HON'BLE SRI JUSTICE P. NAVEEN RAO
&
HON'BLE Dr JUSTICE G. RADHA RANI
CIVIL MISCELLANEOUS APPEAL No.4690 of 2003
Date : 26.08.2022
Between:
M/s.Rajender Reddy & Co. rep.by its
GPA Holder Sri G.Pratap Reddy.
.... Appellant
And
The Hyderabad Agricultural Co-operative
Association Limited, rep.by its Managing
Director, Public Gardens Road, Hyderabad
and others.
.... Respondents
The Court made the following:
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HON'BLE SRI JUSTICE P. NAVEEN RAO
&
HON'BLE Dr. JUSTICE G. RADHA RANI
CIVIL MISCELLANEOUS APPEAL No.4690 of 2003
JUDGMENT: (Per Hon'ble Sri Justice P Naveen Rao)
Heard learned counsel for appellant Sri K.Prabhakar and learned
counsel for respondents Sri B.Chinnappa Reddy. The contractor is
referred to as claimant and the Hyderabad Agricultural Cooperative
Association (HACA) as respondent.
2. The Hyderabad Agricultural Cooperative Association (HACA)
awarded contract to M/s. Rajendra Reddy & Co on 11.8.1990 to
construct the second and third floors over the newly constructed office
complex. The value of the work was 40,81,720/- against an
estimated contract value of 33,18,500/-.
3. The terms of agreement disclose that the site was deemed to
have been handed over on the same day and the work was to be
completed within a period of 6 months. Accordingly, the work ought to
have been completed by 10.2.1991. It was actually completed on
17.5.1992.
4. The agreement provided for resolving of the disputes by a panel
of Arbitrators (Cl.17 of the General Conditions), consisting of a
nominee of the claimants and a nominee of the respondents and in the
event of the two Arbitrators not agreeing by the decision, an Umpire to
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be appointed by the two Arbitrators prior to their entering on the
reference.
5. Disputes and differences arose between the contracting parties
on delay in supply of drawings and designs; delay in supply of copy of
agreement and handing over site; withdrawal of a part of the work and
interference in work; delay in payment of bills. The disputes were
referred to three member arbitral Tribunal.
6. The Arbitral Tribunal held that there were certain defaults on the
part of the respondents in handing over the site in time, in the supply
of designs and drawings and the ad hoc withdrawal of substantial
portion of the work from the claimant without notice, which resulted in
breaches of contract.
6.1. The Arbitral Tribunal held that even though there was no valid
agreement in force after 30.6.1991 the contract was deemed to have
been subsisting upto the date of completion recorded in the
measurement book i.e., 17.5.1992. However, to make the assessment
of claims, the value of the work done upto 30.6.1991 only was taken
into consideration. Holding that prolonging the contract was not due
to the claimants fault, but due to the delay in handing over the site,
and the supply of designs and drawings, the Arbitral Tribunal held that
the claimants are entitled for escalation for the work done beyond the
agreement period. According to the Tribunal, the tenders were called
on 31.5.1990 based on an estimate prepared as per 89-90 SSR
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whereas substantial work was executed when 90-91 SSR were in force
and determined the percentage of escalation between the years 89-90
and 90-91 as 16.5 % and arrived at the figure as 1,17,000-00.
6.2. On withdrawal of a portion of work the Arbitral Tribunal though
recognized the competency of the respondents to delete items from the
contract either because of change of specification or on account of slow
progress on the part of the contractor, observed that they should have
done under the relevant clauses of the agreement Cl.60 (c ) after due
notice. It has held that the ad hoc withdrawals and changes have
resulted in breach of contract. The Tribunal held that it is reasonable
to adopt the damages towards loss of profit on the value of the work
withdrawn as 15%. However, the Tribunal rejected the plea of
claimants with regard to non-register of agreement copy in time and
delay in payments.
6.3. On recording said findings, the Arbitral Tribunal discussed the
claims of the contractor under 11 headings and interest component
separately.
6.4. The following is the summary of the AWARD:
S.No. Details of claim Amount of Amount
claim awarded
1 Towards escalation in rates (labour and 2,13,900 1,17,000
materials) for work done beyond agreement
period
2 Towards loss of profit on deletion of major 4,56,630 1,13,000
portion of contract value
3 Towards additional cost incurred on payment 5,85,000 Rejected
of rent for centering materials
4 Towards over head charges on establishment 73,800 Rejected
beyond agreement period
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5 Towards refund of illegal recovery on steel 25,000 Rejected
6 Towards loss of earnings for retaining excess 19,600 Rejected
deposit
7 Towards refund of additional expenditure 15000 7000
incurred on purchase of cement
8 Towards cost of construction of sheds and 25000 10000
sump
9 Towards refund of penalty 5000 5000
10 Towards loss of profit on front elevation work 3,00,000 Rejected
11 Towards compensation for delay in release of 1,18,122 Rejected
final bill
18,37,052 2,52,000
Interest claimed at 24 % per annum from the Interest 1,86,883
awarded at 18
date they fall due to the date of the award
% p.a. from
17.10.1994 the
ate of serving
of notice to
30.11.98 the
date of passing
of the award
4,83,883
Interest To be
awarded at
calculated
18% p.a.from
1.12.1998 upto at the
the actual date time of
of payment payment
6.5. The Tribunal awarded interest @ 18 % on the claim amounts
from 17.10.1994, the date of serving of the notice to 30.11.1998 the
date of passing of the award and also future interest at 18% per
annum on the claim amounts from 30.11.1998, the date of passing of
the award to the date of actual payment.
7. Challenging the award of Arbitral Tribunal HACA filed O.P No.
273 of 1999 under Section 34 of the Arbitration and Conciliation Act,
1996 in the Court of the Chief Judge, City Civil Court, Hyderabad. The
award was challenged on the grounds that the claims put forth by first
respondent are outside the scope of the Arbitration; that they are not
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included in the terms of the agreement; that the Arbitrators cannot
entertain new claims which are not arising under the contract; that the
Arbitrators have traveled beyond the scope of the reference; that they
exceeded their jurisdiction; the Arbitration Tribunal failed to appreciate
that there was no delay in handing over the site or handing over the
designs and drawings; that first respondent came forward to seek
agreement copy 138 days after the agreement and the delay is due to
first respondent; it is stated that when the delay is due to the lapse of
the contractor the same cannot be shifted to the petitioner; that the
Arbitrators have no jurisdiction to assess the profit or loss of the
contractor and that the reasons assigned by the Arbitral Tribunal are
illegal and unsound.
8. The Challenge is opposed by contending that the petitioner has
raised all these grounds before the learned Arbitrators and they
considered all the aspects and rejected. The Courts have no appellate
jurisdiction to interfere with the award. The interference is not
permissible except the areas specified under Section 34 of the Act and
this is a case not falling within the scope of the exceptions. It is also
urged that the site was not available to the contractor as on 7.8.1990
and after prolonged correspondence and approaches only the site was
handed over. There was delay in supplying the drawings and designs.
9. The Civil Court observed that the agreement was concluded on
11.8.1990 and the site was deemed to have been handed over on the
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same day. As per the terms and conditions of the agreement the
contractor was required to complete the work within the stipulated
period of six months, i.e., by 10.2.1991 but it was actually completed
on 17.5.1992 i.e., nearly after one year three months. The Civil Court
further observed that 51 % of the first floor slab was completed on
24.7.1990 and the balance by 25.8.1990 and that within 11 days from
the date of agreement the site was handed over.
9.1. The Civil Court pointed out that the Arbitrators should have
noted that there is a difference between handing over of the site and
deemed to have hand over the site whereas the words used in the
agreement is 'deemed to have been handed over' and in fact within few
days from the date of agreement the site was handed over.
9.2. The Civil Court further observed that when the contractor was
making an allegation that there was delay in furnishing the designs
and drawings, duty was cast on him to prove the said allegation but
failed to do so, yet the Arbitrators concluded that there had been delay
in supply of drawings and designs. It is an absurd conclusion and is
without any basis and without any proof. In the absence of clear proof,
the respondent cannot be penalized. The Civil Court therefore held
that the findings of Arbitral Tribunal are against public policy as they
have not appreciated the evidence properly.
9.3. The civil Court held that even in arbitration proceedings, the law
of evidence can not be ignored, whereas, the Arbitrators have arrived at
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wrong conclusions without any evidence or proof. The Civil Court held
that under Section 34 (2) (b) (ii) if the arbitral award is in conflict with
the public policy of India the same can be set aside. The public policy
is well defined by the Apex Court and the High Courts. When the
arbitral award is in conflict with the law of the land, more particularly
the law of evidence, it is liable to be set aside.
9.4. The Civil Court held that the respondent is not responsible for
the delay in execution of the work and therefore claimant is not
entitled to price escalation. The finding of the Arbitral Tribunal on
alleged loss caused to the claimant for withdrawing portion of the work
is also held not valid on the ground that it was outside the scope of the
reference. As the delay in completion of work is not attributable to the
respondents, the Civil Court held that the claimant is not entitled to
interest @ 18 % per annum.
10. Learned counsel reiterated their respective stands as urged
before the Arbitral Tribunal and in the civil Court. We have carefully
gone through the award and the order of the Civil Court.
11. The dispute is on delay in handing over site; supply of copy of
agreement, drawings and designs; payment of bills; interference in the
work; and taking away part of the work and entrusting to another
contractor.
12. The facts which are not in dispute are that agreement was
entered on 11.8.1990 and work was to be completed within six
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months from that date. Agreement clause incorporated deemed
handing over of possession. The work was actually completed on
17.5.1992, i.e., after one year and three months. It is not in dispute
that 51% of slab work on first floor was completed by 28.7.1990 and
balance 49% by 25.8.1990. The contractor executed works worth
13.15 lakhs and to that extent payment was made by 10.1.1991.
The facts on record disclose that site was physically handed over
within 11 days of entering into the contract. From the case record, it is
apparent that no evidence was laid to show delay in handing over the
designs and drawings. It is not in dispute that part of the work was
withdrawn from the contractor and entrusted to another contractor.
13. In the above factual background the question for consideration is
whether Civil Court erred in interfering with the award of Arbitral
Tribunal.
14. Section 34 of the Act, vests right in a party to arbitral
proceedings to challenge the award before Civil Court. However, the
remedy provided by this Section is not an appeal remedy. The
provision prescribes contours for consideration of the challenge. The
consideration by the Court is circumscribed by the parameters laid
down in the Section. The award of the Arbitral Tribunal cannot be
interfered merely because a different view or different conclusion is
possible. The Court can set aside an award if it finds that the award is
in conflict with the public policy of India.
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15. According to Civil Court administering justice in accordance with
law implies following the law of evidence. Whereas, finding of the
Arbitral Tribunal that there was delay in handing over designs was
without any evidence and findings of Arbitral Tribunal are against
public policy.
16. In catena of judgments, Hon'ble Supreme Court considered what
is 'Public Policy of India'. In Welspun Specialty Solutions Ltd. v. ONGC1,
Hon'ble Supreme Court reviewed the precedent decisions on scope of
'public policy of India'. Hon'ble Supreme Court held:
"23. The limited grounds provided under Section 34 of the Act, has been
interpreted by this Court on numerous occasions. In this case at hand, the
challenge of award is based on the fact that the same is against the public
policy and patent illegality. Public policy as a ground of challenge has always
been met with certain scepticism. The phrase "public policy" does not indicate
"a catch-all provision" to challenge awards before an appellate forum on infinite
grounds. However, the ambit of the same is so diversly interpreted that in some
cases, the purpose of limiting the Section 34 jurisdiction is lost. This Court's
jurisprudence also shows that Section 34(2)(b) has undergone a lot of churning
and continue to evolve. The purpose of Section 34 is to strike a balance between
the court's appellate powers and integrity of the arbitral process.
......
26. In ONGC v. Saw Pipes Ltd. [ONGC v. Saw Pipes Ltd., (2003) 5 SCC 705] , the scope of Section 34 was expanded to include patent illegality as a ground for challenging the award and held as under : (SCC pp. 727-28 & 744-45, paras 31 & 74) "31. Therefore, in our view, the phrase "public policy of India" used in Section 34 in context is required to be given a wider meaning. It can be stated that the concept of public policy connotes some matter which concerns public good and the public interest. What is for public good or in public interest or what would be injurious or harmful to the public good or public interest has varied from time to time. However, the award which is, on the face of it, patently in violation of statutory provisions cannot be said to be in public interest. Such award/judgment/decision is likely to adversely affect the administration of justice. Hence, in our view in addition to narrower meaning given to the term "public policy" in Renusagar case [Renusagar Power Co. Ltd. v. General Electric Co., 1994 Supp (1) SCC 644] it is required to be held that the award could be set aside if it is patently illegal. The result would be--award could be set aside if it is contrary to:
(a) fundamental policy of Indian law; or
(b) the interest of India; or
(c) justice or morality, or
(d) in addition, if it is patently illegal.
1(2022) 2 SCC 382 PNRJ & Dr.GRRJ CMA No.4690 of 2003 11 Illegality must go to the root of the matter and if the illegality is of trivial nature it cannot be held that award is against the public policy. Award could also be set aside if it is so unfair and unreasonable that it shocks the conscience of the court. Such award is opposed to public policy and is required to be adjudged void.
***
74. In the result, it is held that:
(A)(1) The court can set aside the arbitral award under Section 34(2) of the Act if the party making the application furnishes proof that:
(i) a party was under some incapacity, or
(ii) the arbitration agreement is not valid under the law to which the parties have subjected it or, failing any indication thereon, under the law for the time being in force; or
(iii) the party making the application was not given proper notice of the appointment of an arbitrator or of the arbitral proceedings or was otherwise unable to present his case; or
(iv) the arbitral award deals with a dispute not contemplated by or not falling within the terms of the submission to arbitration, or it contains decisions on matters beyond the scope of the submission to arbitration. (2) The court may set aside the award:
(i)(a) if the composition of the Arbitral Tribunal was not in accordance with the agreement of the parties,
(b) failing such agreement, the composition of the Arbitral Tribunal was not in accordance with Part I of the Act.
(ii) if the arbitral procedure was not in accordance with:
(a) the agreement of the parties, or
(b) failing such agreement, the arbitral procedure was not in accordance with Part I of the Act.
However, exception for setting aside the award on the ground of composition of Arbitral Tribunal or illegality of arbitral procedure is that the agreement should not be in conflict with the provisions of Part I of the Act from which parties cannot derogate.
(c) If the award passed by the Arbitral Tribunal is in contravention of the provisions of the Act or any other substantive law governing the parties or is against the terms of the contract.
(3) The award could be set aside if it is against the public policy of India, that is to say, if it is contrary to:
(a) fundamental policy of Indian law; or
(b) the interest of India; or
(c) justice or morality; or
(d) if it is patently illegal.
(4) It could be challenged:
(a) as provided under Section 13(5); and
(b) Section 16(6) of the Act."
27. Eventually, a three-Judge Bench in ONGC v. Western Geco International Ltd. [ONGC v. Western Geco International Ltd., (2014) 9 SCC 263 : (2014) 5 SCC (Civ) 12] , while upholding Saw Pipes case [ONGC v. Saw Pipes Ltd., (2003) 5 SCC 705] , noted that "illegality" of the award must go to root of the matter. Illegality of a trivial nature could not be held to violate the public policy."
16.1. In ONGC Ltd. v. Western Geco International Ltd.,2 Hon'ble Supreme Court lucidly explained what constitutes 'fundamental policy of Indian Law'.
2(2014) 9 SCC 263 PNRJ & Dr.GRRJ CMA No.4690 of 2003 12 "35. What then would constitute the "fundamental policy of Indian law" is the question. The decision in ONGC [ONGC Ltd. v. Saw Pipes Ltd., (2003) 5 SCC 705] does not elaborate that aspect. Even so, the expression must, in our opinion, include all such fundamental principles as providing a basis for administration of justice and enforcement of law in this country. Without meaning to exhaustively enumerate the purport of the expression "fundamental policy of Indian law", we may refer to three distinct and fundamental juristic principles that must necessarily be understood as a part and parcel of the fundamental policy of Indian law. The first and foremost is the principle that in every determination whether by a court or other authority that affects the rights of a citizen or leads to any civil consequences, the court or authority concerned is bound to adopt what is in legal parlance called a "judicial approach" in the matter. The duty to adopt a judicial approach arises from the very nature of the power exercised by the court or the authority does not have to be separately or additionally enjoined upon the for a concerned. What must be remembered is that the importance of a judicial approach in judicial and quasi-judicial determination lies in the fact that so long as the court, tribunal or the authority exercising powers that affect the rights or obligations of the parties before them shows fidelity to judicial approach, they cannot act in an arbitrary, capricious or whimsical manner. Judicial approach ensures that the authority acts bona fide and deals with the subject in a fair, reasonable and objective manner and that its decision is not actuated by any extraneous consideration. Judicial approach in that sense acts as a check against flaws and faults that can render the decision of a court, tribunal or authority vulnerable to challenge.
..........
38. Equally important and indeed fundamental to the policy of Indian law is the principle that a court and so also a quasi-judicial authority must, while determining the rights and obligations of parties before it, do so in accordance with the principles of natural justice. Besides the celebrated audi alteram partem rule one of the facets of the principles of natural justice is that the court/authority deciding the matter must apply its mind to the attendant facts and circumstances while taking a view one way or the other. Non-application of mind is a defect that is fatal to any adjudication. Application of mind is best demonstrated by disclosure of the mind and disclosure of mind is best done by recording reasons in support of the decision which the court or authority is taking. The requirement that an adjudicatory authority must apply its mind is, in that view, so deeply embedded in our jurisprudence that it can be described as a fundamental policy of Indian law.
39. No less important is the principle now recognised as a salutary juristic fundamental in administrative law that a decision which is perverse or so irrational that no reasonable person would have arrived at the same will not be sustained in a court of law. Perversity or irrationality of decisions is tested on the touchstone of Wednesbury principle [Associated Provincial Picture Houses Ltd. v. Wednesbury Corpn., (1948) 1 KB 223 : (1947) 2 All ER 680 (CA)] of reasonableness. Decisions that fall short of the standards of reasonableness are open to challenge in a court of law often in writ jurisdiction of the superior courts but no less in statutory processes wherever the same are available.
40. It is neither necessary nor proper for us to attempt an exhaustive enumeration of what would constitute the fundamental policy of Indian law nor is it possible to place the expression in the straitjacket of a definition. What is important in the context of the case at hand is that if on facts proved before them the arbitrators fail to draw an inference which ought to have been drawn or if they have drawn an inference which is on the face of it, untenable resulting in miscarriage of justice, the adjudication even when made by an Arbitral Tribunal that enjoys considerable latitude and play at the joints in making awards will be open to challenge and may be cast away or modified depending upon whether the offending part is or is not severable from the rest." (emphasis supplied) PNRJ & Dr.GRRJ CMA No.4690 of 2003 13
17. Apart from wider meaning ascribed to 'fundamental policy of Indian Law' by the Hon'ble Supreme Court in 'Saw Pipes' reading of provisions in Sections 24, 27, 28 and 29B make it abundantly clear that taking evidence oral and / or documentary is mandatory unless expressly dispensed with by consent of parties to the dispute. It is also axiomatic that any decision on an issue must be based on evidence brought on record.
18. In paragraph 22, the Tribunal recorded its findings. On delay in supply of drawings which is attributed for delay in execution of work, the Tribunal records as under:
"22.2. Regarding the delay in supply o the drawings and designs, neither side was able to establish the dates on which the respective drawings were handed over. The claimants heavily relied on the site order book, through which they say the drawings have been handed over to them. The respondents were uncertain as to whether a site order book was maintained at all at the time and in any case, were not in a position to produce the same. After going through the respective stands taken by the two parties, we are of the view that there have been delays in the supply of the drawings and designs."
19. While holding that neither party has established the dates on which the drawings were handed over, Tribunal erred in holding that there were delays in supply of drawing and designs. It is perplexing how such a conclusion is arrived. This finding of the Tribunal is not based on evidence brought on record. The Tribunal erred in not adopting judicial approach in holding against the respondent. To this extent the Civil Court was right in holding against the finding of the Arbitral Tribunal.
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20. On delay in handing over site, it is seen that as per the terms of contract, on the date of signing the contract, it was deemed that site was handed over. The claimant having agreed for deemed handing over clause cannot complain of not handing over the site. The Tribunal ignored the fact that with eyes wide open the claimant has agreed for deemed handing over clause, did not protest if site was not ready to commence work, took physical possession and carried on his work.
21. Therefore, the Tribunal findings on delay in handing over the site and delay in handing over designs and drawings is not sustainable.
We uphold the view of the civil Court on these two aspects. Once these two issues are held against the claimant as a corollary, the claimant is not entitled to money towards escalation of costs for work executed beyond the original agreed schedule.
22. However, on withdrawing a portion of work entrusted to the contractor and entrusting to another contractor civil court rightly upheld the opinion of the Tribunal. Once this opinion is upheld it would logically lead to assessing the loss caused to the contractor.
Therefore, the Civil Court erred in holding that awarding compensation on loss of profit due to withdrawal of a portion of work is outside the scope of reference.
23. As a consequence, the amounts awarded by the Tribunal towards loss of profit on deletion of major portion of contract value (item 2 in the table in para 39 of the award) and items 7 to 9 have to be PNRJ & Dr.GRRJ CMA No.4690 of 2003 15 upheld. We also uphold the interest awarded by the Arbitral Tribunal for pre-award and post award period.
24. This Appeal is allowed to the extent indicated above. Pending miscellaneous petitions if any shall stand closed.
______________________ P. NAVEEN RAO,J _______________________ Dr.G.RADHA RANI,J Date: 26.08.2022 TVK/KKM PNRJ & Dr.GRRJ CMA No.4690 of 2003 16 HON'BLE SRI JUSTICE P. NAVEEN RAO & HON'BLE Dr JUSTICE G. RADHA RANI CIVIL MISCELLANEOUS APPEAL No.4690 of 2003 Date : 26.08.2022 Tvk/kkm