Indian Oil Corporation Ltd. vs Artson Engineering Ltd.
2006 Latest Caselaw 1104 Bom

JUDGMENT

D.K. Deshmukh, J.

1. By this petition the Award dated 30.6.2005 made by the learned sole Arbitrator directing the petitioner to pay to the respondent an amount of Rs. 3,12,74,444/-with interest, is challenged. The facts that are relevant and material for deciding this petition are that the respondent entered into a contract for execution of work of "Crude Distribution system" for AU V project at Gujarat Refinery site Vadodara of the petitioner-Indian Oil Corporation Ltd. The contract contained an arbitration clause. As per the arbitration clause in case of dispute on receipt of notice of arbitration from the claimant, the General Manager of the petitioner had to nominate a panel of three persons and the claimant had to select one of them as sole arbitrator. The respondent filed the petition under Section 9 of the Arbitration and Conciliation Act,1996 being Arbitration application No. 31 of 2002. In that petition, the parties arrived at the consent terms. By virtue of those consent terms one Mr. H. Parekh was appointed as arbitrator. By the consent terms time for making award was fixed. During the period that was fixed for making the award Mr.Parekh could not make the award. The parties did not agree on extension of term of the Arbitrator. Therefore, proceedings were initiated in this Court and in those proceedings in place of Mr. H. Parekh, Honble Mr. Justice A.B. Palkar (Retired) was appointed as sole Arbitrator. Before the new Arbitrator the parties appeared, filed their pleadings, produced evidence and the learned Arbitrator made the Award directing the petitioner to pay to the respondent the aforementioned sum with interest.

2. Perusal of the Award shows that before the learned Arbitrator amounts were claimed on seven accounts. The learned Arbitrator in paragraph 20 of the Award has described those claims as (a) to (g). By the final Award the learned Arbitrator has issued directions to the petitioner to pay amounts to the respondent against claim nos.(a), (b), (c), (d) and (g). The claims (e) and (f) have been rejected.

3. The principal challenge to the award is that the learned Arbitrator could not have issued a direction against the petitioner to make payment of any amount against claim (d). Perusal of paragraph 20 of the award shows that against claim (d) the respondent was claiming an amount of Rs. 26,97,759/- being the cost incurred in keeping the bank guarantee in force beyond the period require in the contract with interest at 18% per annum till the date of payment. According to the petitioner, as per the arbitration clause the arbitrator has jurisdiction to make an award in relation only to the notified claims. In short, according to the petitioner, the claim (d) was not arbitrable. According to the petitioner, under Clause 9.0.1.0 and 9.1.1.0 of the General Conditions of the contract disputes and differences between the parties arising out of the notified claims of the contractor included in the final bill were only arbitrable. Claim (d) was admittedly not a notified claim and therefore, the Arbitrator had no jurisdiction to make any award in relation to that claim. According to the petitioner, therefore, the entire award is liable to be set aside. The respondent relied on the reasons that have been given by the learned Arbitrator for holding that the learned Arbitrator has jurisdiction to make the Award in relation to claim (d). In addition it is submitted on behalf of the respondent that if the learned Arbitrator could award an amount lesser than the amount claimed in the final bill as a notified claim then by analogy the Arbitrator had power to award the amount higher than the amount claimed in the final bill. It is further submitted that by the consent terms all the disputes included in the arbitration notice dated 24.1.2002 were referred to the arbitration, and therefore, the learned Arbitrator had jurisdiction to make an Award in relation to claim (d). Then it is submitted that the petitioner has disputed the correctness of the final bill and has stated that the said bill is not a final bill. It is submitted that if the petitioner do not accept the said bill as final bill then it is not open for the petitioner to restrict the respondent to the claims notified in the final bill. It is further submitted that the claim (d) arose out of actual cost incurred by the respondent for keeping bank guarantee alive. It is submitted that there was deviation from the original contract only about giving one fresh bank guarantee instead of two bank guarantees contemplated under the contract and that right to claim cost of bank guarantee is implied in the consent terms. It is submitted that in any case claim (d) arouse out of the notified claim and therefore, it is arbitrable.

4. Now, in the light of these rival submission, if the record of the case is perused, it appears that in the contract between the parties the arbitration clause is Clause 9.0.1.0 It reads as under:

9.0.1.0 Subject to the provisions of Clause 6.7.1.0 and 6.7.2.0 hereof, any dispute or difference between the parties hereto arising out of any notified claim of the Contractor included in his Final Bill in accordance with the provisions of Clause 6.6.3.0 hereof and/or arising out of any amount claimed by the Owner (whether or not the amount claimed by the Owner or any part thereof shall have been deducted from the Final Bill of the Contractor or any amount paid by the Owner to the contractor in respect of the work) shall be referred to arbitration by a Sole Arbitrator selected by the Contractor from a panel of three persons nominated by the General Manager.

Perusal of the above quoted arbitration clause shows that disputes and differences between the parties arising out of any notified claim of the contractor included in the final bill in accordance with the provisions of Clause 6.6.3.0 are arbitrable. Perusal of the above quoted arbitration clause shows that it has referred to three clauses in the agreement. In order to understand what is a notified claim, one has to refer to Clause 6.6.1.0. It reads as under:

6.6.1.0 Should the Contractor consider that he is entitled to any extra payment or compensation in respect of the works over and above the amount due in terms of the Contract as specified in Clause 6.3.1.0 hereof or should the Contractor dispute the validity of any deductions made or thereatened by the Owner from any Running Account Bills or any payments due to him in terms of the Contract, the Contractor shall forthwith give notice in writing of his claim in this behalf to the Engineer-in-Charge and the Site Engineer within 10(ten) days from the date of the issue of orders or instructions relative to any works for which the Contractor claim such additional payment or compensation, or on the happening of other event upon which the Contractor bases such claim, and such notice shall give full particulars of the nature of such claim, grounds on which it is based, and the amount claimed. The Contractor shall not be entitled to raise any claim nor shall the Owner anywise be liable in respect of any claim by the Contractor unless notice of such claim shall have been given by the Contractor to the Engineer-in-Charge and the site Engineer in the manner and within the time aforesaid and the Contractor shall be deemed to have waived any or all claims and all his rights in respect of any claim nor notified to the Engineer-in- Charge and the Site Engineer in writing in the manner and within the time aforesaid.

Perusal of the above clause shows that if the contractor wants to claim any amount he is required to give notice in writing to the Engineer-in-charge and the Site Engineer. It further lays down that unless such a notice is given a contractor shall not be entitled to make any claim and the claims which are not made in this manner are deemed to have been waived. Then comes Clause 6.6.3.0 which is referred to in the arbitration clause quoted above. The arbitration clause requires that the claims are to be notified in accordance with the provisions of Clause 6.6.3.0.

Clause 6.6.3.0 reads as under:

6.6.3.0 Any or all claims of the Contractor notified in accordance with the provisions of Clause 6.6.1.0 hereof shall remain at the time of preparation of Final Bill by the Contractor shall be separately included in the Final Bill prepared by the Contractor in the form of a Statement of Claims attached thereto, giving particulars of the Contractor in the claim, grounds on which it is based, and the amount claimed and shall be supported by a copy(ies) of the notice(s) sent in respect thereof by the Engineer-in-Charge and Site Engineer under Clause 6.6.1.0 hereof. In so far as such claim shall in any manner particular be at variance with the claim notified by the Contractor within the provision of Clause 6.6.1.0 hereof, it shall be deemed to be a claim different from the notified claim with consequence in respect thereof indicated in Clause 6.6.1.0 hereof, and with consequences in respect of the notified claim as indicated in Clause 6.6.3.1 hereof.

Perusal of the above quoted clause shows that if any claims made by the contractor in accordance with the provisions of the above quoted Clause 6.6.1.0 remain undecided, they shall be included separately in the final bill. The contractor is also required to indicate the basis on which he is making the claim. He is also required to enclose copy of the notice given by him to Engineer-in-charge and Site Engineer in accordance with Clause 6.6.1.0. Then comes Clause 6.6.3.1. It reads as under:

6.6.3.1 Any and all notified claims not specifically reflected and included in the final Bill in accordance with the provisions of Clause 6.6.3.0 hereof shall be deemed to have been waived by the Contractor, and the Owner shall have no liability in respect thereof and the Contractor shall not be entitled to raise or include in the Final Bill any claim(s) other than a notified claim conforming in all respects in accordance with the provisions of Clause 6.6.3.0 hereof.

It lays down that the claims which are not included in the final bill as provided by the clause preceding those claims shall be deemed to have been waived. In my opinion Clause 6.6.4.0 is also relevant. It reads as under:

6.6.4.0 No claim(s) shall on any account be made by the Contractor after the Final Bill, with the intent the Final Bill prepared by the Contractor shall reflect any and all claims whatsoever of the Contractor against the Owner arising out of or in connection with the Contract or work performed by the Contractor thereunder or relation thereto, and the Contractor shall notwithstanding any enabling provision in any law or Contract and notwithstanding any claim in quantum merit that the Contractor could have in respect thereof, be deemed to have waived any and all such claims not included in the Final Bill and to have absolved and discharged the Owner from and against the same, even if in not including the same as aforesaid, the Contractor shall have acted under a mistake of law or fact.

Perusal of the above quoted clause shows that all claims on any account made by the contractor after the final bill are deemed to have been waived. It is thus clear that it is only the notified claims which are arbitrable and in the contract elaborate provisions have been made for notification of claims and there is specific provision made that any claim of the contractor which is not notified in accordance with the above quoted clauses of the contract, is deemed to have been waived. It is an admitted position that so far as claim (d) is concerned, it was not notified at all and no procedure prescribed by the contract was followed in relation to that claim. It is also an admitted position that before the learned Arbitrator a specific contention was urged on behalf of the petitioner that the jurisdiction of the learned Arbitrator is restricted only to the notified claims. That contention of the petitioner has been dealt with by the learned Arbitrator in paragraph 136 and 137 of the Award.

They read as under:

136. Mr. Bhatt Ld. Advocate for respondent drew my attention to arbitration clause contained in 9.0.1.0 and 9.1.1.0 of GCC Clause 9.0.1.0 refers to dispute or difference between the parties arising for the notified claim of contractor included in final bill. Therefore, according to Mr. Bhatt arbitration can be only in respect of claim notified in the final bill and the other claims are not arbitrable. As against this Mr. K.G. Wagle relied on the consent terms recorded in the High Court which are at pg.680 Vol.1 Book-2 and contended that parties by consent have varied the arbitration clause in as much as there was a change in the bank guarantee initially provided and one guarantee of Rs. 65 lacs was agreed to be given. Arbitration was made time bound for the first time by consent terms and therefore, there was novation in the original agreement contained in GCC arbitration clause. In fact there has been a further change in the scope of arbitrability of disputes in view of the order passed by Justice D.K. Deshmukh to which a reference has already been made. By the said order while appointing me as a substitute arbitrator, Justice D.K. Deshmukh after holding that the mandate of earlier arbitrator had come to end as per Section 15 of the Arbitration and Conciliation Act 1996, ordered that the substitute arbitrator is appointed as a sole arbitrator to take up the disputes between the parties which were already referred to the arbitrator i.e. to Mr. H. Parekh whose mandate according to the order of the Ld. Judge had come to an end. Therefore, the disputes, which were referred to the earlier arbitrator now stand referred to me by virtue of this order and even the consent terms stand superseded. The disputes are the same which the claimant raised by filing claim petition before the earlier arbitrator and which claims were disputed by the respondent by filing the written statement.

137. Another aspect of the matter is arbitration notice was issued dt. 24.01.2002 by the claimant on Exhibit R-19 and its reply is at Exhibit R-20. The dispute raised in the petition were all raised in the notice and were denied by respondent and even on that ground also the claims based on the said disputes are arbitrable.

5. Perusal of the above quoted paragraph 136 and of the Award shows that the learned Arbitrator has given three reasons for holding that he is competent to make Award in relation to claim (d). According to the learned Arbitrator the first reason is that because in the consent terms filed by the parties in the petition filed under Section 9 of the Arbitration Act the arbitration was made time bound, the original arbitration clause was novated. The second reason given is that by the order passed by this Court substituting Honble Mr. Justice A.B. Palkar as Arbitrator in place of Shri.H. Parekh, the disputes which were referred to Shri. H. Parekh stood referred to Justice A.B. Palkar and claim (d) was made by the respondent in his statement of claim therefore that claim also stood referred to Justice A.B. Palkar, therefore, he has jurisdiction to make the Award in relation to claim (d). The third reason given is that in the arbitration notice dated 24.1.2002 the respondent had included this claim and it was denied by the petitioner and therefore, the dispute becomes arbitrable.

6. Now to examine whether the first reason given by the learned Arbitrator in the Award is valid or not one has to refer to the consent terms. The consent terms to which reference is made by the learned Arbitrator in the above quoted paragraph are dated 1.4.2002. So far as the arbitration clause is concerned, it is only Clause (1) of those consent terms which is relevant. It reads as under:

1. The Petitioner and the Respondent No. 1 agree that the arbitration between them shall be time bound and shall be concluded within a period of 8 months from the month following the month of appointment of Arbitrator. The Arbitrator shall also be bound by this condition. Subject to the above the Petitioner and the Respondent No. 1 by mutual consent may extend the time to conclude the arbitration, if necessary.

Perusal of the Clause 9.1.1.0 of the contract between the parties shows that the parties had decided that the arbitration shall be governed by the provisions of Indian Arbitration Act,1940. Under the 1940s Act there was a time limit fixed for the arbitrator to make an award, and therefore, the parties after agreeing that the arbitration will be governed by the provisions of the 1940s Act had included following clause No. 9.1.2.0 in the contract. It reads as under:

9.1.2.0 The Contractor and the Owner may by mutual agreement from time to time enlarge the time within which the Arbitrator shall make and publish his award, and the time for making and publishing the award shall accordingly stand enlarged.

By this clause the parties had agreed that by mutual consent they can extend the time fixed for making the Award. Perusal of the contract thus shows that when the parties entered into the agreement they had agreed that there shall be a period fixed by the parties for making of the Award and that period can be extended by mutual agreement of the parties. Clause (1) of the consent terms therefore, was in consonance with the agreement between the parties and not a modification of the agreement between the parties. Therefore, the first reason given by the learned Arbitrator that by the consent terms there was novation of the arbitration clause is incorrect.

7. So far as the second reason is concerned, the learned Arbitrator has relied on the order made by this Court dated 7.7.2003. Perusal of the order dated 7.7.2003 shows that that order was made by this Court in Arbitration Petition No. 248 of 2003 and Arbitration application No. 68 of 2003. The parties by consent terms had agreed to fix 8 months as time within which Shri. H. Parekh was to make the Award. That period came to an end on 31.12.2002. The respondent did not agree to extend the term of Shri.H.Parekh, instead respondent filed two proceedings before this Court, one was arbitration petition No. 248 of 2003 seeking a declaration that the mandate of Shri.Parekh the Arbitrator has come to an end, and the arbitration application No. 68 of 2003 was filed under Section 11 of the Arbitration Act for appointment of substitute in place of Shri. Parekh. Perusal of the order shows that this Court came to the conclusion that because the time for making the Award fixed by the consent terms came to an end, the mandate of Shri. Parekh came to an end on 31.12.2002, and therefore, in terms of Section 15 of the Act, a substitute arbitrator was to be appointed by following the same procedure which is provided in the contract for appointment of the arbitrator. The Court held that though according to the contract the petitioner has power to nominate the Arbitrator, because they have failed to nominate a panel as required by the contract within the time allowed by the law in terms of Sub-section (5) of Section 11 of the Act it is now the Chief Justice or his nominee who can appoint the arbitrator and not the petitioner, and therefore, in exercise of power under Sub-section (5) of Section 11 of the Act, Honble Mr. Justice A.B. Palkar was appointed as arbitrator. It is clear from the order of this Court that appointment of Honble Mr. Justice A.B. Palkar as Arbitrator was made by the Court in view of the provisions of Sub-section (2) of Section 15 and Sub-section (5) of Section 11 of the Act. Those provisions read as under:

11. Appointment of arbitrators (5) Failing any agreement referred to in Sub-section (2), in an arbitration with a sole arbitrator, if the parties fail to agree on the arbitrator within thirty days from receipt of a request by one party from the other party to so agree the appointment shall be made, upon request of a party, by the Chief Justice or any person or institution designated by him.

15. Termination of mandate and substitution of arbitrator (2) Where the mandate of an arbitrator terminates, a substitute arbitrator shall be appointed according to the rules that were applicable to the appointment of the arbitrator being replaced.

Perusal of the above quoted provisions show that when the mandate of A arbitrator is terminated his substitute is to be appointed by following the same procedure which is provided for appointment of arbitrator which was followed while appointing the arbitrator whose mandate was terminated, and the Chief Justice or his nominee under Sub-section (5) of Section 11 of the Act gets power to appoint an arbitrator on failure of the parties to appoint an arbitrator. Both these provisions have no bearing on enlarging the jurisdiction of the arbitrator or restricting the jurisdiction of the arbitrator. Under these provisions only an arbitrator is substituted, the jurisdiction of the arbitrator is not enhanced or reduced by the Court or the judicial authority. The jurisdiction of the arbitrator is governed by the arbitration agreement. Perusal of Section 7 of the Act shows that a judicial authority or Court does not have power to modify the arbitration agreement between the parties. Therefore, in my opinion, the order of the Court dated 7.7.2003 can by no stretch of imagination be read to enhance the jurisdiction of the arbitrator to decide the claims which are not arbitrable according to the arbitration clause. In my opinion, therefore, this reason given by the learned Arbitrator is completely incorrect.

8. So far as the third reason given by the learned Arbitrator is concerned, as observed above the jurisdiction of the arbitrator is governed by the arbitration agreement between the parties and merely because a claim is included in the arbitration notice and denied by the other party, if the claim itself is not arbitrable, it does not become arbitrable only because of its inclusion in the notice invoking the arbitration clause. Therefore, this reason given by the learned Arbitrator is also not correct.

9. Thus, I find that the reasons that have been given by the learned Arbitrator, to hold that he has jurisdiction to make the Award in relation to the claims which are not notified, are not sustainable and are totally unacceptable and the conclusion reached by the learned Arbitrator in this regard is impossible conclusion.

10. A submission is made on behalf of the respondent that the amount awarded against claim (d) can be termed as cost awarded by the learned Arbitrator and therefore, the Arbitrator had jurisdiction to make the award. However, perusal of Sub-section (8) of Section 31 of the Act shows that the costs is well defined term and the costs incurred by a party for keeping bank guarantee alive pursuant to the agreement between the parties can by no stretch of imagination be termed as costs which the Arbitrator gets power to award. In any case, this ground does not appear to have been urged before the learned Arbitrator and has also not been referred to by the learned Arbitrator, therefore, the submission cannot be considered at the first time by this Court. It was also contended on behalf of the respondent that though claim (d) may not be itself a notified claim, but it arises out of the notified claim and therefore, the learned Arbitrator had jurisdiction to make the Award. Perusal of the terms of the contract which I have quoted above shows that there is elaborate procedure for making claims and any claim which is not made by following the procedure is deemed to have been waived, and therefore, there is no question of the Arbitrator getting jurisdiction to decide any claim arising out of the notified claim. In any case this ground was also never urged, admittedly, before the learned arbitrator and therefore, it cannot be permitted to be raised for the first time before this Court.

11. In the written submission that has been filed on behalf of the respondent, it is submitted that if this Court finds that the Award is liable to be set aside because of the directions made against claim (d), this Court should in order to eliminate the ground for setting aside the Award remit the matter back to the Arbitrator. Firstly, though the submission is made, the provision of law under which the Court can remit the award back is not pointed out by the learned Counsel appearing for respondent. The only power which the Court has in this regard is contained in Section 34(4) of the Act under that power the Court can adjourn the proceedings in order to enable the Arbitrator to take steps to eliminate the ground for setting aside the Award. But perusal of that provision shows that such a power can be exercised by the Court only at the request of the parties. Therefore, I enquired from the learned Counsel appearing for respondent whether the respondent is willing to make an application under Section 34(4) of the Act, the learned Counsel appearing for respondent after taking instructions stated that the respondent is not willing to make any application as contemplated by Section 34(4) of the Act. Hence, I cannot make any order under Section 34(4) of the Act. As I find that the learned Arbitrator has made the Award on a claim which was not arbitrable, the Award is vitiated and is liable to be set aside.

12. In the result therefore, the petition succeeds and is allowed. The Award impugned in the petition is set aside. The respondent is directed to pay cost of this petition to the petitioner as incurred by the petitioner.