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PETITIONER: U.P. RAJKIYA NIRMAN NIGAM LTD.

       Vs.

RESPONDENT: INDURE PVT. LTD. & ORS.

DATE OF JUDGMENT:       09/02/1996

BENCH: RAMASWAMY, K. BENCH: RAMASWAMY, K. AHMAD SAGHIR S. (J) G.B. PATTANAIK (J)

CITATION:  1996 AIR 1373            1996 SCC  (2) 667  JT 1996 (2)   322        1996 SCALE  (2)247

ACT:

HEADNOTE:

JUDGMENT:                       J U D G M E N T K. Ramaswamy, J.      Leave granted.        This appeal by special leave arises from the judgment and order  passed on  April 10, 1992 by the Delhi High Court in O.M.P. No.62 of 1992.      The appellant  filed an application under Section 33 of the  Arbitration  Act,  1940  [for  short,  "the  Act"]  for declaration  that  there  exist  no  agreement  between  the appellant and  the first  respondent-Indure Pvt. Ltd. on the basis of  which a  dispute for  a claim  of Rs.1,68,73,628/- could be referred for arbitration as the agreement set up by the respondent  was non  est and  alternatively the  dispute was not  arbitrable  under  the  agreement.  Accordingly  it sought declaration  to set  aside the  said  agreement.  The learned single  Judge of  the High  Court  in  the  impugned order held  that the  draft agreement  dated June  22,  1984 contains provision for arbitration under clause [14] and the appellant is  bound thereby;  consequently, the  arbitrators are entitled to arbiter the dispute.      The dispute arose in the backdrop of the facts that the U.P.   State  Electricity  Board  had  floated  tenders  for construction, supply  and erection  of mechanical  equipment and construction  work including  consultancy services. Last date for  submission of  the tender  was June  30, 1984. The appellant-Nigam,  an   Undertaking  of  State  of  U.P.  had purchased tender  documents-from the  Board on  February  6, 1984. The  respondent approached  the  appellant  for  their joint participation  to submit  the tenders to the Board. In furtherance thereof,  negotiations were set on foot and they decided to  enter into  an  agreement  in  that  behalf  and ultimately draft  agreement dated. June 22, 1984 was sent to the respondent for signature. The appellant did not sign the draft agreement.  On June  27, 1984,  the respondent  sent a

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counter-proposal  deleting  clause  [10]  of  the  agreement suggested by  the appellant  and materially  altering clause [12] therein  after  signing  the  same.  The  tenders  were submitted  on  June  30,  1984,  i.e.,  the  last  date  for submission of tenders; but before negotiating with the Board on  February  23,  1985  the  appellant  had  withdrawn  the tenders. On February 25, 1985, the respondent had offered in its letter  to the  Board agreeing  to undertake  the entire contract by  itself and  offered to complete the formalities with the  Board.  Simultaneously,  on  March  3,  1985,  the respondent  sent  a  notice  through  its  counsel  claiming damages  stating  therein  that  there  was  no  arbitration agreement between  the parties.  On January  21,  1986,  the respondent  had   further  sent   a  notice   nominating  an arbitrator an  arbitrator on  its part  and called  upon the Appellant  to   nominate  its   arbitrator.  The  respondent purported to  have exercised that right under clause [14] of the draft  agreement proposed  by the  appellant on June 22, 1984 alleging  that they  had accepted  the same  by  letter dated June  27, 1984. The appellant by letter dated February 28, 1986 disputed the existence of the arbitration agreement and also asserted that no concluded contract existed between the parties.  It was further stated therein that deletion of material clause  [10] of  the draft  agreement and  material alteration   of    clause   [12]   constituted   substantial modification of  the draft agreement and consequently it did not accept  the counter-proposal of the respondent and that, therefore, no  valid agreement came into existence which was admitted by  the respondent  in their  letter dated March 5, 1985. The  question of  appointing an  arbitrator  on  their behalf did  not arise.  However, without  prejudice to their right  to   claim  that   no  valid   agreement,  much  less arbitration agreement,  was in  existence, they nominated an arbitrator on  their  behalf  to  arbiter  on  the  question "whether there  existed ant  valid or  subsisting  agreement between the  parties and whether there existed any valid and binding arbitration  clause between  the parties?" Since the arbitrator nominated  by them  expired, the  respondent  was called upon the appellant to nominate another arbitrator. At that stage  the appellant filed above petition under Section 33 of the Act.      The High  Court found  that the respondent returned the agreement duly  signed but  after deleting  clause [10]  and materially  altering  clause  [12]  thereof.  There  was  no communication by  the appellant  refusing or  negativing the alternations made  in  the  draft  agreement.  Tenders  were submitted on  June 30,  1984 after  receipt of  the modified agreement. Till  March  1,  1986,  the  respondent  had  not received any communication disowning the contract between it and the appellant. Clause [14] of the agreement contained an arbitration clause  for adjudication  of the  disputes.  The withdrawal of the tenders by the appellant caused damages as claimed by  the appellant  in  the  notice.  Therefore,  the respondent  called   upon  appellant   to   nominate   their arbitrator to  adjudicate the  dispute intimating  in  their letter appointment  of the  arbitrator on  their part.  From this there  emerged a  concluded contract  containing clause [14] providing  for  arbitration  for  adjudication  of  the disputes.      As  stated   earlier,  the   High  Court  came  to  the conclusion that  from the correspondence between the parties there emerged  a concluded  contract. After  due  discussion between the  parties the  draft agreement  duly signed  with official  seal   of  the  respondent  affixed  thereon,  was communicated  to  the  appellant  on  June  27,  1984  which

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contained clause  [14] which  formed an integral part of the contract. The modifications suggested by the respondent were acted upon  by the  appellant. At  no point  of time  it was suggested by  any communication  that the modifications were not accepted.  On the  other hand, tenders were submitted on June 30,  1984 for  the joint participation of the appellant and the respondent. The respondent had sent a bank Draft for a sum of Rs.2 lakhs on October 29, 1984. "(I)t is clear that the petitioner  had accepted  the agreement  and in  such an eventuality, the  petitioner cannot  deny the  existence  of arbitration clause".  "Therefore, from  the conduct  of  the petitioner the inference can be drawn that the agreement had come into  force the  moment it was signed by the respondent and sent  the same  to the  petitioner  and  the  petitioner though did  not sign  it but  acted upon it which amounts to indirect acceptance".      Section 3  of the  Indian Contract  Act, 1872 envisages communication of  proposal, acceptance  of proposal  and the revocation of  the proposal and acceptance. Communication of proposal is  complete under  Section 4  when it comes to the knowledge of the person to whom it is made. Communication of an acceptance is complete - as against the proposer, when it is put in the course of transmission to him, so as to be out of the  power of the acceptor; as against the acceptor, when it comes  to the knowledge of the proposer. Under Section 7, "in  order  to  convert  a  proposal  into  a  promise,  the acceptance must  [1] be  absolute and  unqualified;  [2]  be expressed in  some usual  and reasonable  manner, unless the proposal  prescribes  the  manner  in  which  it  is  to  be accepted...".  Under   Section  10,   "all  agreements   are contracts if  they are  made by  the free consent of parties competent to contract, for a lawful consideration and with a lawful object,  and are  not expressly declared to be void". Section 31 defines "Contingent contract" to mean to contract to do  or not  to do something, if some event, collateral to such contract,  does  or  does  not  happen".  A  contingent contract to  do or  not to  do anything,  if  an  unforeseen future event  happens, cannot  be  enforced  by  law,  under Section 32, unless and until that event has happened. If the event  becomes   impossible,  such  contract  becomes  void. Section 2  [a] of the Act defines "arbitration agreement" to mean "a  written agreement  to  submit,  present  or  future differences, to  arbitration, whether an arbitrator is named therein or  not". To  constitute an  arbitration  agreement, there must  be an  agreement between  the parties, viz., the parties must  be ad idem. The parties are not ad unless they agree  to   the  terms   and  conditions  mentioned  in  the agreement. As  seen, under  the Contract Act unless there is an agreement,  i.e., there is an acceptance of the proposal, the contract  is not  complete. It  is seen  that the  draft agreement dated June 22, 1984 was sent to the respondent for acceptance, Admittedly,  clause [10]  was deleted and clause [12] was  materially altered  unilaterally to  convert joint liability to  individual  liability  of  the  appellant.  It would,  therefore,  be  a  counter-proposal  signed  by  the respondent  and  communicated  to  the  appellant.  At  this juncture,  it   is  relevant   to  notice  the  Articles  of Association of  the appellant-Company,  a  State  Government Undertaking. Article  125 of  the  Articles  of  Association gives power   to  the Board  of Directors  of the appellant- Company and  Article 126,  clause [xii] confers power on the Board of  Directors "to  refer  claims  or  demands,  by  or against the Company to arbitration". Under Article 125, the Company has  the control  and the  competent  authority  has power to  sign the  contract on behalf of the Company. After

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the counter-proposal  was  signed  by  the  respondent,  the appellant had not signed any contract to bind the parties.      From this  factual matrix, the question arises: whether there emerged  any concluded  contract pursuant to which the parties are bound by the terms and conditions of the tenders submitted to  the Board  and for  further performance? It is seen that  the  tenders  were  not  jointly  signed  by  the appellant and the respondent but were unilaterally submitted to the  Board by  the appellant and were later on withdrawn. There did not exist any concluded contract between the Board and the  appellant for  the performance  of the  work as per terms and  conditions of  the tenders  floated by the Board. Under Section  32 it  was a contingent contract until it was accepted by  the  Board.  In  this  background,the  question emerges: whether  there is  an arbitration agreement between the parties?  It is  see; that  clause [141 of the agreement [subject to  the dispute  whether  it  is  arbitrable  under clause [14]  which is  yet another issue with which were are not concerned]  independently does  not come  into existence unless  there  is  a  concluded  contract  pursuant  to  the proposal made  by the  appellant  on  June  22,  1984  or  a counter-proposal by  the respondent dated June 26, 1984.  It is not  the case of the respondent that there exist any such independent arbitration agreement.      Shri  R.F.   Nariman,  the   learned  counsel  for  the respondent, therefore, contended that the counter-offer made by the  respondent amounts  to acceptance  by conduct of the appellant  and   he  placed   reliance  on   paragraphs   53 [Acceptance by conduct] and 99 [Agreement in principle only] of the i on Contract. Paragraph 53 provides ’ that "an offer may be  accepted by  conduct. For  example, an  offer to buy goods can  be accepted  by supplying  them; and  an offer to sell goods,  made by  sending them  to the  offeree, can  be accepted by  using them".  The substance  of paragraph 99 is that parties  may  reach  agreement  in  principle  but  the details may  be worked  out at  a later  date. There  is  no dispute to the proposition of law but two factors have to be kept in  mind, viz.,  when the counter offer was made by the respondent and  whether  the  unilateral  offer  amounts  to acceptance by submitting the tenders by the appellant to the Board. We  find that  it does  not amount  to acceptance  of counter proposal.  It is  seen that  admittedly, clause [10] which thrusts  responsibility on  the first  respondent  was deleted in  the counter-  proposal. In  clause 12, for joint responsibility unilateral  liability  was  incorporated.  In other   words   the   respondent   disowned   its   material responsibilities.  Unless   there  is   acceptance  by   the appellant to  those conditions  no concluded contract can be said to  have emerged.  It is  seen that  the appellant is a Government  Undertaking and unless contract is duly executed in    accordance  with  the  Articles  of  Association,  the appellant is  not bound  by any such contract. Shri  Nariman sought to  rely on the passage from Palmer on  Companies Law containing that  it is  an  indoor  management  between  the appellant and  its  officers.  When  the  negotiations  were undertaken on  behalf of  the  appellant, the respondent was led to believe that the  officer was competent to enter into the contract  on  behalf of the appellant. When the counter- proposal was   sent,  The appellant  had  not  Returned  the proposal.   Therefore it  amounts  to  acceptance  and  thus concluded     contract  came  into  existence.  We  fail  to appreciate     the  contention.   As  seen,   the   material alterations in   the  contract make  world of  difference to draw  an     inference  of  concluded  contract,  The  joint liability of  the parties  was vade  unilateral liability of

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The   appellant. Thereby,  the respondent  sought to absolve itself From  the liability  of further  performance of   the contract with  the Board.  Similarly,  clause  [10]    which contains material  part of the terms for the  performance of the contract  with the  Board was deleted  Thereby, there is no consensus  A on  the material  terms of the contact which contains several  clauses. In  the absence  of consensus  ad idem on  the material  terms of  the contract  to be entered into  between   the  parties,  there  emerged  no  concluded contract. Apart  from the  draft agreement  and the counter- proposal, there  is no independent contract for reference to arbitration.   Clauses [14] which is an integral part of the draft agreement  proposed by  the appellant and the counter- proposal is the foundation for reference to the arbitration.      Section 31 [2] of the Act provides that notwithstanding anything contained  in any  other law  for the time being in force and  save  as  otherwise  provided  in  the  Act,  all questions regarding  the validity, effect or existence of an award or an arbitration agreement between the parties to the agreement or persons claiming under them shall be decided by the Court in which the award under the agreement has been or may be,  filed, and by no other Court. Section 33  envisages that any  party to  an arbitration  agreement or  any person claiming under  him desiring  to challenge  the existence or validity of  an arbitration agreement or an award or to have the effect of either determined shall apply to the Court and the Court shall decide the question on affidavits. Under the proviso, if  the Court  deems it  just and expedient, it may set down  the application for hearing on other evidence also and may pass such orders for discovery and particulars as it may do in a suit.      In "Law  of Arbitration" by Justice Bachawat [2nd Edn.] at page 19 of Chapter II it is stated that "to constitute an arbitration agreement,  there must  be an agreement, that is to say,  the parties must be ad-idem. The parties are not ad -idem if  there is  an arbitration clause in the bought note while there is none in the sold note. To be enforceable, the agreement must be made by the free consent of the parties".      We find no force in the contention of Shri Nariman that the appellant  had submitted  to  the  jurisdiction  of  the arbitrators and  having nominated  the arbitrator,  they are estopped to  go back  upon it  Acquiescence does  not confer jurisdiction,      The  arbitrability   of  a   claim   depends   on   the construction of  the clause  in the contract. The finding of the arbitrator/arbitrators  on arbitrability of the claim is not conclusive  as under  Section 33,  ultimately it  is the Court   that   decides   the   controversy.   It   being   a jurisdictional  issue,   the  arbitrator/arbitrators  cannot cloth themselves  with jurisdiction  to conclusively  decide the issue. In "Russel on Arbitration" [19th Edn.] at page 99 it is stated thus:      "It  can   hardly  be   within  the      arbitrator’s jurisdiction to decide      whether   or    not   a   condition      precedent to  his jurisdiction  has      been  fulfilled.   It  has   indeed      several  times  been  said  bluntly      that an  arbitrator has no power to      decide his  own jurisdiction and in      one  case   where   rules   of   an      institution  prepared   to  conduct      arbitrations  gave  the  arbitrator      such power,  the court  will ignore      this  when  asked  to  enforce  the

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    award,  and   decide  the  question      itself. However,  an arbitrator  is      always entitled  to inquire whether      or  not  he  has  jurisdiction.  An      umpire faced with a dispute whether      or not  there was  a contract  from      which alone  his  jurisdiction,  if      any, can  arise can  adopt one of a      number of  courses.   He can refuse      to deal  with the matter at all and      leave the  parties to  go to court,      or he  can consider  the matter and      if  he  forms  the  view  that  the      contract upon which the claimant is      relying   and    from   which,   if      established, alone his jurisdiction      can arise is in truth the contract,      he can proceed accordingly."      In "Law  of Arbitration" by Justice Bachawat [2nd Edn.] at page  155 it is stated that "the question whether matters referred to were within the ambit of clause for reference of any difference  or  dispute  which  may  arise  between  the parties, it is for the Court to decide". The arbitrator by a wrong decision  cannot enlarge  the scope of the submission. It is  for the  Court to  decide finally  the ambit  of  the clause in  dispute or  any clause  or a  matter or  a  thing contained  therein   or  the   construction   thereof.   We, therefore, hold that the arbitrators cannot cloth themselves with jurisdiction  to decide  conclusively the arbitrability of the  dispute. It  is for the Court under Section 33 or on appeal  thereon   to  decide   it  finally.  The  appellant, therefore, is  not estopped  to challenge  the action and to seek a declaration under section 33.      The clear  settled law  thus is  that the  existence or validity of an arbitration agreement shall be decided by the Court  alone.  Arbitrators,  therefore,  have  no  power  or jurisdiction  to   decide  or   adjudicate  conclusively  by themselves the  question since  it is the very foundation on which the  arbitrators proceed  to adjudicate  the disputes. Therefore, it  is rightly  pointed out  by Shri Adarsh Kumar Goel, learned  counsel for  the appellant  that they  had by mistake agreed  for reference and that arbitrators could not decide  the   existence  of  the  arbitration  agreement  or arbitrability of  the disputes  without prejudice  to  their stand  that   no  valid   agreement  existed.  Shri  Nariman contended that  having agreed  to  refer  the  dispute,  the appellant  had   acquiesced  to   the  jurisdiction  of  the arbitrators and,  therefore, they  cannot exercise the right under Section  33 of  the Act.  We  find  no  force  in  the contention. As  seen, the appellant is claiming adjudication under Section  33 which the Court alone has jurisdiction and power to  decide whether  any valid  agreement  is  existing between the  parties. Mere  acceptance or acquiescing to the jurisdiction of  the arbitrators  for  adjudication  of  the disputes as to the existence of the arbitration agreement or arbitrability  of   the  dispute  does  not  disentitle  the appellant to  have the  remedy under  section 33 through the Court. In our considered view the remedy under Section 33 is the only right royal way for deciding the controversy.      Since the  tenders - the source of the contract between the parties  - had  not transformed into a contract, even if the  proposal   and  counter  proposal  are  assumed  to  be constituting an  agreement, it  is a contingent contract and by operation  of Section 32 of the Contract Act, the counter proposal of  the respondent  cannot be  enforced  since  the

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event of  entering into  the contract with the Board had not taken place.      In Ramji Dayawala & sons [P] Ltd. v. Invest Import [AIR 1981 SC  2085], a  two-Judge Bench  of this Court considered the  existence   of  the  contract  and  arbitration  clause thereunder. This Court had held that in the facts of a given case  acceptance   of  a  suggestion  may  be  sub  silentio reinforced by  the subsequent  conduct.  Where  there  is  a mistake as  to terms  of a  document, amendment to the draft was suggested and a counter-offer was made, the signatory to the original  contract is not estopped by his signature from denying that  he intended  to make an offer in the terms set out in  the document.  Where the  contract is in a number of parts it  is essential  to the validity of the contract that the contracting  party should  either have  assented  to  or taken to  have assented  to the same thing in the same sense or as  it is  sometimes put,  there should  be consensus  ad idem. In that case a sub-contract was signed and executed by the Managing  Director of  the appellant-Company but part of the contract was altered subsequently since counter-proposal was given  by the  respondent. This  Court had held that one such case  is where  a part of the offer was disputed at the negotiation stage and the original offeree communicated that fact to the offeror saying that he understood the offer in a particular sense;  this communication  probably amounts to a counter-offer in  which case  it may be that mere silence of the original  offeror will  constitute his acceptance. Where there is  a mistake  as to  the terms of the documents as in that case,  amendment to  the  draft  was  suggested  and  a counter-offer  was  made,  the  signatory  to  the  original contract is  not estopped by his signature from denying that he intended  to make  an offer  in the  terms set out in the document;  to  wit,  the  letter  and  the  cable.  It  can, therefore, be  stated that where the contract is in a number of parts  it is  essential to  the validity  of the contract that the contracting party should either have assented to or taken to have assented to the same thing in the same senseor as it  is sometimes  put, there should be consensus ad idem. It was  held that  there was  no consensus  ad idem  to  the original contract.  It was  open  to  the  party  contending novatio to  prove that  he had  not accepted  a part  of the original  agreement  though  it  had  signed  the  agreement containing that part.      As found  earlier, there  is no  signed agreement  by a duly competent  officer on  behalf  of  the  appellant.  The doctrine  of  "indoor  management"  cannot  be  extended  to formation of the contract or essential terms of the contract unless the  contract with other parties is duly approved and signed on  behalf of  a public undertaking or the Government with  its  seal  by  an  authorised  or  competent  officer. Otherwise, it  would be hazardous for public undertakings or Government or  its instrumentalities  to deal on contractual relations with third parties.      In view  of the  fact that  Section 2  [a] of  the  Act envisages a  written  agreement  for  arbitration  and  that written  agreement   to  submit   the  existing   or  future differences to arbitration is a pre-condition and further in view of the fact that the original contract itself was not a concluded contract,  there existed  no arbitration agreement for reference to the arbitrators. The High Court, therefore, committed a  gross  error  of  law  in  concluding  that  an agreement  had   emerged  between   the  parties,  from  the correspondence and  from submission  of the  tenders to  the Board. Accordingly  it is  declared that  there  existed  no arbitration  agreement   and  that   the  reference  to  the

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arbitration, therefore,  is  clearly  illegal.  Consequently arbitrators cannot  proceed further  to arbiter the dispute, if any. The conclusion of the High Court is set aside.      The appeal is accordingly allowed with costs quantified at Rs.15,000/-.