The Arbitration and Conciliation Act 1996 provides for setting aside of the Arbitral Award if there exist limited grounds as enumerated under section 34 of the Act. The ground of “error of law apparent on the face of the award”, a ground known in the Indian Arbitration Jurisprudence as the ChampseyBhara Principle, was discussed by the Privy Council in 1923 in the case of ChampseyBhara& Co. v. Jivraj Balloo Spinning and Weaving Co. Ltd, (1923) 47 ILR 578.
Background of the Case:
The ChampseyBhara& Co. (Appellant/Seller), and the Jivraj Balloo Spinning & Weaving Co. Ltd (Respondent/Buyer) entered into two contracts, subject to the rules of Bombay Cotton Trade Association, for the sale of certain quantity bales of cotton.
Upon delivery of the cotton, it was rejected by the Respondent for inferior quality. As per Rule 12 of the Association, the dispute concerning quality was to be submitted to the arbitrator for survey. The arbitrator found it of inferior quality and therefore awarded an allowance of Rs. 10–8–0 (i.e. Rs.10.50) per candy.
Thereafter, the Appellant claimed Rs.25,000 as compensation for the difference between the Contract Rate of the rejected goods and the market rate of the goods when it was rejected. The respondent denied this liability and subsequently, this dispute was submitted to Arbitration. Though the Respondent protested against the submission to arbitration, the association appointed arbitrators as per the rules of the association.
Arbitral Award:
The Arbitrator decided in favor of the Appellant, directing the respondent to pay a sum of Rs.25,000 as compensation for causing loss to the appellant. The respondent thereafter filed an appeal to the Appeals Board. This appeal was rejected and the award was confirmed by the Board.
Petition before Bombay High Court:
The Respondent then filed a petition before the Hon’ble Bombay High Court for setting aside the award. The Respondent contended that,
1. There was no need for arbitration, for there was no dispute which needed to be resolved;
2. The arbitrator lacked jurisdiction because the contract between the respondent and appellant was already repudiated on account of the rejection by the respondent of the goods delivered by the appellant;
3. There was an error of law patent on the face of the award.
This petition was rejected by the single-judge bench of the Hon’ble Bombay High Court.
Appeal: [(1919) ILR 44 BOM 780]
The Respondent then preferred an appeal before the division of the Bombay High Court, making the same contention. The Bombay High Court observed that the respondent acted as per the rules of the association, as Rule 52 of the association provides that when the compensation awarded for the inferior quality of the goods is more than Rs. 5 then the buyer has the following options;
1. to buy substitute goods at the expense of the seller or,
2. to invoice the rejected goods back to the seller at the market rate on the day of the final award being made.
The Court observed that in the present case, the respondent exercised none of the above options and had merely rejected the inferior quality goods. The Court further referred to Landauer v. Asser (1905), where it was held that if there exists an error of law patent on the face of an award it will be set aside by the court.
The court then found that the award, in the present case, enumerates no reasons for its findings, therefore on a speculative basis an award cannot be set aside for error patent on the face of it. But the Court noted that since the arbitrators referred to the letter communicating the rejection of goods by the respondent which relates to the contract between the parties, that is subject to the rules of the association. Therefore, it observed that, as the arbitrators incorrectly construed the rules of the association, the award was liable to be set aside.
Thus, the court held that the award made by the arbitrators was based on their interpretation of Rule 52 of the Association, but according to the correct interpretation of Rule 52, the respondent should not have been made liable to pay the compensation as awarded by the Arbitrators, and therefore the award has an error of law patent on the face of it, thus liable to set aside.
The court observed that it is against the general provisions of the contract Act and Common law that a buyer who has rightly rejected the goods under a contract is made liable to pay the seller.
Based on, inter alia, the reasons above stated the Hon’ble Bombay High Court set aside the award for error of law patent on the face of the award, introducing this as a ground in Indian Legal Framework.
Privy Council: [(1923) ILR 47 PC 578]
The Appellant then preferred an appeal to the Privy Council against the judgment of the Bombay High Court.
The Privy Council distinguished the Landauer v. Asser (1905), stating that it is not binding upon it and is different from the present case because, in Landauer v. Asser (1905), the legal proposition forming the basis of the award was stated, whereas in the present case, the award does not mention the legal proposition upon which it proceeds.
The reference, in the award, to the letter of communicating rejection of the goods, in light of the earlier arbitral award as to inferior quality goods, was a narrative or rather the reference to the background of the case and not something upon which the impugned award was based.
The Privy Council referred to Hodgkinson v. Fernie and observed that the exception i.e. the ground for setting aside the award should not be extended. The Council highlighted that an award or a document actually incorporated in the award, whereby the arbitrator/s states the reasoning or legal proposition for his award, and if such reasoning or legal proposition can be said to be erroneous in law, then the award can be set aside for errors in law patent on the face of the award.
In the present case, observed the Privy Council, there appears no reasoning or legal proposition on the basis of which the award can be said to have been made. Merely because the award makes reference to a letter (i.e. the letter communicating the rejection of goods as made by the Respondent/Buyer), will not allow the Court to inquire what that letter is and to test the correctness of the letter in light of the contract, upon which depends the rights of the parties.
The Privy Council observed that it was not right on the part of the High Court to inquire into the soundness of the letter and the contract, because there appears no mistake on the face of the award. The High Court has set aside the award by observing that in light of the letter of rejection, the arbitrators have misinterpreted Rule 52, the Privy Council observed that this was incorrect on the part of the High Court because the Arbitrators are entitled to give interpretation.
The Privy Council observed that had it been the scenario where the Arbitrators have based its award upon some special legal proposition, which upon examination appears to be unsound, then the said Award could be said to have an error of law patent on the face of the award.
The Privy Council held that the present dispute is within the jurisdiction of the Arbitrator because it is in relation to the contract which is made subject to the rules of the Cotton Trade Association.
Therefore, the Privy Council restored the award.
Conclusion:
This is one of the oldest Indian Cases, where the ground of “error of law patent on the face of the award” was discussed. Their Lordships of Privy Council have highlighted, in the early 1930s when the Arbitration Jurisprudence was indeed at the incipient stage, the principle of Minimum Judicial Interference and the importance of Judicial Deference for the findings of the Arbitrators.
Author Name- R.Harshal , Course: BA.LL.B, Year: 5th Year (2021-26)
