If the award is erroneous on the basis of record with regard to proposition of law or its application, the Court will have jurisdiction to interfere with the same.
Dealing with the similar question, this Court in M/s. Alopi Parshad and Sons Ltd. vs. The Union of India, (1960) 2 SCR 793 observed that the extent of jurisdiction of the Court to set aside the award on the ground of an error in making the award is well defined and held thus:-
“The award of an arbitrator may be set aside on the ground of an error on the face thereof only when in the award or in any document incorporated with it, as for instance, a note appended by the arbitrators, stating the reasons for his decision, there is found some legal proposition which is the basis of the award and which is erroneous – Champsey Bhara and Company vs. Jivaraj Balloo Spinning and Weaving Company Limited [LR 50 IA 324]. If however, a specific question is submitted to the arbitrator and he answers it, the fact that the answer involves an erroneous decision in point of law, does not make the award bad on its face so as to permit of its being set aside – In the matter of an arbitration between King and Duveen and others [LR (1913) 2 KBD 32] and Government of Kelantan vs. Duff Development Company Limited [LR 1923 AC 395].”
Thereafter, the Court held that if there was a general reference and not a specific reference on any question of law then the award can be set aside if it is demonstrated to be erroneous on the face of it. The Court, in that case, considering Section 56 of the Indian Contract Act held that the Indian Contract Act does not enable a party to a contract to ignore the express provisions thereof and to claim payment of consideration for performance of the contract at rates different from the stipulated rates, on some vague plea of equity and that the arbitrators were not justified in ignoring the expressed terms of the contract prescribing the remuneration payable to the agents. The aforesaid law has been followed continuously. Re: Rajasthan State Mines and Minerals Ltd. vs. Eastern Engineering Enterprises and another, (1999) 9 SCC 283, Sikkim Subba Associates vs. State of Sikkim, (2001) 5 SCC 629 and G.M., Northern Railway and another vs. Sarvesh Chopra, (2002) 4 SCC 45.
There is also elaborate discussion on this aspect in Union of India vs. A. L. Rallia Ram, (1964) 3 SCR 164 wherein the Court succinctly observed as under :-
“. . . . .But it is now firmly established that an award is bad on the ground of error of law on the face of it, when in the award itself or in a document actually incorporated in it,there is found some legal proposition which is the basis of the award and which is erroneous. An error in law on the face of the award means: “you can find in the award or a document actually incorporated thereto, as for instance, a note appended by the arbitrator stating the reasons for his judgment, some legal proposition which is the basis of the award and which you can then say is erroneous. It does not mean that if in a narrative a ‘reference is made to a contention of one party, that opens the door to setting first what that contention is, and then going to the contract on which the parties’ rights depend to see if that contention is sound”. Champsey Bhara and Company vs. Jivraj Balloo Spinning and Weaving Company Ltd. [(1932) LR 50 IA 324]. But this rule does not apply where questions of law are specifically referred to the arbitrator for his decision; the award of the arbitrator on those questions is binding upon the parties, for by referring specific questions the parties desire to have a decision from the arbitrator on those questions rather than from the Court, and the Court will not unless it is satisfied that the arbitrator had proceeded illegally interfere with the decision.”
The Court thereafter referred to the decision rendered in Seth Thawardas Pherumal vs. The Union of India (1955) 2 SCR 48 wherein Rose, J. delivering the judgment of the Court had observed:
“Therefore, when a question of law is the point at issue, unless both sides specifically 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 arguments about point of law in the course of the proceedings is not enough.”
The learned Judge also observed at p. 59 after referring to F. R. Absalom Ltd. vs. Great Western (London) Garden Village Society (1933) AC 592, 616:
“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.”
The Court also referred to the test indicated by Lord Russell of Killowen in F. R. Absalom Ltd. vs. Great Western (London) Garden Village Society Ltd., and observed that the said case adequately brings out a distinction between a specific reference on a question of law, and a question of law arising for determination by the arbitrator in the decision of the dispute. The Court quoted the following observations with approval:-
“. . . .it is, I think, essential to keep the case where disputes are referred to an arbitrator in the decision of which a question of law becomes material distinct from the case in which a specific question of law has been referred to him for decision. x x x x The authorities make a clear distinction between these two cases, and, as they appear to me, they decide that in the former case the Court can interfere if and when any error of law appears on the face of the award, but that in the latter case no such interference is possible upon the ground that it so appears that the decision upon the question of law is an erroneous one.”
Further, in Maharashtra State Electricity Board vs. Sterilite Industries (India) and another [(2001) 8 SCC 482, the Court observed as under:-
“9. The position in law has been noticed by this Court in Union of India vs. A. L. Rallia Ram [AIR 1963 SC 1685] and Madanlal Roshanlal Mahajan vs. Hukumchand Mills Ltd. [(1967) 1 SCR 105 to the effect that the arbitrator’s award both on facts and law is final that there is no appeal from his verdict: that the Court cannot review his award and correct any mistake in his adjudication, unless the objection to the legality of the award is apparent on the face of it. In understanding what would be an error of law on the face of the award, the following observations in Champsey Bhara and Co. vs. Jivraj Balloo Spg. and Wvg. Co. Ltd. [(1922-23) 50 IA 324] a decision of the Privy Council, are relevant (IA p. 331).
“An error in law on the face of the award means, in Their Lordship’s view, that you can find in the award on a document actually incorporated thereto, as for instance, a note appended by the arbitrator stating the reasons for his judgment, some legal proposition which is the basis of the award and which you can then say is erroneous.”
In Arosan Enterprises Ltd. vs. Union of India [(1999) 9 SCC 449, this Court again examined this matter and stated that where the error of finding of fact having a bearing on the award is patent and is easily demonstrable without the necessity of carefully weighing the various possible viewpoints, the interference in the award based on an erroneous finding of fact is permissible and similarly, if an award is based by applying a principle of law which is patently erroneous, and but for such erroneous application of legal principle, the award could not have been made, such award is liable to be set aside by holding that there has been a legal misconduct on the part of the arbitrator.”
