Bharat Heavy Electricals Limited vs Globe Hi-Fabs Limited
2004 Latest Caselaw 725 Del

JUDGMENT

R.C. Jain, J.

1. The petitioner, M/s Bharat Heavy Electricals Limited (in short BHEL) has filed this application under Section 34 of the Arbitration and Conciliation Act, 1996 (hereinafter to be referred as the Act) for setting aside the award dated 5.8.1998 made and published by the sole arbitrator Shri S. Krishnan.

2. The relevant facts leading to the present application, in brief, are that the BHEL was awarded a contract on turnkey basis for setting up of 2 Units of 210 MW by Tenughat Vidyut Nigam Limited (TVNL), an Undertaking of State Government of Bihar for setting up of Tenughat Power Plant on cost plus basis. Out of the main contract, the BHEL awarded a contract for structural steel works for Unit-I and Unit-II of the power plant to the respondent, Globe Hi-Fabs Limited (in short GHF) at a lump sum price of Rs. 8,64,13,027.25 on 12.1.1989. GHF submitted final bill for the Unit-II work on 01.11.1994 for Rs. 26.28 lacs but the BHEL wanted to make deduction of Rs. 5.71 lacs on account of staircase fabrication and steel used for the same, therefore, the bill was forwarded to the Head Office of BHEL at New Delhi for payment. The Head Office further deducted a sum of Rs. 6.55 lacs towards the hire charges of power winch provided by the BHEL to GHF, which deductions were disputed by the GHF. The contract between the BHEL and GHF was subject to the General Conditions of Contract (in short GCC) which contained an arbitration agreement in clause 43(i) of the GCC. The GHF vide a communication dated 28.5.1998 addressed to the General Manager (EPX) sought appointment of arbitrator and General Manager (EPX) appointed Shri S. Krishnan as the sole arbitrator in terms of clause 43(i) (supra). The sole arbitrator entered the reference on 19.9.1996 and made and published his award on 5.8.1998. The arbitrator allowed the following claims in favor of the GHF:

i) Payment of Rs. 26.28 lacs towards the final bill;

ii) Interest on the above amount @18% per annum from 30.4.1995 till the whole amount is paid to GHF.

iii) Rs. 50,000/- towards the cost of arbitration fee and other expenses incurred by GHF.

iv) The arbitrator rejected the counter-claim made by the BHEL towards the hire charges of the power winch and for certain other items.

3. Though in the application the BHEL sought to assail the award of the sole arbitrator on a number of grounds but during the course of hearing, learned counsel for the petitioner has primarily confined his attack to the following three grounds:

a) The arbitration proceedings initiated by the GHF were premature and against the terms of the contract because the GHF failed to refer their claim/dispute to the 'Engineer' and obtain his decision in terms of clause 43(i) of GCC.

b) Rejection of the claim of BHEL for Rs.6,65,765.40 paise towards hire charges of power winch is totally arbitrary and whimsical and not based on the terms of the contract, trade and usage; and

c) The award of interest @18% per annum from 30.4.1995 to the date of realisation of the amount on the amount of Rs. 26,28,430.72 paise is illegal and against the terms and conditions of GCC.

4. I have heard Mr. J.K. Seth, learned counsel representing the petitioner BHEL and Mr. V.K. Makhija, learned senior counsel representing the respondent / GHF and have given my anxious consideration to their respective submissions. The three grounds on which the petitioner seeks to assail the award are being dealt with ad seriatem.

GROUND-I

5. In order to assail the award of the sole arbitrator, the first and the foremost contention put forward by learned counsel for the petitioner is that the award is a nullity. This contention is based on the submissions that the very invocation of the arbitration by GHF was not in accordance with the arbitration agreement contained in GCC in as much as GHF has failed to follow and exhaust the procedure and channel provided in the arbitration agreement for the resolution of the dispute / differences between the parties before invoking the arbitration agreement.

6. To appreciate this submission, it is necessary to take note of the text of the arbitration agreement contained in clause 43(i) of the GCC, which is to the following effect:

''43.0 Settlement of Disputes and Arbitration

(i)''Except where otherwise provided in the Contract all questions and disputes relating to the meaning of specifications, design, drawings and instructions hereinbefore mentioned and as to the quality of workmanship or materials used in the work or as it any other questions, claim, right, matter or thing whatsoever in any way arising out of or relating to the Contract, designs, drawings, specifications, estimates, instructions, orders or these Conditions or otherwise concerning the work or the execution or failure to execute the same whether arising during the progress of the Work or after the completion or abandonment thereof shall be referred to and decided by the ''Engineer'' whose decision shall be final to the parties hereto subject however, to the Arbitration referred hereunder. Any disputes of differences including those considered as such by only one of the parties arising out of or in connection with the Contract shall be to the extent possible settled amicably between the parties. If amicable entitlement cannot be reached then all such disputed issues shall be referred to the sole Arbitration of the person appointed by the General Manager of the Employer''.

7. On the strength of the above clause, Mr. Seth has strongly urged that before invocation of the arbitration agreement it was mandatory for GHF to have referred the disputes to the ''Engineer'' and to obtain his decision. In this connection it is pointed out that in the present case before issuing letter dated 28.5.1996, the GHF has not referred the said dispute to the ''Engineer'' and, therefore, there has been no decision of the engineer in terms of the above referred clause and consequently there has been a failure on the part of GHF in adhering to the procedure provided under the Contract for invoking the arbitration. On the other hand, Mr. Makhija has urged that the invocation of the arbitration by the respondent was not premature as from the sequence of events it can be safely inferred that there has been a decision of the ''Engineer'' and in the alternative it is pointed out that there was no ''Engineer'' designated or notified by the BHEL in terms of clause (v) of clause 1.1 of the GCC. Mr. Makhija further urged that this ground / objection is not available to the petitioner at this stage for challenging the award of the arbitrator under Section 34 of the Act more particularly when the petitioner itself acting on the letter of the respondent dated 28.5.1996 referred the disputes between the parties to arbitration and appointed a sole arbitrator and no such objection under Section 16(2) of the Act to the above effect was taken by the petitioner before the sole arbitrator.

8. To appreciate the controversy, it is necessary to refer to clause (v) of clause 1.1 and clause 7.2 of the GCC and clause 4.0 of the Special Conditions of Contract (in short SCC), which are to the following effect:

''1.1 (v) ''Engineer'' means the Engineer designated as such or the Engineer appointed from time to time by the Employer and notified in writing to the Contractor to act as Engineer for the purpose of the Contract in place of the Engineer so designated.

''7.2 ENGINEER'S REPRESENTATIVE

The Engineer may from time to time in writing delegate to the Engineer's Representative any of the powers, discretions, functions and authorities vested in the Engineer and shall furnish to the Contractor a copy of all such written delegations of powers and authorities. Any written instructions or approvals given by the Engineer's representative to the Contractor within the terms of such delegation (but not otherwise) shall bind the Contractor and the Employer as though it had been given by the Engineer

Provided always as follows:

(a) Failure of the Engineer's Representative to disapprove any work or materials shall not prejudice the power of the Engineer thereafter to disapprove such work or materials and to order the pulling down, removal or breaking up thereof.

(b) If the Contractor shall be dissatisfied by reason of any decision of the Engineer's representative, he shall be entitled to refer the matter to the Engineer who shall thereupon confirm, reverse or vary such decision.

(c) The Engineer may at any time revoke any such delegation and shall in the event of such revocation inform the Contractor in writing.''

''4.0 'Engineer' shall be the Construction manager at site, who shall be in charge of site operation for all purposes of contract.''

9. Admittedly, BHEL had not designated, appointed or notified any of its engineers to be the 'Engineer' to the respondent in terms of clause (v) of clause 1.1 of the GCC. However, if we go by the definition of 'Engineer' appearing in clause 4.0 of the SCC, the Construction Manager at site, who is in charge of site operation for all purposes of contract, can be deemed to be the engineer. Therefore, strictly speaking when there was no designated, appointed or notified engineer within the meaning of clause (v) of clause 1.1 of the GCC or clause 43(i) of the GCC, the BHEL could not insist upon the GHF to have made a reference to such an 'Engineer' for obtaining his final decision in the matter before invocation of the Arbitration. Assuming that the parties having regard to the definition of 'Engineer' appearing in clause 4.0 of the SCC were deeming the Construction Manager at the site i.e. the General Manager, Tenughat as the engineer, it is to be seen as to whether the GHF will be deemed to have made reference to him and if not so, to what effect. From the material obtaining on record and more particularly the two communications dated 15.2.1996 and 28.5.1996 issued by the GHF to the General Manager (EPX), BHEL, New Delhi clearly bring out that the respondent GHF has referred the disputes in regard to the deduction on account of the staircase fabrication and pursuant to some settlement reached between them and the General Manager, Tenughat have agreed to settle the issue regarding credit for materia consumed for the staircase and fabrication charges on the assurance that the balance amount of Unit-II final bill would be released to the GHF by 31.3.1996. However, this proposal was not accepted to by the BHEL for a period of about six months and, therefore, the GHF vide their communication dated 28.5.1996 withdrew the said concession made by them vide earlier letter dated 15.2.1996 and asked for the full payment for the staircase fabricated by them besides claiming the interest @24% per annum on the full amount of the final bill from 1.1.1996 onwards till the date of payment. This communication also refers to the sequence of events in relation to the preparation of the final bill. Para-3 of the said communication is relevant and it reads as under:

''We request you to release our final bill after adding the amount for the staircase fabricated by us along with interest from 01.01.1996, at the earliest. If, however, you are not agreeing to release payment for staircase and the interest and/or are billing any recovery from our final bill, the issue(s) may please be referred to arbitration. In such an eventuality, this letter may be considered as reference for arbitration as per Clause 43.0 of the General Conditions of Contract.''

Acting on the said communication, the General Manager (EPX), BHEL, New Delhi vide order dated 23.8.1996 appointed the sole arbitrator. The said order reads as under:

''Sub: In the matter of arbitration between Globe Hi-Fabs Ltd. and BHEL for the structural Steel Works for Tenughat Unit-II

Sir,

Whereas M/s Globe Hi-Fabs Limited has called upon BHEL vide their letter No.270-C/RKC/166 dated 28.5.1996 addressed to General Manager (EPX), BHEL that certain disputes have arisen between the parties in respect of the above noted work awarded under Contact No. PW:PE:EPX:TGT:P-338/88.

Whereas I, V. Umesh Rao, General Manager (EPX), BHEL, BHEL House, Sirifort, New Delhi-110049, is empowered by Clause 43 of the General Conditions of the Contract No.PW:PE:EPX:TGT:P-338/88 between the parties to appoint the Arbitrator. Accordingly, in exercise of my powers I thereby appoint Shri S. Krishnan, Advocate, 233-H, MIG Flats, Rajouri Garden, New Delhi-110 027 as the sole Arbitrator to decide and make the Award regarding claims/disputes raised by M/s. Globe Hi-Fabs Ltd. As mentioned in their aforesaid letter dated 28.5.96 and the counter claims of BHEL, if any, which they would be permitted to make before the Arbitrator. Reference of the aforesaid claims and counter claims of BHEL, if any, would further be subject to their admissibility under Clause 43 of the aforesaid Agreement. The Arbitrator shall proceed with the arbitration in accordance with the Clause 43 of the Agreement and shall give reasons for the Award.''

10. It is pertinent to note here that the General Manager (EPX), BHEL, New Delhi made the above order without any reservation and before doing so at no stage GHF was informed that their request for invoking the arbitration and appointment of an arbitrator was premature as the disputes/differences were sought to be referred to the arbitration have not yet been referred to and decided by the 'Engineer' as envisaged by clause 43 of the GCC. This would clearly show that the BHEL was not entertaining any doubt in regard to the premature invocation of the arbitration agreement. It is also pertinent to note that not only the Head Office of the BHEL approved the deduction of a sum of Rs.5.71 lacs towards the recovery for staircase fabrication and steel but they tended to make further recovery of Rs.6.55 lacs towards the winch hire charges and even the balance amount after making deductions on the above two grounds was not paid to the GHF. On the face of this position this Court is clearly of the opinion that here existed disputes and differences between the parties in relation to the work executed by the respondent for the petitioner and, therefore, the respondent was within its right to invoke the arbitration agreement for settlement thereof through the mechanism of arbitration.

11. Mr. V.K. Makhija, learned senior counsel for the respondent GHF also urged that the BHEL are not within their rights to raise the above objection in regard to the invalid constitution of the arbitral tribunal in the present application under Section 34 of the Act. This contention is based on the submission that BHEL has waived its right to raise such an objection because any objection in relation to the constitution of the arbitral tribunal had to be taken at the earliest before filing the statement of defense to the claim filed by the respondent. In this connection attention of this Court has been drawn to the provisions of sub-section (2) of Section 16 and Section 4 of the Act, which read as under:

''16(2)__ A plea that the arbitral tribunal does not have jurisdiction shall be raised not later than the submission of the statement of defense; however, a party shall not be precluded from raising such a plea merely because that he has appointed, or participated in the appointment of, an arbitrator.''

''4. Waiver of right to object. A party who knows that--

(a) any provision of this Part from which the parties may derogate, or

(b) any requirement under the arbitration agreement, has not been complied with and yet proceeds with the arbitration without stating his objection to such non-compliance without undue delay or, if a time limit is provided for stating that objection, with in that period of time, shall be deemed to have waived his right to so object.''

12. In the present case no objection was raised by the petitioner before the Arbitrator within the meaning of Section 16(2) of the Act and, therefore, by application of Section 4 of the Act, they will be deemed to have waived the said objection. A similar question has been considered by the Supreme Court in the case of Narayan Prasad Lohia Vs. Nikunj Kumar Lohia and Others, reported as , where the Court held as under:

''Following the decision in Konkan Rly. Corpn. Ltd. case it is no longer open to contend that, under Section 16, a party cannot challenge the composition of the Arbitral Tribunal before the Arbitral Tribunal itself. Such a challenge must be taken, under Section 16(2) not later than the submission of the statement of defense. Section 16(2) makes it clear that such a challenge can be taken even though the party may have participated in the appointment of the arbitrator and/or may have himself appointed the arbitrator. Needless to state, a party would be free, if it so chooses, not to raise such a challenge. Thus a conjoint reading of Sections 10 and 16 shows that an objection to the composition of the Arbitral Tribunal is a matter which is derogable. It inderogable because a party is free not to object within the time prescribed in Section 16(2). If a party chooses not to so object there will be a deemed waiver under Section 4.''

13. In this very judgment the Hon'ble Supreme Court held that the respondents having not raised any objection to the composition of the arbitral tribunal as provided in Section 16, they must be deemed to have waived their right to object. In the case of Wee Aar Constructive Builders Vs. Delhi Jal Board and Anr., 2004(2) Arb.LR 418 (Delhi) it was held that if the petitioner did not challenge the appointment of the arbitrator at the very initial stage and instead submitted to his jurisdiction by filing it claims and counter-claims and, therefore, in the light of the said facts the principles of waiver and acquiescence applied and the petitioner was not entitled to raise the aforesaid plea. In the opinion of this Court also, a conjoint reading of Section 16(2) and Section 4 of the Act would make it crystal clear that the petitioner is not within its rights to challenge the constitution of the arbitral tribunal in the present application under Section 34 of the Act.

GROUND II

14. The next ground relates to the rejection of the counter-claim of BHEL for Rs. 6,65,765.40 towards the hire charges of the power winch. Mr. Seth has strongly contended that the arbitrator has exceeded his jurisdiction in rejecting the claim of the petitioner under this head and has ignored the terms of the contract as well as the policy of the BHEL and rejected the claim on wholly untenable premises. There is no doubt that the power winch was provided by the petitioner to the respondent for a certain period on hire basis. The power winch was stated to be a huge crane weighing about 100 tonnes which was not capable of being removed from the site every day and then brought back to the site on the following day or the day on which it was required. It is not disputed that the power winch was not in use by the contractor for all the 24 hours and on all the days. Therefore, the controversy before the arbitrator revolved as to whether the petitioner was entitled to hire charges for the entire period i.e. from the day the winch was made available to the respondent at the site up to the date when it was removed from the site by the BHEL or the respondent was to pay charges only for the exact period / hours the winch was actually used by them. The learned arbitrator took into consideration the policy of the BHEL dated 20.5.1988 which was in force up to 31.3.1990 on the strength of which the petitioner claimed the hire charges but the Arbitrator held that the said policy was not relevant as the winch was issued to the respondent only on 03.8.1991 i.e. after the policy has ceased to be in force. That policy provided for charging the hire charges for the entire period for which the winch was used. The arbitrator has given justification for not allowing the claim of the petitioner in that behalf. In the opinion of this Court, the petitioner is not entitled to challenge the said decision of the Arbitrator on the merits of the case as this Court is not examining the award as if it is sitting in an appeal against the order of a Court or Tribunal. Even if it is assumed that another view was possible in the matter, that is no ground to set aside the decision of the Arbitrator. This Court, therefore, finds no force in the contention of the learned counsel for the petitioner and the award of the Arbitrator in respect of this item is not liable to be set aside.

GROUND III

15. Mr. Seth has strenuously urged that the Arbitrator has exceeded his jurisdiction in granting the interest because the contract between the parties prohibited the grant of interest to the contractor. In this connection heavy reliance has been placed to Condition No. (ix) of 3.3 of the GCC relating to the security deposit. The said clause reads as under:

''3.3 (ix) No interest shall be payable by the Employer on Earnest Money, Security Deposit or on any money due to the Contractor by the Employer.''

16. Mr. Makhija on the other hand has urged that this clause has no application firstly because it only prohibits the payment of interest on the security deposit and earnest money and not on any other payment which has become due and payable to the contractor. In the opinion of this Court also this is the real interpretation and scope of the said clause because reading it otherwise verges to absurdity more particularly in view of other stipulations contained in the GCC. The contract provides that the bills would be cleared within 180 days and after the expiry of 180 days, the amount would be deemed to have become payable by the employer to the contractor. The contract does not debar the payment of the interest on the money which has been illegally with held by the employer after it became due. In the present case the bill was submitted on 01.11.1994 and giving a margin of 180 days to the employer, it became due and payable on 30.4.1995 and the learned Arbitrator was, therefore, justified in granting the interest from the said date. He has dealt with the matter in great detail in accordance with Section 31(7)(a) of the Act in awarding the interest @18% per annum from 30.4.1995 and also from the date of the award till the date of payment. Mr. Seth has urged that in their letter dated 28.5.1996 issued by GHF addressed to the General Manager (EPX), the respondent itself had allowed some grace period to the petitioner to settle the issue amicably and has asked interest from 01.01.1996. Mr. Makhija fairly conceded at the bar that the respondent will have no objection if the interest is granted from 01.01.1996 instead of 30.4.1995. In the opinion of this Court the only modification which can be made in the award is that the petitioner can be allowed to pay the interest w.e.f. 01.01.1996 @18% per annum instead of 30.4.1995.

17. The net result of the above discussion is that the petition is liable to be dismissed as devoid of any merits and is accordingly dismissed. However, the award of the arbitrator shall stand modified only to the extent that interest on the awarded amount of Rs. 26.20 lacs would be payable by the petitioner @18% per annum w.e.f. 01.01.1996 till its realization. With these observations the petition stands disposed of.