counsel for the respondent, Mr. Pathak, argued that interest might be awarded on equitable grounds and relied upon the Interest Act of 1839. That Act permits a court to award interest to a plaintiff when the claim is for a sum certain payable at a definite time by virtue of a written instrument. However, the Act also contains a proviso that interest shall be payable only in cases where it is already payable by law. This proviso applies to situations where a court of equity exercises jurisdiction to allow interest. The Judicial Committee, referring to the Bengal Nagpur Railway Company case (1937) L.R. 65 I.A. 66, cited Lord Tomlin’s observation in Maine and New Brunswick Electrical Power Company v. Hart ([1929] A.C. 631, 640), stating that to invoke an equitable rule, the plaintiff must first demonstrate circumstances that attract equitable jurisdiction, such as the non‑performance of a contract that equity could specifically enforce. The Court held that the present case does not, however, attract the equitable jurisdiction of the court.

The Court noted that the present matter did not fall within the scope of the proviso contained in the Interest Act and therefore could not be governed by it. The judgment of the Privy Council in the Bengal Nagpur Railway Company case (1937) L.R. 65 I.A. 66 was later relied upon in the case of Seth Thawerdas Pherumal to reject a claim for interest. In that earlier case a contractor had entered into a written agreement with the Dominion of India for the supply of bricks. The contract contained a clause requiring that any dispute between the parties be referred to arbitration. When a dispute arose, the parties referred the matter to an arbitrator, who subsequently issued an award in favour of the contractor. After the Dominion of India was succeeded by the Union of India, the Union contested the arbitral award on several grounds, one of which concerned the liability to pay interest on the amount awarded. Justice Bose, delivering the judgment of the Court, observed that the interest awarded to the contractor could not be granted under the law. He explained that an arbitrator does not constitute a court within the meaning of the Interest Act of 1839 and that interest may be awarded only when there is a debt or a sum certain, payable at a definite time by virtue of a written contract, and when a written demand for interest has been made. Justice Bose found that none of these essential elements were present in the case before the arbitrator, and therefore the arbitrator had erred in law by assuming he possessed the power to allow interest merely because he considered the demand reasonable. The Court then turned to the present award made by the umpire, which granted interest to the respondent on the ground that, in order to perform his contract with the Government of India, the respondent had to obtain loans from bankers and consequently paid interest on those loans. The Court observed that when the contract was partially performed and subsequently abandoned, the Government of India could not be held liable for the loss of interest suffered by the respondent. No existing legal principle was found that would impose such liability on the Government of India under the circumstances relied upon. If any obligation to pay interest arose from the portion of the contract that was abandoned, it would have been the respondent’s responsibility to assert that claim while negotiating the terms of cancellation. Regarding the goods that the respondent returned, the Court held that he could obtain compensation for breach of warranty, but such compensation could not include interest as damages for the detention of money. Consequently, the Court concluded that the award of interest was based on an erroneous view of the law as apparent on the face of the award. Accordingly, the appeal was allowed in part and the umpire’s award was set aside to the extent that it granted interest of Rs 68,833/12/3 and incidental expenses of Rs 1,25,000/-.

The Court observed that the portion of the award which granted the respondent a sum of Rs. 1,32,417/10‑/‑ as compensation for loss incurred in connection with 6,34,270 packets of cigarettes would remain intact and would not be set aside. In reaching this conclusion, the Court noted that the award in this respect was proper and therefore required no alteration. The Court further explained that because the appeal succeeded only in part, there was no basis for the Court to make any order regarding the allocation of costs to either party. Accordingly, the Court declined to issue any costs order across the parties. As a result of these determinations, the Court concluded that the appeal was allowed in part, leaving the award for the loss of the cigarettes in force while setting aside the portions of the award that had been challenged.