Before the Hon’ble High Court at Bombay

Champsey Bhara And Company ……………… Appellants

vs

The Jivraj Balloo Spinning and Weaving Co. …………… Respondents

(1923)25BOMLR588

FACTS

1. In order to have an award issued in favour of the appellants, Messrs. Champsey Bhara
& Co., set aside, the respondents, Jivraj Baloo Spinning and Weaving Co., Ltd., filed
a petition.
2. The appellants, who were the sellers, signed a contract on August 17, 1918, to sell the
appellants 100 bales of new machine-ginned, fully-good Mundra cotton for Rs. 905,
with a delivery window of October 1 through November 25, 1918.
3. A similar agreement was entered into by the parties on September 4, 1918, for the sale
of 100 bales of cotton at a price of Rs. 950 per candy. The Bombay Cotton Trade
Association, Ltd.'s rules and regulations applied to both of the aforementioned
contracts (as the appellants were members of the Bombay Cotton Trade Association).
4. As a result, the respondents informed the appellants on November 25 that they had
refused to accept the order tendered as the cotton received was of an inferior quality.
5. The appellants responded to the respondents on November 29th, asserting that the
amount of Rs. 25,000 represented the discrepancy between the contract prices and the
market rates on the day that the cotton was turned down. On November 30, the
respondents responded, stating that since the contracts had been violated, they were
not accountable to the respondents.
 6. In accordance with the Rules, the Association designated two arbitrators at the
appellants' request to resolve the purported claim that the appellants had filed. The
respondents wrote their arguments and presented them before the arbitrators.
7. The arbitrators issued their award and instructed that the respondents pay the
appellants the amount demanded by the appellants after reciting the aforementioned
contracts, the appellants ' claim, the rejection of the cotton tendered, and the
respondents' denial of culpability.
8. On June 9th, the Appeal Board verified this award. Following that, the appellants
submitted a petition to have the award set aside.

LAWS APPLICABLE

This case, having been filed in the year 1923, predates not only the current laws related to
arbitration (Arbitration and Conciliation (Amendment) Act,1996), but also the first statute
containing the laws related to arbitration (The Arbitration Act, 1940) and as such belongs to a
period where no there was no statute that governed an arbitration. In the present case, the
following rules of the Bombay Cotton Trade Association Ltd. were applicable: -

1. Rule 12: All questions or disputes as to quality between buyer and seller shall be
referred to the arbitration of two disinterested persona, one to be chosen by each
disputant, such arbitrators having the power to call in a third arbitrator. The award
made by such arbitrators or any two of them shall be final and binding subject only to
the right of appeal to the Appeal Committee All arbitrations held under this Rule must
be held in accordance with Rule 5, and only shareholders and/or Directors shall be
eligible to act on arbitrations held in the rooms of the Association. Associate
members, however, shall be eligible to act as arbitrators when the arbitration is held in
the seller's jetha and/or go down as provided under Rule 5.
2. Rule 13: All questions in dispute (other than that of quality) arising out of, or in
relation to, contracts made subject to the Rules and Regulations of The Bombay
Cotton Trade Association, Limited, provided one of the parties to the contract is a
member or associate member of the Association, shall be referred to the arbitration of
two disinterested persons being shareholders or directors of the Association, one to be
chosen by each disputant; such arbitrators having the power to call in a third arbitrator
who must also be a shareholder or director of the Association. The award made by
 such arbitrators or any two of them shall be final and binding on both parties, subject
only to the right of appeal to the Board within 15 days of the date of the arbitrators'
award on payment of Rs. 100.
3. Rule 52: If the final award for inferiority of quality be in excess of Rs. 5 per candy
(unless as provided for in the exception mentioned below) or if the lot tendered be
found to be a full grade below the quality contracted for, or to be fraudulently packed
or damaged, the buyer shall have the option either to take the cotton at the allowance
fixed by the arbitrators or the Appeal Committee, or upon giving notice in writing to
the seller and original tenderer to refuse the same, in which latter case he may either
buy in the market at a reasonable rate on account, risk and expense of the seller, or
invoice it back to the seller at the market rate of the day upon which the final award
shall have been made, provided always that in the event of the buyer exercising the
option of buying in the market, he shall do so not later than the day following that on
which arbitration and (or) appeal (if any) is finally disposed of, and shall intimate his
purchase to his immediate seller and to the original tenderer within 24 hours of such
purchase. In the event of the buyer exercising his option of invoicing the cotton back
to the seller at the market rate of the day upon which the final award has been made,
he shall notify his immediate seller and the original tenderer within 24 hours of the
arbitration and (or) appeal (if any) being finally disposed of.
The term “Full Grade” shall be understood to mean the difference between “fine” and
“fully good” and other similar differences.
If, however, when a lot of cotton is tendered under jaitha terms before the due date of
the contract, the quality of the cotton should be objected to by the buyer, the seller
shall be allowed to withdraw the tender and make a new tender within the contract
time, provided no arbitration has been held on the cotton; nut no withdrawal of any
tender shall be allowed offer an arbitration has been held. Cotton tendered by a
Railway Receipt shall not be withdrawn except in the case the cotton not arriving
within the time stipulated in the contract in which case a fresh tender from the jaitha
may be made on the due date.

Exception- Where the difference between the market rates for the grade contracted
for, and for the full grade next below exceeds Rs. 10, the cotton must be taken by the
buyer unless more than half grade off.
ARBITRAL AWARD

To all to whom these presents shall come, We, Purshotamdas Thakoredas of Hindu
Inhabitant, and Vincent Alpe Grantham, also of Bombay, European Inhabitant, send greeting.
Whereas by a contract dated 17th day of August, 1918, Messrs. Champsey Bhara and
Company bad agreed to sell to the Jivraj Balloo Spinning and Weaving Company, Limited,
100 bales of Mundra M.G. Fully Good Staple cotton on the terms and conditions mentioned
in the contract. And whereas by another contract dated 4th day of September, 1918, the said
Messrs Champsey Bhara and Company had also agreed to sell to the said Jivraj Balloo
Spinning and Weaving Company, Limited, 100 bales of New M.G. Mundra Cotton Fully
Good Staple on the terms and conditions therein contained. And whereas both the said
contracts were made subject to the rules and regulations of the Bombay Cotton Trade
Association, Limited. And whereas the goods tendered under the said contracts by the said
Messrs, Champsey Bhara and Company were rejected by the Jivraj Balloo Spinning and
Weaving Company, Limited, on the grounds contained in their letters dated 25th November,
1918, and 11th November, 1918, respectively. And whereas the said Messrs. Champsey Bhara
and Company claimed from the said Jivraj Balloo Spinning and Weaving Company, Limited,
the sum of Rs. 25,003 (rupees twenty-five thousand) in respect of the aforesaid contracts.
And whereas the said Jivraj Balloo Spinning and Weaving Company, Limited, denied liability
in respect of the said sum or any part thereof. And whereas the said disputes were referred to
the arbitration of us, Purshotamdas Thakoredas and Vincent Alpe Grantham, who were
appointed Arbitrators by the Deputy Chairman of the Bombay Cotton Trade Association,
Limited. And whereas on the 12th day of December the time for making our Award was
extended by the Deputy Chairman to the 27th day of December, 1918. Now know ye that we,
the said Purshotamdas Thakoredas and Vincent Alpe Grantham, having taken upon ourself
the burden of the said reference, and having done all acts necessary to enable us to make a
valid Award, hereby make our Award as follows, that is to say:-We award and direct that the
said Jivraj Balloo Spinning and Weaving Company, Limited, do pay to the said Messrs.
Champsey Bhara and Company the sum of 25,000 (Rupees Twenty-Five Thousand), and we
do further award and direct) that the said Jivraj Balloo Spinning and Weaving Company,
Limited, do pay the costs of this our Award, which we assess at the sum of Rs. 55 (Rupees
Fifty-Five).

In witness whereof we have hereunto set our respective hands this 23rd day of December,
1918.

ISSUES RAISED

The following issues were brought up by the parties before the court, when the 1 st appeal
made by the respondents before the Bombay High Court in the year 1919.

1. Whether there was no dispute which could be referred to arbitration,

RESPONDENTS CONTENTIONS

The present respondents, who were at the time the petitioners, argued in their petition that
there were no disputes or questions that fell under the ambit of Rule 13 of the Association and
therefore there was no matter that could be referred to arbitration. Thus, the arbitral tribunal
had no jurisdiction over the dispute, moreover they had no authority to issue an arbitral
award. The further argued that the opposing party had committed a breach of contract, despite
which they were allowed to recover amount of Rs. 25000 form the petitioners, this makes it
clear that there is in fact an error of law patent on the arbitral award. In their contentions, the
respondents also mentioned that the award was granted by the tribunal against them despite
the fact that they were ready and willing to perform their part of the contract. They finally
pleaded before the court, to set aside the arbitral award on the grounds that the tribunal had
acted without jurisdiction and that the tribunal had misconducted themselves in awarding the
claim to the M/s Champsey Bhra and Co.

APPELLANTS CONTENTIONS

In response to the above, the present appellants, then respondents argued by making an
affidavit against the plaint. In the affidavit, they denied that there was any misconduct on the
part of the tribunal while issuing the award favouring them. In this light they also argued that
when the respondents denied their claim, it was the very first time in the history of the cotton
trade in Bombay that such a claim was disputed upon and denied by the opposing party. They
further denied the fact that there was no error of law on the face of the award also that the
award in no reflected the fact that there was but a breach of contract by the sellers. They
lastly alleged that there lacked a solid (if any at all) foundation upon which the plaintiffs
based their arguments and that the allegations made by the plaintiffs at the end of the plain
were entirely incorrect and lacking any justification.

JUDGEMENT

After going through the previous judgements made by Justice Pratt (1 st petition to set aside
the arbitral tribunals award; petition rejected by the learned judge) and then by the bench
comprising McLeod, CJ and Heaton, J (appeal made by the petitioner/appellant/present
respondent; the previous decision of Pratt, J was overturned and the award was set aside by
the judges), Dunedin, J in whose court the appeal was filed, came to the conclusion that the
decision that the bench of McLeod, CJ and Heaton, J arrived upon was based upon the
misinterpretation of Rule 52 of the Association and depended entirely upon the case of
Landauer v. Asser [1905] 2 K.B. 184, which too was erroneous.

The learned judge further explained that the law on the subject was clearly sated by William,
J in the case of Hodgkinson v. Fernie: [1857] 3 C.B.N.S. 189. Dunedin, J, in this context said
that the precedent is well-established and remains unshaken, it's important to acknowledge
the limitations. Traditionally, arbitrators – legal or not – have final say on both factual and
legal issues within the scope of their reference. However, exceptions do exist. Firstly,
corruption or fraud can invalidate an award. Secondly, a more questionable exception has
emerged: where a legal question is explicitly evident on the face of the award, or in
accompanying, integral documents. While the legitimacy of this latter exception may be
debatable, it appears firmly entrenched. The justice backed this by stating that his view was
adhered to in different cases, the leading case being House of Lords in British Westinghouse
Electric and Manufacturing Co., Limited v. Underground Electric Railways Co. of London,
Limited [1912] A.C. 673.

The judge first addresses the question of whether an error in law is evident from the face of
the award, citing the British Westinghouse case where such an error was clear. In that
instance, the arbitrator's reliance on an erroneous opinion from the Divisional Court was
evident in the award, leading to the recognition of a legal error.
Moving to the case of Landauer v. Asser, the judge highlights the different circumstances
where the issue concerned liability and interest on an insurance policy. In this case, the legal
principle was explicitly stated in the award, distinguishing it from British Westinghouse.

The judge then critiques a two-judge bench's decision, which cited their authority to review
and found legal errors in the arbitrators' decision. Despite referring to the Landauer v. Asser
case, the judge argues that it was irrelevant and potentially flawed in this context. The crucial
difference lies in Landauer's explicit statement of a legal principle within the award, whereas
the present award merely refers to correspondence without a clear legal foundation. This lack
of established legal propositions and the one-sided viewpoint presented in the referenced
letters further weaken the award's legal standing. To align with Landauer, the judge suggests
that the award should explicitly state the legal basis for the decision, similar to the provided
example.

The judge further elaborated on the concept of error in law appearing on the face of the
award, referencing the regret expressed by Williams J. in Hodgkinson v. Fernie and
cautioning against extending the exception. According to the judge, an error in law on the
face of the award means that a legal proposition forming the basis of the award can be found
within the award itself or in a document incorporated into it, such as a note by the arbitrator
explaining their judgment. However, it does not entail scrutinizing references made in the
narrative to one party's contention and then examining the underlying contract to assess its
validity. In the case at hand, the judge argued that it was impossible to ascertain the
arbitrators' mistake solely from the face of the award. The learned Judges of the Court of
Appeal had concluded that the arbitrators must have misinterpreted a specific clause based on
the result they reached. However, the judge asserted that the arbitrators were entitled to
interpret the clause or any other contractual provision and that the award should stand unless
it explicitly tied itself to a legal proposition that, upon examination, proved unsound.
Therefore, the judge upheld Justice Pratt's judgment and overturned the decision of the two-
judge bench.

The judge then addressed the contentions raised by Jivraj Baloo Spinning and Weaving Co.,
specifically focusing on their argument regarding the termination of the contract and the
jurisdiction of the tribunal. They argued that once the buyer rejected the cotton based on the
arbitrators' quality decision, the contract was terminated, and the arbitration clause could no
longer be invoked.
The judge expressed the view that this argument stemmed from a confusion of thought. When
determining whether an arbitrator acts within their jurisdiction, it is the court's role to decide
if the tribunal has jurisdiction. However, whether the arbitrator acts within their jurisdiction
depends solely on the clauses of the Articles. The relevant clause in this case assigns to the
arbitrator the authority to decide any dispute arising from or related to a contract governed by
the rules of the Bombay Cotton Trade Association. This includes disputes regarding both law
and fact, except those concerning quality. Therefore, it is the arbitrator's prerogative, not the
court's, to determine the implications of the rejection based on the quality decision rendered
in the award.

After providing the above explanation and reasoning, the court decide that the judgement
given in the first appeal was indeed a result of mistakes and misinterpretations and therefore
the judgement given when the initial petition to set aside the arbitral award was the correct
decision and as such the court found itself pronouncing that the decision of the trial judge
should be restored.