Delhi High Court
Indraprastha Power Generation ... vs M/S Harvinder Singh & Co. & Anr. on 23 May, 2011
Author: Vipin Sanghi
* IN THE HIGH COURT OF DELHI AT NEW DELHI
Judgment reserved on: 24.02.2011
% Judgment delivered on: 23.05.2011
+ O.M.P. 706/2009 & I.A. Nos. 15344/09 & 44/2010
INDRAPRASTHA POWER GENERATION CO. LTD ..... Petitioner
Through: Mr. A.R. Dateer, Advocate.
versus
M/S HARVINDER SINGH & CO. & ANR. ..... Respondent
Through: Mr. Sandeep Sharma, Advocate.
CORAM:
HON'BLE MR. JUSTICE VIPIN SANGHI
1. Whether the Reporters of local papers may
be allowed to see the judgment? : NO
2. To be referred to the Reporters or not? : YES
3. Whether the judgment should be reported
in the Digest? : YES
JUDGMENT
VIPIN SANGHI, J.
1. These are the objections under Section 34 of the Arbitration and
Conciliation Act, 1996 (the Act) preferred to assail the award dated
10.8.2009 passed by the learned Sole Arbitrator Shri S.M. Chopra,
Former Additional District and Sessions Judge in relation to the claims
made by the respondent contractor-claimant M/s Harvinder Singh &
Co. against the petitioner-Indraprastha Power Generation Co. Ltd.
2. The petitioner issued an NIT for removal of 3,00,000 cum of ash
deposit. The respondent submitted its bid. The petitioner vide the
letter dated 20.01.2003 (Exhibit C-1) conveyed the intention of the
petitioner to offer a quantity of 1,80,000 cubic metres of fly ash to the
respondent at the negotiated rate of Rs.55.50 cubic metre to be
completed in seven months, subject to the condition that the
respondent extends the validity of its offer for the balance quantity,
i.e., 1,20,000 cubic metres for seven months from the date of start of
work of initial offer (i.e. pertaining to 1,80,000 cum). The respondent
was required to submit its acceptance, if the terms were acceptable to
it, before a formal letter of intent was issued.
3. Vide letter dated 21.01.2003 (Exhibit C-2), the respondent gave
its acceptance of the conditions imposed by the petitioner. A letter of
intent dated 21.01.2003 was consequently issued by the petitioner,
awarding the contract for a quantity of 1,80,000 cubic metres of ash
disposal work. The date of commencement of the work was to be
reckoned from the 15th day of issue of the letter of intent and the
entire work was to be completed within a period of seven months.
Accordingly, the date of the commencement was reckoned as
04.02.2003 and the date of completion was stipulated as 03.09.2003.
4. The parties entered into a formal contract on 28.01.2003 in
pursuance of the aforesaid letter of intent.
5. Even though the stipulated time for completion of the work under
the contract was seven months, the same was not completed within
that period. The work was completed by 22.10.2003 for which
necessary extension was granted by the petitioner without imposing
any penalty.
6. The petitioner issued a letter of intent dated 28.11.2003 in
respect of 1,20,000 cubic metres of ash in favour of the respondent.
The date of commencement was to be reckoned from the third day of
issue of letter of intent and the entire work was to be completed within
a period of four months. Consequent, the date of commencement was
fixed 30.11.2003 and the date of completion was stipulated as
29.03.2004.
7. This letter of intent, inter alia, provided that the respondent shall
make, at its own costs, arrangements for execution of the contract.
This letter of intent also contained special conditions and it specifically
provided that "all the terms and conditions of tender documents
including special conditions are applicable in addition to the important
terms and conditions specified in this letter of intent". The special
conditions, inter alia, provided "these special conditions shall be
applicable to those work in addition to those already specified in
General Terms and Conditions of the tender. However, whenever there
is a conflict between the two, the special conditions shall prevail".
Clause 3 of the special conditions stipulated "the accepted rates of the
successful bidder/tenderor shall be applicable and remain in force for a
period of one year from the date of commencement of the work which
shall be reckoned from the seventh day after the date of issue of letter
of intents/order to commence the work, whichever is earlier".
8. The formal contract was entered into between the parties on
02.12.2003. This contract also, inter alia, made a reference to the
special conditions of contract. The actual date of completion of the
work under the second work order dated 28.11.2003 was 01.05.2004
for which necessary extensions were granted by the petitioner.
9. The respondent demanded escalation under clause 10CC of the
General Conditions of Contract vide a letter dated 14.01.2004 (Exhibit
C-10). The said clam was reiterated on 28.03.2004 vide Exhibit C-14
and letter dated 25.05.2005 (Exhibits C-15 & C-16). As the petitioner
did not agreed to make payment of the amount claimed by the
respondent, the respondent invoked the arbitration agreement and
consequently this court appointed the learned Arbitrator vide order
dated 09.04.2008 passed in Arbitration Petition No.97/2007.
10. The respondent raised its claims towards escalation in price of
diesel under clause 10CC of the general conditions of the contract, and
interest thereon. The claims were opposed by the petitioner on the
ground that each of the two work orders constitute separate contracts
for which the period of completion was separately stipulated and the
two contracts could not be clubbed together for the purposes of
applicability of clause 10CC of the general conditions of contract. It
was further contended by the petitioner that the clause 10CC of the
General Conditions of Contract stood superseded by clause 3 of the
Special Conditions of the Contract, whereby the accepted rates were to
remain in force for a period of one year.
11. The arbitrator considered whether the two work orders constitute
a single contract or two separate contracts. The said aspect is
discussed in Para 13 of the award. The Ld. Arbitrator has returned the
finding that both the work orders are part of the same transaction and
constituted one contract for the purposes of computing its duration. On
this basis, the learned arbitrator determined the applicability of the
general conditions over the special conditions of the contract, and
upheld the entitlement of the respondent to claim escalation on
account of the increase in the price of diesel. This finding is sought to
be challenged in this petition.
12. The arbitrator then considered the aspect of escalation on
account of increase in diesel prices as per clause 10CC. The Ld.
Arbitrator has recorded the finding that execution of the work was
extended beyond one year and extension was duly granted without
any penalty. He noted that claimant had agreed to freeze the agreed
rate for 7 months, hence they cannot ask for an escalation for the first
work order, more so, when, for the major portion of the extended
tenure of the work order the rate of diesel was very close to what was
envisaged at the time of submission of tender as well as at the time of
negotiations. In case of the first work order, the claimant is not
considered entitled to any escalation.
13. However, the arbitrator allowed the escalation charges for the
second work order and interest thereon. The reasoning adopted by the
learned arbitrator for allowing the said claim reads as follows:
"16. For the work of 1,20,000 cum of the second work order,
since the same was part of the same contract, the claimant is
legitimately entitled in law, within the four corners of the
agreement between the parties including the general and
special conditions of contract, to be reasonably compensated for
the increase in the administered price of diesel in Delhi. In the
absence of any cogent material as to the quality of diesel
actually consumed by the claimant in carrying out the work of
the second work order, taking notice of the material available in
the public domain, namely, from the website of Indian Oil
Corporation referred to earlier, it is established that there has in
fact been, on an average, 13.1% increase in the administered
price of diesel in Delhi between December, 2002 i.e. the time
period of negotiation of the accepted rates and the freezing of
such negotiated/accepted price and the date of completion of
the work of the second work order i.e. 1.5.2004. Thus, qua the
work of the second work order, I am of the considered view that
the claimant is entitled to a compensation of Rs.4,45,595/- which
appears to be fair, just and proper and the same has been
assessed on the basis of the probable quantity of diesel that
must have been used in the execution of the work of the second
work order. In taking the aforesaid view, I have also taken note
of the variation in the rate allowed by the respondent for the
first and the second work order in the case of IP Station,
between the same parties, where the distance between the
place of excavation and loading of the fly ash to the place of its
dumping has substantially affected the rate given and accepted
between the parties (Rs.55.50 for the larger distance and
Rs.38.80 for the nearer dumping site) suggesting the
consumption of diesel did affect the cost, both for the
respondent as well as for the claimant, reflected in the rate for
the second work order. The amount being awarded to the
claimant comes to less than 7% of the total value of
Rs.66,60,000/- of the second work order and the same is
considered to be just, fair and quite reasonable. Thus, the claim
No.1 is partly allowed only to the extent of Rs.4,55,595/- only".
14. The submission of the learned counsel for the petitioner is that
the arbitrator failed to appreciate that the parties entered into two
separate agreements and two separate LOIs were issued for different
quantities of ash which was to be lifted, at different points of time,
which prescribed different time schedules for completion, i.e. seven
months and four months respectively. These two periods cannot be
clubbed together to apply clause 10CC in present case.
15. Petitioner further submits that respondent cannot take benefit of
its own inefficiency. It is the admitted fact that respondent was not
able to complete the work within stipulated time, and extension was
granted on his request. He cannot take the benefit by clubbing the two
contracts and the period of extension of these contracts to circumvent
special condition under clause 3 which read as follows:
"3. The accepted rates of the successful
bidder/tenderer shall be applicable and remain in force
for a period of one year from the date of commencement
of the work which shall be reckoned from 7th day after
the date of issue of letter of intent/order to commence
the work whichever is earlier. At the time of finalization of
contract for this work, the work shall be awarded on lowest
acceptable bidder and option would lie with the Deptt. to watch
his performance for a period of one month and if during this
period, the contractor fails to maintain the progress of work as
per targets stipulated in the contract, the award of work on
them shall be rescinded by giving a notice period of 7 days. On
the expiry of this notice period, the work shall be automatically
stand rescinded unless the department is satisfied that delay is
not attributable to contractor. In event of rescinding the
contract, the E/Money and Security deposit of the defaulting
contractor shall stand forfeited". (emphasis supplied)
16. Petitioner submits that arbitrator grossly and patently erred in
holding that it is not necessary that the percentage of various
components, such as materials, labour, POL etc should be
predetermined as to attract the provisions of clause 10CC. When the
contracts were for periods of less than one year, and predetermined
fixed rates were agreed, such observation does not hold good. He
submits that the percentage of various components such as materials,
POL etc. had not been fixed because it was clearly understood that
clause 10CC has no application. It is urged that the award suffers from
patent illegality and is opposed to public policy of Indian law, and the
illegality goes to the root of the matter. It is also submitted that the
award is so unfair and unreasonable that it would shock the conscience
of the Court.
17. The respondent opposes the petition. Learned counsel for the
respondent submits that special condition No.3 is not in conflict with,
or a bar to allowance of claim under clause 10CC. Clause 10CC
provides that if period of completion is only 6 months, then escalation
would not be payable. However, in this case the contract period is
over one year if the two work orders are considered as part of the
same contract, as held by the learned arbitrator.
18. Reliance is placed on General Manager, Northern Railways
v. Sarvesh Chopra, 2002 (1) Arb. LR 506 (SC) to contend that "under
the Indian law, in spite of there being a contract between the parties
whereunder the contractor has undertaken not to make any claim for
delay in performance of the contract occasioned by an act of the
employer, still a claim would be entertainable in one of the following
situations: (i) if the contractor repudiates the contract exercising his
right to do so under Section 55 of the Contract Act, (ii) the employer
gives an extension of time either by entering into supplemental
agreement or by making it clear that escalation of rates or
compensation for delay would be permissible, (iii) if the contractor
makes it clear that escalation of rates or compensation for delay shall
have to be made by the employer and the employer accepts
performance by the contractor in spite of delay and such notice by the
contractor putting the employer on terms."
19. It is argued that the aforesaid observations were followed in
NTPC Ltd. v. Deconar Services Pvt. Ltd, 2010 (116) DRJ 648 (DB).
Reliance is also placed on Asian Tech Limited v. Union of India,
(2009) 10 SCC 354 to contend that the bar contained in special
condition No.3 binds the petitioner, but it does not bind the arbitral
tribunal, and the tribunal has the jurisdiction to award the claim
founded on clause 10CC.
20. Mr. Sharma, counsel for the respondent, submits that section 34
of the Act has limited scope. Disputes adjudicated by the arbitrator
were within the terms of reference, and it cannot be said that the
arbitrator has exceeded his jurisdiction. He further submits that
arbitrator is the sole judge of quality and quantity of the evidence.
21. Mr. Sharma has placed reliance on Sudarshan Trading Co. v.
Government of Kerala, AIR 1989 SC 890 to submit that the
jurisdiction of the Court while examining the award is to enquire
whether the award falls within the jurisdiction of the arbitrator, or
outside his jurisdiction. There is a distinction between an error within
jurisdiction and an error of jurisdiction, i.e. an error beyond jurisdiction.
The Court cannot interfere with an award made within jurisdiction by
the arbitrator. The Supreme Court held:
"31. ... ... ... But, in the instant case the court had examined
the different claims not to find out whether these claims were
within the disputes referable to the arbitrator, but to find out
whether in arriving at the decision, the arbitrator had acted
correctly or incorrectly. This, in our opinion, the court had no
jurisdiction to do, namely, substitution of its own evaluation of
the conclusion of law or fact to come to the conclusion that the
arbitrator had acted contrary to the bargain between the
parties. Whether a particular amount; was liable to be paid or
damages liable to be sustained was a decision within the
competency of the arbitrator in this case. By purporting to
construe the contract the court could not take upon itself the
burden of saying that this was contrary to the contract and, as
such, beyond jurisdiction. It has to be determined that there is a
distinction between disputes as to the jurisdiction of the
arbitrator and the disputes as to in what way that jurisdiction
should be exercised... ... ....".
22. Further reliance is placed on G. Ramachandra Reddy & Co. v.
Union of India, AIR 2009 SC 2629, to submit that "interpretation of a
contract may fall within the realm of the Arbitrator. The Court while
dealing with an award would not reappreciate the evidence. An award
containing reasons also may not be interfered with unless they are
found to be perverse or based on a wrong Proposition of law. If two
views are possible, it is trite, the Court will refrain itself from
interfering".
23. Having heard learned counsel for the parties, perused the
impugned award and the documents placed on record, I am of the view
that the impugned award is patently erroneous and illegal and the
same is wholly unsustainable. The finding of the learned Arbitrator
that there was only one contract is, ex facie, illegal and contrary to the
record. The learned Arbitrator has fallen in patent error in concluding
that the first work order/letter of intent dated 21.01.2003 pertaining to
the lifting of 1,80,000 cum. of ash, and the second work order/letter of
intent dated 28.11.2003 pertaining to lifting of 1,20,000 cum. of ash
constitute one contract. This finding of the learned arbitrator
demonstrates complete lack of application of mind by the Arbitrator to
the facts of the case and understanding of basic and fundamental
principles of Contract law.
24. Ex.C-1 dated 20.01.2003, i.e. the letter of the petitioner recorded
that the petitioner intended to offer to the respondent 1,80,000 cum.
of fly ash disposal work, subject to the condition that the respondent
extends "the validity of your offer for the balance quantity for the total
period of work for which the department intends to offer you the initial
quantity of 1,80,000 cum. of fly ash i.e upto seven months from the
date of start of work of initial offer." Therefore, what was initially on
offer was only 1,80,000 cum. of fly ash. For the remaining quantity of
1,20,000/- cum., the respondent was required to keep its offer open for
a period of "seven months from the date of start of work of initial
offer". The aforesaid facts show that the petitioner made a conditional
offer to enter into a contract, initially only for 1,80,000 cum of fly ash.
In relation to 1,20,000 cum. of fly ash, there was no offer made by the
petitioner. Therefore, it was not obligatory on the petitioner to award
the contract for the balance quantity of 1,20,000 cum. of ash to the
respondent. Vide Ex.C-2, the respondent extended " the validity of our
offer upto seven months from the date of start of initial offer of
removal of 1,80,000 cum. of fly ash from Kanchanpuri, RPH ashponds".
Therefore, the respondent only extended the validity of its "offer". It
was clearly understood between the parties that there was no
concluded contract even on the date of issuance of Ex.C-2 i.e.
21.02.2003 in relation to the balance quantity i.e. 1,20,000 cum. of fly
ash. The letter of intent/work order, Ex.C-3 dated 21.01.2003 pertained
only of 1,80,000 cum. fly ash and not to the balance quantity of
1,20,000 cum. of fly ash.
25. The stipulated date of start of work under the first letter of
intent/work order dated 21.01.2003 was 04.02.2003 and the stipulated
date of completion was 03.09.2003 i.e after a lapse of seven months.
Admittedly the petitioner did not issue any letter of intent/work order
in respect of any part of the balance quantity of 1,20,000 cum. on or
before 03.09.2003. Therefore, the offer made by the respondent to
keep its offer initially open upto 03.09.2003 (i.e. for a period of seven
months from the date of start of the initially awarded work) lapsed on
03.09.2003, and the respondent was no longer bound to accept any
further letter of intent/work order from the petitioner at the same rate
as had been negotiated and agreed between the parties in relation to
the first work order. It is for this reason that on 22.10.2003 (Ex.C-8),
the respondent wrote to the petitioner, inter alia, stating as follows"-
"The scope of work awarded to us has been successfully
executed and we submit in case the balance work is awarded on
us by 15.11.2003, we will accept the offer at our negotiated rate
and terms and conditions of our original offer."
26. From the aforesaid, it is clear that the respondent, on its own
extended the validity of its earlier offer upto 15.11.2003. The petitioner
issued its acceptance of the respondents extended offer vide
phonogram dated 14.11.2003 and thereafter on 28.11.2003, the
petitioner issued the second letter of intent/work order dated
28.11.2003 in relation to the quantity of 1,20,000 cum of ash at the
same negotiated rate of Rs.55.50 per cum. Reference may be made to
paras 19 and 20 of the respondents statement of claim. The same
read as follows:
"19. The claimant by the letter dated 22.10.2003
informed the respondent that the work awarded by the
letter of intent dated 21.01.2003 has been completed. The
claimant also reminded the respondent of extending the
validity of their offer for 7 months and so requested the
respondent to award the balance quantity of the same.
The claimant in this letter also made it clear that if
the balance work is awarded by 15.11.2003 the
claimant would accept the same at their negotiated
rates and terms and conditions of the original offer.
20. The claimant states that after the receipt of the
aforesaid letter dated 22.10.2003, a phonogram dated
14.11.2003 regarding award of the balance quantity of
1,20,000 cum to the claimant. This was followed by the
letter of intent dated 28.11.2003. By this letter of intent
the order for executing the balance quantity of 1,20,000
cum of ash @ Rs.55.50 per cum for the value of
Rs.66,60,000/- awarded to the claimant."
27. The respondent was not bound to extend its offer to remove
1,20,000 cum of ash at the earlier negotiated rate of Rs.55.50 per cum.
The respondent voluntarily made the said offer. Pertinently, its earlier
offer had already lapsed on 03.09.2003. The respondent made the
said offer without any reservations or conditions with regard to the
rate, and the only condition was that it was valid till 15.11.2003.
Pertinently, the respondent did not claim any enhancement of rates on
account of rise in the cost of diesel, POL etc. before making the said
offer to the petitioner on 22.10.2003.
28. Merely because both the work orders were issued in pursuance
of the same tender enquiry, it does not follow that the two work orders
are a part of the same contract. It is open to the parties to incorporate
the terms of an earlier existing contract, in a latter contract, and such
incorporation would also not make the second contract a part of the
first contract. The finding of the Arbitrator that for purposes of
quantum of work, the entire quantity of 3,00,000 cum. - comprising of
1,80,000 cum. of the work order and 1,20,000 cum. of the subsequent
work order has to be treated as one contract is wholly perverse and a
view that cannot be accepted by any stretch of reasoning.
29. There is absolutely no reason given by the learned Arbitrator as
to on what basis he has concluded that "it is not necessary that the
various components such as material, labour, POL etc (as in building
contracts) should be pre determined so as to attract the provisons of
clause 10 CC of the general conditions of contract because the same
would depend upon the nature of the work under any given contract
and pre determination of the various components cannot be held to be
a sine qua non for the entitlement or otherwise to the escalation
benefit, if the circumstances of the case may otherwise justify."
30. The relevant portion of Clause 10CC of the Contract reads as
follows:-
"If the prices of materials (not being materials supplied or
services reduced at fixed prices by the department in
accordance with clause 10 and 33 thereof) and/or wages of
labour required for execution of the work increase, the
contractor shall be compensated for such increase as per
provisions detailed below and the amount of the contact shall
accordingly be varied subject to the condition that such
compensation for escalation in prices shall be available only for
work done during the stipulated period of the contract including
such period for which the contract is validly extended under the
provisions of clause 5 of the contract without any action under
clause 2 and also subject to the condition that no such
compensation shall be payable for a work which the stipulated
period of completion is six months or less. Such compensation
for escalation in the prices of materials and labour when due,
shall be worked out based on the following provisions.
1. The base date or working out such escalation shall be the
last date on which tenders were stipulated to be received.
2. The cost of work on which escalation will be payable shall
be reckoned as 85% of the cost of work as per the bills running
or final and from this amount the value of materials supplied
under clause 10 of this contract or services rendered at fixed
charges as per clause 33 of this contract, and proposed to be
recovered in the particular bill shall be deducted before the
amount of compensation for escalation is worked out. In the
case of materials brought to site for which the secured advance
is included in the bill the full value of such materials as assessed
by the Engineer-in-charge (and not the reduced amount for
which secured advance has been paid) shall be included in the
cost of work done or incorporated in the work and the secured
advance is deducted from the bill the full assessed value of the
materials original considered for operation of this clause should
be deducted from the cost of the work shown in the bill, running
or final. Further the cost of the work shall not include any work
for which payment is made under clause 12 or 12(a) at
prevailing market rates.
3. The components of materials, labour, P.O.L. etc shall be
pre-determined for every work and incorporated in the
conditions of contract attached to the tender papers and the
decision of the Engineer-in-charge in working out such
percentages shall be binding on the contractor.
4. The compensation for escalation for materials and P.O.L
shall be worked out as per the formula given below:-
i.
VM - Variation in material cost i.e increase or
decrease in the amount in Rupees to be paid
or recovered.
W - Cost of work done worked out as indicated in
sub-para 2 above.
X - Component of materials expressed as percent
of the total value of work.
MI & MI° All India whole sale index for all commodities
for the period under reckoning as published by
the Economic Advisor to Govt. of India,
Ministry of Industry and that valid at the time
of receipt of tenders.
ii.
VF - Variation in cost of fuel, oil and lubricant
increase or decrease in rupees to be paid or
recovered.
W - Value of work done, worked out indicated in
sub para 2 above.
Z - Component of P.O.L expressed as percent of
total value of work as indicated under special
conditions of contract.
FI & FI°- Average index of whole sale price for group
(fuel power light and lubricants) as published
weekly by the Economic Advisor to Govt. Of
India, Ministry of Industry for the period under
reckoning and that valid at the time of receipt
of tenders respectively."
31. Clause 10 CC itself provides that "the components of materials,
labour, POL etc shall be pre determined for every work and
incorporated in the conditions of contract attached to the tender
papers and the decision of the Engineer-Incharge in working out such
percentages shall be binding on the contractor". Moreover, the formula
prescribed in sub-clause (4) extracted above shows that to calculate
the escalation under Clause 10 CC, the variation in cost of fuel, oil and
lubricant (increase or decrease) can be computed only when the
component of POL is "expressed as percentage of total value of work".
This percentage was not indicated in the conditions of contract,
precisely, for the reason that clause 10CC was specifically excluded
from its application in relation to the first work order, and the same
was not applicable, in any event, in relation to the second work order
as clause 10CC itself provides "that no such compensation shall be
payable for a work for which the stipulated period of completion is six
months or less." Pertinently in relation to the second work order, the
stipulated period of completion was only four months.
32. The learned Arbitrator has completely ignored Clause 3 of the
Special Conditions of Contract which binds the parties. Clause 3 of the
Special Conditions clearly stipulated that " the accepted rates of the
successful bidder/tenderer shall be applicable and remain in force for a
period of one year from the date of commencement of the work which
shall be reckoned from 7th day after the date of issue of letter of
intent/order to commence the work whichever is earlier....." The
learned Arbitrator has gone against the grain of the contract between
the parties by adopting a completely perverse process of reasoning, to
find a justification to award escalation to the respondent under Clause
10CC of the General conditions of Contract, which had no application in
the facts of this case. I find it equally shocking that the learned
Arbitrator has been swayed by the language found in a certificate
dated 07.07.2004 issued by the petitioner to the claimant certifying
the work done under the aforesaid two contracts. Merely because the
same certificate certifies the work done under the two contracts, the
same has been construed to mean that, even according to the
petitioner, the work under the two contracts form a part of the same
contract. In my view, the approach of the learned Arbitrator in relying
upon the said certificate dated 07.07.2004 for construing that the two
works constituted a single contract is completely misdirected.
33. I am not at all impressed by the submission of learned counsel
for the respondent that the impugned award cannot be interfered with
in these proceedings. In my view the impugned award is patently
illegal and perverse. None of the cases cited by the respondent holds
that the Court is powerless to interfere with, and set aside a patently
erroneous and perverse award. The award in question goes contrary
to the plain language of the contractual terms. The learned Arbitrator
has committed misconduct in disregarding the contract between the
parties while making the impugned award. It is settled law that where
there are errors apparent on the fact of the award, it can be set aside.
If, in the award, there is any erroneous proposition of law which is
apparent on the face of the award, namely, in the award itself, or any
document incorporated in the award it can be set aside by the Court.
In the present case, the learned Arbitrator has propounded a
proposition of law which goes contrary to the established law. If the
impugned award is accepted it would mean that a party is not bound
by its offer, and can seek to resile from it, as has been done by the
respondent.
34. In Ramachandra Reddy (supra), the Supreme Court quoted
the following extract from State of Rajasthan V. Pure Construction
Company Limited & Ors, (1994) 6 SCC 485:-
"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 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 was furthermore stated:
"Error apparent on the face of the record does not mean that on
closer scrutiny of the import of documents and materials on
record, the finding made by the arbitrator may be held to be
erroneous. Judicial decisions over the decades have indicated
that an error of law or fact committed by an arbitrator by itself
does not constitute misconduct warranting interference with the
award."
35. The Supreme Court also quoted the following extract from
Trustees of the Port of Madras V. Engineering Constructions
Corporation Ltd., AIR 1995 SC 2423 :-
"14. ...A note of clarification may be appended, viz., where the
parties choose to refer a question of law as a separate and
distinct matter, then the Court cannot interfere with the award
even if the award lays down a wrong proposition of law or
decides the question of law referred to it in an erroneous
fashion. Otherwise, the well-settled position is that an arbitrator
"cannot ignore the law or misapply it in order to do what he
thinks is just and reasonable. [See Thawardas Pherumal v. Union
of India , AIR 1955 SC 468.]
It was clarified:
20. The proposition that emerges from the above decisions is
this: in the case of a reasoned award, the court can interfere if
the award is based upon a proposition of law which is unsound in
law. The erroneous proposition of law must be established to
have vitiated the decision. The error of law must appear from
the award itself or from any document or note incorporated in it
or appended to it. It is not permissible to travel beyond and
consider material not incorporated in or appended to the
award."
36. Reliance placed on Sarvesh Chopra (supra) appears to be
wholly misplaced. The Arbitrator has not even found, as a matter of
fact, that it was the petitioner who was responsible for the delay in
completion of the contractual work by the respondent. Merely because
the extension of time had been granted to the respondent, without
levy of liquidated damages, it cannot be inferred that the delay was on
account of the petitioner.
37. The Supreme Court in New India Civil Erectors (P) Ltd. V. Oil
and Natural Gas Corporation, (1997) 11 SCC 75, upheld the order
of the Division Bench of the High Court in relation to claim No.9 which
had been made to claim escalation. Paragraph 10 of this decision
reads as follows:-
"10. Claim No. 9: The appellant claimed an amount of Rs.
32,21,099.89p. under this head, against which the arbitrators
have awarded a sum of Rs. 16,31,425. The above claim was
made on account of escalation in the cost of construction during
the period subsequent to the expiry of the original contract
period. The appellant's claim on this account was resisted by the
respondent-corporation with reference to and on the basis of the
stipulation in the corporations' acceptance letter dated 10th
January, 1985 which stated clearly that "the above price is firm
and is not subject to any escalation under whatsoever ground till
the completion of the work". The Division Bench has held, and in
our opinion rightly, that in the face of the said express
stipulation between the parties, the appellant could not have
claimed any amount on account of escalation in the cost of
construction carried on by him after the expiry of the original
contract period. The aforesaid stipulation provides clearly that
there shall be no escalation on any ground whatsoever and the
said prohibition is effective till the completion of the work. The
learned arbitrators, could not therefore have awarded any
amount on the ground that the appellant must have incurred
extra expense in carrying out the construction after the expiry of
the original contract period. The aforesaid stipulation between
the parties is binding upon them both and the arbitrators. We
are of the opinion that the learned single Judge was not right in
holding that the said prohibition is confined to the original
contract period and does not operate thereafter. Merely because
the time was made the essence of the contract and the work
was contemplated to be completed within 15 months, it does not
follow that the, aforesaid stipulation was confined to the original
contract period. This is not a case of the arbitrators construing
the agreement. It is a clear case of the arbitrators acting
contrary to the specific stipulation/condition contained in the
agreement between the parties. We, therefore, affirm the
decision of the Division Bench on this Court as well (Claim No.
9)."
38. In Oil and Natural Gas Corporation Ltd. V. Saw Pipes Ltd.,
AIR 2003 SC 2629, the Supreme Court held that the decision of the
arbitral tribunal must be within the bounds of its jurisdiction conferred
under the Act or the contract. In exercising jurisdiction, the arbitral
tribunal cannot act in breach of some provision of substantial law or in
breach of the Arbitration and Conciliation Act. The Supreme Court in
its decision further held as follows:-
"12. The question, therefore, which requires consideration is--
whether the award could be set aside, if the arbitral tribunal has
not followed the mandatory procedure prescribed under
Sections 24, 28 or 31(3), which affects the rights of the parties"
Under Sub-section (1)(a) of Section 28 there is a mandate to the
arbitral tribunal to decide the dispute in accordance with the
substantive law for the time being in force in India. Admittedly,
substantive law would include the Indian contract Act, the
Transfer of Property Act and other such laws in force. Suppose, if
the award is passed in violation of the provisions of the Transfer
of Property Act or in violation of the Indian Contract Act, the
question would -- whether such award could be set aside?
Similarly, under Sub-section (3), arbitral tribunal is directed to
decide the dispute in accordance with the terms of the contract
and also after taking into account the usage of the trade
applicable to the transaction. If arbitral tribunal ignores the
terms of the contract or usage of the trade applicable to the
transaction, whether the said award could be interfered?
Similarly, if the award is non-speaking one and is in violation of
Section 31(3), can such award be set aside? IN our view, reading
Section 34 conjointly with other provisions of the Act, it appeals
that the legislative intent could not be that if the award is in
contravention of the provisions of the Act, still however, it
couldn't be set aside by the Court. If it is held that such award
could not be interfered, it would be contrary to basic concept of
justice. If the arbitral tribunal has not followed the mandatory
procedure prescribed under the Act, it would mean that it has
acted beyond its jurisdiction and thereby the award would be
patently illegal which could be set aside under Section 34.
13. The aforesaid interpretation of the Clause (v) would be in
conformity with the settled principle of law that the procedural
law cannot fail to provide relief when substantive law gives the
right. Principle is -- there cannot be any wrong without a
remedy. In M.V. Elisabeth and Ors. Harwan Investment &
Trading Pvt. Ltd., 1993 Supp(2) SCC 433, this Court observed
that where substantive law demands justice for the party
aggrieved and the statute has not provided the remedy, it is the
duty of the Court to devise procedure by drawing analogy from
other systems of law and practice. Similarly, in Dhanna Lal v.
Kalawatibi and Ors. (2002) 6 SCC 16, this Court observed that
wrong must not be left unredeemed and right not left
unenforced.
14. Result is -- if the award is contrary to the substantive
provisions of law or the provisions of the Act or against the
terms of the contract, it would be patently illegal, which could be
interfered under Section 34. However, such failure of procedure
should be patent affecting the rights of the parties."
39. In Saw Pipes (supra), the Supreme Court also considered the
meaning of the expression "public policy of India" used in Section 34 of
the Act and gave it a broader meaning. The Supreme Court, in this
behalf held as follows:-
"20. Mr. Desai submitted that the narrow meaning given to the
term 'public policy' in Renusagar's case in context of the fact
that the question involved in the said matter was with regard to
the execution of the award which had attained finality. It was
not a case where validity of the Award is challenged before a
forum prescribed under the Act. He submitted that the scheme
of Section 34 which deals with setting aside the domestic
arbitral award and Section 48 which deals with enforcement of
foreign award are not identical. A foreign award by definition is
subject to double exequatur. This is recognized inter alia by
Section 48(1) and there is no parallel provision to this clause in
Section 34. For this, he referred to Lord Mustill & Stewart C.
Boyd QC's "Commercial Arbitration" 2001 wherein [at page 90] it
is stated as under:--
"Mutual recognition of awards is the glue which holds the
international arbitrating community together, and this will
only be strong if the enforcing court is willing to trust, as the
convention assumes that they will trust, the supervising
authorities of the chosen venue. It follows that if, and to the
extent that the award has been struck down in the local court
it should be a matter of theory and practice be treated when
enforcement is sought as if to the extent it did not exist."
21. He further submitted that in foreign arbitration, the award
would be subject to being set aside or suspended by the
competent authority under the relevant law of that country
whereas in the domestic arbitration the only recourse is to
Section 34.
22. The aforesaid submission of the learned senior counsel
requires to be accepted. From the judgments discussed above, it
can be held that the term 'public policy of India' is required to be
interpreted in the context of the jurisdiction of the Court where
the validity of award is challenged before it becomes final and
executable. The concept of enforcement of the award after it
becomes final is different and the jurisdiction of the Court at that
stage could be limited. Similar is the position with regard to the
execution of a decree. It is settled law as well as it is provided
under Code of civil Procedure that once the decree has attained
finality, in an execution proceeding, it may be challenged only
on limited grounds such as the decree being without jurisdiction
or nullity. But in a case where the judgment and decree is
challenged before the Appellate Court or the Court exercising
revisional jurisdiction, the jurisdiction of such Court would be
wider. Therefore, in a case where the validity of award is
challenged there is no necessity of giving a narrower meaning to
the term 'public policy of India'. On the contrary, wider meaning
is required to be given so that the 'patently illegal award' passed
by the arbitral tribunal could be set aside. If narrow meaning as
contended by the learned senior counsel Mr. Dave is given,
some of the provisions of the Arbitration Act would become
nugatory. Take for illustration a case wherein there is a specific
provision in the contract that for delayed payment of the
amount due and payable, no interest would be payable, still
however, if the Arbitrator has passed an award granting interest,
it would be against the terms of the contract and thereby
against the provision of Section 28(3) of the Act which
specifically provides that "arbitral tribunal shall decide in
accordance with the terms of the contract". Further, where there
is a specific usage of the trade that if the payment this made
beyond a period of one month, then the party would be required
to pay the said amount with interest at the rate of 15 per cent.
Despite the evidence being produced on record for such usage,
if the arbitrator refuses to grant such interest on the ground of
equity, such award would also be in violation of sub-sections (2)
and (3) of Section 28. Section 28(2) specifically provides that
arbitrator shall decide ex aequo et bono [according to what is
just and good] only if the parties have expressly authorised him
to do so. Similarly, if the award is patently against the statutory
provisions of substantive law which is in force in India or is
passed without giving an opportunity of hearing to the parties as
provided under Section 24 or without giving any reason in a case
where parties have not agreed that no reasons are to be
recorded, it would be against the statutory provisions. In all such
cases, the award is required to be set aside on the ground of
'patent illegality'."
40. It was further held as follows:-
"30..............Further, for achieving the object of speedier
disposal of dispute, justice in accordance with law cannot be
sacrificed. In our view, giving limited jurisdiction to the Court for
having finality to the award and resolving the dispute by
speedier method would be much more frustrated by permitting
patently illegal award to operate. Patently illegal ward is
required to be set at naught, otherwise it would promote
injustice.
31. Therefore, in our view, the phrase 'Public Policy of India'
used in Section 34 in context is required to be given a wider
meaning. It can be stated that the concept of public policy
connotes some matter which concerns public good and the
public interest. What is for public good or in public interest or
what would be injurious or harmful to the public good or public
interest has varied from time to time. However, the award which
is, on the face of it, patently in violation of statutory provisions
cannot be said to be in public interest. Such
award/judgment/decision is likely to adversely affect the
administration of justice. Hence, in our view in addition to
narrower meaning given to the term 'public policy' in
Renusagar's case (supra) it is required to be held that the
award could be set aside if it is patently illegal. Result would be--
award could be set aside if it is contrary to:--
(a) fundamental policy of Indian law; or
(b) the interest of India; or
(c) justice or morality, or
(d) in addition, if it is patently illegal.
Illegality must go to the root of the matter and if the illegality is
of trivial nature it cannot be held that award is against the public
policy. Award could also be set aside if it is so unfair and
unreasonable that it shocks the conscience of the Court. Such
award is opposed to public policy and is required to be adjudged
void."
41. Reliance placed on Asian Techs Ltd. (supra) appears to be
misplaced. That judgment came to be passed in its own special facts.
The appellant-contractor, vide its letter dated 24.11.1998 had required
the respondent employer "to settle accounts of the value of work
already carried out, to make payment in terms of the
agreement and to close the agreement due to continued
suspension of works and increased cost of construction due to
efflux of time so as to arrange the remaining works through
separate work order". The employer had "sent a letter dated
11.08.1989 assuring the petitioner to settle rates across the
table and directed to carry out such items, agreeing to take up
objections as to rates, for settlement by the appropriate
authority". The respondent-employer also required the appellant to
forward vouchers for items to take up its objections as to rates before
its accepting authority. In the light of the aforesaid, the Supreme
Court concluded as follows:-
"17. The letter dated 24.11.1988 makes it clear that the
appellant was not ready to carry out the work beyond the
contracted period otherwise than on separate work orders, and
the subsequent correspondence like the letter dated
11.10.1989 makes it clear that it was on the specific assurance
given by the respondent to the appellant to continue the work
and that the rates would be decided across the table that the
appellant went ahead with the work. Hence, in our opinion it is
now not open to the respondent to contend that no claim for
further amount can be made due to Clause 11(C) and that the
arbitrator would have no jurisdiction to award the same."
42. It is in these circumstances that the Supreme Court did not
permit the respondents to place reliance on Clause 11(c) which
prohibited the contractor to claim further amounts at higher rates than
those agreed under the contract, during the extended period of
contract.
43. In a recent decision reported as ONGC V. Wig Brothers
Builders and Engineers Private Limited, (2010) 13 SCC 377, the
Supreme Court has once again reiterated the position that an
Arbitrator is bound by the contractual terms such as clause 11(c) of the
General Conditions of Contract and he cannot award any amount in
contravention of the said clause. If he does so, he would be exceeding
his jurisdiction. In this case, compensation was claimed by the
Contractor for loss on account of prolongation of the completion period
on account of the employer's failure to perform its contractual
obligations. The arbitrator held that the delay in completion was due to
fault of both the contractor and the employer and that both were
equally liable for delay. On this basis the Arbitrator held that the
contractor was entitled to be compensated for half of the period of
delay. Even though clause 5(A) of the contract, which pertained to
extension of time for completion of work, specifically barred any claim
for damages and was similar to clause 11(c) of the General Conditions
of Contract, the learned Arbitrator observed that there was no
provision in the contract by which the contractor could be estopped
from raising a claim for compensation for delay in completion of the
work. The relevant extract from this decision of the Supreme Court
reads as follows:-
"7. In view of the above, in the event of the work being
delayed for whatsoever reason, that is even delay which is
attributable to ONGC, the contractor will only be entitled to
extension of time for completion of work but will not be
entitled to any compensation or damages. The arbitrator
exceeded his jurisdiction in ignoring the said express bar
contained in the contract and in awarding the
compensation of Rs. 9.5 lakhs. This aspect is covered by
several decisions of this Court. We may refer to some of
them.
8. In Associated Engineering Co. v. Government of
A.P.,1991 (4) SCC 93, this Court observed:
"24. The arbitrator cannot act arbitrarily,
irrationally, capriciously or independently of the
contract. His sole function is to arbitrate in terms
of the contract. He has no power apart from
what the parties have given him under the
contract. If he has travelled outside the bounds
of the contract, he has acted without
jurisdiction...."
9. In Rajasthan State Mines and Minerals Ltd. v.
Eastern Engineering Enterprises: 1999 (9) SCC 283,
this Court held:
"22.........The rates agreed were firm, fixed and
binding irrespective of any fall or rise in the cost
of the work covered by the contract or for any
other reason or any ground whatsoever. It is
specifically agreed that the contractor will not be
entitled or justified in raising any claim or dispute
because of increase in cost of expenses on any
ground whatsoever. By ignoring the said terms,
the arbitrator has travelled beyond his
jurisdiction as his existence depends upon the
agreement and his function is to act within the
limits of the said agreement. This deliberate
departure from the contract amounts not only to
manifest disregard of the authority or misconduct
on his part but it may be tantamount to mala fide
action.
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...............
* * *
44. (h) He cannot award an amount which is ruled
out or prohibited by the terms of the agreement."
10. In Ramnath International Construction (P) Ltd.
v. Union of India : 2007 (2) SCC 453, a similar issue
was considered. This Court held that Clause 11(C) of the
General Conditions of Contract (similar to Clause 5A
under consideration in this case) was a clear bar to any
claim for compensation for delays, in respect of which
extensions had been sought and obtained. This Court
further held that such a clause amounts to a specific
consent by the contractor to accept extension of time
alone in satisfaction of claims for delay and not to claim
any compensation; and that in view of such a bar
contained in the contract in regard to award of damages
on account of delay, if an arbitrator awards
compensation, he would be exceeding his jurisdiction.
11. In view of the above, the award of the arbitrator in
violation of the bar contained in the contract has to be
held as one beyond his jurisdiction requiring
interference. ..................."(emphasis supplied)
44. In the light of the aforesaid discussion, it is evident that the
impugned award is opposed to the public policy of India as it is
opposed to fundamental policy of Indian Law. The Ld. Arbitrator has
misconducted himself and the proceedings. He has exceeded his
jurisdiction by acting contrary to the express contractual terms. For the
aforesaid reasons, I set aside the impugned award. The petitioner
shall be entitled to costs quantified at Rs.50,000/-.
I.A. Nos. 15344/09 & 44/2010
In view of the award being set aside, as aforesaid, these
applications have become infructuous and are disposed of as such.
(VIPIN SANGHI)
JUDGE
MAY 23, 2011
AS/BSR
