Holding

The award does not contain a wrong proposition of law and therefore cannot be set aside; the umpire’s interpretation is a permissible view, and the award is confirmed.

Summary

U.P. Hotels entered into a bulk‑supply agreement with Agra Electric Supply Co. which was later taken over by the U.P. State Electricity Board (SEB). The SEB unilaterally imposed a uniform tariff under section 49 of the Electricity Supply Act, 1949, withdrawing agreed discounts. The dispute was referred to arbitration; the umpire held that the agreement remained binding on the SEB and that the uniform tariff could not override its terms, granting the hotel its contractual discounts. The SEB challenged the award, alleging an error of law and that no specific question of law was referred. The High Court set aside the award, but the Supreme Court held that the award did not contain a wrong proposition of law, that a question of law was indeed involved, and that even if the umpire’s view was erroneous it was not a ground for setting aside. Consequently, the appeal was allowed, the award was confirmed and made rule of court.

Issues considered

Whether an arbitral award can be set aside on the ground of an error of law apparent on the face of the award.
Whether a specific question of law (interpretation of the bulk‑supply agreement) was referred to the umpire, making the award binding on the parties.
Whether the bulk‑supply agreement, accepted by the SEB, is binding on the SEB and precludes the application of uniform tariff under s.49(1)&(2) of the Electricity Supply Act, 1949.
Whether the umpire’s interpretation of clause 9 and the discount provisions constitutes a wrong proposition of law.
Whether the High Court and the Additional District Judge erred in setting aside the award.

Legislation cited

Arbitration Act, 1940s. 14, s. 17, s. 30, s. 33
Electricity (Supply) Act, 1948
Electricity (Supply) Act, 1949s. 49

Subjects

ArbitrationAward setting asideError of lawSpecific question of lawElectricity tariffSection 49Bulk supply agreementContract interpretationIndian Aluminium case

Judgment

A U.P. HOTELS ETC.
v.
U.P. STATE ELECTRICITY BOARD

OCTOBER 28, 1988

B [SABYASACHI MUKHARJI AND M.H. KANIA, JJ.]

Arbitration Act, 1940: Sections 14, 17, 30 and 33-Award-
Setting aside of-Wrong proposition of law laid down in award as basis
of award.

On taking over the Agra Electric Supply Co. in December i973,
C the respondent-U.P. State Electricity Board-intimated to the
appellant-U.P. Hotels-that the Bulk Supply Agreement between the
appellant and the Agra Electric Supply Co. would continue to be In
force until such time the agreement was determined in accordance with
its relevant provisions. The agreement contained terms of rates,
D discounts, minimum sum payable and increase in the rates and sums
payable once a yosr on account of increase in cost of production and
distribution of electrical energy (clause 9) and also contained an arbit-
ration clause (clause 18).

In November 1976, the appellant received a communication from
E the respondent informing that uniform tatiff rates issued under section
49 of the Electricity Supply Act, 1949 wouid be applicable to them. The
Board also withdrew the contractual discount and rebates. While sub-
sections (1) and (2) of section 49, stipulate a uniform tariff for electric
supply, sub-section (3) authorises the Board to fix different tariffs for
the supply of electricity. ·
F
The appellant protested against this unilateral increases and with-
drawal, but 'without success. The appellant then informed the respon-
dent that it was referring the disputes for decision by the arbitrator and
appointed a retired High Court Judge as its arbitrator. The respondent
in turn appointed another retired High Court Judge as a joint
.G arbitrator. The joint arbitrators appointed Justice V. Bhargava, a
retired Judge of the Supreme Court, as the Umpire. The arbitrators
having failed, the proceedings started before the Umpire.

The Umpire gave his award in June 1983 and held that the Board
having accepted the agreement, it became binding on the Board and
H once the agreement was binding, its terms u~der sub-section (3) of
670
U.P. HOTELS v. U.P. S.E.B. 671

section 49 could not be varied by fixation of uniform tariff under snb·
sections (1) and (2). The Umpire further held that the present case was A
fully covered by the decision of the Supreme Court in Indian
Aluminium Co. wherein it was held that where a stipulation in a contract
was entered into by a public authority in exercise of a statutory power ·
then, even though such stipulation fettered subsequent exercise of the
same statutory power, it would be valid and the exercise of such statu- B
tory power would pro tanto stand restricted. In that view of the matter
the Umpire held that in terms of clause 9 the Increase in unit rate was
permissible and the fuel cost variation charges which were variable
every month was contrary to clause 9 as increase was permitted only
once in a year of accounts, and further that the appellant was entitled to
discount of 50% of the charges for electricity and also to discount for C
prompt payment of bills.

Objections were filed by the respondent before the Hod Addi·
tioual District Judge during the proceedings initiated for making the
~-
award the Rule of the Court. The Ilnd Additional Dist!. Judge set aside
the award on the ground that the reference made to arbitration was D
unilateral. In appeal, the High Court, while holding against the above
finding of the Ilnd Addi. Judge, set aside the award on the ground that
the Indian Aluminium Co. case was inapplicable to the present case,
and the mistake committed by the Umpire in this regard was error of law
apparent on the face of the award. The High Court held that even if the
stipulation as to the tariff structure in the agreement be taken to have E
been continued in existence in view of sub-section (3) of section 49 of the
Act, the same was not unrestricted, and that the stipulation was
expressly made subject to certain reservations as would be clear from the
opening sentence of clause 9 of the agreement, the main clause was
"subject to the provisions hereinafter contained". It was further held
that in drawing distinction between 'rates' and 'discount' and uphold· f
ing the right of the Board to tamper with the former . and negating
similar right in respect of the latter, the Umpire had committed an
error.

Before this Court it was contended on behalf of the appellant that
a specific question of law being a question of construction had been G
referred to the Umpire and hence, his decision, right or wrong, had to
be accepted.

On behalf of the respondent ii was contended that there was no
specific question of law referred ti' the Umpire but it was a general
reference in which a question of law arose, and that it was a question in H
672 SUPREME COURT REPORTS [1988] Supp. 3 S.C.R.

the proceedings and the question of law, as such, did not arise.
A
Allowing the appeal, it was,

HELD: (I) Even assuming that there was an error of construction
of the agreement or even that there was an error of a law in arriving at a
B conclusion, such an error was not an error which was amenable to
correction even in a reasoned award under the law. [68JB I

(2) Where the question referred for arbitration is a question of
construdion; which is, generally speaking a qnestion of law, the
arbitrator's 'decision can not be set aside only because the court would
itself have come to a different conclusion, but if it appears on the face of
c the award that the arbitrator has proceeded illegally' as, for instance,
by deciding mi evidence which was riot admissible, or on principles of
construction which the law does not countenance, there is error in law
which may be ground for setting aside the award. [683G-H; 684A]

D (3) In order to set aside an award, there must be a wrong proposi'
tion of law laid down in the award as the basis of the award. [684D]

(4) Irl the instant case, a question of law arose certainly during
the course of the proceedings. Such a question has been decided by the
Umpire oii a view which is a possible one to take. Even if there was iio
E specific reference of a question referred to the Umpire, there was
a question of law involved. Even on the assumption that such a view
is not right, the award is not amenable to interference or correction
by the Courts of law as there was no proposition of la:w which-could be
said to be the basis of the award of the Umpire, and which was
erroneous. [6898-C]
F
(5) The Umpire ill his award stated that the decision of this Corirt
covered and supported the clainl ot the claimant. In the present case the
only difference was tha! there wils oniy an agreement which was iieid by
tile Uilipire to have heroniio opebitive. Oiite iliat agreement was binding
on the Board, its terms could not be vaired from the uniform rate uiider
G sub-sections (1) and (2) of section 49. The Umpire was right. The
Umpire committed no error in arriving at such conclusion. Fnrther-
more, such a conclusion was certainly a pbssihle view of the interpreta-
tion of the decision of this Conrt in Indian Aluminium Co. 's case, ifoot
'the oDly view: (688G,H; 689A]

t-i intiian Aluminium C_o. Lid. v. Kera/a Eleciticity Board, lt97ill i
U.P. HOTELS v. U.P. S.E.B. [MUKHAR11, 1.J 673

SCR 70; Coimbatore Dutt. P. T. Sangam v. Bala Subramanla Foundry,
AIR (1987) SC 2045; Delhi Municipal Corpn, v. Mis Jagan Nath A1hok A
Kumar, AIR (1!187) SC 23Ui; Mis. Hindustan Tea Co. v. Mis.
K. Sashlkant &: Co., AIR 11187 SC Hl; Kanpur Nagar Mahapallka v.
Mis. Narain Das Harlbansh, (1970] 2 SCR 28; Chompsey Bhora 4t Co.
v. Jlvraj Ba/loo Spinning&: Weaving Co. Ltd., (19231AC4801 Dr. S.B.
Dutt v. University of Delhi, [1959] SCR 1236; Mis. Kapoor Nllokherl B
Co-op. Dairy Farm Society Ltd. v. Union of India, [1973] 1 SCC 788;
Tarapore & Co. v. Cochin Shipyard Ltd. Cochin, [11184] 3 SCR 118;
Hltchins & Anr. v. British Coal Refining, [1936] 2 A,E,R. Reprint
1111; Pioneer Shipping Ltd. &: Ors. v. ETP Tloxlde Ltd., [1981] 2 AEll
1030 1 referred to.
c
CIVlL APPBLLATI! JURISDICTION: Civil Appeal No. 756
of 1988.
From the Judgment and Order dated 21.7.1987 of the Blah Court
of Allahabad In F.A.F.O. No. 106of1984.
D
~r.-
F.S. Narlm11n, M.L. Verma, Jee! tJ11h11j11n and Rnnjlt Kumar for
the Appellats.
D. Sen, Oopal Subramanlum nnd Mrs. Shobha Dlkshlt for the
Respondent.
H
The Jud11ment of the Court wns delivered by
!lADYA!lACIU MlJKllARJI, J, This appMl by i!peelal leove Is
from the jud11ment and order of the Hi!lh Cuurt or Alloh11b11d, dated
2 lst July, 1987. The High Court has set aside the 11w11rd of the Umpire.
To appreciate the deeleion nnd the contentions urged, a few fncts JI
are nece8s11ry.
On or nbout Wth October, 1962 there WM 11 Bulk Supply Agree·
ment entered Into between Agra Electric Supply Co. Ltd. and the
nppellnnt herein, for supply of electrical ener11y to the !niter's )lotel,
inter alia, cont11lnln11 terms of rates, discounts, minimum sum pnynble a
nnd Increase in the rates and sums payable once a year on account of
~
lncrense in cost of production and distribution of electrical energy.
' Clause 9 of the said agreement contained terms of the rate of supply
and the contingencies in wnich such rates could' be increased. The said
Clause provided as follows: H
674 SUPREME CdVRT REPdRTS [1988] Supp. 3 S.C.R.

"The consumer shall, subject to the provisions hereinafter
A contained, pay to the Company for all electrical energy
supplied and registered or esiimated as herein provided at
the rate of Rs .0 .20 (Rupees zero decimal two zero) per unit
I. per month for all energy so supplied and registered and/or
estimated in the case of a defective meter installation in
il accordance with the proviso to clause 6 thereof. The charge
for all energy shall be subject to the scale of special dis-
counts in accordance with the schedule annexed thereto.

Provided that, (without regard to the quantity of units
supplied) if the payment made or to be made for any one
English Calendar year ending 31st March in respect of the
c electricity consumed shall fall short of a minimum sum of
Rs.38640 (Rs.Thirty eight thOusand six hundred and forty)
the consumer shall nevertheless pay to .the Company such
amount in addition to the payments already made in
respect of the electricity consumed for such Calendar year
D as will, being the total payment made in this respect to the
said minimum of Rs.38640 (Rs. Thirty eight thousand six .,i--,
hundred and forty).

Provided Further that, in the event of the first and last
years of this Agreement not being complete calendar year
E. as aforesaid the Company shall make a proportionate
reduction on the aforesaid annual Maximum Demand and
Minimum charges in respect of the period for which the ~--

said first and last year as the case may be shall be less than a
complete 'calendar year.

F Provided also that, if and whenever during the subsistence
of this Agreement the Company is satisfied that there has
been an increase in the cost of production and distribution
of electrical energy it shall be at liberty (but not more than
once in any year of accounts) to increase the rates and sums
payable by the Consumer under the foregoing provision of
this present clause 9 by such amount as it shall i11 its sole
and absolute discretion decide."

, > There was a clause providing for arbitration i.e. clause 18 which
r~ad as follows:

"If any question. or diference whatsoever shall arise bet-
U.P. HOTELS v. U.P. S.E.B. [MUKHARJI, J.] 675

ween the parties to these presents as to the interpretation
or effect of any provision or clause herein contained or the
A
construction thereof or as to any other matter in anyway
connected with or arising out of these presents or the opera-
tion thereof or the rights, duties or liabilities of either party
in connection therewith, when unless the means for decid-
ing any such question or difference is provided for by the B
Indian Electricity Act, 1910 or.the Electricity (Supply) Act,
1948 as the case may be, or by the rules made respectively
under the said Acts or by a specific provision of this Agree-
ment, in every such case the matter in difference shall be
referred to the Arbitration of two Arbitrators, one to be
appointed by each party hereto, and an Umpire to be
appointed by the Arbitrators before entering upon the c
reference and the decision or award of the said Arbitrators
or Umpire shall be final and binding on the parties hereto
and any reference made under this clause shall be deemed
to be a submission to arbitration under the Indian Arbitra-
tion Act, 1940 (Act X of 1940) or any statutory modifica- D
tion or re-enactment thereof for the time being in force.

The Arbitrators or the Umpire giving their or his
decisions shall also decide by which party the cost of the
Arbitration and award shall be paid and if by both parties
in what proportion." E
On or from 26th September, 1973 the Agra Electric Supply Co.
Ltd. increased per unit rate of electricity from 0.20 P to 21.5 P in terms
l of clause 9 of the said agreement. Thereafter, the bills were sent ·@
21.5 P per unit, after giving discounts and rebates as per the agree-
ment. On or about 17/18th December, 1973, the respondent herein p
took over the undertaking of the Agra Electric Supply Co. Ltd·. On or
about 16th January, 1974, the respondent informed the appellant by a
written communication that consequent upon the expiry of licence
granted to Agra Electric Supply Co. Ltd. to generate and supply
electricity the respondent had taken it over and would supply electric
energy to the hotel and that the Bulk Supply Agreement with Agra n.
Electric Supply Co. Ltd. will continue to be in force with the respon-
dent until such time the agreement is determined in accordance with
its relevant provisions. All bills received subsequent to the take over
were billed at the agreed rate allowing discounts and rebates.

On or about 23rd November, 1974, the appellant received a com' H
676 · SUPREME COURT REPORTS [1988] Supp. 3 S.C.R.
'

muriicatfon from the respondent informing that uniform tariff rates
A
Issued under section 49 of the Electricity Supply Act, 1949 will be
applicable to the' electrical energy supplied to the hotel w.e.f.
12.10.1974 . Section 49 of the Electricity (Supply) Act, 1948 (herein·
after called 'the Act'), is to the 'following effect:

B : -~ "49. Provision for the sale of electricity by the Board to
I
persons other than_ licensees.-(1) Subject to the pro·
.. visions. of this Act and of regulations, If any, made In this
behalf, the Board may supply electricity to any person not
,being a licensee upon such terms and conditions as the
Board thinks flt and may for the purposes of such supply
frame uniform tariff,
c ',.
(2) In fixing the lllllform tariffs, the Board shllll have
regard to all or any of the following faeton, namely:

(a) the nature of supply and the purposes for which It Is
D required:

(b) the co-ordinated development of the 8upply and dis·
trlbutlon of electricity within the State in the moat efflehmt
and economical manner, with particular reference to such
development in areas noi for the time being served or
D 11dequately served by the licensee;

(c) the slmpllfleatltln and 8t11nd1trdlsatltln of methods and
rutes tlf charge for such suppllH;

(d) the exten8lon and cheapening of 8Upplie8 of eleetrlelty
fl to sparsely developed 11reas.

(3) Nothing In the foregoing provl8ltlns of this
8Cctlon shall derogate from the power of the Board, If It 11'
'con8lders It necessary or expedient to fix different tnrlffs
for tlie supply of electrlelty to any person not being a
Ci lleen8ee, having regard ttl the geo11mphleal .llOBltlon or any
area, ·.the nntul'll of the supply, and purpo11t1 for which supply
. luequlred nnd any other relevant factor.s.
(4) In fixing the tariff and terms and conclltlons for
the supply of electricity, the Board shall not show undue
H preference to any person."
U.P. HOTELS v. U.P. S.E.B. (MUKHARJI, J.] 677

After the sald date the bills were sent at the enhanced rate of · A
0.30 P per unit, adding fuel cost variation charges and without allowing
any discount or rebate. On or about 28th November, 1974, the appel-
lant, however; protested against the unilateral withdrawal of
contractual discount and rebates and enhancement in the rates and
drew the attention of the respondent to the existing and subsisting bulk
supply agreement, but the respondent took no action. on· or about B
31st August, 1976, a Circular was issued by the Chief Engineer of the
respondent advising all Engineers-in-charge of the undertakings to bill
the consumers having special agreements with the ex-licensees as per ·
those agreements and steps be'taken to terminate the old agreements
with new agreements prov.iding for application of tariff.

On 7th October, 1977, vide written communication the appellant C
informed the respondent that upon latter's failure to resolye the dis-
putes and differences arising between- them consequent to the illegal
increase. in the rates and di~continuation of discounts and rebates
w .e.f. 12.10.1974, the appellant was referring the disputes for decision
by the arbitrator and appointed Justice Manchanda, a .retired Judge of D
the Allahabad High Court, as the arbitrator and the respondent
appointed Justice Nigam, another retired Judge of the same High
Court, as its arbitrator. On or about 8th April, 1977, the joint
arbitrators appointed Justice V. Bhargava, a retired Judge of this
Court, as an Umpire. ·
E
Between 3rd November, 1979 and 4th March, 1980, several sit-
tings were held before the arbitrators but the parties· were unable to
agree and upon their disagreement the disputes were referred to the
learned Umpire for decision. From 4th March, 1980 onwards, pro-
ceedings started before the Umpire and. there was a plea for de novo
hearing of the proceedings before the Umpire, by the respondent. The p
learned Umpire started de novo proceedings taking evidence of the
parties. On 21st March, 1980, the respondent filed an application,
being Case No. 59 of 198P under section 33'of the Arbitration Act,
1940 before the District Judge, Lucknow, denying the existence of the
agreement dated 20th October, 1962. The respondent also denied the ·
. ·acceptance and adoption of the agreement cor;s~quent upon the take G
· over and sought a declara:iion · from 'the' Court that the arbitration
agreement did not exist. The Vth Addi. lJlstrict Judge by his order
dated 27.5.1983 held that the agreement was duly executed, accepted
. and adopted by the respondent and was binding oi{it and that the
arbitration proceedings were pursuant to the arbitration clause and, as
such, the applicaiion under section 33 'of the Arbifration Act, was H
rejected. ·
678. SUPREME COURT REPORTS [1988] Supp. 3 S.C.R.

A On 1st June, 1983, the award was made by the learned Umpire
holding that in terms of clause 9 the increase in the unit rate was
permissible and the fuel cost variation charges which were variable
every month was contrary to clause 9 as increase was permitted only
once in a year of accounts, and further held that the appellant was
entitled to discount of 50% on the charges for electricity.; and was also
B entitled to 0.03 paise per rupee for prompt payment of bills. The
learned Umpire in his award set out the facts and therein recited these
as follows:

'The main terms of the agreement were that in respect of
the bulk electric supply to the petitioner the Hotel was to
be charged at the rate of twenty paise per unit per month.
c There was also a clause for granting a special discount to
the petitioner to the extent of 50% and in addition a cash
discount of three paise per whole rupee was to be allowed
to the petitioner in case the petitioner paid the bills of the
Company within the stipulated period. The bills for the
D \ electric energy supplied by the Supply Company continued
on these contractual rates till October 1974; even after the
Supply Company was acquired by the opposite party in
December 1973, and the bills were ,accordingly paid.
r-··1
However, in October 1974, the opposite party under s. 49
E
'.'
of the Electricity (Supply) Act, 1948 (hereinafter referred
to as the Act) unilaterally and according to the petitioner
illegally and arbitrarily purported to replace the original
terms in the agreement and revised the charges with effect
from Uth October, 1974. The Board, under this notifica-
tion, increased the rate of electricity supplied to 30 piiise
F per unit and further refused to grant the discount to which
I'
the. petitioner was entitled under the agreement as well as
the cash discount of three paise per rupee. The 0pposite
,'.
party further levied a fuel cosf adjustm~nt ch~rges and sub-
sequently the rate was raised to 31 paise per unit with effect
from June 1976."
G
',' There.after, .the learned Umpire set out the history of the nego-
tiations between the parties resulting in the agreement dated
20.10.1962. After referring to the bulk sµpply agreement the learned
arbitrator set out the terms upon which supply was made to the appel-
lant: The appellant was to make an initial payment of Rs.35,326
H towards service connection for the purpose of supply, though irrespec-
U.P. HOTELS v. U.P. S.E.B. (MUKHARJI, J.J 679

tive of the payment the service connection was to continue to be the
A
property of the Supply Company. The Supply Company was to make
provision in the appellant's monthly bill granting a rebate of Rs.147.20
for el\ch month that the agreement remained inforce upto a maximum
of 20 years. Under para 9 of the agreement the appellant was to pay
the Company for all electric energy supplied, registered, and esti-
mated at the rate of 20 paise p.m. The charges for energy consumed B
were subject to special discount according to the scale in the schedule
which permitted a maximµm discount of 50% in case a minimum of
41,000 units were consumed in each month. The consumption as
shown by the record was never less than 41,000 units p.m. In addition,
there was a provision under clause (ii) of the agreement for cash dis-
count of 3 paise per whole rupee in case payment was made within the
stipulated period. Under the first proviso to para 9, the appellant had
c
to pay a minimum sum of Rs.38,640 for electricity consumed in any
English calendar year. The prpvision mad~ was that in addition to the
amouµt paid in accordance with the bills, the appellant was to make
payment in such cases so as to make up the said minimum of
Rs.38,640. The second proviso laid down that if and whenever during D
the subsistence of the agreement the Supply Company was satisfied
that there was an increase in the cpst of production and distribµtion of
electric energy it shall be l\t lib<,:rty (but not more than once a year) to
increase the rates and sums payable by the consumder under the provi-
sions of Clause 9 by such amoµnt as the Company shall, in its sole and
absolute discretion, decide. Heµ~e, it was held by the Umpire on the E
oral and docµmentary evic:l~nce that the payment was made at the
enhanced rate under protest.

Challenging the Award, several contentions Were raised,
namely, (i) that there \"as nci agreement in existence and that neithe1
the Umpire nor the arbitrator had any jurisdiction to make the award. f
This contention was rejected and no argument was advanced before us
challenging this finding of the Umpire, (ii) that the appellant should
p'rove the terms and conditions upon which the Supply Company was
supplying the electricity to the appellant. This the Unpire held, had
been duty proved and there was no challenge to either of the findings
of the Umpire. (iii) it was thirdly contended that the agreement even if G
in existence' was not binding upon the respondent, and that while
admitting that the respondent under section 49 of the Act, issued
Notification under which the tariff was revised w.e.f. 12.10.1974, jt
was claimed that the opposite party had not, in any way, failed to fulfil
its obligations on the alleged agreement and that the opposite party
was fully competent under law to fix a uniform tariff and also to levy Ji
680 SUPREME COURT REPORTS [1988] Supp. 3 S.C.R.

A fuel adjustment charges. This is the main and substantial question
involved in this matter.

It was then contended that the respondent was entitled even
under the agreement and under its second proviso to clause 9 to revise
the tariff and the appellant was not entitled to any relief. It was further
S urged that the payments were made after coming into operation of the
Electricity (Supply) Act, under protest. In respect of these contentions
the learned Umpire held thafthe plea was that even if the agreement
was in existence, it was not binding on the opposite party and that the
opposite party was competent under section 49 of the Electricity Sup·
ply Act, to fix revised charges w.e.f. 12.10.1974 and had not vio·
C lated any terms of the agreement. The appellant had also relied on the
alternative provisions of section 49(3) of the Act, set out herein before.
The said sub-sectio11 (3) provides that nothing contained in sub-
sections ( 1) & (2) of section 49 shall derogate from the power of the
Board, if it happens to enter into an agreement at different rates of
tariff fith any person other than a licensee. It appears that when the
Ii> Supply Company was taken over on17/18.12.1973, the resident
Engineer wrote a letter on 16.1.1974 in which he informed the appel-
lant that the licence of M/s. Agra Electric Supply Co. Ltd. having
expired and the U .P. State Electricity Board having taken over the
supply, it was to supply energy. to the appellant at the aforesaid date.
Their further contention was that the bulk supply agreement which tbe
JI appellant had with M/s. Agra Electric Supply Co. Ltd., would con-
tinue' to be in force with the State Electricity Board until such time as
the agreement was determined in accordance with the relevant provi-
sions thereof. The learned Umpire held that the letter clearly laid down
that the U .P. Electricity Board had accepted the agreement which was
in existence between the Supply Company and the appellant, and the
JI Umpire proceeded on that basis. The learned Umpire further stated as
follows:

"The Board thus having accepted the agreement with the
claimant, it became binding on the Board and under sub-
section (3) of s. 49 of the Electric Supply Act nothing con-
tained in sub-sections (1) & (2) of s: 49 of the Act could
have any bearing on the terms of the agreement. The result
was that the uniform tariff fixed by the Board with effect
from 12th October, 1974 did not apply to the claimant and
the claimant had to be granted the various rebates laid
down in the agreement. The decision of the Supreme Court
in Indian Aluminium Co. Ltd. v. Kera/a Electricity Board,
U.P. HOTELS v. U.P. S.E.B. IMUKHARJI, J.) 681

[1976] 1 SCR pa. 70 fully covers the case and supports the A
claim of the claimant. In the case before the Supreme.
Court an agreement had been entered into by the State
Government and it was held that under s. 60 of the Elect-
ricity Supply Act, 1940 it became binding on the Kerala
State Electricity Board and further that that agreement was
enforceable under sub-section (3) of s 49 irrespective of the B
fixation of uniform tariff under sub-sections ( 1) and (2) of
s. 49. In the present case the only difference is that instead
of the agreement being first binding between the consumer
and the State Government, the agreement became binding
on the Electricity Board, because it accepted the agree-
ment and becaine a party to it by letter dated 16th January
1974 (Ex. R)."
c
The aforesaid basis of the decision, it was contended, was the
error of law which vitiated the award. This question will require
further consideration later. It was held that the decision in Indian
Aluminium Co., (supra) fully covered the dispute on this aspect in the D
instant case. The learned Umpire further held ~s follows:

''Once the agreement was binding on the Board its terms
under sub-section (3) of s. 49 could not be varied by fixa-
tion of uniform tariff under sub-sections (1) and (2) of S.
49. The opposite party in these circumstances must be held E
to have failed to fulfil its obligations under the agreement".

On 1st July, 1983, an application was made under section 14(2)
of the Arbitration Act before the learned District Judge, Lucknow, for
filing of the award and making the same Rule of the Court. Objections
were filed by the respondent against the said award. The learned Ilnd F
Addi. Distt. Judge, Lucknow, held that the award was legal, valid and
binding on the parties and the alleged grounds of misconduct were not
maintainable. The award was, however, set aside on the ground that
the reference made to arbitration was unilateral. The appellant filed
an appeal. The Lucknow Bench of the Allahabad High Court held
against the finding of the Ilnd Additional Distt. Judge, Lucknow, that G
the reference was unilateral, but set-aside the award on the ground
that there was an error of law apparent on the face of it in xiew of the
agreement dated 20.10. 1962 and the ratio of the decision of this Court
in Indian Aluminium Co., (supra). The revision filed by the respon-
dent against the judgment of the Vth Addi. Distt. Judge, Lucknpw,
was also rejected. This appeal is from the aforesaid decision of the H
High Court by special leave.
682 SUPREME COURT REPORTS [1988] Supp. 3 S.C.R.

A The two learned Judges of the High Court gave separate judg-
ments. The High Court was of the view that the instant case was
distinct from the facts in the case of Indian Aluminium Co., (supra).
There it was held that where a stipulation in a contract is entered into
by a public authority in exercise of a statutory power then, even
though such stipulation fetters subsequent exercise of the same statu-
B tory power, it would be valid and the exercise of such statutory power
would pro tanto stand restricted. Mr Justice Loomba was of the view
that in the instant case even if the stipulation as to the tariff structure
in the agreement by taken to have been continued to be in existence in
view of sub-section (3) of section 49 of the Act, the same was not
~nrestricted. The stipulation was expressly made subject to certain
C reservations as would be clear from the opening sentence of clause 9 of
the agreement, the main clause was "subject to the provisions
hereinafter contained".

Mr Justice Loomba was of the view that the decision of the
Indian Aluminium Co., (supra) case was inapplicable to the present
E> case. According to the learned Judge, the mistake committed by the
Umpire was a manifest error. It was further stated that it is well-settled
proposition of law that if the reasons are stated on the basis of which
the award was made and such reasons are found to be erroneous, the
errors become apparent on the face of the award and constitute legal
misconduct on the part of the Umpire vitiating the award. The other
E learned Judge Mr Justice Mathur also held that there was error of law
apparent on the face of the award of the Umpire. He was of the
opinion that the expression "sum payable by the consumer under the
foregoing provision of this present clause 9" was subject to the dis-
counts mentioned in the subsequent clauses of the agreement. In view
of the discounts, the sum payable under clause 9 was altered and the
F altered amount becomes the sum payable under clause 9. According to
the learned Judge, since the amount determined after allowing dis-
counts is also sum payable under clause 9, it followed that in exercise
of the power conferred under the third proviso, the discount could
only be tampered with in the same way the unit charge could be
tampered with. Beyond this it was not permissible. In permitting this
Cl the Umpire committed an error in drawing distinction between 'rates'
and 'discount' and upholdir.g the right of the Board to tamper with the
former and negating similar right in respect of the latter. According to
the learned Judge, this was a wrong understanding of the decision of
the Indian Aluminium's case (supra). In the ·aforesaid view of the
matter, the learned Judge agreed with the other learned Judge and
H held that the award was vitiated.
U.P. HOTELS v. V.P. S.E.B. [MUKHARJI, J.] 683

It appears that the main question that arises is: whether the
A
decision of this Court in Indian Aluminium's case (supra) was properly
understood and appreciated by the learned Umpire and whether he
properly applied the agreement between the parties in the light of the
aforesaid decision. It was contended that the question was whether the
sums.payable under clause 9 included discounts. On the aforesaid basis
it was contended that there was an error of law and such error was B
manifest on the face of the award. Even assuming, however, that there
was an error of construction of the agreement or even that there was
an error of law in arriving at a conclusion, such an error is not an error
which is amenable to correction even in a reasoned award under the
law. Reference may be made to the observations of this Court in
Coimbatore Distt, P. T. Sangam v. Bala Subramania Foundry, AIR
1987 SC 2045, where it was reiterated that an award can only be set C
aside if there is an error on its face. Further, it is an error of law and
not mistake of fact committed by the arbitrator which is justiciable in
the application before the Court. Where the alleged mistakes or
errors, if any, of which grievances were made were mistakes of facts if
at all, and did not amount to error of law apparent on the face of the D
record, the objections were not sustainable and the award could not be
set aside. See also the observations of this Court in Delhi Municipal
Corpn. v. Mis. Jagan Nath Ashok Kumar, AIR 1987 SC 2316, where
this Court reiterated that reasonableness of the reasons given by an
arbitrator in making his award cannot be challenged. In that case
before this Court, there was no evidence of violation of any principle E
of natural justice, and in this case also there is no violation of the
principles of natural justice. It may be possible that on the same evi-
dence some court might have arrived at some different conclusion than
the one arrived at by me arbitrator but that by itself is no ground for
setting aside the award of an arbitrator. Also see the observations of
Halsbury's Laws of England, 4th Edn., Vol. 2, at pages 334 & 335, F
para 624, where it was reiterated that an arbitrator's award,may be set
aside for error of law appearing on the face of it, though that jurisdic-
tion is not lightly to be exercised. If a specific question of law is
submitted to the arbitrator for his decision and he decides it, the fact
that the decision is erroneous does not make the award bad on its face
so as to permit it being set aside; and where th•! .:iuestion referred for G
arbitration is a question of construction, which is, generally speaking,
a question of law, the arbitrator's decision cannot be set aside only
because the court would itself have come to a different conclusion; but
if it appears on the face of the award that the arbitrator has proceeded
illegally, as, for instance, by deciding on evidence which was not ad-
missible, or on principles of .construction which the law does not H
684 SUPREME COURT REPORTS [1988] Supp. 3 S.C.R.

A countenance, there is error in law which may be ground for setting
aside the award.

It was contended by Mr F.S. Nariman, counsel for the appellant,
that a specific question of law being a question of construction had
been referred to the Umpire and, hence, his decision, right or wrong,
B had to be accepted. In view of clause 18, it was submitted that.in this
case a specific reference had been made dn the interpretation~f the
agreement between tne parties, hence, the parties were bound by the
decision of the Umpire. Our attention was drawn to the observations
of this Court in Mis. Hindustan Tea Co. v. Mis. K. Sashikant & Co.,
AIR 1987 SC 81, where this Court held that under the law, the
arbitrator is made the final arbiter of the dispute between the parties,
c referred to him. The award is not open to challenge on the ground that
the arbitrator has reached a wrong conclusion or has failed to
appreciate facts. Where the award which was a reasoned one was
challenged on the ground that the arbitrator had acted contrary to the
provisions of s. 70 of the Contract Act, it was held that the same could
D not be set aside.

In order to set aside an award, there must be a wrong proposition
of law laid down in the award as the basis of the award. For this see the
observations of this Court in Kanpur Nagar Mahapalika v. Mis. Narain
Das Haribansh, [ 1970] 2 SCR 28. In that case the appellant had
E entered into a contract with the respondent for certain construction
work. The contract contained an arbitration agreement between the
parties. The respondent filed a suit in 1946 claiming certain moneys
due against its final bills but, at the 'instance of the appellant, the suit
was stayed and the matter referred to arbitration. The arbitrator .made
an award in Marth 1960 in favour of the plaintiffs cjetermining the
p amount payable by the appellant. Thereafter the appellant made an
. application for setting aside the award on the ground that the
arbitrator had misconducted himself in not. properly consigering that
the claim of the respondent was barred by limitation under section 326
of the U .P. Act 2 of 1916. Although the trial court set aside the award,
the High Court, in appeal, reversed this decision. In appeal to .this
G Court it was contended for the appellant that the award was bad by
reason of an error apparent on its face.

Dismissing the appeal, it was held that there could not be pre-
dicated. of the award that there was any proposition of law forming the
basis of the award, and, therefore, it could not be said that there was
H any error apparent on the face of the award.
U.P. H01ELS v. U.P. S.E.B. [MUKHARJI, J.] 685

The Judicial Committee in the famous decision of Champsey
Bhara & Co. v. Jivraj Bal/oo Spinning & Weaving Co. Ltd., [1923] AC
A
480 held that the error of law on the face of the award means that one
can find in the award or in document 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 is erroneous. The same view was reiterated by this Court in B
Dr. S.B. Duttv. University of De/hi, [1959] SCR 1236.

In this case, Mr. Nariman appearing for the appellant contended
. that there was no proposition of law as such 'stated by the Umpire
which could be said to be the basis of his decision. Hence, the award
was not amenable to corrections on the ground that there was an error
of law apparent on its face. Mr. Nariman further submitted that the c
Umpire had decided the specific question of law and such a decision,
right or wrong, is binding on the parties. In aid of his submission
Mr. Nariman referred to the decision of this Court in Mis. Kapoor
Nilokheri Co-op. Dairy Farm Society Ltd. v. Union of India & Ors.,
[1973] 1 SCC 708, where it was held that in a case of arbitration where D
the appellants had sepcifically stated that their claims were based on
the agreement and on nothing else and all that the arbitrator had to
decide was as to the effect of an agreement between the appellant and
the respondent, the arbitrator had really to decide a question of law,
i.e. of interpreting the document, the agreement. Such a decision of
his, is not open to challenge. E
Our attention was drawn to the observations of this Court in
Tarapore & Co. v. Cochin Shipyard Ltd.. Cochin & Anr., [1984] 3 SCR
118, where Desai J., spoke for the Court and Justice Chinnappa Reddy
agreed with him. It was stated that a question of law might figure
before an arbitrator. in two ways. It may arise as an incidental point F
while deciding the main dispute referred to the arbitrator or in a given
case parties may refer a specific question of law to the arbitrator for his
decision. This Court reiterated that ·the arbitration has been con-
sidered a civilised way of resolving disputes avoiding court proceed-
ings. There was no reason why the parties should be precluded from
referring a specific question of law to an arbitrator for his decision and G
agree to be bound by the same. This approach manifests faith of
parties in the capacity of the tribunal of their choice to decide even a
pure question of law. If they do so, with eyes wide open, there is
nothing to preclude the parties from doing so. If a question of law is
specifically referred and it becomes evident that the parties desired to
have a decision on the specific question from the arbitrator rather than I H
686 SUPREME COURT REPORTS [1988] Supp. 3 S.C.R.

A one from the Court, then the court will not interfere with the award of
the ·arbitrator on the ground that there was an error or law apparent on
the face of the award even if the view oflaw taken by the arbitrator did
not accord with the view of the court. A long line of decisions was
relied upon by this Court for that proposition.

B Mr. B. Sen, learned counsel for the respondent, however, con-
tended that in the present case, there was no specific question of law
referred to. the Umpire. He.submitted that it was a general reference in
which a question of law arose. It was a question in the proceedings and
the question of law, as such, did not arise. According to Mr. Sen, the
mistake that the Umpire, has committed is clear from his following
statement:
c
"The Board thus having accepted the agreement with the
claimant, it became binding on the Board and under sub-
section (3) of s. 49 of the Electricity Supply Act nothing
contained in sub-section (1) & (2) of s. 49 of the Act could
D have any bearing on the terms of the agreement. The result
was that the uniform tariff fixed by the Board with effect
from 12th October, 1974 did not apply".

It was stated that no specific question having beeu referred to,
this mistake was fatal.
E
We are unable to accept this submission. Our attention was
drawn by Mr. Nariman to the observations of Justice Macnaghten in
Hitchins & Anr. v. British Coal Refining Processes Ltd., [1936] 2
A.E.R. Reprint 191. There, by an agreement the applicants were to
act as consulting Engineers in connec'tion with a certain coal refining
F process owned by the respondents. While the plant for the working of
the process was being erected, a dispute arose, the respondents want-
ing the applicants to attend every day at the site of the plant and the
applicants considering this to be no part of their duty. The resl\ondents
thereupon terminated the agreement and the matter was referred to
arbitration. The applicants pleaded that the termination of the agree-
G ment was unjustified; the respondents pleaded that the applicants
should have attended every day and that they had been quilty of negli-
gence in respect of certain matters set out in the counterclaim. The
arbitrator found the termination of the agreement to be unjustified
and also negligence on the part of the appellants in respect of th.e
matters set out in the counterclaim, and he awarded the appellants
H damages after setting off an unspecified amount for damages for negli-
U.P. HOTELS v. U.P. S.jl.B. [~UKHARJI, J.) 687

gence. The respondents moved to set aside the award on the ground of A
error of law apparent on the face of it. At the hearing the respondents
contended that the whole of the pleadings in the arbitration were
admissible. The respondents contended that for the purpose of decid-
ing whether there was an error of faw apparent on the face of the
award, the court could not look at any document except the award
itself. The respondents further contended that the arbitrator had com- B
mittcd an error of law in deciding that the negligence found did not
afford sufficient ground for the termination of the agreement, and
further that on the true consideration of the agreement, the refusal to
attend daily was as a matter of law a sufficient ground for the termina-
tion of the agreement. It was held that inasmuch as the arbitrator in his
award referred to certain paragraphs in the counterclaim, such paras C
ought, in considering whether there was an error on the face of the
award, to be regarded as forming part of the award. Whether miscon-
duct justifies dismissal is a question of fact, and the arbitrator's deci-
sion was final. It was further held that the right to terminate the
agreement because the applicants refused to attend daily was a ques-
tion specifically submitted to the arbitrator and the court could not D
interfere with his decisiol\, even if the question was a question of law.
Mr. Justice Macnaghten at page 195 of the report observed that it was
permissible to look at the whole of the pleadings delivered in the
arbitration, and it appears therein that the respondents affirmed and
the applicants denied that the respondents were entitled to terminate
the agreement as the applicants refused to attend daily at the site, and E
that this was a specific question submitted to the decision of the
arbitrator. Our attention was also drawn to the observations of House
Of Lords in Pioneer Shipping Ltd. & Ors. v. ETP Tioxide Ltd., [1981) 2
AER 1030. In that case by a charterparty dated 2nd November, 1978
the owners of a vessel chartered her to the charterers. It was held by
the House of Lords that having regard to the purpose the Arbitration F
Act, 1970 of England which was to promote greater finality in.arbitra-
tion awards then had been the case under the special case procedure
judicial interference· with the arbitrator's award was only justified if it
was shown that the arbitratq_r had misdirected himself in law or had
reached a decision which no reasonable arbitrator could have.
G
In the instant case, the view taken by the Umpire on the
interpretation of th.e agreement between the parties in the light of the
observations of this Court in Indian Aluminium Co. 's case (supra) was
at best a possible view to take, if not the correct view. If that was the
position then such a view, even if wrong, cannot be corrected by this
Court on the basis of long line of decisions of- this Court. In the H
688 SUPREME COURT REPORTS [1988] Supp. 3 S.C.R.

aforesaid view of the matter it is necessary to examine the aforesaid
A
decision in the Indian Aluminium Co's case (supra). There under sec-
tion 49(1) & (2) of the Electricity Supply Act, 1948, the Legislature
had empowered the State Electricity Board to frame uniform tariffs
and had also indicated the factors to be taken into account in fixing
uniform tariffs. Under sub-section (3), the Board was empowered, in
B the special circumstances mentioned therein, to fix different tariffs for
the supply of electricity, but in doing so, sub-section (4) directed that
the Board was not to show undue preference to any person. Under
s. 59 it was stipulated that the Board shall not, as far as practicable,
·carry on its operations at a loss and shall adjust its charges accordingly
from time to time. Certain consumers of electricity had entered into
agreements for the supply of electricity for their manufacturing
c purposes at specified rates for specified period. Some of the agree-
ments were entered into with the State Governments and the others
with the State Electricity Boards. In one of the agreements there was
an arbitration clause. On account of the increase in the operation and
maintenance cost, due to various causes which caused loss to the State
D Electricity Boards, the Boards wanted to increase the charges in all the
cases. The consumers challenged the competency of the Boards to do
so by petitions in the respective High Courts. The High Court sustained
the Board's claim, in some cases, under sections 49 & 59, and in
others, held that the Board was incompetent to do so. In the case of
the consumer where there was the arbitration clause, the High Court
E refused to entertain the petition on account of the clause. This Court
held that fixation of special tariffs under s. 49(3) can be a unilateral
Act on the part of the Board but more often.it is the result of negotia-
tions between the Board and the consumer and hence a matter of
agreement between them. Therefore, the Board can, in exercise of the
power conferred under the sub-section, enter into an agreement with a
F consumer stipulating for special tariff for supply of electricity for a
specific period of time. The agreements for supply of electricity to. the
consumers must therefore be regarded as having been entered into by
the Boards in exercise of the statutory power conferred under section
49(3). The Umpire in his award stated that the decision of this Court
covered and supported the claim of the claimant. In the present case
G the only difference is that there was only an agreement by which the
Electricity Board accepted the agreement which was held by the
Umpire to have become operative. Once that agreement was binding
on the Board, its terms could not be varied from the uniform rate
under sub-sections (1) & (2) of s. 49. The Umpire was right. In our
opinion, the Umpire committed no error in arriving at such conclu-
H sion. Furthermore, such a conclusion is certainly a possible view of the
U.P. HOTELS v. U.P. S.E.B. [MUKHARJI, J.] 689

interpretation of the decision of this Court in Indian Aluminium Co's A
case, if not the only view. We need go no further than that.

We, are, therefore, of the opinion that the view taken by the
Umpire on section 49 was a possible view in the light of the decision of
this Court in Indian Aluminium's case. In the premises, a question of 8
law arose certainly during the course of the proceedings. Such a ques-
tion has been decided by the Umpire on a view which is a possible one
to take. Even if there was no specific reference of a question of law
referred to the Umpire, there was a question of law involved. Even on
the assumption that such a view is not right, the award is not amenable
to interference or correction by the courts of law as there is no proposi-
tion of law which could be said to be the basis of the award of the C
Umpire, and which is erroneous.

In the premises, we are of the opinion that the High Court and
the learned Ilnd Additional District Judge were in error in the view
they took of the award of the Umpire. The appeal must, therefore, be
allowed and the decision of the High Court, dated 21st July, 1987 as D
well as the order of the Ilnd Additional Judge, Lucknow, dated 30th
May, 1984 are set aside. No other point was urged challenging the
award of the Umpire. The award of the Umpire is confirmed and let
the award be made Rule of the Court under section 14(2) of the Act.
The appeal is allowed with costs.
E
R.S.S. Appeal allowed.