1980 PLP 470 (CLC)

Less: Duty and clearance charges on 3rd consignment paid by the K. D. A. @ Duty 12 1/2% plus clearance 1/2% (C.

1. F. value S 286,205.65) $ 37,206.73 Duty and clearance on 4th consignment, if to be paid by K. D. A. : C.

1. F. value Sh. 14,796.15 @ Duty 121 % plus clearance 1/2 $ 1,923.50 1,86,259.90

Total : $ 39,130.23. 6,82,882.88 Less amount received on 21-5-1964 and 10-8-1964. 3,00,000.00

3,82,882.88 The respondents have made the following claims;-- Wrongly recovered. 3,00,000.00 Customs duty. 1,73,893.00 Extra duty. 28,258.00 K. P. T. wharfage. 1,992.78 K. P. T. cranning. 2,04,242.00 Agency commission. 474.00 Damages for the breach of contract committed by the respondents and the consequent delay of 2 years in the commencement of installation and erection work. 10,03,956.00

17, 54,136.76

I have clearly dealt with the counter claim of the respondents and maintain that there was no wilful breach of the contract by them, but they were rather prevented from discharging their responsibilities of non-payment of funds due to them. I have also shown that the delay in the erection of machinery was primarily due to the delay in completion of the civil engineering works. In view of these reasons I do not admit the claim of any penalty or damages against the claimants by respondents. As regards the normal charges of customs duty, wharfage, etc., these had to be paid by the respondents in any case. As regards the claim made by the claimants, I hold that as a result of acts of omission and commission detailed in the preceding paragraphs, of the respondents, the claimants suffered loss of business, and are entitled to some compensation. I further hold that this compensation should be linked with the local currency expenditure from which the claimants expected to make reasonable profit after paying for their cost of maintaining an office and other overheads. The claimants bad suggested for local expenditure the equivalent in local currency of $ 119,569.82. Their principals were willing to allow the equivalent of $ 92,

000. Taking human nature into consideration, the former may be an over-estimate, while the latter may be an under estimate. Probably the correct figures lies somewhere in-between, and I fix it at the rupee equivalent of $ 100,

000. On this total amount, the claimants could reasonably expect to make a profit of 25% which is not much, considering that they will have to give about half of it to Government in the form of taxes. I, therefore, decide that the claimants be given a compensation of the rupee equivalent of $ 25,000 which at the approximate rate of Rs. 5 to a dollar works out to about Rs. 1,25,

000. The claimants have already paid Rs. 20,186.25 on account of customs duty on the first two consign ments. This amount, together with the compensation of Rs. 1,25,000 should be deducted from the Rs. 3,00,000 received by the claimants from the respondents, and the balance of Rs. 1,56,814 should be returned to the respondents. These approximate figures have been worked out at the rate of Rs. 5 to a U. S. dollar, but if the respondents so desire the exact figures may be worked at the current official rate. I further decide that both sides should bear their own legal costs. Finally, both sides should pay me in equal half my fee as sole Arbitrator which had been fixed at Rs. 5,

000. In addition they should pay in equal half Rs. 500 to my Stenographer for the work done by him and the actual cost of stamp papers in giving this award." From what has been stated, it is clear that the basis of the award is the amendment of the contract, said to have been made by letter dated l8th February, 1964, as well as the entitlement of the Claimants for compensation on account of loss of business and the expectation of making reasonable profit out of the bargain. The Government filed objections raising various pleas. It was asserted that the Claimants, in order to accommodate themselves, asked for making changes in the mode of payment and to this the Government showed all consideration but the Principals declined to accede to these changes. In the meantime the machinery shipped by the Principals arrived and the Claimants wrongfully did not pay the custom duty and therefore, the contract with the Claimants had to be terminated. Furthermore, the claimants wrongfully recovered Rs. 7,50,190.76 in respect of custom duty, wharfage, demurrage, agency commission, etc. although these charges had to be borne by the Claimants as the same had been included in the trunk-key value. Claimants had also caused a loss of Rs. 10,03,946 to Government by delayed supplies. It was also pleaded that the arbitrator misconducted himself and the proceed ings, that there were errors apparent on the face of the award, that the award was prejudicial, arbitrary and biased, that the arbitrator assumed role of Claimants and tendered unwarranted advice, that the award was perverse and introduced matters beyond the terms of the contract and reference, that in no case the law permitted any amount over and above the contracted price but the arbitrator awarded custom duty and clearance charges, etc. to the .Claimants although admittedly the full amount was paid to the Claimants, that it was none of the concern of the Government to secure those amounts from the Principal to the Claimant, that the claimants were liable to refund the excess amount -received by them, that the arbitrator tried to substitute his own impression and notions in place of the express provisions of the contract and the award was even otherwise invalid and illegal. Finally, it was prayed that the award be set aside. The parties have not examined any witness but have confined themselves to the arbitration proceedings which have been admitted in evidence. At the time of arguments, the learned counsel who appeared on behalf of the Government, summarised the grounds of attack against the award as under :

"(1) Amendment of clause 14 of the contract was not approved by the Principals, and, therefore, could not form the basis of the award. (2) Award was inconsistent with clause 15 of the contract. (3) The amount of Rs. 20,186.25 on account of custom duty was illegally allowed in contravention of clause 15. (4) Award was beyond the scope of reference. (5) Arbitrator made certain unwarranted suggestions which affected his decision." On the other hand it was contended by the learned counsel for the claimants that neither there was any error of law apparent on the face of the award nor the Court could interfere with the finding of arbitrator, even if, he had committed any error in law or taken an erroneous view of the evidence as in law he was sole judge of the facts and law. Before dealing with the grounds of attack put forth on behalf of the Government, I would like to dispose of the contentions raised on behalf of the claimants. There are numerous decisions defining the limits of the jurisdiction and scope of the powers of the Courts to interfere with the decision of the arbitrators and the errors in law committed by him. I will, however, confine myself to the principle laid down in the case of Sheikh Muhammad Sadiq v. Ministry of Industries (P L D 1966 Kar. 412). The pertinent observation reads as under; "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 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 findings of the arbitrator." In that case, as in the present case, the dispute was referred to arbitration in terms of clause 21, P. S. 35 and the question of the interpretation of certain clauses of the contract arose, The relevant expression in clause 21, P. S. 35 reads as under ;

"Any question of dispute arising under these conditions or any special condition or in connection with the contract." It is clear that the expression is an general terms and, therefore, it cannot be said that any question of law or interpretation of any clause in contract was specifically referred to the arbitrator for his decision but the necessity of disputed questions and the interpretation of the clauses of the contract arose incidentally during the course of the arbitration proceedings. Conse quently, in view of the principle laid down in the aforesaid authority, if the decision of the arbitrator is wrong on the face of the award, it is open to review. The meaning of the expression "error" en the face of award has been thus stated by the Privy Council in the case of Champesy Bhara & Company v. Jivraj Ballo Spinning & Weaving Company (50 IA 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 judgments to some legal position which is the basis of the award and which you can say is erroneous." This rule is, however, subject to exception that when a specific point of law is referred to an arbitrator, the award cannot be set aside if the arbitrator wrongfully decides the point of law. In the present case the arbitrator had given detailed reasons and referred to the correspondence exchange between the parties and, therefore, the same can be looked into to assess, whether his findings are supported by evidence or he has ignored some important evidence which has materially affected his decision. In the latter case his decision cannot be upheld. In this connection I may also refer to the observation made in the case of Amin Baling Company v. Aminpur Union Co-operation Multipurpose Society (P L D 1961 Dacca 103), to the effect that the arbitrators, have got to determine the disputed questions judicially and they should, therefore, be well advised to go into the evidence when the nature of the evidence requires it and if they decide those disputed questions without going into evidence they will be guilty of legal misconduct and dereliction of duty. It was said that the disputed claim was agitated in the pleadings and, therefore, it gave him an authority to decide and his decision could not be assailed. There is no force in this contention. The reply to this may be provided by the following observation made by Lord Russet of Killowen, as reproduced in P L D 1966 Kar. 412; "No specific question of construction or of law was submitted. The parties bad, 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 matters which had been submitted. This question of law the arbitrator had decided ; but if upon face of the award he had decided it wrongly his decision is in my opinion open to review by the Court." Thus, although an arbitrator is competent construe a clause of the contract but in the absence of any specific reference about the interpretation of the contract it is open to the Courts to consider whether the finding of the arbitrator on that point was good or bad in law. The statement of claim filed before the arbitrator, by itself, is not enough to oust the jurisdiction of the Court to subject the finding of the arbitrator to scrutiny. This brings me to the grounds of attack pressed before me during the course of arguments. The first ground relates to clause 14 of the Contract which has already been reproduced. The question that arises for considera tion is whether the clause ran be treated to have been amended as was held by the Arbitrator on the basis of the letter dated 18-2-1964. It is an admitted position that the proposal for the bifurcation of the amount payable in foreign currency to the Principals and the amount needed in Pakistani currency tomcat the local charges made by the claimants and accepted by the Government was not approved by the Principals out they consulted to the amount of $ 92,000 to defray the local expenses. Despite this, the Arbitrator allowed the benefit to the Claimants ay proposed by them. In this, he clearly erred in law. The original contract could not be amended without 'the consent of the Principals who were the beneficiaries under the contract, as was even conceded by the Arbitrator. The claimants were merely acting as agents and admittedly they had received no authority beyond what was authorized by the Principals, to get the agreement amended. Indeed the Government had accepted the proposal but it had lost its legal effect when the Principals withheld their approval. Thus, the view entertained by the Arbitrators is not sustainable in law. The dispute had to be decided in terms of the original clause as it' stood its the agreement are amended to the extent agreed upon by the Principals. In order to meet this it was urged by the learned counsel for the Chairman that the finding of the Arbitrator was based on the appreciation of evidence and could riot be assailed in these proceedings. I find no force in this contention. Recalling the meaning of the expression, "error on the face of award", stated by the Privy Council, the reasons given by the Arbitrator can be locked into. The Arbitrator had given detailed reasons by referring to the correspondence exchanged between the parties and forming basis of the claim and the finding thereto. The original contract, according to the Arbitrator, was amended by certain letters. In, my view when there is correspondence whereby the original contract is sought to be amended, the entire correspondence exchanged between the parties interested in the contract must be deemed to have been incorporated in the contract which, then, has to be incorporated accordingly. It, therefore, follows that the arbitrator was not justified to base his decision on a sole letter of acceptance by the Government but he had to consider the entire correspondence, including the letters addressed by the Principals. It is an attempt in futility to say that the Arbitrator was competent to rely upon that letter to the exclusion of the fact of the refusal communicated by the Principals. By ignoring the material correspondence, the Arbitrator did not consider the implication of the refusal of the Principals to agree to the proposal and he simply based his decision on the letter which could not be effectual unless the Principals had accepted the variation in the terms of the original contract agreed upon. It also cannot be said that this question was specifically referred to the Arbitrator for his decision. The necessity to determine this arose during arbitration proceed ings. Taking up the second and third grounds relating to the award being inconsistent with clause 15(d) of the Contract and allowing the claim for Rs. 20,186:25 paid by the claimants as custom duty on the first two consign ments, it was held by the Arbitrator that it was the duty of the Government to make available to the claimants 90% of local currency expenses on presentation of their bills supported by the shipping documents to enable them to defray the expenses on account of payment of custom duty, sales tax etc. without having to strain their financial resources. This finding is again based on the letter dated 18-2-1964 which, as I have already shown, has no effect. Clause 15(d) makes it clear that the custom duty of 12 % was included in turn-key price, providing further that in case of reduction in custom duty, the benefit of it had to go to the purchase account and in case of excess, it had to be borne by the K. D. A. Evidently it was not the responsibility of the Government to separately pay any money for the purpose of custom duty, sales tax etc. Consequently, the finding of the Arbitrator is inconsistent with clause 15(d). Indeed the custom duty etc. had to be paid in local currency but it was for the Principals or the claimants, acting as their agent, to make arrangement to meet those expenses. Since this could not be otherwise possible the Principal had agreed to the amendment of the original Contract to the extent of $ 92,

000. Even the Arbitrator had conceded in the award while stating the reasons that the Principals were the chief beneficiaries of the Letters of Credit and the proposed amendment was without their approval. He had also conceded that the irrevokable Letters of Credit could not be revoked or amended without the consent of the Principals. In spite of this, he proceeded to allow the benefit to the Claimants. Besides, the amount of Rs. 20,186.25 was paid by the claimants on the first two consignments, which, it appears, had arrived before the proposed bifurcation and, therefore, the Government was under no legal or contractual obligation to reimburse them but this was to be borne by the Principals and the Claimants could only recover from them, as they had made the payment on their behalf and not on behalf of the Government. Moreover, on the third consignment, which was 'not cleared by the Claimants, nearly Rs. 4 lacs had been paid by the K. D. A. to secure the release of the consignment. In this amount a sum of more than Rs. 2 lacs is included as demurrage. Even if the demurrage is excluded yet more than 2 lacs which had to be paid by the Principals were paid by the Government. Another sum of s. 3 lacs was received by the Claimants as has been admitted by them as well as found by the Arbitrator. According to the acceptance, communicated by the Principals, a sum of $ 92,000 was to be set apart for the purpose of custom duty, etc. but it appears that by that time $ 89,000 had been left to be paid while the remaining sum had already been withdrawn by the Principals on the basis of the Letters of Credit. It may also be noted that the Principals were not prepared to concede anything by way of profit or commission to the Claimants as is clear from the reasons given by the Arbitrator and they wanted the variation-only for the purpose of custom duty and such other charges. Taking up the fourth ground that the award is beyond the scope of reference, it is also not without force. As already pointed out, the arbitration had taken place in terms of clause 21, P. S. 35, which is in general terms. The dispute had to be confined to the terms and conditions of the contract or anything connected therewith but, in the present case, the arbitrator allowed the claim, not arising out of any such contract but on different considerations. This is clear from the reasons given by the arbitrator, particularly the concluding portion of the award as has been reproduced. He awarded a sum of Rs. 1,25,000 as according to him the claimants had suffered loss of business and were entitled to some compensation and profit. In this connection the following observation made in the case of Trawardas v. Union of India (AIR1955SC468) may be noted; "An arbitrator is not a conciliator and cannot ignore the law or misapply it in order to do what he thinks is just and reasonable. He is a tribunal selected by the parties to decide their disputes according to law and so is bound to follow and apply the law, and if he does not, he can be set right by the Court provided his error appears on the face of the award. The single exception to this is when the parties choose specifically to refer a question of law as a separate and distinct matter. If no specific, question of law is referred either by agreement or by compulsion, the decision of the arbitrator on that as not final however much it may be within his jurisdiction and indeed essential for him to decide the question incidentally." No dispute could be said to have been referred to the arbitrator, with regard to the claim for profit or damages arising from the alleged lose of business sustained by the claimant due to non-fulfilment of the terms of the letter dated 18-2-1964 by the Government as a result of the refusal of the Principals to approve the proposal. The Government was in no way liable for payment of anything by way of profit or compensation to the claimants. The questions relating to agency or remuneration thereunder was the sole concern of the Principals and the claimants inter se anti were to be regulated according to the terms agreed between them. This was also the position taken up by the Principals and repeatedly stressed in their letters. So the cause of action, if any, was against the Principals and not against the Government. There is nothing in the original contract that any commission was settled or it was payable by Government. It is, therefore, difficult to assume that a cause of action based on breach of contract and a totally dissimilar and altogether different cause of action arising out of the dispute between the Principals and Claimants could be included in the reference under the arbitration clause contained in the contract, which clause is confined to breaches of contract only. It may be said that the scope of the arbitration or reference could be enlarged by agreement between the parties or by their conduct. But in the present case there is no such agreement nor there His any evidence of conduct. Mere averment in the pleadings is not enough as observed by Lord Russel of Killowen. This was further elaborated in the aforesaid decision of the Supreme Court of India as under :-- "A reference requires the assent of both sides. If one side is not prepared to submit a given matter to arbitration when there is an agreement between them that it should be referred, then recourse must be had to the Court under section 20 of the Act and the recalcitrant party can then be compelled to submit the matter under subsection (4). In the absence of either, agreement by both sides about the terms of reference, or any order of the Court under section 20(4) compelling a reference, the arbitrator is not vested with the necessary exclusive jurisdiction. Therefore, when a question of law is the point at issue, unless both sides specially 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 agreements about a point of law in the course of the proceedings is not enough. 1933 A C 592, Rel. on. Simply because the matter was referred to incidentally in the pleadings and arguments 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." Plainly, the award of compensation or profit by the arbitrator was beyond the scope of the reference and, therefore, there was initial want of jurisdiction. In this view of the matter, the arbitrator illegally enlarged the scope of the arbitration and awarded the damages. Consequently, the award is bad and is liable to be struck off as it will be covered by the expression, "otherwise invalid" in section 30(c) of the Arbitration Act. Yet there is another error. There has to be legal basis for the award of damages but it is lacking in the present case. No evidence was led as to the amount of commission payable to the claimants or to prove the extent of loss suffered. In the absence of evidence no such amount could be allowed. The burden of proof was upon the" claimants and they failed to establish that the; could have earned the commission or profit to the extent awarded by the arbitrator. On the contrary, it is an admitted position that K. D. A. paid far in excess of what was payable as custom duty and such other charges. It was stated in the aforesaid Indian decision that facts must `be based either on evidence or on admission; they cannot be found to exist frog a mere contention by one side specially when they are expressly denied by the other. It was also indicated in the case of Nana Kwaku v. Nana Sir' Afori Atta (AIR 1933PC46) that if the arbitrator has set out at great length the evidence, the party challenging the award can show that there is no evidence at all on which the arbitrator could have come to his conclusion. Thus on this account also the error is apparent on the face of award and therefore, not sustainable. The fifth ground is 'that the arbitrator had misconducted himself and made certain unwarranted suggestions which affected his decisions. In this respect the comments of the arbitrator have already been reproduced at page 12 of this judgment. He had suggested that the Government ought to have asked the principals to send their representative to Karachi to resolve the dispute, and since this step was not taken the Government bad to be blamed for it. I am unable to understand the fallacy of this argument. The dispute was between the claimant and their principals and it was for the claimant to have taken suitable steps and pursued the matter to resolve the dispute. The Government had done whatever they could as they had agreed to the proposals made by the Claimant but to this the principals did not agree. Nothing beyond this could be done by the Government. It is also evident from the reasons given by the arbitrator that this had greatly influenced him in making the award. In the circumstances, the conclusion is irresistible that the award suffers from serious infirmities and errors in law which are apparent on the face of it, so far it relates to the claim allowed to the claimants. I, therefore, uphold the objections and set aside the award relating to the deduction of the amount allowed to the claimants. The result will be that the claimants shall have to return the entire amount of Rs. 3 lacs to the Government, With regard to the fees of the arbitrator I sanction Rs. 2,000 in addition to Rs. 200 for the stenographer and the actual cost of the stamp paper and this amount be contributed equally by the parties. Each party to bear its own costs in this suit. S. G. D. Order accordingly.