Supreme Court Upholds Appellant in Arbitration Award Challenge — No Error of Law Apparent on Face of Award. Arbitrator's Award for Damages Set Aside by High Court; Supreme Court Rules that Absent Stated Reasons or Principles, Award Cannot Be Examined for Legal Error under Indian Contract Act, 1872, Section 73.

Case Note & Summary

The litigation arose out of two contracts for the supply of steel bins between the Union of India and Bungo Steel Furniture Pvt. Ltd., entered into on November 30, 1944, and June 25, 1945, and subsequently modified on February 20, 1946. The contracts contained an arbitration clause, and the Government undertook to supply steel for manufacturing the bins. After 2,172 bins had been manufactured, supplied, and accepted by the Government, the Government cancelled the contracts for the balance of 2,528 bins. The company referred the dispute to arbitration, and Sir R. C. Mitter, the arbitrator, by award dated September 2, 1959, found that the cancellation was wrongful. At the time of cancellation, the component parts of the balance 2,528 bins were ready but not assembled into finished bins. The arbitrator found no evidence relating to the manufacturing cost of the remaining component parts. By way of compensation for wrongful termination, he awarded the company the amount representing the value of steel used in making the component parts, which was Rs 1,65,825, and disallowed the Government credit for the value of that steel. The Government applied to the Calcutta High Court to set aside the award on the ground that there was a mistake of law apparent on the face of the award in the estimation of damages. A Single Judge, Mallick J., substantially confirmed the award but made a minor modification by reducing the amount by Rs 10,385 on account of extra partitions. The Government appealed, and a Division Bench of the Calcutta High Court, consisting of Bachawat and Laik JJ., allowed the appeals and set aside the award. The company then appealed to the Supreme Court by certificate. The core legal issue before the Supreme Court was whether the High Court could set aside the arbitral award on the ground of an error of law apparent on the face of the award when the arbitrator had not recorded reasons or indicated any principles of law for estimating damages. The appellant argued that there was no error on the face of the award; the arbitrator was not bound to give reasons for estimating damages; and the court could not speculate about the arbitrator's reasoning. The appellant relied on Champsey Bhara and Co. v. Jivraj Balloo Spinning and Weaving Co. Ltd. The respondent, Union of India, contended that the arbitrator had committed a mistake of law apparent on the face of the award by ignoring Section 73 of the Indian Contract Act and awarding damages on a wrong legal basis. The Supreme Court, by majority, allowed the appeals. Bhargava and Raghubar Dayal JJ. held that an arbitrator is not required to record reasons or lay down principles of law; if he does not do so, the award cannot be examined for an error of law apparent on the face of the record. The court noted that the arbitrator had not indicated the consideration that led him to equate the compensation with the value of steel used in component parts; he simply considered it right in his discretion. Such a decision cannot be held erroneous on the face of the record. The court distinguished the situation where an arbitrator states reasons or principles; only then can the court test whether he proceeded contrary to law. Ramaswami J. dissented, holding that the arbitrator had ignored Section 73 and awarded damages on a wrong legal basis, and that the award was vitiated by an error of law apparent on its face. The Supreme Court's decision restored the arbitrator's award as modified by Mallick J., and the appeals were allowed with the Divisional Bench order set aside.

Headnote

Issue of Consideration

Final Decision

The Supreme Court by majority (Bhargava and Raghubar Dayal JJ.; Ramaswami J. dissenting) allowed the appeals, set aside the judgment of the Division Bench of the Calcutta High Court, and restored the arbitrator's award as modified by Mallick J. The award granted compensation to the company for wrongful cancellation of the contract for the balance quantity of steel bins. The dissenting judge would have dismissed the appeals and upheld the setting aside of the award for error of law on its face.

Law Points