M/S. Texmaco Ltd. vs Union Of India
2009 Latest Caselaw 4624 Del

*      IN THE HIGH COURT OF DELHI AT NEW DELHI

+         I.A. No.8660 of 1997 in C.S. (OS) No.713-A of 1997

       M/S. TEXMACO LTD.             ..... Petitioner/Claimant
                    Through: Mr. Sumit Sen, Advocate.

                           versus

       UNION OF INDIA                  ..... Respondent
                     Through: Mr. V.P. Dewan, Advocate.

%                              Date of Decision : November 12, 2009

CORAM:
HON'BLE MR. JUSTICE MANMOHAN

1. Whether the Reporters of local papers may be allowed to see the judgment?
2. To be referred to the Reporter or not? Yes
3. Whether the judgment should be reported in the Digest? Yes


                            JUDGMENT

MANMOHAN, J (ORAL)

1. By way of the present application, petitioner-claimant has filed

objections under Sections 30 and 33 of the Indian Arbitration Act, 1940

(hereinafter referred to as "Act, 1940") challenging the Award dated

30th January, 1997 rendered by Mr. Justice Hari Swarup (retired), sole

Arbitrator.

2. Mr. Sumit Sen, learned counsel for the petitioner-claimant

submitted that the sole Arbitrator had misconstrued and misconstructed

the contract executed between the parties, in particular, Clauses 20.2,

39.1 56 and 57 which are reproduced herein below :-

"20.2 The Corporation shall have the right to require the contractor to make any change in the design which may be necessary in the opinion of the Engineer-in-Charge to make the plant and materials conforms to the provisions and contents of the specification. Approval by the Engineer-in- Charge or by the representative of the Corporation, of the contractor‟s or sub- contractor‟s drawings, designs, materials, or of the other parts of works involved in the contract or the tests carried out either by the sub-contractor, shall not relieve the contractor of any obligation for the correctness of the contractor‟s designs and drawings, or any other obligation under the contract. Any manufacture or work performed prior to the approval of drawings and tests will be at the contractor‟s risk and responsibility.

CLAUSE 39 POWER TO VARY OR OMIT WORK:

39.1 No alterations, amendments, omissions, additions, substitutions, or variations or the equipment or work (hereinafter referred to as „variations‟) under the contract shall be made by the contractor except as directed in writing by the Engineer-in-charge but the Engineer-in-charge shall have full power, subject to the provisions contained in the tender document etc. to instruct the contractor by notice in writing from, time to time during the execution of the contract, to make such variations as will not result in change of the scope of the contract and the contractor shall carry out such variations and be bound by the same conditions as though the said variations occurred in the contract.

CLAUSE 56 FINALITY CLAUSE It shall be accepted as an inseparable part of the contract that in matters regarding materials, workmanship, removal of improper work, interpretation of the contract drawings and contract specifications, mode of procedure and the carrying out of the work as stipulated in the clause Nos.7, 8, 10, 12, 16, 17, 20, 21, 22, 23, 27, 28, 29, 33, 34, 39, 41, 42, 45, 46 & 48 of Section IV of Part I and Clause 2.6 of part II, the decision of the

Engineer-in-charge, which shall be given in writing, shall be final and binding on the contract.

57.1 Except as otherwise provided, in clause 56 herein before, all questions, disputes, or differences in respect of which the decision has not been final and conclusive, arising between the contractor and the Corporation, in relation to or in connection with the contract shall be referred for arbitration in the matter provided as under and to the sole arbitrator appointed as follows:-....."

(emphasis supplied)

3. Mr. Sen further submitted that the decision of the Engineer-in-

charge did not fall within the category of „excepted matters‟ as the

petitioner-claimant had carried out under protest the modifications

suggested by the Engineer-in-charge in excess of the contractual

specifications. He submitted that as the petitioner-claimant had

contemporaneously raised protest against the Engineer-in-charge‟s

decision, the Arbitrator‟s finding in the impugned Award that the

Engineer-in-charge‟s decision could not be challenged because the said

decision had been implemented by the petitioner-claimant, was clearly

erroneous. In this context, Mr. Sen referred to the petitioner-claimant‟s

two letters dated 7th September, 1983 and 31st January, 1984 which, in

fact, had been noted by the learned Single Judge while referring the

dispute to arbitration. The relevant portion of the said two letters are

reproduced herein below :-

A) Petitioner-claimant‟s letter dated 7th September, 1983 :

Drawings No.116/6078/8517A, 8518A and 8519A, detail of horizontal girder It was agreed in the meeting held on 27th and 28th July, 1983, that the size and number of bolts connecting the horizontal girder to arm will be revised as per our comments sent vide our letter No. NP/CW/04/17/4002 dated 4.7.83. The same may please be carried out....... Drawing No.116/6078/8513 and 8514 - skin plate details As the shape of the hood has been changed from circular shape to water shape profile, the level of the hood joint requires to be modified, with the revision of the level of hood joint, the length of a number of items like 2, 3, 4, 8, 8x9, 9x, 10, 10x, etc., requires to be changed......"

B) Petitioner-claimant‟s letter dated 31st January, 1984:

"We would like to point out that our essentiality certificate for materials have been based on our designs as submitted earlier. Those designs were made as per our vast experience for similar work. A number of drawings of various projects completed to our designs have also been forwarded to you from time to time for your kind reference. Gates at all such projects have been functioning satisfactorily over the last few decades. Therefore, withholding of approval prior to effecting such changes in thickness of some members of increase of depth of sill hence or other such changes etc. etc. which in no way shall affect or improve performance, may not be insisted upon, on this would adversely affect our procurement of prime steel, and consequentially may lead to delays. This will also burden us with unnecessary and infructuous expenses not previously envisaged. However, for the sake of expeditious approval in most of the instances we have revised the sections as desired by you.

4. Mr. Sen further submitted that mere reference by the Arbitrator

to the documents or material on record or a cryptic observation that all

the materials had been considered is no substitute itself for proof of

positive consideration.

5. Mr. Sen also submitted that in view of the definition of the

expression „specification‟, the Engineer-in-charge‟s decision was

neither final nor could it be treated as an „excepted matter‟. In this

connection, Mr. Sen referred to Clause 1 (xii) of General Conditions of

Contract which reads as under :-

"1(xii) SPECIFICATION: shall mean collectively all the terms, stipulations and conditions of contract, technical provisions and annexures thereto and list of corrections or amendments, mutually agreed upon from time to time."

6. In the alternative, Mr. Sen submitted that even if the Engineer-in-

charge is assumed to have the power to modify the specifications, then

also his decision would not be final or binding as it would be contrary

to principles of natural justice inasmuch as one of the parties to the

contract cannot be a judge in its own cause, if a dispute is raised on that

aspect. In this connection, Mr. Sen relied upon a judgment of the

Hon‟ble Supreme Court in Bharat Sanchar Nigam Ltd. and Anr. Vs.

Motorola India Pvt. Ltd. reported in 2008 (3) Arb. LR 531 (SC)

wherein it has been held as under :-

"9. Having heard the learned counsel for the parties and after examining the judgment of the High Court and the other materials on record, we

are of the view that this appeal must be dismissed. Clause 20 is the arbitration clause and provides that any question, dispute or difference arising under this agreement or in connection therewith would be referred to arbitration. To this, an exception is also provided which lays down that the matters, the decision to which is specifically provided under this agreement, would not be referred to arbitration. From a bare reading of clause 16.2 of Section III of the tender document, it is clear that if the tenderer fails to deliver the goods and services on turnkey basis within the period prescribed, the purchaser shall be entitled to recover liquidated damages and the quantum of the liquidated damages assessed and levied by the purchaser shall be final and not challengeable by the supplier.

10. We are in full agreement with the findings of the High Court that there was a dispute as to whether the respondent had at all acted in breach of any terms and conditions of the tender document.

The question to be decided in this case is whether the liability of the respondent to pay Liquidated Damages and the entitlement of the appellant, to collect the same from the respondent is an excepted matter for the purpose of clause 20.1 of the General Conditions of contract. The High Court has pointed out correctly that the authority of the purchaser (BSNL) to quantify the Liquidated Damages payable by the supplier Motorolla arises once it is found that the supplier is liable to pay the damages claimed. The decision contemplated under clause 16.2 of the agreement is the decision regarding the quantification of the Liquidated Damages and not any decision regarding the fixing of the liability of the supplier. It is necessary as a condition precedent to find that there has been a delay on the part of the supplier in discharging his obligation for delivery under the agreement.

It is clear from the reading of clause 15.2 that the supplier is to be held liable for payment of liquidated damages to the purchaser under the said clause and not under clause 16.2. The High Court in this regard correctly observed that it was

not stated anywhere in clause 15 that the question as to whether the supplier had caused any delay in the matter of delivery will be decided either by the appellant/BSNL or by anybody who has been authorized on the terms of the agreement. Reading clause 15 and 16 together, it is apparent that clause 16.2 will come into operation only after a finding is entered in terms of clause 15 that the supplier is liable for payment of liquidated damages on account of delay on his part in the matter of making delivery. Therefore, clause 16.2 is attracted only after the supplier's liability is fixed under clause 15.2. It has been correctly pointed out by the High Court that the question of holding a person liable for Liquidated Damages and the question of quantifying the amount to be paid by way of Liquidated Damages are entirely different. Fixing of liability is primary, while the quantification, which is provided for under clause 16.2, is secondary to it.

There is no provision in the agreement, apparent on the face of it, relating to a decision made by any specified authority on the issue of levy of Liquidated Damages, as is contemplated under clause 20.1 of the agreement which is excepted from the purview of arbitration. No decision coming within the scope of excepted matters under clause 20.1 is envisaged by any portion of the agreement regarding the liability of the supplier to liquidated damages.

Quantification of liquidated damages may be an excepted matter as argued by the appellant, under clause 16.2, but for the levy of liquidated damages, there has to be a delay in the first place. In the present case, there is a clear dispute as to the fact that whether there was any delay on the part of the respondent. For this reason, it cannot be accepted that the appointment of the arbitrator by the High Court was unwarranted in this case. Even if the quantification was excepted as argued by the appellant under clause 16.2, this will only have effect when the dispute as to the delay is ascertained.

Clause16.2 cannot be treated as an excepted matter because of the fact that it does not provide for any adjudicatory process for decision on a

question, dispute or difference, which is the condition precedent to lead to the stage of quantification of damages.

The above stated position can be ascertained through the judgment of this Court in the case of State of Karnataka vs. Shree Rameshwara Rice Mills, (1987) 2 SCC 160=1987 (2) Arb. LR 144 (SC). This Court in the said case, made a clear distinction between adjudicating upon an issue relating to a breach of condition of contract and the right to assess damages arising from a breach of condition. It was held that the right conferred to assess damages arising from a breach of condition does not include a right to adjudicate upon a dispute relating to the very breach of conditions and that the power to assess damages is a subsidiary and consequential power and not the primary power."

(emphasis supplied)

7. On the other hand Mr. V.P. Dewan, learned counsel for the

respondent submitted that this Court while dealing with objections filed

under Sections 30 and 33 of the Act, 1940 could neither re-appreciate

the evidence nor look afresh at the documents. He submitted that as

specific question of law had been referred to the Arbitrator by this

Court while disposing of Sections 8 and 20 of Act, 1940 petition filed

by the petitioner-claimant and since the said questions of law had been

decided by the learned Arbitrator, this Court should not interfere with

the Arbitrator‟s Award. In this context, he relied upon a judgment of

the Supreme Court in the case of M/s. Tarapore and Company Vs.

Cochin Shipyard Ltd., Cochin and Another reported in AIR 1984 SC

1072.

8. In rejoinder, Mr. Sen submitted that the issue referred to the

learned Arbitrator was not a pure question of law but a mixed question

of fact and law and as evidence had been led by the parties, it was

incumbent on the Arbitrator to deal with the entire evidence on record

and pass a detailed judgment thereon.

9. It is well settled that an Arbitrator is the sole judge of quality as

well as quantity of evidence and a court cannot sit in appeal qua the

Arbitrator‟s view with regard to the material on record. In fact, the

Supreme Court in Arosan Enterprises Ltd. Vs. Union of India &

Another reported in (1999) 9 SCC 449 has clearly outlined the scope of

interference by this court in petitions filed under Sections 30 and 33 of

the Act, 1940. The relevant observations of the Hon‟ble Supreme

Court are reproduced herein below :-

"36. Be it noted that by reason of a long catena of cases, it is now a well-settled principle of law that reappraisal of evidence by the court is not permissible and as a matter of fact exercise of power by the court to reappraise the evidence is unknown to proceedings under Section 30 of the Arbitration Act. In the event of there being no reasons in the award, question of interference of the court would not arise at all. In the event, however, there are reasons, the interference would still be not available within the jurisdiction of the court unless of course, there exist a total perversity in the award or the judgment is based on a wrong proposition of law. In the event however two views are possible on a question of law as well, the court would not be justified in interfering with the award.

37. The common phraseology "error apparent on the face of the record" does not itself, however, mean and imply closer scrutiny of the merits of documents and materials on record. The court as a matter of fact, cannot substitute its evaluation and come to the conclusion that the arbitrator had acted contrary to the bargain between the parties.

If the view of the arbitrator is a possible view the award or the reasoning contained therein cannot be examined. In this context, reference may be made to one of the recent decisions of this Court in the case of State of Rajasthan v. Puri Construction Co. Ltd., (1994) 6 SCC 485 wherein this Court relying upon the decision of Sudarsan Trading Co. case (Sudarsan Trading Co. v. Govt. of Kerala, (1989) 2 SCC 38) observed in para 31 of the Report as below: (SCC pp. 502-03, para 31) "31. A court of competent jurisdiction has both right and duty to decide the lis presented before it for adjudication according to the best understanding of law and facts involved in the lis by the Judge presiding over the court. Such decision even if erroneous either in factual determination or application of law correctly, is a valid one and binding inter parties. It does not, therefore, stand to reason that the arbitrator‟s award will be per se invalid and inoperative for the simple reason that the arbitrator has failed to appreciate the facts and has committed error in appreciating correct legal principle in basing the award. An erroneous decision of a court of law is open to judicial review by way of appeal or revision in accordance with the provisions of law. Similarly, an award rendered by an arbitrator is open to challenge within the parameters of several provisions of the Arbitration Act. Since the arbitrator is a Judge by choice of the parties, and more often than not, a person with little or no legal background, the adjudication of disputes by an arbitration by way of an award can be challenged only within the limited scope of several provisions of the Arbitration Act and the legislature in its wisdom has limited the scope and ambit of challenge to an award in the Arbitration Act. Over the decades, judicial decisions have indicated the parameters of such challenge consistent with the provisions of the Arbitration Act. By and large the courts have disfavoured interference with arbitration award on account of error of law and fact on the score of misappreciation and misreading of the materials on record and have shown definite inclination to preserve the award as far as possible. As reference to arbitration of disputes in commercial and other transactions involving substantial amount has increased in recent times, the courts were impelled to have a fresh look on the ambit of challenge to an award by the arbitrator so that the award does not get undesirable immunity. In recent times, error

in law and fact in basing an award has not been given the wide immunity as enjoyed earlier, by expanding the import and implication of „legal misconduct‟ of an arbitrator so that award by the arbitrator does not perpetrate gross miscarriage of justice and the same is not reduced to mockery of a fair decision of the lis between the parties to arbitration. Precisely for the aforesaid reasons, the erroneous application of law constituting the very basis of the award and improper and incorrect findings of fact, which without closer and intrinsic scrutiny, are demonstrable on the face of the materials on record, have been held, very rightly, as legal misconduct rendering the award as invalid. It is necessary, however, to put a note of caution that in the anxiety to render justice to the party to arbitration, the court should not reappraise the evidences intrinsically with a close scrutiny for finding out that the conclusion drawn from some facts, by the arbitrator is, according to the understanding of the court, erroneous. Such exercise of power which can be exercised by an appellate court with power to reverse the finding of fact, is alien to the scope and ambit of challenge of an award under the Arbitration Act. Where the error of finding of facts having a bearing on the award is patent and is easily demonstrable without the necessity of carefully weighing the various possible viewpoints, the interference with award based on erroneous finding of fact is permissible. Similarly, if an award is based by applying a principle of law which is patently erroneous, and but for such erroneous application of legal principle, the award could not have been made, such award is liable to be set aside by holding that there has been a legal misconduct on the part of the arbitrator. In ultimate analysis, it is a question of delicate balancing between the permissible limit of error of law and fact and patently erroneous finding easily demonstrable from the materials on record and application of principle of law forming the basis of the award which is patently erroneous. It may be indicated here that however objectively the problem may be viewed, the subjective element inherent in the Judge deciding the problem, is bound to creep in and influence the decision. By long training in the art of dispassionate analysis, such subjective element is, however, reduced to minimum. Keeping the aforesaid principle in mind, the challenge to the validity of the impugned

award is to be considered with reference to judicial decisions on the subject."

(emphasis supplied)

10. In the present case, the matter had been referred to arbitration by

a learned Single Judge of this Court vide judgment dated 27th May,

1993 passed in Suit No.1881-A of 1989. In the said suit, the learned

Single Judge after hearing the parties had passed a detailed reference

order specifically culling out the question that was referred to the

learned Arbitrator. The relevant portion of the reference order reads as

under :-

"The question, whether, any variation or modification of the drawings, which may have led to extra expenditure by the petitioner, could be considered as extra items or not, would depend upon the interpretation of the contract and the Arbitrator, as such, will be at liberty to decide the same. It will also be open for the arbitrator to decide the plea of the excepted matters and it is not necessary for this Court to adjudicate upon the same.

............

The counsel for the respondent, Union of India, has argued that the variations and modifications are within the terms of the contract and the decision of the Engineer-in-charge in this regard is final and no reference can be made. There is, however, no doubt that in case, the variations and modifications, which have been made by the Engineer-in-charge, are outside the jurisdiction of the Engineer-in-charge, his decision cannot be termed as final. If the variations and modifications have been made, as referred to in the letter of the respondent dated 7.9.1983, which were not contemplated by the terms of the contract, as contended by the petitioner and extra expenditure had to be incurred in this regard, the disputes

relating thereto, can be referred to arbitration as the Contractor and the Engineer-in-charge have not mutually settled the same jointly. On the other hand, if the variation and modifications of the drawings are within the framework of the contract, this will be an expected matter to which Finality Clause applies, then no dispute arises, which can be referred to arbitration.

Under the circumstances of the case, it will not be safe for this Court to determine the question, which may require some technical skill for arriving at a finding that the variations and modifications are covered by the provisions of the contract and vice versa. It will be accordingly appropriate for this Court to leave it to the arbitrator, before whom the parties would lead evidence, to decide only those disputes and differences, which are not covered by the Finality Clause 56 of the Contract. The arbitrator will also be well equipped to decide, whether the present dispute between the parties is an excepted matter in view of the fact that the variations and modifications of the drawings are within the framework of the contract and such a dispute is not referable to arbitration, as the decision of Engineer-in-charge is final.

In view of the above, this petition is allowed. Let the arbitration agreement be filed and reference be made in terms of Clause 57 of the contract. The arbitrator, so appointed, shall enter upon the reference and will first decide whether the claim, which is raised by the petitioner, in respect of the variations and modifications of the drawings, fall within the ambit of the contract, for which no extra payment is provided. This question indeed is referable and, in case, the same is answered by the Arbitrator in the affirmative, there will be no dispute, which need to be decided by the Arbitrator, as the decision of the Engineer-in- charge is final and binding. There shall be no order as to costs."

(emphasis supplied)

11. From the aforesaid, it is apparent that a very specific preliminary

question of law had been referred to the learned Arbitrator, namely,

whether the claim raised by the petitioner-claimant in respect of

variations and modifications of the drawings fell within the ambit of the

contract for which no extra amount was payable.

12. Upon a perusal of the impugned Award, I find that the Arbitrator

has not only interpreted the contractual provision and given a specific

answer on the question of law referred to him but has also reached a

detailed conclusion on facts. The relevant portion of the impugned

Award is as under :-

"In the Claim Petition, the Claimant has taken the case that "many modifications and/or variations sought for by the Engineer-in-charge, were contrary to the fundamental assumptions, stated hereinabove, arbitrary commercially and technically impractical and contrary to and inconsistent with the predicated facts stated herein.....". But there is no specific case put forward by the claimant that the final drawings which formed the basis for the execution of the work were either inconsistent with or contrary to or not in accordance with the specifications given in the contract.

The following words in Clause 21.1 are relevant: "Anything shown in the drawings but not mentioned in the specifications or called for in the specifications but not shown in the drawings shall be furnished by the Contractor as if called for or shown in both." This implies that the designs which are ultimately shown in the drawings by the contractor and approved by Engineer-in-charge will be deemed to be the specifications.

On the basis of the facts established by the material on record and the terms of the contract, I find no merit in the contention of the Claimant that the designs and drawings ultimately made by the Contractor and approved by the Engineer-in- charge on the basis of which the work was

executed went beyond the scope of the contract or the specifications mentioned in the contract.

Clause 20 gives a detailed process for the making of designs and drawings on the basis of which work is to be executed. It starts with the submission by the contractor of the proposed designs and drawings. It is followed by scrutiny by the Engineer-in-charge and the making of suggestions, if deemed necessary by him. Whether the change in the designs and drawings was necessary to make the plant and material conform to the provisions and contents of the specifications, depends entirely on the opinion of the Engineer-in- charge. The acceptance of his opinion by the contractor and the making of the designs and drawings by the Contractor in accordance with the suggestions and the giving of approval by the Engineer-in-charge puts on the drawings the seal of finality........

Part A of the schedule of Items and Rates gives the description of the items, quantity, unit price and the total price. There is no case put forward by the Claimant that any item of work was done, which was not mentioned in the Schedule of Items mentioned in the contract. No work was executed by the Contractor for which drawings had not been submitted and approved by the Engineer-in-charge under Clause 20. I accordingly hold that no extra work was done by the contractor for which price was not indicated in the Schedule of Items and Rates."

(emphasis supplied)

13. Accordingly, I am of the opinion that the Arbitrator has decided a

specific question that was referred to him and has interpreted provisions

of the contract. In my opinion, construction of a contract is within the

jurisdiction of the Arbitrator and interpretation of a contract is a matter

for the Arbitrator to determine even if it amounts to determination of a

question of law (refer to Mcdermott International Inc. Vs. Burn

Standard Co. Ltd. reported in 2006 (11) SCC 181, Pure Helium India

Pvt. Ltd. Vs. Oil & Natural Gas Commission reported in 2003 (8) SCC

593 and D.D. Sharma Vs. Union of India reported in 2004 (5) SCC

325). In any event, the interpretation of contractual provisions made by

the Arbitrator cannot certainly be said to be one that is perverse or

contrary to the terms of the contract. Consequently, I am of the view

that the said decision calls for no interference in a petition filed under

Sections 30 and 33 of the Act, 1940.

14. Moreover the letters referred to by Mr. Sen do not contain any

averment that the modifications/variations in the drawings suggested by

the Engineer-in-charge were contrary to or in excess of the

specifications provided for in the contract. It was certainly not the

petitioner-claimant‟s case that instead of constructing a dam, the

Engineer-in-charge had directed them to construct a residential house

for the Project Director. In any event, in my opinion, Clause 20.2 gives

finality to the Engineer-in-charge‟s opinion to make changes in

drawings and design so as to bring them in conformity with the

specifications. By virtue of the contract, the Engineer-in-charge‟s

decision is final and non-arbitrable.

15. It is further well settled that an Arbitrator is not expected to write

a judgment like a court of law. In my opinion, even though it is

obligatory for the Arbitrator to state reasons, it is not obligatory for him

to give a detailed judgment dealing with each and every inconsequential

letter or document referred to or relied upon by either of the parties.

(refer to Ircon International Ltd. Vs. Arvind Construction Company

Ltd. & Anr. reported in 1999 (81) DLT 268, Indian Oil Corporation

Vs. Indian Carbon Ltd. reported in AIR 88 Supreme Court 1340 and

College of Vocational Studies Vs. S.S. Jaitely reported in AIR 87

Delhi 134).

16. The Bharat Sanchar's judgment (supra) relied upon by learned

counsel for the petitioner-claimant is clearly distinguishable on facts as

the said case did not deal with objections to an Arbitrator‟s Award but

was case of objections to reference to arbitration. Moreover, in Bharat

Sanchar's case (supra), though the Court upheld the excepted matter

clause but held that it operated in a limited field of quantification of

liquidated damages and not with regard to delay.

17. Accordingly, in my opinion, the impugned Arbitrator‟s Award is

not liable to be set aside. Consequently, the objections being devoid of

merits are dismissed and the Award is made rule of the Court. Registry

is directed to prepare a decree in terms thereof. With the aforesaid

observations, present application and suit stand disposed of.

MANMOHAN, J.

NOVEMBER 12, 2009 'AA'