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CASE NO.:

Appeal (civil) 2789-2790 of 1997

PETITIONER:

M/S SIKKIM SUBBA ASSOCIATES

Vs.

RESPONDENT:

STATE OF SIKKIM

DATE OF JUDGMENT: 01/05/2001

BENCH:

CJI, R.C. Lahoti & Doraiswamy Raju

JUDGMENT:

RAJU, J.

L...I...T.......T.......T.......T.......T.......T.......T..J

A skeletal reference to the facts, without much emphasis

on the details of merits of the case, would help to

appreciate certain submissions, at the time of actual

consideration of the claims projected before us.

The respondent, State of Sikkim, and the appellant, M/s

Sikkim Subba Associates (referred throughout as appellants),

claimed to be a firm of Partnership, entered into an

agreement on 22.1.1991 under which the appellants have been

appointed as the organising agents for its lotteries

enumerated therein subject to the terms and conditions more

fully set out therein regulating the rights and obligations

of the parties. It needs to be kept in view that since

running of private lotteries would constitute a criminal

offence, some of the States have allowed parties to put on

the apparel of the State in return for a stipulated fee to

mobilise funds, in public interest to undertake public

works. Disputes and misunderstanding arose which led to the

termination of the agreement resulting in the appellants

seeking recourse to litigation by getting an Arbitrator

appointed invoking the powers under Section 8 of the

Arbitration Act, 1940 (hereinafter referred to as the

`Act).

As against the order dated 24.10.1992 of the District

Judge, Gangtok (Sikkim), appointing the sole Arbitrator, the

respondent challenged the same before the High Court by

filing an appeal which came to be dismissed on 23.11.1992.

The matter was pursued further before this Court in SLP (C)

No.26 of 1993 and by an order dated 26.4.1993 the same was,

by the agreement of parties, dismissed subject to the

observation that the Arbitrator shall give a speaking order

and, therefore, there was no need to go into the controversy

raised. The appellants filed their statement of claim

before the Arbitrator for a sum of Rs.81,84,679.45 with

further relief for the refund of Rs.76 lacs, said to have

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been realised by the State by encashing two bank guarantees,

with interest at 18% p.a. from 23.9.1992, the date of

encashment. The respondent-State filed its reply opposing

the claims made by the appellants and asserted a counter

claim against the appellants for a sum of Rs.8,64,81,445/-

with future interest and costs. Both parties marked

documents and adduced oral evidence. Thereupon, the

Arbitrator made an Award on 8.2.1994 determining the amount

payable by the State to the appellants at Rs.37,75,00,000/-

and the amount payable by the appellants to the State by way

of counter claim at Rs.4,61,35,242/- and after adjusting the

amounts due to the State towards its counter claim,

determined the net amount payable to the appellants by the

State at Rs.33,13,54,758/-. Proportionate costs were

awarded and future interest was also granted at the rate of

12% p.a. on the sum of Rs.33,13,54,758/-.

Aggrieved, the State filed an application under Section

30 of the Act to set aside the Award. The District Judge by

his decision dated 27.10.94 overruled the objections of the

State and made the Award the rule of court by passing a

decree in terms of the Award. The State challenged the same

before the High Court by filing an appeal under Section 39

of the Act. The matter was heard in the High Court by a

Division Bench consisting of the learned Chief Justice

(Justice S.N. Bhargava) and Justice R. Dayal. In a

judgment dated 29.9.1995 the learned Chief Justice agreed

with the contentions raised on behalf of the State and

sustained the challenge made to the Award by setting aside

the Award as well as the Judgement of the learned District

Judge, thereby allowing the appeal with costs. Dayal, J.

rendered a separate dissenting judgment by coming to the

ultimate conclusion that the quantum of damages arrived at

by the Arbitrator suffered an illegality apparent on its

face and, therefore, in his view the matter required to be

remitted for reconsideration of the matter afresh to the

Arbitrator. In view of the above, the Court passed the

following order :-

There is a difference of opinion between us. Chief

Justice has come to the conclusion that the appeal should be

allowed with costs whereas Justice Dayal has come to the

conclusion that the matter may be remitted back to the

Arbitrator for determining quantum of damages. As such, the

matter may be placed before the Honble Chief Justice/Judge

as soon as he assumes charge.

Sd/- Sd/-

(Ripusudan Dayal) (S.N. Bhargava)

Judge

Chief Justice

29/09/1995

29/09/1995

Thereafter, Dayal, J. ceased to be Judge of the Sikkim

High Court and was transferred to the Allahabad High Court

and in his place Justice M. Sengupta assumed office.

Though the date for hearing of the matter was fixed by the

said learned Judge, on the said date it was mentioned that

Sikkim Subba Associates, the appellants, has filed an

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application in CMA No.11/96 invoking powers under Sections

98 and 151,CPC, opposing the hearing of the appeal in view

of Section 98(2). The State also filed CMA No.15/96

invoking Sections 11, 98 and 151, CPC, questioning the very

maintainability of the application filed by Sikkim Subba

Associates. The said applications though initially were

before Sengupta, J., due to inadvertence came to be listed

before the new Chief Justice (Justice K.M. Agarwal) and

when the learned Chief Justice asked the counsel as to

whether they wanted the case to be made over to Sengupta,

J., both sides wanted the same to be heard by the Chief

Justice himself. The learned Chief Justice was of the view

that the order of reference made on the judicial side by the

Division Bench cannot be upset either on the administrative

side or on the judicial side while hearing the appeal as a

third Judge pursuant to the order of reference.

Consequently, by an order dated 14.8.96 the application

filed by the appellants came to be dismissed and the one

filed by the State came to be allowed to the extent of

challenge made to the maintainability of the application

filed by the appellants. These appeals came to be filed in

this Court challenging those orders.

On 3.3.1997 when SLP (C) Nos.3232-3233 of 1997 came up

for hearing, this Court (Honble the Chief Justice and

Honble Mrs. Justice Sujata V. Manohar) passed the

following order, after briefly noticing the circumstances in

which the appeals have been filed :-

Against the said order of 14.8.96 made by Agarwal Chief

Justice, the petitioners filed the present Special Leave

Petitions. When these petitions were came up for hearing on

the last occasion a technical objection was raised that the

per Court order of 29.9.95 had not been challenged by the

petitioners and, therefore, the petitions were not

maintainable. To overcome this technical objection by way

of abundant caution the petitioners have sought amendment of

the petition with a view to challenging the said per Court

order of 29.9.95. The amendment is opposed on the ground

that it is barred by 400 days. However, in the

aforementioned circumstances, we conclude that there was no

deliberate delay on the part of the petitioners, but it was

only because they thought that it was not necessary to

challenge the order of 29.9.95 as they had challenged the

subsequent order of 14.8.96. We, therefore, condone the

delay and allow the amendment.

We would also like to make it clear that we do not

propose to go into the merits of the matter except to

consider whether in the aforesaid factual background was it

permissible to the learned Chief Justice to hear and pass

the order of 14.8.96. In other words, was the learned Chief

Justice entitled to hear the matter in view of the per Court

order passed on 29.9.95. If yes, the question is whether

the per Court order of 29.9.95 itself was a correct order.

If no, what order this Court should pass in the matter.

This is the limited question which we may be required to

consider at the initial stage unless we find it necessary to

enter into the merits of the matter.

We direct the learned counsel appearing for the

contesting parties to file their brief written submissions

within two weeks from today. The matters may thereafter be

fixed for final disposal. Permitted to mention before the

learned Chief Justice.

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On 11.4.1997 when the SLPs came up once again before the

very Bench of this Court, it was ordered as follows :-

In order to avoid multiplicity of the proceedings which

may be the consequence if this Court first decides only the

legality of the order dated 14.8.1996 passed by the learned

third Judge in the High Court, we consider it appropriate to

treat these special leave petitions as ones against the

judgment of the High Court even on merits. Irrespective of

the view taken by this Court on the question of the legality

of the order of the learned third Judge, these matters would

be heard as appeals even on merits of the case. This is

clarified in view of the earlier order dated 3.3.1997 which

had indicated that this Court did not propose then to go

into the merits of these matters. Learned counsel for both

sides agree that this would be the more appropriate course

to avoid any further delay in the decision of the matters on

merits and it would also avoid multiplicity of proceedings

because in either view taken on the question of legality of

the learned third Judges order, the aggrieved party would

be required to then challenge the decision on merits. It is

clarified accordingly.

Leave granted.

No stay.

Shri B. Sen, learned senior counsel for the appellants,

submitted that having regard to the fact that the Sikkim

High Court, at the relevant point of time, had only two

judges, inclusive of the Chief Justice, and they have chosen

to differ from each other - the learned Chief Justice taking

the view that the appeal of the State has to be allowed and

the Award of damages in favour of the appellants was

unwarranted as well as unsustainable in law and the other

learned Judge (R. Dayal J.,) expressing the view that the

award suffered from an error of law apparent only in the

manner of determination of the quantum of damages and that

for purposes of re-determination afresh of the quantum of

damages alone, the matter has to be remitted to the

Arbitrator, the Award ought to have been confirmed under

Section 98 (2) C.P.C., particularly when rules 149 & 150 of

the Sikkim High Court (Practice & Procedure) Rules, 1991

came to be deleted with effect from 12.3.92, the date of

enforcement of the original rules. Reliance has been placed

in this regard on the decision of this Court reported in Tej

Kaur & another vs Kirpal Singh & Another (1995 (5) SCC 119)

and that of the Assam High Court in Abdul Latif vs Abdul

Samad (AIR 1950 Assam 80). In traversing the said claim,

Shri V.A. Bobde, learned senior counsel for the Sikkim

State, contended that the words Court consisting of in

juxtaposition to the words Constituting the Bench, in

proviso to sub-Section (2) of Section 98 will only have

relevance and has to be construed with reference to the

sanctioned strength alone - which at all relevant points of

time was only three so far as Sikkim High Court is concerned

and whenever there is a third judge, even on the vacancy

being filled up on such vacancy arising for any reason in

respect of any one of the two, the matter should be referred

to and heard by the third judge and neither any exception

could be taken for the same nor could it be claimed that the

judgement under appeal before the High Court should only be

confirmed. Since retrospective deletion of a statutory rule

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could not have been legitimately made by a notification by

the rule-making authority in the absence of a specific

statutory provision conferring any such power in this case,

it is contended that the deletion could be only of

prospective effect and the case before us would be governed

by those rules, as if it existed.

In our view, the decision in AIR 1950 Assam 80 (Supra)

has no application to this case where unlike the Assam Case,

the very Division Bench, as part of their judicial order

also made a consequential order of reference to a third

judge and inasmuch as there was no appeal challenging the

same. We are of the view that rules 149 & 150 of the Sikkim

High Court (Practice & Procedure) Rules, 1991, which

governed the situation, were very much in force on the date

when the Division Bench exercised their power and the order

of reference passed in this case could not therefore be said

to be bad in law. Apart from the axiomatic principle of law

that a subordinate legislation in the form of Rule or

Notification could not be made/unmade retrospectively unless

any power in that regard has been specifically conferred

upon the Rule-making Authority , a mere retrospective

deletion could not per se have the effect of nullifying or

destroying orders passed or acts already performed, when

such powers were available in the absence of any specific

statutory provision enacted to destroy all such rights

already acquired or obligations and liabilities incurred.

The decision in 1995 (5) SCC 119 (supra) will have no

application to this case, in view of rules 149 & 150 noticed

above and also for the reason that unlike in the present

case, the case considered therein, concedingly involved only

a question of fact over which the dissenting views came to

be expressed. That apart, the words Consisting of shall

mean and also considered to have relevance only to the

sanctioned strength. Therefore, taking into account the

fact that for the time being, there were only two Judges in

position and that the learned judges, who constituted the

Division Bench, expressed different views and at the same

time thought fit to refer the matter to the opinion of a

third judge, the matter should await till the arrival of a

third judge. Not only such a contingency also fructified in

this case but the matter also came to be actually posted

before the third judge for hearing. The amplitude of powers

of this Court under Articles 136 and 142 of the Constitution

of India for doing complete justice in any cause or matter

brought before it, cannot also be otherwise disputed. As a

matter of fact, in the teeth of the Orders passed by this

Court on 11.4.97 to treat the appeals as having been filed

even on the merits of the case and be heard as such, and

that too, on the agreement expressed by the counsel on both

sides, to be also the appropriate course, in these matters,

it is not permissible for the appellants to take a stand to

the contrary to avoid or stall an hearing and disposal of

these appeals on the merits of the matters involved therein.

The respondent-State, though at some point of time,

seems to have pressed into service Article 299 of the

Constitution of India, to contend that no valid contract

between parties came into existence as envisaged therein and

consequently neither the Arbitrator could have entered upon

reference nor can the State be held bound by such an

agreement, the same was not pursued before us realising the

futility of the same, having regard to the peculiar facts of

this case. We are not called upon, in such circumstances,

to decide this issue and the parties have also proceeded on

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the footing that there was a valid and binding contract

between the appellants and the State, in this case, without

prejudice to their contentions in respect of their rights

under the agreement.

On behalf of the appellants, it has been strenuously

contended that the Arbitrators award cannot be challenged

in proceedings under Section 30 of the Act, as if on an

appeal and that the Award in this case has been rightly

upheld by the District Judge, since it did not disclose any

misconduct on the part of the Arbitrator and no other

ground for any such an interference within the parameters of

Section 30, having also been substantiated by the

respondent-State. It is, therefore, contended that the

decision of Chief Justice Bhargava, for the same reason,

could not be sustained and that the learned Chief Justice

committed an error in directing the Award, as affirmed by

the District Judge, to be set aside for any one or other of

the reasons assigned by him. At the same time, while

strongly defending the decision of the learned Chief

Justice, it was urged for the respondent- State that the

numerous errors apparent ex facie on the Award have been not

only meticulously enumerated but found to have been

substantiated succinctly, by adverting to the materials in

support thereof for justifying Courts interference. It was

also submitted for the respondents that Dayal J., having

found the Award to suffer from serious infirmities in

awarding damages, erred in directing a remand to the very

Arbitrator for consideration afresh, to re-determinate the

damages and instead there should have been only a

supersession of the arbitration agreement itself under

Section 19 read with Section 16 (c) of the Act. The learned

senior counsel on either side invited our attention to

voluminous case law on the scope and ambit of powers of

Courts exercising jurisdiction under Section 30 as well as

Section 39 of the Act for interference with the award of an

Arbitrator, which, on a closer scrutiny, would disclose that

the observations in each of such cases came to be made,

invariably and ultimately in the context of the peculiar

facts and circumstances of the cases dealt with therein and

having regard to the particular class or category of

mistakes or nature of errors found highlighted in those

cases. It is appropriate, before undertaking an

adjudication on the merits of the claims of parties, to

advert to the salient and overall peripheral parameters,

repeatedly re- emphasised by this Court, in justification of

interference with an Award of the Arbitrator by different

Courts at various levels exercising powers under the Act as

well as by this Court, without unnecessarily multiplying the

number of authorities by making reference to only some

relevant out of the same, for our purpose.

Relying upon the ratio in Champsey Bhara & Company vs

Jivraj Balloo Spinning & Weaving Company Ltd. (AIR 1923

P.C. 66) this Court in M/s Alopi Parshad & Sons Ltd. vs

Union of India (AIR 1960 SC 588) observed that the award may

be set aside on the ground of an error on the face thereof,

when in the award or in any document incorporated with it,

as for instance, a note appended by the Arbitrator(s)

stating the reasons for the decision wherein the legal

propositions which are the basis of the award are found to

be erroneous. A specific question submitted to the

Arbitrator for his decision, even if found answered wrongly

involving an erroneous decision in point of law also, was

considered not to make the award bad on its face so as to

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call for interference. While emphasising the position that

misconduct in Section 30 (a) of the Act comprises legal

misconduct, this Court held it to be complete in itself when

the Arbitrator was found to have, on the face of the award,

arrived at a decision by ignoring very material and relevant

documents which throw abundant light on the controversy to

help a just and fair decision or arrived at an inconsistent

conclusion on his own finding (K.P Poulose vs State of

Kerala & Anr. - AIR 1975 SC 1259). In M/s Chahal

Engineering and Construction Company vs Irrigation

Deptartment., Punjab, Sirsa, (1993 (4) SCC 186), this Court

held that the words is otherwise invalid in clause (c) of

Section 30 of the Act would include an error apparent on the

face of the record. In Trustees of the Port of Madras vs

Engineering Constructions Corporation Ltd., (1995 (5) SCC

531) after adverting to the ratio of the Constitution Bench

of this Court in Raipur Development Authority & Ors. vs M/s

Chokhamal Contractors & others (1989 (2) SCC 721), this

Court held that the error apparent on the face of the award

contemplated by Section 16 (1) (c) and Section 30 (c) of the

Act is an error of law apparent on the face of the award

and not an error of fact and that the Arbitrator cannot

ignore the law or misapply it in order to do what he thinks

is just and reasonable. In The President, Union of India &

Another vs Kalinga Construction Co. (P) Ltd. (AIR 1971 SC

1646), it was held that the Court, in a proceeding to set

aside the award cannot exercise jurisdiction, as if on an

appeal by re- examining and re-appraising the evidence

considered by the Arbitrator and come to the decision that

the Arbitrator was wrong (See also AIR 1989 SC 268; 1989 SC

777 and 1989 SC 890).

In Union of India vs M/s Jain Associates & Another (JT

1994 (3) SC 303), this Court held as follows:

7. In K.P. Poulose vs State of Kerala & Anr. [(1975)

Supp. SCR 214)], this Court held that misconduct under

Section 30(a) does not connote a moral lapse. It comprises

of legal misconduct which is complete if the arbitrator, on

the face of the award, arrives at an inconsistent conclusion

even on his own finding, by ignoring material documents

which would throw abundant light on the controversy and help

in arriving at a just and fair decision. It is in this

sense that the arbitrator has misconducted the proceedings

in the case. In that case the omission to consider the

material documents to resolve the controversy was held to

suffer from manifest error apparent ex facie. The award was

accordingly quashed. In Dandasi Sahu vs State of Orissa

(1990 (1) SCC 214), this Court held that the arbitrator need

not give any reasons. The award could be impeached only in

limited circumstances as provided under Section 16 and 30 of

the Act. If the award is disproportionately high having

regard to the original claim made and the totality of the

circumstances it would certainly be a case of non

application of mind amounting to legal misconduct and it is

not possible to set aside only invalid party while retaining

the valid part. In other words the doctrine of severability

was held inapplicable in such a situation. It is,

therefore, clear that the word misconduct in Section 30(a)

does not necessarily comprehend or include misconduct of

fraudulent or improper conduct or moral lapse but does

comprehend and include actions on the part of the

arbitrator, which on the face of the award, are opposed to

all rational and reasonable principles resulting in

excessive award or unjust result or the like circumstances

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which tend to show non application of the mind to the

material facts placed before the arbitrator or umpire. In

truth it points to fact that the arbitrator or umpire had

not applied his mind and not adjudicated upon the matter,

although the award professes to determine them. Such

situation would amount to misconduct. In other words, if

the arbitrator or umpire is found to have not applied his

mind to the matters in controversy and yet, has adjudicated

upon those matters in law, there can be no adjudication made

on them. The arbitrator/umpire may not be guilty of any act

which can possibly be construed as indicative or partiality

or unfairness. Misconduct is often used, in a technical

sense denoting irregularity and not guilt of any moral

turpitude, that is, in the sense of non-application of the

mind to the relevant aspects of the dispute in its

adjudication. In K.V. George vs Secretary to Government,

Water & Power Department, Trivandrum & Anr. [(1989) 4 SCC

595], this Court held that the arbitrator had committed

misconduct in the proceedings by making an award without

adjudicating the counter claim made by the respondent. In

Indian Oil Corporation Ltd. vs Amritsar Gas Service and

Ors. [(1991) 1 SCC 533 & 544], the counter claim was

rejected on the ground of delay and non consideration of the

claim, it was held, constituted an error on the face of the

award.

It is also, by now, well settled that an Arbitrator is

not a conciliator and his duty is to decide the disputes

submitted to him according to the legal rights of the

parties and not according to what he may consider it to be

fair and reasonable. Arbitrator was held not entitled to

ignore the law or misapply it and cannot also act

arbitrarily, irrationally, capriciously or independently of

the contract (See 1999 (9) SCC 283 : Rajasthan State Mines

and Minerals Ltd. vs Eastern Engineering Enterprises &

Anr.). If there are two equally possible or plausible views

or interpretations, it was considered to be legitimate for

the Arbitrator to accept one or the other of the available

interpretations. It would be difficult for the Courts to

either exhaustively define the word misconduct or likewise

enumerate the line of cases in which alone interference

either could or could not be made. Courts of Law have a

duty and obligation in order to maintain purity of standards

and preserve full faith and credit as well as to inspire

confidence in alternate dispute redressal method of

Arbitration, when on the face of the Award it is shown to be

based upon a proposition of law which is unsound or findings

recorded which are absurd or so unreasonable and irrational

that no reasonable or right thinking person or authority

could have reasonably come to such a conclusion on the basis

of the materials on record or the governing position of law

to interfere. So far as the case before us is concerned,

the reference to the Arbitrator is found to be a general

reference to adjudicate upon the disputes relating to the

alleged termination of the agreement by the State and not a

specific reference on any particular question and

consequently, if it is shown or substantiated to be

erroneous on the face of it, the award must be set aside.

The Award under challenge, in our view, stands vitiated

on account of several serious errors of law, apparent on the

face of it and such infirmities go to substantiate the claim

of the State that not only the Arbitrator acted arbitrarily

and irrationally on a perverse understanding or misreading

of the materials but also found to have misdirected himself

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on the vital issues before him so as to render the award to

be one in utter disregard of law and the precedents.

Although the award purports to determine the claims of

parties, a careful scrutiny of the same discloses total

non-application of mind to the actual, relevant and vital

aspects and issues in their proper perspective. Had there

been such a prudent and judicious approach, the Arbitrator

could not have awarded any damage whatsoever and, at any

rate, such a fabulous and astronomical sum on mere

conjectures and pure hypothetical exercises, absolutely

divorced from rationality and realities, inevitably making

law, equity and justice, in the process, a casualty. The

Arbitrator has acknowledged when recording a finding on the

basis of indisputable facts that except for the first set of

draws in respect of eight lotteries in groups A & B, the

prize money obliged to be deposited seven days before the

draw (since the winners have to be paid only out of such

deposits, after draw) as well as the agency fee running to

crores was not deposited/remitted in time constraining

thereby the State to mobilise funds to distribute prize

money from State funds in order to preserve and protect the

fair name and reputation of the State, the lotteries being

run as that of and for and on behalf of the State. Even, as

late as 8.2.94 when the award came to be passed the

appellants were in arrears, due to non-deposit of prize

money within the stipulated time, a sum of Rs.1,37,47,026/-

besides non-remittance of agency fee of Rs.3,72,87,884/-.

Despite this, the Arbitrator tried to find an alibi for the

defaulter appellants in the fact that the State, in spite of

warnings and threats, did not actually stop either those

draws or the further subsequent draws and allowed the

lotteries to go on without any break. From the above, the

Arbitrator as well as the learned District Judge chose to

infer that the respondent-State had condoned or waived the

lapses and defaults completely overlooking the vital fact

that the Arbitrator is not dealing with any claim for

damages from the respondent-State against the appellants who

defaulted in respect of such defaults but on the other hand

a claim from the defaulter appellants itself for damages

against the State for not willing to put up any longer with

a recurrent and recalcitrant defaulter. The Arbitrator,

grossly omitted to give due weight to such defaults

committed by the appellants and further misdirected himself

in not drawing the legal inferences necessarily flowing from

them. Even if it is assumed for purposes of consideration

that the State had waived past lapses, it cannot be

compelled to condone the persistent and continuous wrongs

and defaults and continue to perform their part of the

contract to their disadvantage and detriment and also

further penalise them with damages for not doing so, when

even dictates of common sense, reason and ordinary prudence

would commend for rejecting the claim of the appellants as

nothing but a gamble and vexatious. The Arbitrator, who is

obliged to apply law and adjudicate claims according to law,

is found to have thrown to winds all such basic and

fundamental principles and chosen to award an astronomical

sum as damages without any basis or concrete proof of such

damages, as required in law.

Though the entire award bristles with numerous

infirmities and errors of very serious nature undermining

the very credibility and objectivity of the reasoning as

well as the ultimate conclusions arrived at by the

Arbitrator, it would suffice to point out a few of them with

necessary and relevant materials on record in support

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thereof to warrant and justify the interference of this

Court with the award allowing damages of such a fabulous

sum, as a windfall in favour of the appellants, more as a

premium for their own defaults and breaches :-

a) The conclusions in the award are found seriously

vitiated on account of gross misreading of the materials on

record as well as due to conspicuous omission to draw

necessary and lawful inferences, inevitably flowing from the

indisputable materials as well as findings recorded by the

Arbitrator himself. Conclusions directly contrary to the

indisputable facts placed on record are shown to have been

drawn on the question of alleged waiver throwing over board

the well-settled norms and criteria to be satisfied and

proved before the plea of waiver, can ever be countenanced

leave alone, the basic and fundamental principle that a

violator of reciprocal promises cannot be crowned with a

prize for his defaults. Chief Justice Bhargava has taken

great pains to enumerate them. Neither the Arbitrator, nor

the District Judge or even the learned Judge who has chosen

to differ from the view of the Chief Justice appear to have

applied their mind judiciously or judicially to these

aspects before countenancing the claim of damages made by

the appellants. Even a cursory reading of the contents of

Ex. R-14, R- 16 to R-19, R-21, R-22 to R-25 and R-26 to

R-34 as well as R-80 would belie the claims based upon the

plea of condonation or waiver forever so as to entitle the

appellants to still insist upon the State alone,

notwithstanding its own continuing wrongs, to perform its

part of the obligations under the contract or to claim

damages from the respondent for not doing so. To illustrate

R-25 dated 7.8.91 written to the appellants may be usefully

extracted :-

I have been repeatedly reminding you for sending

Government dues of Agency fees and prize money but it seems

that you are not bothering to care for it. Since three

months have passed you have not yet paid any instalments of

Agency fees. As regards prize money you have paid only for

the five draws and remaining ten draws are still

outstanding. Now Govt. has taken a very serious view for

the lapses on your part. I am, therefore, directed to

inform you that if we do not receive Agency fees together

with 18% interest and prize money by the end of the next

week, we shall be constrained to stop all your lottery draws

without any further notice which may please note:

This may be treated as our final reminder and we shall

not be held responsible if any thing goes wrong against you.

R-39 dated 12.2.92 also reads as follows :

In continuation of our Telegram dated

8.2.92, a detailed statement of Agency fee due

upto 31st January, 1992 is enclosed herewith:-

1st. lot of eight lotteries -

Agency Fee - 1,09,36,924

Interest - 10,64,272

2nd. lot of eight lotteries -

Agency fee - 1,15,09,517

Interest - 5,25,534

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3rd. lot of eight lotteries -

Agency fee - 48,46,154

Interest - 1,15,324

__________

Total Rs. :- 2,89,97,725

(Rupees two crores eighty nine lakhs

ninety seven thousand seven hundred twenty

five only).

Please clear the dues before 25th of Feb

92 positively so that money could be credited

in time in the Govt. A/c.

Besides this, draw expenses of

Rs.6,00,000/- in respect of 3rd. lot of eight

lotteries may be sent expeditiously and prize

money in respect of all the 24 lotteries should

be cleared immediately so that all the pending

claims could be settled early in order to keep

the prestige of the Sikkim State Lotteries.

R-45 dated 31.3.92 addressed to the appellants reads

thus :

Please refer to our various letters and

telegrams requesting you to settle the dues as

mentioned below :-

(1) Telegram No.452/Fin./Lott. Dated 28.10.91

(2) Telegram No.572/Fin/Lott. Dated 19/11/91

(3) Letter No.484/Fin/Lott. Dated 27/11/91

(4) Letter No.902/Fin/Lott. Dated 17/1/92

(5) Telegram No.1062/Fin/Lott. Dated 8/2/92

(6) Letter No.1066/Fin/Lott. Dated 12/2/91

As per your requests we have given sufficient

time to settle the dues but because of your failure we

have been compelled to stop printings of Tickets

from 16/4/1992 onwards to avoid further liabilities.

Further you have also failed to give assurance or

proper response to our various letters. In view of

your failure to settle the huge amount of dues your

request to continue Seven Weekly Lotteries from

16/4/92 onward has not been considered by the

Government.

The dues based on draws upto 15/4/92 works

out as under :-

1. Agency Fees - Rs.3,72,87,824/-

2. Interest - Rs. 28,80,621/-

Total Rs.4,01,68,505/-

Besides above you have also failed to deposit

the prize money from time to time as a result of

which we have not been able to settle the claim.

I am therefore directed to give you this notice

to settle the entire dues before 15th April, 1992 failing

which Government will be compelled to take action

and also invoke the guarantees.

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Waiver involves a conscious, voluntary and intentional

relinquishment or abandonment of a known, existing legal

right, advantage, benefit, claim or privilege, which except

for such a waiver, the party would have enjoyed. The

agreement between parties in this case is such that its

fulfilment depends upon the mutual performance of reciprocal

promises constituting the consideration for one another and

the reciprocity envisaged and engrafted is such that one

party who fails to perform his own reciprocal promise cannot

assert a claim for performance of the other party and go to

the extent of claiming even damages for non-performance by

the other party. He who seeks equity must do equity and

when the condonation or acceptance of belated performance

was conditional upon the future good conduct and adherence

to the promises of the defaulter, the so-called waiver

cannot be considered to be forever and complete in itself so

as to deprive the State, in this case, of its power to

legitimately repudiate and refuse to perform its part on the

admitted fact that the default of the appellants continued

till even the passing of the Award in this case. So far as

the defaults and consequent entitlement or right of the

State to have had the lotteries either foreclosed or stopped

further, the State in order to safeguard its own stakes and

reputation has continued the operation of lotteries even

undergoing the miseries arising out of the persistent

defaults of the appellants. The same cannot be availed of

by the appellants or used as a ground by the Arbitrator to

claim any immunity permanently for being pardoned, condoned

and waived of their subsequent recurring and persistent

defaults so as to deny or denude forever the power of the

State as other party to the contract to put an end to the

agreement and thereby relieve themselves of the misfortunes

they were made to suffer due to such defaults. Once the

appellants failed to deposit the prize money in advance

within the stipulated time, the time being essence since the

prizes announced after the draw have to be paid from out of

only the prize money deposited, the State was well within

its rights to repudiate not only due to continuing wrongs or

defaults but taking into account the past conduct and

violations also despite the fact that those draws have been

completed by declaration or disbursement of prize amounts by

the State from out of its own funds. The conclusion to the

contrary that the State has committed breach of the contract

is nothing but sheer perversity and contradiction in terms.

b) The mere reference to the documents or material on

record, or a cryptic observation that all those materials

have been considered is no substitute by itself for proof of

such positive consideration, which should otherwise be

apparent from only the manner of consideration disclosed

from the award and reasonableness of the conclusions arrived

at by the Arbitrator. That the contents of Ex. R-52 and

R-43 have been patently misread is obvious from the fact

that the Arbitrator has merely chosen to fall back on the

word postpone totally ignoring the following words there

will be no draw of these weekly lotteries w.e.f. 16.4.1992

and onwards, taking together with the further fact that no

re-scheduled date on which they propose to hold the draw for

the so-called postponed lotteries have been given.

Likewise, Ex.C-3 another vital document has also been

misconstrued by ignoring the vital and relevant portions

contained therein. Similar instances in respect of other

relevant documents also are rampant, as could be seen from

the award, appropriately pointed out by the Chief Justice in

his judgment.

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c) The manner in which the Arbitrator has chosen to

arrive at the quantum of damages alleged to have been

sustained by the appellants not only demonstrates perversity

of approach, but per se proves flagrant violation of the

principles of law governing the very award of damages. The

principles enshrined in Section 54 in adjudicating the

question of breach and Section 73 of the Contract Act

incorporating the principles for the determination of the

damages, are found to have been observed more in their

breach. Despite the fact that M.K. Subba, who had been all

along corresponding and dealing with the matter directly,

has without any justification whatsoever, not only been

withheld from the witness box but despite the oral evidence

of RW-1, facts which could only be denied or proved by M.K.

Subba have been taken for granted. No one from the

appellants side who could speak for as to what is the usual

course of things in lotteries was examined and no material

about similar lotteries making consistent profit at 7.51%

throughout all years regardless even of stoppage of lots and

absence of sale of all the tickets and other relevant

factors highlighted in the course of cross examination of

CW-1 and CW-2 were produced to prove the profit range

claimed. Merely relying upon CW-1, the Chartered

Accountant, who, admittedly, was unaware of the actual

functioning of the business and who had not looked into or

shown any accounts, records or was in the knowledge of the

state of affairs of the lottery business in question, the

Arbitrator appears to have relied upon some hypothetical

calculations worked out on mere surmises and conjectures as

though it constituted substantive evidence even in utter

disregard of the specific admissions contained in the letter

of the appellants marked as R-46, against the very claims

now put forward on behalf of the appellants. The Award also

suffers from obvious and patent errors of law in calculating

damages on the footing that all the lotteries continued for

their full term, ignoring the real facts.

d) Clause 2 of the Agreement reads as follows:-

2. Except on the detection of the default or

fraudulent conduct in lotteries or of any act of malfeasance

or misfeasance on the part of the Organising Agents, the

Government shall not rescind or modify this agreement.

Provided that the Organising Agents shall be given an

opportunity of being heard in person before any decision

regarding rescission or modification is taken.

Even a cursory reading of the clause would show that the

Arbitrator has adopted a narrow, pedantic and perfidious

construction of the clause not only doing violence to the

language but defeating the very object of introducing such a

clause reducing it to a mere dead letter by holding that

apparent, obvious and admitted defaults of the nature will

not fall within the said clause, but instead only defaults

which are and could be found out or unearthed after

detection alone would answer the situation envisaged

therein. By such construction, the Arbitrator has chosen to

deny the powers of the State to put an end to the contract

on account of the defaults of the appellants, which as

observed by the Arbitrator himself could have under general

law of the contract provided grounds for the respondent

(meaning thereby the State) to terminate the contract.

This misconstruction and misdirection alone is sufficient to

scrap the Award of the Arbitrator.

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e) The Award of an Arbitrator cannot be opposed to law

and what is not permissible in law cannot be granted or even

approved by Courts merely because it was an Arbitrator who

granted it. Section 54 of the Contract Act is a complete

answer to the claim at the instance of the appellants for

either performance of the contract or for asserting a claim

for compensation/damages for the alleged non-performance

arising out of repudiation by the State. The Arbitrator

could not have been oblivious of the fact that it was the

defaults, violations and breaches committed by the

appellants that necessitated the termination of the contract

by the State, left with no other option for it, in law.

Even a cursory reading of the Award in the light of the

materials on record, as rightly pointed out in the judgment

of Chief Justice Bhargava, with particular reference to the

indisputable facts disclosed on the basis of the

correspondence between parties would disclose that no

reasonable or prudent person could have ever either

reasonably, fairly or justly arrived at such findings as

have been recorded by the Arbitrator in this case by any

known or proclaimed process of consideration and judicious

reasoning. The errors which could be noticed in the form of

obvious and conspicuous mistake of facts vital and essential

aspects and misapplication of law are found to so

extensively and deeply pervade the entire adjudicatory

process undertaken by the Arbitrator as to render it

impossible to save the Award except at the expense rendering

the ends of justice, a casualty. It would be no

exaggeration or meaning any disrespect to place on record as

to how appropriately the following observations of Lord

Halsbury, L.C. in Andrews Vs. Mitchell (1904-7 All E R 599

at 600 E) fits in with the manner of disposal given by the

Arbitrator :

I should be anxious myself, as I have no doubt that all

your Lordships would be, to give every effect to their

decisions. On the other hand, there are some principles

which it is impossible to disregard, and, after giving every

credit to the desire on the part of this arbitration court

to do justice, I think it manifest that they proceeded far

too hastily in this case; and without imputing to them any

prejudice or any desire to do wrong, I think that the mode

in which the whole question was raised and was disposed of,

was so slipshod and irregular that it might lead to

injustice.

Consequently, we have no hesitation to set aside the

Award of the Arbitrator, as affirmed by the District Judge,

insofar as it purports to award damages to the tune of

Rs.37,75,00,000/- in favour of the appellants, as wholly

uncalled for and illegal.

On behalf of the State of Sikkim, a strong plea has been

made in pursuit of its counter-claim by contending that it

is always permissible for this Court to set aside the bad or

vitiating part of the Award and retain and affirm the valid

portion, alone and, therefore, the Award to that extent may

be allowed to stand and the same be made a rule of Court.

No doubt this Court in M. Chelamayya Vs. M. Venkataraman

(AIR 1972 SC 1121); Upper Ganges Valley Electricity Supply

Co. Ltd. Vs. U.P. Electiricty Board (1973(3) SCR 107)

and Union of India Vs. M/s Jain Associates & Anr. (JT

1994(3) SC 303) has held so. The Arbitrator has allowed a

sum of Rs.5,39,15,531/- in favour of the State and after

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adjusting against the same, the sum admittedly due to the

appellants, the counter-claim to the tune of

Rs.4,61,35,242/- was awarded to them. The various facts

adverted to supra would go to show that though the initial

default was committed by the appellants, the

respondent-State was also not adhering strictly to the time

schedule and other stipulations contained in the agreement.

The lotteries agreed to be run through the appellants have

since been closed, once and for all. Due to certain

supervening difficulties said to have been encountered by

the appellants, their business adventure did not proceed on

the expected lines and it is not also the case of the State

that the appellants have made any undue profit or enriched

themselves at the expense of the State. We cannot

completely ignore the fact that the initial preparations to

float and publicise the scheme of lotteries in question

involving considerable expenditure did not bring to them the

expected returns, on account of the premature termination of

the Agency agreement and the encashment and appropriation of

the bank guarantees. The appellants could not have reaped

the full benefit of those business ventures. There seem to

be no proper rendition of accounts at the proper time and

the finalisation came only at a much later stage. Keeping

in view all these practicalities and realities of the

situation, we are convinced, on the peculiar facts and

circumstances of this case, that equities have to be

properly worked out between parties to ensure that no one is

allowed to have their pound of flesh unjustly against the

other. Since this Court has chosen to take up for

consideration the merits of the claims of the respective

parties in these appeals filed by the appellants, in order

to do substantial justice between parties in exercise of its

powers under Article 142 of the Constitution of India, we

consider it not only appropriate but just and necessary as

well, on an overall consideration of the matter, to reject

the counter-claim made by the State.

The challenge to the orders of the High Court dated

11.8.96 fails and shall stand rejected. Consequently, we

set aside the Award of the Arbitrator, as affirmed by the

learned District Judge. The judgment of the High Court

rendered on 29.9.1995 shall stand modified, accordingly.

The appeals shall stand finally disposed of on the above

terms. The parties will bear their respective costs.

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