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PETITIONER: BUNGO STEEL FURNITURE PVT.  LTD.

       Vs.

RESPONDENT: UNION OF INDIA

DATE OF JUDGMENT: 30/09/1966

BENCH: RAMASWAMI, V. BENCH: RAMASWAMI, V. BHARGAVA, VISHISHTHA DAYAL, RAGHUBAR

CITATION:  1967 AIR  378            1967 SCR  (1) 633  CITATOR INFO :  RF         1976 SC 425  (13)  D          1988 SC1166  (7)  R          1990 SC1426  (22)

ACT: Arbitration-Award-Party  contracting  to  obtain  supply  of steel  bins-Cancellation  of  contract  after  part  supply- Arbitrator awarding damages for wrongful termination-Reasons or principles not indicated in Award- if could be set  aside on ground of error of law on face of the Award.

HEADNOTE: The  Union of India entered into two contracts  in  November 1944   and  June  1945  with  the  appellants,  which   were subsequently  modified in February 1946, for the  supply  of 4,700  bins  at  an agreed price inclusive of  the  cost  of steel.  The Government undertook to make available the steel required  for the manufacture of the bins and  accordingly,, supplied to the appellants steel valued at Rs. 2,53,521  for which  amount  credit  was to be given  to  the  Government. After  2,172 bins had been manufactured and supplied to  the Union,  the latter cancelled the contract for the supply  of the balance 2,528 bins. Each  of  the  contracts between the  parties  contained  an arbitration  clause and in accordance with  this  provision, the dispute arising out of cancellation of the contracts was referred  to an arbitrator.  The arbitrator found  that  the contract had been wrongfully cancelled; and that at the time of the cancellation the component parts of the balance 2,528 bins  were  ready but had not been assembled  into  finished bins.   By way of compensation for the wrongful  termination of  the contract by the Government, the  Arbitrator  awarded damages to the company of the amount representing the  value of  steel  used up in making the component  parts  for  bins which  had  not been assembled into  completed  bins.   This amounted to Rs. 1,65,825. The  Government  made an application to  the  Calcutta  High Court for setting aside the arbitrator’s award on the ground that there was a mistake of law apparent on the face of  the award in the estimation of damages for wrongful  termination of  the  contract.   A  single  Judge  of  the  High   Court

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substantially confirmed the arbitrator’s award.  The Govern- ment  took the matter in appeal to a Division Bench  of  the High  Court and the two appeals filed were allowed  by  that Bench and the award was set aside. It  was contended on behalf of the appellants that the  High Court  could  not  have interfered with  the  award  of  the arbitrator  as there was no error on the face of the  award; that  the  arbitrator  was not bound to  give  -reasons  for estimating  the damages to which the appellant was  entitled and that he had not in fact given any such reasons. HELD : Allowing the appeal (per Bhargava and Raghubar Dayal, JJ.).  The arbitrator in fixing the amount  of  compensation had  not proceeded to follow any principles, the valdity  of which  could  be tested on the basis of laws  applicable  to breaches  of contract.  He awarded the compensation  to  the extent  that he considered right in his  discretion  without indicating  his reasons.  Such a decision by  an  Arbitrator could not be held to be erroneous on the face of the record. [642 A-B] 634 The  consideration that led the arbitrator to consider  that the  value of the steel was equal to, and not more  or  less than,  the amount which he considered it right to  award  as compensation,  was not indicated by him in his award.   This was, therefore, clearly a case where the arbitrator came  to the conclusion that a certain amount, should be paid by  the Government  as compensation for wrongful termination of  the contract, and in his discretion-he laid down that the amount should  be  equal to the value of the steel  as  it  existed after it had been converted into component parts. [641 F-G] It is now a well settled principle that if an arbitrator, in deciding  a dispute before him, does not record his  reasons and does not indicate the principles of law on which he  has proceeded, the award is not on that account vitiated.  It is only when the arbitrator proceeds to give his reasons or  to lay down principles on which he has arrived at his decisions that the court is competent   to  examine  whether  he   has proceeded contrary to law and is entitled    to interfere if such  error  in  law is apparent on the face  of  the  award itself. [640 H] (Per  Ramaswami  J.,  dissenting)-In the  present  case  the arbitrator   had  estimated  the  measure  of   damages   as equivalent  to  the  value of steel used up  in  making  the component parts.  That was the legal proposition upon  which he  had  based his award and the question was  whether  that legal  proposition  was correct.  The arbitrator  had  found that  the appellant had produced no evidence with regard  to the  manufacturing cost of the component parts of the  2,528 unfinished  bins;  he  had therefore  failed  to  prove  the resultant damage on account of the breach of contract.   But if in spite of this finding the arbitrator decided to  award damages to the appellant, the highest amount which he  could award would be Rs. 1,03,066, which is the difference between the  contract  price and the value of the steel used  up  in manufacturing  their  component  parts.   The  estimate   of damages at this figure is based, on the assumption that  the appellant  had manufactured completely 2,528 bins  according to  the terms of the contract.  The arbitrator  had  ignored the  provisions of s. 73 of the Indian Contract Act and  had awarded  damages  to the appellant on a wrong  legal  basis. The award was therefore vitiated by an error of law apparent on the face of it. [639 C, G, H] . Champsey Bhara and Co. v. Jivraj Balloo Spinning and Weaving Co. Ltd. 50 I.A. 324 and James Clark (Brush Materials)  Ltd. v.   -Carters   (Merchants)   Ltd.  [1944]   1   K.B.   566,

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distinguished.

JUDGMENT: CIVIL  APPELLATE JURISDICTION : Civil Appeals Nos.  754  and 755 of 1964. Appeals from the judgment and order dated August 1, 1962  of the  Calcutta High Court in Appeals Nos. 13 and 131 of  1961 respectively. A.   K. Sen, Uma Mehta, P. K. Chatterjee and P. K. Bose, for the appellant (in both the appeals). N.   S.  Bindra and R. N. Sachthey, for the  respondent  (in both he appeals). The  Judgment  of  BHARGAVA  and  RAGHUBAR  DAYAL  J.J   was delivered by BHARGAVA J. RAmAswAmi J. delivered a dissenting Opinion. Ramaswamy, J. These appeals are brought by certificate’ from the judgment of the Calcutta High Court dated August 1, 1962 by which an award of the arbitrator, Sir R. C. Mitter  dated September 2, 1959 was set aside. The  disputes  arise out of two contracts being A.  T.  1000 dated  November 30, 1944 and A. T. 1048 dated June 25,  1945 between  the  Government of India  (hereinafter  called  the "Government")  and  the  Bungo Steel  Furniture  Pvt.   Ltd. (hereinafter  called the "appellant").  Both  the  contracts contained the usual arbitration clause embodied in cl. 21 of the  general conditions of contract in form no.  W.S.B.  133 for  reference  of  any  question  or  dispute  arising   in connection with the contract or arising under the  condition thereof.   The claims and the counterclaims of  the  parties under the two contracts were referred to the arbitration  of Sir  R.  C. Mitter.  The award of the  arbitrator  is  dated September  2, 1959.  The arbitrator found that the  contract no.   A.  T.  1000 was for the supply of 4700  bins  at  Rs. 107/2/6 per bin inclusive of the price of steel.  In respect of  the  supply of bins under this contract  the  Government agreed  to  pay  an  extra Rs.  4/12/6  per  bin  for  extra partition.  The contract no.  A. T. 1048 was for the  supply of  2000 steel bins at Rs. 132/8/- per bin inclusive of  the price  of steel.  The arbitrator found that on February  20, 1946  the parties agreed to a modification of the  contracts and  the  agreed  modification was  that  the  supply  under contract no A. T. 1000 would be reduced to 1805 bins and the supply  under contract no.  A. T. 1048 would be  reduced  to 367  bins, so that the total supply under the two  contracts would be 4700 bins.  The arbitrator further found that  only 1805 bins had been manufactured under contract no. 1000  and 367  bins had been manufactured under contract no. 1048  and that in all 2172 bins were manufactured by the appellant and were  accepted by the Government and the appellant  was  en- titled  to the price of 2172 bins so supplied  inclusive  of the  price  of  steel  amounting  to  Rs.  2,42,044/-.   The arbitrator held that the Government wrongfully cancelled the contract  with respect to the balance 2528 bins and that  at the  time  of this cancellation the component parts  of  the balance 2528 bins had not been assembled into finished bins. The  arbitrator found that the appellant was entitled  to  a credit for the sum of Rs. 10,385/- on account of the cost of supply of the extra partitions for 2172 bins.  This  finding of  the arbitrator was held to be erroneous by  Mallick,  J. who reduced the amount awarded to the appellant by a sum  of Rs. 10,385/-.  The finding of Mallick, J. was not challenged by  the  appellant  before the Division Bench  of  the  High Court.   The  arbitrator also found that the  appellant  was

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entitled  to credit for the sum of Rs. 27,969/on account  of payment  made by the appellant towards the cost of steel  on M.R.O.  and  that  the Government was entitled  to  a  cross credit for a sum of Rs. 7,851/- on account of payment made 636 by it to the appellant directly.  These two findings of  the arbitrator were not challenged before the Division Bench. The  arbitrator  found  that the  Government  was  under  an obligation  to supply steel for the manufacture of the  bins and  that  it did supply such steel to the  appellant.   The arbitrator  disbelieved  the appellant’s case  that  it  had rejected the steel sheets supplied by the Government and had used  the  steel sheets from their own stocks and  that  the steel  sheets supplied by the Government became  rusted  and were still lying in their factory grounds as powdered  rust. The  arbitrator  found  : (a) that the price  of  the  total quantity  of  steel  supplied  by  the  Government  to   the appellant  at basic rates was Rs. 2,53,521/-, (b)  that  the price  of  the  steel used for  making  2172  finished  bins amounted to Rs. 87,696/- and the Government was entitled  to credit for this sum of money, and (c) that no surplus  steel was  left  after manufacture of 2172 finished bins  and  the component  parts of the unfinished bins.  It  followed  from this  finding that the price of steel used up in making  the component  parts  of  the unfinished bins  amounted  to  Rs. 1,65,825/-. The arbitrator found that the appellant was entitled to com- pensation for the wrongful cancellation of the balance  2528 bins.  His findings in the award read as follows :- "I further hold that the cancellation by Government for  the balance was wrongful.  There is however no evidence relating to  the  manufacturing  cost  of  the  aforesaid   remaining component  parts.  By way of compensation for  the  wrongful termination  of  the contract by Government as  aforesaid  I give  the company the amount representing the value  of  the steel  used up in making the said component parts which  had not been assembled into completed bins.  I therefore do  not allow the Government credit for the value of the steel  used up in manufacturing those component parts." The  Government  made an application to  the  Calcutta  High Court for setting aside the award of Sir R. C. Mitter on the ground that the arbitrator had failed to apply his mind  and there was a mistake of law apparent on the face of the award in the estimation of     damages for wrongful termination of the contract.  Mallick, J.    made  a minor modification  in the award with regard to a sum of  Rs. 10,385/- and on  July 27, 1960 the learned Judge pronounced his judgment in  terms of  the modified award.  The Government look the  matter  in appeal before the Division Bench of the High Court,  appeals nos.  13  and 131 of 1961.  These appeals  were  allowed  by Bachawat  and  Laik,  JJ. who set a-side the  award  of  the arbitrator in respect of the two contracts. 637 On  behalf  of the appellant Mr. A. K. Sen put  forward  the argument  that there was no error on the face of  the  award and  the  High Court exceeded its  jurisdiction  in  setting aside  the award of the arbitrator.  It was  contended  that the  arbitrator is not bound to give reasons for  estimating the  damages  to which the appellant was entitled.   It  was stated that the estimate of the: arbitrator may be arbitrary but  he  was  not bound to give  reasons  for  the  estimate reached  by  him ’and that it is not open to  the  Court  lo speculate,  when no reasons are given by the arbitrator,  as to what impelled the arbitrator to arrive at his  conclusion In support of this argument Counsel for the appellant relied

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on  the following passage from the judgment of Lord  Dunedin in Champasey Bhara and Company v. Jivraj Balloo Spinning and Weaving Company Ltd.(1): "An  error in law on the face of the award means,  in  their Lordships’  view,  that  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.  It does  not mean  that  if  in  narrative  a  reference  is  made  to  a contention  of  one party, that opens the  door  to,  seeing first  what that contention is, and then going to  the  con- tract  on  which the parties’ rights depend to see  if  that contention is sound." It is true that the Court in dealing with an application  to set  aside an award has not to consider whether the view  of the   arbitrator   on  the  evidence  is   justified.    The arbitrator’s  adjudication is generally  considered  binding between  the  parties, for he is a tribunal elected  by  the parties and the power of the Court to set aside the award is restricted  to  ’cases set out in s. 30 of  the  Arbitration Act. An  award may be set aside by the court on the ground of  an error of law apparent on the face of the award but an  award is not invalid merely because by a process of inference  and argument  it  may be demonstrated that  the  arbitrator  has committed  some mistake in arriving at his conclusion.   Mr. A.  K. Sen on behalf of the appellant also, referred to  the decision of Tucker, J. in James Clark (Brush Materials) Ltd. v.  Carters (Merchants), Ltd. (2) Wherein it is pointed  out that  in  determining  whether the award  of  an  arbitrator should be remitted or set aside on the ground that there  is an  error of law appearing on the face of it, the  court  is not entitled to draw any inference as to the finding by  the arbitrator  of facts supporting the award, but must take  it at its face (1) 50 1. A. 324, 331. (2) [1944] 1 K.B. 566. 638 value.   In  my  opinion,, the principle laid  down  by  the Judicial Committee in Champsey Bhara and Company v.  Jivaraj Balloo  Spinning and Weaving Company Ltd.(’) and by  Tucker, J.  in  James  -Clark (Brush  Materials),  Ltd.  v.  Carters (Merchants), Ltd.(2) has no application in the present case, for the arbitrator in the present case has expressly  stated the  reasons  for  the estimate of  damages  -to  which  the appellant was entitled for the breach of the contract.   The claim  of the appellant is stated by the arbitrator  in  the award -as follows : "the Company claims the price of 2528 bins by way of damages for the wrongful cancellation of the contract." Section  73  of  the Indian Contract Act  provides  for  the measure of compensation for loss or damage caused by  breach of the contract.  Section 73 states : "73.  When a contract has been broken, the party who suffers by  such breach is entitled to receive, from the  party  who has broken the contract, compensation for any loss or damage caused  to him thereby, which naturally arose in  the  usual course  of  things from such breach, or  which  the  parties knew,  when they made the contract, to be likely  to  result from the breach of it. Such  compensation  is not to be given for  any  remote  and indirect loss or damage sustained by reason of the breach. Explanation.-In estimating the loss or damage arising from a breach of contract, the means which existed of remedying the

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inconvenience caused by the non-performance of the  contract must be taken into account." Section  55  of the Sale of Goods Act deals with  suits  for breach  -of the contract where the buyer refuses to pay  for the goods -according to the terms of the contract.   Section 55 states : "55. (1) Where under a contract of sale the property in  the goods  has  passed  to the buyer and  the  buyer  wrongfully neglects  or refuses to pay for the goods according  to  the terms of the contract, the seller may sue him for the  price of the goods. (2)Where under a contract of sale the price is payable on  a day   certain  irrespective  of  delivery  and   the   buyer wrongfully neglects or refuses to pay such price, the seller may sue him for the price although the property in the goods has not passed and the goods have not been appropriated to the contract." (1)  50 I.A. 324. (2) [1944] 1. K.B. 566.  639 This section does not apply to the present case because  the bins  were not manufactured and the property could not  have passed to the Government.  But the appellant was entitled to claim  damages for the wrongful cancellation of the  balance 2528  bins by the Government and for non acceptance  of  the 2528 bins under s.  56 of the Indian Sale of Goods Act which provides : "56.   Where  the buyer wrongfully neglects  or  refuses  to accept  and  pay for the goods, the seller may sue  him  for damages for non-acceptance." In  the  present  case, the  arbitrator  has  estimated  the measure  of damages as equivalent to the value of the  steel used  up in making the component parts.  That is  the  legal proposition  upon which the arbitrator has based  his  award and  the  question  is whether  that  legal  proposition  is correct.  Now the amount representing the value of the steel used up in making the component parts of the unfinished 2528 bins could not be the true measure of damages for their non- acceptance.   The normal rule for computing the damages  for non-acceptance   of  2528  unfinished  bins  would  be   the difference  between the contract price and the market  price of  such goods at the time when the contract is broken.   If there  is no available market at the place of delivery,  the market price of the nearest place or the price prevailing in the controlling market may be taken into consideration.   It was  argued for the appellant that this rule may  not  apply because  the  bins were not completely fabricated,  but,  in that  case  the measure of damages would be  the  difference between the contract price on the one hand, and the cost  of labour  and  material required for the  manufacture  of  the component  parts of the 2528 unfinished bins on  the  other. In  this  case,  the arbitrator  found  that  the  appellant produced  no evidence with regard to the manufacturing  cost of  the  component parts of the 2528  unfinished  bins.   In other  words,  the appellant failed to prove  the  resultant damage on account of breach of contract, but if in spite  of this finding the arbitrator decided to award damages to  the appellant  the highest amount which he could award for  non- acceptance  would be Rs. 1,03,066/- which is the  difference between the contract price at Rs. 107/2/6 per bin  including the price for extra partition amounting to Rs. 2,68,891 /and the value of the steel used up in manufacturing their compo- nent  parts  amounting to Rs. 1,65,825/-.  The  estimate  of damages  at this figure is based on the assumption that  the appellant had manufactured completely 2528 bins according to

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the terms of the contract.  It is therefore manifest that on no  conceivable  legal basis whatever could  the  arbitrator pronounce  an  award  for  a sum  of  Rs.  1,65,825/-  which represents  the  value of the steel used up  in  making  the component  parts  as the compensation to be awarded  to  the appellant.   In other words, the arbitrator has ignored  the provisions  of  s.  73 of the Indian Contract  Act  and  has awarded 640 damages to the appellant on a wrong legal basis.  The  award of  the arbitrator therefore is vitiated by an error of  law apparent on the face of it. For  these reasons I hold that the judgment of the  Division Bench  of the High Court dated August 1, 1962 is  right  and these appeals must be dismissed with costs. Bhargava, J. The facts in these two appeals have been  given in  the judgment of Ramaswami, J., and hence, they need  not be  repeated  by us.  The award was set aside  by  the  High Court,  in  appeal from the judgment of the  learned  single Judge passing a decree on its basis, on the ground that  the award of the Umpire with regard to the compensation for  the wrongful  cancellation of the contract was erroneous in  law and  the  error appeared on the face of the award.   In  the award,  the  arbitrator held that under Contract No.  A.  T. 1000,  only  1805 bins had been manufactured and  under  the second   Contract  No.  A.  T.  1048,  367  bins  had   been manufactured.   These bins were accepted and  the  remaining component  parts had not been assembled into  more  finished bins  by  the  time when the  contract  was  cancelled.   He further held that the cancellation by the Government for the balance  was  wrongful.   There was,  however,  no  evidence relating   to  the  manufacturing  cost  of  the   aforesaid remaining  component  parts.   Thereupon,  he  proceeded  to award,  by way of compensation for the wrongful  termination of  the  contract  by the Government as  aforesaid,  to  the company the amount representing the value of the steel  used up  in  making the said component parts which had  not  been assembled  into completed bins, and, therefore, he  did  not allow the Government credit for the value of the steel  used up in manufacturing those component parts.  He further  held that  after  manufacturing the finished bins  and  component parts and unfinished bins, no surplus steel was left. The High Court, in setting aside the award, was of the view, that  in this part dealing with compensation payable by  the Government  to the appellant, the learned Umpire  had  acted contrary  to the principles recognised in law for  assessing compensation.  In our view, considering the principles which apply  to the exercise of the power of a Court to set  aside an award of an arbitrator, this order by the High Court  was not justified. It is now a well-settled principle that if an arbitrator, in deciding  a dispute before him, does not record his  reasons and does not indicate the principles of law on which he  has proceeded, the award is not on that account vitiated.  It is only when the arbitrator proceeds to give his reasons or  to lay down principles on which he has arrived at his decisions that the Court is competent to examine                             641 whether he has proceeded contrary to law and is entitled  to interfere  if such error in law is apparent on the  face  of the award itself. In  the present case, the Umpire held that the  cancellation of  the  contract by the Government for the balance  of  the bins  was  wrongful.  He was, therefore, fully  entitled  to award  compensation  for  that breach  of  contract  to  the

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appellant.   He, however, found that there was  no  evidence relating  to  the  manufacturing  cost  of  the   aforesaid. remaining component parts which, on principles applicable to breaches of contract, would ordinarily have been the  amount awarded  as  compensation.   Having no  such  evidence,  the Umpire,  it  appears,  proceeded to use  his  discretion  to determine the compensation which he thought should be equit- ably  made payable by the Government to the  appellant.   He had  already arrived at the finding that the steel  supplied by  the Government, which had not been used up in  completed bins,  had already been consumed in making component  parts. In  these  circumstances, having decided  that  compensation should be paid by the Government to the appellant, he  fixed the  amount of compensation at the value represented by  the steel  used up in making those component parts.  This  award is not to be interpreted as proceeding on any basis that the value of the steel used up in making the component parts was held by him on some principle to be the compensation payable by  the Government.  What he actually meant was that  having mentally  decided  on the amount that was to be  awarded  as compensation,  he  came  to the view that  that  amount  can equitably  be  treated as being equal to the  value  of  the steel used up in making the component parts.  What the value of  that steel in the component parts was at that stage  was not  computed  by him.  May be, the steel  had  become  less serviceable  and  deteriorated  in  value.   What  was   the consideration that led him to consider that the value of the steel  was equal to, and not more or less than,  the  amount which  he considered it right to award as compensation,  was not  indicated  by him in his award.   This  is,  therefore, clearly  a case where the arbitrator came to the  conclusion that  a certain amount should be paid by the  Government  as compensation  for wrongful termination of the contract,  and in his discretion, he laid down that that amount is equal to the value of the steel as it existed after it had been  con- verted  into  component  parts.  He did not  hold  that  the Government  was  not entitled to the return  of  the  unused steel.  What he actually held was that the Government  being entitled  to  the  value of the unused  steel,  no  separate direction  in respect of it need be made, because the  value of that steel was equal to the amount of compensation  which he  was  awarding  to  the  appellant;  and  thus,  the  two liabilities  of the appellant to the Government and  of  the Government to the appellant were set off against each other. In the circumstances, it has to be held that the Umpire, 642 in  fixing the amount of compensation, had not proceeded  to follow any principles, the validity of which could be tested on the basis of laws applicable to breaches of contract.  He awarded  the compensation to the extent that  he  considered right  in  his discretion without  indicating  his  reasons. Such a decision by an Umpire or an Arbitrator cannot be held to  be erroneous on the face of the record.  We,  therefore, allow the appeals with .costs, set aside the appellant order of  the High Court, and restore that of the  learned  single Judge.                            ORDER In  view of the majority Judgment, the appeals  are  allowed with  ,costs, the appellate order of the High Court  is  set aside and that -of the learned single Judge, is restored. R.K.P.S.