(Appeal under section 37 of Arbitration Act, against the order/decree in O.P.No.1457 of 2001 dated 05.11.2004 on the file of the court of the 3rd Additional chief Justice, City Civil Court, Hyderabad.)

G. Rohini, J.

This appeal is preferred under Section 37 of the Arbitration and Conciliation Act, 1996 (for short, ‘ the’) against the order dated 5-11-2004 in O.P.No.1457 of 2001 on the file of the Court of III-Addl. Chief Judge, City Civil Court, Hyderabad, whereunder the application made by the appellant herein under Section 34 of theto set aside the arbitral award dated 6-6-2001 was dismissed.

The facts, in brief, may be noted as under:

The second respondent herein was awarded the contract for supply of fresh fruits at supply depots at Tirumalgherry, Hakimpet and ASC Golconda for the period from 1-10-1999 to 30-9-2000 in pursuance of the tenders invited by the appellant. As per the agreement dated 6-8-1999 executed between the parties, the second respondent was required to make the supply of fresh fruits in terms of the specifications and conditions annexed to the agreement. It is not in dispute that in pursuance of the said agreement though the supply of fruits was commenced with effect from 1-10-1999, the 2nd respondent stopped the supply from 6-6-2000 on the ground that non-local variety of fruits demanded by the appellant were not available. Consequently, the appellant had to resort to local purchase of fruits from 6-6-2000 to 15-8-2000 incurring a sum of Rs.4,14,582-07 ps. Thereafter, the contract in favour of the second respondent was rescinded vide notice dated 29-6-2000 and a short term agreement was executed in favour of a third party for the supply of fresh fruits for the period from 16-8-2000 to 30-09-2000. For the said purpose, it was claimed that the appellant incurred a sum of Rs.1,74,548-65 ps towards consideration under the short term agreement.

Aggrieved by the action of the appellant in terminating the contract and forfeiting the security deposits worth Rs.1.01 lakhs and also withholding the payment for the fruits supplied by the 2nd respondent upto 5-6-2000, the 2nd respondent invoked the arbitration clause under Condition No.23 of the agreement and sought for reference of the dispute to a sole Arbitrator. Accordingly, a sole Arbitrator (1st respondent herein) was appointed and the 2nd respondent filed his statement of claim to which the appellant filed its statement of defence. Though the appellant did not make any independent claim before the Arbitrator, it appears that a counter-claim was made by letter dated 13-12-2000 for a sum of Rs.5,89,139-72 ps contending that the contractor/2nd respondent herein was liable to pay the additional expenditure incurred by the Appellant in meeting the requirement of fruits during the remaining contract period.

The Arbitrator, after hearing both the parties, passed an Award dated 6-6-2001 holding that the contract was void ab initio and therefore the question of its enforceability did not arise. Accordingly, it was concluded that no right accrued to any of the parties for breach of the contract and therefore the claim of the second respondent for Rs.12,23,732/- towards the alleged loss suffered by him could not be accepted. Similarly, a sum of Rs.5,89,130/- claimed to have been spent by the appellant herein subsequent to the breach of the contract by resorting to local purchases at its own expense, was also denied. However, the Arbitrator, having taken note of the fact that the contract in question was non-gratuitous, opined that Section 70 of the Contract Act would attract and accordingly ordered that the appellant herein shall pay a sum of Rs.38,173/- towards the cost of fresh fruits admittedly supplied by the 2nd respondent which remained unpaid till that date together with interest at the rate of 18% per annum. The Arbitrator further directed the appellant to return the Fixed Deposit Certificates to the 2nd respondent.

Aggrieved by the same, the appellant herein filed O.P.No.1457 of 2001 on the file of the Court of III-Addl. Chief Judge, City Civil Court, Hyderabad under Section 34 of the Arbitration and Conciliation Act, 1996 seeking to set aside the Award dated 6-6-2001 contending inter alia that the conclusion of the Arbitrator that the contract itself was void was erroneous. It was also contended that the award was passed in violation of the terms of the reference and the counter-claim made by the appellant for recovery of Rs.5,86,000/- was rejected arbitrarily.

The 2nd respondent herein filed a counter contesting the said O.P.No.1457 of 2001.

The learned Additional Chief Judge, after hearing both the parties, by order dated 5-11-2004 dismissed O.P.No.1457 of 2001, which is under challenge in this Appeal under Section 37 of the.

We have heard the learned Senior Standing Counsel for the Central Government appearing for the appellant as well as the learned Counsel for the 2nd respondent, and perused the material on record.

The learned Senior Standing Counsel for the appellant contended that the Arbitrator having answered all the issues in favour of the appellant was not justified in not granting the counter-claim made by the appellant on the ground that the contact was void. The learned Standing Counsel submitted that as a matter of fact the conclusion that the contract was void ab initio, being opposed to public policy, itself was erroneous. The learned Standing Counsel contended that even assuming that the contract was void ab initio, the Arbitrator being a creature under the agreement, once the agreement was held to be void, no relief could be granted to either party and the Arbitrator automatically would become incompetent to adjudicate the dispute between the parties. Thus, according to the learned Standing Counsel, the award was patently illegal and the court below committed a serious error in not setting aside the said award under Section 34 of the.

On the other hand, the learned Counsel for the 2nd respondent contended that the learned Arbitrator had rightly upheld the plea of the 2nd respondent that the contract was void ab initio because the tender was accepted by the panel of the officers contrary to the policy as laid down under the Notification issued by the Government of India, Ministry of Defence, dated 31-8-1990. The Counsel further contended that even though the contract was held to be void, the Arbitrator was competent to grant the appropriate relief in terms of Section 70 of the Contract Act, 1872 and therefore the Award dated 6-6-2001 did not suffer from any infirmity warranting interference on any of the grounds specified under Section 34 of the Arbitration and Conciliation Act, 1996.

A perusal of the award dated 6-6-2001, marked as Ex.C-1 before the Court below shows that the Arbitrator had settled the following issues for consideration.

(1) Whether the parties to the contract were discharged

(2) Whether the disputed contract was discharged in the following ways.

(a) By performance of the contract

(b) By breach of the contract

(c) By impossibility of performance

(3) Construction of A.S.C. Specification No.68.

(4) Whether the contract was legally enforceable

Having heard both the parties and on appreciation of the evidence produced by them, the Arbitrator recorded a finding on Issue No.1 that the appellant was discharged from its obligation to perform their part of contract on account of unilateral act of the 2nd respondent in not providing the fresh fruit as agreed. So far as Issue No.2 is concerned, though the 2nd respondent pleaded that there was breach of contract due to impossibility of performance on account of crop failure and also on account of arbitrary scheduling of fresh fruit, the Arbitrator did not accept the said plea and held that the 2nd respondent himself committed breach of contract. Even Issue No.3 was decided in favour of the appellant rejecting the contentions of the 2nd respondent.

However, on Issue No.4 i.e., whether the contract was legally enforceable, the Arbitrator held that since the appellant accepted the tender without adhering to the procedure laid down in the notification issued by the Government of India, Ministry of Defence dated 31-8-1990, the contract was void ab initio and therefore it could not be enforced and no right accrued to any of the parties for breach of the contract.

In view of the finding recorded on Issue No.4, the Arbitrator rejected the claim of the 2nd respondent for a sum of Rs.12,13,732/-. Similarly, the claim of the appellant for a sum of Rs.5,89,130/- towards the expenses incurred for purchase of fruit subsequent to the breach of contract was also denied. However, having regard to the admitted fact that the 2nd respondent had supplied fresh fruits as per the terms of the contract from 1-10-1999 to 5-6-2000, it was held that the appellant who received the benefit was bound to pay compensation to the 2nd respondent in terms of Section 70 of the Indian contract Act. Though the statement of claim filed by the 2nd respondent for the value of the supplied by him as per the market rate was not accepted, the Arbitrator concluded that the 2nd respondent was entitled to the rate as agree in the contract and accordingly awarded a sum of Rs.38,173/- towards the rate of fruits supplied together with interest at the rate of 18% per annum. That apart, the 2nd respondent was also directed to return the Fixed Deposit Certificates furnished towards security within six (6) weeks.

The appellant filed O.P.No.1457 of 2001 under Section 34 of theto set aside the said Award dated 6-6-2001. The Court below held that the award passed by the Arbitrator was not patently illegal and therefore no ground was made out to set aside the sale under Section 34 of the. While extensively referring to the decision of the Supreme Court in Oil and Natural Gas Commission Limited v. Saw Pipes Limited (AIR 2003 SC 2629 [LQ/SC/2003/517] ) the Court below also concluded that the Court cannot sit in appeal against the finding of the Arbitrator that the contract was unenforceable. Thus, the Court below declined to set aside the Award. Aggrieved by the same, the appellant preferred the present Appeal.

In the light of the submissions made by the learned Counsel for the parties, the only question that arises for consideration in this appeal is whether the order under Appeal refusing to set aside the Arbitral Award under Section 34 of thesuffers from any infirmity warranting interference by this Court while acting as an appellate Court under Section 37 of the.

At the outset, it is to be noted that in an Appeal Against Order of the Civil Court refusing to set aside an award, the appellate Court will not review the decision of the Arbitrator given on points referred for arbitration, but it would only see whether the award of Arbitrator was vitiated on account of excess of jurisdiction, incompleteness or misconduct. The appellate Court would only interfere where it is found that the Civil Court had acted unreasonably in exercise of its discretion or where it had ignored the relevant facts.

In the case on hand, it is not in dispute that both the parties were afforded ample opportunity of being heard before the Arbitrator as well as the Court below. On the basis of the claim statement made by the 2nd respondent as well as the statement of defence filed by the appellant (Union of India), the Arbitrator had settled as many as four issues for consideration.

May be that, Issue Nos. 1 to 3 were held in favour of the appellant/Union of India, however, the Arbitrator on issue No.4 held that the contract itself was void ab initio and therefore unenforceable. Consequently, the Arbitrator concluded that no right accrued to any of the parties for breach of the contract and accordingly rejected the claim of the 2nd respondent for a sum of Rs.12,23,723/- as well as the counter-claim made by the appellant (Union of India) for a sum of Rs.5,89,130/-.

The said finding was assailed by the Union of India before the Court below while seeking to set aside the award under Section 34 of theon the ground that the conclusion of the Arbitrator that the contract awarded in violation of the Notification dated 31.8.1990 being opposed to public policy was void and unenforceable was erroneous. It was contended that the said notification dated 31-8-1990 was nothing but an administrative order and under no circumstances can be termed as a law creating a right in favour of the 2nd respondent.

The Court below while relying upon the decision of the Supreme court in Oil and Natural Gas Commission Limited’s case 1 (supra) rejected the said contention holding that the finding recorded by the Arbitrator that the notification in question was law and the contract entered into in violation of such law was void cannot be interfered in exercise of jurisdiction under Section 34 of thejust because two views were possible and the one taken by the Arbitrator was different from the one taken by the Court. It was also held that while exercising the jurisdiction under Section 34 of the Act, the Court will not sit in appeal against the findings of the Arbitrator.

On a careful consideration of the material on record, we do not find any infirmity in the said conclusion of the Court below. In Oil and Natural Gas Commission Limited’s case (1 supra) the Supreme Court having considered the ambit and scope of the jurisdiction of the Court where the award was passed by the Arbitral Tribunal was under challenge under Section 34 of the Act, enumerated the circumstances under which the award can be set aside.

In the case on hand, there was no allegation that the Arbitrator failed to follow the mandatory procedure prescribed under Sections 24, 28 or 31 of the affecting the rights of the parties. The only contention raised was with regard to the interpretation of the notification dated 31-8-1990 and whether the contract entered into in violation of the instructions under the said notification rendered the contract unenforceable. The finding recorded by the Arbitrator on the said issue cannot be interfered with on any of the grounds enumerated by the Supreme Court in Oil and Natural Gas Commission Limited’s Case (1 supra). Hence, the Court below had rightly declined to set aside the award.

Moreover, as held in the above case, as per Section 19 of thethe Arbitral Tribunal was not bound by the Civil Procedure Code, 1908 or the Indian Evidence Act, 1872 and the parties were free to agree on the procedure to be followed by the Arbitral Tribunal in conducting its proceedings. In the absence of any agreement between the parties, the Arbitral Tribunal has to conduct the proceedings in the manner it considers appropriate, which includes the power to determine the admissibility, relevancy, materiality and weight of any evidence. In the circumstances, we are unable to hold that the Court below committed any error in refusing to interfere with the finding recorded by the Arbitrator on issue No.4 that the contract in question was unenforceable.

We also do not find any substance in the contention of the learned Counsel for the appellant that the Court below erred in not setting aside the award insofar as rejecting the counter claim made by the appellant for a sum of Rs.5,86,000/-. Once the agreement itself was held to be unenforceable, no right accrued to any of the parties on the ground of the breach of contract and therefore the counter-claim made by the appellant was rightly rejected.

So far as the relief granted by the Arbitrator awarding compensation under Section 70 of the Contract Act, we are of the considered view that the same is well within the jurisdiction of the Arbitral Tribunal.

Under Section 28(1)(a) of the Act, the Arbitral Tribunal has to decide the dispute in accordance with the substantive law for the time being in force. Substantive law would include the Contract Act, 1872 and consequently it is open to the arbitral Tribunal to invoke the provisions of Section 70 and to grant compensation even after concluding that the contract was void.

In Mulamchand v. State of M.P. (AIR 1968 SC 1218 [LQ/SC/1968/47] ), the Supreme Court has laid down the principle underlying Section 70 of the Contract Act. It was held that the first condition to be satisfied under Section 70 is that a person should lawfully do something for another person or deliver something to him. The second condition is that in doing the said thing or delivering the said thing he must not intend to act gratuitously. The third condition is that the other person for whom something is done or to whom something is delivered must enjoy the benefit thereof, If these conditions are satisfied Section 70 of the Contract Act imposes upon the latter person a liability to make compensation to the former in respect of the thing so done or delivered.

Applying the above principles, it is manifest that a person whose contract is void would be entitled to compensation under Section 70 of the Contract Act if he had established his claim that the other person had enjoyed the benefit of the thing delivered and that the said thing was never intended to be delivered gratuitously.

Hence, the Court below had rightly declined to set aside the Arbitral Award dated 6-6-2001. The impugned order passed by the Court below is in accordance with the settled principles of law and there is absolutely no justifiable reason to interfere with the same.

Accordingly, the Civil Miscellaneous Appeal is dismissed. However, in the fact and circumstances of the case, there shall be no order as to costs.