PETITIONER:
UNION OF INDIA
Vs.
RESPONDENT:
D.M. REVRI & CO.
DATE OF JUDGMENT02/09/1976
BENCH:
BHAGWATI, P.N.
FAZALALI, SYED MURTAZA
CITATION:
1976 AIR 2257 1977 SCR (1) 483
1976 SCC (4) 147
ACT
Arbitration Act, 1940--Contract between lay parties not
to be thwarted by narrow pedantic and legalistic interpreta-
tion--Intendment of parties regarding validity of arbitra-
tor’s appointment. whether material.
HEADNOTE
The respondent partnership firm, entered into contract
with the appellant for the supply of East German sugar.
Provision for arbitration was made in clause (17) of the
contract, and the arbitrator was to be nominated by the
Secretary in the Ministry of Food & Agriculture. In the
present dispute, before an arbitrator was nominated, the
Ministry of Food & Agriculture was bifurcated into two
separate Ministries and the subject-matter of the contract
was allotted to the Ministry of Food. The respondents took
the stand that there was no longer any Secretary in the
non-existent Ministry of Food and Agriculture and clause
(17) of the contract was a dead-letter. The appellant’s
proposal to amend clause (17) to suit the changed circum-
stances, was rejected by the respondents. Thereafter, the
two Ministries were reintegrated into a Ministry of Food &
Agriculture and two Secretaries were put incharge of the two
departments. The Secretary, Food Department, on a request
from the appellant under clause (17), appointed an arbitra-
tor. The respondents served on the appellant a notice under
C.P.C. Sec. 80 but instead of proceeding to sue the appel-
lants, they submitted to the jurisdiction of the Arbitrator
without protest until award was made, The appellant’s appli-
cation to the Sub Judge, Delhi, for passing a decree in
terms of the award was resisted by the respondents who
sought to set aside the award, challenging the validity of
the Arbitrator’s appointment and contending that the arbi-
tration agreement under clause (17) was made by only one of
the partners, and was not binding on the others. The Sub-
Judge rejected their objections and made the award a rule of
the court. An appeal to the High Court was allowed on the
ground that on bifurcation of the Ministries clause (17) of
the contract became dead, and could not be revived on their
re-integration.
Allowing the appeal the Court,
HELD: There were, after integration, two Secretaries in
the Ministry of Food & Agriculture, but the argument that
this event rendered the arbitration agreement vague and
uncertain, is based on a highly technical and doctrinaire
approach and is opposed to. plain common sense. A contract
is a commercial document between the parties and must be
interpreted in such a manner as to give it efficacy rather
than to invalidate it. It would not be right while inter-
preting a contract entered into between two lay parties, to
apply strict rules of construction which are ordinarily
applicable to formal documents. The meaning of such a
contract must be gathered by adopting a common sense ap-
proach and it must not be allowed to be thwarted by a narrow
pedantic and legalistic interpretation. The Secretary in
the Ministry of Food and Agriculture in charge of the De-
partment of Food, would be the Secretary in the Ministry of
Food and Agriculture concerned with the subject matter of
the contract and under clause (17), he would be the person
intended by the parties to exercise the power of nominating
the arbitrator. Furthermore, the respondents did not raise
any objection to the appointment of the arbitrator and
participated in the arbitration proceedings without protest,
indicating the clear intendment of the parties that the
Secretary in the Ministry of Food & Agriculture concerned
with the subject matter of the contract should be the person
entitled to nominate the arbitrator. [488 B-E, 489 A-E]
484
JUDGMENT
CIVIL APPELLATE JURISDICTION: Civil Appeal No. 135 of 1972.
Appeal by Special Leave from the Judgment and Order
dated 12-8-71 of the Delhi High Court in F.A.O. No. 47-D of
1964.
Gobind Das and Girish Chandra, for the Appellant.
Bakshi Shiv Charan Singh and Harbans Singh, for the
Respondents.
The Judgment of the Court was delivered by
BHAGWATI, J., This appeal, by special leave, is direct-
ed against a judgment of the High Court of Delhi setting
aside an award made by an arbitrator on the ground that he
was not a validly appointed arbitrator and hence had no
jurisdiction to arbitrate and make an award. The facts
giving rise to the appeal are few and may be briefly stated
as follows.
The respondents--a partnership firm--entered into a
contract with the appellant for the supply of 30,000 tons of
East German sugar at the rate and as the terms and condi-
tions set out in a letter dated 3rd July, 1954 addressed by
the Secretary to the Government of India, in the Ministry of
Food & Agriculture to the respondents. The Ministry of Food
and Agriculture was concerned with the subject-matter of
this contract and hence clause (9) provided that "superin-
tendence and inspection of quality, weight and packing of
sugar Shall be made by a reputable superintending agency to
be approved by the Government of India, in the Ministry of
Food & Agriculture" and clause (10) stipulated for delivery
to be made to "authorities or parties nominated by the
Ministry of Food and Agriculture". There was provision for
arbitration made in clause (17) and that clause also re-
ferred to the Ministry of Food and Agriculture. It was in
the following terms:
"ARBITRATION: All questions, disputes or
differences whatsoever which may at any time arise
between the parties to the agreement touching the
agreement or the subject-matter thereof, arising
out of or in relation thereto and whether as to
construction or otherwise shall be referred to a
single arbitrator for decision. Such a single
arbitrator shall be nominated by the Secretary to
the Government of India in the Ministry of Food and
Agriculture in his absolute discretion and the
decision of such arbitrator shall be final and
binding upon the parties. The reference to the
arbitrator shall be governed by the provisions of
the Indian Arbitration Act, 1940 as amended from
time to time and the rules made thereunder."
It appears that disputes arose between the appellant and.
the respondents in regard to the fulfilment of this con-
tract. The appellant made a claim for payment of Rs.
3,29,107-8-0 against the respondents by a letter dated 11th
August, 1956 and threatened to recover it from the security
furnished by the respondents through their bankers. The
respondents disputed the claim of the appellant and by
their letter dated 23rd August, 1956 pointed out that it
was not competent to the: appellant to recover the amount of
the demand from the bankers of the
485
respondents without first. establishing its claim by arbi-
tration or suit. The respondents intimated to the appellant
that they were prepared to go to arbitration and. suggested
that it would be better still, .if a special case for the
opinion of the court were stated under section 90 of the
Code of Civil Procedure. The respondents also claimed to
recover from the appellant under the contract diverse
amounts aggregating to Rs. 6,05,689. There was no response
to this letter from the appellant and no steps were taken by
the appellant to have the disputes referred to an arbitrator
nominated by the Secretary in the Ministry of Food and
Agriculture as provided in clause (17) of the Contract. In
the meantime, as a result of an order made by the President
under clause (3) of Article 77 of the Constitution, the
Ministry of Food and Agriculture was bifurcated into two
separate Ministries, one of Food and the other of Agricul-
ture, with effect from 19th October, 1956 and sugar, the
subject-matter of the contract, came to be allotted to the
Ministry of Food. The respondents, by their letter dated
9th November, 1956, pointed out to the Secretary, Ministry
of Food that by reason of this bifurcation, the Ministry of
Food and Agriculture has ceased to exist and there was no
Secretary in the Ministry of Food and Agriculture and the
arbitration agreement contained in clause (17) of the con-
tract had, therefore, become a dead letter and was no longer
enforceable and once again called upon the appellant to
agree in stating a special case for the opinion of the court
failing which the respondents would have to file a suit
against the appellant. This letter also did not evoke any
response from the appellant and the disputes remained unre-
solved.
On 13th/l4th February, 1956 the appellant addressed a
letter to the respondents stating that since the Ministry of
Food and Agriculture was bifurcated into Ministry of Food
and Ministry of Agriculture, it was necessary to amend
clause (17) of the Contract so as to provide for arbitration
by "the Secretary to the Ministry, Government of India
administratively dealing with the subject of contract at the
time of reference to arbitration, or if there is no Secre-
tary, the administrative head of such Ministry at the time
of such reference" and proposed an amendment to that effect
for the acceptance of the respondents. The respondents, by
their letter in reply dated 26th February, 1957, declined to
accept the proposal for amendment of clause (17) of the
contract and once again reiterated that the arbitration
agreement contained in that clause was "dead and unenforce-
able". However, within a short time thereafter, another
order was issued by the President under clause (3) of Arti-
cle 77 of the Constitution integrating the Ministry of Food
and the Ministry of Agriculture into one single Ministry of
Food and Agriculture with effect from 23rd April, 1957.
This Ministry of Food and Agriculture had two departments,
one of Food and the other of Agriculture, and there was a
Secretary incharge each department. It seems that the
appellant requested the Secretary, Department of Food in the
Ministry of Food and Agriculture to nominate an arbitration
for adjudicating upon the disputes which had arisen between
the appellant and the respondents in terms of clause (17)
the Contract and the Secretary, Department of Food in the
Ministry of Food and Agriculture, by a letter dated 27th
February, 1958, nominated Shri A.V. Vishwanath Shastri,
Advocate, to act as sole arbitrator to
486
adjudicate upon such disputes. On the same day, the re-
spondents served a notice on the appellant under section 80
of the Code of Civil Procedure demanding payment of the
amounts due to the respondents and stating that in case the
appellant failed to meet these demands, the respondents
would have to file a suit against the appellant. Though
respondents gave this notice under section 80 of the Code
of Civil Procedure, they did not proceed to file a suit, but
instead filed their statement of claim before the arbitrator
and in the statement they claimed payment of an aggregate
sum of Rs. 7,89,858/- from the appellant and also prayed
for a declaration that the contract stood "final and
properly performed" by the respondents. The appellant
filed its reply disputing the claim of the respondents. The
appellant also field a statement making its own claim for
Rs. 3,29,107-8-0 against the respondents. It was stated in
paragraph 18 of the statement of claim of the appellant
"that under Clause 17 of the contract the Secretary Food and
Agriculture Ministry of the Government in his discretion has
the right to nominate a sole Arbitrator and refer the dis-
pute to the Arbitrator and that has been duly done on 27th
February,1958, and the parties have been duly notified under
Secretary to the Government letter No. SIMP-3(4C) dated the
27th February, 1958". The respondents filed their written
statement denying the claim of the appellant and in para-
graph 18 of this written statement they averted "That para
18 of the Statement of Claim of the Government of India is
not objected to". The proceedings in connection with the
claim of the respondents and the counter-claim of the appel-
lant were carried on before the arbitrator and the respond-
ents participated in the arbitration proceedings without
objection or protest against the jurisdiction of the arbi-
trator. The arbitrator ultimately made an award against the
respondents.
The appellant made an application before the Sub-Judge,
Delhi to pass a decree in terms of the award. The respond-
ents resisted the application of the appellant and sought
to set aside the award mainly on two grounds. One ground
was that Daljeet Singh, a partner of the respondents, had no
power to bind the other partners by an arbitration agreement
and hence clause (17) of the contract was not binding on the
respondents, and the other was that the arbitrator was not
validly appointed and he had, therefore, no jurisdiction to
enter upon the reference and adjudicate upon the disputes
between the parties. Both these grounds were rejected by
the learned Sub-Judge and the award was made a rule of the
court. The respondents thereupon preferred an appeal to
the High Court. The same two grounds were also urged in the
appeal. Out of them, the first ground relating to lack of
authority in Daljeet Singh to bind the respondents by clause
(17) of the contract Was negatived by the High Court and it
was held that clause being an integral part of the contract,
the authority of Daljeet Singh to enter into the contract on
behalf of the respondents extended also to clause (17) of
the contract and in any event, the conduct of all the
partners showed that Daljeet Singh had authority on behalf
of the other partners to enter into the arbitration
agreement contained in clause (17) of the contract. The
second ground, however, found favour with the High Court
which held that in view of the bifurcation of the Ministry
of Food and Agriculture into two separate Ministries,
487
one of Food and the other of Agriculture, by the Presiden-
tial Order, which came into effect from 19th October, 1956,
the arbitration agreement in clause(17) of the contract
became dead and unenforceable and nothing that happened
thereafter could revive it and in any event, even after
reintegration of the Ministry of Food and Agriculture into
one single Ministry of Food and Agriculture, the arbitra-
tion agreement could not be given effect to since there
were then two Secretaries in the Ministry of Food and
Agriculture and clause (17) of the contract did not indicate
as to which Secretary was to exercise the power of nomi-
nating the arbitrator, with the result that the arbitration
agreement suffered from the fault of vagueness and uncer-
tainty. The High Court accordingly allowed the appeal and
set aside the award made by the Arbitrator. Hence the
present appeal by the appellant with special leave obtained
from this Court.
The only question debated before us in this appeal was
as to whether the appointment of the arbitrator by the
Secretary, Department of Food in the Ministry of Food &
Agriculture was a valid appointment. Obviously, if the
appointment was invalid, the arbitrator would have no juris-
diction to arbitrate upon the disputes between the parties
and the award would be invalid. But, an alternative
argument was also advanced on behalf of the appellant to
sustain the award and it was that the respondents not having
raised any objection to the appointment of the arbitrator
and participated in the arbitration proceedings without any
demur or protest, it was not open to them, after the award
was made, to challenge it on the ground of invalidity of
appointment of the arbitrator. The respondents, having
taken the chance of obtaining the award in their favour,
could not denounce the award when it went against them. We
will first examine whether the appointment of the arbitrator
was valid, for, if it was, the second question, which raises
the issue of waiver, would not arise.
Now, clause (17) of the contract provided that all
disputes arising out of the contract shall be resolved by
arbitration. It embodied an arbitration agreement between
the parties. It also laid down the machinery for appoint-
ment of the arbitrator. It provided that the arbitrator
shall be nominated by the Secretary in the Ministry of Food
& Agriculture in his absolute discretion. There was un-
doubtedly a Ministry of Food & Agriculture at the time when
the contract was made and there was one and only one Secre-
tary in that Ministry, so that at the date of the contract
there could be no question as to who was the person autho-
rised to nominate the arbitrator, The same position contin-
ued to obtain also at the time when disputes arose between
the parties. But before an arbitrator could be nominated by
the Secretary in the Ministry of Food & Agriculture to
adjudicate upon these disputes, the Ministry of Food &
Agriculture was bifurcated into two separate Ministries and
it ceased to exist as Ministry of Food & Agriculture. Then
obviously there was no individual who fiIIed the description
of "Secretary in the Ministry of Food & Agriculture" and,
consequently the machinery for appointment of the arbitrator
became unworkable. If the matter had rested there, a ques-
tion could well have arisen whether, despite the break-down
of the machinery for nomination of an arbitrator, the arbi-
tration agreement in clause (17)
15--1104SCI/76
488
could still be enforced by the Court by appointing an arbi-
trator in a proceeding under section 20 of the Arbitration
Act. But the position again changed and the Ministry of
Food & Agriculture came into being as a result of integra-
tion of the Ministry of Food and the Ministry of Agricul-
ture, with this change, namely, that the new Ministry of
Food & Agriculture had two departments, one of Food and the
other of Agriculture and there was a Secretary incharge of
each department. There were thus, after integration, two
Secretaries in the Ministry of Food & Agriculture and the
argument of the respondents was--and that argument found
favour with the High Court--that this event rendered the
arbitration agreement vague and uncertain, inasmuch as it
did not specify which of the two Secretaries was to nominate
the arbitrator "in his absolute discretion". Though this
argument appears attractive at first sight, a little scruti-
ny will reveal that it is unsound. It is based on a highly
technical and doctrinaire approach and is opposed to plain
commonsense.
it must be remembered that a contract is a commercial
document between the parties and it must be interpreted in
such a manner as to give efficacy to the contract rather
than to invalidate it. It would not be right while inter-
preting a contract, entered into between two lay parties, to
apply strict rules of construction which are ordinarily
applicable to a conveyance and other formal documents. The
meaning of such a contract must be gathered by adopting a
commensense approach and it must not be allowed to be
thwarted by a narrow pedantic and legalistic interpretation.
Here, at the time when the arbitrator came to be nominated
and the reference was made, there was a Ministry of Food &
Agriculture and there was a Secretary in that Ministry, but
the only difficulty, according to the High Court, was that
there were. instead of one, two Secretaries and it could not
be predicated as to which Secretary was intended to exercise
the power of nominating an arbitrator. We do not think this
difficulty is at all real. Let us consider, for a moment,
why in clause (17), the power to nominate an arbitrator was
conferred on the Secretary in the Ministry of Food & Agri-
culture and not on a Secretary in any other Ministry. The
reason obviously was that at the date of the contract the
Secretary in the Ministry of Food & Agriculture was the
Officer dealing with the subject-matter of the contract. If
this object and reason of the provision of clause (17) is
kept in mind, it will become immediately clear that the
"Secretary in the Ministry of Food & Agriculture"authorised
to nominate an arbitrator was the Secretary incharge of the
Department of Food who was concerned with the subject-matter
of the contract. The Secretary incharge of the Department
of Food filled the description "Secretary in the Ministry of
Food & Agriculture" ’yen in clause (17). The respondents
relied strongly on the use of the definite article ’the’
before the words "Secretary in the Ministry of Food & Agri-
culture" and urged that what the parties to the contract had
in mind was not a Secretary in the Ministry of Food & Agri-
culture, but the Secretary in the Ministry of Food & Agri-
culture and that clearly postulated one definite Secretary
in the Ministry of Food & Agriculture and not one of two
Secretaries in that Ministry. This is, in our opinion, a
hyper technical argument which seeks to make a
489
fortress out of the dictionary and ignores the plain intend-
ment of the contract. We fail to see why the Secretary in
the Ministry of Food & Agriculture incharge of the Depart-
ment of Food could not be described as the Secretary. He
would be the Secretary in the Ministry of Food & Agriculture
concerned with the subject-matter of the contract and
dearly and indubitably he would be the person intended by
the parties to exercise the power of nominating the arbitra-
tor. The parties to the contract obviously could not be
expected to use the words "a Secretary in the Ministry of
Food & Agriculture", because their intendment was not that
any Secretary in the Ministry of Food & Agriculture should
be entitled to exercise the power of nominating an arbitra-
tor, but it should only be the Secretary in the Ministry of
Food & Agriculture concerned with the subject-matter of the
contract. That is why the use of the definite article
’the’. It is also significant to note that when the Secre-
tary in charge of the Department of Food in the Ministry of
Food & Agriculture nominated the arbitrator, the respondents
did not raise any objection to the appointment of the arbi-
trator and participated in the arbitration proceedings
without any protest. The respondents knew at that time that
there were two Secretaries in the Ministry of Food and
Agriculture and the appointment of the arbitrator was. made
by the Secretary in charge of the Department of Food and yet
they acquiesced in the appointment of the arbitrator and
took part in the proceedings. This circumstance is also
clearly indicative of the intendment of the parties that the
Secretary in the Ministry of Food & Agriculture concerned
with the subject-matter of the contract should be the person
entitled to nominate the arbitrator. Or else the respondents
would have objected to the appointment of the arbitrator and
declined to participate in the arbitration proceedings or at
any rate, participated under protest. We are, therefore, of
the view that the arbitrator was validly nominated by the
Secretary in charge of the Department of Food in the Minis-
try of Food & Agriculture.
This view renders it unnecessary for us to consider
whether by participating in the proceedings before the
arbitrator without objection or protest and taking the
chance of obtaining an award in their favour, the respond-
ents could be said to have waived the defect in the
appointment of the arbitrator.
We accordingly allow the appeal, set aside the order of
the High Court and while dismissing the application for
setting aside the award, pass a decree in terms of the
award. Having regard to the peculiar facts and circum-
stances of the case, we make no order as to costs through-
out.
M.R. Appeal allowed
490