Union of India v A.L. Rallia Ram
Supreme Court of India

19 April 1963
Civil Appeal No. 414 of 1961, Appeal from the judgment and decree dated April 17, 1958 of the Punjab High Court in F.A.O. No. 75 of 1951.
The Judgment was delivered by: J. C. Shah, J.
1. This is an appeal with certificate under Art. 133 (1) (c) of the Constitution against the order of the High Court of Punjab in First Appeal No. 75 of 1951 confirming the order of the Subordinate Judge, Delhi, refusing a motion to set aside an award directing payment by the Union of India of Rs. 3,26,251/6/3 with costs and future interest a per cent to the respondent. In August, 1946, the Chief Director of Purchases (Disposals), Food Department, Government of India, invited tenders for purchasing the stock of American cigarettes lying in Calcutta, Karachi, Delhi and Agra. The respondent submitted his tender offering to purchase the entire stock at uniform rate of Re. /8/3 per packet of 20 cigarettes. The total value of the stock offered at that rate amounted approximately to Rs. 39 lakhs. The Government of India accepted the tender. The acceptance letter (with which was enclosed Form F.D. (M)70 setting out the general conditions of contract) was signed by the Chief Director of Purchases. Condition No. 13 in Form F.D. (M) 70 contained an arbitration clause:
2. In the event of any question or dispute arising under these conditions or any special Conditions of Contract or in connection with this contract (except as to any matters the decision of which is specially provided for by these conditions) the same shall be referred to the award of an arbitrator to be 'nominated by the Chief Director and an arbitrator to be nominated by the Contractor or in the case of the said arbitrators not agreeing, then to the award of an Umpire to be appointed by the arbitrators in writing before proceeding on the reference and the decision of the arbitrators, or in the event of their not agreeing of the Umpire appointed by them shall be final and conclusive
x x x x
3. The respondent took delivery of 29,93,597 packets of cigarettes and paid Rs. 17,78,573/6/4 but on inspection he found that some cigarettes were mildewed and unfit for use. A Board of Survey appointed by the Government of India to inspect the undelivered stock reported that cigarettes of the value of Rs. 6,58,453/ were wholly "unfit for issue," for the remaining cigarettes the Board recommended reduction in price at certain rates. The respondent did not agree to accept the goods on the revised terms reported by the Board and requested the Government of India to agree to a uniform reduction of 50 per cent in price on the cigarettes delivered to him as well as those still lying with the Government. The Government of India thereafter decided to cancel the contract in respect of the undelivered cigarettes, and offered to take back from the respondent, out of the stock of cigarettes delivered such as "were in their original packing and could be identified," subject to the condition that no claim will be made by the respondent in respect of freight, storage, rents, charges or any other expenses incurred by the respondent in connection with the cigarettes taken back by the Government. The respondent accepted the offer made by the Government, reserving his right "to claim incidental expenses." 24,13,500 packets of cigarettes in the original packing were then returned by the respondent and between June 13, 1947 and February 8, 1948, Rs. 14,54,215/7/ were refunded to him by the Government of India. On June 26, 1948 the respondent addressed a letter to the Director General of Disposals intimating that he had appointed M. W. Lewis as arbitrator on his behalf in accordance with el. 13 of the general conditions of F.D. (M) 70 and called upon the Director General of Disposals to appoint his arbitrator. By his letter dated July 7, 1948 the Director General informed the respondent that the Government of India had appointed Bakshi Shiv Charan Singh as their arbitrator, reserving full liberty to take all pleas before the arbitrator including the plea that no dispute between the parties which could be referred to arbitration survived.
4. The arbitrators entered upon the reference but could not agree upon a decision, and the dispute was referred to an umpire. The umpire by his award dated January 30, 1950 awarded to the respondent Rs. 1,32,417/10/ for loss suffered in respect of the 6,34,270 packets of cigarettes not returned by him; Rs. 1,25,000/ for incidental expenses; and Rs. 68,833/12/3 as interest. The umpire accordingly awarded against the Union of India Rs. 3,26,251/6/3 and future interest and costs of the arbitration. The respondent applied to the Subordinate Judge, Delhi for filing the award under s. 14 of the Arbitration Act, and the Union of India applied for an order setting aside the award. It was contended, by the Union of India that there was no legally binding contract between the Union and the respondent, for the acceptance note was not signed on behalf of the Governor General of India, and the entire proceeding including the appointment of the arbitrators and the umpire was vitiated for want of compliance with s. 175 (3)of the Government of India Act, and that in any event the award contained errors of law apparent on its face. The Subordinate Judge, refused the motion for setting aside the award and ordered that a decree be issued in terms of the award. In appeal against the order refusing to set aside the award, the High Court of Punjab confirmed the order.
5. Two questions arise for determination in this appeal:
Whether the award is liable to be set aside on the ground that there was in existence no valid arbitration agreement in conformity with s. 175 (3) of the Government of India Act, 1935 which authorised the umpire to make his award; and whether the award is liable to be set aside on the ground that it is erroneous on the face thereof. The letter accepting the tender dated September 9, 1946 issued under the signature of the Director of Purchases recited that the tender submitted by the respondent was accepted to the extent shown in the schedule attached to the letter and subject to the special terms and conditions in the letter from the Chief Director of Purchases, and the general conditions of contract in Form F.D. (M) 70 which accompanied that letter. The general conditions of contract by the first clause defined 'Government' as meaning "the Governor General for India in Council and when the context so admits his successors and assigns and the Government of India and officers acting for him or them." By cl. 2 it was provided that the Governor General for India in Council was not bound to accept the highest or any tender or to assign reasons for non acceptance. The other clauses prescribed conditions for payment of price, state of goods, risk, delivery, liability, failure to pay price and failure to take delivery after payment, recovery of sums due, etc. By cl. 13, the arbitration clause was incorporated as a term of the contract. Acceptance of the tender was therefore subject to the special conditions in the letter of the Chief Director of Purchases and the general conditions in F.D. (M) 70, and in case of conflict special conditions were to prevail over the general conditions.
6. Did the terms of the acceptance letter which formed the contract between the parties comply with the requirements of the Government of India Act, 1935? S. 175 (3) provided:
"All contracts made in the exercise of the executive authority of the Dominion or of a Province shall be expressed to be made by the Governor General, or by the Governor of the Province, as the case may be, and all such contracts and all assurances of property made in the exercise of that authority shall be executed on behalf of the Governor General or Governor by such persons and in such manner as he may direct or authorise."
7. The section was in terms mandatory. Before a liability binding the Dominion of India could arise, the contract had to be expressed to be made by the Governor General, if it was made in exercise of the executive authority of the Dominion, and it had to be executed on behalf of the Governor General, and by such persons and in such manner as he directed or authorised. This Court in Seth Bikhraj Jaipuria v. Union of India [1962] 2 S.C. R. 880 1961 Indlaw SC 454, , held in dealing with the validity of contract which did not conform to the requirements of s. 175 (3) of the Government of India Act that the provisions of s. 175 (3) were mandatory and not directory and if the contract did not conform to the requirements prescribed by s. 175 (3), no obligation enforceable at law flowed therefrom.
The authority of an arbitrator depends upon the authority conferred by the parties by agreement to refer their differences to arbitration. By s. 2 (a) of the Arbitration Act, 1940 "arbitration agreement" means "a written agreement to submit present or future differences to arbitration, whether an arbitrator is named therein or not." A writing incorporating a valid agreement to submit differences to arbitration is therefore requisite:it is however not a condition of an effective arbitration agreement that it must be incorporated in a formal agreement executed by both the parties thereto, nor is it required to be signed by the parties; There must be an agreement to submit present or future differences to arbitration, this agreement must be in writing, and must be accepted by the parties. Cl. 13 in Form F.D. (M) 70 fulfils all these requirements. But the Dominion of India being a party to the arbitration agreement, to be binding the agreement had also to conform to the requirements of s. 175 (3) of the Government of India Act, 1935, for an arbitration agreement is a contract within the meaning of the Government of India Act and it must, to bind the Dominion of India, be made in the form prescribed by that section. The question which then falls to be determined is whether the letter accepting the tender of the respondent conformed to the requirements of s. 175 (3)of the Government of India Act.
8. S. 175 (3) does not in terms require that a formal document executed on behalf of the Dominion of India, and the other contracting party, alone is effective. In the absence of any direction by the Governor General under s. 175 (3) of the Government of India Act prescribing the manner a valid contract may result from correspondence if the requisite conditions are fulfilled. The contracts for sale of "War disposal" goods were not directed by the Governor General to be made by a formal document executed on behalf of the GovernorGeneral as well as by the purchasing party. It is true that s, 175 (3) uses the expression "executed" but that does not by itself contemplate execution of a formal contract by the contracting parties. A tender for purchase of goods in pursuance of an invitation issued by or on behalf of the Governor General of India and acceptance in writing which is expressed to be made in the name of the Governor General and is executed on his behalf by a person authorised in that behalf would conform to the requirements of s. 175 (3). The goods offered to be sold belonged to the Government of India. The tender notice was also issued by the Government of India, Department of Food. The title of the notice was "Tender Notice issued by the Government of India, Department of Food (Division III), New Delhi." The name of the authority issuing the tender notice was "Government of India, Department of Food (Division III), office of the Chief Director of Purchases, Jamnagar House, New Delhi.
"By el. 9 delivery was to be made, ex site the Government agreeing to afford assistance for movement to the extent feasible, and by cl. 11 import duty on the cigarettes was to be , paid by the Government. Cl. 6 provided that the stock of cigarettes to be delivered will be surveyed by the Survey Board appointed by the Government of India and the decision of the Board shall be binding on the tenderer. In the letter dated August 21, 1946, submitting his tender the respondent stated that he, was Willing to offer a rate of Re. /8/3 per packet only on the condition that the Government gave a guarantee not to undersell the cigarettes at any stage.";
9. It appears that the respondent had a discussion with the Chief Director on September 3, 1946, and certain terms were agreed upon, which were robe incorporated in the acceptance letter. In his letter dated September 4, 1946, the respondent set out these terms. These terms clearly show that the Government undertook certain obligations, such as appointment of a Survey Board, if the goods were rejected on the ground that they were unfit for consumption, issue of separate delivery letters for each Depot to facilitate delivery, and an assurance that the Government shall tender help in getting railway priority and other transport facilities in the dispatch of goods lying at the various depots, undertaking transportation from the Assam Depot to Calcutta at the risk and cost of the Government. These conditions were incorporated in the acceptance note issued by the Chief Director of Purchases. The acceptance note is also headed "Government of India, Department of Food (Div.III) New Delhi" and refers to the obligations of the Dominion in cls. 6, 9, 10 and by cl. 13 made the special conditions prevail over the general conditions which were incorporated in the contract. The correspondence between the parties ultimately resulting in the acceptance note, in our judgment, amounts to a contract expressed to be made by the Government and therefore by the Governor General, because it was the Governor General who .had invited the tender through the Director of Purchases, and it was the Governor General who through the Chief Director of Purchases accepted the tender of the respondent subject to the conditions prescribed therein. The authority of the Chief Director of Purchases to contract for sale of "War disposal" goods and sign the contract is not denied. The Chief Director of PurChases has subscribed his signature in his official designation and he has not stated in the description that the contract was executed on behalf of the Governor General, but on a fair reading of the contents of the letter, in the light of the obligations undertaken thereunder, it would be reasonable to hold that the contract was executed on behalf of the Governor General. No rules made by the Governor General have been placed before the Court showing that in executing a contract for the sale of "Wardisposal " goods, the officer authorised in that behalf must describe himself as signing on behalf of the Governor General of India.
10. The High Court held that the Government of India having agreed to refer differences to arbitration and having taken part in the proceeding before the arbitrators and the umpire, had waived the objection as to the illegality of the contract and could not therefore raise any such objection in an application for setting aside the award. We are unable to agree with that view. The requirements of s. 175 (3) of the Government of India Act are mandatory, and the fact that the Government of India did not contend before the arbitrator that there was in law no arbitration agreement on which the arbitrator was competent to act would not invest the arbitration agreement with any validity. It is from the terms of the arbitration agreement that the arbitrator derives his authority to arbitrate: if in law there is no valid arbitration agreement, the proceedings of the arbitrator could be unauthorised. Every contract to bind the Government must comply with the requirements of s. 175 (3) of the Government of India Act, 1935, and waiver will not preclude the Government from pleading absence of a contract in consonance with the law. An award being a decision of an arbitrator whether a lawyer or a layman chosen by the parties, and entrusted with power to decide a dispute submitted to him is ordinarily not liable to be challenged on the ground that it is erroneous. In order to make arbitration effective and the awards enforceable, machinery is devised for lending the assistance of the ordinary courts. The Court is also entrusted with power to modify or correct the award on the ground of imperfect form or clerical errors, or decision on questions not referred, which are severable from those referred.
11. The Court has also power to remit the award when it has left some matters referred undetermined, or when the award is indefinite, where the objection to the legality of the award is apparent on the face of the award. The Court may also set aside an award on the ground of corruption or misconduct of the arbitrator, or that a party has been guilty of fraudulent concealment or wilful deception. But the. Court cannot interfere with the award if otherwise proper on the ground that the decision appears to it to be erroneous. The award of the arbitrator is ordinarily final and conclusive, unless a contrary intention is disclosed by the agreement. The award is the decision of a domestic tribunal chosen by the parties, and the civil courts which are entrusted with the power to facilitate arbitration and to effectuate the awards, cannot exercise appellate powers over the decision. Wrong or right the decision is binding, if it be reached fairly after giving adequate opportunity to the parties to place their grievances in the manner provided by the arbitration agreement. But it is now firmly established that an award is bad on the ground of error of law on the face of it, when in the award itself or in a document actually incorporated in it, there is found some legal proposition which is the basis of the award and which is erroneous. An error in law on the face of the award means:
"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 a narrative a reference is made to a contention of one party, that opens the door to setting first what that contention is, and then going to the contract on which the parties' rights depend to see if that contention is sound"
12. Champsey Bhara and Company v. Jivraj Balloo Spinning and Weaving Company Ltd. (1932) L.R. 50 I. A, 324. But this rule does not apply where questions of law are specifically referred to the arbitrator for his decision; the award of the arbitrator on those questions is binding upon the parties, for by referring specific questions the parties desire to have a decision from the arbitrator on those questions rather than from the Court, and the Court will not, unless it is satisfied that the arbitrator had proceeded illegally interfere with the decision.
The argument advanced by the respondent that in the present case specific questions were referred to the umpire, and his decision on those questions must be regarded as binding and not liable to be re opened, even assuming that there is some error on the face of the award, must therefore be examined. The arbitrators on July 16, 1948 called upon the parties to file their respective statements of claim and written statement. The respondent filed on August 16, 1948, an argumentative claim petition setting out in paragraph 22 the three heads under which he made a total claim of Rs. 5,95,518/13/ . To this claim, the Dominion of India filed a written statement denying the claims made by the respondent. A replication was filed by the respondent to the written statement. The arbitrators recorded that the parties had complied with the order, that issues had been proposed by counsel for the respondent, and that the parties were agreed that the dispute between them be tried on those issues. Then they set out ten substantive issues, and evidence was led before the arbitrators.
13. The arbitrators recorded that they were unable to agree upon the decision, and therefore they submitted the case to the umpire R.B. Nathoo Ram. The umpire entered upon the reference, the evidence which was recorded before the arbitrators was accepted as evidence before the Umpire, and the umpire proceeded to pronounce his award after recording reasons in support of his conclusions on the diverse issues which were raised before the arbitrators. But filing of pleadings pursuant to the directions of the arbitrators and agreeing to a trial of the dispute on the issues raised by the arbitrators cannot be regarded as reference of specific questions implying an agreement between the parties that they intended to give up their right to resort to the Courts even if the award was vitiated on account of an error apparent on the face thereof. The only permissible inference from the agreement recorded by the arbitrators was that the parties agreed to have the dispute8 adjudicated on the issues raised, and not to submit the issues raised for adjudication.
14. The terms of el. 13 of the contract F.D. (M) 70 which incorporated the arbitration agreement are general. By his letter dated June 26, 1946 the respondent intimated the Director of Purchases that he had appointed an arbitrator on his behalf "in accordance with clause No.13 of the general conditions of the contract" and the appointment of an arbitrator by the Union by their letter dated July 7, 1948 (subject to the reservation of a right to contend that there was no dispute) for adjudication of the claim made by the respondent. In these two letters there is no reference to any specific questions to be referred to the arbitrators: nor can the filing of pleadings in support of their respective cases by the parties pursuant to the direction given by the arbitrators, and the framing of issues arising thereon with the object of focussing the attention of the parties on the question to be decided for adjudicating upon the dispute amount to a reference on specific questions, rendering the award binding upon the parties. In Seth Thawardas Pherumal v. The Union of India [1955] 2 S.C.R. 48 1955 Indlaw SC 11. , Bose, J, delivering the judgment of the Court observed in dealing with the contention that there was a reference of a specific question, and the award was nor liable to be questioned even on the ground that it disclosed an error on its face:
"Therefore, when a question of law is the point at issue, unless both sides specifically agree to refer it and agree to be bound by the arbitrator's decision, the jurisdiction of the Courts to set an arbitration right when the error is apparent on the face of the award is not ousted. The mere fact that both parties submit incidental arguments about point of law in the course of the proceedings is not enough."
15. The learned Judge also observed after referring to F.R. Absalom Ltd. v. Great Western (London) Garden Village Society [1933] A.C. 592, 616:
"Simply because the matter was referred to incidentally in the pleadings and agruments in support of, or against, the general issue about liability for damages, that is not enough to clothe the arbitrator with exclusive jurisdiction on a point of law."
16. In dealing with a similar question in M/s. Alopi Parshad & Sons Ltd. v. The Union of India [1960] 2 S. C. R. 793 1960 Indlaw SC 428. , the Court observed:
"Issues were undoubtedly raised by the arbitrators, but that was presumably to focus the attention of the parties on the points arising for adjudication. The Agents had made their claim before the arbitrators, and the claim and the jurisdiction of the arbitrators to adjudicate upon the claim, were denied. The arbitrators were by the terms of reference only authorized to adjudicate upon the disputes raised. There is no foundation for the view that a specific reference, submitting a question of law for the adjudication of the arbitrators, was made."
17. In Durga Prosad Chamria v. Sewkishendas Bhattar A.I.R. (1949) P.C 334, the Judicial Committee held that questions of law were specifically referred to arbitration where in a pending suit after issues were raised with the consent of parties "the outstanding matters" in the suit were referred to three named arbitrators, conferring upon them special enumerated powers. But the decision was reached in the special circumstances of the case, and not on the view that where agreed issues are raised before the arbitrator on the pleadings filed before him, the reference must be regarded as a reference on the specific questions incorporated in the issues. Undoubtedly, under an arbitration agreement which is initially in terms general the parties may after disputes have actually arisen, refer specific questions to arbitration. But each case must depend upon its facts. Filing of pleadings before the arbitrators, or even an agreement that certain issues arise on the pleadings will not always yield the inference that the parties agreed to refer specifically the questions incorporated in the issues to the arbitrator, so as to preclude themselves from challenging the award on the ground of error of law on the face of the award.
18. The test indicated by Lord Russell of Killowen in F.R. Absalom Ltd. v. Great Western (London) Garden Village Society Ltd. [1933] A.C. 592,616 adequately brings out the distinction between a specific reference of a question of law, and a question of law arising for determination by the arbitrator in the decision of the dispute. was observed :
" x x, it is, I think, essential to keep the case where disputes are referred to an arbitrator in the decision of which a question of law becomes material distinct from the case in which a specific question of law has been referred to him for decision.
The authorities make a clear distinction between these two cases, and, as they appear to me, they decide that in the former case the Court can interfere if and when any error of law appears on the face of the award, but that in the latter case no such interference is possible upon the ground that it so appears that the decision upon the question of law is an erroneous one."
Then after referring to the authorities it was observed
" x x x
19. The primary quarrel between the parties was whether, if the value of work executed and materials on site up to and including March 11, 1929, had been truly assessed, the net value available for certification on that date was in excess of(as the contractor alleged) or less than (as the employer contended) the amount which had actually been certified up,to and including that date x x x x. Those were the disputes in regard to the issue of certificates and the validity of the notice' which were in general terms submitted to the arbitrator. No specific question of construction or of law was submitted. The parties had, however been ordered to deliver pleadings, and by their statement of claim the contractor had claimed that the arbitrator should under his powers revise the last certificate issued so as to include therein the excess net value which they had alleged and which the arbitrator has found (though for a reduced amount) to have existed. on March 11, 1929. It is at this point that the question of the construction of condition 30 arose as a question of law, not specifically submitted, but material in the decision of the matters which had been submitted. This question of law the arbitrator has decided; but if upon the face of the award he has decided it wrongly his decision is in my opinion open to review by the Court."
In the present case the respondent had claimed from the Dominion of India, compensation m respect of the goods delivered to him under the contract, interest on the amounts raised by him for carrying out the contract and for incidental expenses incurred by him after delivery of the goods. That dispute was referred to arbitration pursuant to cl. 13 of Form F.D. (M) 70. Pleadings were filed. by the parties pursuant to the direction of the arbitrators, but thereby the parties did nothing more than state in writing their respective cases. the parties also agreed that certain issues arose on those pleadings but the function of the issues was to focus the attention of the parties to the points on the decision of which the adjudication of the dispute between the parties depended. The issues of law may be material for the determination of the dispute, but they are not issues of law specifically referred to the arbitrators.
20. There is one more aspect which must be considered. Assuming that during the course of arbitration proceedings, the parties may enter into. a fresh agreement and modify the original terms of reference, and extend or restrict their scope. But such an agreement must, to be effective, amount to an arbitration agreement. The respondent has not relied and could not rely upon any subsequent agreement modifying the agreement of reference, for any subsequent contract between him and the Union of India had also to satisfy the requirements of s. 175 (3) of the Government of India Act, 1935 or Art. 299 of the Constitution if such an agreement took place after the Constitution came into force and such an agreement can only be in the form prescribed by these constitutional provisions. By merely assenting to the issues raised before the arbitrators the advocate appearing on behalf of the Government of India could not assume to himself authority to bind the Dominion or the Union to a specific reference on a question of law, because a reference on a specific question may be effective only if there be an agreement express or implied that the arbitrator will decide the question specifically referred to him and that his decision will be binding upon the parties. In the absence of any such contract in the form prescribed, a plea of an agreement subsequent to the reference would be futile. We are therefore unable to agree with the High Court that specific questions of law were referred to the arbitrators, the decision whereof is binding upon the parties.
The question then remaining to be decided is whether the award of the umpire was in law erroneous on the face of it. The umpire has awarded Rs.1,32,417/10/ under the head loss suffered by the respondent in respect of the packets of cigarettes delivered to him. He has awarded Rs. 1,25,000/ in respect of the incidental expenses and Rs. 68,833/12/3 as interests. The Loss suffered in respect of the packets of cigarettes is computed in this manner: the contract rate of cigarettes was Re. 1813 per packet, the respondent was able to sell the packets supplied to him at the rate of 'Re. /4/9 per packet. That a part of the stock of cigarettes supplied to the respondent was mildewed and unfit for consumption is not denied. The respondent was therefore entitled to claim compensation for breach of contract on the ground that the Government of India had committed a breach of warranty.
21. It appears that the Government disposed of some stock of cigarettes at the rate of Re. /1/9 per packet. The respondent had claimed that the goods supplied to him were only worth Re. /1/9 per packet because that was the price. which the Government recovered by sale of similar goods and he was entitled to get from the Government as compensation the difference at the rate of Re, /6/6 per each packet. The umpire held that the respondent was not entitled to compensation at the rate claimed by him but to get the difference between the price paid and price received by him on sale. In our view no error apparent on the face on this part of the award is disclosed and the award in so far as it awards Rs. 1,32,417/10/ to the respondent under this head is not open to challenge. But on the second head the claim for Rs. 1,25,000/ for incidental expenses cannot be sustained. The umpire in paragraph (xi) of his award observed:
"While the Government sold the stocks of cigarettes taken back by it at Re. /1/9 the purchaser was able to get a very substantial higher price. This undoubtedly resulted from the efforts which he put in, advertisement, publicity, storge, transport, payment of agency commission and other overhead expenses. It appears to me that to all such expenses the purchaser is clearly entitled, in addition to the expenses incurred by him with respect to the cigarettes taken by the Government. The law of compensation compels me to hold that all expenses incurred by the purchaser with respect to the cigarettes taken back by the Government must be paid to him."
22. This observation proceeds upon a clear fallacy. The respondent had purchased and taken delivery of 29,74, 270 packets, out of which he sold 6,34,270 packets and returned 23,40,000 packets under an arrangement whereby the Government of India was to take back the goods found with the respondent in their original packing. The respondent had purchased the goods under the acceptance of tender dated September 9, 1946 which provided by cl. 11 that
"All sales will be conducted on the distinct understanding that the goods sold are on a 'said to contain' basis. No responsibility for quality will be accepted whatsoever after the delivery is made at the depot".
When he took delivery of the goods, he became owner of the goods by the express intendment of the contract. The expenditure incurred for advertisement, publicity, storage, agency commission and other overhead expenses since the respondent took delivery was therefore in respect of his own goods and he cannot claim these expenses as part of compensation payable for breach of warrant in respect of goods retained by him. The respondent was undoubtedly entitled to the difference between the contract price and the market price of the goods which he retained, and that compensation has been awarded to him.
23. Transport and storage charges after the Government agreed to take back the goods, properly attributable to the goods, may also be awarded to the respondent as expense incurred on behalf of the Government of India. But no such claim was made. For the goods returned the respondent could not maintain a claim for damages, because the contract was by mutual arrangement cancelled. For his claim for incidental expenses in respect of goods appropriated by him the respondent's claim could not be, apart from the damages, awarded. The amount of Rs. 1,25,000/awarded by the umpire to the respondent, on the head of incidental expenses could not therefore be awarded as compensation, on any view of the case. The amount has been awarded on an erroneous assumption of law, which is on the face of it erroneous.
We. are, therefore, of the view that the award on that part cannot be sustained.
The claim for interest was discussed by the umpire in paragraph (ix) of his award:
24. "Applying the principles on which compensation is assessed, I have come to the conclusion that the purchaser was entitled to be paid interest on all the moneys paid by him to the Government, with respect to stores taken back by the Government, fight from the date of pay ment up to the date on which moneys were returned. The rate of such interest has to be the same as the rate at which the purchaser paid interest to his bankers. This I find on the evidence to be 0 per cent per annum. Irrespective of the rate at which the Government usually borrows money, the law of compensation compels me to award interest at the rate of 6 per cent per annum."
It is again difficult to appreciate on what ground, interest could be awarded to the respondent. The contract did not provide for payment of interest in respect of amounts paid by the respondent if the contract fell through. Nor could interest be awarded under s. 61 of the Sale of Goods Act. The right of the seller or the buyer to recover interest or special damages in any case where by law interest or special damages may be recoverable, or to recover the money paid where the consideration for the payment of it has failed, is undoubtedly not affected by the Sale of Goods Act, and by sub s. (2) of s. 61 in the absence of a contract to the contrary, the Court may award interest at such rate as it thinks fit on the amount of the price to the buyer in a suit for refund of the price in case of a breach of the contract on the part of the seller. But the claim made by the respondent was not for refund.of price.
25. In respect of that part of the contract which was cancelled, by mutual agreement, price paid was refunded. In respect of the goods sold by the respondent his claim was for damages, and damages have been awarded. The respondent claimed before the umpire (and that claim was upheld) that he had to borrow from his bankers a large amount of money for meeting his obligation under the contract with the Government and he was entitled to recover from the Dominion of India interest paid by him to his bankers, for the period during which his moneys remained with the Dominion of India. Mr. Pathak for the respondent submits that the umpire was in this state of affairs competent to award interest on the amount which was detained by the Dominion by way of damages.
But as held by the Judicial Committee in Bengal Nagpur Railway Company Ltd. v. Ruttanji Ramji (1937) L.R. 65 I.A. 66. , in the absence of any usage or contract, express or implied, or of any provision of law to justify the award of interest, interest cannot be allowed by way of damages caused to the respondents for wrongful detention of their money. In that case in an action against the Railway Company for remuneration for work done by the contractor not covered by the contract Rs. 67,000/ were found due by the Railway Company to the contractor on the basis of fair and reasonable rates. The contractor claimed interest on that amount for the period prior to the date of the suit. The Judicial Committee held that interest on the amount awarded as compensation could not be awarded by way of damages, and there being no contract, nor statute, nor usage in support of such a claim, the claim for interest had to be disallowed.
26. In dealing with the claim for interest on the principle incorporated in illustration (n) of s. 73 of the Indian Contract Act which is as follows:
(n) "A, contracts to pay a sum of money to B, on a day specified. A, does not pay the money on that day; B, in consequence of not receiving the money on that day, is unable to pay his debts, and is totally mined. A. is not liable to make good to B, anything except the principal sum he contracted to pay, together with interest up to the day of payment."
The Judicial Committee observed:
"The illustration, however, does not deal with the right of a creditor to recover interest from his debtor on a loan advanced to the latter by the former. It only shows that if any person breaks his contract to pay to another person a sum of money on a specific date, and in consequence of that breach the latter is unable to pay his debts and is ruined, the former is not liable to make good to the latter anything except the principal sum which he promised to pay, together with interest up to the date of payment. The illustration does not confer upon a creditor a right to recover interest upon a debt which is due to him, when he is not entitled to such interest under any provision of the law. Nor can an illustration have the effect of modifying the language of the section which alone forms the enactment."
27. Illustration (n) therefore does not aid the respondent. Mr. Pathak submitted that interest may be awarded on grounds of equity, and placed reliance upon the Interest Act, 3" of 1839. Under that Act the Court may allow interest to the plaintiff if the amount claimed h a sum certain which is payable at a certain time by virtue of a written instrument. The Act, however, contains a proviso that interest shall be payable in all cases in which it is now payable by law. This proviso applies to cases in which the Court of Equity exercises jurisdiction to allow interest. As observed by the the Judicial Committee in Bengal Nagpur Railway Company's case (1937) L.R. 65 I.A. 66 after referring to the observation made by Lord Tomlin in Maine and New Brunswick Electrical Power Company v. Hart [1929] A.C. 631,540. , observed:
"In order to invoke a rule of equity it is necessary in the first instance to establish the existence of a state of circumstances which attracts the equitable jurisdiction, as, for example, the non performance of a contract which equity can give specific performance. The present case does not, however, attract the equitable jurisdiction of the court and cannot come within the purview of the proviso. The judgment of Their Lordships of the Privy Council in Bengal Nagpur Railway Company's case (1937) L.R. 65 I.A. 66 was relied upon in Seth Thawerdas Pherumal's case [1955] 2 S.C.R. 48. in negativing a claim for interest. In that case a contractor had entered into a contract with the Dominion of India for supply of bricks. Under a clause which required that all disputes between the parties to the contract should be referred to arbitration, dispute having arisen, the matter was referred to arbitration and the arbitrator gave award in the contractor's favour.
28. The Union of India which had succeeded to the rights and obligations of the Dominion contested the award on numerous grounds one of which was the liability to pay interest on the amount awarded. Bose, J, in delivering judgment of the Court observed that the interest awarded to the contractor could not in law be awarded. He pointed out that an arbitrator is not a court within the meaning of the Interest Act of 1839: in any event interest could only be awarded if there was a debt or a sum certain, payable at a certain time or otherwise, by virtue of some written contract at a certain time and there must have been a demand in writing stating that interest will be claimed from the date of the damand. In the view of Bose, J, none of the elements was present and the arbitrator erred in law in thinking that he had the power to allow interest simply because he thought the demand was reasonable."
29. The umpire has awarded interest to the respondent on the footing that for the purpose of carrying out his contract with the Government of India, the respondent was required to make arrangements by borrowing moneys from his bankers and he had to pay interest in that behalf, and when the contract was abandoned after it was partially performed, the Government of India became liable to make good the loss of interest which the respondent suffered. We know of no principle on which the Government of India could be rendered liable for payment of interest in the circumstances relied upon. In respect of that part of the contract which was abandoned,. If any liability to pay interest had arisen it was for the respondent to claim it in settling the terms on which cancellation of the contract was to be made. In respect of the goods which had been returned by him, he could claim compensation for breach of warranty, but such compensation could not include interest as damages for detention of money. Interest was therefore allowed on a view of the law which appeared on the face of the award to be erroneous.
This appeal must be partially allowed and the award of the umpire set aside in so far as it awards interest amounting to Rs. 68,833/12/3 and incidental expenses amounting to Rs. 1,25,000/ . The award in so far as it awards Rs. 1.32,417/10/ for loss suffered by the respondent in the matter of 6,34,270 packets of cigarettes is not liable to be set aside. In view of the partial success, there will be no order as to costs throughout.
Appeal partly allowed.


Coimbatore District Podu Thozillar Samgamrepresented By Its v Bala Subramania Foundry and Others
Supreme Court of India

11 August 1987
C.M.P. No. 46931 of 1985. IN W.P. Nos. 11361-62 of 1983
The Judgment was delivered by : Sabyasachi Mukharji, J.
1.  There were disputes between the partners of the firm Balasubramania Foundry (hereinafter called 'the firm') and several legal proceedings were taken in the courts of Coimbatore, these ultimately came to this Court. This Court by an order dated 2nd of November, 1982 referred the disputes to the Arbitrator. The order stated that the disputes were referred to the sole Arbitrator, Justice K.S. Palaniaswamy failing him Justice C.J.R. Paul and the respective parties including the firm were directed to file their joint memos in all the courts where the suits/proceedings were pending before the Arbitrator. The Arbitrator was directed1 to proceed in accordance with the Arbitration Act. In order to complete the narration, there was an application for appointment of Receiver which was directed to be proceeded with in the trial court. This Court, however, by the said order directed the trial court to dispose of that application.
2.  By the said order as mentioned hereinbefore in the absence of Justice K.S. Palaniaswamy, Justice C.J.R. Paul duly heard and considered the matter and published the award on 3rd April, 1985.
3.  It is claimed by Mr. Ghosh, appearing on behalf of respondent no. 1 as well as Mr. Venugopal, appearing on behalf of other respondents supporting that the said award be made a rule of the court and the judgment in terms of the said award be passed. It may be mentioned that the Coimbatore District Podu Thozillar Munnetra Samgam represented by its Secretary being a union of the workers filed writ petitions in this Court being writ petitions Nos. 11361-62 of 1983. Later on another special leave petition being special leave petition No. 2271 of 1983 was filed by the firm against the order of the High Court confirming the order of appointment of Receiver'of the firm. In those proceedings the Court was pleased to pass an order on 17th of February, 1984 that all the claims of the workers for their past dues would be referred for arbitration to the Arbitrator and considered by him. On 27th of July, 1984 this Court was pleased to refer the money claims of one Velmurugan Factory and the money claims of the workers who were members of the Coimbatore District Engineering and General Workers Union to the Arbitrator for adjudicating by arbitration.
4.  The Arbitrator has duly filed the award dated 3rd April, 1985 in this Court under section 14(1) of the Arbitration Act.A. Rangaswamy, the petitioner herein for whom Mr. Ganguly is appearing has filed an affidavit alleging that the arbitrator was guilty of legal misconduct and there were errors which were amenable to corrections by this Court. It was contended on behalf of the workers also that their claims had not been fully protected. Mr. Sampath, appearing on their behalf has contended that the claims of the workers would amount to about rupees seven lakhs while provision had been made only for rupees three lakhs and even, then there was not sufficient provision. The workers, gratuity, it was contended would come to about rupees seven lakhs while the Arbitrator had really estimated erroneously rupees four lakhs and provisions had been made only for Rs.3,10,000 which according to Mr. Sampath have been further diminished by payments made by the Receiver in the meantime. There is also an application on behalf of the workers' union on these grounds.
5.  It appears, however, that this objection on behalf of the workers on ground of imperfect protection of workers was under a misconception on behalf of the respondents. It was stated and brought before us that in the last two years there had been sufficient profit to cover the claims of the workers. Indeed it appears that of the 27 workers whose claims had to be settled on account of gratuity, 14 had received the same and a document indicating the payments to them was sought to be filed before us. We are satisfied that sufficient provisions have been made for the existing liabilities of the workers and for any further contingencies in respect of the workers' claims. It cannot be said, therefore, that the award of the Arbitrator is incomplete and left undetermined this dispute. The right to gratuity has been recognised and provision for the same has been made. The respondents Nos. 2, 3, and 5 pleaded before us through counsel that they had no objection to the award being made the rule of the court. The respondent no. I as mentioned hereinbefore is arguing that the award be made the rule of the court. Respondent no. 4 is also supporting that claim.
6. It is only the petitioner A. Rangaswamy who is the only party opposing the award. It was submitted by Mr. Ganguly in support of his objection that the Arbitrator while holding that the lease in favour of the firm was bad had awarded substantial sum on the basis of the lease. It was further submitted that the Arbitrator while noting the reasons and recording the formal award had applied a reasoning altogether unconnected with the merits of the controversy which amounted to legal misconduct. It was further alleged that the award was inconsistent. In those circumstances, it was submitted that the award so far as it was against the applicant. A. Rangaswami should be set aside. It was submitted that in spite of the alleged lapses in the illegal leases it was Palaniappan who was continuing to manage the business, sometimes as the Managing Partner of the firm and at other times as the proprietor or partner of the lessee company and recognition and rewarding him on that basis was perverse.
7. It was further submitted that reliance placed on Exhibit A-46 for the purpose of allotting the articles was perverse and a grave error apparent on the face of the record. It was submitted that the Arbitrator committed a grave error in rejecting the claim of the applicant for a sum of Rs.39,27,940.11 which was due from Palaniappan and Doraiswamy as suppressed profits. It was submitted by Mr. Ganguly that at least rupees nine lakhs should have been left out in item No, 9. This was not duly noted. On the other hand, it was urged that the alleged errors were not amenable to be corrected in this application by this Court. Mr. Ganguly submitted that on the whole the award was wholly inequitable.
8.  The law on this aspect is, however, settled. In Union of India v. A.L. Rallia Ram, [1964] 3 S.C.R. 164 1963 Indlaw SC 277, this Court reiterated that in order to make arbitration effective and the awards enforceable, machinery was devised by the Arbitration Act for lending the assistance of the ordinary courts. The Court was also entrusted with .the power to modify or correct the award on the ground of imperfect form or clerical errors, or decision on questions not referred, which were severable from those referred. The Court had also power to remit the award when it had left some matters referred undetermined, or when the award was indefinite, where the objection to the legality of the award was apparent on the face of the award. The Court might also set aside an award on the ground of corruption or misconduct of the ' arbitrator, or that a party had been guilty of fraudulent concealment or wilful deception. But the Court could not interfere with the award if otherwise proper on the ground that the decision appeared to it to be erroneous.
9. The award of the arbitrator was ordinarily final and conclusive, unless a contrary intention was disclosed by the agreement. The award was the decision of a domestic tribunal chosen by the parties, and the civil courts which were entrusted with the power to facilitate arbitration and to effectuate the awards, could not exercise appellate powers over the decision. Wrong or right the decision was binding, if it be reached fairly after giving adequate opportunity to the parties to place their grievances in the manner provided by the arbitration agreement. This Court reiterated in the said decision that it was now firmly established that an award was bad on the ground of error of law on the face of it, when in the award itself or in a document actually incorporated in it, there was found some legal proposition which was the basis of the award and which was erroneous.
10. This view had been enunciated' by the Judicial Committee in Champsey Bhara and Company v. Jivraj Balloo Spinning and Weaving Company Ltd., [1932] L.R. 50 I.A. 324. This view was again reiterated and emphasised by this Court in Kanpur Nagar Mahapalika v. M/s. Narain Das Hari [1970] 2 S.C.R. 28 1969 Indlaw SC 115, where Ray, J. as the learned Chief Justice then was observed at page 30 of the report relying on Champsey Bhara's case 1923 Indlaw PC 14 (supra) "an error of law on the face of the award meant that one could find in the award, or in a document actually incorporated thereto, as, for instance a note appended by the arbitrator stating the reasons for his judgment, some legal proposition which was the basis of the award and which one can say is erroneous."
11. In the instant case there is no legal proposition either in the award or in any document annexed with the award which was erroneous. In Allen Berry and Co. (P) Ltd. v. Union of India, New Delhi, [1971] 3 S.C.R. 282 1971 Indlaw SC 485, this Court reiterated that the principle was that an award could only be set aside where there is an error on its face. In the instant case, the alleged mistakes or alleged errors, if there be any of which Mr. Ganguly made grievances are mistakes of fact if at all. Mr. Ganguly's grievances have a ring of similarity with the grievances which were agitated before this Court in Hindustan Tea Co. v. K. Sashikant Co. and another, [1986] Suppl. S.C.C. 506 1986 Indlaw SC 801, and this Court reiterated that it was an error of law and not mistake of fact committed by the arbitrator which was justiciable in the application before the court. It was an error of law and not mistake of fact committed by the arbitrator which was amenable to corrections by this Court. The grievances of Mr. Ganguly's client even if true, which as at present advised we are not inclined to accept, do not amount to error apparent on the face of the record.
12.  In the aforesaid view of the matter we are unable to sustain, the objections to the award. There will, therefore, be judgment in terms of the award, there will no interim interest. There will, however, be interest on judgment at 9%. The objections are dismissed and the workers' objections are disposed of by stating that there are sufficient provisions in the award to meet the claim of the gratuity of the workers and they should have the right to be met out of the award. In that view of the matter the award is made the rule of the Court and the judgment be in terms of the award. No order as to costs.
Appeal disposed of


K.I. Shephard And Ors. Etc. Etc. v Union Of India And Ors.
Supreme Court of India

18 September 1987
ORIGINAL JURISDICTION: Writ Petition No. 177 of 1987 etc. etc.
The Judgment was delivered by: Rangnath Misra, J.
1.  The writ petitions u/art. 32 of theConstitution and appeals by special leave are against the judgment of the Division Bench of the Kerala High Court in writ appeals have a common set of facts as also law for consideration. These matters have been heard together and are disposed of by this common judgment.
2.  Hindustan Commercial Bank ('Hindustan' for short). The Bank of Cochin Ltd. (hereafter referred to as 'Cochin Bank') and Lakshmi Commercial Bank ('Lakshmi' for short) were private banks. the Act on was initiated u/s. 45 of the Banking Regulation Act, 1949 ('the Act' for short) for amalgamation of these three banks with Punjab National Bank, Canara Bank and State Bank of India respectively in terms of separate schemes drawn under that provision of the Act. Amalgamation has been made. Pursuant to the schemes, 28 employees of Hindustan, 21 employees of Cochin Bank and 76 employees of Lakshmi were excluded from employment and their services were not taken over by the respective transferee banks. Some of these excluded employees of the Cochin Bank went before the Kerala High Court for relief u/art. 226 of theConstitution. A learned Single Judge gave them partial relief but on an appeal to the Division Bench by the transferee bank concerned the writ petitions have been dismissed. The civil appeals are against the decision of the Division Bench. The writ petitions directly filed before this Court are by some of the excluded employees of Hindustan and Lakshmi respectively.
3.  Though employees of the other two banks had not challenged the vires of s. 45 of the Act, on behalf of Lakshmi such a challenge has been made. Since the grounds of attack on this score did not Impress us at all, we do not propose to refer to that aspect of the submissions involving interpretation of Article 31-A, Art. 16 and Art. 21. It has often been said by this Court that Courts should not enter into constitutional issues and attempt interpretation of its provisions unless it is really necessary for disposal of the dispute. In our opinion, this group of cases can be disposed of without reference to question of vires of some part of s. 45 of the Act being examined. Counsel on behalf of the excluded employees have broadly contended that the draft schemes did not include any name of employees intended to be excluded; no opportunity of being heard was afforded to them before exclusion was ordered under the schemes and the authorities concerned have not acted fairly; they deny the allegation that any of them was responsible for ficticious, improper or non-business like advances of loan to parties thereby bringing conditions near about bankruptcy for the appropriate banking companies; many other employees against whom there were definite charges already pending enquiry or even orders of dismissal had been proposed have been taken over and retained in service of the transferee banks while these excluded employees without justification have been called upon to face this unfortunate situation.
4.  The transferee banks, the Reserve Bank of India (hereafter referred to as RBI for short) and the Union of India have appeared and filed affidavits in opposition. The Union of India has contended that the scheme in respect of each of the banks that has got amalgamated had been approved by it as required under the Act and since finality was attached to such schemes challenge was not open against the schemes particularly in view of the provisions contained in Art. 3 I-A of theConstitution. On behalf of the Reserve Bank of India, several contentions were raised by way of opposition and shortly stated these submissions are:-
(1) Law does not require that the draft scheme should contain the names of the employees to be excluded;
(2) The incorporation of the names finalised on the basis of scrutiny of the records before the schemes were placed before the RBI was sufficient compliance of the requirements of the law;
(3) The provisions of the Act did not confer any right on the employees of being heard;
(4) The scheme-making process was legislative in character and therefore did not come within the ambit of natural justice. Alternately the action not being judicial or quasi-judicial and at the most being administrative or executive was also not open to challenge on allegations of violation of rules of natural justice;
(5) moratorium under the statutory provisions could not be beyond six months and in view of the fact that the entire operation had to be finalised within a brief time frame, the requirement of an enquiry by notice to all the officers intended to be excluded could not have been intended to be implanted into the provisions of section 45; and
(6) Provision of compensation has been made for those who were excluded from the respective scheme. Each of the transferee banks generally adopted the stand taken by RBI.
5.  Before we proceed to examine the tenability of the several contentions and counter contentions advanced at the hearing, it is appropriate that we refer to the relevant provisions of the Act. The entire law applicable to the facts of these cases is to be found in Part Ill of the Act and in particular in s. 45. As far as relevant, that section provides:
"Notwithstanding anything contained in the foregoing provisions of this Part or in any other law or any agreement or other instrument, for the time being in force. where it appears to the Reserve Bank that there is good reason so to do, the Reserve Bank may apply to the Central Government for an order of moratorium in respect of a banking company.
(2) The Central Government, after considering the application made by the Reserve Bank under sub-section (1), may make an order of moratorium staying the commencement or continuance of all actions and proceedings against the company for a fixed period of time on such terms and conditions as it thinks fit and proper and may from time to time extend the period so however that the total period of moratorium shall not exceed six months;
(3) ..................... ...................
(4) During the period of moratorium, if the Reserve Bank is satisfied that-
(a) in the public interest; or
(b) in the interests of the depositors; or
(c) in order to secure the proper management of the banking company; or
(d) in the interests of the banking system of the country as a whole,-it is necessary so to do, the Reserve Bank may prepare a scheme-
(i) for the reconstruction of the banking company, or
(ii) for the amalgamation of the banking company with any other banking institution (in this section referred to as "the transferee bank").
(5) The scheme aforesaid may contain provisions for all or any of the following matters, namely:-
(a)...............................................
(b)...............................................
(c)...............................................
(d)...............................................
(e)...............................................
(f)...............................................
(g)...............................................
(h)...............................................
(i) the continuance of the services of all the employees of the banking company (excepting such of them as not being workmen within the meaning of the Industrial Disputes Act, 1947 are specifically mentioned in the scheme) in the banking company itself on its reconstruction or, as the case may be, in the transferee bank at the same remuneration and on the same terms and conditions of service, which they were getting or, as the case may be, by which they were being governed, immediately before the date of the order of moratorium:
Provided.........................................
(j) notwithstanding anything contained in cl. (i) where any of the employees of the banking company not being workmen within the meaning of the Industrial Disputes Act, 1947 are specifically mentioned in the scheme under clause (i), or where any employees of the banking company have by notice in writing given to the banking company or, as the case may be, the transferee bank at any time before the expiry of one month next following the date on which the scheme is sanctioned by the Central Government, intimated their intention of not becoming employees of the banking company on its reconstruction or, as the case may be, of the transferee bank, the payment to such employees of compensation, if any, to which they are entitled under the Industrial Disputes Act, 1947, and such pension, gratuity, provident fund and other retirement benefits ordinarily admissible to them under the rules or authorisations of the banking company immediately before the date of the order of moratorium:
(k)...............................................
(I) ..............................................
(6) (a) A copy of the scheme prepared by the Reserve Bank shall be sent in draft to the banking company and also to the transferee bank and any other banking company concerned in the amalgamation, for suggestions and objections, if any, within such period as the Reserve Bank may specify for this purpose;
(b) the Reserve Bank may make such modifications, if any, in the draft scheme as it may consider necessary in the light of the suggestions and objections received from the banking company and also from the transferee bank, and any other banking company concerned in the amalgamation and from any members, depositors or other creditors of each of those companies and the transferee bank.
(7) The scheme shall thereafter be placed before the Central Government for its sanction and the Centraly Government may sanction the scheme without any modifications or with such modifications as it may consider necessary; and the scheme as sanctioned by the Central Government may specify in this behalf:
Provided .........................................
(7A) The sanction accorded by the Central Government under sub-section (7), whether before or after the commencement of s. 21 of the Banking Laws (Miscellaneous Provisions) Act, 1963, shall be conclusive evidence that all the requirements of this section relating to reconstruction, or, as the case may be, amalgamation have been com plied with and a copy of the sanctioned scheme certified in writing by an officer of the Central Government to be a true copy thereof, shall, in all legal proceedings (whether in appeal or otherwise and whether instituted before or after the commencement of the said section 21), be admitted as evidence to the same extent as the original scheme.
(8) on and from the date of the coming into operation of the scheme or any provision thereof, the scheme or such provision shall be binding on the banking company or, as the case may be, on the transferee bank and any other banking company concerned in the amalgamation and also on all the members, depositors and other creditors and employees of each of those companies and of the transferee bank, and on any other person having any right or liability in relation to any of those companies or the transferee bank.............
(9)...............................................
(10) If any difficulty arises in giving effect to the provisions of the scheme, the Central Government may by order do anything not inconsistent with such provisions which appear to it necessary or expedient for the purpose of removing the difficulty.
(11) Copies of the scheme or of any order made under sub-section ( 10) shall be laid before both Houses of Parliament, as soon as may be, after the scheme has been sanctioned by the Central Government or, as the case may be, the order has been made.
(12)..............................................
(13)..............................................
(14)..............................................
(15).............................................."
6.  Allegations advanced on behalf of the excluded employees is that the draft scheme contemplated under sub-s. 6(a) did not specifically mention names of the excluded employees and at a later stage when the scheme was sent up by the RBI to the Central Government a schedule containing the names of the excluded employees was attached to each of the schemes. S. 45 of  the Act provides a legislative scheme and the different steps required to be taken under this section have been put one after the other. A reading of this section indicates a sequence oriented pattern. What would ordinarily be incorporated in the draft scheme is indicated in sub- s. (5). After the requirements of sub-s. (5) are complied with and the scheme comes to a presentable shape, sub-s. (6)(a) requires a copy thereof as prepared by RBI to be sent to the banking company (transferer) as also to the transferer bank. Cl. (b) of sub-s. (6) authorises RBI to make modifications in the draft scheme as it may consider necessary in the light of suggestions and objections received from the banking company and the transferee bank. On a simple construction of sub-ss. (5) and (6) and on the basis of the sequence pattern adopted in s. 45 it would be legitimate to hold that the Act contemplates the employees to be excluded to be specifically named in the draft scheme.
7. Since it is a draft scheme prepared by RBI and the right to object or to make suggestions is extended to both the banking company as also the transferee bank, and in view of the fact that cl. (i) of sub-s. (5) specifies this item to be a matter which may be included in the scheme, it must follow that the legislative intention is that the scheme would incorporate the names of such employees as are intended to be excluded in accordance with the scheme. Once it is incorporated in the scheme the banking company as also the transferee bank would be entitled to suggest/object to the inclusion of names of employees. It may be that the names of some of the employees may have been wrongly included and the banking company-the hither-to employer would be in a position to suggest/object to the inclusion of the names or it may even be that names of some undesirable employees which should have been left out have been omitted and the banking company as the extant employer of such employees would be most competent to deal with such a situation to bring about rectifications by exercising the power to suggest/object to the draft scheme. The contention advanced on behalf of RBI that since it is open to it under sub-s. (6)(b) of s. 45 to make modifications of the draft scheme, even if the names were not included earlier, at the stage of finalising the scheme for placing it before the Central Government as required under sub-section (7), the earlier non-inclusion is not a contravention is not acceptable. We are of the view that in case some employees of the banking company are intended to be excluded, their names have to be specifically mentioned in the scheme at the draft stage. The requirement of specific mention is significant and the legislature must be taken to have intended compliance of the requirement at that stage. Mr. Salve for the RBI adopted the stand that the provisions of s. 45 did not specifically concede a right of objection or making of suggestions to employees and in sub-s. (6)(b) mention was made only of members, depositors or other creditors. For the reasons we have indicated above, this aspect of the contention does not impress us.
8.  It is the common case of RBI as also the transferee banks that the records of service of each of the employees had been scrutinised and the names for inclusion in the scheme were picked up on the basis of materials like irresponsible action in regard to sanction of loans and accommodations to customers which affected the financial stability of the banking company concerned. Such an allegation made in the counter-affidavit in this Court has been seriously disputed by the litigating excluded employees. It is their positive case that there was no foundation in such allegation and dubious loans, if any, had been sanctioned under instructions of the superior in the banking company and, therefore, did not involve any delinquency on the part of such employees. Since it is the case of the respondents that exclusion had been ordered on the basis of an objective assessment and the very A foundation of the allegation upon which such assessment has been made is disputed, a situation arose where facts had to be ascertained, and it involved assessment. That has admittedly not been done.
9. These employees were in employment under contract in the banking companies which were private banks. They have been excluded from service under the transferee banks and the contracts have now been terminated as a result of inclusion of their names in the schemes. It cannot be disputed-nay has not been-that exclusion has adversely affected this category of employees and has brought about prejudice and adverse civil consequences to them. Two contentions have been raised with reference to this aspect of the matter:-
(1) There has been infraction of natural justice and
(2) The transferee banks which are 'State' and RBI which has monitored the operation being admittedly 'State' their action in excluding some of the employees of the banking company and taking over the services of others who are similarly situated is hit by Art. 14 of theConstitution. It may be pointed out that according to the excluded employees, many facing similar allegations and/or in worse situation have been taken over.
10.  Whether there is infraction of Art. 14 of theConstitution on the allegation advanced would depend upon facts relating to the excluded employees as also the allegedly derelict employees whose services have been taken over. In the absence of an enquiry in which the excluded employees should have been given an opportunity of participation it has become difficult for us to probe into the matter further.
11.  Admittedly the excluded employees have neither been put to notice that their services were not being continued under the transferee banks nor had they been given an opportunity of being heard with reference to the allegations now levelled against them. Learned counsel for RBI and the transferee banks have taken the stand that the scheme-making process u/s. 45 is legislative in character and, therefore, outside the purview of the ambit of natural justice under the protective umbrella whereof the need to put the excluded employees to notice or enquiry arose. It is well-settled that natural justice will not be employed in the exercise of legislative power and Mr. Salve has rightly relied upon a recent decision of this Court being Union of India and Anr. v. Cynamide India Ltd. & Anr., [ 1987] 2 SCC 720 1987 Indlaw SC 28421 in support of such a position. But is the scheme-making process legislative? Power has been conferred on the RBI in certain situations to take steps for applying to the Central Government for an order of moratorium and during the period of moratorium to propose either reconstruction or amalgamation of the banking company. A scheme for the purposes contemplated has to be framed by RBI and placed before the Central Government for sanction. Power has been vested in the Central Government in terms of what is ordinarily known as a Henery-8 clause for making orders for removal of difficulties. S. 45(11) requires that copies of the schemes as also such orders made by the Central Government are to be placed before both Houses of Parliament. We do not think this requirement makes the exercise in regard to schemes a legislative process.
12.  It is not necessary to go to any other authority as the very decision relied upon by Mr. Salve in the case of Cynamide India Ltd. 1987 Indlaw SC 28421 (supra) lays down the test. In paragraph 7 of the judgment it has been indicated:-
"Any attempt to draw a distinct line between legislative and administrative functions, it has been said, is 'difficult in theory and impossible in practice'. Though difficult, it is necessary that the line must sometimes be drawn as different legal rights and consequences may ensue. The distinction between the two has usually been expressed as 'one between the general and the particular'. 'A legislative act is the creation and promulgation of a general rule of conduct without reference to particular cases; an administrative act is the making and issue of a specific direction or the application of a general rule to a particular case in accordance with the requirements of policy'. 'Legislation is the process of formulating a general rule of conduct without reference to particular cases and usually operating in future; administration is the process of performing particular acts, of issuing particular orders or of making decisions which apply general rules to particular cases'. It has also been said: "Rule-making is normally directed towards the formulation of requirements having a general application to all members of a broadly identifiable class" while, "an adjudication, on the other hand, applies to specific individuals or situations. But this is only a broad distinction, not necessarily always true."
13. Applying these tests it is difficult to accept Mr. Salve's contention that the framing of the scheme u/s. 45 involves a legislative process. There are similar statutory provisions which require placing of material before the two Houses of Parliament yet not involving any legislative activity. The fact that orders made by the Central Government for removing difficulties as contemplated under sub-cl. (10) are also to be placed before the two Houses of Parliament makes it abundantly clear that the placing of the scheme before the two Houses is not a relevant test for making the scheme framing process legislative. We accordingly hold that there is no force in the contention of Mr. Salve that the process being legislative, rules of natural justice were not applicable.
14.  The alternate contention on this score is that the scheme-making process being an executive activity or alternately an administrative matter, rules of natural justice have no application. This contention has again to be rejected. Neither in "Privy Council, Natural Justice and Certiorari" has indicated:-
"Formerly the presumption had been that there was obligation to give a hearing unless the statute itself indicated such an obligation; now the presumption is that there is such an obligation unless the statute clearly excludes it, notwithstanding the vesting of a power, in subjective terms, in a minister responsible to Parliament."
15.  As has beer. pointed out by Wells J. in Perre Brothers v. Citrus organisation Committee, [1975] 10 SASR 555:-
"It is now well established-and there is no need for me to canvass the innumerable authorities bearing on this point-that duties, responsibilities and functions of an administrative authority may be purely ministerial, or they may embody some quasi or semi-judicial characteristic. At one time a good deal of ingenuity-and with all respect it seems to me a great deal of energy- was wasted in attempting to discern whether a particular function was administrative or quasi- judicial. In my view the House of Lords, and now the High Court, have, to a very large extent set all such controversies at rest. In my opinion, the test now is not so much as to whether one can fairly call something "ministerial" or "administrative", or "quasi-judicial" but whether the duties of a non-judicial authority must, having regard to the wording of the the Act, be carried out in a spirit of judicial fairness. "
16.  In Re (H) K (an infant), [1967] 1 AER 226 Lord Parker, CJ, found that the immigration officer was not acting in a judicial or quasi-judicial capacity. Yet, the learned Chief Justice held that he still had to act fairly. In that case it meant giving K an opportunity of satisfying the officer as to his age, and for that purpose he had to let K know what his immediate impression was so that K could disabuse him of it. Lord Parker observed:-
"I appreciate that in saying that, it may be said that one is going further than is permitted on the decided cases because heretofore at any rate the decisions of the courts do seem to have drawn a strict line in these matters according to whether there is or is not a duty to act judicially or quasi-judicially".
17.  The obligation to act fairly even in administrative decision making has since been widely followed.
Mulla in 'Fairness: The New Natural Justice' has stated:-
"Natural justice co-exists with, or reflected, a wider principle of fairness in decision-making and that all judicial and administrative decision-making and that all judicial and administrative decision-makers had a duty to act fairly."
18.  In the case of State of Horsily v. Dr. (Miss) Binapani Dei & ors., [ 1967] 2 SCR 625 1967 Indlaw SC 144 this Court observed:-
"It is true that the order is administrative in character but even an administrative order which involves civil consequences as already stated, must be made consistently with the rules of natural justice after informing the first respondent of the case of the State, the evidence in support thereof and after giving an opportunity to the first respondent of being heard and meeting or explaining the evidence. No such steps were admittedly taken; the High Court was, in our judgment, right in setting aside the order of the State."
19.  ln A.K Kraipak & ors. v. Union of India & ors., [ 1970] 1 SCR 457 1969 Indlaw SC 271 a Constitution Bench quoted with approval the observations of Lord Parker in Re: (H) K (an infant) (supra). Hegde, J. speaking for the Court stated:
"Very soon thereafter a third rule was envisaged and that is that quasi-judicial enquiries must be held in good faith, without bias and not arbitrarily or unreasonablly. But in the course of years many more subsidiary rules came to be added to the rules of natural justice. Till very recently it was the opinion of the courts that unless the authority concerned was required by the law under which it functioned to act judicially there was no room for the application of the rules of natural justice. The validity of that limitation is now questioned. If the purpose of the rules of natural justice is to prevent miscarriage of justice one fails to see why those rules should be made inapplicable to administrative enquiries. Often times it is not easy to draw the line that demarcates administrative enquiries from quasi-judicial enquiries. Enquiries which were considered administrative at one time are now being considered as quasi-judicial in character. Arriving at a just decision is the aim of both quasi-judicial enquiries as well as administrative enquiries. An unjust decision in an administrative enquiry may have more far reaching effect than a decision in a quasi-judicial enquiry."
20.  These observations in A.K. Kopak's 1969 Indlaw SC 271 (supra) case were followed by another Constitution Bench of this Court in Chandra Bhavan Boarding and Lodging, Bangalore v. The State of Mysore & Anr., l 19701 2 SCR 600 1969 Indlaw SC 32. In Swadeshi Cotton Mills v. Union of India, [1981] 2 SCR 533 1981 Indlaw SC 349 a three-Judge Bench of this Court examined this aspect of natural justice. Sarkaria, J. who spoke for the Court, stated:-
"During the last two decades, the concept of natural justice has made great strides in the realm of administrative law. Before the epoch- making decision of the House of Lords in Ridge v. Baldwin, it was generally thought that the rules of natural justice apply only to judicial or quasi-judicial proceedings; and for the purpose, whenever a breach of the rule of natural justice was alleged, Courts in England used to ascertain whether the impugned action was taken by the statutory authority or tribunal in the exercise of its administrative or quasi-judicial power. In India also, this was the position before the decision of this Court in Dr. Bina Pani Dei's case 1967 Indlaw SC 144 (supra); wherein it was held that even an administrative order or decision in matters involving civil consequences, has to be made consistently with the rules of natural justice. This supposed distinction between quasi-judicial and administrative decisions, which was perceptibly mitigated in Bina Pani Dei's case 1967 Indlaw SC 144 (supra) was further rubbed out to a vanishing point in A.K. Kraipak's case 1969 Indlaw SC 271 (supra) ......................... ".
21.  On the basis of these authorities it must be held that even when a State agency acts administratively, rules of natural justice would apply. As stated, natural justice generally requires that persons liable to be directly affected by proposed administrative acts, decisions or proceedings be given adequate notice of what is proposed so that they may be in a position (a) to make representations on their own behalf; (b) or to appear at a hearing or-enquiry (if one is held); and (c) effectively to prepare their own case and to answer the case (if any) they have to meet.
22.  Natural justice has various facets and acting fairly is one of them. RBI which monitored the three amalgamations was required to act fairly in the facts of the case. The situation necessitated a participatory enquiry in regard to the excluded employees. Since the decision to exclude them from service under the transferee banks is grounded upon a set of facts the correctness whereof they deny, if an opportunity to know the allegations and to have their say had been afforded, they could have no grievance on this score. The action deprives them of their livelihood and brings adverse civil consequences and could obviously not be taken on the ipse dixit of RBI officers without verification of facts. It is quite possible that a maneuvering officer of the banking company adversely disposed of towards a particular employee of such bank could make a report against such employee and have him excluded from further service under the transferee bank. The possibility of exclusion on the basis of some mistake such as to identity cannot also be ruled out. There is all the more apprehension of this type is the process has to be completed quickly and very often the records of a large number of employees have to be scrutinised. We are of the view that rules of natural justice apply to administrative action and in the instant cases the decision to exclude a section of the employees without complying with requirements of natural justice was bad.
23.  It has been contended on behalf of respondents that moratorium could be for a total period of six months and that was the time allowed for the entire operation to be conducted. In view of the time frame, by necessary implication it must follow that application of natural justice compliance of which would involve a time-consuming process was ruled out. We do not think that there is any merit in this contention either. As a fact, in respect of the three banks the total number of excluded employees is around 125. It is the common case of parties that proceedings were pending against some of them. It may be that in view of the time frame a detailed enquiry involving communication of allegations, show cause, opportunity to lead evidence in support of the allegations and in defence of the stand of the employees may not be possible. Keeping the legislative scheme in view perhaps a simpler enquiry, for instance, communication of the allegation and even receiving an explanation and in cases where the allegation was serious or there was a total denial though there was firm basis for the allegation a single personal hearing could be afforded. In this case we are not really concerned with the manner or extent of hearing as there has been no hearing at all. It must, therefore, be held that the action of excluding these employees in the manner done cannot be supported.
24.  Fair play is a part of the public policy and is a guarantee for justice to citizens. In our system of Rule of Law every social agency conferred with power is required to act fairly so that social action would be just and there would be furtherance of the well-being of citizens. The rules of natural justice have developed with the growth of civilisation and the content thereof is often considered as a proper measure of the level of civilisation and Rule of Law prevailing in the community. Man within the social frame has struggled for centuries to bring into the community the concept of fairness and it has taken scores of years for the rules of natural justice to conceptually enter into the field of social activities. We do not think in the facts of the case there is any justification to hold that rules of natural justice have been ousted by necessary implication on account of the time frame. On the other hand we are of the view that the time limited by statute provides scope for an opportunity to be extended to the intended excluded employees before the scheme is finalised so that a hearing commensurate to the situation is afforded before a section of the employees is thrown out of employment.
"We may now point out that the learned Single Judge of the Kerala High Court had proposed a post-amalgamation hearing to meet the situation but that has been vacated by the Division Bench. For the reasons we have indicated, there is no justification to think of a post-decisional heading. On the other hand the normal rule should apply. It was also contended on behalf of the respondents that the excluded employees could now represent and their cases could be examined. We do not think that would meet the ends of justice. They have already been thrown out of employment and having been deprived of livelihood they must be facing serious difficulties. There is no justification to throw them out of employment and then given them an opportunity of representation when the requirement is that they should have the opportunity referred to above as a condition precedent to action. It is common experience that once a decision has been taken, there is a tendency to uphold it and a representation may not really yield any fruitful purpose.
'Amalgamation' as such saved under Article 31A(1)(c) of theConstitution is not under challenge here. Strong reliance, however, had been placed on the provisions of sub- section (7A) of s. 45 of the Act. The relevant part of it is as requoted here for convenience:-"
25.  The sanction accorded by the Central Government under sub-s. (7) .. shall be conclusive evidence that all the requirements of this section relating to ............ amalgamation have been complied-with
26.  This provision is indeed one for purposes of evidence. In Smt. Somavanti & ors. v. State of Punjab & Ors., [19631 2 SCR 774 1962 Indlaw SC 405 this Court pointed out that there was no real difference between 'conclusive proof' provided for in s. 4 of the Evidence Act and 'conclusive evidence' as appearing in sub-section (7A). This provision does not bar the raising of a dispute of the nature received here. As we have already pointed out, amalgamation is not under challenge. Parties are disputing as to what exactly are the requirements of the procedure laid down underthe Act and the position that no opportunity was afforded to the excluded employees is not in dispute. To a situation as here protection of the umbrella of conclusive evidence is not attached so as to bar the question from being examined. There is, therefore, nothing in sub-section (7A) to preclude examination of the question canvassed here
27.  The writ petitions and the appeals must succeed. We set aside the impugned judgments of the Single Judge and Division Bench of the Kerala High Court and direct that each of the three transferee banks should take over the excluded employees on the same terms and conditions of employment under the respective banking companies prior to moratorium. The employee would be entitled to the benefit of continuity of service for all purposes including salary and perks throughout the period. We leave it open to the transferee banks to take such action as they consider proper against these employees in accordance with law. Some of the excluded employees have not come to Court. There is no justification to penalise them for not having litigated. They too shall be entitled to the same benefits as the petitioners. Ordinarily the successful parties should have been entitled to costs but in view of the fact that they are going back to employment, we do not propose to make orders of costs against their employers.
28. We hope and trust that the transferee banks would look at the matter with an open mind and would keep themselves alive to the human problem involved in it.
Petitions and Appeals allowed.
Appeals allowed.


International Contractors Limited v Prasanta Kumar Sur
Supreme Court of India

25 January 1961
C.A. No. 205 of 1956
The Judgment was delivered by : J. L. Kapur, J.
1. This is an appeal against the judgment and decree of the High Court of Judicature at Calcutta. The appellant was the defendant in the suit out of which this appeal has arisen and respondent No. 1 was the plaintiff, and the second respondent was a proforma defendant. The facts of this case are these:
2. On February 4, 1941, the respondent sold the property in dispute to the appellant for a sum of Rs. 10,000. On February 10, 1941, there was an agreement for reconveyance within a period up to February 10, 1943, for a sum of Rs. 10,001. The relevant clause of this agreement was the third clause which was as follows : -
"Clause 3.-The purchase shall be completed by the purchasers within two years, i.e., to say on or before the 10th day of February, 1943, time being the essence of the contract. If the purchasers shall on or before the 10th day of February, 1943, pay to the vendor a sum of Rs. 10,001 the vendor shall at the cost of the purchasers execute such conveyance as may be necessary for conveying and transferring its right, title and interest in the said property free from encumbrances, if any, created by it. "
3. On November 26, 1942, the solicitor for respondent No. 1 wrote a letter to the appellant stating that that respondent was ready and willing to have the purchase completed as early as possible on payment of Rs. 10,001. Along with that letter a draft conveyance was sent for approval but all this was subject to the result of a search as to the encumbrances, if any, created by the appellant. On November 30, 1942, the solicitors for the appellant company wrote back saying that immediate arrangements should be made for giving inspection of the agreement of sale on which the respondents were relying as the appellant was unable to trace the copy of the said agreement from its record.
4. Again on December 11, 1942, the respondent's solicitor sent a letter stating :
"My client is very eager to complete the purchase and the full consideration money therefore is lying idle in his hands awaiting, the return of the relative draft conveyance as approved by you on your clients' behalf."
5. To this the reply of the appellant's solicitors dated December 18, 1942, was:-
"Our clients deny that there was any concluded or valid agreement for sale with your client or with any other person in respect of the above premises."
6. On June 10, 1943, respondent No. 1 filed a suit for specific performance and in the alternative for redemption on the footing that the transaction was in reality a mortgage. The trial court dismissed the suit oil May 16, 1950, holding that the transaction on the basis of which the suit was brought was not a mortgage but was out and out sale with an agreement for repurchase and as the vendor had not paid the money " punctually according to the terms of the contract, the right to repurchase was lost and could not be specifically enforced ", and the court had no power 'to afford any relief against forfeiture of this breach. The plaintiff-respondent took an appeal to the High Court and it was there held that the failure on the part of the respondents to actually tender the amount of the consideration does riot bar a suit for specific performance because after the repudiation of the contract by the appellant, the tender would have been a useless formality. The appeal was therefore allowed and the suit for specific performance decreed. It is against this judgment and decree that the appellant has come in appeal to this Court.
7. The correspondence which has been proved in this case shows that when the respondent's solicitor called upon the appellant to reconvey the property in dispute to the respondent and also sent a draft conveyance, the appellant denied that there was any concluded or valid agreement for sale in respect of the property in dispute. This was a complete repudiation of the contract to reconvey which the appellant had agreed to by cl. 3 of the agreement which has been set out above. As the appellant had repudiated the contract and had thus failed to carry out his part of the contract it was open to the respondent to sue for its enforcement. But it was argued on behalf of the appellant that the respondent did not tender the price, i.e., Rs. 10,001 nor was he in a position to do so and in that view of the matter the respondent is not entitled to get a decree for specific performance. In cases of this kind no question of formal tender of the amount to be paid arises and the question to be decided is not whether any money was within the power of the respondent but whether the appellant definitely and unequivocally, refused to carry out his part of the contract and intimated that money will be refused if tendered. The principle laid down in Hunter v. Daniel (1845) 4 Hare 420; 67 E.R. 712 is applicable to cases of this kind. In that case Wigram, V. C., stated the position as follows:-
"The practice of the Courts is not to require a party to make a formal tender where from the facts stated in the Bill or from the evidence it appears the tender would have been a mere form and that the party to whom it was made would have refused to accept the money. "
8. Lord Buckmaster in Chalikani Venkatarayanim v. Zamindar of Tuni (1922) 50 I.A. 41 1922 Indlaw PC 39 accepted this statement of the law and observed:-
"Their Lordships think that that is a true and accurate expression of the law, and the question therefore is whether the answer that was sent on behalf of the mortgagee amounted to a clear refusal to accept the money. "
9. This principle applies to the facts of the present case also and the question is whether the answer sent on behalf of the appellant amounted to an unequivocal refusal to carry out its part of the contract which in our opinion it was. It was next contended that the offer made by a solicitor is not a proper offer in law and therefore when the solicitor for the respondent called upon the appellant to execute the documents they were not bound to do so. We are unable to accord our assent to this proposition. The case upon which the Counsel for the appellant relied, i.e., Ismail Bhai Rahim v. Adam Osman 1938 Indlaw CAL 268 , in our opinion has no application to the facts and circumstances of this case. It was held in that case that the offer made by a promiser through a solicitor to pay a debt with interest thereon at the date of the offer does not of itself afford a reasonable opportunity to the promisee of ascertaining that the promisor is able and willing to perform his promise. Unless there is something peculiar in the circumstances of that case that case does not lay down good law. It is difficult to see why a tender made through a solicitor who is for that purpose an agent, is not a proper tender.
10. In our opinion the High Court rightly held that the respondents were entitled to a decree for specific performance and we therefore dismiss this appeal with costs.
Appeal dismissed.