Union Of India Through Executive ... vs District Judge Lucknow And Others
2014 Latest Caselaw 2152 ALL

HIGH COURT OF JUDICATURE AT ALLAHABAD, LUCKNOW BENCH
 
 

Reserved
 
A.F.R.
 
Court No. - 27
 

 
Case :- FIRST APPEAL FROM ORDER DEFECTIVE No. - 720 of 2010
 

 
Appellant :- Union Of India Through Executive Engineer Lucknow & Ors.
 
Respondent :- District Judge Lucknow And Others
 
Counsel for Appellant :- Ghaus Beg
 
Counsel for Respondent :- Sudeep Seth
 

 
Hon'ble Devi Prasad Singh,J.

Hon'ble Ashwani Kumar Mishra,J.

(Per Hon. Ashwani Kumar Mishra, J.)

1. Union of India through Executive Engineer, Lucknow Central Division - II, Central Public Works Department, Aliganj, Lucknow, has filed the present appeal under section 37 (1)(b) of the Arbitration and Conciliation Act, 1996 (hereinafter referred to as 'Act'), challenging the judgment and order of the District Judge, Lucknow dated 29.1.2010, whereby the objection of the appellant against the award of the arbitrator dated 16.3.2006, filed under section 34 of the Act, has been rejected.

2. Brief facts giving rise to present dispute are that appellant on 31.5.2001 invited item rate tenders from pre-qualified contractor for construction and electrical works of Regional Office Building for NABARD, Gomti Nagar, Lucknow. Nine contractors applied pursuant to it and five ultimately were shortlisted, including M/S J.S.M. Construction Co. through its proprietor Srikant Singh - respondent no.3 (hereinafter referred to as 'contractor'). The first call of the tender was invited on 15.1.2002 for the five shortlisted contractors but on account of various discrepancies, the same was rejected. Similarly, the second call of tenders invited on 10.4.2002 was also rejected. The third notice for call of tender dated 14.5.2002 was challenged by the respondent-contractor and the Writ Petition No.3031 (M/B) of 2002 was allowed on 2.12.2002, quashing the notice dated 14.5.2002 and fresh notice for inviting tenders were issued fixing 25.1.2003. The respondent-contractor also submitted its bid, which was lowest and consequently, it was accepted after negotiations and got communicated vide letter dated 9.5.2003. An agreement no. 2/EE/LCD-II/2003-04 dated 9.5.2003 was drawn and signed by the appellant and respondent-contractor. The estimated cost of the project was quantified at Rs.7,23,42,701 and the lowest tender of contractor, submitted and accepted, was to the tune of Rs.6,75,51,617/-. The work was to start on 19.5.2003 and stipulated date of its completion was 18.2.2005 i.e. after a period of 21 months.

3. Tender of respondent-contractor had been submitted on the prescribed tender document/format which included price escalation as a part of the tender itself. The tender of contractor, accepted by appellant, has been brought on record as Annexure-1. The tender encloses performa of schedules, relevant portion whereof containing schedule 'E', clause 10 CC as filled by the contractor in the tender, and definition clause 2(xi), are reproduced below:-

"Schedule 'E'

Schedule of component of materials, labour etc. for escalation.

 

 
Clause 10 CC
 

 
Component of materials-                            'X'
 
Expressed as per cent of total value of works.      ......75%  
 

 
Component of labour-                                'Y'
 
Expressed as per cent of total value of works.      ......25%
 

 
Component of P.O.L.-                                 'Z'                    
 
Expressed as per cent of total value of work.        .......NIL %
 
Definition: 2(xi)   
 
Standard Schedule of Rates       : D.S.R. 2002 with upto date 
 
 				        correction slips"
 

 

4. From the aforesaid, it is clear that price escalation components of material, labour and P.O.L. (Petroleum Oil and Lubricant) were required to be filled as part of the bid itself in schedule 'E'. As per clause 10 CC, percentages were specified as 75%, 25% and Nil respectively in the tender submitted by the contractor for working out price escalation. It appears that price escalation as per contract was calculated in accordance with the various components of work in schedule 'E' by resorting to method of calculation given in clause 10 CC. Seven quarterly escalation payment upto the month of February, 2005 amounting to Rs.24,05,734 was paid to the contractor.

5. Respondent-contractor was not satisfied with the quantification of price escalation awarded to it and claimed higher price escalation. Representations were submitted by the respondent-contractor on 31.10.2004 and 17.11.2004. These representations were considered and rejected by the appellant on 7.12.2004 and the decision was communicated to the contractor on 8.12.2004. Being aggrieved against the rejection of its claim, the respondent-contractor sought appointment of arbitrator, in accordance with clause 25 of the agreement executed between the parties.

6. Existence of arbitration for settlement of dispute, contained as per clause 25 of the agreement, was not questioned and, therefore, the appellant proceeded to appoint Sri A.K. Singhal as Arbitrator, Govt. of India, Ministry of Urban Development, New Delhi.

7. On 28.1.2005 the respondent-contractor submitted its statement of claim which consisting of following three demands:-

"(i) Claim for additional payment towards escalation under clause 10CC of agreement, on the ground that price escalation was required to be determined, by calculating it under the separate components of cement, steel and materials instead of material alone, in addition to labour and POL.

(ii) Claim for interest at the rate of 15% on the amount worked out under the claim no.1.

(iii) Cost of arbitration proceedings amounting to Rs.20,000/- was claimed."

The appellant contested the claim and disputed the demand of the respondent-arbitrator. A counter claim demanding cost of Rs.50,000/- towards arbitration proceedings was also raised.

8. Learned arbitrator dealing with the first claim, held that agreement entered into between the parties consisted of General Conditions of Contract for CPWD, 2003, which provided in clause 10 CC, a detail procedure to work out percentage of cement, steel and other materials as components for determining price escalation. The arbitrator, therefore, accepted the claim of contractor that material component of 75% indicated in the bid consists of 12% cement, 35% steel and 28% other materials respectively, in addition to 25% for labour and 'Nil' % for POL. The arbitrator accordingly held that payment of escalation had to be calculated consisting of 5 components i.e. cement 12%, steel 35%, other materials 28%, labour 25% and P.O.L. Nil % respectively. The declaratory award, thus, was given holding the claimant-contractor entitled to payment of escalation under aforesaid 5 components (steel, cement, other material, labour and POL) instead of 3 components (material, labour and POL) as specified in the bid. On the second claim the arbitrator awarded simple interest of 8% on the arrears of escalation from the date when such arrears in terms of Ist claim became due, to the date of its payment. Third claim regarding cost of arbitration and counter claim of appellant on the same issue, was adjudicated by holding that cost of arbitration be borne by the parties themselves.

9. Aggrieved against the aforesaid award, the appellant invoked the jurisdiction of the court under section 34 of the Act. The appellant's objection to the award essentially was that the respondent-contractor had submitted its tender in the format provided, wherein price escalation component was agreed to be determined under three heads consisting of component of materials of 75%, components of labour 25% and components of POL as Nil percentage. The price escalation was to be determined with reference to the aforesaid three components, agreed between the parties and that splitting of the component of materials between cement, steel and other materials was neither agreed in the agreement nor their respective percentage of components was predetermined or agreed in the bid and, therefore, the claim of the respondent-contractor for splitting the components of materials in three separate component i.e. steel, cement and materials as per ratio claimed by the respondent-contractor and awarded by the arbitrator was contrary to the agreement and award thus had the effect of modifying the agreement/contract itself, which was impermissible and thereby the arbitrator had misconducted in delivering his award. It was further stated that the respondent-arbitrator misdirected itself while observing that carelessness and negligence existed on part of the appellant, in preparing the format of notice inviting tenders by not incorporating correction slip dated 10.12.2001 which required the component of steel and cement to be included as a separate head for price escalation. Appellant's case before the court was that desirability to amend the format of notice inviting tender in terms of the direction dated 10.12.2001 may not be disputed, but so long as bids were not invited by modifying the format itself, the tender submitted in the format alone cannot be resorted for price escalation and it was not open for the arbitrator to substitute the format itself and thereby treat the tender of respondent-contractor as being on the amended format. The objection was that so long as the NIT format had not been amended and tender was submitted in the unamended format, it was not open for arbitrator to substitute the agreement by treating the tender as having been submitted in the amended format. Emphasis was given to the fact that tender submitted consisted of 3 components of price escalation and the contractor had specified the percentages, then in the absence of contractor specifying the percentage of cement, steel and other materials, it was not open to modify the contract itself by substituting heads and percentages of price escalation. The price escalation could only be calculated treating the components of materials as 75% of total value of work. It was, therefore, submitted that the arbitrator had committed misconduct by going against the agreed terms of the contract/agreement.

10. The court considering the objection under section 34 heard the parties and it came to the conclusion that the correction slips issued on 10.12.2001 together with clause 10 CC of the General Conditions of contract were part of the agreement and the determination of escalation at the rate of 75% of the components of material had rightly been directed to be splitted between cement, steel and material in the ratio of 12%, 35% and 28%, instead of materials as a component of 75% alone as mentioned in the bid of the contractor. Accordingly, the objection under section 34 has been rejected. Aggrieved against the award of the arbitrator dated 16.3.2006 as well as rejection of objection under section 34 dated 29.1.2010, the appellant has preferred the present appeal, invoking the jurisdiction of this court under section 37 of the Act.

11. We have heard Sri Gaush Beg, learned counsel appearing for appellant and Sri Sudeep Seth, learned counsel appearing for the respondent-contractor and have perused the materials available on record.

12. Challenging the award Sri Gaush Beg submitted as under:-

"At the time of execution of the agreement between the appellant and respondent No. 3 on 9.5.2003, the terms of contract clearly provide in Schedule 'E' that price escalation is pre-determined only in respect of three components viz component of materials (75%), component of Labour (25%) component of POL (Petroleum Oil Lubricants) NIL %. It is relevant to mention here that at the time of execution of the said agreement the respondent No. 3 did not raise any objection regarding any kind of ambiguity in the terms of contract specially schedule 'E'. The Arbitrator while adjudicating the dispute has admitted the fact that Schedule 'E' provides price escalation only in respect of three components but without any basis has given a finding that the appellant has committed mistake by enclosing old schedule 'A to F' in the agreement entered between the parties, although this finding is hypothetical and resulted in the miscarriage of justice because the Arbitrator himself has substituted the terms in the agreement by saying that schedule annexed in the agreement is in contravention of the office memorandum dated 10.12.2001. Thus, the Arbitrator has acted beyond the scope of the agreement, which is not permissible under the law. The award given by the Arbitrator directing that the respondent No. 3 is entitled to get the payment of escalation under Clause 10 CC after considering five component for cement, steel other material, labour and POL with their percentages as 12 %, 25%, 28%, 25%, and NIL % respectively. Thus, the award has caused huge financial implications to the appellant, which is not justified, as such the award is illegal and arbitrary and liable to be set aside.

The objections preferred by the appellant under Section 34 of the Arbitration and Conciliation Act, 1996 before the learned District Judge, Lucknow were also dismissed without any legal basis. The learned District Judge failed to appreciate the terms and conditions entered between the parties at the time of execution of the agreement dated 9.5.2003, but instead the learned District Judge placed reliance upon the general conditions of contract 2003 which is attached to the agreement. However, the learned District Judge failed to appreciate the fact that the general condition of Contract 2003 merely explains the method of calculation of escalation and instead has also relied upon the office memorandum dated 10.12.2001 by which Clause 10 CC and Schedule of CPWD contract from 7/8 was proposed to be amended, whereas the agreement executed between the parties was not in amended form. Infact, both the Arbitrator and learned District Judge has placed reliance upon the amended Schedule 'E', which was not part of the agreement entered between the parties, but the Court below has assumed as in the agreement annexing of old schedule 'E' was by mistake, which fact has never been raised by the respondent No.3 nor after the execution of the agreement, the agreement was ever sought to be amended by the respondent No. 3 before approaching the Arbitrator.

It is further submitted that the office memorandum dated 10.12.2001 does not enforce to change the components predetermined and included in Schedule 'E' in the agreement drawn prior to issuance of this office memorandum dated 10.12.2001. Thus, the award as well as the judgement passed by the learned District Judge is contrary to the terms of the contract and as such the same is illegal."

Sri Beg in support of his argument relied upon the judgment of the Apex Court in Oil and Natural Gas Corporation Ltd. v. Saw Pipes Ltd. : AIR 2003 SC 2629.

13. Sri Sudeep Seth has appeared for the respondent-contractor and submitted as under:-

"1. That the Appellant cannot lay down foundation of ase to the effect that one Clause (Arbitration Clause 25) of the General Conditions of Contract would apply and the other Clause (Amended Cluse 10CC with Five Components for Price Escalation) would not apply.

2. That Schedules 'A' to 'F' emanate from the terms and conditions of the Contract and they cannot be at variance with the conditions of contract signed between the parties. A Clause does not emanate from Schedule but a Schedule emanates from the Clause. Even the indices are applicable in the context of O.M. dated 10.12.2001 for the limited purpose of price escalation component and there is no universal application of indices.

3. That the learned Arbitrator has passed a valid and reasoned award and there was no scope of interference by the learned District Judge under Section 34 of the Arbitration and conciliation Act, 1996 (hereinafter referred to as "the Act, 1996"). The learned Arbitrator worked out the percentage of five components for price escalation according to the procedure provided under Clause 10CC of the General Conditions of Contract for CPWD Work 2003.

4. That the scope of Section 34 of the Act, 1996, is very limited and the grounds to challenge the arbitral award are limited to fie in number under Section 34(2)(a) of the Act, 1996. None of the grounds taken in the objections filed by the appellant under section 34 of the Act, 1996, fell in the ambit of limited five grounds enumerated in Section 34(2)(a) of the Act, 1996

5. That vide detailed and reasoned order dated 29.1.2010, the learned District Judge, Lucknow dismissed the objection of the appellant and affirmed the award. Every contention of the appellant has been considered including the written arguments submitted by the appellant. In internal page 9 of the order, the learned District Judge has considered the agreement between the parties and has observed that there is clear difference between the conditions signed by the parties given in the tender notice (unamended Clause 10 CC with three components for price escalation) and terms and conditions mentioned in the general conditions of the Contract (amended Clause 10 CC with five components for price escalation). Quoting internal page 17 of the award of the learned Arbitrator, it has been observed by the learned District Judge, Lucknow that the arbitrator had passed the award according to the terms and conditions of the agreement and had rightly discarded the condition mentioned in the tender form signed by the parties. After considering the law laid down by the Hon'ble Apex Court on the scope of interference under Section 34 of the Act, 1996, it has been observed in internal page 14 by the learned District Judge, Lucknow that the appellant had not objected that the award being passed contrary to the terms and conditions of the contract but only argued that it was passed against the agreed terms of the tender form. It has been further observed that the conditions mentioned in the tender form provided only three component for price escalation but on the basis of the said tender form, the parties had executed the contract in which Clause 10 CC had been incorporated which clearly provided consideration of five components for price escalation; award was not contrary to the terms of the contract; award was not in violation of in the public policy and has not been passed contrary to substantive law of India. It has been further observed that the reasons assigned in the award were not perverse and the appellant had not furnished any proof that the award had been passed against the fundamental policy of Indian Law or the interest of India or justice or morality."

Sri Seth also relied upon the judgment of the Apex Court in Macdermott International Inc. v. Burn Standard Co. Ltd. & others: 2006 (11) SCC 181, Numaligarh Refinery Ltd. v. Daelin Industrial Co. Ltd. : 2007 (8) SCC 466 and Rashtriya Ispat Nigam Ltd. v. Dewan Chand Ram Saran : 2012 (5) SCC 306.

14. It transpires from the record that before the arbitrator, it was contended by the respondent-contractor that in view of clause 10 CC contained in the standard form having general conditions of contract for CPWD Work, 2002, clearly contained reference to the determination of price escalation as consisting of components of cement, steel, material and POL along with formula for its working out. Clause 10 CC as occurring in general conditions of contract forming part of agreement relied upon by the respondent-contractor is to the following effect:-

"1. Clause 10 CC sub para (iii) and (iv) shall stand amended and substituted as under:

(iii) Components of cement, steel, materials, labour, POL etc. shall be predetermined for every work & incorporated in the conditions of contract attached to the tender papers included in Schedule 'E'. The decision of the Engineer-in- Charge in working out such perchange shall be binding on the contractors.

(iv) The compensation for escalation for cement, steel, materials & POL shall be worked as per the formula.

Separate formulas for determination in respect of cement, steel, material, POL and labour have been given. The formula in respect of cement for illustration is reproduced:-

 
"a)	Adjustment for component of 'Cement'
 
Vc	=	W  x  Xc   x  CI - CI,,
 
                               100         CI,,
 

 
Vc:	Variation in cement cost i.e. increase or 	decrease 	in the amount in rupees to be paid or recovered.
 

 
W:	Cost of work done worked out as indicated in sub- 	para (ii) of Clause 10CC.
 

 
Xc:	Component of cement expressed as percent of total 	value of work.
 

 
CI:	All India Wholesale Price Index for cement for the 	period under consideration as published by the 	Economic Advisor to Govt. of India, Ministry of 	Industry and Commerce.   
 

 
CI,,:	All India Wholesale Price Index for cement as 	published by the Economic Advisor to Govt. of India, 	Ministry of Industry and Commerce as valid on the 	last stipulated date of receipt of tenders including 	extension, if any.  			
 
                               
 

15. It was then submitted that correction slip issued on 10.12.2001 would apply by virtue of clause 2(xi) of the schedules attached to the tender itself. The correction slip dated 10.12.2001 is same as clause (iv) quoted above. Schedule 'E' and Clause 10 CC have also been amended by correction slip in following words:-

"The schedule 'E' of the general conditions of contract shall be accordingly amended as under:

Schedule 'E'

Schedule of component of cement, steel, other materials, labour etc. for escalation.

 

 
Clause 10CC
 
Component of Cement 'Xc'        	%
 
Component of Steel 'Xs'            	%
 
Component of Material 'Xm'     	%
 
Component of Labour 'Y'           	%
 
Component of POL 'Z'              	%
 

 
These components will be expressed as percent of total value of work."
 
16. The proforma of schedules as per general conditions of contract also contains the aforesaid amended Schedule 'E' and Clause 10 CC attached to it. 
 
17. The arbitrator accepted the aforesaid contention of the contractor. Clause (i) of 3.1, 3.2 and 3.4 of the award of the arbitrator, which dealt with issue for allowing claim is reproduced below:-
 

"3.1.(i) - It was incorrect to say on the part of the respondents that all the entries in Schedules A to F were filled with utmost care and caution and NIT was prepared as per the directions of circular and situation prevalenet at that time. In fact, it was a case of carelessness and negligence on the part of the respondents. While preparing the NIT, they did not enclose the Schedules B to F which were modified and corrected with upto date correction slips. In this case, the Schedule E was not modified as per the correction slip issued by Directorate General of Works vide their Office Memorandum No. DB/CON/163 dated 10.12.01. But while entering into the agreement, the respondents enclosed the copy of the Standard Form containing General Conditions of Contract for CPWD Works, 2003, which was corrected with upto date correction slips. In this Standard Form the necessary modifications contained in correction slip issued by the Directorate General of Works vide their letter dated 10.12.01 were also incorporated. Therefore, the Schedule- E attached with the tender documents was having 3 components i.e. material, labour and POL; whereas the Standard Form containing General Conditions of Contract for CPWD Works, 2003 was having 5 components i.e. cement, steel, materials, labour and POL for working out the escalation under clause 10CC. Thus, it would be seen that Schedule-E enclosed with tender documents and the clause 10CC contained in the Standard Form having General Conditions of Contract for CPWD Works, 2003 were incompatible. According to the instructions contained in Office Memorandum dated 10.12.01, both the Schedule-E enclosed with tender documents and clause 10CC contained in the Standard Form having General Conditions of Contract for CPWD Works, 2003 should have been compatible. This was a serious lapse on the part of the respondents.

3.2 - In the end to sum up the whole case, I find that the respondents while preparing the tender documents committed a mistake that instead of enclosing the corrected and updated Schedule A to F enclosed old Schedule A to F which was in contravention of the existing instructions and rules issued by DG(W), CPWD, New Delhi. In old Schedules A to F, the Schedule-E was having 3 components i.e. materials, labour and POL. This was done by the respondents without any justified reason and simply by mistake. It was only due to this reason that the respondents at the time of signing the contract enclosed the Standard Form containing General Conditions of Contract for CPWD Works, 2003 which was corrected upto date and was in conformity with the existing rules and instructions issued by DG(W), CPWD, New Delhi from to time. In the Standard Form containing General Conditions of Contract for CPWD Works, 2003, the clause 10CC was having 5 components i.e. cement, steel, materials, labour and POL.

3.4- Coming to the percentages of cement and steel, I find that Standard Form containing General Conditions of Contract for CPWD Works, 2003 provides under clause 10CC, a detailed procedure to work out percentages of cement, steel and other materials in the contract. According to this procedure, the percentages of cement, steel and other materials works out to 12%, 35% and 28%. Thus, it would be seen that the materials component of 75% gets sub-divided into three components i.e. cement, steel and other materials in the ratio of 12%, 35% and 28%, respectively. I, therefore, consider and decide that the claimants were entitled to the payment of escalation under clause 10CC by considering 5 components i.e. cement, steel, materials, labour and POL with their percentage as 12%, 35%, 28%, 25% and 'Nil' percentage, respectively. In this way, the respondents would be making the payment of escalation under clause 10CC as per the existing rules and instructions and the claimants would be getting their due share which was otherwise demed by the respondents by taking the advantage of their own mistake. I, therefore, give a declaratory award that the claimants were entitled to get the payment of escalation under clause 10CC after considering 5 components i.e. cement, steel, other materials, labour and POL with their percentages as 12%, 35%, 28%, 25% and 'Nil', respectively."

18. In objection filed under section 34, the court noticed the aforesaid observation of the arbitrator contained in its award and after noticing the judgment cited before this court also, the court held as under:-

"In view of above principles of law, I have cautiously considered the facts of this case. In the present case, the petitioner-objector has not objected that the award has been passed contrary to the terms and conditions of the contract. It is only argued that the award has been passed against the agreed terms of the tender form. It is correct that the conditions mentioned in the tender form had provided only three components for consideration for escalation but on the basis of said tender form, ther parties have executed the contract in which clause 10CC has been incorporated which clearly provides that while considering the escalation cost, five components should be considered as done by the arbitrator in this case. So it is clear that the award is not contrary to the terms of the contract. It is also clear that the award is not in violation of the public policy. It is also clear that the award has not been passed in contrary to substantive law of India. The perusal of award clearly shows that the reason assigned are not perverse. The award does not contain any internal contradictions.

In view of above discussions, facts and circumstances, it is clear that the objection-petitioner has not furnishes any proof that the award has been passed against the fundamental policy of Indian Law; or the interest of India; or justice or morality; or in addition, if it is patently illegal, so the objection-petition filed under section 34 of the Arbitration and Conciliation Act, 1996 is liable to be dismissed."

19. The arbitrator in his award as well as the court while affirming it has proceeded to consider the provisions of the general conditions of contract, as well as the correction slip issued on 10.12.2001 by the department itself and have come to the conclusion that components for consideration of escalation had to consist of cement, steel, material, labour and POL and it could not be confined to three i.e. material, labour and POL, for which bids of the contractor had been accepted.

20. The question for consideration arising in the present appeal is, as to whether in view of the contract existing, consisting of three heads for price escalation (materials, labour and POL), the arbitrator and the court were justified in declining price escalation to consist of five components i.e. cement, steel, other materials, labour and POL, even though it was not pre-determined in the contract?

21. We have examined respective contentions of the parties as well as materials available on record. The Government of India had invited tenders on the format, which is on record. The tender also accompanies with it, the performa of schedules. According to the tender submitted by the contractor, the schedule for price escalation consisted of components of material, component of labour and component of POL. The contractor submitted his bid determining 75% as being the component of material and 25% as being the component of labour and 'Nil'% for POL for computation of escalation. The NIT form issued by the department is akin to invitation to offer and the rates predetermined by the contractor specifying percentage for computation of escalation as consisting of material, labour and POL amounted in law to constitute an offer. This offer of the contractor was accepted by the appellant resulting in conclusion by a binding contract between the parties. It is clear that tender form as well as actual offer of the contractor were very clear and specific and the price escalation was clearly to be computed with reference to 75% on account of component of material and 25% for component of labour and 'Nil' % as component of POL. The rights of the parties were required to be governed by the contract, thus arrived at between them.

22. The correction slip dated 10.12.2001 which finds incorporated in the general conditions of contract, are to the effect that computation of escalation would be worked out as component of cement, steel, material, labour and POL predetermined as per the bid. Once amended provisions contained in the correction slip have been included in the general conditions of the contract, it becomes a part of the agreement itself.

23. However, from the record we find that the contractor had submitted its bid predetermining 75% component towards material and 25% component towards labour in the tender form. The bid itself had not been invited or submitted predetermining the component of cement, component of steel, component of material separately. In the absence of any bid having been submitted predetermining the component of cement, steel, material, labour and POL, the question of its acceptance or creation of contract based on five components of price escalation does not arise.

24. The change in format by referring to correction slip or specifying it in the general conditions of contract cannot be of any avail as the contractor itself has not submitted any bid in the corrected format. The predetermined component of cement, steel, material, labour and POL were not contemplated in the format, nor were it actually indicated in the tender form. The bid actually submitted consisted only of component of material, labour and POL as being heads for escalation, instead of component of cement, steel, material, labour and POL. In the absence of any invitation to offer, offer or acceptance that price escalation would be payable treating its components as consisting of cement, steel, material, labour and POL, no contract/agreement actually came into being for determining escalation as claimed by the contractor and allowed by the arbitrator. The rights and contentions of the parties had to be determined with reference to the agreement which actually got entered into between the parties. The terms agreed upon and constituting the contract with regard to escalation were confined only to three components of material, labour and POL alone.

25. The change in format requiring predetermining rates in bid of five components, instead of three contemplated in NIT alone would serve no purpose. In the absence of rates having been predetermined under five heads no contract in this regard came into being. Admittedly, the contract contained three heads for escalation pursuant to the bid submitted by the contractor specifying predetermined rates of three components for price escalation which alone had been accepted and now constitute the binding contract.

26. In the absence of bid containing predetermined rates of components of cement and steel separately, in addition to component of material, labour and POL, the mere change in the format or the formula for calculation of escalation would be meaningless.

27. We find that the arbitrator in his award has virtually created a new contract by subsequently mentioning percentage of cement, steel and material as 12%, 35% and 28%, which was never predetermined in the agreement/contract. This determination in the award, based upon a claim made by the contractor virtually amounted to substituting a fresh contract for determination of escalation in place of contract actually entered into between the parties. This was wholly impermissible.

28. This court in Gulzari Lal v. Har Prasad: AIR 1925 Alld. 97 observed as under:-

"The court must construe the contract which the parties have made and is not at liberty to make a fresh contract on their behalf because it thinks that they might have intended to do certain things which they have not expressed in their written agreement."

29. In Western Power Co. Canada Ltd. v. Corporation of the District Matsqui: AIR 1934 PC 254, Privy Council observed as under:-

"No doubt words can be supplied to give effect to the obvious or apparent purpose of a contract. But this can only be if the language taken as a whole in connection with the circumstances carries with it the meaning sought to be attached to it. Unexpressed intention is of no legal effect."

30. Having not indicated in its tender form the predetermined rates of cement, steel and material as components for determination of escalation, it is not open for the arbitrator and the court to accept the contention on account of the provisions of general conditions of contract and the correction slips requiring bids as five components of price escalation, instead of three.

31. The constitution bench of the Apex Court in General Assurance Society Ltd. v. Chandmull Jain : AIR 1966 SC 1644, while dealing with provisions of contract observed as under:-

"In interpreting documents relating to a contract of insurance, the duty of the court is to interpret the words in which the contract is expressed by the parties, because it is not for the court to make a new contract, however reasonable, if the parties have not made it themselves."

32. In Oil and Natural Gas Corporation Ltd. (supra), while dealing with the provisions of section 34 of the Arbitration and Conciliation Act, 1996, the Apex Court has held as under in para 54, 55, 56:-

"54. In the light of the aforesaid decisions, in our view, there is much force in the contention raised by the learned counsel for the appellant. However, the learned senior counsel Mr. Dave submitted that even if the award passed by the arbitral tribunal is erroneous, it is settled law that when two views are possible with regard to interpretation of statutory provisions and or facts, the Court would refuse to interfere with such award.

55. It is true that if the arbitral tribunal has committed mere error of fact or law in reaching its conclusion on the disputed question submitted to it for adjudication then the Court would have no jurisdiction to interfere with the award. But, this would depend upon reference made to the arbitrator; (a) if there is a general reference for deciding the contractual dispute between the parties and if the award is based on erroneous legal proposition, the court could interfere; (b) It is also settled law that in a case of reasoned award, the Court can set aside the same if it is, on the face of it, erroneous on the proposition of law or its application; (c) If a specific question of law is submitted to the arbitrator, erroneous decision, so as to permit of its being set aside, unless the Court is satisfied that the arbitrator had proceeded illegally.

56. In the facts of the case, it cannot be disputed that if contractual term, as it is, is to be taken into consideration, the award is on the face of it, erroneous and in violation of the terms of the contract and thereby it violates Section 28(3) of the Act. Undisputedly, reference to the arbitral tribunal was not with regard to interpretation of question of law. It was only a general reference with regard to claim of respondent. Hence, if the award is erroneous on the basis of record with regard to proposition of law or its application, the court will have jurisdiction to interfere with the same."

33. In P. Radhakrishna Murthy v. National Buidings Construction Corporation Ltd. : (2013) 3 SCC 747, the Apex Court has held as under in para 15:-

"15. The High Court has rightly held that the arbitrator is not a conciliator and his duty is to decide the disputes submitted to him according to the legal rights of the parties and not according to what he may consider to be fair and reasonable. The High Court has further rightly made observation in the impugned judgment that an arbitrator cannot ignore law or misapply it, nor can he act arbitrarily, irrationally, capriciously or independent of the contract while passing the award. The courts of law have a duty and obligation to maintain purity of standards and preserve full faith and credit as well as to inspire confidence in the minds of litigants while adjudicating the claims of the parties by resorting to alternate dispute redressal method of arbitration under the provisions of the Arbitration Act."

34. In State of Rajasthan v. Nav Bharat Construction Company Ltd. : 2006 (1) SCC 86, the Apex Court has held that arbitrator cannot go beyond the terms of the contract between the parties, in the guise of doing justice and he cannot rule contrary to the terms of the contract and if he does so, he will have misconducted himself. Para 27 of the aforesaid judgment is reproduced below:-

"27. There can be no dispute to the well-established principle set out in these cases. However, these cases do not detract from the law laid down in Bharat Coking Coal Ltd. case or Continental Construction Co. Ltd. case. An arbitrator cannot go beyond the terms of the contract between the parties. In the guise of doing justice he cannot award contrary to the terms of the contract. If he does so, he will have misconducted himself. Of course if an interpretation of a term of the contract is involved then the interpretation of the arbitrator must be accepted unless it is one which could not be reasonably possible. However, where the term of the contract is clear and unambiguous the arbitrator cannot ignore it."

35. In Bharat Coking Coal Ltd. v. Annapurna Construction: 2003 (8) SCC 154, the Apex Court observed as under in para 22:-

"22. There lies a clear distinction between an error within the jurisdiction and error in excess of jurisdiction. Thus, the role of the arbitrator is to arbitrate within the terms of the contract. He has no power apart from what the parties have given him under the contract. If he has travelled beyond the contract, he would be acting without jurisdiction, whereas if he has remained inside the parameters of the contract, his award cannot be questioned on the ground that it contains an error apparent on the face of the record."

36. In view of the aforesaid proposition of law, this court is satisfied that according to the terms of the contract the price escalation was to be assessed only in terms of the tender submitted and accepted, which provided for three component to assess escalation i.e. material, labour and POL. No contract existed for calculating escalation as consisting of five components i.e. inclusive of cement and steel. The arbitrator and the court were required to confine their decision with reference to the terms of the contract only and it was not permissible for the arbitrator to have interpreted the contract in a manner such that expressed terms of the contract stood substituted by a contract which never came into being. The arbitrator and the court completely lost sight of the fact that in the absence of contract submitting bids predetermining percentage of cement and steel for calculating escalation, it was not open for a claim to succeed in this regard.

37. Even otherwise the contractor with his open eyes had submitted his tender which contains escalation permissible under three heads of material, labour and POL only. The contractor never objected to the format prescribed for submission of tender nor did it raised a claim on that count at the time of agreement. The subsequent claim raised before the department was even otherwise barred by principles of sub silentio.

38. Although, there is no dispute on the proposition that if two interpretations are possible from the terms of the contract, and the arbitrator accepts one, it is not open for the court to interfere in the matter. Reliance has been placed by counsel for the contractor on the judgment in Macdermott Internation Inc. (supra), wherein he Apex Court has relied upon the judgment in ONGC (supra) and held as under in para 59, 61 and 64:-

"59. Such patent illegality, however, must go to the root of the matter. The public policy violation, indisputably, should be so unfair and unreasonable as to shock the conscience of the court. Where the arbitrator, however, has gone contrary to or beyond the expressed law of the contract or granted relief in the matter not in dispute would come within the purview of Section 34 of the Act. However, we would consider the applicability of the aforementioned principles while noticing the merits of the matter.

61. In ONGC6 this Court observed: (SCC pp. 727-28, para 31)

"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 case5 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.

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."

64. We, therefore, would proceed on the basis that ONGC6 lays down the correct principles of law."

39. In Numaligarh Refinery Ltd. (supra), the Apex Court has held as under in para 17:-

"17. We have considered the rival submissions of the parties. So far as the legal proposition as enunciated by this Court in various decisions mentioned above, it is correct that courts shall not ordinarily substitute their interpretation for that of the arbitrator. It is also true that if the parties with their eyes wide open have consented to refer the matter to the arbitration, then normally the finding of the arbitrator should be accepted without demur. There is no quarrel with this legal proposition. But in a case where it is found that the arbitrator has acted without jurisdiction and has put an interpretation on the clause of the agreement which is wholly contrary to law then in that case there is no prohibition for the courts to set things right. In the present case, the aforesaid clauses reproduced above, clearly lay down that all taxes, duties and levies have to be borne by the contracting party. Countervailing duty which came into force with effect from 1-1-1995 by way of Ordinance (subsequently converted into an Act) is a duty enforced by the statute and hence in face of Clause 2(b) and Clause 6 of the Consolidated Agreement read with Clause 2.1(g) of the Instructions to Bidders and Clause 13(f) of the Bid Document, there is leaves (sic left) no manner of doubt that DIC has to pay the same. Therefore, this levy has to be borne by DIC and they cannot escape from this situation."

Para 24 of the said decision (Numaligarh) dealt with the peculiar situation arising therein necessitating intervention by the Apex Court. Similarly, in Rashtriya Ispat Nigam Ltd. (supra) the proposition laid down was that if the provisions of agreement are possible of two interpretations and the arbitrator takes a plausible view then no interference would be required.

40. We are in respectful agreement that the view expressed in these cases, but the ratio provided therein has no applicability to the facts of the present case, inasmuch as the arbitrator has clearly travelled beyond the terms of the agreement/contract and the view taken by him is not permissible under the terms of the contract. The arbitrator has virtually created a new contract to sustain the claim of the contractor which was wholly without jurisdiction and amounted to misconduct on his part.

41. In view of the discussions made above, we are of the view that the arbitrator and the court committed manifest illegality in allowing the claim of the contractor, permitting the escalation to be calculated with reference to the five components i.e. cement, steel, material, labour and POL with their percentages as 12%, 35%, 28%, 25% and NIL respectively. The price escalation claimed by the contractor and allowed by the arbitrator was against the contract and was liable to be rejected. Similarly, the claim for payment of interest was misconceived inasmuch as price escalation, as permitted in the contract had already been paid and the declaratory award could not create any arrears.

42. Accordingly, the present appeal succeeds and is allowed. The award passed by the arbitrator dated 16.3.2006 and its affirmence by District Judge, Lucknow, vide order dated 29.1.2010 are set aside.

43. No order, however, is passed as to cost.

Order Date :- 29.5.2014

Ashok Kr.