Reportable IN THE SUPREME COURT OF INDIA

CIVIL APPELLATE JURISDICTION

CIVIL APPEAL NO.7121 OF 2001

M/s. Kwality Manufacturing Corporation … Appellant

Vs.

Central Warehousing Corporation … Respondent

J U D G M E N T

R.V.RAVEENDRAN, J.

This appeal by special leave relates to the validity of an arbitration

award made against the respondent. The respondent (also referred to as the

‘Corporation’)  entered  into  a  contract  dated  9.6.1984  with  the  appellant

(also referred to as the ‘contractor’) for supply of 32 lacs bamboo mats at a

price of Rs.3.35 per mat to be supplied by the appellant, inclusive of sales-

tax,  F.O.R.  destination.  In  pursuance  of  the  said  contract  the  respondent

supplied  5,59,554  mats.  The  contractor  sent  various  communications

requesting for joint inspection and payment.  

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2. As  its  demands  were  not  complied  with,  at  the  instance  of  the

appellant,  the  disputes  were  referred  to  arbitration.  The  claims  of  the

contractor were as follows :

(i) Amount due towards supplies      Price of 5,59,554 mats at Rs.3.35       each Rs.18,74,505.90

    Less: Amount paid by respondent Rs. 4,86,114.75 Rs.13,88,391.15      (Initial claim : Rs.13,94,710.60       subsequently reduced)

(ii) Loss of profit at the rate of Rs.1 lac p.m.       from Dec., 1984 to May, 1985 Rs.  6,00,000.00

(iii) Loss of business on account of supply orders        placed by the appellant with another agency Rs.  5,00,000.00   

(iv) Refund of earnest money Rs.     25,000.00

(v) Interest on the balance sale price at 20%       per annum up to date of claims       statement (30.9.1985) Rs. 2,87,340.82

3. The respondent resisted the claim. It contended that the mats supplied

were of sub-standard quality and did not conform to the specifications, and

therefore  the  entire  supply was  rejected;  that  the  appellant  had  failed  to

comply  with  the  arrangements  mutually  agreed  in  the  telex  dated

15.12.1984 and letter dated 2.3.1985; that the appellant did not contact the

Regional Offices for joint inspection of the defective mats; and that as the

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appellant  committed  breach  by  failing  to  supply  mats  according  to  the

specifications and failed to act in accordance with the arrangements arrived

at between the parties, it was not entitled to any relief. The respondent made

a counter claim for Rs.8,16,733/70, made-up of Rs.1,78,698.68 towards the

extra  cost  incurred  for  risk purchase  and  Rs.6,38,035.02 towards  storage

charges for the rejected mats, which were not removed from the warehouses

of the respondent.

4. The arbitrator made a reasoned award dated 31.8.1988. He rejected

the claim of appellant for damages on account of loss of profit and loss of

business as also the interest up to the date of claim statement. The arbitrator

awarded a sum of Rs.11,80,132.48 towards the price of material supplied (at

85% of the price) and Rs.25,000/- towards refund of earnest money deposit,

in  all,  Rs.12,05,132.48 with  pendente  lite  interest  at  the rate of  11% per

annum on  Rs.11,80,132.48   up  to  the  date  of  the  award.  The  arbitrator

rejected the counter claims of the respondent.

5. The said award was challenged by the respondent by filing a petition

under sections 30 and 33 of the Arbitration Act, 1940 (for short ‘the Act’)

for setting aside the award in the High Court of Calcutta. A learned Single

Judge of the High Court held that the award was well-reasoned, and made

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after analyzing the evidence and applying judicial mind; that the award did

not suffer from any infirmities; that the respondent failed to make out that

the arbitrator had misconducted himself or the proceeding or that there was

any error of law apparent on the face of the award; and that the correctness

of  factual  findings  and  the  reasonableness  of  the  award  could  not  be

challenged  under  sections  30  and  33  of  the  Act.  As a  consequence,  the

application for setting  aside the award was dismissed by judgment dated

20.3.1992.

6. Feeling  aggrieved,  the  respondent  filed  an  intra-court  appeal.  A

Division Bench of the High Court  allowed the appeal by judgment dated

25.5.2001, and set aside the award on the following grounds :  

(a) The appellant did not discharge its onus to adduce evidence that the mats supplied were in accordance with the specifications;  

(b) that the respondent had rejected 1,30,300 mats on three  grounds : (i) that the mats were of poor quality; (ii) that they were loosely woven; and (iii) that they were not in accordance with the specifications. But the arbitrator without the benefit of any expert opinion or inspection, had wrongly assumed that there were “no major defects in regard to the mats”;  

(c) that  the  Arbitrator  had  acted  arbitrarily  in  holding  that  the  entire quantity  of  mats  supplied  should  be  accepted  by  applying  a  15% quality cut in the price and that amounted to an error apparent on the face of the award.  

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The said judgment is challenged in this appeal by special leave.  

7. At the outset,  it  should  be  noted  that  the scope  of  interference by

courts  in  regard  to  arbitral  awards  is  limited.  A  court  considering  an

application under section 30 or 33 of the Act, does not sit in appeal over the

findings and decision of the arbitrator. Nor can it re-assess or re-appreciate

evidence  or  examine  the  sufficiency  or  otherwise  of  the  evidence.  The

award of the  arbitrator  is  final  and the  only grounds on which it  can be

challenged are those mentioned in sections 30 and 33 of the Act. Therefore,

on  the  contentions  urged,  the  only  question  that  arose  for  consideration

before the High Court was, whether there was any error apparent on the face

of  the  award  and  whether  the  arbitrator  misconducted  himself  or  the

proceedings.

8. We will  first  note how the arbitrator  has proceeded.  The arbitrator

recorded a finding that 1,30,300 mats out of 5,59,554 mats were defective or

sub-standard and there was nothing on record to help in assessing the extent

of their defects.  The arbitrator also found that a joint statement had been

made by the parties on 29.6.1988 from which it could be inferred that the

respondent  had  no serious  objection  in  regard  to  the  remaining 4,29,254

mats.  He  also  found  that  after  such  joint-statement,  the  respondent  had

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added an unilateral  postscript  which  was  not  agreed to  or  signed  by the

appellant to the following effect : “82,646 mats were found conforming to

specifications even after the post-inspection and remaining were rejected.”

The Arbitrator did not accept the said unilateral addition. The payment of

Rs.4,86,114.75  by  the  Corporation  demonstrated  that  it  had  accepted

1,45,109  mats  (when  calculated  at  the  rate  of  Rs.3.35  per  mat).  If  said

number (1,45,109) for which payment was made, was deducted, the balance

was  4,14,445  mats.  Though  1,30,300  were  stated  to  be  defective,  the

arbitrator found that the complaint was only that they were loosely woven

and not strictly in accordance with the specifications, and that respondent

had not pointed out any major defects nor specified in what manner they

were not in accordance with the specifications. He therefore proceeded on

the basis the entire remaining supply of 4,14,445 mats should be treated as

‘accepted’ by applying a fair and reasonable quality cut of 15% in the price

to meet the ends of justice, so that the appellant was penalized not only for

1,30,300 defective mats but in regard to the entire quantity of 4,14,445 mats

out of which 2.84 lakh mats did not bear any remark in the joint statement

dated 29.6.1988. The arbitrator therefore adopted the following calculation

to arrive at the amount payable by the respondent-Corporation towards price

of mats as Rs.11,80,132.48 :

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Total value of 559554 mats supplied @ Rs.3.35 per mat Rs.18,74,505.90

        Amount paid by the Corporation Rs.4,86,114.75 ------------------

      A. Balance payable to contractor at Rs.13,88,391.15

contract price (A)

  B. 15% by way of quality cut (B) Rs.2,08,258.67 ------------------

Net amount payable to contractor (A minus B) Rs.11,80,132.48

---------------------

9. The  Division  Bench,  on  consideration  of  the  evidence  held  that

following  findings  recorded  by  the Arbitrator were inconsistent with his

conclusion  that  there  were  no  major  defects  except  that  the  mats  were

loosely woven and not  strictly  in  accordance  with  the  specifications  and

therefore, there should be only a cut in price by 15% instead of rejection :

(i) There was nothing from the side of the contractor to show that the mats  were  satisfactory  and  not  defective  as  reported  by  the Corporation, or that the remarks given in the reports were incorrect.

(ii) There was no joint  inspection and therefore there could not be any agreed quality cut.

(iii) There was nothing on record which may help in assessing the extent of  defects  in  the  sub-standard  mats  which  according  to  the  joint statement of 29.6.1988 would number to about 1.3 lakhs.

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The Division Bench found that the respondents had rejected the mats on the

ground that they did not conform to the specifications and were defective as

they were loosely woven and of poor quality;  that  the contractor did  not

place any material to show that the mats supplied were in accordance with

the specifications;  and that therefore the finding of the arbitrator that the

respondent should accept the entire supplies with a 15% cut for the inferior

quality, was perverse. Consequently, it set aside the entire award.  

10. But the High Court did not notice that the respondent was itself not

very consistent in its stand. At one point of time, it had rejected all the mats

which were supplied by the appellant  as being defective.  It  subsequently

stated that 82,646 mats were in accordance with the specifications. It also

paid Rs.486,114.75 towards the cost of 145109 mats which implied that it

accepted the said quantity. Therefore the findings of fact recorded by the

Arbitrator  ought  not  to  have  been  interfered,  except  to  the  extent  of

inconsistency in the findings.   We find that the approach of the Division

Bench  is  contrary to  well  settled  principles  relating  to  interference  with

arbitral awards under sections 30 and 33 of the Act. The Division Bench has

proceeded as if it was sitting in appeal over the award of the arbitrator and

has reassessed the evidence. A careful reading of the award shows that the

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inconsistency referred to  by the Division  Bench relates  to  only a clearly

separable  issue relating to  1,30,300 mats. The High Court  ought to  have

therefore modified the award only to that extent instead of setting aside the

entire award.  

11. We  however  agree  with  the  Division  Bench  that  the  award  is

inconsistent  in  regard  to  1,30,300  mats.  The  arbitrator  has  recorded  the

following finding in para 20.8 of the award : “We have, therefore, to take it

that 1.30 lakh mats out of 5.59 lakhs were defective or sub standard in one

way or another.” The arbitrator thereafter did not record any finding that the

rejection of 1,30,300 on the grounds that they were of poor quality, they

were loosely woven and they were not in accordance with the specifications,

was erroneous. If that was so, the Corporation was justified in rejecting the

said 1,30,300 mats. In the circumstances, the direction of the Arbitrator that

the respondent should accept the said 130,300 rejected mats as there were

no major defects in them, and pay for them at the contract rate less 15%, is

vitiated on account of an apparent inconsistency in findings which amounts

to an error apparent on the face of the award. Having recorded a finding that

the 1,30,300 mats were defective and sub-standard and having found that

parties  had  jointly  stated  that  1,30,300  mats  were  rejected  by  the

respondent-Corporation, in the absence of any evidence about their quality

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or  personal  inspection,  the  arbitrator  could  not  have  assumed  that  the

defects were not major defects, nor could he force the respondent to accept

them by providing a 15% cut in the price. The award, in so far as it relates to

the said 1,30,300 mats,  directing payment (at  the rate of Rs.3.35 per mat

with a discount of 15%) is thus arbitrary and inconsistent with the findings

about  their  rejection,  recorded  by  him.  It  is  clearly  unsustainable.  That

portion should be separated from the remaining part of the award and set

aside.  But  in  so  far  as  the  remaining  quantity  of  4,29,254  mats  (which

includes the quantity that is deemed to have been accepted by full payment),

the arbitrator on the basis of the evidence which included a joint-statement,

has recorded a finding that there was no valid rejection. He has also directed

that they should be accepted at a price of Rs.3.35 per mat by applying a cut

of 15%. This finding being a finding of fact arrived at after considering the

evidence, was not open to interference by the High Court by re-examining

the evidence or drawing different inferences from the material placed before

the arbitrator.

12. The  appellant  had  not  also  challenged  the  award  in  regard  to  the

quality cut of 15% applied by the Arbitrator. In view of it, the amount to

which the contractor will be entitled is worked out as follows :

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• Total mats supplied 5,59,554

• Mats deemed to have been accepted (by making payment of

         Rs.4,86,114.75 at the rate of           Rs.3/35 per mat) 1,45,109

----------- Balance quantity of mats 4,14,445

• Less: Mats rejected as defective 1,30,300 -----------

• Quantity for which payment            should be made 2,84,145

• Amount payable for 284,145 mats           at the rate of Rs.3.35 per mat   Rs. 8,09,103           (with a cut of 15%)  

Plus : Refund of earnest money deposit    Rs.   25,000 (awarded by Arbitrator)     ----------------

Total amount due to the contractor    Rs. 8,34,103                ---------------

We, accordingly, reduce the amount payable by the respondent-Corporation

to the appellant as Rs.8,34,103/- instead of Rs.12,05,132.48 awarded by the

Arbitrator.  

13. The arbitrator has not awarded any interest from the due date till the

date of entering upon the reference. The appellant has not challenged the

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said refusal.  The Arbitrator  has awarded interest  at  11% per annum only

pendent lite, that is from the date of his entering upon the reference up to

the date of the award. The appellant will therefore be entitled to interest at

11% per annum on the award amount from 2.9.1985 till date of award and at

the same rate from the date of award till date of payment.  

14. The appeal is accordingly allowed in part and there shall be a decree

in  terms  of  the  award  for  Rs.834,103/-  with  interest  at  11% P.A.  from

2.9.1985 till date of payment. Parties to bear their respective costs.

……………………….J. (R. V. Raveendran)

New Delhi;       ..…………………………J. February  23, 2009.        (Dr. Mukundakam Sharma)  

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