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: Civil Appeal No. 414 of 1961

Decision Date: 19 April 1963

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

In Union of India versus A.L. Rallia Ram, the Supreme Court of India delivered its judgment on 19 April 1963; the opinion was written by Justice C. Shah and the bench also comprised Justice Bhuvneshwar P. Sinha, who sat as Chief Justice, and Justice N. Rajagopala Ayyangar. The petition was brought by the Union of India against A.L. Rallia Ram, who was the respondent. The case is reported in the 1963 volume of the All India Reporter at page 1685 and in the 1964 edition of the Supreme Court Reports (Third Series) at page 164, and it has subsequently been cited in a long series of decisions extending from 1964 to 1992, reflecting its importance for the law of arbitration. The factual background concerns a procurement undertaken in 1946 when the Chief Director of Purchases (Disposals) of the Food Department of the Government of India invited tenders for the purchase of war‑surplus American cigarettes. The respondent submitted a tender offering to buy the entire stock, and the Government accepted the tender by a letter that enclosed a standard form containing the general conditions of contract. Those conditions incorporated a clause specifying that any dispute between the parties would be referred to arbitration. Following acceptance, the respondent took delivery of 2,993,597 packets of cigarettes and paid the sum of Rs 17,78,573⅔ four paise for the goods. Subsequent inspection revealed that a portion of the cigarettes were mildewed and therefore unfit for use. The Government consequently decided to cancel the contract with respect to the undelivered cigarettes and proposed to take back from the respondent those cigarettes that remained in their original packing and could be identified, on the condition that the respondent would not claim any freight, storage, rent, charges or any other expenses incurred in connection with the cigarettes taken back. The respondent accepted the Government’s offer while reserving his right to claim incidental expenses. He returned 2,413,500 packets, and the Government refunded to him Rs 14,54,215⅔. In accordance with the arbitration clause, each side appointed an arbitrator, and the two arbitrators entered upon the reference. The parties filed their statements of claim and written statements, and the arbitrators framed a series of issues. The parties expressly agreed that the dispute would be decided solely on those issues. Because the arbitrators could not reach a consensus, they appointed an umpire to resolve the deadlock. The umpire rendered an award granting the respondent Rs 1,32,417⅔ for loss suffered in respect of cigarettes not returned, Rs 1,25,000 for incidental expenses, and Rs 68,833⅔ as interest. The respondent thereafter applied to the Subordinate Judge for an order directing that the award be filed, while the Union of India applied for a decree setting aside the award. The Subordinate Judge made an order, the record noting simply that the Judge ordered.

The court ordered that a decree be issued in conformity with the arbitrators’ award. On appeal, the High Court affirmed that order. The appellant argued that no arbitration agreement existed because the contract had not been executed in the manner prescribed by section 175 (3) of the Government of India Act, 1955, and further asserted that the award contained an obvious error of law on its face. The respondent, on the other hand, maintained that the parties’ agreement to limit the issues to those raised by the arbitrators constituted a reference of specific questions, and that an award based on such a reference could not be set aside even if it manifested an error apparent on its face. The Court held that a valid arbitration agreement bound the parties and that the arbitrators possessed jurisdiction to consider the reference. It observed that the letter of acceptance of the tender, signed by the Director of Purchases, satisfied all the requisites of section 175 (3) of the Government of India Act. The provision did not demand the creation of any formal document, nor was there any direction from the Governor‑General concerning the sale of disposal goods. The goods proposed for sale belonged to the Government of India, and every act concerning them was undertaken by the Government in its name, thereby creating a binding contract that incorporated an arbitration clause. The Court further noted that the appellant was not barred from questioning the existence of a binding arbitration agreement merely because it had submitted to the arbitrators’ jurisdiction or because it had failed to raise the objection before them, since the arbitrators’ jurisdiction itself depended on the presence of such an agreement, as referred to in Seth Bikhraj Jaipuria v. Union of India [1962] 2 SCR 880. The Court also held that the parties’ consent to try the dispute on the issues identified by the arbitrators did not amount to a reference of specific legal questions, nor did it imply an agreement to relinquish the right to challenge the award in court, even if the award were tainted by an evident error. The parties merely agreed that their differences would be adjudicated on the issues raised, without submitting those issues for a fresh arbitration. Moreover, any such agreement before the arbitrators could not constitute a new arbitration agreement independent of the original one, because a valid and binding agreement would still need to satisfy the requirements of section 175 (3) of the Government of India Act, 1935. Consequently, the appellant retained the right to attack the award on the ground of an apparent error of law. The Court cited several authorities in support of this position, including Champsey Bhara and Company v. Jivraj Balloo Spinning and Weaving Company Ltd. (1923) LR 50 IA 324, Seth Thawardas Pherumal v. Union of India [1955] 2 SCR 48, F.R. Absalom Ltd. v. Great Western (London) Garden Village Society [1933] AC 592, M/s. Alopi Petshad & Sons Ltd. v. Union of India [1960] 2 SCR 793, and Durga Prosad Chamaria v.

Sewkishendas Bhattar, A.I.R. (1949) P.C. 334, was referred to. The Court held that the award contained an error of law on its face because it granted the respondent incidental expenses and interest, and that portion of the award therefore had to be set aside. The incidental expenses had been awarded for amounts that the respondent spent on advertisement, publicity, storage, agency commission and other overhead costs after he had taken delivery of the cigarettes and thus became the owner of the goods. Because those expenditures related to his own goods, the Court found that the respondent could not claim them as compensation for a breach of warranty concerning the goods that he retained. The award also granted interest on all amounts paid by the respondent to the Government for the returned cigarettes, calculated from the date of payment to the date of return. The Court observed that such interest was not payable under section 61 (2) of the Sale of Goods Act, since it was not a claim for refund of the sale price, nor was it payable under the Interest Act. In the absence of any usage, express or implied term of the contract, or any statutory provision justifying the award of interest, the Court concluded that interest could not be granted as damages. Regarding the part of the contract that had been abandoned, the Court said that if any liability to pay interest had arisen, it was for the respondent to claim it when settling the cancellation terms, and that interest could not be awarded on equitable grounds. The Court also referred to Bengal Nagpur Railway Company Ltd. v. Ruttanji Ramji, (1937) LR. 65 I.A. 66 and Maine and Hew Brunswick Electrical Power Company v. Hart, [1929] A.C. 631.

The judgment concerned Civil Appeal No. 414 of 1961, filed in the Civil Appellate Jurisdiction. The appeal challenged the judgment and decree dated 17 April 1958 of the Punjab High Court in First Appeal No. 75 of 1951, which in turn affirmed the order of the Subordinate Judge, Delhi, refusing a motion to set aside an award directing the Union of India to pay Rs. 3,26,251/6/3 with costs and future interest at a percent to the respondent. Counsel for the appellant and counsel for the respondent appeared. The judgment was delivered by Shah J. This appeal was made with a certificate under Article 133 (1) (c) of the Constitution. The factual background began in August 1946 when the Chief Director of Purchases (Disposals), Food Department, Government of India, invited tenders for the purchase of American cigarettes stock located in Calcutta, Karachi, Delhi and Agra. The respondent submitted a tender to purchase the entire stock at a uniform rate of Re. ‑/8/3 per packet of twenty cigarettes, a rate that valued the total stock at approximately Rs. 39 lakhs. The Government of India accepted the tender, and the acceptance letter, accompanied by Form F.D. (M) 70 which set out the general conditions of the contract, was signed by the Chief Director of Purchases. Condition No. 13 of that form contained an arbitration clause providing that any dispute arising under the conditions or any special conditions of the contract, except those specifically provided for, would be referred to arbitration by an arbitrator nominated by the Chief Director and an arbitrator nominated by the contractor, with the possibility of appointing an umpire if the two arbitrators could not agree. The respondent subsequently took delivery of 29,93,597 packets of cigarettes and paid Rs. 17,78,573/6/4. Upon inspection, the respondent discovered that some of the cigarettes were mildewed and unfit for use, leading to the involvement of a Board of Survey.

In the contract, Condition No. 13 of Form F.D. (M) 70 provided an arbitration clause stating that any question or dispute arising under the general or special conditions of the contract, except those expressly provided for, would be referred to an arbitrator to be nominated by the Chief Director of Purchases and an arbitrator to be nominated by the contractor; if the two arbitrators could not agree, they were to appoint an umpire in writing, and the decision of the arbitrators or, failing their agreement, the decision of the appointed umpire, would be final and conclusive. The respondent took delivery of twenty‑nine lakh ninety‑three thousand five hundred ninety‑seven packets of cigarettes and paid the sum of seventeen lakh seventy‑eight thousand five hundred seventy‑three rupees six annas four paise. Upon inspection the respondent discovered that some of the cigarettes were mildewed and therefore unfit for use. A Board of Survey appointed by the Government of India examined the undelivered stock and reported that cigarettes valued at six lakh fifty‑eight thousand four hundred fifty‑three rupees were wholly unfit for issue, and for the remaining cigarettes the Board recommended price reductions at specified rates. The respondent refused to accept the goods on the revised terms suggested by the Board and instead requested that the Government agree to a uniform reduction of fifty percent in price for both the cigarettes already delivered to him and those still in the Government’s possession. Subsequently the Government decided to cancel the contract with respect to the undelivered cigarettes and offered to take back from the respondent those delivered cigarettes that were still in their original packing and could be identified, on the condition that the respondent would make no claim for freight, storage, rents, charges or any other expenses incurred in connection with the returned cigarettes. The respondent accepted this offer while reserving his right to claim incidental expenses. Accordingly, twenty‑four lakh thirteen thousand five hundred packets of cigarettes in their original packing were returned by the respondent, and between June thirteenth 1947 and February eighth 1948 the Government refunded the amount of fourteen lakh fifty‑four thousand two hundred fifteen rupees seven annas to the respondent. On June twenty‑six 1948 the respondent sent a letter to the Director General of Disposals stating that he had appointed M. W. Lewis as his arbitrator pursuant to clause 13 of the general conditions of Form F.D. (M) 70 and requesting that the Director General appoint the Government’s arbitrator. By a letter dated July seventh 1948 the Director General informed the respondent that the Government of India had appointed Bakshi Shiv Charan Singh as its arbitrator, and that the Government retained full liberty to raise all pleas before the arbitrator, including the plea that no dispute between the parties could be referred to arbitration.

In this matter the parties first proceeded to arbitration, but the two arbitrators were unable to reach a common decision, so the dispute was referred to an umpire. The umpire, by an award dated 30 January 1950, granted the respondent Rs 1,32,417/10/- as compensation for the loss of 6,34,270 packets of cigarettes that the respondent had not returned, Rs 1,25,000/- as payment for incidental expenses, and Rs 68,833/12/3 as interest. Consequently the umpire ordered the Union of India to pay a total sum of Rs 3,26,251/6/3 together with future interest and the costs of the arbitration proceedings. Following the award, the respondent filed a petition before the Subordinate Judge in Delhi under section 14 of the Arbitration Act seeking to have the award filed. The Union of India simultaneously moved for an order to set aside the award, asserting that no legally binding contract existed because the acceptance note had not been signed on behalf of the Governor‑General of India, that the entire arbitration process, including the appointment of arbitrators and the umpire, was invalid for non‑compliance with section 175(3) of the Government of India Act, and that the award contained apparent errors of law. The Subordinate Judge rejected the Union’s motion, ordered that a decree be issued in accordance with the award, and the High Court of Punjab, on appeal, affirmed that decision. The appeal before this Court therefore raises two points for determination: first, whether the award should be set aside because there was no valid arbitration agreement that complied with section 175(3) of the Government of India Act, 1935, which is required to empower the umpire to make the award; and second, whether the award should be set aside on the ground that it is manifestly erroneous on its face.

The background of the contractual relationship shows that the letter accepting the tender, dated 9 September 1946 and signed by the Director of Purchases, stated that the respondent’s tender was accepted to the extent shown in the accompanying schedule and subject to the special terms and conditions issued by the Chief Director of Purchases, as well as the general conditions of contract contained in Form F.D. (M) 70 attached to the letter. The first clause of those general conditions defined the term “Government” to mean “the Governor‑General for India in Council and, where the context so admits, his successors and assigns, the Government of India and officers acting for him or them.” Clause 2 clarified that the Governor‑General for India in Council was not bound to accept the highest or any tender, nor was it required to give reasons for non‑acceptance. Subsequent clauses set out the rules governing price payment, condition of goods, risk, delivery, liability, failure to pay price, failure to take delivery after payment, and recovery of sums due. Importantly, clause 13 incorporated an arbitration clause as a term of the contract, thereby creating an arbitration agreement between the parties. Acceptance of the tender was therefore subject to these special conditions and the general conditions, with the special conditions prevailing in case of any conflict.

The Court observed that the tender was accepted subject to the special conditions contained in the letter of the Chief Director of Purchases and to the general conditions set out in Form F.D. (M) 70, and that, in the event of any inconsistency between the two, the special conditions would govern. The Court then examined whether the terms of the acceptance letter, which together formed the contract between the parties, satisfied the requirements imposed by 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 must be expressed to be made by the Governor‑General, or by the Governor of the Province as the case may be, and that such contracts and any assurances of property made in the exercise of that authority must be executed on behalf of the Governor‑General or Governor by persons and in the manner directed or authorised by him. The Court noted that the language of the section is mandatory, not directory. Consequently, before any liability could attach to the Dominion of India, the contract had to be expressed as made by the Governor‑General and executed on his behalf in the manner he had prescribed. The Court referred to the decision in Seth Bikhraj Jaipuria v. Union of India, which held that the provisions of Section 175(3) are mandatory and that a contract which does not comply with those provisions gives rise to no enforceable legal obligation. Turning to the arbitration clause, the Court explained that an arbitrator’s authority depends on the parties’ agreement to refer their differences to arbitration. Under Section 2(a) of the Arbitration Act, 1940, an “arbitration agreement” is a written agreement to submit present or future differences to arbitration, whether or not an arbitrator is named therein. The Court clarified that a written agreement incorporating a valid arbitration clause is required, but it need not be a formal instrument executed by both parties nor signed by them; the essential requirement is a written agreement accepted by the parties. Clause 13 in Form F.D. (M) 70 satisfied those requirements. However, because the Dominion of India was a party to the arbitration agreement, the Court held that the arbitration agreement was itself a contract within the meaning of the Government of India Act and therefore also had to comply with the mandatory form prescribed by Section 175(3). The Court therefore identified the remaining issue as whether the letter accepting the respondent’s tender complied with the statutory form required by Section 175(3).

In this case, the issue to be decided was whether the letter that accepted the respondent’s tender satisfied the requirements of section 175 (3) of the Government of India Act. The Court observed that section 175 (3) does not, in itself, demand that a formal document be executed by both the Dominion of India and the other contracting party for the agreement to be effective. Moreover, there was no direction issued by the Governor‑General under that provision prescribing that a valid contract must be created only through a formally executed document. Consequently, the contracts for the sale of “War‑disposal” goods were not required by the Governor‑General to be executed in a formal manner by both parties. Although the wording of section 175 (3) includes the term “executed,” the Court held that this term does not automatically imply the execution of a formal contract by the parties involved. The Court further explained that a tender issued for the purchase of goods under an invitation made by or on behalf of the Governor‑General of India, and an acceptance expressed in writing as being made in the name of the Governor‑General and signed on his behalf by an authorized person, would meet the requirements of section 175 (3). The goods proposed for sale were owned by the Government of India, and the tender notice itself had been issued by the Government’s 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 issuing authority was identified as “Government of India, Department of Food (Division III), office of the Chief Director of Purchases, Jamnagar House, New Delhi.” Clause 9 of the notice stipulated that delivery was to be made, with the Government agreeing to provide assistance for movement to the extent feasible, while clause 11 required that import duty on the cigarettes be paid by the Government. Clause 6 provided that the stock of cigarettes to be delivered would be surveyed by a Survey Board appointed by the Government of India and that the Board’s decision would be binding on the tenderer. In a letter dated 21 August 1946, the respondent submitted his tender, offering a rate of Re 8 ³ per packet, conditional upon the Government giving a guarantee that it would not undersell the cigarettes at any stage. The Court noted that the respondent subsequently met with the Chief Director on 3 September 1946, and that certain terms agreed during that discussion were incorporated into the acceptance letter. In a further letter dated 4 September 1946, the respondent set out those terms, which clearly indicated that the Government had undertaken obligations such as appointing a Survey Board, providing separate delivery letters for each depot to facilitate delivery, and assuring assistance in obtaining the necessary transport and other facilities for moving the goods.

In addition to the railway priority and other transport facilities that were to be provided for dispatching goods stored at the various depots, the Government also undertook to transport the goods from the Assam Depot to Calcutta at its own risk and expense. These stipulations were incorporated into the acceptance note that was issued by the Chief Director of Purchases. The acceptance note bore the heading “Government of India, Department of Food (Div. III) New Delhi” and it referred specifically to the obligations of the Dominion set out in clauses 6, 9, 10 and, by clause 13, it declared that the special conditions would take precedence over the general conditions that had been incorporated in the contract.

In the Court’s view, the entire correspondence between the parties, which ultimately produced the acceptance note, amounted to a contract that was expressed to have been made by the Government and, consequently, by the Governor‑General. This conclusion was reached because it was the Governor‑General who, through the Director of Purchases, had invited the tender, and it was the Governor‑General who, through the Chief Director of Purchases, had accepted the respondent’s tender subject to the conditions that were prescribed therein. 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. Although the Chief Director of Purchases signed the document in his official capacity and did not expressly state that the contract was executed on behalf of the Governor‑General, a fair reading of the letter’s contents, taken together with the obligations undertaken therein, makes it reasonable to hold that the contract was, in fact, executed on behalf of the Governor‑General.

No rules issued by the Governor‑General were placed before the Court that would require an officer, when executing a contract for the sale of “War‑disposal” goods, to describe himself as signing on behalf of the Governor‑General of India. The High Court had held that because the Government of India had agreed to refer disputes to arbitration and had taken part in the proceedings before the arbitrators and the umpire, the Government had waived any objection to the alleged illegality of the contract and therefore could not raise such an objection in an application for setting aside the award. The Court could not agree with that view. The requirements of section 175(3) of the Government of India Act are mandatory, and the fact that the Government of India did not contest before the arbitrator that, in law, there was no arbitration agreement capable of conferring competence on the arbitrator does not give the arbitration agreement any validity. The arbitrator’s authority to arbitrate derives from the terms of the arbitration agreement; if, in law, there is no valid arbitration agreement, the arbitrator’s proceedings are unauthorised.

Consequently, every contract intended to bind the Government must comply with the requirements of section 175(3) of the Government of India Act, 1935, and a waiver does not prevent the Government from pleading the absence of a contract in accordance with the law. An award, being the decision of an arbitrator—whether that arbitrator is a lawyer or a layperson chosen by the parties—must therefore be subject to these statutory requirements.

In the present case, the Court observed that an arbitrator who was given the authority to resolve a dispute was generally not subject to challenge merely on the basis that the decision was erroneous. To ensure that arbitration functioned effectively and that arbitral awards could be enforced, a system was established that permitted the ordinary courts to provide assistance. The Court explained that it possessed the power to modify or correct an award when the award suffered from imperfections in form, clerical mistakes, or when it addressed questions that had not been referred to the arbitrator, provided those matters were separable from the issues that had been referred. Additionally, the Court held that it could remit an award if the arbitrator had left certain referred matters undetermined, if the award was indefinite, or if an objection to the legality of the award was evident on its face. The Court further stated that it could set aside an award in circumstances where the arbitrator was guilty of corruption or misconduct, or where a party had engaged in fraudulent concealment or willful deception. However, the Court clarified that it could not interfere with an otherwise proper award simply because the decision appeared erroneous to it. The arbitrator’s award was described as ordinarily final and conclusive, unless the arbitration agreement itself indicated a contrary intention. Because the award represented the decision of a domestic tribunal selected by the parties, the civil courts tasked with facilitating arbitration and enforcing awards did not possess appellate authority over that decision. The Court emphasized that the award, whether correct or not, bound the parties so long as it was reached fairly after giving each side an adequate opportunity to present its grievances in the manner prescribed by the arbitration agreement. The Court also noted that it was now well‑settled law that an award could be declared void on the ground of an error of law apparent on its face, when the award itself or any document incorporated into it contained a legal proposition that formed the basis of the award and that proposition was erroneous. The Court explained that an error of law on the face of the award meant that one could locate, within the award or an incorporated document such as a note of reasons appended by the arbitrator, a legal proposition that underpinned the award and then declare that proposition erroneous. The Court warned that this did not mean that a mere narrative reference to a party’s claim would open the door to scrutinising that claim and then examining the underlying contract to test its validity, a principle illustrated by the decision in Champsey Bhara and Company v. Jivraj Balloo Spinning and Weaving Company Ltd. Nevertheless, the Court pointed out that this rule did not apply when the parties had specifically referred questions of law to the arbitrator for his decision. In such circumstances, the arbitrator’s award on those specific legal questions was binding on the parties, because by referring those questions the parties intended to obtain the arbitrator’s determination rather than the Court’s, and the Court would not intervene unless it was satisfied that the arbitrator had acted illegally.

The Court first observed that the contention raised by the respondent required examination, namely that specific questions had been referred to the umpire and that his decision on those questions was binding and could not be reopened even if an error appeared on the face of the award.

According to the record, the arbitrators issued an order on 16 July 1948 directing the parties to file their statements of claim and written statement. The respondent complied on 16 August 1948 by filing an argumentative claim petition that, in paragraph‑22, identified three heads of claim amounting to a total of Rs 5,95,518/13/‑. The Dominion of India responded by filing a written statement that denied each of the respondent’s claims. Subsequently, the respondent filed a replication to the written statement.

The arbitrators noted that both parties had obeyed the filing order, that counsel for the respondent 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 allowed evidence to be presented before them. After hearing the evidence, the arbitrators recorded that they could not reach a consensus on the decision and therefore referred the matter to the umpire, identified as R B Nathoo Ram.

The umpire accepted the reference and admitted as evidence the material that had been recorded before the arbitrators, as indicated by the citation (1) (1932) L R 50 I A, 324. After considering that evidence, the umpire rendered an award and set out reasons supporting his conclusions on the various issues that had been raised before the arbitrators.

However, the Court held that the act of filing pleadings under the arbitrators’ direction and agreeing to a trial on the issues raised did not constitute a reference of specific questions that would imply the parties’ intention to surrender their right to approach the courts, even if the award contained an apparent error. The only reasonable inference from the agreement recorded by the arbitrators was that the parties consented to have the dispute adjudicated on the issues identified, not that they submitted those issues for final adjudication.

The contract clause referred to as element 13 of contract F D (M) 70 was found to be of a general nature. In a letter dated 26 June 1946, the respondent informed the Director of Purchases that he had appointed an arbitrator on his behalf “in accordance with clause No 13 of the general conditions of the contract.” The Union, in its letter dated 7 July 1948, appointed an arbitrator subject to reserving the right to claim that no dispute existed, for adjudication of the respondent’s claim. Neither of these letters mentioned any specific questions to be referred to the arbitrators, and the filing of pleadings in support of their respective cases pursuant to the arbitrators’ direction could not be interpreted as a definitive reference of specific questions, and the passage ends with the

The Court explained that merely appointing arbitrators and framing issues so as to direct the parties’ attention toward the matter to be decided does not amount to a specific reference of questions, and therefore does not make the award automatically binding. In the case of Seth Thawardas Pherumal v. The Union of India, Bose, J, speaking for the Court, considered the argument that a specific question had been referred and that the award could not be challenged even on the basis of an apparent error on its face. The Judge stated that when a point of law constitutes the dispute, the parties must expressly agree to refer that point to the arbitrator and must also agree to be bound by the arbitrator’s decision; otherwise the jurisdiction of the courts to set aside an award on the ground of an obvious error is not displaced. He further clarified that the mere submission of incidental arguments concerning a point of law during the proceedings does not satisfy the requirement of a specific reference. The judgment also quoted the observation at page 59, after referring to F.R. Absalom Ltd. v. Great Western (London) Garden Village Society, that the incidental mention of a legal issue in pleadings or arguments concerning a general liability question is insufficient to give the arbitrator exclusive jurisdiction over that point of law.

The Court then turned to several other authorities to illustrate the principle. It noted that in M/s Alopi Parshad & Sons Ltd. v. The Union of India the Court observed that arbitrators may raise issues only to focus the parties on the matters that arise for adjudication, and that the arbitrators were authorised solely by the terms of reference to decide the disputes that were expressly raised. The Court rejected any suggestion that a specific reference of a legal question had been made. The judgment also cited Durga Prosad Chamria v. Sewkishendas Bhattar, where the Judicial Committee held that questions of law were specifically referred to arbitration only because, in that particular case, the parties consented to refer the outstanding matters of a pending suit to three named arbitrators with expressly enumerated powers. The Court stressed that this decision was based on the special circumstances of that case and should not be read as a general rule that any agreed‑upon issue raised in pleadings creates a specific reference. Finally, the Court recognised that a generally worded arbitration agreement may later be supplemented by a specific referral of questions after a dispute has arisen, but each situation must be examined on its own facts, and the filing of pleadings alone does not inevitably lead to the inference that the parties intended a specific legal question to be bound by the arbitrator’s award.

In this case, the Court observed that the mere act of filing pleadings before the arbitrators, or even an agreement that certain issues had arisen on those pleadings, could not be taken to mean that the parties had expressly agreed to refer the specific questions contained in the issues to the arbitrator, thereby barring themselves from later challenging the award on the ground of an error of law apparent on its face. The Court then explained that the test set out by Lord Russell of Killowen in F.R. Absalom Ltd. v. Great Western (London) Garden Village Society Ltd. (2) clearly distinguished between a specific reference of a question of law and a question of law that emerged for determination by the arbitrator while deciding the dispute. At page 607 of the judgment the Court quoted, “x x, 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 (1) A.I.R. (1949) P.C 334, (2) [1933] A.C. 592,616 becomes material distinct from the case in which a specific question of law has been referred to him for decision. x x x x The authorities make a clear distinction between these two cases, and, as they appear to me, they decide that in the former case the Court can interfere if and when any error of law appears on the face of the award, but that in the latter case no such interference is possible upon the ground that it so appears that the decision upon the question of law is an erroneous one.” After referring to the authorities, the Court further noted at page 610, “x x x The primary quarrel between the parties was whether, if the value of work executed and materials on site up to and including March 11, 1929, had been truly assessed, the net value available for certification on that date was in excess of (as the contractor alleged) or less than (as the employer contended) the amount which had actually been certified up to and including that date x x x x. Those were the disputes in regard to the issue of certificates and the validity of the notice which were in general terms submitted to the arbitrator. No specific question of construction or of law was submitted. The parties had, however, been ordered to deliver pleadings, and by their statement of claim the contractor had claimed that the arbitrator should under his powers revise the last certificate issued so as to include therein the excess net value which they had alleged and which the arbitrator has found (though for a reduced amount) to have existed on March 11, 1929. It is at this point that the question of the construction of condition 30 arose as a question of law, not specifically submitted, but material in the decision of the matters which had been submitted. This question of law the arbitrator has decided; but if upon the face of the award he has decided it wrongly his decision is in my opinion open to review by the Court.” In the present case the

The respondent had claimed from the Dominion of India compensation for the goods that had been delivered to him under the contract, interest on the sums he had advanced for performing the contract, and reimbursement for incidental expenses that he incurred after delivery of the goods. The dispute was referred to arbitration in accordance with clause 13 of Form F.D. (M) 70. The parties filed pleadings as directed by the arbitrators, but the pleadings consisted only of written statements of each party’s case. Both parties also concurred that certain issues arose from those pleadings; the purpose of identifying those issues was to draw the parties’ attention to the points upon which the adjudication of their dispute depended. Although issues of law could be material to the resolution of the dispute, they were not issues of law that had been specifically referred to the arbitrators. The Court considered another aspect: even if, during the arbitration proceedings, the parties entered into a fresh agreement that altered the original terms of reference or expanded or limited their scope, such an agreement would have to constitute an arbitration agreement in order to be effective. The respondent neither relied upon nor could rely upon any subsequent agreement that modified the original reference, because any later contract between him and the Union of India would also 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 occurred after the Constitution came into force, and such an agreement could be valid only in the form prescribed by those constitutional provisions. By merely assenting to the issues raised before the arbitrators, the counsel appearing for the Government of India could not assume authority to bind the Dominion or the Union to a specific reference on a question of law, since a reference on a specific question is effective only if there is an express or implied agreement that the arbitrator will decide that particular question and that the decision will be binding on the parties. In the absence of any contract in the prescribed form, a claim that a subsequent agreement altered the reference would be futile. Accordingly, the Court was unable to accept the High Court’s finding that specific questions of law had been referred to the arbitrators and that the arbitrators’ decision on those questions was binding upon the parties. The remaining issue was whether the umpire’s award was erroneous on its face. The umpire had awarded Rs 1,32,417 10/‑ for loss suffered by the respondent in respect of the packets of cigarettes delivered to him, Rs 1,25,000 /- for incidental expenses, and Rs 68,833 12/3 for interest. The loss concerning the cigarette packets was calculated as follows: the contract rate for cigarettes was Re ‑/8 3 per packet.

The Court observed that the contract price for each packet of cigarettes was Re. ‑ 8/3, while the respondent was able to sell the supplied packets at a price of Re. ‑ 4/9 per packet. It was undisputed that a portion of the stock delivered to the respondent had become mildewed and was therefore unfit for consumption, giving the respondent a right to claim compensation on the basis that the Government of India had breached a warranty. The Court noted that the Government had disposed of some of the cigarettes at a rate of Re. ‑ 1/9 per packet. The respondent argued that the goods supplied to him were only worth Re. ‑ 1/9 per packet because that was the price obtained by the Government from the sale of similar goods, and consequently he sought compensation for the difference at a rate of Re. ‑ 6/6 per packet. The umpire rejected this claim, holding that the respondent was not entitled to compensation at the rate asserted by him, but was instead entitled only to the difference between the price he had paid and the price he actually received on resale. The Court found that this portion of the award did not disclose any apparent error; therefore the award of Rs. 1,32,417/10/- granted to the respondent for this head of loss was not open to challenge. However, the Court held that the claim for Rs. 1,25,000/- as incidental expenses could not be sustained. The umpire, in paragraph (xi) of his award, had stated that while the Government sold the reclaimed stocks at Re. ‑ 1/9, the purchaser was able to obtain a substantially higher price owing to his efforts in advertisement, publicity, storage, transport, payment of agency commission and other overhead expenses, and that, in the Court’s view, the law of compensation required payment of all such expenses incurred with respect to the cigarettes taken back by the Government. The Court found this observation to be based on a clear fallacy. It pointed out that the respondent had purchased and taken delivery of 2,974,270 packets, of which he sold 634,270 packets and returned 2,340,000 packets under an arrangement whereby the Government of India would take back goods found with the respondent in their original packaging. The purchase had been made under the acceptance of a tender dated 9 September 1946, which contained clause 11 providing that “All sales will be conducted on the distinct understanding that the goods sold are on a ‘said to contain’ basis. No responsibility for quality will be accepted whatsoever after the delivery is made at the depot.” Consequently, when the respondent took delivery, he became the owner of the goods by express intent of the contract. The expenditure incurred for advertisement, publicity, storage, agency commission and other overhead expenses after the respondent took delivery therefore related to his own goods, and he could not claim those costs as compensation for breach of warranty concerning the goods retained by him.

The Court observed that the expenses incurred by the respondent for advertising, publicity, storage, agency commission and other overheads could not be treated as compensation for the breach of warranty relating to the goods that the respondent retained. While the respondent was clearly entitled to receive the difference between the contract price and the prevailing market price for the goods he kept, that amount had already been awarded to him. The Court further noted that transport and storage charges incurred after the Government agreed to take back the goods, provided those charges could be properly linked to the goods, might be recoverable as expenses borne on behalf of the Government of India; however, the respondent had made no claim for such charges. Regarding the goods that were returned, the Court held that the respondent could not claim damages because the contract concerning those goods had been terminated by mutual agreement. Consequently, the respondent’s request for incidental expenses related to the goods he had appropriated could not be granted, except for the damages that had already been awarded. The Court therefore concluded that the sum of Rs 1,25,000 awarded by the umpire as incidental expenses could not be sustained as compensation, since it rested on a misconception of law that was plainly erroneous.

The Court then turned to the umpire’s award of interest, quoted in paragraph (ix) of the umpire’s decision. The umpire had applied the principle that compensation should include interest on all monies paid by the purchaser to the Government for stores that the Government later reclaimed, calculated from the date of payment until the date the monies were returned. The umpire fixed the rate of interest at the rate at which the purchaser paid interest to his bankers, which the evidence showed to be zero percent per annum, but nevertheless applied a statutory rate of six percent per annum, stating that the law of compensation required such an award. The Court found it difficult to discern any legal basis for awarding interest to the respondent. The contract did not contain any provision for interest on amounts paid by the respondent if the contract failed, and Section 61 of the Sale of Goods Act did not provide a basis for interest. Although the Sale of Goods Act does not preclude a seller or buyer from recovering interest or special damages where the law allows such recovery, subsection (2) of Section 61 permits a court, in the absence of a contrary contract, to award interest at a rate it deems appropriate in a suit for refund of price when the seller breaches. However, the Court noted that the respondent’s claim was not for a refund of price; the price for the portion of the contract cancelled by mutual agreement had already been refunded, and the claim for the goods sold was limited to damages, which had been awarded. Consequently, the Court concluded that the umpire’s award of interest lacked legal justification.

In this case the respondent’s claim was not for a refund of the purchase price. The portion of the contract that had been cancelled was mutually agreed to be refunded, and that refund was actually made. For the portion of the contract involving the goods that the respondent had sold, the respondent sought damages, and the Court awarded those damages. Before the umpire the respondent further contended, and the umpire upheld the contention, that he had been compelled to obtain a large loan from his bankers in order to fulfil his obligations under the contract with the Government. The respondent argued that he should be allowed to recover from the Dominion of India the interest that he had paid to his bankers for the period during which the money he had paid remained with the Dominion. Counsel for the respondent submitted that, under these circumstances, the umpire possessed the authority to award interest on the sum that was retained by the Dominion as damages.

The Court, however, referred to the decision of the Judicial Committee in Bengal Nagpur Railway Company Ltd. v. Ruttanji Ramji (1937) L.R. 65 I.A. 66, which held that in the absence of any express or implied usage, any contractual term, or any statutory provision that would justify the award of interest, interest could not be granted as part of damages caused by the wrongful detention of money. In the cited case, a contractor had been awarded Rs 67,000 by the Railway Company for work not covered by the contract, based on fair and reasonable rates. The contractor sought interest on that amount for the period before the suit was filed. The Judicial Committee ruled that interest could not be added to the compensation awarded, because there was no contract, statute, or recognized usage supporting such a claim, and therefore the interest claim was dismissed. The Court also examined 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, as a consequence of not receiving the money on that day, is unable to pay his debts and is totally ruined. A is not liable to make good to B anything except the principal sum he contracted to pay, together with interest up to the day of payment.” The Judicial Committee observed that this illustration does not create a right for a creditor to recover interest on a loan advanced to a debtor; it merely states that when a debtor fails to pay on the agreed date, the creditor is entitled only to the principal sum and, if provided by the contract, interest up to the date of payment. Consequently, the illustration does not support the respondent’s claim for interest.

The Court explained that the illustration referenced in section 73 of the Indian Contract Act requires the debtor to pay only the principal sum that was promised, together with any interest that had accrued up to the actual date of payment. The illustration does not create a general right for a creditor to claim interest on a debt that is due, unless the law specifically provides such a right. Moreover, the illustration cannot be used to alter the wording of the statutory provision, because the provision itself is the sole source of the law. Consequently, illustration (n) offers no assistance to the respondent in this matter. Counsel for the respondent, Mr. Pathak, argued that interest could be awarded on equitable grounds and relied upon the Interest Act of 1839. Under that Act, a court may award interest to a plaintiff when the claim consists of a certain sum that is payable at a specified time by virtue of a written instrument. The Act, however, contains a proviso stating that interest shall be payable in all cases where it is already payable by law. This proviso is intended to apply only in situations where a court of equity exercises its jurisdiction to permit interest. The Court noted the observation of the Judicial Committee in the Bengal Nagpur Railway Company case, which, after citing Lord Tomlin’s remarks in Maine and New Brunswick Electrical Power Company v. Hart, held that to invoke an equitable rule it is first necessary to establish circumstances that attract equitable jurisdiction, such as the non‑performance of a contract where equity might award specific performance. The Court further observed that the present case does not engage equitable jurisdiction and therefore falls outside the scope of the proviso.

The judgment also referred to the decision of the Privy Council in the Bengal Nagpur Railway Company case, which was subsequently relied upon in the matter of Seth Thawerdas Pherumal. In that earlier case, a contractor had entered into a contract with the Dominion of India for the supply of bricks, and a clause in the contract required that any dispute be referred to arbitration. When a dispute arose, it was arbitrated and the arbitrator awarded relief in favour of the contractor. The Union of India, having succeeded to the Dominion’s rights and obligations, contested the arbitrator’s award on several grounds, one of which was the claim for interest on the awarded sum. Justice Bose, delivering the judgment of the Court, observed that interest could not be awarded under the law because an arbitrator is not a court within the meaning of the Interest Act of 1839. He further explained that interest may be granted only when there exists a debt or a certain sum that is payable at a particular time, or otherwise, under a written contract, and where a written demand for interest has been made stating the date from which interest is to be claimed. The Court concluded that none of these essential elements were present in the present case, and therefore the arbitrator had erred in law by assuming he could award interest merely because he considered the demand reasonable.

In the view of Bose, J, the arbitrator had failed to satisfy any of the requirements for awarding interest under the applicable statute. He observed that none of the essential elements – a certain debt, a sum payable at a definite time, a written contract obligating payment of interest, and a written demand for interest – were present. Consequently, the arbitrator’s conclusion that he could award interest merely because he considered the demand reasonable was a mistake of law. Bose, J, referred to the authorities set out in (1) (1937) L.R. 65 I.A. 66 and (2) [1955] 2 S.C.R. 48 to support this position.

The umpire had granted interest to the respondent on the basis that, in order to perform his contract with the Government of India, the respondent had been compelled to obtain loans from bankers and to pay interest on those loans. The umpire further reasoned that when the contract was abandoned after partial performance, the Government of India became liable to compensate the respondent for the loss of interest he had incurred. The Court found no legal principle that would make the Government of India liable to pay interest under those circumstances. Regarding the portion of the contract that was abandoned, the Court held that any entitlement to interest, if it existed, should have been claimed by the respondent at the stage of negotiating the terms of cancellation. For the goods that the respondent returned, the Court recognized his right to claim compensation for breach of warranty, but clarified that such compensation could not incorporate interest as a damage for the detention of money. Accordingly, the interest awarded was based on a view of the law that was erroneous on the face of the award. The appeal was therefore partially allowed. The Court set aside the umpire’s award to the extent that it granted interest of Rs. 68,833/12/3 and incidental expenses of Rs. 1,25,000/‑. However, the award of Rs. 1,32,417/10/‑ for loss suffered by the respondent in connection with 6,34,270 packets of cigarettes was left undisturbed. Because the appeal succeeded only in part, the Court did not award any costs to either party. The appeal was allowed in part.