Arb.A. 8/2004 BEFORE HON’BLE JUSTICE I A ANSARI JUDGMENT & ORDER (Ansari, J.) A challenge has been made by this appeal against the order, dated 18.11. 2004, passed by the learned Deputy Commissioner, Papumpare District, Arunachal P radesh, in Misc. Arbitration (Appeal) No.1/2003, whereby the award has been set aside by invoking the provisions of Section 34 of the Arbitration and Conciliati on Act, 1996. The material facts, which gave rise to the present appeal, may, in brief , be set out as follows: 2. FACTS LEADING TO ARBITRATION: (i) A Notice Inviting Quotation, dated 18.08.93, was issued by the Chief Eng ineer, Department of Power, Government of Arunachal Pradesh, for supply of 30 Hy del Power Generating Sets (in short, ’hydel sets’) of 20KW, 30KW and 50KW capaci ty meant for supply of electricity to remote areas of Arunachal Pradesh. The hy del sets, to be so procured by the Government, were to be utilized with the help of natural water sources and springs for production of electricity. The appell ant herein submitted its proposal, on 29.09.93, to the Chief Engineer (Power) fo r supply of the 30 hydel sets. This offer of the appellant had three distinct fe atures, namely, (i) prices F.O.R. Itanagar, (ii) 75% on the strength of indemnit y bond/undertaking/proof of despatch, and (iii) commissioning, if sought for. F ollowing a meeting, held on 28.04.94, between the appellant, on the one hand, an d the Chief Engineer, Department of Power, Govt. of Arunachal Pradesh, on the ot her, the appellant confirmed that it would install the hydel sets within a perio d of seven days on receipt of the sites. In consequence of the meeting, so held , the appellant, in its communication, dated 28.04.94, agreed to do the followin g: 1. We are maintaining all spares parts that may be required. 2. We even have spare T/G sets and in the event of major problem in the sup plied sets within the Guarantee period the same shall be replaced altogether. 3. We shall arrange to provide suitable training to Departmental staff/vill age people as desired by you. This training shall be provided free of cost. 4. The penstock offered by us are of GRP pipes which are suitable for such remote areas for their light weight. This will simplify the transportation and l aying and no maintenance is required. 5. On receipt of site the set can be installed within a period 7 days. 6. In view of the light weight and small dimension of the sets, the size an d cost of the Power House and installation shall be considerably low. 7. We shall be able to supply 15 sets per months commencing 2 months from t he date of order as per the terms and conditions. (ii) Pursuant to further negotiations, which took place between the parties c oncerned, the appellant issued, on 19.05.94, a communication undertaking, inter alia, free installation and commissioning of the sets at the site including, fre e of cost, construction of power house. This communication, dated 19.05.94, fur ther clarified that the rate charged would be F.O.R. project site. The main feat ures of this communication, dated 19.05.94, issued by the appellant were as foll ows: 1. Free Installation & commissioning at site. 2. Power house building will be constructed free of cost from pre fabricate d structure. 3. Rate will be F.O.R. project site. 4. We will supply pen stock pipe upto 200mm dia pipe free of cost subject t o 100 mtr. each project. 5. Our offer against the above referred NIT will be valid upto 30th July’94 . (iii) On the same date, i.e., 19.05.94, the appellant issued yet another commu nication undertaking to survey, free of cost, all the sites, identity the sourc es of power from its hydrologist and prepare survey data, etc., in association w ith the Department concerned. For the sake of convenience, the relevant portion of the second communication, dated 19.05.94, is quoted hereinbelow: Further, we also confirm that we will survey all the sites free of cost & ident ify source from our Hydrologist and prepare survey data etc. in association with your department. (iv) On the basis of the post-tender negotiations between the parties concern ed and also considering various technical and commercial aspects of the contract work, the Work Advisory Board, constituted for the purpose, approved, on 25.07 .1994, the terms and conditions subject to which the appellant had agreed to sup ply the said hydel sets. The minutes of the proceedings of the Work Advisory Boa rd, held on 25.07.1994, further conveyed that the Chief Secretary, Govt. of Arun achal Pradesh, had desired that the firm may be asked to explore the possibility to import turbine from a country, other than Italy, if tie-up arrangement can b e made with the other country and if such a turbine can be made available at the shortest interval. A letter of intent, pending issuance of final order, was acc ordingly issued to the appellant. Shortly thereafter, the appellant, on 26.09.1 994, requested the respondent No. 1 to pinpoint the locations, wherein survey ca n be conducted for installation of the hydel sets. The respondent No. 1 did not, however, respond to the appellant’s said letter, dated 26.09.94; rather, the Ch ief Engineer, Department of Power, issued a letter, dated 28.10.94, to the appel lant informing the appellant that the appellant’s offer for supply of the 30 hyd el sets, as mentioned above, stands approved at an estimated cost of Rs. 7,70,00 ,000/-. Thereafter, a work order was issued, on 09.01.95, by the Chief Engineer (Power), Govt. of Arunachal Pradesh, to the appellant for supply of the said 30 hydel sets. The communication, dated 09.01.95, however, made it clear that the time allowed for carrying out the work shall be reckoned from the 15th day of t he letter, i.e., with effect from 24.01.95. A formal deed of agreement between the parties was accordingly executed on 12.01.95. Thus, the period of contract was for two years commencing from 24.01.95 and ending on 23.01.97. The said agr eement contained, inter alia, the following terms: INSTALLATION & COMMISSIONING : The firm shall install and commission th e sets at site. GUARANTEE : The stores and services under the contract shall be guar anteed for 18 months; Any defective equipments or part thereof shall be repaired /replaced free of cost, if noticed within the guarantee period. PAYMENT : i. An advance payment of 25% of order/contract value shall be ma de alongwith the order/signing of the contract ii. Balance 70% payment shall be made on supply of equipments iii. Balance 5% shall be paid after installation an d commissioning of the equipments with the fullest satisfaction of the departmen t. (v) The agreement, which the parties had, thus, entered into, made it clear that the appellant, as contractor, would receive 25% of the contract value along with the work order and payment of the balance 70% of the value shall be made o n supply of the equipments and the remaining 5% of the value shall be paid after installation and commissioning of the equipments to the fullest satisfaction of the Department concerned. (vi) Following execution of the agreement, dated 12.01.95, aforementioned, th e authorities concerned paid, on 14.01.95, a sum of Rs. 1,92,51,750/- to the app ellant, the said sum being 25% of the contractual amount as had been agreed to under the agreement, dated 12.01.95. By its communication, dated 28.04.1995 and 08.05.1995, the appellant requested the appellant No. 1 to hand over the sites. Pursuant to the communication, so issued by the appellant, Superintending Engi neer (Civil), Department of Power, Govt. of Arunachal Pradesh, issued a hand-wri tten note asking the appellant to visit the areas of Along and Roing and contact the Assistant Engineer (Civil) for the purpose of survey. (vii) Thereafter, the appellant, by communication, dated 12.06.95, addressed t o the Chief Engineer (Power), requested for change of the brand of the hydel set s from IREM of Italy to CINK MVE of Czech Republic as the delivery schedule of t he IREM of Italy was not matching with the time stipulated for execution of the contract, in question. The appellant also enclosed, with its communication, dat ed 12.06.1995, specifications of the CINK brand inasmuch as the specifications w ould have been necessary for the Department concerned to grant approval to the a ppellant’s communication seeking change of the brand of the hydel sets, should t he Department decide to accord such approval. An invitation was also given by t he said communication to the officials of the respondent Department to inspect t he hydel sets of CINK brand. The appellant also communicated, vide its letter, dated 12.06.1995, aforementioned, to the respondent Department, that the hydel s ets, so offered, were Asynchronous type compared to the earlier brand, which was Synchronous type. (viii) By communication, dated 13.06.95, the Superintending Engineer (Civil) c onveyed to the appellant the decision of the Department to accept, in principle, the change in make from IREM of Italy to CINK MVE of Czech Republic subject to satisfaction of performance of the units and after the service is ensured . In the said communication, it was further mentioned by the Superintending Engineer (Civil) that suitable sites with heads and discharge combination, as required f or the units, would be made available on arrival of the machinery. By letter, d ated 13.06.95, aforementioned, the appellant was also asked to arrange for insta llation of, at least, one unit of each of the 20KW, 30KW and 50KW hydel set for ascertaining their suitability and performance level. (ix) On the ground that the sites for installation of the hydel sets had not been identified till then, the appellant, vide its communication, dated 13.10. 95, addressed to the Chief Engineer (Power), requested the latter to let the app ellant know about the place, where the equipments were to be carried to and deli vered. By yet another letter, dated 13.11.95, addressed to the Superintending E ngineer (Civil), the appellant requested the latter to give the name of the cons ignee to whom the hydel sets could be delivered as no site had been handed over to the appellant till then. On 13.11.1995 itself, the Superintending Engineer ( Civil), by his letter, dated 13.11.95, addressed to the appellant, informed the appellant that the machinery may be delivered at the storeyard of the Department of Power at Bhalukpung or Charduar, Arunachal Pradesh, as may be arranged by th e Executive Engineer (Civil), Bomdila. (x) By its communication, dated 30.11.1995, the appellant submitted to the D epartment concerned survey data in respect of eight different sites. These data were received by the Assistant Engineer (Civil), Department of Power, Roing Civ il Sub-Division. (xi) The appellant completed the supply of the 30 hydel sets by 21.03.96 and the same were acknowledged by the authorized representative of the Department c oncerned. In fact, the Assistant Engineer (Civil), Department of Power, Governm ent of Arunachal Pradesh, Bomdilla, took the delivery of the hydel sets on writt en instructions of the Chief Engineer (Power), as conveyed by the communication, dated 14.02.1996. On 21.03.1996 itself, a sum of Rs. 3,85,02,000/- was paid to the appellant. Though the agreement, in question, had stipulated that upon sup ply of the equipments, 70% of the total contract value, i.e., a sum as much as R s. 5,39,04,800/-, would be paid to the appellant, an amount of Rs. 3,85,02,000/- only was paid to the appellant. (xii) The appellant claims that after having made supply of the 30 hydel sets, it continued to make requests, from time to time, to the respondents/authoritie s concerned to allot the sites, where the hydel sets were to be installed; but t he respondents failed to allot the sites and it was, for the first time, on 29.0 7.96, that the Chief Engineer (Power) gave to the appellant a list of 46 probabl e sites to be surveyed without, however, pinpointing the places, where the hydel sets were to be installed. (xiii) The appellant, then, submitted, on 10.11.96, to the Chief Engineer (Powe r), for approval, a list of 12 sites; but no action was taken by the respondents on the list so submitted by the appellant. Instead of responding to the appell ant’s letter, dated 10.11.1996, a show cause notice was issued, on 22.11.96, by the Chief Engineer (Power) informing the appellant that the hydel sets, which th e appellant had supplied, could not be accepted by the Department and the appell ant was further asked to show cause as to why the appellant had supplied hydel sets of CINK MVE make of Czech Republic instead of Ecowatt make of Italy. The a ppellant submitted a reply, on 12.01.97, stating therein that the hydel sets, su pplied by the appellant, were as per approval granted. The respondents, on rece ipt of the appellant’s letter, 12.01.97, aforementioned, did not pursue the cont roversy, raised by them, with regard to the change in the brand of the hydel set s. (xiv) Thereafter, the appellant, once again, submitted, on 29.01.1997, the sai d list of 12 sites for approval. However, on 19.02.1997, 5 sites were approved. By communication, dated 08.03.1997, the appellant requested for return of the approved drawings, duly signed and sealed, in respect of the 5 approved sites so that installation works could be taken up. The drawings, which had been submit ted by the appellant seeking approval thereof, contained three sets, one set was meant for the respondent Department, one set for the contractor, and the third set was to be kept at the site. By its communication, dated 19.03.1997, the app ellant sought for extension of the period of contract; but no extension was gran ted. This was followed by a letter, dated 21.03.1997, issued by the Executive E ngineer (Civil), informing the appellant that due to non-availability of funds, the payment could not be released. However, on 28.10.1997, i.e., after about 18 months of the handing over of the hydel sets to the representative of the respo ndent Department, a further amount of Rs. 1,10,00,000/- was p aid to the appellant leaving still a sum of Rs. 44,02,900/- as outstanding . (xv) In short, the respondents did not, on receipt of the letter, dated 12.10.19 97, pursue the controversy, raised by them, as regards the change in the brand o f the hydel sets; rather, the Executive Engineer (Civil) informed the appellant, vide communication, dated 21.03.97, that due to non-availability of funds, paym ent could not be released. Thereafter, on 29.10.97, a further amount of Rs. 1,1 0,00,000/- was released to the appellant. Thus, a total amount of Rs. 6,87,53,7 50/-, which was equivalent to 89.2% of the total contract value, was paid to the appellant and an amount of Rs. 44,02,900/- remained outstanding. However, on 1 9.02.1997, out of the 12 sites, submitted by the appellant for approval, the res pondent authorities approved 5 sites. At the time of submission of the survey d ata, three sets of drawing, in respect of each set, had been submitted to the re spondent No. 1 by the appellant. Out of the three sets, one set, according to t he appellant, was meant for the respondent Department, one set for the contracto r, and the third set was to be kept at the site. Upon receiving the communicati on as regards the approval of the 5 sites, the appellant requested the responden ts, vide communication, dated 08.03.97, to return the approved drawings, duly se aled and signed, for the purpose of installation of the hydel sets. This apart, as the contract period stood expired on 23.01.97, the appellant sought for an e xtension and, on 19.03.97, extension was granted for a period of six months, i.e ., up to 30.06.97. The respondents did not, however, furnish to the appellant t he approved drawings. (xvi) Thus, the appellant contended that it was because of the failure of the respondents to show the sites, where the hydel sets were to be installed, and al so due to the respondents’ failure to return the approved drawings, duly signed and sealed, that the contract work could not be executed, the respondents, on th e other hand, contended that it was the responsibility of the appellant to selec t the sites and install the hydel sets. The appellant, then, requested, on 19.0 2.1999, for appointment of arbitrator. As the respondents did not appoint any a rbitrator, the appellant approached this High Court and, in terms of the provisi ons of Section 11 of the Arbitration and Conciliation Act, 1996, Mr. Justice R.K . Monisena Singh, former Chief Justice of this High Court, was appointed as the arbitrator. 3. ARBITRATION PROCEEDING: (i) In the Arbitration Proceeding, the present appellant, as contractor, filed i ts Statement of Claim seeking an amount of Rs. 5,73,80,068/- along with interest - pendente lite as well as future - alleging, inter alia, that the respondents had committed breach of the contract by not providing the sites for installation of the hydel sets within the period of subsistence of the agreement and, hence, they are liable to pay not only compensation, but also interest. In its Stateme nt of Claim, the appellant, as contractor, further alleged to the effect, inter alia, that the contract, in question, had failed due to the fact that the respon dents had not fulfilled, within the stipulated period, the conditions of the con tract. (ii) The respondent No. 1 submitted its Statement of Defence and also filed a c ounter-claim of Rs. 16,53,12,430/-. In their Statement of Defence, the responden ts contended, inter alia, that it was not the responsibility of the respondents to provide the sites inasmuch as it was the contractor, who was to locate the si tes and install the hydel sets. The contract, in question, according to the resp ondents, had failed, because of the failure of the contractor to fulfill its par ts of the obligations under the contract. Hence, the contractor was not entitled to receive any amount from the respondents; rather, the contractor was liable t o pay compensation to the respondents for the breach of contract committed by th e contractor. (iii) The appellant, thereafter, submitted its reply to the Statement of Defence and the respondent No. 1 filed its rejoinder thereto. A reply was also filed t o the said rejoinder by the appellant. (iv) The learned Arbitrator framed as many as 13 issues. The arbitration proc eedings ended with the delivery of the award on 02.12.2002. The issues, raised in the arbitration proceedings, read as follows: (1) Whether the Respondents breached the terms of the contract by failing to perform their part of the contractual obligation, viz. by not providing the sit es, by no releasing the payment on time as per the terms of the contract? (2) Whether the Respondents failed to release 70% of the payment towards the cost of the equipments at one go against delivery of the equipments as stipulat ed in the contract? (3) Whether the Respondents breached the contract by failing to pinpoint/app rove the sites at the appropriate time as demanded by the Claimants and whether the sites were actually handed over as defined in the agreement? (4) Whether the Respondents defaulted in releasing the payment and the inter est claimed by the Claimant? (4A) Whether the Claimant is entitled to interest, if so, what shall be the r ate of interest? (5) Whether the Respondents failed to perform their part of contractual obli gation? (6) Which of the parties have breached the contract? (7) Whether the Claimants were bound to perform a gratuitous offer for insta llation of Hydel sets and other accessories? (7A) Whether the contract was a compete job/work? Or Whether the contract of installation of Hydel sets and other related wor ks were divisible? (8) Whether the Claimants are entitled to the relief claimed and if so, to w hat extent? (9) Whether the Respondents are entitled to the counter claims preferred by them, and if so, to what extent? (9A) Whether the counter-claim is barred by limitation? (10) To what relief any of the parties is entitled to? (v) The question, as to whether the respondent No. 1 had committed breach of the terms of the contract, as regards the handing over of the sites and payment of the lawful dues, which the issue No. 1 and 3 had raised, was dealt with by t he learned Arbitrator and the findings of the learned Arbitrator on these aspect of the case were recorded from para 7.1 to 7.2.9 of the award. The findings of the learned Arbitrator were, in brie f, as under: (a) At para 7.10, the learned Arbitrator came to a finding that the Departme nt of Power was under obligation to identify/fix and/or make available the place or site for installation of the hydel sets. The learned Arbitrator also conclu ded that the appellant had been excused from the liability to install the hydel sets and perform other related works or discharge other obligations as were refl ected from the letter, dated 13.06.95, whereby the respondent Department had acc epted, in principle, the change in the brand of the hydel sets from IREM of Ital y to CINK MVE OF Czech Republic. (b) While dealing with the question of the release of 70% of the payment tow ards the cost of equipments at one go, the learned Arbitrator came to a finding, at para 8.9, that contrary to the communication, dated 21.03.97, of the Executi ve Engineer (Civil), wherein it had been mentioned that the amount was not being paid due to non-availability of fund, the pleadings, contained in paragraph Nos . 11(b) and 11(c) of the Statement of Defence, clearly disclosed that withholdin g of the payment against delivery of equipments was not on account of non-availa bility of funds, but due to alleged non-performance of the contract i.e., the al leged failure of the contractor to install the hydel sets. (c) The learned Arbitrator concluded, at para 8.17, that the supply or sale of the hydel sets shall be deemed to have been completed by operation of law or by legal fiction, on 21.03.96, when the sets were delivered at Charduwar. The l earned Arbitrator further concluded, at para 8.18, that withholding of the payme nt by respondent No. 1 was not on the ground that the goods, supplied, were not of the specifications contracted for, but for non-installation of the hydel sets . It is in such circumstances that the learned Arbitrator recorded his findings , at para 8.19 and 8.20, as under: In view of the above, the respondent could not withhold the sum of Rs. 44,02 ,000/- because, if the description of the goods delivered were not answering to those contracted for, the respondent might reject the goods and get refund of pr ice paid, which has not been done in the present case and cannot be done at this stage. (d) Dealing with the issue No. 7 and 7(a), which essentially pertained to th e questions as to whether the contract, in question, was a divisible contract, o r not, and as to whether the appellant was bound to install the hydel sets, the learned Arbitrator came to a finding that the supply of the hydel sets was divis ible from installation thereof. The learned Arbitrator concluded, in this regar d, at para 9.9 to 9.11, that the appellant had been excused from the obligation or responsibility to install the hydel sets and perform other related works inas much as the respondent Department had failed to provide the sites at the appropr iate time coupled with the fact that the respondent Department had failed to fur nish the approved drawings duly counter-signed and sealed. (e) Coming to issue Nos. 5 and 6, which relate to the determination of the