http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 1 of 8

PETITIONER:

U.P. RAJKIYA NIRMAN NIGAM LTD.

Vs.

RESPONDENT:

INDURE PVT. LTD. & ORS.

DATE OF JUDGMENT: 09/02/1996

BENCH:

RAMASWAMY, K.

BENCH:

RAMASWAMY, K.

AHMAD SAGHIR S. (J)

G.B. PATTANAIK (J)

CITATION:

1996 AIR 1373 1996 SCC (2) 667

JT 1996 (2) 322 1996 SCALE (2)247

ACT:

HEADNOTE:

JUDGMENT:

J U D G M E N T

K. Ramaswamy, J.

Leave granted.

This appeal by special leave arises from the judgment

and order passed on April 10, 1992 by the Delhi High Court

in O.M.P. No.62 of 1992.

The appellant filed an application under Section 33 of

the Arbitration Act, 1940 [for short, "the Act"] for

declaration that there exist no agreement between the

appellant and the first respondent-Indure Pvt. Ltd. on the

basis of which a dispute for a claim of Rs.1,68,73,628/-

could be referred for arbitration as the agreement set up by

the respondent was non est and alternatively the dispute

was not arbitrable under the agreement. Accordingly it

sought declaration to set aside the said agreement. The

learned single Judge of the High Court in the impugned

order held that the draft agreement dated June 22, 1984

contains provision for arbitration under clause [14] and the

appellant is bound thereby; consequently, the arbitrators

are entitled to arbiter the dispute.

The dispute arose in the backdrop of the facts that the

U.P. State Electricity Board had floated tenders for

construction, supply and erection of mechanical equipment

and construction work including consultancy services. Last

date for submission of the tender was June 30, 1984. The

appellant-Nigam, an Undertaking of State of U.P. had

purchased tender documents-from the Board on February 6,

1984. The respondent approached the appellant for their

joint participation to submit the tenders to the Board. In

furtherance thereof, negotiations were set on foot and they

decided to enter into an agreement in that behalf and

ultimately draft agreement dated. June 22, 1984 was sent to

the respondent for signature. The appellant did not sign the

draft agreement. On June 27, 1984, the respondent sent a

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 2 of 8

counter-proposal deleting clause [10] of the agreement

suggested by the appellant and materially altering clause

[12] therein after signing the same. The tenders were

submitted on June 30, 1984, i.e., the last date for

submission of tenders; but before negotiating with the Board

on February 23, 1985 the appellant had withdrawn the

tenders. On February 25, 1985, the respondent had offered in

its letter to the Board agreeing to undertake the entire

contract by itself and offered to complete the formalities

with the Board. Simultaneously, on March 3, 1985, the

respondent sent a notice through its counsel claiming

damages stating therein that there was no arbitration

agreement between the parties. On January 21, 1986, the

respondent had further sent a notice nominating an

arbitrator an arbitrator on its part and called upon the

Appellant to nominate its arbitrator. The respondent

purported to have exercised that right under clause [14] of

the draft agreement proposed by the appellant on June 22,

1984 alleging that they had accepted the same by letter

dated June 27, 1984. The appellant by letter dated February

28, 1986 disputed the existence of the arbitration agreement

and also asserted that no concluded contract existed between

the parties. It was further stated therein that deletion of

material clause [10] of the draft agreement and material

alteration of clause [12] constituted substantial

modification of the draft agreement and consequently it did

not accept the counter-proposal of the respondent and that,

therefore, no valid agreement came into existence which was

admitted by the respondent in their letter dated March 5,

1985. The question of appointing an arbitrator on their

behalf did not arise. However, without prejudice to their

right to claim that no valid agreement, much less

arbitration agreement, was in existence, they nominated an

arbitrator on their behalf to arbiter on the question

"whether there existed ant valid or subsisting agreement

between the parties and whether there existed any valid and

binding arbitration clause between the parties?" Since the

arbitrator nominated by them expired, the respondent was

called upon the appellant to nominate another arbitrator. At

that stage the appellant filed above petition under Section

33 of the Act.

The High Court found that the respondent returned the

agreement duly signed but after deleting clause [10] and

materially altering clause [12] thereof. There was no

communication by the appellant refusing or negativing the

alternations made in the draft agreement. Tenders were

submitted on June 30, 1984 after receipt of the modified

agreement. Till March 1, 1986, the respondent had not

received any communication disowning the contract between it

and the appellant. Clause [14] of the agreement contained an

arbitration clause for adjudication of the disputes. The

withdrawal of the tenders by the appellant caused damages as

claimed by the appellant in the notice. Therefore, the

respondent called upon appellant to nominate their

arbitrator to adjudicate the dispute intimating in their

letter appointment of the arbitrator on their part. From

this there emerged a concluded contract containing clause

[14] providing for arbitration for adjudication of the

disputes.

As stated earlier, the High Court came to the

conclusion that from the correspondence between the parties

there emerged a concluded contract. After due discussion

between the parties the draft agreement duly signed with

official seal of the respondent affixed thereon, was

communicated to the appellant on June 27, 1984 which

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 3 of 8

contained clause [14] which formed an integral part of the

contract. The modifications suggested by the respondent were

acted upon by the appellant. At no point of time it was

suggested by any communication that the modifications were

not accepted. On the other hand, tenders were submitted on

June 30, 1984 for the joint participation of the appellant

and the respondent. The respondent had sent a bank Draft for

a sum of Rs.2 lakhs on October 29, 1984. "(I)t is clear that

the petitioner had accepted the agreement and in such an

eventuality, the petitioner cannot deny the existence of

arbitration clause". "Therefore, from the conduct of the

petitioner the inference can be drawn that the agreement had

come into force the moment it was signed by the respondent

and sent the same to the petitioner and the petitioner

though did not sign it but acted upon it which amounts to

indirect acceptance".

Section 3 of the Indian Contract Act, 1872 envisages

communication of proposal, acceptance of proposal and the

revocation of the proposal and acceptance. Communication of

proposal is complete under Section 4 when it comes to the

knowledge of the person to whom it is made. Communication of

an acceptance is complete - as against the proposer, when it

is put in the course of transmission to him, so as to be out

of the power of the acceptor; as against the acceptor, when

it comes to the knowledge of the proposer. Under Section 7,

"in order to convert a proposal into a promise, the

acceptance must [1] be absolute and unqualified; [2] be

expressed in some usual and reasonable manner, unless the

proposal prescribes the manner in which it is to be

accepted...". Under Section 10, "all agreements are

contracts if they are made by the free consent of parties

competent to contract, for a lawful consideration and with a

lawful object, and are not expressly declared to be void".

Section 31 defines "Contingent contract" to mean to contract

to do or not to do something, if some event, collateral to

such contract, does or does not happen". A contingent

contract to do or not to do anything, if an unforeseen

future event happens, cannot be enforced by law, under

Section 32, unless and until that event has happened. If the

event becomes impossible, such contract becomes void.

Section 2 [a] of the Act defines "arbitration agreement" to

mean "a written agreement to submit, present or future

differences, to arbitration, whether an arbitrator is named

therein or not". To constitute an arbitration agreement,

there must be an agreement between the parties, viz., the

parties must be ad idem. The parties are not ad unless they

agree to the terms and conditions mentioned in the

agreement. As seen, under the Contract Act unless there is

an agreement, i.e., there is an acceptance of the proposal,

the contract is not complete. It is seen that the draft

agreement dated June 22, 1984 was sent to the respondent for

acceptance, Admittedly, clause [10] was deleted and clause

[12] was materially altered unilaterally to convert joint

liability to individual liability of the appellant. It

would, therefore, be a counter-proposal signed by the

respondent and communicated to the appellant. At this

juncture, it is relevant to notice the Articles of

Association of the appellant-Company, a State Government

Undertaking. Article 125 of the Articles of Association

gives power to the Board of Directors of the appellant-

Company and Article 126, clause [xii] confers power on the

Board of Directors "to refer claims or demands, by or

against the Company to arbitration". Under Article 125, the

Company has the control and the competent authority has

power to sign the contract on behalf of the Company. After

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 4 of 8

the counter-proposal was signed by the respondent, the

appellant had not signed any contract to bind the parties.

From this factual matrix, the question arises: whether

there emerged any concluded contract pursuant to which the

parties are bound by the terms and conditions of the tenders

submitted to the Board and for further performance? It is

seen that the tenders were not jointly signed by the

appellant and the respondent but were unilaterally submitted

to the Board by the appellant and were later on withdrawn.

There did not exist any concluded contract between the Board

and the appellant for the performance of the work as per

terms and conditions of the tenders floated by the Board.

Under Section 32 it was a contingent contract until it was

accepted by the Board. In this background,the question

emerges: whether there is an arbitration agreement between

the parties? It is see; that clause [141 of the agreement

[subject to the dispute whether it is arbitrable under

clause [14] which is yet another issue with which were are

not concerned] independently does not come into existence

unless there is a concluded contract pursuant to the

proposal made by the appellant on June 22, 1984 or a

counter-proposal by the respondent dated June 26, 1984. It

is not the case of the respondent that there exist any such

independent arbitration agreement.

Shri R.F. Nariman, the learned counsel for the

respondent, therefore, contended that the counter-offer made

by the respondent amounts to acceptance by conduct of the

appellant and he placed reliance on paragraphs 53

[Acceptance by conduct] and 99 [Agreement in principle only]

of the i on Contract. Paragraph 53 provides ' that "an offer

may be accepted by conduct. For example, an offer to buy

goods can be accepted by supplying them; and an offer to

sell goods, made by sending them to the offeree, can be

accepted by using them". The substance of paragraph 99 is

that parties may reach agreement in principle but the

details may be worked out at a later date. There is no

dispute to the proposition of law but two factors have to be

kept in mind, viz., when the counter offer was made by the

respondent and whether the unilateral offer amounts to

acceptance by submitting the tenders by the appellant to the

Board. We find that it does not amount to acceptance of

counter proposal. It is seen that admittedly, clause [10]

which thrusts responsibility on the first respondent was

deleted in the counter- proposal. In clause 12, for joint

responsibility unilateral liability was incorporated. In

other words the respondent disowned its material

responsibilities. Unless there is acceptance by the

appellant to those conditions no concluded contract can be

said to have emerged. It is seen that the appellant is a

Government Undertaking and unless contract is duly executed

in accordance with the Articles of Association, the

appellant is not bound by any such contract. Shri Nariman

sought to rely on the passage from Palmer on Companies Law

containing that it is an indoor management between the

appellant and its officers. When the negotiations were

undertaken on behalf of the appellant, the respondent was

led to believe that the officer was competent to enter into

the contract on behalf of the appellant. When the counter-

proposal was sent, The appellant had not Returned the

proposal. Therefore it amounts to acceptance and thus

concluded contract came into existence. We fail to

appreciate the contention. As seen, the material

alterations in the contract make world of difference to

draw an inference of concluded contract, The joint

liability of the parties was vade unilateral liability of

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 5 of 8

The appellant. Thereby, the respondent sought to absolve

itself From the liability of further performance of the

contract with the Board. Similarly, clause [10] which

contains material part of the terms for the performance of

the contract with the Board was deleted Thereby, there is

no consensus A on the material terms of the contact which

contains several clauses. In the absence of consensus ad

idem on the material terms of the contract to be entered

into between the parties, there emerged no concluded

contract. Apart from the draft agreement and the counter-

proposal, there is no independent contract for reference to

arbitration. Clauses [14] which is an integral part of the

draft agreement proposed by the appellant and the counter-

proposal is the foundation for reference to the arbitration.

Section 31 [2] of the Act provides that notwithstanding

anything contained in any other law for the time being in

force and save as otherwise provided in the Act, all

questions regarding the validity, effect or existence of an

award or an arbitration agreement between the parties to the

agreement or persons claiming under them shall be decided by

the Court in which the award under the agreement has been or

may be, filed, and by no other Court. Section 33 envisages

that any party to an arbitration agreement or any person

claiming under him desiring to challenge the existence or

validity of an arbitration agreement or an award or to have

the effect of either determined shall apply to the Court and

the Court shall decide the question on affidavits. Under the

proviso, if the Court deems it just and expedient, it may

set down the application for hearing on other evidence also

and may pass such orders for discovery and particulars as it

may do in a suit.

In "Law of Arbitration" by Justice Bachawat [2nd Edn.]

at page 19 of Chapter II it is stated that "to constitute an

arbitration agreement, there must be an agreement, that is

to say, the parties must be ad-idem. The parties are not ad

-idem if there is an arbitration clause in the bought note

while there is none in the sold note. To be enforceable, the

agreement must be made by the free consent of the parties".

We find no force in the contention of Shri Nariman that

the appellant had submitted to the jurisdiction of the

arbitrators and having nominated the arbitrator, they are

estopped to go back upon it Acquiescence does not confer

jurisdiction,

The arbitrability of a claim depends on the

construction of the clause in the contract. The finding of

the arbitrator/arbitrators on arbitrability of the claim is

not conclusive as under Section 33, ultimately it is the

Court that decides the controversy. It being a

jurisdictional issue, the arbitrator/arbitrators cannot

cloth themselves with jurisdiction to conclusively decide

the issue. In "Russel on Arbitration" [19th Edn.] at page 99

it is stated thus:

"It can hardly be within the

arbitrator's jurisdiction to decide

whether or not a condition

precedent to his jurisdiction has

been fulfilled. It has indeed

several times been said bluntly

that an arbitrator has no power to

decide his own jurisdiction and in

one case where rules of an

institution prepared to conduct

arbitrations gave the arbitrator

such power, the court will ignore

this when asked to enforce the

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 6 of 8

award, and decide the question

itself. However, an arbitrator is

always entitled to inquire whether

or not he has jurisdiction. An

umpire faced with a dispute whether

or not there was a contract from

which alone his jurisdiction, if

any, can arise can adopt one of a

number of courses. He can refuse

to deal with the matter at all and

leave the parties to go to court,

or he can consider the matter and

if he forms the view that the

contract upon which the claimant is

relying and from which, if

established, alone his jurisdiction

can arise is in truth the contract,

he can proceed accordingly."

In "Law of Arbitration" by Justice Bachawat [2nd Edn.]

at page 155 it is stated that "the question whether matters

referred to were within the ambit of clause for reference of

any difference or dispute which may arise between the

parties, it is for the Court to decide". The arbitrator by a

wrong decision cannot enlarge the scope of the submission.

It is for the Court to decide finally the ambit of the

clause in dispute or any clause or a matter or a thing

contained therein or the construction thereof. We,

therefore, hold that the arbitrators cannot cloth themselves

with jurisdiction to decide conclusively the arbitrability

of the dispute. It is for the Court under Section 33 or on

appeal thereon to decide it finally. The appellant,

therefore, is not estopped to challenge the action and to

seek a declaration under section 33.

The clear settled law thus is that the existence or

validity of an arbitration agreement shall be decided by the

Court alone. Arbitrators, therefore, have no power or

jurisdiction to decide or adjudicate conclusively by

themselves the question since it is the very foundation on

which the arbitrators proceed to adjudicate the disputes.

Therefore, it is rightly pointed out by Shri Adarsh Kumar

Goel, learned counsel for the appellant that they had by

mistake agreed for reference and that arbitrators could not

decide the existence of the arbitration agreement or

arbitrability of the disputes without prejudice to their

stand that no valid agreement existed. Shri Nariman

contended that having agreed to refer the dispute, the

appellant had acquiesced to the jurisdiction of the

arbitrators and, therefore, they cannot exercise the right

under Section 33 of the Act. We find no force in the

contention. As seen, the appellant is claiming adjudication

under Section 33 which the Court alone has jurisdiction and

power to decide whether any valid agreement is existing

between the parties. Mere acceptance or acquiescing to the

jurisdiction of the arbitrators for adjudication of the

disputes as to the existence of the arbitration agreement or

arbitrability of the dispute does not disentitle the

appellant to have the remedy under section 33 through the

Court. In our considered view the remedy under Section 33 is

the only right royal way for deciding the controversy.

Since the tenders - the source of the contract between

the parties - had not transformed into a contract, even if

the proposal and counter proposal are assumed to be

constituting an agreement, it is a contingent contract and

by operation of Section 32 of the Contract Act, the counter

proposal of the respondent cannot be enforced since the

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 7 of 8

event of entering into the contract with the Board had not

taken place.

In Ramji Dayawala & sons [P] Ltd. v. Invest Import [AIR

1981 SC 2085], a two-Judge Bench of this Court considered

the existence of the contract and arbitration clause

thereunder. This Court had held that in the facts of a given

case acceptance of a suggestion may be sub silentio

reinforced by the subsequent conduct. Where there is a

mistake as to terms of a document, amendment to the draft

was suggested and a counter-offer was made, the signatory to

the original contract is not estopped by his signature from

denying that he intended to make an offer in the terms set

out in the document. Where the contract is in a number of

parts it is essential to the validity of the contract that

the contracting party should either have assented to or

taken to have assented to the same thing in the same sense

or as it is sometimes put, there should be consensus ad

idem. In that case a sub-contract was signed and executed by

the Managing Director of the appellant-Company but part of

the contract was altered subsequently since counter-proposal

was given by the respondent. This Court had held that one

such case is where a part of the offer was disputed at the

negotiation stage and the original offeree communicated that

fact to the offeror saying that he understood the offer in a

particular sense; this communication probably amounts to a

counter-offer in which case it may be that mere silence of

the original offeror will constitute his acceptance. Where

there is a mistake as to the terms of the documents as in

that case, amendment to the draft was suggested and a

counter-offer was made, the signatory to the original

contract is not estopped by his signature from denying that

he intended to make an offer in the terms set out in the

document; to wit, the letter and the cable. It can,

therefore, be stated that where the contract is in a number

of parts it is essential to the validity of the contract

that the contracting party should either have assented to or

taken to have assented to the same thing in the same senseor

as it is sometimes put, there should be consensus ad idem.

It was held that there was no consensus ad idem to the

original contract. It was open to the party contending

novatio to prove that he had not accepted a part of the

original agreement though it had signed the agreement

containing that part.

As found earlier, there is no signed agreement by a

duly competent officer on behalf of the appellant. The

doctrine of "indoor management" cannot be extended to

formation of the contract or essential terms of the contract

unless the contract with other parties is duly approved and

signed on behalf of a public undertaking or the Government

with its seal by an authorised or competent officer.

Otherwise, it would be hazardous for public undertakings or

Government or its instrumentalities to deal on contractual

relations with third parties.

In view of the fact that Section 2 [a] of the Act

envisages a written agreement for arbitration and that

written agreement to submit the existing or future

differences to arbitration is a pre-condition and further in

view of the fact that the original contract itself was not a

concluded contract, there existed no arbitration agreement

for reference to the arbitrators. The High Court, therefore,

committed a gross error of law in concluding that an

agreement had emerged between the parties, from the

correspondence and from submission of the tenders to the

Board. Accordingly it is declared that there existed no

arbitration agreement and that the reference to the

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 8 of 8

arbitration, therefore, is clearly illegal. Consequently

arbitrators cannot proceed further to arbiter the dispute,

if any. The conclusion of the High Court is set aside.

The appeal is accordingly allowed with costs quantified

at Rs.15,000/-.