Case: Union Of India Vs. A.L. Rallia Ram

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 4 1/2 per cent to theAugust, 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 arbitrationthe 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 conclusivex x x xrespondent 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 ofJune 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 cl. 13 of the general condition 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 survivedThe 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 therespondent 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, inter alia, 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

Court's reasoning:
Mr. Pathak submitted that interest may be awarded on grounds of equity, and placed reliance upon the Interest Act, 32 of 1839. Under that Act the Court may allow interest to the plaintiff if the amount claimed is 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 Judicial Committee in Bengal Nagpur Railway Companys 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, 640.), 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 thejudgment of Their Lordships of the Privy Council in Bengal Nagpur Railway Companys case (1937 L.R. 65 I.A. 66.) was relied upon in Seth Thawerdas Pherumals 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 contractors favour. 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 demand. 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 reasonableThe 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