Punjab-Haryana High Court

M/S Sain Dass Rice Mill vs Distt. Food And Supplies Controller ... on 14 July, 2009

Author:
Permod Kohli

Bench:
Permod Kohli

FAO NO.4855 OF 2007 1

IN THE HIGH COURT OF PUNJAB AND HARYANA AT
CHANDIGARH.

DATE OF DECISION: 14 .7.2009

1.FAO NO.4855 OF 2007

M/s Sain Dass Rice Mill, Mathana ..Appellant

Versus

Distt. Food and Supplies Controller Kurukshetra ...Respondent

2.FAO NO.4897 OF 2007

M/s Nagpal Rice Mills, GT Road, Umri ..Appellant

Versus

Distt. Food and Supplies Controller Kurukshetra ...Respondent

3.FAO NO.4898 OF 2007

M/s Bharat Rice Mill, Gamri Road, Kurukshetra ...Appellant

Versus

Distt. Food and Supplies Controller Kurukshetra ...Respondent

CORAM

HON'BLE MR.JUSTICE PERMOD KOHLI

PRESENT: Mr.Ram Chander, Advocate for appellants

Mr.Sanjiv Bansal, Addl.A.G., Haryana with

Mr.Rajive Kawatra, Sr.DAG, Haryana
FAO NO.4855 OF 2007 2

Permod Kohli, J.

These appeals preferred under
Section 37
of the Arbitration and

Conciliation Act, 1996 (hereinafter referred to as "the
Arbitration Act
")

have arisen against the orders dated 3.10.2007 passed by the District Judge,

Kurukshetra dismissing the applications under
Section 34
of the Arbitration

Act for setting aside the award dated 14.3.2006 under challenge in FAO

No.4855 of 2007, award dated 8.3.2006 under challenge in FAO No.4898 of

2007 and award dated 8.3.2006 under challenge in FAO No.4897 of 2007.

Even though separate awards have been passed in each case and

separate applications under
Section 34
of the Arbitration Act were filed

challenging the awards in each case, however, the grounds of challenge

under
Section 34
of the Arbitration Act and in these appeals being common,

these appeals are being disposed of by this common judgment.

It may be useful to briefly refer to the facts giving rise to the dispute

between the parties and passing of the consequential awards and the present

appeals.

The appellants in these appeals are partnership firms and have

established their Mills (shellers for conversion of paddy into rice). Under

the State policy, the millers are given the paddy for custom milling on year

to year basis. The present dispute relates to the year 2002-2003. The millers

and the Governor of Haryana entered into agreements regarding the custom

milling of the paddy. In FAO No.4855 of 2007, an agreement came to be

FAO NO.4855 OF 2007 3

executed on 16.10.2002 between the Govenor of Haryana through District

Food and Supplies Controller and M/s Sain Dass Rice Mill, Mathana Distt.

Kurukshetra for milling the quantity specified in the agreement. In FAO

No.4898 of 2007, an agreement came to be executed on 1.10.2002 between

the Govenor of Haryana through District Food and Supplies Controller and

M/s Bharat Rice Mill, Gamri Road, Kurukshetra for milling the quantity

specified therein. Similarly, in FAO No.4897 of 2007, an agreement came to

be executed on 16.10.2002 between the Govenor of Haryana through

District Food and Supplies Controller and M/s Nagpal Rice Mills, GT

Road, Umri, Distt. Kurukshetra for milling the quantity specified therein.

On behalf of the State of Haryana, it is alleged that the millers failed

to mill the quantity in time and also did not return the paddy/rice which

caused huge loss to the Government. The millers also raised certain

defences which gave rise to disputes between the parties. Clause 23 of the

agreement(s) executed between the parties requires the settlement of

disputes between the parties through arbitration. The Director Food and

Supplies or any person appointed by him can act as the Arbiter Tribunal for

adjudication of the disputes between the parties. It may be useful to

consider Clause 23 of the agreement(s) which reads as under:-

"23.All the disputes and different arising out of or in any

manner touching or concerning this agreement

whatsoever (except as to any matter the decision of

which is expressly provided for in the contract) shall be

referred to the sole arbitration of the Director or any

FAO NO.4855 OF 2007 4

person appointed by him in this behalf. There will be no

objection to any such appointment that the person

appointed is or was an employee of Food & Supplies

Deptt. Haryana and he had expressed views on all or any

of the matter in dispute or difference. The award of such

arbitration shall be final and binding on the parties to

this contract. It is a term of this contract that in the event

of transfer, vacation of office, or being unable to act for

any reason of a person appointed as an arbitrator by the

Director at the time of such transfer, vacation of office,

death or inability shall appoint another person to act as

an arbitrator such a person shall be entitled to proceed

with reference from the stage where is was left by his

predecessor....."

This arbitration clause takes into its sweep all kinds of disputes. The

District Food and Supplies Controller, Kurukshetra approached the Director

Food and Supplies, Haryana for appropriate instructions, in view of the

default committed by the three millers named above, vide his request letter

dated April, 2003. This request was accompanied with a letter from the

concerned miller for extension of time for completing the job of milling as

also a separate letter of the even date wherein the miller undertook to

deliver the rice by the extended time and on failure to do so to deposit the

entire amount of the rice, as per rules. A representative of the miller also

filed an affidavit in support of the request. Separate affidavits dated

FAO NO.4855 OF 2007 5

18.12.2003 were also filed requesting the authorities to grant extension in

time and failing which the matter may be taken up before the arbitrator as

per agreement Clause. On the aforesaid request of the District Food and

Supplies Controller, a Junior Legal Remembrance (JLR) advised to proceed

in accordance with the terms of the contract and action under Clauses 14

and 23 of the agreement may be taken by the Government. A note was

prepared by one Naresh Kumar, Deputy Director (Procurement) and

initiator of the note namely Naresh Kumar Sharma, Deputy Director

(Procurement) was appointed as the Arbitrator by the Director Food and

Supplies Haryana vide his order dated 2.7.2004. The said Aribter Tribunal

entered upon the reference and passed an order dated 1.10.2004 whereby the

claims made by the District Food and Supplies Controller, Kurukshetra

against the millers were dismissed as withdrawn in view of the extension in

the period for delivery of the CMR by the Government upto 5.12.2004. The

claim was accordingly dismissed as withdrawn being premature with liberty

to file a fresh claim.

It appears that the millers failed to deliver the CMR even by the

extended period and thus Baljit Singh Kularia was appointed as the sole

Arbitrator to consider the claims lodged by the District Food and Supplies

Controller, Kurukshetra. The said Arbitrator entered upon the reference.

During the proceedings before him, the millers made an applications under

Sections 12
,
and
of the Arbitration Act to challenge his appointment.

However, the said application was dismissed vide order dated 28.1.2005.

The millers besides filing their reply also filed their counter claims against

FAO NO.4855 OF 2007 6

the claimant in all the cases. The Arbitrator vide his separate awards

mentioned here-in-above allowed the claims and also awarded interest at the

rate of 11.55% per annum in favour of the claimant, namely, District Food

and Supplies Controller, Kurukshetra.

These awards were challenged in the Court of District Judge,

Kurukshetra by filing applications under
Section 34
of the Arbitration Act

on variety of grounds . These applications have been rejected by the

District Judge vide his detailed judgments which are under challenge in

these appeals before this Court.

The millers-appellants have accordingly filed these appeals questing

the judgments/orders passed by the District Judge, Kurukshetra under

Section 34
of the Arbitration Act and also the validity of the awards passed

by the Arbitrator.

The grounds of challenge urged in applications under
Section 34
of

the Arbitration Act have been reiterated in the present appeals. The validity

of the awards has been challenged on the following grounds:-

i) The Agreement signed by District Food and Supplies Controller,

Kurukshetra on behalf of the Governor of the State is nullity as the

said Officer was not competent to execute the agreement/contract

on behalf of the Governor of Haryana in terms of
Article 299 (1)

of the Constitution of India;

ii) The award passed by the Arbitrator is against public policy as

the claim preferred by the Department before Sh.Naresh Kumar

Sharma, Deputy Director (Procurement), the earlier appointed

FAO NO.4855 OF 2007 7

Arbitrator had been withdrawn with liberty to file a fresh claim;

iii)The Arbitrator has failed to decide the counter claims filed by

the appellants herein vitiating the entire award;

iv)The Arbitrator has awarded interest which was not within his

domain as the question of interest could only be decided by the

Director Food and Supplies Haryana in terms of Clause 9 of the

agreement, thus not arbitrable.

v)Since the period of delivery was extended by the Government

of India from 1.3.2003 to 31.8.2005, no interest was payable for

the said period and the award allowing interest for the aforesaid

period is illegal and without any basis;

vi)Under the agreement only simple interest is awardable whereas

the Arbitrator has awarded compound interest

vii)The agreement executed by only one of the partners is void ab

initio in so far as the enforceability of the arbitration clause is

concerned in terms of
Section 19 (2)
of the Indian Partnership

Act;

viii)The reference itself is bad as State of Haryana has not filed

any claim or sought reference of dispute to the Arbitrator;

ix)The Arbitrator has been appointed by the Director Food and

Supplies Controller, Kurukshetra without any request by either of

the parties to the dispute; and

x)No notice was issued to the appellants before making

appointment of the Arbitrator.

FAO NO.4855 OF 2007 8

Ground No. i)

This ground relates to the validity of the arbitration agreement. It is

alleged that the District Food and Supplies Controller who has executed the

agreement on behalf of the Governor is not the competent authority having

been not authorized in accordance with the provisions of
Article 299
of the

Constitution of India nor he had any specific or genuine authority to execute

such agreement.
Article 299
of the Constitution of India reads as under:-

"299.Contracts.- (1) All contracts made in the exercise of the
executive power of the Union or of a State shall be expressed
to be made by the President, or by the Governor of the State,
as the case may be, and all such contracts and all assurances of
property made in the exercise of that power shall be executed
on behalf of President or the Governor by such persons and in
such manner as he may direct or authorize.

(2) Neither the President nor the Governor shall be personally
liable in respect of any contract or assurance made or executed
for the purposes of this Constitution, or for the purposes of any
enactment relating to the Government of India heretofore in
force, nor shall any person making or executing any such
contract or assurance on behalf of any of them be personally
liable in respect thereof."

This Article provides that Contracts made in exercise of executive

power of the Union or the State should be expressed to be made by the

President or by the Governor of the State, as the case may be and all such

contracts are to be executed on behalf of the President or the Governor by

such person(s) or in such manner as he may direct or authorize. The word

"he" is significant. This clearly prescribes that the Contracts are to be

executed by such person(s) as may be authorized by the Governor or under

his direction. Mr. Bansal, learned counsel appearing on behalf of the

FAO NO.4855 OF 2007 9

respondents has referred to and relied upon Annexure O-2 forming part of

the record of the Arbitrator which is a policy letter for purchase of paddy

during the kharif 2002-03. In the aforesaid letter, it has been mentioned in

paragraph 2 that the instructions earlier issued by the Head Office on

5.10.2000 and 8.10.2001 are applicable. Clause (b) of the aforesaid policy

decision, however, directs all District Food and Supplies Controllers in the

State to execute the agreements with rice millers. Based upon the aforesaid

policy decision, it is contended that there was specific delegation of power

and authority by the Government to execute the agreements on behalf of the

Governor/State. To the contrary, counsel for the appellants has vehemently

argued that there is no specific authority under the business rules framed by

the Governor under
Article 166
of the Constitution of India authorizing the

District Food and Supplies Controller to execute the agreement on behalf of

the Governor. I have perused
Article 166
of the Constitution of India. From

the perusal thereof, it appears that it has no application to the issue involved

and sought to be argued.
Article 166
is quoted here under:-

"166. Conduct of business of the Government of a

State.- (1) All executive action of the Government

of a State shall be expressed to be taken in the

name of the Governor.

(2)Orders and other instruments made and

executed in the name of the Governor shall be

authenticated in such manner as may be specified

in rules to be made by the Governor, and the

FAO NO.4855 OF 2007 10

validity of an order or instrument which is so

authenticated shall not be called in question on the

ground that it is not an order or instrument made or

executed by the Governor.

(3)The Governor shall make rules for the more

convenient transaction of the business of the

Government of the State, and for the allocation

among Ministers of the said business in so far as it

is not business with respect to which the Governor

is by or under this Constitution required to act in

his discretion."

This only provides that all executive actions of the Government of the

State are to be expressed to be taken in the name of the Governor and all

orders and instruments made and executed are to be authenticated in the

manner specified in the rules. This Article does not deal with the execution

of the Contracts and agreements, but only deals with the authentication of

the orders and instruments made on behalf of the Governor. It is only

Article 299
which specifically deals with the execution of the agreements.

In case of elected Government, the Governor has to act on the aid and

advice of the Council of Ministers and once an action is approved by the

Government i.e. the Council of Ministers, it is deemed to be valid for the

purpose of
Article 299
and thus, there is no infirmity in the execution of the

agreement. Arbitration agreement has been defined under
Section 7
of the

Arbitration Act and reads as under:-

FAO NO.4855 OF 2007 11

"7. Arbitration agreement
(1) In this part "arbitration agreement" means an
agreement by the parties to submit to arbitration all or
certain disputes which have arisen or which may arise
between them in respect of a defined legal relationship,
whether contractual or not.

(2) An arbitration agreement may be in the form of an
arbitration clause in a contract or in the form of a separate
agreement.

(3) An arbitration agreement shall be in writing.
(4) An arbitration agreement is in writing if it is contained
in-

(a) a document signed by the parties;

(b) an exchange of letters, telex, telegrams or other means
of telecommunication which provide a record of the
agreement; or

(c) an exchange of statements of claim and defence in which
the existence of the agreement is alleged by one party and
not denied by the other.

(5) The reference in a contract to a document containing an
arbitration clause constitutes an arbitration agreement if
the contract is in writing and the reference is such as to
make that arbitration clause part of the contract."

From the reading of the aforesaid Section, it appears that an arrangement to

submit to arbitrational all or certain disputes between the parties itself constitutes an

arbitration agreement. It may be a Clause or contract or may be a separate agreement

between them. The only requirement is that it should be in writing and signed by the

parties. An arbitration agreement can be created even by separate documents. The validity

of the arbitration agreement can be challenged under
Section 16
of the Arbitration Act

before the Arbiter Tribunal. The appellants did challenge the validity of the arbitration

agreement before the arbiter Tribunal who decided the same during the arbitration

proceedings by order dated 28.1.2005. Otherwise also for the purpose of
Arbitration Act
,

even if the contract is nullified, it does not affect the validity of the arbitration clause as

is specifically provided under
Section 16 (b)
of the Arbitration Act. An order passed by

the Arbitrator rejecting the plea of the objector regarding the existence or validity of the

FAO NO.4855 OF 2007 12

arbitration agreement is not appealable under
Section 37
of the Arbitration Act. It is only

when such a plea is accepted, then an appeal is maintainable. The issue is no more res

integra.
In the case of
National Agricultural Coop. Marketing Federation India Ltd.

vs. Gains Trading Ltd.
, (2007) 5 Supreme Court Cases, 692 while considering the

scope of
Section 16 (b)
of the Arbitration Act, Hon'ble Supreme Court

observed as under:-

"6. Respondent contends that the contract was abrogated

by mutual agreement; and when the contract came to an

end, the arbitration agreement which forms part of the

contract, also came to an end. Such a contention has

never been accepted in law. An arbitration clause is a

collateral term in the contract, which relates to resolution

disputes, and not performance. Even if the performance

of the contract comes to an end on account of

repudiation, frustration or breach of contract, the

arbitration agreement would survive for the purpose of

resolution of disputes arising under or in connection with

the contract. [Vide : Heymen vs. Darwins Ltd,
Union of

India vs. Kishori Lal Gupta & Bros
.

and
The Naihati Jute

Mills Ltd. vs. Khyaliram Jagannath
. This position is now

statutorily recognized. Sub-section (1) of
section 16
of

the Act makes it clear that while considering any

objection with respect to the existence or validity of the

arbitration agreement, an arbitration clause which forms

FAO NO.4855 OF 2007 13

part of the contract, has to be treated as an agreement

independent of the other terms of the contract; and a

decision that the contract is null and void shall not entail

ipso jure the invalidity of the arbitration clause. The first

contention is, therefore, liable to be rejected."

In view of the above legal position, the validity of the arbitration

agreement on any ground is unassailable.

Ground No. ii)

It is admitted case of the parties that Naresh Kumar Sharma, Deputy

Director (Procurement) was appointed as Abitrator vide order dated

2.7.2004. The Arbitrator entered upon the reference. However, during the

pendency of reference, the period for delivery of CMR was extended by

the Government of India and on that basis, the Arbitrator vide his order

dated 1.10.2004 allowed the Department to withdraw the claim with liberty

to file a fresh one. It is contended on behalf of the appellants that once the

claims were withdrawn and liberty was granted to file fresh claims,

proceedings before the Arbitrator, namely, Naresh Kumar Sharma only

remained suspended and thus the fresh claims can only be filed before the

same Arbitrator and the Director was not competent to appoint a new

Arbitrator. The relevant part of the order dated 1.10.2004 reads as under:-

"2.On dated 1.10.2004, I heard both the parties and during

arguments, the representative of the claimant admitted the fact

that the department/government extended the period for

delivery of the CMR, therefore, they may be allowed to

FAO NO.4855 OF 2007 14

withdraw the claim dated 12.7.2004 at this stage, with liberty

to file fresh. Since the delivery period of CMR was extended

by the Director Food and Supplies, Haryana on dated 13.7.2004

upto 5.9.2004, therefore the claim of the claimant was

premature. According, the claim dated 12.7.2004 is hereby

dismissed as withdrawn with liberty to file a fresh claim."

From the perusal of the aforesaid order, it is evident that on

withdrawal of the claims, the proceedings before the appointed Arbitrator

stood terminated, though liberty was granted to file a fresh claim. Obviously

when the fresh claims were to be filed, it has to be based upon a new cause

of action i.e. on failure of the millers to deliver CMR within the extended

period. It was thus open to the appointing authority to appoint same or a

new Arbitrator. There is no substance in the contention which is rejected.

GROUND NO. iii)

It is vehemently argued on behalf of the appellants that millers had

raised counter claims before the Arbitrator, but the same have not been

decided. I have perused the awards passed by the Arbitrator. In all the

awards, the counter claims have been raised by the millers and reference is

made in the arbitration award itself wherein it is also mentioned that the

counter claims are available at pages 165-449 of the record of the

Arbitrator. Even while referring to the discussion, reference is made to the

counter claim to the extent of Rs.63,16,428/- in case of M/s Sain Dass Rice

Mill. Similarly, reference is made to the counter claim available at pages

100-131 of the record of the Arbitrator to the extent of Rs.10,89,442 in the

FAO NO.4855 OF 2007 15

case of M/s Bharat Rice Mill, Gamri Road, Kurukshetra and to the

counter claim available at pages 114-165 of the record of the Arbitrator to

the extent of Rs.48,65,609.80 in the case of M/s Nagpal Rice Mills, GT

Road, Umri. From the reading of all the three awards, it appears that the

counter claims, though made by all the millers/appellants have not been

decided or even considered. The Arbitrator has not given any finding

whether the counter claims in each case are sustainable or not. This is

sufficient to vitiate the awards. This is the contention of appellants.

In the case of
K.V.George v. The Secretary to Govt. Water and

Power Dept., Trivandrum and another
, AIR 1990 Supreme Court 53, it

has been observed as under:-

"13.is not disputed that the Arbitrator did not at all consider
the counter claims and kept the same for consideration
subsequently while making award in respect of the claims
filed byt he appellant. Undoubtedly, this award made by the
Arbitrator is not sustainable in law and the Arbitrator has mis-
conducted himself and in the proceedings by making such an
award. It is the duty of the Arbitrator while considering the
claims of the appellant to consider also the counter claims
made on behalf of the respondents and to make the award after
considering both the claims and counter claims. This
has not been done and the Arbitrator did not at all
consider the counter claims of the respondents in making the
award. As such the first award dated January 22, 1981 made by
the Arbitrator in Arbitration Case No.132 of 1980 is wholly
illegal and unwarranted and the High Court was right in
holding that the Arbitrator mis-conducted himself and the
proceedings in making such an award and in setting aside
the same and directing the Arbitrator to dispose of the
reference in accordance with law considering the claim of the
contractor and the counter claim of the respondents."

Mr.Bansal, learned counsel appearing on behalf of the respondent

has, however, argued that the Government is willing to undertake not to

execute the award to the extent of the counter claims till such time the

FAO NO.4855 OF 2007 16

counter claims are adjudicated upon afresh by the Arbitrator. His further

contention is that the award can still be upheld leaving the Arbitrator to

decide the counter claims of the appellants herein. It is contended that since

counter claims are separable from claims of the respondents, the rest of the

awards is still valid. With a view to support his contention, he has relied

upon the judgment of the Hon'ble Supreme Court in the case of

J.C.Budhraja v. Chairman, Orissa Mining Corporation Ltd. & Anr., JT

2008 (1) SC 514 wherein following observations have been made:-

"25. The award of the arbitrator in respect of time
barred claim of Rs.67,64,488 is an error apparent on the
face of the award. Award of amounts in excess of claim
(referred to in paras 22, 23 and 24) clearly amount to
exceeding the jurisdiction. All these, that is awarding
amount towards time barred part of the claim of
Rs.67,64,488, and awarding amounts of Rs.29,86,871,
Rs.670,285 and escalation in cost at a rate more than
what is claimed, are all legal misconducts and the award
in regard to those amounts are null and void. There is
however some overlapping of the aforesaid amounts.

26. Does it mean that the entire award should be set
aside? The answer is no. That part of the award which is
valid and separable can be upheld......"

In view of the undertaking given before this Court on behalf of the

State that the part of the award to the extent of counter claims will not be

put to execution, the question of adjudication of counter claims and the

validity of the award shall be considered here-in-below after other grounds

are examined.

Grounds Nos. iv, v,vi

The appellants have challenged the jurisdiction of the Arbitrator to

award interest as a whole including for the period from 1.3.2003 to

FAO NO.4855 OF 2007 17

31.8.2005 when the period for delivery of CMR was extended charging

compound interest. In the present case, the Arbitrator has awarded interest

at the rate of 11.55%. Clause 9 of the agreement deals with the question of

payment of interest under certain circumstances indicated therein. It is

relevant to notice the relevant part of the said Clause which reads as under:-

"9.....The stocks of rice not conforming to the specifications so

laid down, shall be liable to be rejected in respect of such

quantity of rice which is not found to be within the

specifications and the miller shall be liable to pay to the

Government for the quantity of rice short supplied, as penalty

at the custom milling rate fixed by the Govt. of India plus

Reserve Bank of India CCL rate of interest from the date it

becomes payable till the date of actual realization of converted

variety of rice. The decision of the Director, Food & Supplies,

Haryana hereinafter referred to as the "Director" in this behalf

shall be final.....

In the event of his failure to supply rice within the

stipulated period he shall be liable for interest @ CCL of

Reserve Bank of India prevailing interest for the period of

default on the custom milled price fixed by Government of

India from the date it becomes payable till the date of actual

realization towards the left over quantity/stocks of paddy. The

decision of the Director, Food & Supplies, Haryana (hereinafter

referred to as the "Director", in this behalf shall be final."

FAO NO.4855 OF 2007 18

Under the aforesaid Clause, interest is payable for short supply of the

rice as also left over quantity of stocks of paddy as may be realizable from

the miller. The rate of interest is as being charged by the Reserve Bank of

India CCL rate and the decision of the Director Food and Supplies, Haryana

on the question of interest is final. There is no other clause in the

contract/agreement which provides for payment of interest. Under this

Clause, it is Director who is to take decision regarding the payment of

interest. The Arbitrator has, however, awarded the interest. It is nobody's

case that the Director was approached for taking decision on the question

of payment of interest and he has declined the request for interest raising

another dispute to be adjudicated upon the Arbitrator. Where stipulation in

a contract requires a decision to be taken by any specified authority under

the agreement, the Arbitrator ceases to have the jurisdiction to adjudicate

upon such issues as it does not fall within the domain of the Arbitrator to

take decision on such issues.
In the case of
Rajasthan State Mines and

Minerals Ltd. v. Eastern Engineering Enterprises and another
, AIR

1999 Supreme Court 3627 wherein it has been observed as under:-

"20.Despite the admission by the contractor, it is apparent
that arbitrator has ignored the aforesaid stipulations in
the contract. In the award, the arbitrator has specifically
mentioned that he has given due weightage to all the
documents placed before him and has also considered the
admissibility of each claim. However, while passing the
award basic and fundamental terms of the agreement between
the parties are ignored. By doing so, it is apparent that he has
exceeded his jurisdiction."

In the case of
Associated Engineering Co. v. Government of

Andhra Pradesh and another
, AIR 1992 Supreme Court 232, it has been

FAO NO.4855 OF 2007 19

held as under:-

"26.The Arbitrator cannot act arbitrarily irrationally,
capriciously or independently of the contract. His sole
function is to arbitrate in terms of the contract. He has no
power apart from what the parties have given him under
the contract. If he has traveled outside the bounds of the
contract, he has acted without jurisdiction. But if he has
remained inside the parameters of the contract and has
construed the provisions of the contract, his award
cannot be interfered with unless he has given reasons for
the award disclosing an error apparent on the face of it."

The law is settled that where the condition of contract confers

jurisdiction upon an authority other than the arbitrator to decide an issue

such issue can only be decided by such authority and not by the Arbitrator.

There can be situations where the authority under the agreement

refuses to decide the issue and dispute in this regard is created, the

Arbitrator may in such an eventuality consider the question, subject to the

reference made to it. In the present case, the Arbitrator has simply awarded

the interest at the asking of the claimants even though the decision was to be

taken by the Director Food and Supplies, Haryana and he was never

approached by the claimants to decide the question of interest. I am of the

opinion that Arbitrator has exceeded his jurisdiction in awarding the interest

de hors Clause No.9 of the agreement and thus, the award to the extent it

contains awarding of interest is liable to be set aside.

Ground No.vii)

It has been argued on behalf of the appellants that the agreement for

reference to Arbitrator is violative of
Section 19 (2)
of the Indian

Partnership Act, 1932. The said Section, inter-alia, deals with the implied

FAO NO.4855 OF 2007 20

authority of partner as agent of the firm. Sub-Section (2) of
Section 19

excludes certain acts of partners from the purview of the implied authority.

However, such exclusion is again subject to usage or custom of trade. The

relevant provisions of
Section 19
of the Indian Partnership Act, 1932 read

as under:-

"19.Implied authority of partner as agent of the firm.-

(1) Subject to the provisions of
Section 22
, the act of a

partner which is done to carry on, in the usual way,

business of the kind carried on by the firm, binds the

firm.

XXX XXX XXX

(2) In the absence of any usage or custom of trade to the

contrary, the implied authority of a partner does not

empower him to--

(a) submit a dispute relating to the business of the firm to

arbitration,

XXX XXX XXX

From the construction of the aforesaid provisions, it appears that the

implied authority of partner does not extend for reference to the arbitration.

This is, however, subject to usage or practice of any trade. In the instant

case, all agreements with Government have been signed by only one

partner of each firm of Millers. Arbitration Clause is part of the contract

and is inseparable. No other partner has come forward at any stage of

dispute to challenge the authority of the partner who has signed the contract

FAO NO.4855 OF 2007 21

(arbitration agreement). This very partner appeared before the Arbitrator,

contested the case, challenged the awards before the District Judge and filed

the present appeals. It appears that it is the normal routine, usage and

practice in the trade of milling that one partner enters into contract on

behalf of the firm. Hence the present case does not fall within the mischief

of Sub Section (2) (a) of
Section 19
of the Indian Partnership Act.

Grounds No. viii, ix & x)

It is contended on behalf of the appellants that Haryana Government

never made any request for appointment of Arbitrator nor the award has

been passed in favour of the Haryana Government. It is further contended

that the Arbitrator has been appointed without request being made by any of

the parties to the dispute nor the appellants were heard before appointment

of Arbitrator. From the record produced before me which is said to be part

of the record of the Arbitrator and noticed here-in-above, it appears that the

request was made by the District Food and Supplies Controller to the

Director Food and Supplies for taking action against the three firms named

above for breach of the contract and causing loss. The said request was

accompanied with the letters and affidavits of the representatives of the

firms. Each firm had filed an affidavit dated 18.12.2003 that on their failure

to complete the CMR within the extended time, the matter may be taken

before the Arbitrator as per agreement clause. Not only this, the

representatives of the firms also undertook to pay the amount. Hence the

argument of the appellants is not acceptable that the arbitrator has been

appointed without any request from either of the parties. It is true that no

FAO NO.4855 OF 2007 22

formal notice was issued to the appellants before appointment of the

Arbitrator, but fact remains that the appellants appeared before the

Arbitrator on being summoned, participated in the proceedings by filing

their detailed replies and also led evidence. All their actions were voluntary

and without any reservation. It is only after the passing of the award that all

these pleas are being raised. As a matter of fact, the appellants are estopped

from raising such pleas after the passing of the awards. They objected to

the arbitration proceedings only by challenging the validity of the

agreement and on no other ground. Thus, their contentions are totally

devoid of any merit and are rejected.

There is added reason to disagree with the contention of the

appellants. The respondents in their reply before the Arbitrator virtually

admitted the breach of the contract and their liability by making a detailed

proposal before the Arbitrator which has been reproduced by the Arbitrator

in the award and reads as under:-

"The respondent gave the following proposal for

settlement of the dispute:-

i)That the respondent is ready to pay the amount

which would be finally adjudicated by the

Arbitrator within a period of 5 years in half yearly

equal instalments.

ii)That the respondent in order to secure the

interest of the respondent will mortgage the Sain

Dass Rice Mills, Ladhwa Road, Kurukshetra worth

FAO NO.4855 OF 2007 23

Rs.2,01,50,300/- as valued by the Valuer against

the liability of Rs.153 lacs. Even after excluding

the liability of the value of property being

mortgaged. Relevant document in respect of the

property are attached.

iii)That the claimant should not charge any future

interest on the deferred payment. Because of the

reasons as explained in the reply dated 19.1.2005

and the present reply. However, in case of default

in making payment of intalment, then the

department would be entitled to charge interest @

6% till its payment.

iv)That in case the respondent make default in

making payment of half yearly three instalment

continuously then the claimant be fully competent

to take over the mortgaged property and take

action in accordance with law.

v)The payment of first instalment will commence

after six months from the date of award.

vi)The stock of the rice lying in the Mill be

transferred in the name of firm so that after giving

treatment it could be disposed of and loss could be

avoided."

Though this proposal was not accepted by the claimants, however, the

FAO NO.4855 OF 2007 24

fact remains that the appellants therein have by and large admitted their

liability.

In the totality of the circumstances, these appeals partly succeed. The

awards to the extent of awarding of interest are set aside. In so far as the

counter claims are concerned, the matter is remitted back to the Arbitrator to

consider the counter claims of the appellants and take decision thereon in

accordance with law. The awards minus the component of interest are

upheld. However, the awards to the extent of counter claims raised in each

case shall not be executed till the Arbitrator takes decision on the counter

claims and executability of the awards in respect to amount equivalent to

counter claims shall be subject to decision on counter claims. The resultant

award upheld here under shall carry interest at the rate of 12% per annum

from the date of the judgment till the amount is actually realized.

Disposed of.

A copy of this judgment be placed on record on each concerned file.

(PERMOD KOHLI)
JUDGE

14 .7.2009
MFK

NOTE:Whether to be referred to Reporter or not:YES

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