Pannalal vs State

Shivdayal, J.—This appeal u/s 39 of the Arbitration Act is directed against the refusal to set aside an award and also against the decree which was passed in terms of the award by the Additional District Judge, Balaghat.

Rights to collect and propagate lac in Patwari Circles No. 42 and 2 of Waraseoni Tahsil were auctioned for a period of three years on the 3rd October and the 4th October, 1951, respectively. The highest bids of Pannalal (hereinafter called the contractor) for Rs. 21,000 and Rs. 20,000 respectively were accepted. Pannalal deposited Rs. 500 as earnest money for each contract. He also deposited Rs. 5,500 on the 15th October, and Rs. 667 on the 21st November, on account of the first; and Rs. 6,667 on the 21st November on account of the second. However, the contractor did not work the contract. The case for the contractor is that the department did not enter into a written agreement as required by Article 299 of the Constitution, so that he rescinded it and asked for the refund of the deposited amount. The case for the department was that the contractor was not willing to execute an agreement and work the contract. Eventually the matter was referred for arbitration to the Deputy Commissioner, Balaghat. Shri J.P. Mishra, Collector, Balaghat, gave an award on December 20,1957, declaring that the contractor was not entitled to a refund of his deposit of Rs. 13,834 or to any damages from the State Government. On the contrary, he was liable to pay the outstanding of Rs. 27,666.

The contractor filed an application in the Court of the Additional District Judge, Balaghat, u/s 33, read with Sections 45 and 47, of the Arbitration Act, challanging the existence or validity of an agreement to refer and also challenging the award. The Additional District Judge ordered as above Pannalal fees now come up to this Court in appeal u/s 59 of the Arbitration Act. His contention it two-fold.

(1) The arbitrator bad no Jurisdiction to make the award, as the reference itself was null and void; and

(2) The award on its face is erroneous in law.

The facts material for the determination of the contentions raised here are these. Auction took place on the 3rd and 4th October 1951. Under the conditions of auction every intending bidder was requried to diposit a minimum of Rs. 500 as earnest money for every contract that he wished to bid for. The deposit was to be returned to unsuccessful bidders. In the case of a successful bidder, the deposit was to be credited as part payment of the bid. The amount of consideration of lease'' was payable by instalments specified in Clause 5. It will be convenient to reproduce certain clauses of the conditions of auction relied on by the parties. Clause 2 runs thus:

If a successful bidder fails to pay the first instalment or execute the agreement bond when required to do so after the close of the auction and to complete the security bond within 43 days from the date of auction, his earnest money deposit shall be forfeited to Government and the contract shall be reauctioned at his risk. Any loss to Government accruing by such auction will be recovered from the original purchaser as arrears of land revenue u/s 82 of the Indian forest Act, 1927.

Clause 7 reads thus:

The unsuccessful bidders shall have to sign the bid sheet immediately and the agreement bond at the close of the day''s auction. In case the purchaser fails to do this or to make payments as per conditions No. 4, above, any amount already paid by bun shall be forfeited to Government and the contract shall be reauctioned as per condition No. 2.

Clauses 10,17 and 19 are as follows:

No purchaser shall be allowed to start his work unless he produces ft copy of the duly executed agreement bond or a special permission in writing from the Divisional Officer to that effect........". the contract agrees to refer it to the arbitration of a specified authority or a committee to the exclusion of any civil proceedings.

Time is the essence of forest contracts.

It is common ground that an agreement as envisaged in Clause 7 above was never executed between the parties. On November 30, 1951, the contractor gave a notice to the Deputy Commissioner, Balaghat, saying that he had already deposited as the first instalment, Rs. 7,167 for the contract of Patwari Circle No. 42 and Rs. 6,667 for Patwari Circle No 2; that although more than one month and 25 days had expired, a formal leass deed had not been executed in his favour; that unless a lease deed as required under the law was executed in his favour, it was not possible for him to begin work; and that the time for propagation and collection of Lac was fast approaching and if the lease was not executed immediately he would be put to a great loss. He prayed that a lease deed be executed in his favour within 7 days from the receipt of that letter, otherwise the Government would be responsible for all the losses that he would suffer. In response to this notice, the Additional Deputy Commissioner wrote to him on December 5, 1951, to appear before him to execute the deed. In compliance with this, Pannalal appeared in person on the 6th December but the matter was adjourned as the Additional Deputy Collector was on leave and the Tahsildar was busy in mock elections. He was asked to come again on the 10th December. When he appeared on the 10th December, he was asked to come on the 17th December as the necessary forms were not available. On December 15, 1951, the contractor rescinded the contract and informed the authorities accordingly.

Therefore, the Deputy Commissioner wrote letters to the contractor to execute the necessary agreement, otherwise there would be reauction at his risk. But the contractor did not respond. Eventually, by a notification dated November 18. 1954, the Deputy Commissioner, Balaghat, was appointed arbitrator.

It is urged for the Appellant that there was no agreement to refer to arbitration as it was unilateral Clause 17 reproduced above did not come into force as the contemplated agreement, in which the above clause was to be incorporated, in fact never came into being. The argument is that Clause 17 would have come into operation only after it was embodied in the agreement contemplated in Clause 7. Before the execution of that agreement it was only Clause 2 which was enforceable and the contractor''s liability was limited to Rs. 500 and such deficit as would have accrued in case of reauction. Moreover, it is further contended the notificat on appointing the arbitrator was very vague. All that it said was that "a dispute" had arisen and that "the dispute" was referred to arbitration. The notification did not specify what the dispute was. It is also pointed out that upto November 18, 1954, when the notification was issued, it was the contractor who was pressing his demand for refund of the amount deposited by him; upto that date the Government had not made any claim against the contractor, so that the only "dispute" which must be deemed to have been referred to the arbitrator was whether the contractor was entitled to refund or not. The arbitrator exceeded his powers and the terms of reference when he declared that the contractor was liable to pay the balance of the contract money.

We are clearly of the view that it is unnecessary to consider these contentions with any seriousness because of the following facts. On September 23, 1955, Pannalal wrote to the Deputy Commissioner, Balaghat, as follows:

The applicant above named states: That the applicant has been served with a copy of the Order No 4003 4260/XVIII, dated Nagpur, the 18th November, 1954, of the Government of Madhya Pradesh, Land Reforms Department, referring the dispute relating to the Thekas of lac Prasadis mentioned above to the arbitration of the Deputy Commissioner, Balaghat.

The applicant prays that proceedings for the aforesaid arbitration be Marled and the parties called upon to state their respective cases.

On the 16th November, 1955, the Appellant himself lodged a statement of claim before the arbitrator "in the matter of arbitration in respect of auction of lac Parsadis of Patwari Halka numbers 42 and 2 of the Waraseoni Tahsil of Balaghat District held on the 3rd and 4th October, 1951." He stated all the relevant facts and claimed an follows:

hat the claim of the lessee Pannalal is:

(a) For refund of the deposit of Rs. 13,834.

(b) For Rs. 30,000 on account of damages for breach of contract.

On April 2, 1956, the State of Madhya Pradesh filed d before the arbitrator a reply to the statement of Pannalal. The State not only denied the liability to refund but also made a counterclaim that a sum of Rs. 27,667 be awarded to the Government "against the applicant." On July 20. 1957, the arbitrator framed 18 issues. Issues 14, 15, 16, 17 and 18 were as follows:

Issue 14. Whether Pannalal was entitled to rescind the contract ?

Issue 15. Whether the applicant is entitled to a refund of the deposits made by him ?

Issue 16. Whether the applicant is entitled to claim damages and if so what amount ?

Issue 17. Whether Pannalal has committed breach of contract ?

Issuse 18. Whether Pannalal is liable to pay to Government the balance of the auction monies ?

From these facts it is as clear crystal that Pannalal not only did not challenge the reference to arbitration, but he himself moved the arbitrator to start arbitration proceedings. It may be noted that nothing had been done between 18th November, 1954, and 23rd September 1955 a most one year. Then it was Pannalal himself at whose instance the arbitration proceedings started. He offered not only his claim to be tried by the arbitrator but also resisted the counterclaim of the State Government. The contractor cannot now turn round and say that there was no reference to arbitration or that it was invalid by reason of vagueness or., uncertainty. Assuming that the reference to arbitration under the notification dated November 18, 1954, was invalid, it must be said that both the parties, by the applications before mentioned, made a fresh appointment of the arbitrator. They submitted to the arbitration of the Deputy Commissioner, Balaghat, when they lodged their claim and counter-claim. In this view of the matter, all the contentions raised before us by Pannalal as to invalidity of reference and as to want of jurisdiction of arbitrator must be rejected.

It is then maintained by Shri Seth learned Counsel for the Appellant, that there is an error of law apparent on the face of the award. Time was of the essence of the contract, not only because this was a commercial contract and lac was to be collected and propergated within a particular time of the year but also because of Clause 19 of the conditions Of auction. It is further argued that the contract could not be worked and the operation could not start unless and until a written contract was executed. The contract or was within his right to insist on not to begin the work unless and until an agreement was executed with all the formalities required under Article 299 of the Constitution in the absence of which the Government could have escaped all obligations and liabilities On this argument it is maintained that the contractor was within his right to rescind the contract when the Government did not execute an agreement within the time stipulated under the notice of auction, not even within the extended time. [See Md. Habibullah v. Bird and Co., AIR 1922 PC 178, and the contractor did not forfeit his right to rescind the contract just because he extended the time by a short duration (See AIR 1940 443 (Oudh) .

Now, the first question is whether we can enter into the above contentions raised for the Appellant and examine the correctness of the finding on issue No. 14, arrived at by the arbitrator. Our answer is clearly in the negative. Issue No. 14 as this:

Whether Pannalal was entitled to rescind the contract.

Although the question whether the Appellant could rescind the contract was a mixed question of law and fact, it having been specifically referred to arbitration, the Court has no jurisdiction, to override that decision or to substitute its own. See Seth Thawardas Pherumal Vs. The Union of India (UOI), .

It is then urged for the Appellant that the contractor could not be saddled with such heavy damages as Rs. 41,500, even if he committed'' breach of the contract. Reliance is placed on Clause 2 of the conditions of auction and Section 73 of the Contract Act. Whether in each case, the liability of the contractor was limited to forfeiture of Rs. 500 and to farther pay deficit resulting from re auction, and whether the State Government was bound to do every thing which lay in its power to minimise of damages are questions of law. And these questions of law were not "specifically referred" to the arbitrator. Their Lordships have laid down to Seth Thawardas Pherumal Vs. The Union of India (UOI), :

An arbitrator is not a conciliator and cannot ignore the law or misapply it in order to do what be 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 Courts provided his error appears on the face of the award. The single exception to this is when the parties choice specifically to refer a question of of law as a separate and distinct matter.... It is opt enough that the dispute should fall within the clause..... If, therefore, no specific question of law is referred, either by agreement or by compulsion, the decision of the arbitrator on that is not final however much it may be within his jurisdiction, and indeed essential for him to decide the question incidentally.

The Court can, therefore, examine this legal aspect of the case in order to see whether there is an error of law apparent on the face of the award.

It is maintained for the Appellant that the notice of auction dated September 3, 1951, which contains the conditions of auction, provides in Clause 2 for consequences of a successful bidder failing to pay the first instalment or executing an agreement bond when require to do so after the close of the auction. The penalty is that "his earnest money deposited shall be forfeited to Government and the contract shall be reauctioned at his risk. Any loss to Government accruing by such reauction will be recovered from the original purchaser". It is urged that assuming that the contractor failed to execute the agreement bond, his only liability was that his earnest money of Rs. 500 in each case could be forfeited to the Government and he was further liable to reimburse the Government in case there was a deficit on re-auction, but as there was no reauction, there is no liability for any damages beyond the forfeiture of Rs. 1,000. We would advisedly not enter into the question of the quantum of damages.

Now, the rule is that damages are compensatory and not penal and that one who has suffered loss from breach of contract must take every reasonable step that is available to him to mitigate the extent of damages caused by the breach. He cannot claim to be compensated by the party in default for loss which is really due not to the breach but to his own failure to behave reasonably after the breach. This rule is incorporated in the explanation to Section 73 of the Contract Act It runs thus.

In estimating the loss or damage arising from the breach of a contract the means which exist of remedying the inconvenience caused by the non-performance of the contract must be taken into account.

In Frost v. Knight 1872 LR 7 Exch. 111 (115), Cockburn, C.J., observed:

In assessing the damages for breach of performance, a jury will of course take into account whatever the Plaintiff has done, or has had the means of doing, and, as a prudent man, ought in reason to have done, whereby his loss has been, or would have been, diminished.

This rule was exemplified in Brace v. Colder (1895) 2 QB 253. Again Lord Haldane said in British Westing House Electric and Manufacturing Co. Ltd. v. Under Ground Electric Railways Company of London Ltd. 1912 AC 673, 689:

The fundamental basis is thus compensation for pecuniary loss, naturally flowing from the breach; but this first principle is qualified by a second, which imposes on a Plaintiff the duty of taking all reasonable steps to mitigate the loss consequent on the breach and debars him from claiming any part of the damage which is due to his neglect to take such steps.

The explanation to Section 73 of the Contract Act casts a burden upon the person complaining of breach of the contract to show that he did not possess means of remedying the inconvenience caused by the non-performance of the contract. See also Jamal v. Moola Dawood Sons & Co. AIR 1915 PC 48; Foley v. James A. Mcilwee, AIR 1917 PC 255 and Karim Bux Vs. Debi and Another, . The law, for wise reasons, imposes upon a party subjected to injury from a breach of a contract the active duty of making reasonable exertions to render the injury as light as possible.

In this case, the Government could have and, in all events, should have reauctioned the contracts since Pannalal intimated to the Deputy Commissioner on December 15, 1951, of his having rescinded the contract. It must be recalled that the Deputy Commissioner had asked the contractor to appear before him on the 17th December to execute an agreement. He having received the intimation of rescinding: of the contract on the 15th December, the date of the breach can be safely fixed as the 17th December, 1951. If on that date, or soon thereafter, the Government could do something to mitigate the damage, the defaulting contractor is entitled to the benefit of it.

We would refer, here, to the report dated January 1, 1952, from the Additional Deputy Commissioner. Waraseon to the Deputy Commissioner, Balaghat.(Ex. N. A. 24) In this report, the Addl. Deputy Commissioner has stated the developments of the case upto that date and sought instructions for further action. In his letter dated January 29, 1952, (Ex. N.A 26) the Additional Deputy Commissioner wrote to Pannalal:

You have failed to credit the first installment within six days of the date of auction as per conditions of the lease. The lease, is therefore liable to be reauctioned at your'' risk. Please let me know if you have anything to say in the matter. If you fail to give a reply and appear in this Court on 4-2-1952, I shall be at liberty to proceed in the matter as per terms of the lease.

Again in his memorandum to Pannalal (Ex: N. A 28) dated February 26, 1952, the ''Actional Deputy Commissioner wrote.

You have failed to credit the first instalment within six days of the date of aution as per conditions of the lease. The lease, is therefore liable to be reauctioned at your risk. Please let me know if you have anything to say in the matter. If you til to give a reply and appear in this Court on 27th February, I shall be at liberty to proceed in the matter as per terms of the lease.

And again in the memo an sum dated August 4, 1952, inter alia, he was threatened with the reauction at his risk in these words:

...You failed to credit the first instalment within the stipulated period''. In your application dated 15th December, 1952, you rescinded the contract and asked for the refund of the deposited amount. As you are not witting to execute the lease deed and work the contract, the only course open is to reauction the said two Halkas and realise the balance from you as arrears of land revenue.........

The department was thus repeatedly threatening the contractor that the contracts would be reauctioned at his risk, but but it is not known why that necessary step was not actually taken. There could be only two possibilities: either Pannalal was at fault; or he was not. If the default was his, his liability was to pay to the Government the deficit on reauction; if he was not, and he was not liable to make up any loss to the Government, but was not prepared to work the contract and had expressly rescinded it, then also the contracts should have been reauctioned. In cither case, it was the imperative demand of the situation that the contracts should have been reauctioned. This is, therefore, a clear case where the contractor is entitled to the benefit of the law relating to the duty of the promisee to mitigate the extent of damages.

For these reasons it must be held that there is an error of law apparent on the face of the award, so far as it holds the Appellant liable to pay the balance of the auction amount. The Appellant is entitled to get the benefit of the failure on the part of the State Government to reauction the contracts on or soon after December 17, 1951. This part of the award is severable in its nature; the other part of the award is good for reasons already stated. We would, therefore, set aside the invalid portion. See Prestige and Co. Ltd. v. Brettell, (1938) 4 All. ER 346 (352). We need not go into the question as to the quantum of damages which the Government is entitled to We need say no more upon that aspect of the case. The matter has to be remitted to the arbitrator. There is no complaint of misconduct against him.

We think it right to observe that it is a pity that the agreement forms were not available when not only the notice of auction required the execution of the agreement forthwith, on the bid being accepted, but also the intending bidders had been asked inspect those forms before participating in the auction. It is amazing that the forms were not available even upto the 10th December (more than two months after the auction actually took place). Then, again, the officers should have been after the execution of the agreement bond: on the contrary, it was the contractor who was making repeated requests and gave notice to the department that the agreement be executed without delay, and he also attended the office twice but the officers were callous. Above all, a reauction was imperative in every event, so that the forest produce could be collected and propagated. Whether the contractor was liable or not and what the extent of his liability was, were questions which could be determined later on. The necessary step to reauction did not dependon those questions. And where went the forest produce for those three years ? Presumably, the entire produce during the relevant period either must have gone a waste or must have been misappropriated; in either case it was a loss to the Government.

In the result, the appeal is partly allowed. The award, so far as it mates to the decision on issues No. 15, 16 and 18, is set aside as it is invalid to that extent. The rest of the award is upheld as good and valid. The judgment and decree passed by the Additional District Judge, likewise, are also partly set aside. The matter as to the quantum of damages which the contractor is liable to pay (issues No. 15, 16 and 18) shall be remind to the arbitrator for reconsideration and decision according to law. Parties shall bear their own costs in this Court and in the Court below.