1. ' This is an application under section 14(2) of the Arbitration Act, 1940 and rule 282(1) of the Sind Chief Court Rules (Original Side) made by the Arbitrator by filing the award.
2. ' The Government of Pakistan invited tenders for the erection of Clifton Sewage Pump-Power Station, the machinery of which was, however, to be imported. The tender offered by Messrs Barisons (Pakistan) Ltd., Karachi (hereafter called the claimants) on behalf of Messrs M. A. N.
3. (Maschinenfabrik Augsburg Nuernberg) of West Germany (hereafter called the Principals) was accepted by the Government, as per conditions of contract embodied in Forms PS-35 and PS-38 of the Government of Pakistan Ministry of Industries, Department of Supply and Development (Purchase Branch). The contract was entered into on 20th February, 1962.
4. ' Clauses 14 and 15(d) of the contract are relevant for the purpose of the present litigation and the same read as under :- "14. Payment.-A confirmed, irrevocable, transferable and divisible letter of credit for the total contract value in U. S. Dollars will be established permitting part payments for part consignment upto 90% value of the contract on production of shipping documents ; Inspection Certificate to be issued by Director of Inspector, West Germany together with Insurance Policy/Cover Note or Insurance Certificate and D. I. F. Supplier's Certificate (specimen copy enclosed). The balance 10 % will be payable on submission of an authorization letter issued by the Director-General, Supply and Development, Government of Pakistan, Karachi after the plant has been erected, inspected, tested and taken over at site.
5. ' The letter of credit will be established in favour of Messrs Maschinen Fabrik Augsburg-Nuernberg A.-G., Augsburg (West Germany). Insurance shall be arranged by the contractor through Messrs Pakistan Insurance Corporation, Karachi. Insurance charges are included in the total turn-key price stipulated in this contract.
6. ' 15(d) The 'turn-key' prices stipulated in this contract are firm and final for the duration of the contract whatever is the time taken in installation and erection. The 'turn-key' prices have been calculated including custom-duty at 12.1-2%. In case of reduction in customs duty, the benefit will be the purchase account. In case of increase the extra cost will be borne by K. D. A. Direct.
7. Documentary evidence shall be produced to verify the customs duty charges. Sales tax, if any, shall be to the account of contractors. The contract price includes erection charges and all other local charges."
8. ' The meaning of the term 'turn-key' as given in para. 3 of the Schedule reads as under :- ``Turn-key job means manufacture and supply . Of the equipment according to the requirements stipulated, payment of all internal taxes including customs duty, sales tax (if any) K. M. C. Taxes if any, forwarding, erection, working including payment to erection, labour (skilled and unskilled) both foreign and local, procurement of erection tools and equipment, etc. And working of plant for the specified period and handing over to the consignee."
9. ' Originally, the total consideration was for an amount of U. S. A. Dollars 41,310.97 but subsequently the value of the contract was increased to 43,9231.47 amending the A./T., on account of additional machinery in connection with the work. In pursuance of clause 14 Letter of Credit for the required amount was opened by the Government.
10. ' Subsequently, it was apprehended by the claimants that since the total value of the contract did not show the cost of equipment and cost of installation separately, the custom authorities would insist in charging customs duty, sales tax, clearance etc. On the total cost of contract in accordance with the A/T and, therefore, they suggested to the Principal by a telegram dated 1-6- 1963 and to the Government by a letter of the same date, to effect the necessary changes in the contract and the Letters of Credit, to enable the Principals to claim C. I. F. Cost and installation charges separately. This was accepted by the Principals by their letter dated 5-6-1963 and confirmed in another letter dated 2-7-1963.
11. ' Again it was found that since the project was undertaken on the basis of U. S. A. Aid from D. L. F.
12. Funds, the loan agreement precluded use of dollars to finance local currency costs, the Chase Manhattan Bank, holding the Letters of Credit refused to make full 90% payment of the contract value but instead allowed a part payment to the Principals covering 90% of cost of equipment and Marine insurance as the remaining items of cost included in the contract value, such as, clearance, customs duty, sales tax, erection, erection insurance etc. Involving Rupees expenditure could not be paid to to Principals in Foreign Exchange. So a further amendment of A/T was suggested by the claimants by their letter dated 27-8-1963 to the Government. Since no reply was received a reminder dated 1-10-1963 was sent. The proposal was accepted by the Government by letter dated 7-1-1964. As a result of the correspondence, between the Claimants and the Government, a formula was suggested by the Claimant by the letter dated 5-2-1964 to the Government as under :- {{TABLE}}
(i) Net C & F Cost of Equipment, cost of Marine Insurance and cost of Foreign Erection, payable to the Suppliers in foreign currency : $ 3,19,663.66Customs duty, Clearance and Forwarding charges, cost of Erection Insurance, cost of Local Erection, cost of Overheads and our commission, etc., payable to us in local currency :1,19,567.81 Total $ 4,39,231.47 {{TABLE}} ' To this, the Government agreed by letter dated 18-2-1964. As a result of this arrangement between the Claimants and Government, it was necessary to contact the Principals to obtain their approval.
13. So there was correspondence with the Principals but they, by their letters dated 23-6-1964, 9-7- 1964 and 18-8-1964 and a few others rejected the allocation of $ 119,567.81 payable in local currency and agreed to an amount of $ 92,000 payable in Pakistani currency for customs duty, clearance charges, local erection costs and local insurance costs. They complained that the proposed amendments were not correct and the claimants had proceeded in a one sided manner contrary to the internationally accepted rules about Letters of Credit. They also complained that the claimants had failed to furnish the details of the various local expenses although a clarification was sought as to how the figure was arrived at. It appeared to them that claimant had attempted to secure the monetary funds, i,e, especially commission to which, on the basis of the contractual agreement, they were not entitled. They also proceeded to make it clear that the commission was an internal affair between the supplier and his agent, governed by the respective internal' agency contract, and it was not obligatory to pay the commission in Pakistani currency.
14. ' In view of the aforesaid refusal, the Government revoked the arrangement made by the Claimants and amended clause 14 of the contract as under : "The payment of the local turn-key value of the contract amounts to $ 438,231.41 which includes expenditure in Pakistani currency amounting to $ 89,617.87 will be made as under."
15. ' It appears that by that time the amount of $ 89,617.87 instead of $ 92,000 was available with the Government to enable them to make payment in local currency.
16. ' Since there arose a dispute between the parties, the last consignment was not cleared by the Claimants. This caused delay and K. D. A. Had to clear the goods from Customs by paying a sum of Rs, 2,04,242 as demurrage in addition to custom duty, extra duty, K. P. T. Wharf age charge, and agency commission of clearing agent for clearing the goods. This amount works out to Rs, 45,180.76 as indicated in the letter dated 11th March, 1965 written by the K. D. A. To the Government. In this letter it was also stated that the K. D. A. Had been out of pocket by amount of Rs, 7,50,180.76 as earlier a sum of Rs, 3 lacs was deposited to be paid to allow the Claimants for making clearance and pay customs duty on the stores covered by the supply order. In addition C & F cost in U. S. A. 90 % without any condition and 10% under counter L/C had also been paid by K. D. A.
17. ' Eventually arbitration clause was invoked. Originally Mr. A. H. Qarni, C. S. P., Managing Director, National Investment Trust, Karachi was appointed as also arbitrator, but subsequently, this was superseded by letter dated 24th April, 1965 and Dr. Nazir Ahmed, Ex-Chairman Tarrif Commission, Karachi, was appointed as sole arbitrator. This letter reads as under : "I am directed to say that the Government of Pakistan is pleased to appoint Dr. Nazir Ahmed, Ex- Chairman, Tarrif Commission, Mitha Chambers, 93, Nicol Road, Karachi, as Sole Arbitrator, in the above matter vice Mr. A. H. Qarni, C. S. P., Managing Director, National Investment Trust, Karachi, resigned.
18. ' You are, therefore, requested to contact him for fixing time, date and venue for proceeding in the matter."
19. ' The venue of the meeting shall be at Karachi. On the receipt of this letter the Claimants wrote letter dated 17th May, 1965 to the arbitrator which reads as under : "We invite your kind attention to the above letter appointing you as the Sole Arbitrator vice Mr. A. H.
20. Qarni, C. S. P., retired, in the above matter and request you to enter upon the Reference as well as fix the date for filing of the Statement of Claims. As far as the particulars of Reference, the same will be embodied in the Statement of Claims submitted by us.
21. ' It is our earnest desire that all the disputes arising between the parties on account of the subject contract may be resolved once and for all through this arbitration."
22. ' Thereafter, the arbitrator entered upon the reference and fixed various dates. The Claimants filed their statement of claim while the Government filed their written statement as well as statement of counter-claim. The arbitrator proceeded with the arbitration without settling the issues, but he had separately noted down the issues raised by each party. The parties did not lead any oral evidence but confined themselves to the documents produced by them. On conclusion of the arbitration proceedings the impugned award was given on 20th June, 1966.
23. ' Taking up the award and the reasons given by the arbitrator, it was pointed out by him that on account of the difficulties experienced to defray the local expenses in view of the fact that U. S. Aid Fund did not permit any payment in local currency, the original A/T payable in U. S. Dollars was amended. Hi presumed that both the principals and Claimants expected reasonable profit for the goods supplied and for the services rendered by them. He also presumed that by an arrangement between the Claimants and the Principal, the latter were to retain their share of the amount covering the cost of machinery plus profit and foreign components of the cost of erection and remit the rest to the Claimants to enable them to meet their responsibilities, namely, payment of custom duty, sales tax, cost of local erection etc. Plus their share of the profit. According to him, this scheme had two serious flaws, as-commented upon by him. He laid great emphasis on the word "simultaneously" occurring in letter dated 18-2-1964 written by Government to the Claimants and according to him the use of this word placed the Principals and Claimants at par and further 90% of the local currency expenditure was to be made available to the Claimants on presentation of their bill supported by shipping documents to enable them to defray the expenses on account of payment of custom duty, sales tax, etc., without having to strain their financial resources. Thus, according to him it was not the responsibility of the Claimants to pay these charges in the first, instance and later recover from the Government but it was the responsibility of the Government to provide the necessary funds. This view had been expressed by him in interpreting clause 15(d) of the Contract. He further pointed out that the Claimants had already paid a total sum of Rs, 20,186.25 without receiving any payment from the Government on two consignments, although the principals had received 90 % of the C. I. F. Cost.
24. ' The arbitrator also found fault with the Government by not complying with the amended A/T. He pointed out that in view of the restriction imposed by loan agreement prohibiting payment in local currency, he concluded that although the letter of credit, as originally contemplated, was opened in theory, yet in actual practice it was not effective until it was subsequently amended in regard to the amount payable to the principals and, therefore, it could not be said that the Government performed their entire part of the contract by opening irrevocable letter of credit under clause 14 of the A/T dated 20-2-1962. He further observed that by amendment of A/T by letter dated 18-2-1964, it was imagined that all the major obstacles were removed and henceforth there would be smooth sailing in the implementation of the contract but this was not the case to be as it would appear that the amendment dated 18-2-1964 was made without the prior approval of the Principals, who were the Chief beneficiaries of the letter of credit, and they, first by telegram and later by letter dated 23-6-1964, refused to accept the amendment and permitted the deduction of approximately U. S. $ 92,000 in local currency from the full value of the contract for the plaintiffs and not to the extent of U. S. $ 11,99,494.81 as proposed by the plaintiffs and agreed to by the Government and this represented a difference of U. S. $ 27,567 or approximately Rs, 1,35,000.
25. Commenting upon the situation, as created, the arbitrator proceeded to observe as under : "Since an irrevocable letter of credit could not be revoked or amended without the consent of the person in whose favour it had been opened, the respondents were in a quandary. It seems to me that the best course at this stage would have been for the respondents to have asked Messrs M. A.
26. N. Of West Germany to send a responsible representative to Karachi so that by mutual consultations the difference between the claimants and their principals could have been resolved with the respondents' help, if necessary, and the whole matter could have been amicably settled in such a way that the settlement would have taken into consideration the legitimate claims of both the parties. There is no evidence on record to show that such a step was taken, instead, just as earlier the respondents had issued the amendment to the original A/T as desired by the claimants, now they seem to have swa yed completely to the other side, and issued another amendment to the A/T dated August 22, 1964 in which they accepted the position as stated by Messrs M. A. N. Of.
27. West Germany, and reduced the local currency expenditure to U. S. $ 89,617.87, which was even less than what Messrs M. A. N. Of West Germany were willing to concede in their letter dated 23rd June, 1964."
28. ' The arbitrator also blamed the Government for henceforth dealing directly with the principals, thereby making their position independent and strong as a result of which they were able to press their claims, and adopt a rather stiff attitude. According to him it was desirable, if not essential, ' that the contact with a foreign firm should have been maintained and continued through the plaintiffs, being a Pakistani firm and had introduced the main contracting parties and brought about the contract or else it would weaken the position of the local firm on the one hand and would strengthen that of foreign firm on the other and this exactly happened in the present case, which could be avoided if the course suggested by him was adopted and so the plaintiffs were the aggrieved party and had a legitimate cause of complaint against the treatment meted out to them. He further observed that although according to the amendment, 90% of U. S. $ 89,617.67 in equivalent Pakistan currency should have been paid simultaneously to the Claimants but in actual fact the Principals were paid the full amount without the deduction and withholding of 10% perhaps before the issue of the certificate that the plant had been erected, inspected and taken over at site but the plaintiffs were not paid the amount due to them under the contract simultaneously and their payment of even partial amount was made in a very delayed and grudging manner.
29. ' The arbitrator also rejected the contention of Government that it was implied that the claimants were not entitled to receive any benefit in the form of agency commission or profits and the only compensation the plaintiffs were entitled to receive were on account of payment of customs duty, sales tax, clearance and forwarding charges etc. He reached this conclusion on the ground that the plaintiffs had set up and maintained an office and carried on all the correspondence and negotiation in connection with the work and it was unreasonable to assume that they would have done all that work without expectation of any return for it. He further observed that the Claimants had introduced the principals to the Government and as a result of the partial action of the Government' by directly dealing with the principals, the opportunity of carrying through with the job to its end and of making some profits for the services rendered, was lost to the plaintiffs. According to him, since the Principals were entitled to make profit on the goods shipped by them, the Claimants were equally entitled to make profits on the service rendered by them. So, in his opinion, compensation on this account could be awarded to the plaintiffs.
30. ' With regard to the demurrage amounting to Rs, 2,04,242 paid by the Government, it was held by the arbitrator that the claimants could not be held responsible as according to clause 15(d) of the contract, the custom duty etc. Was to be paid by the Government on mere presentation of the bill and further the delay in payment of the amount of Rs, 3 lacs deposited by K. D. A. To the Claimants to defray those expenses was delayed by the Audit Officer for one or the other reason. He also observed that when the difference could not be resolved defendants unilaterally proceeded to amend clause 15(d) of the agreement but to this Claimants did not agree and invoked clause 21 of the conditions of contract. The claimants had also offered to clear the goods without prejudice to their right to claim loss provided the balance of 90% payment of local currency expenditure was paid to them within seven days of the receipt of letter and since the record did not reveal that any reply was given, he was inclined to conclude that the Government decided to make their own arrangement for clearing the consignment.
31. ' The concluding portion of the award reads as under :- "I have dealt with all the important issues and am in a position to give my award. Before doing so, I would like to set down, for the sake of record, the amount demanded by the claimants, and the counterclaim made by the respondents. The claimants have claimed the following : {{TABLE}} Rs, For the loss of business 1,00,000.00 For the loss of profit 1,00,000.00 For loss of reputation and goodwill. 1,00,000.00 Total 100% local expenditure payable to the claimants in Pak currency : $ 119,569.81. 5,69,142.78 8,69,142.78 Less : Duty and clearance charges on 3rd consignment paid by the K. D. A. @ Duty 12 1/2% plus clearance 1/2% (C. I. F. Value $ 286,205.65) $ 37,206.73 Duty and clearance on 4th consignment, if to be paid by K. D. A. : C. I. F. Value Sh. 14,796.15 @ Duty 121 % plus clearance 1/2% $ 1,923.50 Total : $ 39,130.23.
32. Less amount received on 21-5-1964 and 10-8-1964.
33. The respondents have made the following claims :- Wrongly recovered. Customs duty. Extra duty. K. P. T. Wharfage. K. P. T. Cranning. Agency commission. Damages for the breach of contract committed by the respondents and the consequent delay of 2 years in the commencement of installation and erection work.
34. 1,86,259.90 6,82,882.88 3,00,000.00 3,82,882.88 3,00,000.00 1,73,893.00 28,258.00 1,992.78 2,04,242.00 474.00 10,03,956.00 17,54,136.76 {{TABLE}} ' I have clearly dealt with the counter claim of the respondents and maintain that there was no wilful breach of the contract by them, but they were rather prevented from discharging their responsibilities of non-payment of funds due to them. I have also shown that the delay in the erection of machinery was primarily due to the delay in completion of the civil engineering works.
35. In view of these reasons I do not admit the claim of any penalty or damages against the claimants by respondents. As regards the normal charges of customs duty, wharfage, etc., these had to be paid by the respondents in any case.
36. ' As regards the claim made by the claimants, I hold that as a result of acts of omission and commission detailed in the preceding paragraphs, of the respondents, the claimants suffered loss of business, and are entitled to some compensation. I further hold that this compensation should be linked with the local currency expenditure from which the claimants expected to make reasonable profit after paying for their cost of maintaining an office and other overheads. The claimants had suggested for local expenditure the equivalent in local currency of $ 119,569.82. Their principals were willing to allow the equivalent of $ 92,000. Taking human nature into consideration, the former may be an over-estimate; while the latter may be an under estimate. Probably the correct figures lies somewhere in-between, and I fix it at the rupee equivalent of $ 100,000. On this total amount, the claimants could reasonably expect to make a profit of 25 % which is not much, considering that they will have to give about half of it to Government in the form of taxes. I, therefore, decide that the claimants be given a compensation of the rupee equivalent of $ 25,000 which at the approximate rate of Rs, 5 to a dollar works out to about Rs, 1,25,000. The claimants have already paid Rs, 20,186.25 on account of customs duty on the first two consignments. This amount, together with the compensation of Rs, 1,25,000 should be deducted from the Rs, 3,00,000 received by the claimants from the respondents, and the balance of Rs, 1,56,814 should be returned to the respondents. These approximate figures have been worked out at the rate of Rs, 5 to a U. S. Dollar, but if the respondents so desire the exact figures may be worked at the currency official rate. I further decide that both sides should bear their own legal costs.
37. ' Finally, both sides should pay me in equal half my fee as sole Arbitrator which had been fixed at Rs, 5,000. In addition they should pay in equal half Rs, 500 to my Stenographer for the work done by him and the actual cost of stamp papers in giving this award."
38. ' From what has been stated, it is clear that the basis of the award is the amendment of the contract, said to have been made by letter dated 18th February, 1964, as well as the entitlement of the Claimants for compensation on account of loss of business and the expectation of making reasonable profit out of the bargain.
39. ' The Government filed objections raising various pleas. It was asserted that the Claimants, in order to accommodate themselves, asked for making changes in the mode of payment and to this the Government showed all consideration but the Principals declined to accede to these changes. In the meantime the machinery shipped by the Principals arrived and the Claimants wrongfully did not pay the custom duty and therefore, the contract with the Claimants had to be terminated.
40. Furthermore, the claimants wrongfully recovered Rs, 7,50,190.76 in respect of custom duty, wharfage, demurrage, agency commission, etc. Although these charges had to be borne by the Claimants as the same had been included in the trunk-key value. Claimants had also caused a loss of Rs, 10,03,946 to Government by delayed supplies.
41. ' It was also pleaded that the arbitrator misconducted himself and the proceedings, that there were errors apparent on the face of the award, that the award was prejudicial, arbitrary and biased, that the arbitrator assumed role of Claimants and tendered unwarranted advice, that the award was perverse and introduced matters beyond the terms of the contract and reference, that in no case the law permitted any amount over and above the contracted price but the arbitrator awarded custom duty and clearance charges, etc. To the Claimants although admittedly the full amount was paid to the Claimants, that it was none of the concern of the Government to secure those amounts from the Principal to the Claimant, that the claimants were liable to refund the excess amount received by them, that the arbitrator tried to substitute his own impression and notions in place of the express provisions of the contract and the award was even otherwise invalid and illegal. Finally, it was prayed that the award be set aside.
42. ' The parties have not examined any witness but have confined themselves to the arbitration proceedings which have been admitted in evidence.
43. ' At the time of arguments, the learned counsel who appeared on behalf of the Government, summarized the grounds of attack against the award as under :- "(1) Amendment of clause 14 of the contract was not approved by the Principals, and, therefore, could not form the basis of the award.
44. (2)Award was inconsistent with clause 15 of the contract.
45. (3)The amount of Rs, 20,186.25 on account of custom duty was illegally allowed in contravention of clause 15.
46. (4)Award was beyond the scope of reference.
47. (5)Arbitrator made certain unwarranted suggestions which affected his decision."
48. ' On the other hand it was contended by the learned counsel for the claimants that neither there was any error of law apparent on the face of the award nor the Court could interfere with the finding of arbitrator, even if, he had committed any error in law or taken an erroneous view of the evidence, as in law he was sole judge of the facts and law.
49. ' Before dealing with the grounds of attack put forth on behalf of the Government, I would like to dispose of the contentions raised on behalf of the claimants.
50. ' There are numerous decisions defining the limits of the jurisdiction and scope of the powers of the Courts to interfere with the decision of the arbitrators and the errors in law committed by him. I will, however, confine myself to the principle laid down in the case of Sheikh Muhammad Sadiq v.
51. Ministry of Industries (1). The pertinent observation reads as under : "It is now well-established rule in arbitration matters that in cases where question of interpretation of certain clauses in an agreement between the parties is referred to an arbitrator, such award being purely on a question of law, it is not open to any one of the parties to attack the award on the ground that the arbitrator had misconducted the proceedings. However, in law there is a settled distinction between the decision of an arbitrator upon a pure question of law and the decision of an arbitrator upon the dispute between the parties, which (1) PLD 1966 Kar. 412 rests incidentally upon the decision on a. Question of law. In the former case, the parties having elected to accept the decision of the arbitrator on the question of law, it would not be open to them to attack the decision on the ground that the decision was wrong while in the latter case, it would be open to them to attack the finding of the arbitrator if an error of law was apparent on the face of the record, which formed the basis of the findings of the arbitrator."
52. ' In that case, as in the present case, the dispute was referred to arbitration in terms of clause 21, P.
53. S. 35 and the question of the interpretation of certain clauses of the contract arose. The relevant expression in clause 21, P. S. 35 reads as under :- "Any question of dispute arising under these conditions or any special condition or in connection with the contract."
54. It is clear that the expression is in general terms and, therefore it cannot be said that any question of law or interpretation of any clause in contract was specifically referred to the arbitrator for his decision but the necessity of disputed questions and the interpretation of the clauses of the contract arose incidentally during the course of the arbitration proceedings. Consequently, in view of the principle laid down in the aforesaid authority, if the decision of the arbitrator is wrong on the face of the award, it is open to review. The meaning of the expression "error" on the face of award has been thus stated by the Privy Council in the case of Champesy Bhara & Company v. Jivraj Ballo Spinning & Weaving Company (1) : "An error in law on the face of the award means in their Lordships' view that you can find in the award or a document actually incorporated thereto, as for instance, a note appended by the arbitrator stating reasons for his judgments to some legal position which is the basis of the award and which you can say is erroneous."
55. ' This rule is, however, subject to exception that when a specific point of law is referred to an arbitrator, the award cannot be set aside if the arbitrator wrongfully decides the point of law.
56. ' In the present case the arbitrator had given detailed reasons and referred to the correspondence exchange between the parties and, therefore, the same can be looked into to assess, whether his findings are supported by evidence or he has ignored some important evidence which has materially affected his decision. In the latter case his decision cannot be upheld. In this connection I may also refer to the observation made in the case of Amin Baling Company v. Aminpur Union Co-operation Multipurpose Society (2), to the effect that the arbitrators, have got to determine the disputed questions judicially and they should, therefore, be well advised to go into the evidence when the nature of the evidence requires it and if they decide those disputed questions without going into evidence they will be guilty of legal misconduct and dereliction of duty.
57. ' It was said that the disputed claim was agitated in the pleadings and, therefore, it gave him an authority to decide and his decision could not be assailed. There is no force in this contention. The reply to this may be provided by the following observation made by Lord Russel of Killowen, as reproduced in PLD 1966 Kar. 412 : "No specific question of construction or of law was submitted. The (1) 50 I A 324 (2) PLD 1961 Dacca 103 parties had, however, been ordered to deliver pleadings, and by their statement of claim the contractor had claimed that the arbitrator should under his power revise the last certificate issued.
58. ' It is at this point that the question of the construction of condition 30 arose as a question of law, not specifically submitted but material in the decision of matters which had been submitted. This question of law the arbitrator had decided ; but if upon face of the award he had decided it wrongly his decision is in my opinion open to review by the Court."
59. Thus, although an arbitrator is competent to construe a clause of the contract but in the absence of any specific reference about the interpretation of the contract it is open to the Courts to consider whether the finding of the arbitrator on that point was good or bad in law. The statement of claim filed before the arbitrator, by itself, is not enough to oust the jurisdiction of the Court to subject the finding of the arbitrator to scrutiny.
60. ' This brings me to the grounds of attack pressed before me during the course of arguments. The first ground relates to clause 14 of the Contract which has already been reproduced. The question that arises for consideration is whether the clause can be treated to have been amended as was held by the Arbitrator on the basis of the letter dated 18-2-1964. It is an admitted position that the proposal for the bifurcation of the amount payable in foreign currency to the Principals and the amount needed in Pakistani currency to meet the local charges made by the claimants and accepted by the Government was not approved by the Principals but they consented to the amount of $ 92,000 to defray the local expenses. Despite this, the Arbitrator allowed the benefit to the Claimants as proposed by them. In this, he clearly erred in law. The original contract could not be amended without the consent of the Principals who were the beneficiaries under the contract, as was even conceded by the Arbitrator. The claimants were merely acting as agents and admittedly they had received no authority beyond what was authorised by the Principals, to get the agreement amended. Indeed the Government had accepted the proposal but it had lost its legal effect when the Principals withheld their approval. Thus, the view entertained by the Arbitrator is not sustainable in law. The dispute had to be decided in terms of the original clause as it stood in the agreement and amended to the extent agreed upon by the Principals. In order to meet this it was urged by the learned counsel for the Claimants that the finding of the Arbitrator was based on the appreciation of evidence and could not be assailed in these proceedings. I find no force in this contention. Recalling the meaning of the expression, "error on the face of award", stated by the Privy Council, the reasons given by the Arbitrator can be looked into. The Arbitrator had given detailed reasons by referring to the correspondence exchanged between the parties and forming basis of the claim and the finding thereto. The original contract, according to the Arbitrator, was amended by certain letters. In my view, when there is correspondence whereby the original contract is sought to be amended, the entire correspondence exchanged between the parties interested in the contract must be deemed to have been incorporated in the contract which, then, has to be interpreted accordingly. It, therefore, follows that the arbitrator was not justified to base his decision on a sole letter of acceptance by the Government but he had to consider the entire correspondence, including the letters addressed by the Principals. It is an attempt in futility to say that the Arbitrator was competent to rely upon that letter to the exclusion of the fact of the refusal communicated by the Principals. By ignoring the material correspondence, the Arbitrator did not consider the implication of the refusal of the Principals to agree to the proposal and he simply based his decision on the letter which could not be effectual unless the Principals had accepted the variation in the terms of the original contract agreed upon. It also cannot be said that this question was specifically referred to the Arbitrator for his decision. The necessity to determine this arose during arbitration proceedings.
61. ' Taking up the second and third grounds relating to the award being inconsistent with clause 15(d) of the Contract and allowing the claim for Rs, 20,186.25 paid by the claimants as custom duty on the first two consignments, it was held by the Arbitrator that it was the duty of the Government to make available to the claimants 90% of local currency expenses on presentation of their bills supported by the shipping documents to enable them to defray the expenses on account of payment of custom duty, sales tax etc. Without having to strain their financial resources. This finding is again based on the letter dated 18-2-1964 which, as I have already shown, has no effect.
62. Clause 15(d) makes it clear that the custom duty of 12% was included in turn-key price, providing further that in case of reduction in custom duty, the benefit of it had to go to the purchase account and in case of excess, it had to be borne by the K. D. A. Evidently it was not the responsibility of the Government to separately, pay any money for the purpose of custom duty, sales tax etc. Consequently, the finding of the Arbitrator is inconsistent with clause 15(d). Indeed the custom duty etc. Had to be paid in local currency but it was for the Principals or the claimants, acting as their agent, to make arrangement to meet those expenses. Since this could not be otherwise possible the Principal had agreed to the amendment of the original Contract to the extent of $ 92,000. Even the Arbitrator had conceded in the award while stating the reasons that the Principals were the chief beneficiaries of the Letters of Credit and the proposed amendment was without their approval. He had also conceded that the irrevocable Letters of Credit could not be revoked or amended without the consent of the Principals. In spite of this, he proceeded to allow the benefit to the Claimants. Besides, the amount of Rs, 20,186.25 was paid by the claimants on the first two consignments, which, it appears, had arrived before the proposed bifurcation and, therefore, the Government was under no legal or contractual obligation to reimburse them but this was to be borne by the Principals and the Claimants could only recover from them, as they had made the payment on their behalf and not on behalf of the Government. Moreover, on the third consignment, which was not cleared by the Claimants, nearly Rs, 4.1-2 lacs had been paid by the K. D. A. To secure the release of the consignment. In this amount a sum of more than Rs, 2 lacs is included as demurrage. Even if the demurrage is excluded yet more than 2 lacs which had to be paid by the Principals were paid by the Government. Another sum of Rs, 3 lacs was received by the Claimants as has been admitted by them as well as found by the Arbitrator. According to the acceptance, communicated by the Principals, a sum of $ 92,000 was to be set apart for the purpose of custom duty, etc. But it appears that by that time $ 89,000 had been left to be paid while the remaining sum had already been withdrawn by the Principals on the basis of the Letters of Credit. It may also be noted that the Principals were not prepared to concede anything by way of profit or commission to the Claimants as is clear from the reasons given by the Arbitrator and they wanted the variation only for the purpose of custom duty and such other charges.
63. ' Taking up the fourth ground that the award is beyond the scope of reference, it is also not without force. As already pointed out, the arbitration had taken place in terms of clause 21, P. S. 35, which is in general terms. The dispute bad to be confined to the terms and conditions of the contract or anything connected therewith but, in the present case, the arbitrator allowed the claim, not arising out of any such contract but on different considerations. This is clear from the reasons given by the arbitrator, particularly the concluding portion of the award as has been reproduced. He awarded a sum of Rs, 1,25,000 as according to him the claimants had suffered loss of business and were entitled to some compensation and profit.
64. ' In this connection the following observation made in the case of Thawardas v. Union of India (1) may be noted : "An arbitrator is not a conciliator and cannot ignore the law or misapply it in order to do what he 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 Court provided his error appears on the face of the award. The single exception to this is when the parties choose specifically to refer a question of law as a separate and distinct matter.
65. ' If 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 he within his jurisdiction and indeed essential for him to decide the question incidentally."
66. ' No dispute could be said to have been referred to the arbitrator, with regard to the claim for profit or damages arising from the alleged loss of business sustained by the claimant due to non- fulfilment of the terms of the letter dated 18-2-1964 by the Government as a result of the refusal of the Principals to approve the proposal. The Government was in no way liable for payment of anything by way of profit or compensation to the claimants. The questions relating to agency or remuneration thereunder was the sole concern of the Principals and the claimants inter se and were to be regulated according to the terms agreed between them. This was also the position taken up by the Principals and repeatedly stressed in their letters. So the cause of action, if any, was against the Principals and not against the Government. There is nothing in the original contract that any commission was settled or it was payable by Government.
67. ' It is, therefore, difficult to assume that a cause of action based on breach of contract and a totally dissimilar and altogether different cause of action arising out of the dispute between the Principals and Claimants could be included in the reference under the arbitration clause contained in the contract, which clause is confined to breaches of contract only. It may be said that the scope of the arbitration or reference could be enlarged by agreement between the parties or by their conduct. But in the present case there is no such agreement nor there is any evidence of conduct.
68. Mere averment in the pleadings is not enough as observed by Lord Russel of Killowen. This was further elaborated in the aforesaid decision of the Supreme Court of India as under :- "A reference requires the assent of both sides. If one side is not prepared to submit a given matter to arbitration when there is an agreement between them that it should be referred, then recourse must be had to the Court under section 20 of the Act and the recalcitrant party (1) AIR 1955 SC 468 can then be compelled to submit the matter under subsection (4). In the absence of either, agreement by both sides about the terms of reference, or any order of the Court under section 20(4) compelling a reference, the arbitrator is not vested with the necessary exclusive jurisdiction.
69. Therefore, when a question of law is the point at issue, unless both sides specially agree to refer it and agree to be bound by the arbitrator's decision, the jurisdiction of the Courts to set an arbitration right when the error is apparent on the face of the award is not ousted. The mere fact that both parties submit incidental agreements about a point of law in the course of the proceedings is not enough. 1933 A C 592, Rel. On.
70. ' Simply because the matter was referred to incidentally in the pleadings and arguments in support of, or against the general issue about liability for damages, that is not enough to clothe the arbitrator with exclusive jurisdiction on a point of law."
71. Plainly, the award of compensation or profit by the arbitrator was beyond the scope of the reference and, therefore, there was initial want of jurisdiction. In this view of the matter, the arbitrator illegally enlarged the scope of the arbitration and awarded the damages. Consequently, the award is bad and is liable to be struck off as it will be covered by the expression, "otherwise invalid" in section 30(c) of the Arbitration Act.
72. ' Yet there is another error. There has to be legal basis for the award of damages but it is lacking in the present case. No evidence was led as to the amount of commission payable to the claimants or to prove the extent of loss suffered. In the absence of evidence no such amount could be allowed. The burden of proof was upon the claimants and they failed to establish that they could have earned the commission or profit to the extent awarded by the arbitrator. On the contrary, it is an admitted position that K. D. A. Paid far in excess of what was payable as custom duty and such other charges. It was stated in the aforesaid Indian decision that facts must be based either on evidence or on admission they cannot be found to exist from a mere contention by one side specially when they are expressly denied by the other. It was also indicated in the case of Nana Kwaku v. Nana Sir Afori Atta (1) that if the arbitrator has set out at great length the evidence, the party challenging the award can show that there is no evidence at all on which the arbitrator could have come to his conclusion. Thus on the account also the error is apparent on the face of award and therefore, not sustainable.
73. ' The fifth ground is that the arbitrator had misconducted himself and made certain unwarranted suggestions which affected his decisions. In this respect the comments of the arbitrator have already been reproduced at page 12 of this judgment. He had suggested that the Government ought to have asked the principals to send their representative to Karachi to resolve the dispute, and since this step was not taken the Government had to be blamed for it. I am unable to understand the fallacy of this argument. The dispute was between the claimant and their principals and it was for the claimant to have taken suitable steps and pursued the matter to resolve the dispute. The Government had done whatever they could as they had agreed to the proposals made by the Claimant but to this the principals did not agree. Nothing beyond this could be done by the Government. It is also evident from the reasons given by the arbitrator that this had greatly influenced him in making the award.
(1) AIR 1933 P C 46 ' In the circumstances, the conclusion is irresistible that the award suffers from serious infirmities and errors in law which are apparent on the face of it, so far it relates to the claim allowed to the claimants. I, therefore, uphold the objections and set aside the award relating to the deduction of the amount allowed to the claimants. The result will be that the claimants shall have to return the entire amount of Rs, 3 lacs to the Governments With regard to the fees of the arbitrator I sanction Rs, 2,000 in addition to Rs, 200 for the stenographer and the actual cost of the stamp paper and this amount be contributed equally by the parties. Each party to bear its own costs in this suit.