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Letters Patent Appeal No. 62 of 1961, decided on 13th January 1966.
Ss. 19, 30 & 33‑Objection to award on ground of "error of law apparent on face of record " Court whether and when competent to set aside award‑Expression "error of law apparent on face of award"‑Meaning.
It is a well established rule in arbitration matters that in cases where question of interpretation of certain clauses in an agreement between the parties is referred to an arbitrator, such award being purely on a question of law, it is not open to any one of the parties to attack the award on the ground that the arbitrator had misconducted the proceedings. However, in law there is a settled distinction between the decision of an arbitrator upon a pure question of law and the decision of an arbitrator upon the dispute between the parties, which rests incidentally upon the decision on a question of law. In the former case, the parties having elected to accept the decision of the arbitrator on the question of law, it would not be open to them to attack the decision on the ground that the decision was wrong while in the latter case, it would be open to them to attack the finding of the arbitrator if an error of law was apparent on the face of the record, which formed the basis of the finding of the arbitrator. An "error of law on the face of the award" means that one 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 one can then say is erroneous. The real question for consideration would be whether a question of law was specifically referred to the arbitrators or it merely arose in the course of proceedings. If a question of law is specifically referred and it is evident that the parties desire to have a decision from the arbitrators about that rather than one from the Court, then the Courts will not interfere. However, in cases where the question of law is incidentally material in order to decide the question actually referred to the arbitrators it is open to the Court to set aside the award if an error of law is found patent on the face of the record. In the instant case the only dispute that a party had raised was that the Government was not justified in canceling his contract and the Government having committed the default was bound to compensate him. Before the arbitrators the question of the interpretation of contract which was material for the decision of the case arose incidentally. It was held, by the High Court that in the circumstance it was not possible to hold that the party wanted to refer any specific question of law to the arbitrators or that any such question was referred for their decision. The question of construction of the term of the contract arose incidentally for the dispute referred to them. Therefore, simply because the question of interpretation of the relevant clause of the contract was incidentally referred in the pleadings by the parties that would not clothe the arbitrators with the exclusive jurisdiction to decide the question of law involved in it.
Government of Kelantan v. Duff Development Company Ltd. 1923 A C 395; In re: King and Duveen (1913) 2 K B 32; F. R. Absalom Ltd. v. Great Western (London) Garden Village Society Limited 1933 A C 592; Durga Prosad Chamria v. Sewkshendas Bhattar A I R 1949 P C 334 ; Barton and another v. Blackburn and another (1934) 150 L I R 327 ;Hodgkinson v. Fernie 3 C N N S 189; Champsey Bhara Company v. The Jivraj Ballo Spinning and Weaving Co. Ltd. A I R 1923 P C 66 and A. Z. Company v. S. Maula Bukhsh Muhammad Bashir P L D 1965 S C 505 ref.
S. M. Sohail for Appellants.
Noorul Arfin for Respondents.
Dates of hearing: 21st, 22nd and 23rd December 1965.
This is a Letters Patent Appeal from the judgment of a learned Single Judge in Suit No. 210 of 1959 on the original side of this Court. By this judgment the learned Single Judge set aside the award and revoked the authority of the arbitrators leaving the parties to refer their disputes in terms of the arbitration clause to other arbitrators of their choice.
2. The material facts for the decision of this appeal may be briefly stated. On 10th April 1956, an urgent demand for the supply of 20,000 numbers of Sundry poles was received by the Director General, Supply and Development, Karachi, from the Chief Engineering, West Pakistan Electricity Department, Peshawar to meet the demand of Electricity Department, Kunjah Road, Gujrat. On 2nd June 1956, quotations were invited and the tenders received in response to the enquiry were opened on 28th June 1956. The appellant's firm quotation being the lowest was accepted and an advance A/T was issued in their favour on 4th October 1956. The regular A/T was issued on 20th December 1956, in which it was stipulated that the contract will be performed by 31st March 1957. The date of delivery was extended later on up to 30th June 1957, at the request of the appellant's firm. On 13th June 1957, the appellant firm represented that 7,000 poles would be ready for shipment in March/April 1957, from Mangla Port in East Pakistan. On 11th May 1957, they further informed that further 3,000 poles were ready for inspection.
3. The Department Inspector on 23rd May 1957, reported that only 200 poles were tendered for inspection and balance 4,000 were being collected from the forest. He further informed that the poles were not properly creasoted, as per the terms of the tender and requested that the appellant firm should be asked to offer sufficient quantity and then call upon the Inspector to inspect the store. He further requested that the appellant firm be advised to creasote the poles in dispute properly as per terms of the A/T before tendering for inspection. It appears that later on at the request of the appellant firm further inspection was made of the poles to be supplied to the Government. 1n November 1957, 4,000 poles were offered for inspection at Khulna but the Inspector of the Department rejected them as they were not properly creasoted according to specifications and directed the appellant firm to tender them for inspection after necessary treatment.
4. On 16th November 1957, the firm expressed their inability to treat the poles according to specification as they had neither the creasote oil nor the necessary plant to apply this method. The appellant firm was informed that the two plants available in East and West Pakistan could be used by them for this purpose, but they declined to employ these plants because that would have burdened them with heavy expenses and charges. On 30th July 1958, the appellant firm again expressed their inability to undertake this process as being too expensive and offered to treat the poles by swabbing with crude/mustered oil. The alternative process suggested by the firm was not acceptable to the Department. Lengthy correspondence passed between the parties. The Department insisted that the Sundry poles be treated with creasote "forced in under pressure" and the appellant firm insisted that some alternative method may be suggested and should be approved which may be less expensive. The result was that the firm was unable to supply the store according to the specification and the Department on 10th November 1958 terminated the contract without financial repercussion on either side.
5. Thereupon, the appellant firm contested the right of the Department to cancel the contract. By notice dated 7th February 1959, they informed the Department that they were unable to supply the stores as the Department had raised controversy on the method of treatment of the poles and called upon them to reinstate the contract and receive the supplies in fulfilment of the contract. In the alternative the appellant firm claimed Rs.6,00,000 (rupees six lakhs) as damages for breach of the contract. In the event of non‑compliance of their demand the appellants called upon the Department that the dispute be referred to arbitration in terms of clause 21 of P. S. 35.
6. It was in these circumstances that the above dispute between the parties was referred to the decision of the two arbitrators appointed by the parties namely Mr. Muhammad Asim Faruqi and Mr. Zafar Hussain, Advocates of this Court. The arbitrators by award dated 12th August 1959, gave the following finding: --
"(1) the Government was not justified in canceling the contract vide their letter No. Misc. 42773/W/56/679, Government of Pakistan, Department of Supply and Development, Karachi dated 10‑11‑1958 and the said cancellation was illegal;
(2) the appellants are entitled to recover Rs. 4,95,250 (rupees four lakh ninety five thousand two hundred fifty) by way of damages from the Government."
On 31st October 1959 the award was filed in Court and notices were issued to the parties. On 18th December 1959 the Department challenged the validity of the award by filing objections under sections 33 and 19 of the Arbitration Act. Amongst other grounds the Department alleged that the arbitrators had committed an error of law apparent on the face of the record and the award was liable to be set aside for that reason. This plea was accepted by the learned Single Judge by judgment dated 15th August 1961. The appellant firm have challenged it in this Letters Patent Appeal.
7. The main contention of the appellants is that the award could not be set aside on the ground of an alleged error of law apparent on the face of the record. Mr. S. M. Sohail, learned counsel appearing for the appellants contended that in law the arbitrators are sole Judges of facts and law and even if they had committed any error of law or taken an erroneous view of the dispute before them it is not open to a Court of law to interfere with such findings. The learned counsel further contended that in, the present case the error of law found on the face of the record is in respect of a specific question of law namely the interpretation of the terms of the agreement in dispute, referred to the arbitrators and therefore, it was not open to the learned Single Judge to set aside the award on that ground. It may be stated that had this been the position the contention of the learned counsel would have been fatal to the respondent's case. It is now well established rule in arbitration matters that in cases where question of interpretation of certain clauses in an agreement between the parties is referred to an arbitrator, such award being purely on a question of law, it is not open to any one of the parties to attack the award on the ground that the arbitrator had mis conducted the proceedings. However, in law there is a settled distinction between the decision of an arbitrator upon a pure question of law and the decision of an arbitrator upon the dispute between the parties, which rests incidentally upon the decision on a question of law. In the former case, the parties having elected to accept the decision of the arbitrator on the question of law, it would not be open to them to attack the decision on the ground that the decision was wrong while in the latter case, it would be open to them to attack the finding of the arbitrator if an error of law was apparent on the face of the record, which formed the basis of the finding of the arbitrator.
8. In support of their respective contention both the parties have relied on the same case‑law on the point under consideration. Both Mr. Sohail and Mr. Noorul Arfin have relied on the decisions in Government of Kelantan v. Duff Development Company Ltd. (1923 A C 395), In re: King and Duveen ((1913) 2 K B 32), F. R. Absalom Ltd. v. Great Western (London) Garden Village Society Limited (1933 A C 592) and Durga Prosad Chamria v. Sewkishendas Bhattar (A I R 1949 P C 334). Mr. Noorul Arfin has further relied on a decision of the English Courts in Barton and another v. Blackburn and another ((1934) 150 I. I R 327). It is not necessary discuss in detail the view taken in the above mentioned decisions. The basic authority on which these decisions are based is a decision of Williams, J., in the case of Hodgkinson v. Fernie(3 C N N S 189). In that case the learned Judge has discussed the law on the subject fully and observed as under:‑---
"The law has for many years been settled, and remains so at this day, that, where a cause or matters in difference are referred to an arbitrator a lawyer or a layman, he is constituted the sole and final Judge of all questions both of law and of fact . . . . . The only exceptions to that rule are cases where the award is the result of corruption or fraud, and one other, which though it is to be regretted, is now, I think firmly established viz., where the question of law necessarily arises on the face of the award or upon some paper accompanying and forming part of the award. Though the propriety of this letter may very well be doubted, I think it may be considered as establised."
In Champsey Bhara Company v. The Jivraj Ballo Spinning and Weaving Co. Ltd. (AIR1923PC66), the Judicial Committee accepted the above as correct statement of law on the subject. In this connection their Lordships observed at page 69 of the report as under:‑
"An error in law on the face of the award means, that 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."
The law on this point was further discussed in two other important cases, namely Government of Kelantan v. Duff Development Company Ltd. and F. R. Absalom Ltd. v. Great Western (London) Garden Village Society Ltd. In both the decisions it was held that if a question of law is specifically referred and it is evident that the parties desire to have a decision from the arbitrator about that rather than one from the Court, then the Courts will not interfere. However, in cases where the question of law is incidentally material in order to decide the question actually referred to the arbitrators it is open to the Court to set aside the award if an error of law is found patent on the face of the record, In Durga Prasad Chamria v. Sewkishendas Bhattar the Privy Council applied the above English view to the Indian cases and upheld the award on the ground that the error of law was committed on points of law which were specifically referred to the arbitrator. In this connection their Lordships concluded:‑--
"and, if this is so, it would be contrary to well‑established principles such as are laid down in re: King and Duveen (1913) 2 K B 32 (82 L J K B 733) and F. R. Absalom Ltd. v. Great Western (London) Garden Village Society 1933 A C 592: 102 L J K B 648, for a Court of law to interfere with award even if the Court itself would have taken a different view of either of the points of law had they been before it."
In Pakistan this question was considered in A. Z. Company v. S. Maula Bukhsh Muhammad Bashir (PLD1965SC505). In this connection the Supreme Court observed as under:‑-
"What the expression error on the face of the award means has been thus stated by the Privy Council in the well‑known case of Champesy Bhara and Company v. Jivraj Ballo Spinning and Weaving Company Limited 50 I A 324:‑--
An error in law on the face of the award means in their Lordships' view, that you can find in the award or a document actually incorporated thereto, as for instance, a note appended by the arbitrator stating reasons for his judgment to the same legal proposition which is the basis of the award and which you can then say is erroneous.'
The above has been accepted as a general rule since the decision in the case of Hodgkinson v. Fernie 1923 A C 395. Later an "exception was engrafted on this rule to the effect that when a specific point of law is referred to arbitrator the award cannot be set aside if the arbitrator wrongly decides the point of law. See Government of Kelantan v. Duff Development Company (1857) 3 C B (N S) 189; Absalom Limited v. General Western (London) Garden Village Co. 1933 A C 592."
9. In the present case too the learned counsel for the parties did not dispute that the real question for consideration is whether a question of law was specifically referred to they arbitrators or it merely arose in the course of proceedings.1 Thus what is to be examined is whether what was referred to the arbitrators was the general question, whether involving of fact or law or only some specific question of law in express terms as a separate question was submitted. In other words, whether there was a reference in which the questions of construction arose as being material to the decision of the matter which has been referred to arbitration or a reference in which a specific question of law was referred to the decision of the arbitrators as the sole tribunal. Before we consider the contention of the parties on merits, it will be convenient here to mention that this is not one of those cases in which the arbitrators have not given any reason on the findings reached by them. The learned arbitrators have at length discussed the dispute between the parties and had also given reasons in support of the award. It is to be noticed that in the award the learned arbitrators have noted that the following two points emerged for determination:
(a) Whether the Government was justified in canceling the contract
(b) If not to what damages, if any, is the contractor entitled
After stating the circumstances in which the contract was cancelled the arbitrators had further observed that the liability or otherwise of the cancellation of the contract depended in the context of the case on the answers to the following two questions:‑
(i) Whether the poles could be rejected by Government on the score of an objection as to treatment and
(ii) Whether according to the terms of contract, treatment of poles by creosote "forced in under pressure" was compulsory
In rejecting the claim of the Department the arbitrators made the following observations:‑--
"Inasmuch as the method of treatment is provided in clause 1 and not in clause 2 it follows that poles could not be rejected on the score of an objection as to the method of treatment. That being so, the plea of the Government that it was entitled to reject poles for want of pressure treatment, and therefore to cancel contract, is devoid of force and is not tenable."
They further observed:‑--
... . . . . it was not open to the Government to read in the A/T that only the pressure method of treatment, to the exclusion of the other approved method, was prescribed. Such a construction will be doing violence to the plain language used in A/T. It may be said that the contractor should have got the other approved method' clarified before putting in the quotations. This point does not create any complications as the contractor did make the enquiry during the subsistence of the contract. Had the Government suggested the other approved method of treatment at any time during the subsistence of the contract and had the contractor failed to comply the case would have been quite different and the responsibility could be pinned on the contractor."
The learned Judge has held that these conclusions which formed the basis of the award were erroneous on their face and the award, was liable to be set aside for that reason.
10. Mr. Sohail's grievance is that the above observation was made in respect of the specific questions of law referred to the arbitrators and there is no justification to set aside the award on the ground that the arbitrators have taken an erroneous view in construing the terms of the contract. He contended that the question of interpretation of the contract was specifically referred to the arbitrators and even if the decision of the arbitrators is found to be wrong on that point the learned Judge was not competent to set aside the award on that ground. However, the learned counsel was unable to refer us to any document on the record to show that the parties had specifically referred the question of interpretation of the contract in dispute to the arbitrators. Mr. Sohail referred us to the notice, referred to above but there is nothing in it to show that any such specific question was intended to be referred to the arbitrators by the parties. In the award itself the learned arbitrators have not stated that this question was specifically referred to them for their decision. On the other hand, we find that at the outset the arbitrators had framed two general issues and while considering them had further noted two subsidiary points and it is in that context that the question of the interpretation of the contract and other points are discussed.
11. Mr. Sohail finding himself in this difficulty contended that even if the dispute is referred in general terms to the arbitrators and in such case certain specific questions of law arise for their determination it should be presumed that specific questions of law were referred to the arbitrators. In support of his contention the learned counsel relied on the decision of the Privy Council in Durga Prosad Chamria v. Sewkishendas Bhattar. In that case their Lordships observed that the reference in it was of such a nature that the arbitrators may be treated as having been appointed by the parties to decide amongst 'others some specific questions of law which he bad been said to have decided wrongly. That was a case in which a suit for declaration as to the shares of the plaintiff in the partnership business and its dissolution and winding up was claimed. Panckridge, J., had settled certain issues in the action that was then pending. Out of them two issues were as under:
"(a) Is the agreement dated 16tb November 1916 relating to the alleged family settlement valid or admissible in evidence
(b) Is the plaintiff's claim or any portion thereof barred by limitation "
After these issues, had been settled the parties agreed to refer to arbitration the outstanding matters in the suit. In this background the Privy Council was satisfied that the two points of law as to which it was said that the arbitrator's error vitiated the award were specifically referred to him to decide. In the present case no such inference can be made. In the notice itself the appellant never asked the decision of the arbitrators on any question of law. The only dispute that he raised was that the Government was not justified in canceling his contract and the Government having committed the default was bound to compensate him in damages. It was, therefore, incidentally that the question of the interpretation of contract which was material for the decision of the case arose before the arbitrators. It is not possible to hold that in the present case that the appellant firm wanted to refer any specific question of law to the arbitrators or that any such question was referred for their decision. It is one of those cases in which the question of construction of the term of the contract arose incidentally for the decision of the dispute referred to them. It seems to us that simply because the question of interpretation of the relevant clause of the contract was incidentally referred in the pleadings by the parties that would not clothe the arbitrators with the exclusive jurisdiction to decide the question of law involved in it.
12. In the present case the dispute raised in a number of letters written by the appellant to the Department culminated in the notice dated 7th February 1959, calling upon the Department to refer the dispute to arbitration in terms of clause 21 of P. S. 35. In this notice the claim of the appellant was that the Department had cancelled the contract without justification and they were liable to pay damages to them. This was the dispute between the parties which was referred to the arbitrators. In the arbitration proceedings both the parties had to refer incidentally to the relevant clause in the contract to support their plea. In our view that would not lead to the conclusion that by doing so any specific question of law was referred to them. In this connection it will be useful to reproduce the observations of Lord Wright in F. R. Absalom Ltd. v. Great Western (London) Garden Village Society which are as follows:‑
"There is here no submission of any specific question of law as such and as a specific question of law; no doubt incidentally, and indeed necessary the arbitrator will have to decide some questions on the construction of the building contract, but the two matters submitted are both composite questions of law and fact; there is no express submission of the true effect of the contract on the basis of undisputed facts as in the Kelantan case 1923 A C 395 or as a separate and distinct matter on facts to be separately assumed or found, as in re King and Duveen (1913) 2KB32.
The arbitrator was not being asked simply and specifically to decide, upon some agreed or assumed basis of fact, the true interpretation of either clause 26 or clause 30 of the conditions or of both together; he was being required to make an award on the two matters submitted on whatever questions of fact and law might emerge.."
In that case clause 32 of the contract was as under:‑
"Provided always that in case any dispute or difference shall arise between the employer or the architect on his behalf and the contractor either during the progress of the works or after the determination, abandonment, or breach of the contract, as to the construction of the contract or as to any matter or thing arising there under (except as to the matters left to the sole discretion of the architect under clauses 4, 9, 16 and 19 and the exercise by him under clause 18 of the right to have any work opened up), or as to the withholding by the architect of any certificate to which the contractor may claim to be entitled, then either party shall forthwith give to the other notice of such dispute or difference, and such dispute or difference shall be and is hereby referred to the arbitration and final decision of a person to be appointed on the request of either party by the President for the time being of the Royal Institute of British Architects, and the award of such arbitrator shall be final and binding on the parties."
The arbitrator, therefore, found himself competent to construe clause 26 and clause 30 of that contract. In spite of this the house of Lords held that in the absence of any specific reference about the interpretation of the contract it was open to the Courts to consider whether the finding of the arbitrator on that point was good or bad in law. In this connection Lord Russell of Killowen observed at page 610 of the report as under:--
"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 power revise the last certificate issued.
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."
This is exactly the situation here. In the present case also the general issue before the arbitrators was whether the Department had cancelled the contract on valid grounds and whether the Government was liable to pay damages for wrongfully terminating the contract. In our opinion, if for deciding these questions the construction of the terms of the contract in dispute became necessary for the decision of the case, it was not enough to confer on the arbitrators the exclusive jurisdiction to decide the point of law arising out of it. In that view of the matter we are clearly of the view that the learned Single Judge was fully justified in holding that it was open to the Court to consider the validity of the award on the reasoning advanced by the arbitrators in the award.
13. Finally, it was contended by Mr. S. M. Sohail that the view of the learned Judge that the arbitrators had committed an error of law is not correct. In this connection it will be noticed that the arbitrators had held that inasmuch as the method of treatment is provided in clause 1 and not in clause 2; it followed that poles could not be rejected on the score of an objection as to the method of treatment mentioned in clause 1 of the specification. Mr. Sohail contended that the arbitrators were justified in coming to this conclusion on the interpretation of the relevant clauses in the contract, This contention has no force. The learned counsel failed to note that in the specification laid down in the contract it is specifically provided in clause 1 that the "Sundri Wood Poles" required to be supplied were to be treated by "creosote forced in under pressure" or "by any other approved method". Clause 2 deals with the general requirements and clause 3 with causes of rejection. In the last mentioned clause it is clearly mentioned that in case the poles failed to comply with the requirements of clause 2 they would be rejected. But that did not mean that the poles referred to in clause 2 were other than those mentioned in clause 1, which deals with specification. It cannot be doubted that if the poles referred to in clause 2 were not of the description specified in clause 1 they were liable to be rejected under clause 3. The arbitrators' interpretation on this point is erroneous and this was sufficient ground for setting aside the award. In that view of the matter it is not necessary for us to discuss the other alleged errors committed by the arbitrators.
14. On the facts of the present case we are satisfied that the learned Single Judge was fully justified in setting aside the award on the ground that the arbitrators have committed an error of law and in directing the parties to have recourse to further arbitration. In case the appellant is not inclined to refer the dispute in question to further arbitration, it will be open to him to treat the arbitration clause as revoked and establish his claim in a competent Court of civil jurisdiction. In the result, subject to the above remarks, the appeal is dismissed with costs.
K.B.A. Appeal dismissed.
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