1966 (9) TMI 132 - SC - Companies Law

Whether there was no error on the face of the award and the High Court exceeded its jurisdiction in setting aside the award of the arbitrator? Held that - The Umpire, in fixing the amount of compensation, had not proceeded to follow any principles, the validity of which could be tested on the basis of laws applicable to breaches of contract. He awarded the compensation to the extent that he considered right in his discretion without indicating his reasons. Such a decision by an Umpire or an Arbitrator cannot be held to be erroneous on the face of the record. We, therefore, allow the appeals, set aside the appellant order of the High Court, and restore that of the learned single Judge.

Issues Involved:
1. Validity of the arbitrator's award
2. Estimation of damages for wrongful termination of the contract
3. Application of legal principles under Section 73 of the Indian Contract Act and Section 56 of the Indian Sale of Goods Act
4. Jurisdiction of the Court in setting aside the arbitrator's award

Detailed Analysis:

1. Validity of the Arbitrator's Award:
The appeals were brought from the judgment of the Calcutta High Court, which set aside the award of the arbitrator, Sir R. C. Mitter. The disputes arose from two contracts between the Government and the appellant, Bungo Steel Furniture Pvt. Ltd., which contained arbitration clauses. The arbitrator's award found that the appellant was entitled to the price of 2172 bins supplied and compensation for the wrongful cancellation of the balance 2528 bins. The High Court set aside the award on the grounds of an error of law apparent on the face of the award.

2. Estimation of Damages for Wrongful Termination of the Contract:
The arbitrator awarded compensation to the appellant for the wrongful termination of the contract by the Government. The compensation was based on the value of the steel used up in making the component parts of the unfinished bins. The High Court found this estimation erroneous, as it did not align with the legal principles for assessing damages. The normal rule for computing damages would be the difference between the contract price and the market price at the time of breach. If no market price was available, the cost of labor and materials required for the manufacture of the component parts would be considered. The arbitrator's award did not follow these principles, leading to the High Court setting it aside.

3. Application of Legal Principles under Section 73 of the Indian Contract Act and Section 56 of the Indian Sale of Goods Act:
Section 73 of the Indian Contract Act provides for compensation for loss or damage caused by breach of contract, which naturally arises in the usual course of things or which the parties knew would likely result from the breach. The arbitrator's award did not adhere to this, as it compensated the appellant based on the value of the steel used in the component parts rather than the actual loss suffered. Section 56 of the Indian Sale of Goods Act allows the seller to sue for damages for non-acceptance if the buyer wrongfully neglects or refuses to accept and pay for the goods. The appellant was entitled to claim damages under this section, but the arbitrator's method of calculation was flawed.

4. Jurisdiction of the Court in Setting Aside the Arbitrator's Award:
The Court's power to set aside an award is limited to cases set out in Section 30 of the Arbitration Act, which includes errors of law apparent on the face of the award. The appellant argued that the arbitrator is not bound to give reasons for estimating damages and that the High Court exceeded its jurisdiction. However, the Supreme Court held that the arbitrator's award was vitiated by an error of law, as it ignored the provisions of Section 73 of the Indian Contract Act. The arbitrator's compensation estimation was not based on any conceivable legal basis, justifying the High Court's decision to set it aside.

Separate Judgments:

Majority Judgment:
The majority judgment held that the High Court was right in setting aside the award due to the error of law apparent on the face of it. The arbitrator's method of estimating damages was incorrect, and the award was vitiated by an error of law. The appeals were dismissed with costs, and the judgment of the Division Bench of the High Court was upheld.

Dissenting Judgment:
The dissenting judgment argued that the High Court's order was not justified. It emphasized that an arbitrator's award should not be set aside merely because the arbitrator did not record reasons or indicate the legal principles followed. The arbitrator had used his discretion to determine the compensation, and such a decision should not be held erroneous on the face of the record. The dissenting judge would have allowed the appeals, set aside the High Court's order, and restored the judgment of the learned single judge.

Order:
In view of the majority judgment, the appeals were allowed with costs, the appellate order of the High Court was set aside, and the order of the learned single judge was restored.

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