w w w . L a w y e r S e r v i c e s . i n



B. K. D. Alloy P. Ltd v/s Pavi Electrical Industries P. Ltd


Company & Directors' Information:- R K ELECTRICAL INDUSTRIES (INDIA) PRIVATE LIMITED [Active] CIN = U99999DL1980PTC010323

Company & Directors' Information:- K T I ELECTRICAL INDUSTRIES PRIVATE LIMITED [Strike Off] CIN = U31200MH1998PTC114506

Company & Directors' Information:- A B C ELECTRICAL INDUSTRIES PVT LTD [Strike Off] CIN = U31300MP1988PTC004676

Company & Directors' Information:- PAVI ELECTRICAL INDUSTRIES PVT LTD [Active] CIN = U31102WB1973PTC028726

Company & Directors' Information:- M. P. ALLOY PRIVATE LIMITED [Strike Off] CIN = U28111UP1995PTC018405

Company & Directors' Information:- V A ELECTRICAL INDUSTRIES PVT LTD [Strike Off] CIN = U31901WB1981PTC034385

Company & Directors' Information:- B D K ALLOY PRIVATE LIMITED [Amalgamated] CIN = U27106KA1973PTC002355

Company & Directors' Information:- ALLOY INDUSTRIES PVT LTD [Strike Off] CIN = U51420WB1957PTC023457

    M.F.A.Appeal No.835 of 1980

    Decided On, 22 August 1983

    At, High Court of Karnataka

    By, THE HONOURABLE MR. JUSTICE G.N. SABHAHIT
    By, & THE HONOURABLE MR. JUSTICE R.S. MAHENDRA

    For the Appearing Parties: S.S. Ujjannavar, V. Tarkaram, Advocates.



Judgment Text

Sabhahit, J.


(1) THESE appeals by the plaintiff are directed against the judgment and order dated 4-2-1980, passed by the Prl, Civil Judge, Hubli, in Arbn, Suit No. 3 of 1978, on his file, setting aside the award dt, 5-6 1978 passed by V. N. Apte, Arbitrator on allowing I. As. I to III.


(2) THE brief facts leading up to the present appeals are these :


(3) THE plaintiff placed an order with defendant No. 1 Company represented by defendant 2 by letter dated 8-7-1974 for manufacture of an electric Are Furnace and a cheque for Rs, 1,00,000 was remitted as advance payment to defendants. The order was formality accepted by the defendants by then letter dated 10-8-1974. But shortly thereafter there was short supply of electric energy and the future supply of electric energy became uncertain. Therefore the plaintiff by his letter dt. 24 8 1-74 requested the "defendants not to proceed further in processing the order. Defendants by their letter dt. 29-8 1974 assured the plaintiff that they would not take further steps in proceeding with the order further in view of the request made by the plaintiff. Finally the plaintiff by letters dt, 19 3 1975 and 1-4-1975 intimated the defendants that the order was cancelled. Defendants were further requested to return the advance amount of Rs, 1,00,000 given over to the defendants. After some correspondence and talks, defendants accepted the cancellation of the order and agreed to refund rs. 75,000 in four quarterly installments deducting Rs. 25 000 towards expenses incurred by them at various stages. Plaintiff agreed to repayment commencing from the end of April 1976. Since payments were not made, plaintiff called upon the defendants to make the payments. Defendants resisted. According to them the agreement Ext. P 9 was arrived at on the understanding that the furnace that was in the process of manufacture would be purchased by R. G, Foundry Forge Ltd. at the instance of the plaintiff. Hence dispute started.


(4) THE plaintiff got issued a notice to the defendants intimating them that proceedings would be initiated under S. 434 of the Companies Act if payments were not made. Thereupon, since defendants did not pay the amount as agreed, plaintiff filed Arbn. Suit No, 1 of 1977, before the Prl. Civil Judge, Hubli, praying for appointment of an Arbitrator to decide the dispute and pass an award. Accordingly Sri V. N. Apte was appointed as sole arbitrator by the Prl. Civil Judge, Hubli, by his order dt. 31-10-77. The Arbitrator issued registered notices to both the parties Intimating that the proceeding would be commenced in his residence on 20/3/1978. On that day C. L. Bakshi apaeared before the Arbitrator representing the defendants. He prayed for six weeks time to get an order of stay from the Prl. Civil Judge, Hubli. But the Arbitrator granted him only three weeks time since the other side opposed the grant of adjournment and the proceedings stood adjourned to 10 4 1978, either to bring stay order or to file counter-statement or to proceed with the case. On 10-4-1978 neither the defendants nor C. L. Bakshi, their representative, appeared nor was any communication received from the defendants for adjournment, The plaintiff pressed for the hearing of the matter and it was accordingly heard by the Arbitrator and award was passed on 5-6-1978. The award so passed was filed in Court and the defendants resisted the request made to pass a decree in terms of the award.


(5) ACCORDING to the defendants, they carried on business in Calcutta and they had the registered office also in Calcutta. Therefore, it was not possible for them to immediately apply to the Court and obtain stay. In the circumstances the first defendant sent a written statement to the Arbitrator by registered post. A copy of that written statement was also sent to the plaintiff. The registered letter was received by the plaintiff on 24 3 1978. But the one addressed to the Arbitrator was returned to the first defendant with an en. dorsement 'unclaimed'. According to the defendants the Arbitrator misconducted himself and the proceeding by not accepting the written statement sent to him by registered post; for, that gave rise to the presumption that the registered post was duly offered to the Arbitrator, Such action on the part of the Arbitrator was illegal and it amounted to flagrant violation of the principles of natural justice. Hence they submitted by I. As. instituted that the award should be set aside. They further contended that the Arbitrator had no jurisdiction since the original contract relied on by the plaintiff was frustrated and the agreement to arbitrate was no longer available. Hence on that ground also they contended that the award was vitiated. They also contended that the court had no jurisdiction to entertain the petition under S. 8 of the Arbitration Act and the award was not passed within the stipulated time, Besides, defendant 2 was not personally liable for the claim.


(6) THE Court marked by consent Exts. P-1 to r-15 and Exts. D-1 to D 4. Parties did not adduce oral evidence. Their argument were heard. The Court below framed the following issues as arising for its decision from the pleadings. 1. Whether the contract as per agreement Ext. P-3 became frustrated ? 2. Whether the- arbitration clause in ex. P-3 had extinguished ? 3. Whether the second agreement Ex. P 9 did attract the arbitration clause in the first agreement Ex. P 3 ? 4. Whether the Arbitrator had jurisdiction to arbitrate? 5. Whether principle of natural justice was violated by the Arbitrator ? 6. Whether there was legal misconduct on the part of Arbitrator ? 7 ). Whether defendant No. 2 can be made personally liable for any amount due to plaintiff? 8. Whether the contention of defendants about want of jurisdiction for arbitrator to resolve the dispute is barred by res judicata in view of the decision in AC 1/77? 9. Whether there is any delay in producing the Award, if so whether sufficient ground is made out by plaintiff to condone ? 10. Whether the award is valid ? 11. What order? the learned Civil Judge appreciating the case in the light of the arguments addressed before him, answered issues Nos. 1, 2, 5 and 6 in the affirmative and he answered issues Nos. 3, 4, 7, 8, 9 and 10 in the negative and in that view, he passed the impugned order as stated above. Aggrieved by the said judgment and order, the plaintiff has instituted the above appeals before this Court.


(7) THE learned counsel appearing for the appellant strenuously urged before us that the learned Civil Judge was not justified in coming to the conclusion that the original contract evidenced by Ext. P-3 was frustrated and as such the arbitration clause contained in Ext. P 3 perished. He further submitted that Ext. P 9 being in the nature of accord and satisfaction could not be described as a contract de novo and as such the arbitration clause in Ext. P 3 was alive and operative. In that view he submitted that the Arbitrator had jurisdiction to decide the dispute and the award should be passed into a decree. According to him there was no substance in the observation made by the Court below that principles of natural justice were violated and as such the Arbitrator misconducted himself and the proceeding. As against that the learned counsel appearing for the respondents-defendants argued supporting the judgment and order of the learned civil Judge. The points therefore that arise for our consideration in these appeals are : (1) Whether the learned Civil Judge was justified in holding that Ext. P-9 represented a new agreement and as such the arbitration clause contained in Ext. P-3 perished with the agreement ? (2) Whether the learned Civil Judge was justified in holding that the Arbitor had no jurisdiction to entertain and decide the dispute ? (3) Whether the learned Civil Judge was justified in holding that the Arbitrator committed breach of principles of natural justice and as such he misconducted himself and the proceeding ? and (4) Whether the award can be passed into a decree of the Court and whether the judgment and order of the lower court require interference?


(8) THE relevant facts fall within a brief compass and they are largely not in dispute. It is not in dispute that the plaintiff placed an order with the defendants to manufacture an electric furnace. Ext. P-1 dt. 7-7-1974 represents the minutes of the meeting held on that day between B. K,d. Alloy (P) Ltd. , Hubli and Pavi Electrical industries, Calcutta, to finalise the order for Electric Arc Furnace, Type: PDM/ 225/1250, of two tons capacity. Ext. P-1 contains the terms of the contract. Pursuant to Ext. P-1, a cheque for Rs. 1,00,000 was sent with a covering letter ext. P-2 dt. 8-7-1974 along with the enclosures. Then comes Ext. P-3 dated 10 8-1974 which accepts the order placed by the plaintiff. It states inter alia-"we refer to our letter No. 91 x 45052 dt. 24th July '74, under cover of which we forwarded you indemnity Bond and trust you would have received the same by now. We have now pleasure in confirming the order as under -. . . . . . . . ". Then follow the agreed terms. Under the terms there is a clause for arbitration which reads :"if at any time, any dispute of whatsoever nature arises, between you and us, you may give us a notice in writing of the existence of such dispute and the same may be referred to arbitration within the Hubli jurisdiction in accordance with the Arbitration Act". This letter Ext. P-3 has further Annexures I to III. Thereafter, the plaintiff on 24-8-1974 by his letter Ext. P-5 inter alia wrote to the second defendant-Company thus :"further to the power position, you will also agree that the recent ordinances issued by the government has further worsened the financial conditions prevailing in the country. I had proposed to make the Company a Public limited Company and raise sufficient funds required through public issue. Even this also has received a temporary set back. I, therefore, request you not to proceed further in processing the order already placed with you for furnace. . . . ". To this, the second defendant by Ext. P-6 dt. 29-8 1974 replied stating inter alia thus :"immediately after receipt of your order, we had taken up the entire planning in order to deliver the furnace within period committed. We have also ordered certain critical items involving longer delivery. While I do appreciate the circumstances explained by you, you would also appreciate of our having taken initial effective steps for implementation of this order. However, as suggested by you I am not taking any further steps other than what has already been taken. I hope, you will find the same in order. . . . . . . . ". Again in the last para of Ext. P-6. it is stated :"as stated above, I am not taking any further steps in processing the order till i hear from you. Please do advise me at an early date to enable us to proceed accordingly". Thereafter the plaintiff by Ext. P-7 dt. 19-3-1975 intimates the defendant finally thus :"since I have already taken policy decision to postpone the project itself, for some time to come, I have reluctantly decided to cancel the order placed with you for furnace. I, therefore, request you to make arrangements with your company to return the advance of Rs. 1 lakh which was paid along with the placement of the order". To this the second defendant-Company answered by Ext. P 9 dt. 17-11-1975 thus: "with reference to your above order, your Managing Director, Mr. Bharat K. Khimji had a discussion with undersigned this day, we hereby confirm to refund you Rs. 75,000 (Rupees Seventy five thousand only) in four quarterly instalment after deducting Rs. 25,000 (Rupees Twenty five thousand only) for the expenses incurred by us on various stages against advance of Rs. 1,00,000 (Rupees one lakh) paid by you against aforesaid order. The first instalment will start from end of April 1976".


(9) THUS it becomes clear that an order was placed with the defendant-Company for manufacturing the electric furnace as early as in the month of July 1974 and thereafter the defendant Company was intimated not to proceed with the processing of the electric furnace by Ext. P-5 dated 24-8-1974 and finally the plaintiff cancelled the order in March 1975 as per Ext. P-7. In the meanwhile, however, the defendants had already taken steps for the manufacture of the furnace and bad spent some money over it. The discussions over it between the plaintiff and defendants took place and they finalised as per ext. P-9 and the defendants agreed to refund Rs. 75,000 to the plaintiff in four quarterly instalments commencing from the end of April 1976. The plaintiff waited a till the end of April 1976, but the defendant Company did not remit the amount as assured. Accordingly, the plaintiff demanded payments and the defendant Company under Ext. P-11 dt. 4-11-1976 took its stand thus : "the facts are that your client placed an order for one 2. o/2. 5 Ton Electric arc Melting Furnace Type PDM-225/ 1250 valued at Rs. 8 lakhs and paid Rs. 1 lakh as an advance towards the price of the furnace. After the order had been placed and we have started work on the job, your client cancelled the order for the furnace and as such we were not under any obligation to refund an amount to your client. However, we agreed to refund only Rs. 75,000 in instalments on the tacit understanding, undertaking and assurances and agreement of your client that R. G. Foundry forge Ltd. , (R. G. Sales) shall take delivery of the Furnace on behalf of your client as ordered by your client. Your client is fully aware of the fact that r. G. Foundry Forge Ltd. , (R. G. Sales)has refused to take delivery of the Furnace and under these circumstances we are not liable or under any obligation to refund any amount to your client. Our commitment to refund the amount in instalment stands withdrawn and cancelled".


(10) THUS the dispute started and the simple question that arises for our consideration is whether this dispute is amenable for arbitration ? the learned counsel appearing for the respondents urged before us that the arbitration clause was incorporated in Ext. P-3, the first agreement and thereafter the second agreement Ext. P-9 came into existence. According to him that was an agreement which was in substitution of the earlier agreement Ext. P-3 and It represented a contract de novo, as such he submitted that the arbitration clause in ext. P-3 perished with Ext. P-3 and was no longer available to resolve any dispute under Ext. P 9. His other submission was that the first contract became void by frustration and as such the arbitration clause could not be invoked. As against that the learned counsel appearing for the appellant submitted that the contract dt. 17-11-1975 represented by Ext. P-9 was not in abrogation and in substitution of the first contract but at best it represented an accord and satisfaction of the first contract in view of the fact that the first contract was cancelled and repudiated by the plaintiff and as such he submitted that the arbitration clause in the original contract ext. P-3 was still available when the question in dispute was pertaining to the accord and satisfaction in view of the repudiation; he stoutly denied that the original contract become void by frustration.


(11) WE would refer first to the aspect of frustration. S. 56 of the Contract Act, 1872 speaks of agreement to do impossible acts and reads :"a contract to do an act which, after the contract is made, becomes impossible, or, by reason of some event which the promissory could not prevent, unlawful, becomes void when the act becomes impossible or unlawful. Where one person has promised to do something which he knew, or, with reasonable diligence, might have known, and which the promisee did not know, to be impossible or unlawful, such promisor must make compensation to such promisee for any loss which such promisee sustains through the non-performance of the promise". Thus it is clear that when the agreement to do an act becomes impossible or unlawful, S. 56 of the Contract Act is attracted. It is nobody's case that the act of manufacturing electric furnace became impossible due to any difficulty or due to any intervening factor. On the other band, as stated above, cancelled the order unilaterally. That being so, there is no question of frustration of contract on the facts of this case. It is a simple case of the plaintiff repudiating the contract unilateral. ally for his own convenience. That being so, there is no substance in the argument that the contract became void because of frustration. Even assuming that the contract failed because of frustration, it is obvious that (he contract became frustrated after a certain stage and it was not void ab initio. In such circumstances, it is settled law, that the clause for arbitration survives for acts that are already done or for damages of breach of contract. That is what the Supreme Court has ruled in cases more than one. In Damodar Valley Corpn. v. K. K. Kar (1), speaking on this aspect, the Supreme Court has observed in para 9 of the judgment thus : "we have adverted to these several aspects merely to show that contracts being consensual, the question whether the arbitration clause survives or perishes would depend upon the nature of the controversy and its effect upon the existence or survival of the contract Itself. Where the binding nature of the contract is not disputed, but a difference has arisen between the parties thereto as to whether there has been a breach by one side or the other or whether one or both the parties have been discharged from further performance, such differences are 'upon' or 'in relation to' or 'in connection with' the contract. That a contract has come to an end by frustration does not put an end to the contract for all purposes, because there may be rights and obligations which had arisen earlier when it had not come to an end, as it is only the future performance of the contherefore, clear that a dispute as to the binding nature of the contract cannot be determined by resort to arbitration, because as we have stated earlier, the arbitration clause itself stands or falls according to the determination of the question in dispute. It may be stated that the Privy Council had in Hirjt Mulji v. Cheong Yue Steamship Co. 1926 AC 497 held that as the authority of a person claiming arbitral jurisdiction depends on the existence of some submission to him by the parties of the subject matter of the complaint, 'a contract that had determined is in the same position as one that has never been concluded at all'. The observations of Lord Sumner in that case as to the effect of frustration of the contract before its performance on the arbitration clause in at much as frustration operates automatically and the contract ceases to exist for all purposes save for the enforcement of claims vested before that date of which there were none, were dissented from in heyman v. Darwins Ltd. 1942 AC 356, though Lord Macmillan did not want to express any opinion on this question. Be that as it may, in Heyman's case, 1942 AC 356, Lord Macmillan pointed out at pp. 370-371 :"if it appears that the dispute is whether there has ever been a binding contract between the parties, such a dispute cannot be covered by an arbitration clause in the challenged contract. If there has never been a contract at all, there has never been as part of it an agreement to arbitrate. The greater includes (he less. Further, a claim to set aside a contract on such grounds as fraud, duress or essential error cannot be the subject-matter of a reference under an arbitration clause in the contract sought to be set aside. Again, an admittedly binding contract containing a general arbitration clause may stipulate that in certain events the contract shall come to an end. If a question arises whether the contract has for any such reason come to an end I can see no reason why the arbitrator should not decide that question. It is clear, too, that the parties to a contract may agree to bring it to an end to all intents and purposes and to treat it as if it had never existed. In such a case, if there be an arbitration clause in the contract, it perishes with the contract. If the parties substitute a new contract for the con. tract which they have abrogated, the arbitration clause in the abrogated contract cannot be invoked for the determination of questions under the new agreement All this is more or less elementary". Further elucidating this aspect, the Supreme Court has, in para 11 of the judgment, observed thus :". In those cases it is the performance of the contract that has come to an end, but the contract is still in existence for certain purposes in respect of disputes arising under it or in connection with it. As the contract subsists for certain purposes, the arbitration clause operates in respect of these purposes. In those cases, as we have stated earlier, it is the performance of the contract that has come to an end but the contract is still in existence for certain purposes in respect of disputes arising under it or in connection with it. We think as the contract subsists for certain purposes, the arbitration clause operates in respect of those purposes". Thus we are constrained to hold that there is no substance in the submission made before us that the original contract ext. P-3 became void by frustration and as such even the dispute regarding damages for acts done already before the contract was cancelled could not be amenable for arbitration under Ext. P-3.


(12) THAT leads us to the question as to whether the person who has repudiated the contract unilaterally can take advantage of the arbitration clause in the contract when a dispute arises with regard to accord and satisfaction. In Union of India v. Kishorilal Gupta and Bros. (2), the Supreme Court of India has by majority judgment laid down six postulates in regard to operation of the arbitration clause. Subba Rao, J. (as he then was) speaking for the majority, enunciated the following principles :" (1) An arbitration clause is a collateral term of a contract as distinguished from its substantive terms ; but none-the less it is an integral part of it; (2) However comprehensive the terms of an arbitration clause may be, the existence of the contract is a necessary condition for its operation, it perishes with the contract; (3) the contract may be non est in the sense that it never came legally into existence or it was void ab initio ; (4) though the contract was validly executed, the parties may put an end to it as if it had never existed and substitute a new contract for it solely governing their rights and liabilities thereunder ; (5) in the former case, if the original contract has no legal existence, the arbitration clause also cannot operate, for along with the original contract, it is also void ; in the latter case, as the ori ginal contract is extinguished by the substituted one, the arbitration clause of the original contract perishes with it; and (6) Between the two, fall many categories of disputes in connection with a contract, such as the question of repudiation, frustration, breach etc. "the facts of the present case reveal that the plaintiff unilaterally cancelled the contract. Therefore the contract subsists for certain purposes and the arbitration clause operates in respect of those purposes. One such purpose in dispute is in regard to accord and satisfaction. In union of India's (2) case referred to above, Sarkar, J. did not differ from the propositions laid down by Subba Rao, J. The principle laid down was that the accord and satisfaction does not put an end to the arbitration clause. Thus it becomes clear as explained by the Supreme Court itself in Damodar Valley's (I) case that if the parties enter into an agreement as in the present case with regard to accord and satisfaction, it does not mean that the earlier contract perishes or that the later contract is a substitute in abrogation of the earlier contract. In fact, as pointed out by the Supreme Court, it is in furtherance of the earlier agreement and as such the arbitration clause does survive and Is operative. There is therefore no substance in the submission made before us that the arbitration clause perishes with the earlier agreement in view of the later agreement represented in Ext. P 9 between the parties,


(13) THE facts narrated above make it clear that the real dispute between the parties is with regard of a tacit agreement alleged by the defendants that the electric furnace manufactured was to be purchased by R. G. Foundry Forge Ltd. Thus we are of the considered view that the dispute is amenable for arbitration and the arbitration clause survives as the dispute regarding accord and satisfaction arose in connection with the original contract and as such the arbitrator had jurisdiction to resolve the dispute. In fact this position has been affirmed by the defendants themselves in their communication dt. 1-6-1977 Ext. P-14. Ext. P 14 inter alia states :"without prejudice to our rights and contentions that you are not entitled to recover any amount from us, on the contrary we are entitled to recover a very substantial amount from you on account of loss and damages suffered by us due to breach of contract committed by you, we are also desirous of referring the matter to the arbitration in accordance with law. You are aware that under the terms of the arbitration agreement unless the parties to the dispute agree there cannot be reference to a Sole Arbitrator to settle the dispute. . . . . . . . "ah that they contended was that the Arbitration should be in Calcutta. Thus the learned Civil Judge was not at all justified in holding that the dispute was not amenable for arbitration and the arbitration clause was not available to the parties. Before parting with this point it is necessary to refer to another submission made by the learned counsel for the respondents. In the instant case, he submitted that the breach of contract could be described as fundamental breach and as such the contract and the clause for arbitration perished. In support of this submission he relied upon a decision of the Court of Appeal, Civil Division, England, in Harhutt's Plasticine Ltd. , v. Wayne tank and Pump Co. , Ltd (3 ). He invited our attention therein to the definition of fundamental breach of contract and its consequences. Lord Denning MR. in the course of his judgment in that case quotes Lord upjohn's observations which is pressed into service by the learned counsel for the respondents. It reads :". . . the principle on which one party to a contract cannot rely on the clauses of exception or limitation of liability inserted for his sole protection. . . . (is that) if there is a fundamental breach accepted by the innocent party, the contract is at an end ; the guilty party cannot rely on any special terms in the contract". Speaking about the fundamental breach their Lordships have observed, To determine whether a breach of contract was fundamental, not only the breach itself but also the events resulting from the breach must be looked into and in the present case the breach is by the defendants and the consequences of them were so fundamental as to bring it to an end'. Lord denning speaking on this aspect at page 235 (c) has observed :"the results were so grave as to bring the contract to an end. One must, therefore, look not only at the breach but also at the results of it. Diplock LJ made that clear in Hong Kong Fir Shipping Co. Ltd , v. Kawasaki Kisen Kaisa ltd. , (1962)1 All. ER 474 at 486 and 487, when he pointed out that it is the event resulting from the breach which relieved the other parly ct further performance of his obligations. . . . . "faring to the subject Widgery LJ at age 289 J has observed : "adopting this analysis it follows that the first step is to see whether an"event' has occurred which has deprived the plaintiffs of substantially the whole benefit which they were to obtain under the contract. The fire was such an event because not only did it destory the equipment installed by the defendants, but it also destroyed the factory, thus making replacement impracticable. The fire was caused by the defendants' breach of contract and the plaintiffs say that the contract is at an end on this account. It appears to follow from Dip-lock LJ's reasoning that if the event which occurs as a result of the defendants' breach is an event which would have frustrated the contract had it occurred without the fault of either party, then the breach is a fundamental breach for present purposes". Cross LJ at page 241 (H) has observed :"there is no doubt, on the judge's findings, that the fire was caused by negligence of the defendants in prescribing durapipe and, having prescribed it, in leaving the plant unattended. If the disaster which resulted from that negligence had been caused by some third party, there is no doubt that the contract would have frustrated. As the event was brought about solely by the negligence of the defendants in performing their contractual obligations, it amounted to a fundamental breach of contract on their part. (See Diplock LJ in Hong Kong Fir Shipping Co,, Ltd. 's case)". In that case in question, defendants agreed with the plaintiffs to design and install equipment for storing and dispensing stearine in a molten state, i. e. at a temperature between 120f and 160f, at the plaintiff's factory which was an old building. For this purpose the defendants specified durapipe, a form of plastic pipe, which was to be heated by electrical tapes wound round the pipe controlled by a thermostat. In fact durapipe was wholly unsuitable for the purpose because it was laible to distort at temperature above 187f and had a low thermal conductivity. The installation was completed on 5th February 1963 and both parties intended to test it the next day. As it was very cold, to ensure that the stearine would be molten for the tests, an employee of the defendants switched on the heating tapes on the night of 5th February. and the installation was left unattended during that night. In the early hours of 6th February there was a fire which destroyed the factory. The specification of durapipe, although a breach of the contract, would not have been a fundamental breach if its unsuitability for the purpose had been discovered before the fire and it had been replaced by stainless steel pipe. The trial judge held that the fire was caused by distortion of the durapipe under heat causing molten stearine to escape and ignite, and that the defendants were guilty of a fundamental breach of contract in designing and supplying a system which was wholly unsuitable for its purpose. The Judge awarded the plaintiffs damages, including interest, of 172,966 calculated (inter alia)on the cost of reinstating the factory less betterment if any, the plaintiffs having re built the factory with a different and more convenient layout than that of the old factory ; and in awarding interest, held that the substantial sums paid to the plaintiffs by their insurers soon after the fire should go in relief of the damages. On the assumption that a condition (Cl. 15) of the contract limiting the defendants' liability for accidents and damage before take over of the goods to the contract price ( 2300)applied to damage of the nature of the damage done in the present case. It was in that context the Noble Lords had an occasion to consider the nature of fundamental breach and its consequence.


(14) THUS, it becomes clear that the nature of breach in the instant case cannot at all be described as fundamental breach, in the sense in which the Noble lords have described the breach in the court of Appeal, In fact, the Supreme court of India in the aforesaid decision (Damodar Valley Corporation's (1) case at p. 158) in para 8 of the judgment has observed : "in certain circumstances, it may be that there has been a termination of the contract unilaterally and as a consequence the parties may agree to rescind the contract. In such a situation the rescission would put an end to the performance of the contract in future, but it may remain alive for claiming damages either for previous bleaches or for the breach which constituted the termination". These observations of the Supreme Court apply to the facts of the present case. Here the plaintiff cancelled the contract by repudiating for the reasons mentioned in his letter. The defendants accepted it and the further performance of the contract thereafter was put an end to. But the contract would still remain in force for certain purposes. Hence, we are constrained to hold that there is no substance in the submission made before us that the breach in the instant case was a fundamental breach as described by the Noble lords in the Court of Appeal as cited above.


(15) THAT leads us to the next point, namely, whether the arbitrator misconducted imself or the proceedings.


(16) IT is true that an arbitrator is not bound by the technical rules of evidence or Court procedure. But, certainly he has a duty to be fair. He has to follow the principles of natural justice and they require that a party must know what case he has to meet. Natural justice is nothing else but fair play in action. The arbitrator's procedure should not be opposed to natural justice. He should perform his function in a quasi judicial manner and if he does not follow the fundamental rule governing judicial procedure he commits misconduct. It is true that the word 'misconduct' in the context does not involve moral turpitude. It is a technical misconduct which is also described as legal misconduct. The words 'misconducted the proceedings' in S. 30 mean, according to lord Atkin, 'such a mishandling of the arbitration as is likely to cause some substantial miscarriage of justice' (Vide (1914) 2 KB 478- Williams v. Wallis ). 16. The Supreme Court of India in k. P. Poulose v. State of Kerala (4) at para 6 of its judgment has approved the interpretation of Lord Atkin by observing thus :"under S. 30 (a) of the Arbitration act an award can be set aside when an arbitrator has misconducted himself of the proceedings. Misconduct under S. 30 (a) has not a connotation of moral lapse. It comprises of legal misconduct which is complete if the Arbitrator on the face of the award arrives at an inconsistent conclusion even on his own finding or arrives at a decision by ignoring the very material documents which throw abundant light on the controversy to help a just and fair decision. It is in this sense that the Arbitrator has misconducted the proceedings in this case".


(17) IN the light of these observations we would proceed to find out if the Arbitrator has misconducted himself or the proceedings in the present case. The arbitrator, as stated earlier while describing the facts, on the request of the representative of the defendants, adjourned the case from 20 3 1978 to 10-4-1978 for bringing an order of stay, or filing written objections or proceeding with the case. In the meanwhile, the defendants who were in Calcutta, (the second Party to the arbitration) sent their statement of objections by registered post, at the address of the Arbitrator as given by the Arbitrator himself in the notice issued to them. A copy of the objections was sent to the preserr, plaintiff also and it was received by him on 24-3-1978. But the one addressed to the Arbitrator was returned to the first defendant with the endorsement 'unclaimed". That envelope is marked in the records at Ext. D-1. It is seen from the envelope that the post man has endorsed on it as 'unclaimed' on several dates, namely, 25-3-1978, 27-3-1978, 28-3-1978. 29-3-1978. 30 3 1978, 31-3-1978 and 1 4 1978 and finally on 1-4 1978 it is returned as 'unclaimed' and it may be noted in this context that the next adjourned date was on 10 4-1978 and thus, it becomes obvious that the envelope containing objections statemement of the defendants was sent to the Arbitrator, well in time before 10 4-1978 and it was offered to him for the first time on 25 3 1978 and subsequently on consecutive dates. He has not received it as the endorsement 'unclaimed' makes it clear. We have to scrutinise whether this conduct on the part of the Arbitrator amounts to misconduct in the eye of law.


(18) IT may further be seen that on 10-4-1978, the Arbitrator has noted the defendants as absent and in their absence without more, he has recorded the evidence of the plaintiff and proceeded to decide the dispute. The next point, therefore, that arises for our consideration is : Whether this conduct of the Arbitrator amounts to legal misconduct ?


(19) THE High Court of Calcutta had an occasion to consider the legal implication of the endorsement 'not claimed' on an envelope in the matter of service of notice on the addressee in Ganesh C. Nandi v. J. N. Chattarjee A Bros. (5 ). His Lordship P. L. Mookerjee who delivered the judgment for the Bench, in para 9 of the judgment speaking on this aspect, has observed :"on the question of service, the final return of the postal peon was, no doubt, signified by the endorsement that it was 'not claimed' but the said endorsement is preceded by several endorsements, from which it is clear that the defendant was residing and was available at the address, to which the notice was sent. In this context, the expression 'not claimed' must be read as amounting to refusal and, in that view, it would be good service on the defendant. (Satya Chorone's case (5 cwn 1239)".


(20) THUS, it is obvious that the postal cover which was properly addressed to the arbitrator was offered to the Arbitrator and he refused to receive it. That without more amounts to legal misconduct as there is no rule under the Arbitration Act that statement of objections sent by post should' not be received by the Arbitrator.


(21) THE next stage in his conduct, which is vulnerable, is when the Arbitrator without intimating the defendants that he would proceed ex parte, proceeded to record the evidence of the plaintiff in the absence of the defendant-Company, to decide the dispute.


(22) RUSSELL on the law of Arbitration 19th Edn. , speaking on this aspect, at page 270, has observed : "every Arbitrator is authorised, by the nature of his office, to proceed ex parte for good cause. It is unnecessary, though not unusual, to give him the power in express terms in the submission. No application to the Court is necessary to warrant his so proceeding, but the Arbitrator is to judge for himself of the discretion of exercising his power. (Wood v Leake (1806)12 Ves. 412 ). Party neglecting to attend : in cases of reference under order of the Court, Brett M. R. said :"it is a necessary implication of the powers of a referee, whether official or special, and whether he has to try the matter or to report, that he has power, subject to the control of the Court, to give a peremptory appointment for the hearing of the reference, and in case of default of appearance by either party, to proceed with the reference in his absence". Wenlock v. River Dee Co. (1883)53 LJ QB 208 ). It would seem that a similar implication arises in the case of an arbitration under a submission, because, otherwise, either party, by refusing t

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o attend, could render the arbitration abortive, and in effect revoke the authority of the Arbitrator. If, therefore, one of the parties, after having been duly summoned, neglects to attend before the Arbitrator, and the latter is of opinion, from the circumstances which are brought to his notice, that the party is absenting himself with a view to prevent justice and defeat the object of the reference, it is the Arbitrator's duty to give due notice to the absent party that he intends, at a specified time and place, to proceed with the reference, whether the said party shall attend or not. If this notice is ineffectual to secure his attendance, and he does not allege some excuse satisfactory to the Arbitrator, the latter not only may, but ought, to proceed ex parte. Waller v. King (1724) 9 Mod. 63)'. (23) THE High Court of Calcutta in Juggilal Kamlapat v General Fibre Dealers Ltd. , (6)has shed light on the conundrum. His Lordship Chakravarti, C. J. who delivered the judgment for the Bench on reviewing the case law has laid down the procedural rule in such circumstances, in para 14 of his judgment which reads : "the question as to the right of an arbitrator to proceed ex parte and the effect of his doing so when he does not issue a notice that be would proceed in the absence of any party who would fail to attend on the date of hearing has been discussed in Russell on Arbitration', his Lordship further observed :"it appears from the four decisions to which I have already referred and the statement of the law in Russell that the procedural rule applicable to arbitration proceedings is more tolerant than the rule followed in Courts of Law. Broadly stated, the principles which govern the matter are the following. If a party to an arbitration agreement fails to appear at one of the sittings, the arbitrator cannot or, at least, ought not to, proceed ex parte against him at that sitting. Where in such a case it does not appear that the non appearance was anything but accidental or casual, the arbitrator ought ordinarily to proceed in the ordinary way, fixing another date of hearing and awaiting the future behaviour of the defaulting party". (24) IN the present case it is seen from the minutes kept by the Arbitrator that he adjourned the case to 10-4 1978 'for obtaining stay or for tiling statement of objections or for the further proceedings'. In fact, it may also be noted in this context that in Dipti Bikash Sen v. India automobiles Ltd. (7), his Lordship Sabyasachi mukerjee has further affirmed the observations made by Chief Justice Chakravarti, in the above cited decision. We have already noted above that the statement of objections were sent by registered post to the Arbitrator well within time and it was refused as 'unclaimed' by the Arbitrator and thereafter on 10-4-1978 he proceeded without issuing a peremptory hearing notice to the defendant Company bringing to its notice that he would proceed to hear the matter even if they remain absent on the next day of hearing ; he proceeded to record the evidence of the plaintiff which has obviously resulted in flagrant violation of the principles of natural justice and thus the arbitrator has misconducted himself and the proceedings in the present case and the award passed by him cannot be sustained. (25) THAT being so, the appeals are entitled to succeed partly, though the impugned order made by learned Civil Judge, setting aside the award, has to be confirmed. (26) IN the result, the appeals are partly allowed, while confirming the order of setting aside the award made by the learned Civil Judge, we hereby hold that the original agreement Ext. P 3 and the arbitration clause contained therein are available for deciding the dispute that has arisen between the parties and that the dispute is arbitrable. We accordingly set aside the findings given by the learned civil Judge to the contrary and we remit the matter back to the learned Civil Judge with a direction that he shall refer back the dispute to arbitration on further hearing the counsel in that behalf if necessary. There shall be no order as to costs of these appeals. (27) PARTIES are directed to be present before the trial Court, on 26-9-1983 to take further instructions. (28) SEND back the concerned records forthwith to the lower Court.
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