1. This is an appeal by the Union of India against the order of a Sub-Judge at Delhi setting aside the award of an umpire and dismissing the Government's application under Section 14 of the Arbitration Act. The facts of the case are that the respondent a contracting firm named Messrs Allied Trading Co., had a number of contracts with the Supply Department of the Government of India during the war for the supply of various articles and commodities. One of these contracts related to the supply of what is described a Dubbin Protective.
2. A quantity of this amounting to about 20 tons was accepted by an Inspector of the Department and an acceptance note issued on 3-3-1944 and in pursuance of this acceptance note the contractor obtained a payment from the Government a sum of Rs. 64,000/-. Subsequently the Department received information that the consignment which had been accepted and paid for was not upto the proper standard and that its acceptance by the Inspector was fraudulent and collusive.
3. In consequence of this fresh samples were taken from the consignment and retested, and it was discovered that instead of beeswax considerable quantities of liquid paraffin had been used as an ingredient in the dubbin.
4. On this the Department rejected the whole consignment and claimed the refund of the money paid for it from the contractor, who refused repayment. The Government then stopped the payment of Rs. 3,397/- which was due to the contractor on account of a number of bills connected with other supply contracts and he was informed that the Department intended to withhold payment.
5. The Government then stopped the payment of Rs. 3,397/- which was due to the contractor on account of a number of bills connected with other supply contracts and he was informed that the Department intended to withhold payment of his bills in the other contracts for goods already supplied and still to be supplied until the whole amount which the Government claimed had been wrongly paid to the contractor had been recovered. On this threat the contractor stopped making any further supplies in connection with any of these contracts after June 1944.
6. The dispute regarding the repayment of Rs. 64,000/- odd was referred to arbitration under the standard terms governing supply contracts but the arbitrators appointed by the Government and the contractor respectively were unable to agree and the dispute was referred to Mr. Tara Chand Aggarwal then a Subordinate Judge at Delhi who was the umpire appointed by the arbitrators.
7. The umpire delivered his award on 28-8-1946 to the effect that the Government was not entitled to recover anything from the contractor as the goods had been unconditionally accepted in accordance with the terms of the contract and the allegations of fraud and collusion were extremely vague and not supported by any evidence worth the name. He also held that the Government could, not claim any sum as damages, as there was no proof of the extent of the damage sustained.
8. After the delivery of this award, which was apparently not challenged by the Government, the sum of Rs. 3,000/- odd which had been withheld was paid to the contractor, and he then put forward his claim which gave rise to the arbitration proceedings from which this appeal has arisen. He claimed from the Government a sum of Rs. 1,11,775/- on account of damages arising from the breaches of his various contracts by the Government.
9. This claim was also referred to arbitration, Mr. Prithvi Raj Thapar Advocate being appointed by the contractor and Bakshi Shiv Charan Singh by the Government as their respective arbitrators. These arbitrators were nominated in July and August 1947 and it was only in February 1948 that they nominated Mr. Sunder Dass Midha, the Deputy Commissioner of Jullundur as umpire. However, although this delay took place in the appointment of the umpire, the arbitrators made the appointment before they actually began the hearing of the case.
10. In the end they disagreed, the Government's arbitrator by his order dated 22-2-1949 holding, that the contractor's claim should be dismissed with costs while the contractor's arbitrator held that he was entitled to recover Rs. 82,469/12/- as damages also with costs. In due course the dispute was referred to Mr. Midha as umpire. The parties did not produce any further evidence before him but argued on the record as it stood, and by his order dated 21-4-1949 he held that the contractor's claim should be dismissed with costs.
11. The Government then applied under S. 14 of the Act for the award to be filed in. Court and a decree passed in accordance with it. This was opposed by the contractor who raised, some technical objections to the jurisdiction of the umpire, and alleged that in any case the umpire had misconducted himself and that the award washable to be set aside on this ground.
12. These objections were accepted by the lower Court which set aside the award and appointed Mr. Prehlad Singh Bindra, then Additional District and Sessions Judge, Rohtak, as umpire to deal with the matter afresh. The present appeal is against this order.
13. I may say at once that I do not consider that there is any force in the technical objections to the appointment of the umpire on which the decision of the lower Court is apparently based. These objections were that Rakshr Shiv Charan Singh was not properly appointed as arbitrator by the Government, that as one of the arbitrators thus had no jurisdiction the appointment by the two arbitrators of umpire was invalid, and that even if the Government arbitrator was properly appointed the appointment of the umpire was invalid because it was made more than one month after the appointment of the arbitrators, thus contravening rule 2 of the First Schedule to the Arbitration Act.
14. The lower Court upheld the first of these objections on the ground that the letter appointing Bagshi Shiv Charan Singh as the Government arbitrator was only signed by a Deputy Director in the Supply Department and that there was no proof put forward by the Government that the Governor General, in whose name nominally the appointment ought to have been made, had delegated his powers to the Department.
15. I have no doubt, however, that the Department was entitled to nominate arbitrators, and there is on the file a general direction dated 13-7-1946 by the Director of Administration and Co-ordination in the Directorate General of Industries and Supplies to the effect that in all cases in which the Government have to nominate one of the two arbitrators, the officer nominated should be Bakshi Shiv Charan Singh unless he is unable to undertake the work and the Director General decides to nominate another arbitrator.
16. In my opinion there is no defect in the appointment of Bakshi Shiv Charan Singh as arbitrator and consequently the appointment of Mr. Midha as umpire by him and the contractor's arbitrator was not invalid on this ground.
17. The other objection is based on the provisions of Clause 2 of the First Schedule to the Act which bears the general heading “Implied conditions of arbitration agreements” Clause 2 reads:
“If the reference is to an even number of arbitrators, the arbitrators shall appoint an umpire not later than one month from the latest date of their respective appointments.”
18. The First Schedule is referred to in S. 3 of the Act itself which reads:
An arbitration agreement, unless a different intention is expressed therein, shall be deemed to include the provisions set out in the First schedule in so far as they are applicable to the reference”.
19. This would appear to indicate that if the arbitration agreement itself contains any provisions regarding the appointment of the umpire there will be no need to fall back on the implications contained in the First Schedule. All that is provided in the arbitration agreement which is contained in cl. 21 of the General Conditions of Department of Supply (Purchase Branch) Contracts is:
“..or in case of the said arbitration arbitrators not agreeing then to the award of an Umpire to be appointed by the arbitrators in writing before proceeding on the reference….”
20. And ‘prima facie’ it would appear that according to the terms of the contract the appointment of the umpire was validly made as long as it was made before the arbitrators began dealing with the case. This was also the view taken by Dulat, J., in F.A.O No. 5-D of 1953 D/- 14-7-1953 (Punj) (A), and in my opinion it is a correct view of the matter.
21. In any case it does not seem to me that a, defect of this kind in any way makes the appointment of an umpire invalid or deprives him of jurisdiction. The word ‘shall’ in context similar to the provisions of clause 2 in the First Schedule has often been interpreted as merely being directory, and the criterion for deciding whether failure to comply with such a provision is a mere irregularity or invalidates the whole proceedings is whether the statute itself provides any penalty or other consequences for the failure to comply.
22. In my opinion even if clause 2 supersedes or supplements the arbitration clause in the contract, the failure to appoint an umpire within a month of the appointment of the arbitrators, perhaps because they were too busy to get together any earlier, is a mere irregularity which does not invalidate the subsequent proceedings, and I also consider that the contractor had long since waived his right to raise any objection of this kind. I thus consider that the lower Court was wrong in holding that the award should be set aside on these technical grounds.
23. The case of the contractor, however, appears to me to be much stronger on the main-point of the case, namely the alleged misconduct of the umpire against whom it may be stated at once there is no allegation of any malpractice. The chief objection to the award is in fact that it is vitiated by an error of law patent on the record.
24. As I have already mentioned the Government, accepted the award of Mr. Tara Chand Aggarwal ruling that it was not entitled to recover anything out of the amounts paid to the contractor for the consignment of dubbin which was subsequently found to be defective. This award had thus obviously become the final adjudication on the rights of the parties as regards the matters then in dispute.
25. In spite of this, however, the umpire has reopened that matter and come to the conclusion that the acceptance of the defective consignment of dubbin was due to the contractor's having, bribed the inspecting officer who was to pass the consignment, and that therefore the Controller of Supply (Accounts) was fully justified in stopping payment due on any bills of the contractor in other contracts pending at that time with the Department, and it was on the basis of this finding that the umpire came to the further conclusion that the contractor was himself guilty of a breach of all these contracts in refusing to goon supply goods after he had been informed that he would not be paid any more until the sum claimed by the Government had been fully recovered.
26. The importance attached by the umpire to the decision of the points decided by the umpire in the previous arbitration can be seen from the words he has used in starting to discuss the case after setting out the facts. He has observed:
“To my mind the crux of the matter is whether in the supply of the above-mentioned quantity of Dubbin Protective the claimant acted with, clean hands or was guilty of some sharp practice or collusion.”
27. He then goes on to say that although Mr. Tara Chand Aggarwal had come to the finding that the Government had failed to lead any convincing evidence about the alleged collusion between, the claimant and the inspecting staff, at the same time he was wrong in his conclusion, since the circumstances left no doubt that a bribe must have passed.
28. To my mind there can be no doubt that in reopening a matter which had been concluded between the parties by the award of the previous umpire which the Government had accepted without challenge, and even now professes to accept, and coming to the conclusion that the previous umpire was wrong and in then basing his own award on his own contrary conclusion, the umpire has committed an error patent on the face of the record, and it has frequently been held that such errors justify the setting aside of an award.
29. In — ‘British Westinghouse Electric and Manufacturing Co. Ltd. v. Underground Electric Rail Co. of London Ltd.’, 1912 AC 673 (B), the House of Lords actually set aside an arbitration award on the ground that it contained an error of law apparent on the face of the award in spite of the fact that the so called error was based on a decision of the High Court given in the special case stated by the arbitrator, or in other words the arbitrator himself was not really responsible for the error of law but merely had followed the guidance of the Court in the in mater. The law on the point is summed up on page 270 of Fifteenth Edition of Russell on Arbitration as follows:
‘“Where an error, whether of fact or of law appears on the face of an award, the award will be remitted or set aside, unless the error is immaterial to the decision.’”
30. The only exception to this rule is on page 272 where it is stated that the rule will not be applied where the parties have specifically referred a question of law to arbitration.
31. The learned counsel for the Government has relied on certain remarks in the judgment of the Supreme Court in — A.M Mal and Co. v. Gordhandas Sagarmull,’ AIR 1951 SC 9 (C). He relied on the following passage:
“If, therefore, we come to the conclusion that both the disputes raised by the respondents fall within the scope of the arbitration clause, then there is an end of the matter, for the arbitrators would have jurisdiction to adjudicate on the disputes, and we are not concerned with any error of law or fact committed by them or any omission on their part to consider any of the matters.
In this view, it would not be for us to determine the true construction of the contract and find out whether the respondent's contention is correct or not. Once the dispute is found to be within the scope of the arbitration clause, it is no part of the province of the Court to enter into the merits of the dispute.”
32. I do not, however, consider that by these remarks the learned Judges intended to lay down any general proposition of law that in no case could an error of law vitiate an award, and they were merely deciding the case before them, in which two disputed points regarding the interpretation of a contract had been the subject-matter of the arbitration, and in my opinion the case before them was one which fell within the exception stated by Russell.
33. Other Indian cases on the point are — ‘Nani Bala Saha v. Ram Gopal,’ AIR 1945 Cal 19 (D), and — ‘Sherbanubai Jafferbhoy v. Hooseinbhoy Abdoolabhoy,’ AIR 1948 Bom 292 (E). In the former case R.C Mitter and Sharpe, JJ. held that where a Court finds an error of law in the award itself or in some document actually incorporated thereto on which the arbitrator had based his award, that is to say, finds the statement of some erroneous legal proposition which is the basis of the award, it can remit the award to the arbitrator for reconsideration under S. 16(1)(c).
34. In the Bombay case Chagla C.J and Bhagwati J., set aside an award in which the arbitrator had contravened the provisions of Section 48 of the Partnership Act. Chagla C.J, put the matter in these words:
“Now I cannot understand how any Court or any judicial tribunal can award any sum to any party ex gratia. ‘Ex gratia’ can only mean giving to a party something to which he is not entitled as a matter of legal right, and a Court of law does not act on sentiments, nor has it the power to dole out charity. It can only give relief to parties provided those reliefs are based on legal rights established before the Court.
It is true that in a sense an arbitrator is not circumscribed in the same manner as a Court of law is. But when a Court of law refers a matter to an arbitrator it substitutes a domestic forum in place of itself. But that domestic forum has got to act judicially. There can be no doubt that arbitrators perform judicial functions and they must observe the fundamental rules which govern judicial proceedings. What a Court of law cannot do judicially an arbitrator also cannot do.”
35. In the circumstances I agree with the lower Court that the award is bad on account of a patent error of law and that therefore the award was liable to be set aside and a fresh umpire appointed. I accordingly dismiss the appeal with costs.
D.R.R
36. Appeal dismissed.