Tarapore & Company Vs. Cochin Shipyard Ltd. Cochin & ANR [1984] INSC 54 (6 March 1984)
1984 Latest Caselaw 54 SC

Tarapore & Company Vs. Cochin Shipyard Ltd. Cochin & ANR [1984] INSC 54 (6 March 1984)

DESAI, D.A.

DESAI, D.A.

REDDY, O. CHINNAPPA (J)

CITATION: 1984 AIR 1072 1984 SCR (3) 118 1984 SCC (2) 680 1984 SCALE (1)411

CITATOR INFO :

RF 1988 SC 325 (5) R 1988 SC1166 (10) RF 1989 SC 268 (23)

ACT:

Arbitration Act 1940 (Act X of 1940 ) section 16(1)(c), 30 and 33.

Arbitration- Works Contract-Construction of Building Dock and Repair Dock-Reference of specific question of law to arbitrator-Arbitrator framing issue-Parties agreeing to issue being decided-Award if could be set aside on ground of error of law on face of award.

Interpretation:

Agreement-Works contract of large magnitude-over- Simplification of clauses impermissible-Agreement Predicated upon and agreed fact situation-Situation ceasing to exist- Agreement to that extent rendered irrelevant and otiose.

Words & Phrases:

`Without prejudice'-Meaning of-`claim arising out of contract'-`Relating to the contract'-Meaning of-Clause 40 General Conditions of Contract.

HEADNOTE:

The appellant and the respondents entered into a contract for the construction of Building Dock. Clause 40 of the General Conditions of Contract entered into between the parties, provided that "all questions and disputes relating to the meaning of the Specifications Estimates Instructions, Designs, Drawing and the quality of the workmanship or materials used in the work or as to another questions, claim, right, matter or thing whatsoever in any way arising out of or relating to the contract or otherwise concerning the execution whether arising during the progress of the work or after completion shall be referred to the Sole Arbitrator etc," During the implementation of the works contract. disputes arose between the parties in respect of a claim for compensation on account of the increase in the cost of imported pile-driving equipment and technical know- how fees. Correspondence was exchanged between the Appellant and Respondent No. 1 and the dispute was referred to the Sole Arbitrator. The point referred were: (1) Whether the claim of compensation for increase in the cost of imported pile driving equipment and technical know-how fees would fall within the purview of the first para of clause 40 of the General Conditions of Contract; and (2) if it does, the quantum of compensation, if any, to which the appellant would be entitled to. The arbitrator entered upon the reference and after hearing the parties gave his award. The 119 arbitrator held that the appellant was entitled to compensation for the increase in the cost of imported pile drawing equipment and technical know-how fees by a sum of Rs. 99 lakhs which amount shall be payable with interest @ 9.1/2% The award was typed on stamp paper of the value of Rs.150/- The arbitrator forwarded the award to both the parties.

The appellant moved a petition under sections 14 and 17 of the Arbitration Act, in the Court of the Subordinate Judge for filing the award and for making it a rule of the Court, while the respondent moved a petition under sections 30 and 33 for setting aside the award contending that: (1) the award was insufficiently stamped, and (2) the arbitrator had exceeded his jurisdiction by misconstruing clause 40.

The Subordinate Judge negatived both the contentions. It was held that the respondent having submitted the question whether the dispute raised by the appellant was covered by the arbitration clause; could not controvert the jurisdiction of the Arbitrator to decide the dispute; and the award of the arbitrator was modified in the matter of interest from 9.1/2 per cent as awarded by the arbitrator to 6 per cent, and the award was made a rule of the Court.

The respondent preferred an appeal to the High Court, and a Division Bench, agreed with the Subordinate Judge on the question of insufficiency of stamp. It however held that the question whether the dispute was arbitrable or not could not be finally decided by the arbitrator because it was a matter relating to his jurisdiction, and that the arbitrator cannot by an erroneous interpretation or construction of the clause confer jurisdiction on himself and that the court can go into the question whether the matter in dispute between the parties was covered by the arbitration clause. It finally held that even though the arbitration clause was very wide, the dispute as to compensation for increase in the cost of imported pile driving equipment and technical know-how fees could not be covered by the arbitration clause because under clause 26 every plant, machinery and equipment had to be provided by the contractor and any rise or escalation in the price of such equipment or machinery, cannot be the subject matter of compensation by the respondent. The appeal was therefore allowed, and the trial court's order, making the award a rule of the court was set aside and directed that the award be returned to the parties.

In the appeal to this Court it was contended on behalf of the appellant, that though Sec. 16(1)(e) of the Arbitration Act may permit the court to remit or set aside the award on the ground that there is an error of law apparent on the face of it, yet where a specific question of law has been referred to the arbitrator for decision, the fact that the decision is erroneous does not make the award bad on its face so as to permit its being set aside. As a specific question of law touching upon the jurisdiction of the arbitrator was speficially referred to the arbitrator for his decision, the decision of the arbitrator is binding on the parties and the court cannot proceed to inquire whether upon a true construction of the arbitration clause, the dispute referred to the arbitrator for arbitration would be covered by the arbitration clause so as to clothe the arbitrator with the jurisdiction to arbitrate upon the dispute.

On behalf of the respondent, it was contended that the jurisdiction of the arbitrator cannot be left to the decision of the arbitrator so as to be binding on 120 the parties and it is always for the court to decide whether the arbitrator had jurisdiction to decide the dispute, and that the arbitrator cannot by a misconstruction of the arbitration agreement clothe himself with or confer upon himself the jurisdiction to decide the dispute.

Allowing the Appeal;

HELD: 1. A specific question of law touching the jurisdiction of the arbitrator was specifically referred to the arbitrator and therefore the arbitrator's decision is binding on the parties and the award cannot be set aside on the sole ground that there was an error of law apparent on the face of the award. It is also established that the claim for compensation made by the contractor which led to the dispute was covered by the arbitration clause. The quantum of compensation awarded by the arbitrator was never disputed nor questioned. [170E-F]

2. A question of law may figure before an arbitrator in two ways. It may arise as an incidental point while deciding the main dispute referred to the arbitrator or in a given case parties may refer a specific question of law to the arbitrator for his decision. [137G-H] Russel: Law of Arbitration Twentieth Edition p.22;

Halsbury's Laws of England Vol. 2 Para 623 4th Edition referred to.

3. Arbitration has been considered a civilised way of resolving disputes avoiding court proceedings. There is no reason why the parties should be precluded from referring a specific question of law to an arbitrator for his decision and agree to be bound by the same. This approach manifests faith of parties in the capacity of the tribunal of their choice to decide even a pure question of law. If they do so, with eyes wide open, and there is nothing to preclude the parties from doing so, then there is no reason why the court should try to impose its view of law superseding the view of the Tribunal whose decision the parties agreed to abide by.

On Principle it appears distinctly clear that when a specific question of law is referred to an arbitrator for his decision including the one touching upon the jurisdiction of the arbitrator, the decision of the arbitrator would be binding on both the parties and it would not be open to any of the two parties to wriggle out of it by contending that the arbitrator cannot clutch at or confer jurisdiction upon himself by misconstruing the arbitration agreement.[138-E-G]

4. If a question of law is specifically referred and it becomes evident that the parties desired to have a decision on the specific question from the arbitrator rather than one from the court, then the court will not interfere with the award of the arbitrator on the ground that there is an error or law apparent on the face of the award even if the view of law taken by the arbitrator does not accord with the view of the court. [147F] Kelantan Government v. Duff Development Co. Ltd. 1923 All E.R. 349: Re King and Duveen, [1913] 2 K.B. 32: F.R.

Absalom Ltd. v. Great Western (London) Garden Village Society Ltd., [1933] All E.R. 616; Durga Prasad Chamria 121 and Anr. v. Sewkishen das Bhattar and Ors: AIR 1949 Privy Council 334; Seth Thawardas Pherumal v. The Union of India;

[1955] 2 S.C.R. 48; M/s. Alopi Parshad & Sons Ltd. v. The Union of India, [1960] 2 S.C.R. 783; Champsey Bhara and Company v. Jivraj Balloo Spinning and Weaving Company Ltd .:

Law Report 50 I.B. 324; Union of India v. A.L. Rallia Ram., [1964] 3 S.C.R. 164; M/s.Kapoor Nilokheri., Co-op. Dairy Farm Society Ltd. v. Union of India and Others., AIR 1973 S.C. 1338; N. Chellappan v. Secretary, Kerala State Electricity Board & Anr., [1975] 2 S.C.R. 811; Produce Brokers Co. Ltd. v. Olympia Oil and Cake Co. Ltd., [1914-15] All E.R. 133; Attorney General For Manitoba v. Kelly and Others., (1922) H.E.R. 68; Hirji Muulji v. Cheong Yue Steamship Co. Ltd., [1926] All E.R. 51; Heyman & Anr. v. Darwins Ltd., [1942] 1 All E.R. 337; Jivarajbhai Ujamshi Sheth & Ors. v. Chiniamanrao Balaji & Anr., [1954] 5 S.C.R. 480; Dr. S.B. Dutt v. University of Delhi., [1958] S.C.R. 1236; referred to.

5. The expression 'without prejudice' carries a technical meaning depending upon the context in which it is used. An action taken without prejudice to one's right cannot necessarily mean that the entire action can be ignored by the party taking the same. [148F-G] In the instant case, in the context in which the expression 'without prejudice' is used, it would only mean that the respondent reserved the right to contend before the arbitrator that the dispute is not covered by the arbitration clause. It does not appear that what was a contention that no specific question was specifically referred to the arbitrator, On a proper reading of the correspondence, and in the setting in which the term 'without prejudice' is used, it only means that the respondent reserved to itself the right to contend before the arbitrator that a dispute raised or the claim made by the contractor was not covered by the arbitration clause. No other meaning can be assigned to it. [148D-E]

6. In works contract of such magnitude, and which have been undertaken by an Indian contractor for the first time negotiations prior to the finalisation of the contact and the correspondence leading to the formation of contract supply the basis on which the contract was finally entered into. Undoubtedly, if in the final written contract, there is something contrary to the basic understanding during the formative stage of the contract, the written contract would prevail. But if the contract does not indicate to the contactor and the assumptions appeared to be the foundation of the contract, that aspect cannot be overlooked while determining what were the obligations undertaken the formal contract. [151H-152B]

7. Over-simplification of the clauses of the contract involving works of large magnitude is impermissible. The whole gamut of discussions, negotiations and correspondence must be taken into consideration to arrive at a true meaning of what was agreed to between the parties. [156F] In the instant case, there is no room for doubt that the parties agreed that the investment of the contractor under this head would be Rs. 2 crores and the tendered rates were predicated upon and co-related to this understanding.[156G] 122

8. When an agreement is predicated upon an agreed fact situation, if the latter ceases to exist the agreement to that extent becomes irrelevant of otiose. [156G]

9. Phrases such as 'claim arising out of contract' or 'relating to the contract' or 'concerning the contract' on proper construction would mean that if while entertaining or rejecting the claim or the dispute in relation to claim may be entertained or rejected after reference to the contract, it is a claim arising out of contract. The language of clause 40 shows that any claim arising out of the contract in relation to estimates made in the contract would be covered by the arbitration clause. If it becomes necessary to have recourse to the contract to settle the dispute one way or the other then certainly it can be said that it is a dispute arising out of the contract. [157F-G] In the instant case, the arbitration clause is so widely worded as disputes arising out of the contract or in relation to the contract or execution of the works that it would comprehend, within its compass a claim for compensation related to estimates and arising out of the contract. [157H]

10. (i) A dispute, the determination of which turns on the true construction of the contract, would also seem to be a dispute under arising out of or concerning the contract.

The test is that if in settling a dispute, a reference to the contract is necessary, such a dispute would be covered by the arbitration clause.[158D-E] A.M. Mair & Co. v. Gordhandas Sagarmull., [1950] S.C.R.

792; Ruby General Insurance Co. Ltd. v. Pearey Lal Kumar And Another; [1952] S.C.R. 501; referred to.

ii. Where the parties are at one in asserting that they entered into a binding contract, but a difference has arisen between them whether there has been a breach by one side or the other, or whether circumstances have arisen which have discharged one or both parties from further performance, such differences should be regarded as differences which have arisen 'in respect of' or 'with regard to' of 'under' the contract, and an arbitration clause which uses these, or similar expressions should be contoured accordingly. [159B- C] Union of India v. Salween Timber Construction (India) & Ors., [1969] 2 S.C.R. 224; Heyman & Anr. v. Darwins Ltd., [1942] A.C. 356 at 366; Astro Vencedor Compania Naviora S.A.

of Panama v. Mabanaft G.M.B.H. The Diamianos., [1971] 2 Q.B. 588; Gunter Henck v. Andre & CIE. S.A., [1970] 1 Lloyd's Law Reports 235; referred to In the instant case, from the pleadings, it clearly transpires that both the parties had recourse to the contract. It is satisfactorily established that the claim made by the contractor would be covered by the arbitration clause. [160B] 123

CIVIL APPELLATE JURISDICTION: Civil Appeal No. 3023 of 1980.

Appeal by Special leave from the Judgment and Order dated the 21st August, 1980 of the Kerala High Court in M.F.A. No. 409 of 1979.

F.S.Nariman, A.N.Haksar, T.Raghvan, R.F.Nariman, V.A.Bobde & K.R.Nambiar, for the Appellant.

G.B.Pai, P.K.Kumar, A.K.Sharma, Ashok Mathur and Parveen Kumar for the Respondent.

The Judgment of the Court was delivered by DESAI, J. In this appeal by special leave a very interesting question in the field of law of arbitration which honest man dread more than the dreaded law suits' arises for our consideration.

First respondent Cochin Shipyard Limited ('respondent' for short) invited tenders for construction of Building Dock at Cochin. As there was only one tender that of Tarapore & Company, the appellant, the respondent called fresh tenders somewhere in July, 1971. In December, 1971, the respondent invited tenders for construction of a Repair Dock also at Cochin. There were two tenders for Building Dock, namely, one of the appellant and one by M/s National Building Construction Corporation, a Government of India undertaking, the value of the tender of the latter being double that of the appellant. For the construction of the Repair Dock, the only tender was of the appellant. In view of the limited number of tenders received, the appellant was invited to negotiate the terms of tender. The value of the works to be executed was over Rs. 24 crores. In view of the huge investment in the project, the tenders were examined by a committee called the Tender Committee constituted in accordance with the approval of the Ministry of Shipping and Transport for examining and evaluating the tenders received for the Building Dock and the Repair Dock. The Tender Committee taking note of the poor response to the invitation to tender and costly affair decided to accept the tender of the appellant inter alia for the reasons (i) that works of such complexity and magnitude have not been undertaken before by any Indian contractor, (ii) that the plant and equipment required for the work are not available indigenously, (iii) that if the contractor is to procure the 124 specialised equipment required for this work, there is hardly any assurance that after these works are over, he would find any substantial use for the same, (iv) that excavation and subsequent construction involve de-watering which introduces considerable amount of uncertainty and that during the discussions, the apprehension of the tenders of this kind was voiced and noticed by the Committee, (v) that RCC Piling also requires highly skilled and complex technical operations and it involves a large element of risk and uncertainty in the work. Both the tenders of the appellant were accepted, and contracts were entered into between the parties. Both the parties while entering into contracts were aware and conscious of the fact that equipment and technical know-how would have to be imported involving a huge outlay of foreign exchange. Appellant contractor quoted rates on two alternative basis depending- upon whether it had to import equipment and know-how at its cost involving Rs. 2 crores in foreign exchange or the equipment and know how were to be imported by the respondent at its cost and made available for use of the appellant in which case the appellant would be liable to pay hire charges for the pile driving plant at the rate of Rs. 23/- per metre of 600 mm dia. RCC cast-in-situ pipe and Rs. 16/- per metre of 500 mm dia. RCC cast-in-situ pipe and at the rate of 300 per tonne of steel sheet piles driven to be recovered from the running bills payable to the appellant contractor. The appellant was given to understand by a note in the invitation to tender that foreign exchange in yen credit to the tune of Rs. 38 lacs is earmarked for the purchase of construction equipment, accessories etc. from Japan for works of Building Dock, Repair Dock, the three Quays etc. On January 24,1973, work order for Building Dock and Repair Dock was issued by the respondent in favour of appellant and in this work order as recommended by the Tender Committee, the respondent adopted the alternative B as set out in the tender, namely, that the contractor was to procure the equipment and know-how at a cost of about Rs. 2 crores in foreign exchange. In order to make this aspect specific, additional condition No. 31 was incorporated in the works order in order to provide for the expense to be incurred and the amount of foreign exchange needed for importing equipment and technical know-how, relevant portion of which reads as under:

"Requisite foreign exchange, for importing piling plant and machinery, spares, technical know-how and hiring of experts necessary for both the Dock Works vide Work Order No. 13019/1/71-W-II dated January 24,1973 for Building 125 Dock etc. and Work Order No. 13012/15/71-W-II dated January 24, 1973 for Repair Dock etc, amounting to about Rs. 2.00 crores in all will be made available to the contractor from the 11th Yen Credit subject to his getting indigenous clearance and providing detailed justification. The details of such procurement shall be furnished by the Contractor as soon as they are finalised." In view of the huge investment, it was agreed that the respondent would make an advance payment of 75% of the value of old machinery and 90% of the value of new machinery brought to site by the Contractor and in order to secure this advance payment, equipment would be hypothecated by the Contractor to the respondent and the advance payment were to carry interest at 9.1/2% p.a. on the outstanding balance of advance. The mode of recovery was also specified. The formal contract was signed on January 29,1973 which included an arbitration clause to which we would turn a little later.

It so happened that the required pile driving equipment including the technical know-how against 11th Japanese Yen credit were not available. The respondent also made inquires in this behalf but without success. Ultimately, International Foundation Group, Holland agreed to provide the rate of equipment conforming more or less to the same specification for which clearance was sought and received from the Government of India. After the respondent certified that the equipment and know-how offered by International Foundation Group. Holland conform to the earlier clearance and that the same equipment being not indigenously available or against 11th Japanese Yen Credit, the respondent requested the Government of India to give necessary clearance to the appellant to import the equipment. This approval was received on September 1, 1973 and the foreign exchange to the extent of Rs. 211.80 lakhs equal to 9,442.700. Dutch Florins was released in favour of the appellant. The entire imported equipment was received in four consignments between March/July 1974. During the intervening period, there were variations in the rate of exchange and therefore the foreign exchange cost of equipment alone in terms of rupees worked out at Rs. 177.50 lakhs and of the technical know-how fees payable in 11 instalments worked out at Rs. 105 lakhs. The custom duty went up by Rs. 21 lakhs as a consequence of the increase in rupee value of the imported equipment in terms of Dutch Florin.

126 The appellant made a tentative claim in the amount of Rs. 61.27 lakhs from the respondent on account of increase in cost of pile driving equipment and technical know-how fees on the ground that the contractor was entitled to be compensated by the respondent for the same. In the letter dated May 28,1975, the appellant has stated that the 'tendered rates were based on certain total cost of machines which has since gone up considerably rendering the rates no longer workable. The appellant had provided for a cost of 150 lakhs of rupees for the equipment and the life of the equipment was taken as 12,000 hours and its probable period of engagement on this job was taken as 8,000 hours. On this basis two-thirds of the cost of the equipment will be written off by way of depreciation on this job.' It was also stated that there is an increase in the fees for the technical know-how. The letter concluded by saying that the loss sustained by the appellant upto May 15,1975 on account of variation in the rate of foreign exchange was Rs. 61,27,317 and requested the respondent to compensate the loss at least upto the tune of Rs. 45 lakhs which is approximately 75% of the loss suffered by the contractor in this behalf. The respondent responded to this letter as per its letter dated July 2,1975 saying that the letter dated July 14,1972 of the appellant which forms part of the contract documents clearly recites that the total foreign exchange required by the contractor for the equipment, spares, technical know-how and hiring of experts, was expected to be about Rs. 2 crores and that the expenditure incurred by the contractor in this behalf so far has been less than Rs. 2 crores and in the circumstances it was found difficult to accept the position that the tender was based on the assumptions indicated in the letter under reply and that the rates for the pile driving should for the future be revised. There ensued further correspondence between the parties. Ultimately, the appellant by its letter dated March 1,1976 informed the respondent that its claim for compensation for increase in the cost of imported pile driving equipment and technical know-how fees has not been entertained for over a year. It was further stated that inasmuch as the dispute has thus arisen between us regarding the above claim, we are invoking the provisions for arbitration in our contracts and referring this dispute to arbitration.' On March 17,1976 Chief Engineer of the respondent replied saying that the matter as set out in the letter dated March 1, 1976, invoking arbitration clause is receiving their immediate attention and the appellant will hear shortly in this behalf. On March 29,1976, the respondent wrote to the appellant denying the claim for compensation of the appellant. Simultaneously the respondent framed three points 127 covering the dispute so raised for reference to and decision by the arbitrator. The letter also sets out as required by Clause 40 a panel of three names from which anyone can be chosen by the appellant as the sole arbitrator. The appellant by its letter dated April 19,1976 while refuting the contention of the respondent that the dispute would not be covered by Clause 40 i.e. arbitration clause in the contract, stated that the proper course would be to refer the dispute that has arisen between the parties to the decision of the arbitrator and not any particular issue or issues. Ultimately from amongst the three names indicated by the respondent the appellant selected Shri C. Srinivasa Rao, Chief Bridge Engineer, Southern Railway, Madras to be the Sole Arbitrator to decide the dispute. On receipt of this letter the respondent referred the dispute to Shri C. Srinivasa Rao as Sole Arbitrator. While referring the dispute to the sole arbitration of Shri C. Srinivasa Rao, the respondent retained the three points of reference set out in the letter dated March 29,1976 but added one more.

The Arbitrator entered upon the reference on June 2,1976. On being called upon by the Arbitrator, the appellant filed its statement of claim on June 19,1976. The appellant claimed Rs. 2,03,47,266 as per the Schedule to the Statement of Claim on account of increase in the cost of equipment and technical know-how fees. The respondent filed its reply to the Statement of Claim on July 19,1976.

The points/disputes referred by the parties to the sole arbitrator read as under:

"1. Does the claim of Messrs. Tarapore & Co. on Cochin Shipyard Ltd., for compensation for increase in the cost of imported pile driving equipment and technical know-how fees referred to in clauses (2) and (3) hereunder fall within the purview of the first paragraph of Clause 40 of the General Conditions of Contract entered into between the two parties?

2. If the answer to (1) above is in the affirmative, in terms of the provisions of the contract are Messrs. Tarapore & Co. entitled to compensation for increase in the cost of imported pile driving equipment and technical know-how fees to be paid to them by Cochin Shipyard Ltd.? If so, what is the amount ? 128 3. The dispute that has arisen between Messrs.

Tarapore & Co., and Cochin Shipyard Ltd. regarding the claim of M/s. Tarapore & Co., for compensation for increase in the cost of the imported pile driving equipment and the technical know-how fees.

4. "Costs" Parties appeared before the Arbitrator through their respective counsel. The Arbitrator gave its Award on July 6,1977. On Point No. 1, the Arbitrator held as under:

"The claim of Messrs. Tarapore and Company on Cochin Shipyard Limited for compensation for increase in the cost of imported pile driving equipment and technical know-how fees falls within the purview of the first paragraph of Clause 40 of the General Conditions of Contract entered into between the parties." On Point No. 2, the Arbitrator held that the appellant Messrs. Tarapore and Company are entitled to compensation by the Cochin Shipyard Limited for the increase in the cost of imported pile driving equipment and the technical know-how fees by a sum of Rs. 99 lakhs only which amount shall be payable with interest at 9.1/2% per annum from this date till date of payment or decree, whichever is earlier'. On Point No. 3, the decision recorded was 'that it is covered by the decision on Points (1) and (2)'. On Point No. 4, on the question of costs, the Arbitrator having determined his fees and incidental expenses directed both the parties to bear the same equally. The Award was typed on a stamp paper of the value of Rs. 150/- at Madras. By his letter dated Nil July, 1977, the Sole Arbitrator forwarded the award to both the parties.

The appellant moved a petition under Secs. 14 and 17 of the Arbitration Act in the Court of the Subordinate Judge, Ernakulam for filing the award and for making it a rule of the court. On October 7,1977 the respondent moved O.P. 81 of 1977 being a combined petition under Secs. 30 and 33 of the Arbitration Act before the Subordinate Judge, Ernakulam praying for setting aside the award. The prayer for setting aside the award was founded on two grounds; (1) that the award is insufficiently stamped and (2) that the Arbitrator has exceeded his jurisdiction by misconstruing Clause 40 129 of the General Conditions of Contract (Arbitration clause for short).

The learned Subordinate Judge noted the fact that the award was originally engrossed on a stamp paper of Rs. 150/- but before filing the award in the court on August 4,1977, the Arbitrator on August 1,1977 affixed additional stamp of Rs. 14,722.50 p. which would be the requisite stamp under Art. 12 read with Art. 14 of the Kerala Stamp Act. The learned Subordinate Judge accordingly negatived the contention of the respondent that the award was insufficiently stamped. On the second point, the learned Judge held that the respondent having submitted the question whether the dispute raised by the appellant was covered by the arbitration clause cannot be permitted to controvert the jurisdiction of the Arbitrator to decide this dispute and accordingly, negatived the contention of the respondent. The learned Judge after modifying the award of the Arbitrator in the matter of interest from 9.1/2% as awarded by the Arbitrator to 6% granted the application of the applicant and made the award a rule of the court.

The respondent preferred M.F.A. 409 of 1979 in the High Court of Kerala at Ernakulam. A Division Bench of the High Court agreed with the learned Subordinate Judge on the question of insufficiency of stamp. The Division Bench however, after expressing its displeasure about not making a reasoned award by the Arbitrator proceeded to examine the contention whether the arbitration clause covers the dispute. The court held that the question whether the dispute is arbitrable or not cannot be finally decided by the arbitrator because it is a matter relating to his jurisdiction. It was further held that the arbitrator cannot by an erroneous interpretation or construction of the clause confer jurisdiction on himself and the court can go into the question whether the matter in dispute between the parties is covered by the arbitration clause. The specific contention on behalf of the appellant that once a specific question of law is referred to the arbitrator, the parties are bound by the decision of the arbitrator was negatived by the High Court and it was held that as the respondent has joined arbitration under protest, it was not estopped from contesting the question and the award is not binding on it if it can be shown that the arbitration agreement did not cover the dispute raised by the appellant. The court finally held that even though the arbitration clause was very wide, the dispute as to the compensation for increase in the cost of imported pile driving equipment and technical know-how fees would 130 not be covered by the arbitration clause inter alia on the ground that by C1. 26 of the General Conditions of Contract every plant, machinery and equipment had to be provided by the contractor and any rise or escalation in the price of such equipment or machinery cannot be the subject matter of compensation by the respondent. Accordingly, the appeal of the respondent allowed and the judgment and order of the trial court making the award rule of the court was set aside. The court directed that the award be returned to the parties. Hence this appeal by the contractor by special leave.

Before we advert to the rival contentions, it would be advantageous to refer to the arbitration clause being Clause 40 of the General Conditions of Tender subject to which the contract was entered into, the relevant portion of which reads as under:

"Clause 40. Except where otherwise provided in the contract, all questions and disputes relating to the meaning of the Specifications, Instructions, designs Drawings herein before mentioned and as to the quality of workmanship or materials used on the work or as to any other questions, claim, right, matter or thing whatsoever in any way arising out of or relating to the Contract, Designs, Drawings, Specifications, Estimates, Instructions, orders or these conditions or otherwise concerning the works or the execution or failure to execute the same, whether arising during the progress of the work or after completion or abandonment thereof shall, after written notice by either party to the contract, to the either of them, be referred to the Sole Arbitration of a person appointed by the Chief Project Officer of the Cochin Shipyard Project or the Administrative Head of the Cochin Chipyard Project at the time of such appointment by whatever designation known, from a panel of names given in Annexure II." Over and above the extracted portion, the clause provides for the manner and method of appointing the sole arbitrator, the continuance of the work during progress of arbitration proceedings, the time and place of holding the arbitration. proceedings, the power to enlarge the period for making the award and finality to be attached to the award of the Arbitrator.

131 When the arbitration clause was invoked by the appellant, the respondent did contend that the dispute raised by the appellant was not covered by the arbitration clause. After specifying its demur, the respondent formulated the points in dispute on which the arbitration was invited to give his award. Undoubtedly, the respondent proceeded to formulate the points in dispute between the parties on which the Arbitrator was to be invited to give his award without prejudice to its right to contend that the dispute is not covered by the arbitration clause and that the appellant is not entitled to any compensation in respect of the increase in the cost of imported pile driving equipment and technical know-how fees. What is the effect of referring the specific question of law to arbitration without prejudice to one's right to contend to the contrary will be presently examined. The fact remains that on the dispute arising out of a claim for compensation on account of the increase in the cost of imported pile driving equipment and technical know-how fees, the respondent agreed to refer the dispute under two specific heads to the Arbitrator. The dispute so raised have already been extracted. Briefly stated they are : (1) whether the claim for compensation would fall within the purview of the first para of the arbitration clause and (2) if it does the quantum of compensation, if any, to which the appellant would be entitled. Analysing the disputes, let it be made distinctly clear that the appellant asserted that its claim for compensation, would be governed by the arbitration clause and the same was specifically denied by the respondent saying that the claim would be beyond the purview of the arbitration clause. On these rival positions, the specific issue was framed whether the claim for compensation would fall within the purview of the first part of the arbitration clause. This was the specific dispute referred to the arbitrator inviting him specifically to decide this of dispute. If this issue specifically raises a question as to jurisdiction of the arbitrator to arbitrate upon the dispute set out in Point No. 2, it appears to have been specifically referred to the Arbitrator for his decision.

Parties, therefore, agreed to submit the specific question even with regard to the scope, ambit, width and the construction of the arbitration clause so as to define its parameters and contours with a view to ascertaining whether the claim advanced by the appellant and disputed by the respondent would be covered by the arbitration clause.

Whether upon its true construction the arbitration clause would include within its compass the dispute thus raised between the parties was specifically put in issue because parties were at variance about it. Appellant asserted that its claim to compensation would form the subject matter of arbitration under Clause 40 132 and the respondent contending to the contrary. While deciding this dispute, as to the scope, width and ambit of arbitration clause vis-a-vis the dispute raised, it is not necessary to decide whether the claim was tenable justified or had any substance in it. That would fall within the second point of reference to the arbitrator which opens with a specific clause that it needs only to be decided if the answer to the first point of reference, namely jurisdiction of the arbitrator under Clause 40 is in the affirmative meaning thereby that the dispute so raised and subsisting between the parties would be covered by the arbitration agreement. In other words, if the dispute is covered by the arbitration agreement, the arbitrator was further required to decide whether there was any substance in the claim made, and if he found some substance in the disputed claim, to ascertain what amount the appellant would be entitled to recover as and by way of compensation from the respondent.

The arbitrator was thus required and called upon first to decide whether the dispute is arbitrable as falling within the width and ambit of the arbitration agreement. If the answer is in the affirmative, then alone the second point need be examined. If the answer to the first point of reference is in the negative in that if the arbitrator were of the opinion that the dispute is not arbitrable as it would not fall within the scope, width and ambit of the arbitration agreement, it would not be necessary for him to determine whether the appellant was entitled to recover anything by way of compensation. This aspect is being analysed in depth to point out that the parties specifically referred the question of construction of arbitration agreement, its width, ambit and parameters vis-a-vis the dispute raised so as to decide whether the dispute would fall within the purview of the arbitration agreement, in other words the jurisdiction of the arbitrator.

Correspondence placed on record would unmistakably show that a specific question as to the jurisdiction of the arbitrator was specifically referred by the parties to the arbitrator. Appellant contractor by his letter dated March 1,1976 to the Chief Engineer of the respondent invited his attention to the claim for compensation for increase in cost of pile driving equipment and technical know-how fees raised about a year ago and further invited his attention to the letter dated 6th October, 1975 of the respondent informing the appellant that the claim cannot be entertained. The appellant proceeded further to state as under:

"In as much as a dispute has thus arisen between us regarding the above claim, we are invoking the provisions for 133 arbitration in our contracts and referring this dispute to arbitration." The respondent by his letter dated March 17, 1976 informed the appellant that the matter raised in the letter dated March 1,1976 in the matter of compensation is receiving their immediate attention and the appellant will shortly hear from them in this connection. Thereafter the respondent by his letter dated March 29,1976 informed the appellant as under;

"We have dealt with the merits of your claims in the previous correspondence on the subject and we reiterate that no amounts whatever are due to you in respect of these claims. It is also our view that such claim does not fall within the purview of Clause 40 of the General Conditions of Contract and hence does not qualify for arbitration.

However, in view of your insistence and without prejudice to our position, we propose that, the following be the issues to be referred to arbitration:

1. Does the claim of M/s Tarapore & Co., on Cochin Shipyard Ltd., for compensation for increase in the cost of imported pile driving equipment and technical know-how fees fall within the purview of the first para of Clause 40 of the General Conditions of Contract entered into between the two parties?

2. If the answer to 1 is in the affirmative in terms of the provisions of the concerned contract are Messrs. Tarapore & Co. entitled to compensation for increase in the cost of imported pile driving equipment and technical know-how fees to be paid to them by Cochin Shipyard Ltd.? If so, what is the amount?

3. "Costs." The respondent proceeded to notify the panel of names and invited the appellant to choose the arbitrator as agreed to between the parties and set out in clause 40. The appellant by his letter dated April 19,1976 while reasserting that the claim made by it would be covered by Clause 40 further stated that the proper course would be to refer the dispute that has arisen between the parties on 134 the matter of compensation to the decision of the arbitrator and not any particular issue or issues. It was also suggested that framing of the issues will be the function of the arbitrator after he enters upon the reference and after he has the pleadings of both the parties before him. The appellant also suggested what dispute should be referred to the arbitrator and set it out as under:

"The decision of the dispute that has arisen between M/s Tarapore & Co., and the Cochin Shipyard Limited, regarding the claim of M/s Tarapore & Co., for compensation for the increase in the cost of the imported pile driving equipment and of the technical know-how fees." The appellant proceeded to suggest that Shri C. Srinivasa Rao from amongst the panel be appointed as the Sole Arbitrator. The respondent by his letter dated April 27/28, 1976 annexing three earlier letters dated March 1, 1976, March 29, 1976 and April 19, 1976 referred the four points herein before set out for the decision of the arbitrator.

This correspondence would unmistakably show that while the appellant wanted a general reference about its claim, it was the respondent who now contests that no specific question of law was specifically referred to the arbitrator for his decision was specific about the points to be referred for the decision of the Arbitrator. The first point extracted hereinabove would clearly show that the specific question about the jurisdiction of the arbitrator to arbitrate upon the dispute set out in points Nos. 2, 3 and 4 was specifically referred to the arbitrator. On the first point, the arbitrator had to decide whether the claim made by the appellant and disputed by the respondent would be covered by Clause 40 i.e. the arbitration clause. In other words, the specific question referred to the Arbitrator was about his jurisdiction to arbitrate upon the disputes covered by points Nos. 2, 3 and 4, if and only if, upon a true construction of the arbitration clause that is first paragraph of Clause 40, would cover the disputed claim for compensation he can enter into the merits of the dispute and decide it. It is upon the decision on point No. 1 that the arbitrator would have jurisdiction to decide the dispute involved in points Nos. 2, 3 and 4. The first point of reference is clearly a specific question of law touching upon the jurisdiction of the arbitrator and this was framed and referred to by none other than, despite the initial objection of the petitioner, the respondent. Therefore, the respondent invited the arbitrator by the specific point of 135 reference which involves a specific question of law touching upon the jurisdiction of the arbitrator to decide the same.

This becomes further clear from the fact that both the learned counsel appearing before the arbitrator submitted agreed draft issues for the decision of the arbitrator. The first issue amongst the agreed draft issues reads as under:

"Does the claim of the claimant fall within the purview of the purview of the first para of Clause 40 of the General Conditions of Contract entered into between the two parties? This point was not to be incidentally decided while deciding the dispute referred to the arbitrator his jurisdiction to entertain the dispute is questioned. In fact, hereby the reference of the specific point of law touching upon the jurisdiction of the arbitrator the parties invited the arbitrator to decide this specific question. It was he who was asked by the submission or terms of reference to decide his jurisdiction first and then proceed to decide the dispute on merits. We referred to Issue No. 1 in the agreed draft issues only to buttress the conclusion that it was at the instance of the respondent that the arbitrator was called upon to decide the question of the scope, ambit and width of arbitration clause the decision on which would confer jurisdiction upon him to decide the dispute as to compensation. In this context it would be advantageous to refer to paragraphs 11 and 12 of the counter statement filed by the respondent before the arbitrator which reads as under:

"11. It is submitted that the claim in question relating to the increase in the cost of machinery and equipment as also technical know-how fees payable by the contractors/claimants is fully outside the purview of the contract. There is no liability on the part of the respondent to procure the machinery and equipment or technical know-how required by the contractor nor was there any liability to pay any part of the cost, whether it is the original assumed cost or the increased cost. The claim thus is completely outside the purview of the contract and it is submitted, therefore, that the same does not fall within the purview of the first paragraph of Clause 40 of the General Conditions of Contract and thus not arbitrable.

12. It is submitted that the question of arbitrability of the dispute should be decided as a preliminary point before proceeding with the other issues." 136 The formulation of the specific question of law by the respondent along with its suggestion to decide it as a preliminary issue and becoming a party to the agreed draft issue No. 1 would conclusively establish that the specific question of law touching upon the jurisdiction of the arbitrator was referred to the arbitrator for his decision.

Therefore, the conclusion is inescapable that a specific question of law touching upon the jurisdiction of the arbitrator which is indisputably a question construction of Cl. 40 and therefore a question of law was specifically referred by the parties to the arbitrator for his decision and by the terms of Clause 40 agreed to abide by his decision as final and binding.

Mr. F.S. Nariman, learned counsel for the appellant urged that Sec. 16(1) (c) may permit the court to remit or set aside the award on the ground that there is an error of law apparent on the face of it, yet where a specific question of law has been referred to the arbitrator for decision, the fact that the decision is erroneous does not make the award bad on its face so as to permit its being set aside. Expanding the submission, it was urged that a decision on a question of law by an arbitrator may be given in two different and distinct situations; firstly where while deciding a dispute referred to him incidentally a question of law may arise which an arbitrator may decide in order to dispose of the reference and if in such a situation any error of law appears on the face of the award, the court can interfere with the award. But there is an altogether an independent and a distinct situation in which a question of law might arise such as where the parties to the dispute may frame the specific question of law and reflect it to the Arbitrator for his decision. In the later situation, it was urged that the decision of the Arbitrator even if erroneous would not permit the court to interfere with the award.

Proceeding along it was urged that in this case a specific question of law touching upon the jurisdiction of the arbitrator was specifically referred to the Arbitrator for his decision and therefore, the decision of the Arbitrator is binding on the parties and the court cannot proceed to inquire whether upon a true construction of the arbitration clause. the dispute referred to the Arbitrator for arbitration would be covered by the arbitration clause so as to clothe the arbitrator with the jurisdiction to arbitrate upon the dispute.

Mr. Pai, learned counsel for the respondent countered by saying that jurisdiction of the arbitrator cannot be left to the decision of the arbitrator so as to be binding on the parties and it is always for the court to decide whether the arbitrator has jurisdiction to decide 137 the dispute. Alternatively, it was submitted that the arbitrator cannot by a misconstruction of the arbitration agreement clothe himself with or confer upon himself the jurisdiction to decide the dispute. The court it was said has always retains to itself the jurisdiction to look at the arbitration agreement to determine its scope and ambit and if it is found that the dispute referred to the arbitrator does not fall within the arbitration agreement, the court must interfere on the ground that the award disclosed an error of law apparent on the face of it.

The contention may be examined both on principle and on the precedents.

Complexity of rights and obligations in national and international trade and commerce would certainly generate disputes between the parties and treated as a normal incident of commercial life and till commercial arbitration came to be recognised as a civilised way of resolving such disputes, prolix and time-consuming litigation was the only method of resolving such disputes. As an alternative to court proceedings, arbitration as a method of resolving disputes by domestic tribunal constituted by the choice of parties became acceptable. The basic difference between the court proceedings and the arbitration is the choice of the tribunal. Ordinarily, all matters in which relief can be claimed from the court may become subject matter of arbitration. Now if in a law court incidental questions of law arise in the course of proceeding, the court has an obligation to decide those questions of law. But when it came to a tribunal not endowed, with the judicial power of the State but by conferment by the parties to the dispute or which acquires jurisdiction by a submission of the parties to the dispute to invite the decision by the forum of their choice and to be bound by it a question arose whether a pure question of law if at all can be referred to an arbitrator for his decision and even if he decides, can the decision be questioned on the ground that there is an error apparent on the face of the award in deciding the question. Now as stated a short-while ago, a question of law may figure before an arbitrator in two ways. It may arise as an incidental point while deciding the main dispute referred to the arbitrator or in a given case parties may refer a specific question of law to the arbitrator for his decision.

There is no more gainsaying the fact that a pure question of law may and can be referred to an arbitrator for his decision. Russel on the Law of Arbitration Twentieth Edition at page 22 states as under;

138 "A pure question of law may be referred to an arbitrator; and where such a question is specifically referred his award will not be set aside merely upon the ground that his decision is wrong." In Halshury's Laws of England Vol. 2 Para 623 4th Edition the statement of law reads as under:

"If a specific question of law is submitted to the arbitrator for his decision and he decide it, the fact that the decision is erroneous does not make the award bad on its face so as to permit its being set aside;

and where the question referred for arbitration is a question of construction, which is, generally speaking, a question of law, the arbitrator's decision cannot be set aside only because the court would itself have come to a different conclusion." With the ever widenings expansion of international trade and commerce, complex question of private International Law, effect of local laws on contracts between parties belonging to different nations are certainly bound to crop up. Arbitration has been considered a civilised way of resolving such disputes avoiding court proceedings. There is no reason why the parties should be precluded from referring a specific question of law to an arbitrator for his decision and agree to be bound by the same. This approach manifests faith of parties in the capacity of the tribunal of their choice to decide even pure a question of law. If they do so, with eyes wide open, and there is nothing to preclude the parties from doing so, then there is no reason why the court should try to impose its view of law superseding the view of the Tribunal whose decision the parties agreed to abide by. Therefore, on principle it appears distinctly clear that when a specific question of law is referred to an arbitrator for his decision including the one touching upon the jurisdiction of the arbitrator, the decision of the arbitrator would be binding on both the parties and it would not be open to any of the two parties to wriggle out of it by contending that the arbitrator cannot clutch at or confer jurisdiction upon himself by misconstruing the arbitration agreement.

This conclusion is borne out by a long line of decisions both Indian and foreign to which we would now turn.

The earliest case to which we would refer is the decision of the 139 House of Lords in Kelanten Government v. Duff Development Co. Ltd. in which Lord Trevethin in his speech said as under:

"If your Lordships should be of opinion that the award is bad in law upon its face, it should be set aside, for this is not in my view, a submission to arbitration of such a nature that, although the law is bad upon the face of the award, the decision cannot be questioned. That happens only when the submission is of a specific question of law and is such that it can be fairly construed to show that the parties intended to give up their rights to resort to the King's courts and in lieu thereof to submit that question to the decision of a tribunal of their own." Same distinction was also brought out by Lord Parmoor when he said that 'the principle applicable where a specific question of law has been submitted to the decision of arbitration is well expressed by Channel, J., in Re King and Duveen, in which it was said that where a specific question of law is referred to an arbitrator for his decision, the award cannot be set aside on the ground of an error apparent on the face of the award because the question of law was wrongly decided.' At a later stage, it was observed that if the court, before which it is sought to impeach the award, comes to the conclusion that the alleged error in law even if it can be maintained, arises in the decision of a question of law directly submitted to the arbitrator for his decision, then the principle stated by Channel, J., in Re.

King and Duveen applies, is attracted and the parties having chosen their tribunal, and not having applied successfully to the court under either s. 4 or s. 19 of the Arbitration Act, 1889, are not in a position to question the award or to maintain a claim to set it aside.' This decision is an authority of the proposition that where a question of construction is the very point referred for arbitration, then the decision of the arbitrator upon that point cannot be set aside by the court only because the court would itself have come to a different conclusion.

In F.R. Absalom Ltd. v. Great Western (London) Garden Village Society Ltd. the contention was that the award was bad by reason of an error in law appearing on the face of it. The submission was 140 not before the court and a reference to the pleadings had to be made for the purpose of ascertaining whether any specific question of law was in dispute, and was referred to the arbitrator for his decision. The pleadings disclosed that the whole dispute between parties was as to the amount due to the contractor in respect of the value of the work done and of the materials on the site upto and including a certain date. In the background of this fact, Lord Warrington in his speech said that no specific question of construction arose. In order to decide whether the award was bad by reason of an error of law on the face of it, Lord Russel in his speech pointed out at page 621 that it is essential to keep the case where disputes are referred to an arbitrator in the decision of which a question of law becomes material distinct from the case in which a specific question of law has been referred to him for decision.' Thereafter he proceeded to state:

"The authorities make a clear distinction between these two cases and as they appear to me, they decide that in the former case the court can interfere if and when any error of law appears on the face of the award, but that in the latter case no such interference is possible upon the ground that it so appears that the decision upon the question of law is an erroneous one.

In reaching this conclusion, the decision in Kelantan Government v. Duff Development Co. Ltd. was affirmed. On the facts, it was found that no specific question of law was referred to the arbitrator for his decision.

In Durga Prasad Chamria and Anr. v. Sewkishendas Bhattar and Ors; the award was sought to be set aside inter alia on the ground that the award was bad on account of an error of law apparent on the face of it. The errors of law relied upon were; (a) the arbitrator had admitted as evidence the family settlement and the partnership arrangement of 1916, neither of which, though each related (it was said) to immoveable property, had been registered as required by the Indian Registration Act, and (b) the arbitrator ought to have held that Anardeyi's suit was in any event barred by limitation. The Privy Council first noticed the issues settled by Panckridge. J.; amongst them were the two following:

141 "1(b) Is the agreement dated 16th November, 1916, relating to the alleged family settlement valid or admissible in evidence? (9) Is the plaintiff's claim or any portion thereof barred by limitation?,, After these issues had been settled, the parties agreed to refer to arbitration "the outstanding matters in the suit." In a motion for setting aside the award it was urged that there was an error of law apparent on the face of the award both with regard as to the admissibility of the alleged family settlement and about the suit of Anardeyi being barred by limitation. Rejecting the motion, the Privy Council observed as under, "However, that may be, their Lordships are satisfied that the two points of law as to which it is said the arbitrators error vitiates the award were specifically referred to him to decide and if this is so, it would be contrary to well-established principles such as are laid down in re King and Duveen and F.R. Absalom Ltd. v. Great West (London) Garden Village Society Ltd., for a Court of law to interfere with the award even if the Court itself would have taken a different view of either of the points of law had they been before it." Turning to the decisions of our Court, reference may first be made to Seth Thawardas Pherumal v. The Union of India 1. In that case, the question was whether the award was bad on account of error of law apparent on the face of it, as provided in Sec. 16(1) (c) of the Arbitration Act.

Examining this contention, this Court observed as under:

"This covers cases in which in error of law appears on the face of the award. But in determining what such an error is, a distinction must be drawn between cases in which a question of law is specifically referred and those in which a decision on a question of law is incidentally material (however necessary) in order to decide the question actually referred. If a question of law is specifically referred and it is evident that the parties desire to have a decision from the arbitrator about that rather than one from the Courts, then the Courts will not interfere, though even there, there is authority for the view that the courts will interfere if it is apparent that the arbitrator 142 has acted illegally in reaching his decision, that is to say, if he has decided on inadmissible evidence or on principles of construction that the law does not contenance or something of that nature. See the speech of Viscount Cave in Kelantan Government v. Duff Development Co. at page 409. But that is not a matter which arises in this case.

The law about this is, in our opinion the same in England as here and the principles that govern this class of case have been reviewed at length and set out with clarity by the House of Lords in F.R. Absalom Ltd.

v. Great Western (London) Garden Village Society and in Kelantan Government v. Duff Development Co. In Durga Prasad v. Sewkishendas the Privy Council applied the law expounded in Absalom's case to India; see also Champsey Bhara & Co. v. Jivraj Balloo Spinning and Weaving Co. and Saleh Mahomed Umer Dossal v. Nathoomal Kessamal. The wider language used by Lord Macnaghten in Ghulam Jilani v. Muhammad Hassan had reference to the revisional powers of the High Court under the Civil Procedure Code and must be confined to the facts of that case where the question of law involved there, namely, limitation, was specifically referred. An arbitrator is not a conciliator and cannot ignore the law or misapply it in order to do what he thinks is just and reasonable. He is a tribunal selected by the parties to decide their disputes according to law and so is bound to follow, and apply the law, and if he does not he can be set right by the Courts provided his error appears on the fact of the award. The single exception to this is when the parties choose specifically to refer a question of law as a separate and distinct matter." The Court further proceeded to examine whether in the facts of that case, the arbitrator was specifically asked to construe clause 6 of the contract or any part of the contract or whether any question of law was specifically referred. The Court emphasised the word