Siri Ram Syal & Sons (P) Ltd. vs Ircon International Ltd. & Anr.
2010 Latest Caselaw 472 Del

*     IN THE HIGH COURT OF DELHI AT NEW DELHI

+     FAO(OS) No.459/2008

Siri Ram Syal & Sons (P) Ltd.         .....Appellant through
                                      Mr.M.G. Ramachandran &
                                      Mr. Pulkit Aggarwal, Advs.

                  versus

Ircon International Ltd. & Anr.       .....Respondent through
                                      Mr. K.R. Gupta, Ms. Kiran
                                      Dharam & Ms. Shilpa
                                      Bansal, Advs.

%                        Date of Hearing: January 13, 2010

                         Date of Decision: January 28, 2010

      CORAM:
*     HON'BLE MR. JUSTICE VIKRAMAJIT SEN
      HON'BLE MR. JUSTICE MANMOHAN SINGH
      1. Whether reporters of local papers may be
         allowed to see the Judgment?             No
      2. To be referred to the Reporter or not?   Yes
      3. Whether the Judgment should be reported
         in the Digest?                           Yes

VIKRAMAJIT SEN, J.

1. This Appeal impugns the Judgment dated 20.8.2008 of the

learned Single Judge, whereby the Arbitral Award in respect of

two of the claims of the Appellant was set aside and the

remaining Award was made the Rule of Court.

2. The brief facts of the dispute are that Respondent No.1,

IRCON International Limited, bagged two contracts for

improvement of roads from Road & Highway Department,

Dhaka („RHD‟ for short). This work was sub-contracted by

IRCON to the Appellant/Siri Ram Syal & Sons (P) Ltd.[SRS] for

part of the total work. After the work was completed,

differences with respect to Claims made under the contract

arose between IRCON and SRS which necessitated resolution

through Arbitration. A Sole Arbitrator was appointed before

whom all the Claims and Counter-Claims were laid and the

learned Arbitrator, after hearing the parties, passed a common

Award in favour of the Appellant on 27.11.1997 under

Arbitration Act, 1940 („The Act‟ for short). Respondent had filed

his Objections under Sections 30 and 33 of the Act essentially

on the ground that the Arbitrator had ignored the method of

assessing claims agreed by the parties and had evolved his own

formula to calculate the Award for escalation in costs items of

contract. As per the Respondent, this method of assessment of

escalation cost was contrary to the mandate of Agreement

between the parties and this warrants intervention of the court

under Sections 30 and 33 of the Act.

3. Vide Order dated 20.8.2008, the learned Single Judge has

set aside the compensation awarded on two Claims of the

Appellant - firstly, the compensation for Claim No.3- viz.

„Payment of Balance Escalation‟ and secondly, the compensation

awarded for Claim No.2 titled - „Work done but not paid‟ under

the Item „Construction of traffic diversions‟.

4. It is the contention of the Appellant that the learned

Single Judge erred in setting aside its Claims awarded by the

Learned Arbitrator in his Award dated 27.11.97 on the ground

that the Learned Arbitrator transgressed his limits by writing a

new contract between the parties. It has been urged by the

learned counsel for the Appellant that the Learned Arbitrator

has not gone against the agreement between the parties and in

fact to do justice and balance the equities a formula to calculate

the escalation was devised by the Arbitrator and the same is not

a transgression of terms of agreement between the parties.

5. As is admitted by both the parties, IRCON had an

escalation clause in its agreement with RHD and as per the

agreement between SRS and IRCON, IRCON was expected to

pay SRS the escalation amount obtained from RHD on back-to-

back basis, after deducting IRCON‟s overheads and profits.

Therefore, the agreement between the adversaries before us did

not have a formula stipulated in the agreement between them

for the calculation of the escalation cost but had agreed that

the same would be mutatis mutandis governed by the formula

by which RHD has paid escalation to IRCON.

6. The essential components in the formula devised in the

agreement between RHD & IRCON are :-

1. A rise or fall in the indexed cost of labour, contractual plans, material and other inputs till a fluctuation of 10% shall not be considered. Thereby meaning that an escalation of price will be considered only when the same goes above 10% of the estimated cost.

2. The price adjustment factor is to be determined by a formula of general type by keeping a fixed coefficient „x‟ representing a non adjustable position in contractual payment. There are other coefficients a,b,c etc. representing estimated proportion of each cost element.

3. Formula of general type is as under:- P= x + a. EL/ELo + b.LL/LLo + c. PL/PLo + d. FU/FUo + e.BI/BIo + f.CE/CEo + g.RS.RSo + h.ST/STo + i.BR/BRo + j.MI/MIo In this EL, LL, PL etc. are current cost indexes and these are to be divided by ELo, LLo, PLo etc, which are bare cost indexes or price corresponding to various elements at a time prior to submission of bids.

7. It is admitted that IRCON received a sum of BDT

519,427,622.54 as escalation, out of which SRS has been paid

BDT 4,10,47,989. In the reasoned Award, the learned Arbitrator,

while dealing with the claims of the two sides, has recorded that

the procedure suggested for calculation of the compensation for

the escalation payable to SRS by both sides was not acceptable.

Thus, preserving the basic essentials of the agreement between

SRS and IRCON, viz. firstly, escalation payment to SRS

should be on back-to-back basis and secondly, escalation should

be on the basis only on inputs of SRS and IRCON are not to be

considered; the learned Arbitrator proceeded on his own

method of calculation of the compensation for escalation.

8. The salient features of the method/formula adopted by the

learned Arbitrator are-

1. The burden of fixed coefficient of 10% to be shared by both parties in proportionate basis.

2. Escalation has been worked out on the basic amount actually paid to SRS by IRCON. This automatically excluded the overheads and profits of IRCON.

3. Payment to SRS to be made in BDT as well as USD in the proportion in which IRCON has received from RDH keeping in view that the payments are to be made back to back to the SRS.

4. No escalation has been permitted where the same is less than 10 percent.

9. The defects pointed out by Arbitrator in procedure

suggested by IRCON, which according to them was in closest

proximity to the formula in the main contract, are that-

1. Burden of the fixed coefficient [(0.1) in all categories of work] has been thrown entirely on SRS.

2. Input weightage of items applicable only to IRCON has also been included as an additional fixed coefficient applicable to SRS.

3. The said manner of calculation is not logical and it deprives the escalation amount.

4. Escalation induces in respect of some categories of work need to be worked out correctly.

10. There is no gainsaying that the Arbitration Tribunal

appointed by the parties is bound by the Agreement between

the parties and an Arbitrator is not permitted to travel beyond

the hedges placed by the clauses of the Agreement. Any

transgression of these boundaries would certainly land an

Arbitral Award in the nebulous territory of unsustainability.

Hon‟ble Supreme Court in the case of Rajasthan State Mines &

Minerals Ltd. -vs- Eastern Engg. Ent., (1999) 9 SCC 283 has laid

perspicuous norms to be followed by Court while dealing with

the objections against an Arbitral Award being beyond the scope

of agreement referring dispute to Arbitration:-

23. It is settled law that the arbitrator is the creature of the contract between the parties and hence if he ignores the specific terms of the contract, it would be a question of jurisdictional error which could be corrected by the court and for that limited purpose agreement is required to be considered. For deciding whether the arbitrator has exceeded his jurisdiction reference to the terms of the contract is a must. It is true that arbitration clause 74 is very widely worded, therefore, the dispute was required to be referred to the arbitrator. Hence, the

award passed by the arbitrator cannot be said to be without jurisdiction but, at the same time, it is apparent that he has exceeded his jurisdiction by ignoring the specific stipulations in the agreement which prohibit entertaining of the claims made by the contractor. In the letter dated 5-2-1985 appointing the sole arbitrator, it has been specifically mentioned that agreement dated 14-5-1981 was executed by and between the parties and that the contractor has raised the claims as mentioned in the letter dated 7-9-1983 which was denied by the Company and at the request of the contractor, the sole arbitrator was appointed to adjudicate the claims made by the contractor vide his letter dated 7-9-1983. This reference to the arbitrator also clearly provides that reference was with regard to the dispute arising between the parties on the basis of the agreement dated 14-5-1981. It nowhere indicates that the arbitrator was empowered to adjudicate any other claims beyond the agreement between the parties. No such issue was referred for adjudication. Even the arbitrator in his interim award has specifically stated that he was appointed to adjudicate the disputes between the parties arising out of the agreement dated 14-5-1981. ...

44. From the resume of the aforesaid decisions, it can be stated that:

(a) It is not open to the court to speculate, where no reasons are given by the arbitrator, as to what impelled the arbitrator to arrive at his conclusion.

(b) It is not open to the court to admit to probe the mental process by which the arbitrator has reached his conclusion where it is not disclosed by the terms of the award.

(c) If the arbitrator has committed a mere error of fact or law in reaching his conclusion on the disputed question submitted for his adjudication then the court cannot interfere.

(d) If no specific question of law is referred, the decision of the arbitrator on that question is not final, however much it may be within his jurisdiction and indeed essential for him to decide the question incidentally. In a case where a specific question of law touching upon the jurisdiction of the arbitrator was referred for the decision of the arbitrator by the parties, then the finding of the arbitrator on the said question between the parties may be binding.

e) In a case of a non-speaking award, the jurisdiction of the court is limited. The award can be set aside if the arbitrator acts beyond his jurisdiction.

(f) To find out whether the arbitrator has travelled beyond his jurisdiction, it would be necessary to consider the agreement between the parties containing the arbitration clause. The arbitrator acting beyond his jurisdiction is a different ground from the error apparent on the face of the award.

(g) In order to determine whether the arbitrator has acted in excess of his jurisdiction what has to be seen is whether the claimant could raise a particular claim before the arbitrator. If there is a specific term in the contract or the law which does not

permit or give the arbitrator the power to decide the dispute raised by the claimant or there is a specific bar in the contract to the raising of the particular claim then the award passed by the arbitrator in respect thereof would be in excess of jurisdiction.

(h) The award made by the arbitrator disregarding the terms of the reference or the arbitration agreement or the terms of the contract would be a jurisdictional error which requires ultimately to be decided by the court. He cannot award an amount which is ruled out or prohibited by the terms of the agreement. Because of a specific bar stipulated by the parties in the agreement, that claim could not be raised. Even if it is raised and referred to arbitration because of a wider arbitration clause such claim amount cannot be awarded as the agreement is binding between the parties and the arbitrator has to adjudicate as per the agreement. This aspect is absolutely made clear in Continental Construction Co. Ltd. (1988) 3 SCC 82 : (1988) 3 SCR 103, by relying upon the following passage from Alopi Parshad v. Union of India AIR 1960 SC 588: (1960) 2 SCR 793 which is to the following effect: "There it was observed that a contract is not frustrated merely because the circumstances in which the contract was made, altered. The Contract Act does not enable a party to a contract to ignore the express covenants thereof, and to claim payment of consideration for performance of the contract at rates different from the stipulated rates, on some vague plea of equity. The parties to an executory

contract are often faced, in the course of carrying it out, with a turn of events which they did not at all anticipate, a wholly abnormal rise or fall in prices, a sudden depreciation of currency, an unexpected obstacle to execution, or the like. There is no general liberty reserved to the courts to absolve a party from liability to perform his part of the contract merely because on account of an uncontemplated turn of events, the performance of the contract may become onerous."

(i) The arbitrator could not act arbitrarily, irrationally, capriciously or independently of the contract. A deliberate departure or conscious disregard of the contract not only manifests the disregard of his authority or misconduct on his part but it may tantamount to mala fide action.

(j) The arbitrator is not a conciliator and cannot ignore the law or misapply it in order to do what he thinks just and reasonable; the arbitrator is a tribunal selected by the parties to decide the disputes according to law.

11. Therefore, as a prerequisite to set aside the claim for

escalation granted in the Arbitration, the learned Single Judge

had to be satisfied that :-

(a) There was a concluded agreement between the parties on the method of calculation of compensation for escalation and,

(b) That the Arbitrator while granting the said compensation has made a departure or manifestly disregarded the method that was agreed upon by the parties.

12. The learned Single Judge, while setting aside the Award,

has returned the findings that the parties had agreed upon a

specific formula for payment of escalation and that application

of any other formula by the Arbitration would defeat the

contract itself. It has been further held that the Arbitrator has

not disclosed his mind regarding the calculation of escalation,

and by applying a formula independent of those suggested by

the parties, had transgressed his limits. With respect, in our

considered opinion, the findings returned by the learned Single

Judge are erroneous. The Clause regarding escalation payment

is admittedly contained in paragraph 9 of the letter of the

Appellant dated 21.12.1988 and the same reads as under:-

"Claims for extra items and escalation payment etc., shall be passed on to us on back to back basis after taking IRCON‟s Overhead & Profit."

13. This Clause does not provide for any formula or method

for calculation of the escalation to be granted to SRS nor does it

stipulate that the escalation has to be calculated only in

accordance with the formula agreed upon between IRCON and

RHD. As already observed earlier, the two stipulations which

conspicuously find mention in the said Clause is that firstly, the

payment by IRCON has to be made on back to back basis and

secondly, that the IRCON‟s expenditure and profits have to be

excluded while granting the same.

14. From the reasoning given by the learned Arbitrator in his

speaking Award, it is manifestly evident that these two

stipulations have been clearly adhered to. The shortcomings of

the formula suggested by both the parties have also been clearly

set-out and the same are plausible. The methodology adopted by

the Arbitrator and the reasons for the same are also clearly

spelt-out in the Award. The division of burden of fixed

coefficient is sound and reasonable; escalation has been

calculated on the amount that was actually paid to SRS by

IRCON as the working coefficient for each element and finding

its ratio in terms of the contribution by SRS was reasonably

considered to be cumbersome and could have led to an

erroneous result. The payment being made in BDT and USD has

been awarded, keeping the „back-to-back‟ rule in mind.

15. Thus, in our view, there is no capricious divergence from

the Agreement which could have led to a manifest illegality in

Award which would be unsustainable by Courts.

16. As regards the Second Claim that was rejected by the

learned Single Judge, we concur with the findings of the learned

Single Judge that the same was on "Excepted matter‟ and

moreso because the Agreement stipulated that SDS could only

raise claims for which IRCON has received payments from RHD

on back-to-back basis. As no claims had been raised on

payments received by IRCON for making diversions of road, the

Arbitration Tribunal erred in granting the same to the

Appellant.

17. The Appeal is partly allowed. The impugned Order in

respect of claim for escalation cost is set aside and the same is

made rule of the Court along with rest of the Award accordingly.

Parties to bear their own costs.

                                      ( VIKRAMAJIT SEN )
                                            JUDGE




                                      ( MANMOHAN SINGH )
January 28, 2010                           JUDGE