* THE HON’BLE SRI JUSTICE V.V.S. RAO AND THE HON’BLE SRI JUSTICE B.N.RAO NALLA CIVIL MISCELLANEOUS APPEAL No.874 of 2005 AND CIVIL MISCELLANEOUS APPEAL No.876 of 2006 % 20.10.2009 Between: Hindusthan Petroleum Corporation Ltd., represented by its Deputy General Manager (Projects), Mr.Y.K.Rao … Appellant AND M/s.Indwell Constructions Ltd., represented by its Managing Director, Sri K.Rama Rao ad another …Respondents Counsel for the Appellant: Sri V.Ravinder Rao Counsel for the Respondent: Sri C.Kodanda Ram < Gist: > Head Note: ? CITATIONS: 1. (2003) 5 SCC 705 2. (2006) 4 SCC 445 3. (2007) 8 SCC 466 4. (2009) 6 SCC 414 5. (2008) 13 SCC 80 6. (2000) 9 SCC 552 7. (2002) 4 SCC 45 8. (2006) 1 SCC 86 THE HON’BLE SRI JUSTICE V.V.S. RAO AND THE HON’BLE SRI JUSTICE B.N.RAO NALLA CIVIL MISCELLANEOUS APPEAL No.874 of 2005 AND CIVIL MISCELLANEOUS APPEAL No.876 of 2006 20.10.2009 Between: Hindusthan Petroleum Corporation Ltd., represented by its Deputy General Manager (Projects), Mr.Y.K.Rao … Appellant AND M/s.Indwell Constructions Ltd., represented by its Managing Director, Sri K.Rama Rao ad another …Respondents THE HON’BLE SRI JUSTICE V.V.S. RAO AND THE HON’BLE SRI JUSTICE B.N.RAO NALLA CIVIL MISCELLANEOUS APPEAL No.874 of 2005 AND CIVIL MISCELLANEOUS APPEAL No.876 of 2006 COMMON ORDER: (Per Hon,ble VVSR,J) These two appeals under Section 37 of Arbitration and Conciliation Act, 1996 (the Act, for brevity), can be disposed of by common order as they arise out a common order passed by the Court of District Judge, Visakhapatnam, in O.P. No.1654 of 2001 and O.P.No.603 of 2003. Hindustan Petroleum Corporation Limited (HPCL) through M/s.Engineers India Limited invited tenders for civil and structural works for off-sites for Visakha Refinery Expansion Programme-II (VREP-II) at an estimated cost of Rs.10,20,53,687.70 ps. The quotation of Indwell Construction Limited (ICL) of Rs.10,20,53,687.70 ps was accepted and contract was awarded on 25.9.1997. The work was scheduled to be completed by 28.8.1998 but the same was extended upto 06.2.1999 due to a fire accident in the Refinery. During the course of the implementation of contract disputes arose. ICL submitted claims for Rs.82,45,542/- and also requested for appointment of arbitrator. The Director (Refineries), HPCL, by letter dated 29.11.2000 appointed Sri S.V.K. Gnaneshwar, Project Head, Visakha Power Project, HPCL, as sole arbitrator, to adjudicate the disputes. The arbitrator entered reference and issued notice to the parties. ICL filed claim petition on 30.12.2000 claiming a total sum of Rs.87,79,851/- under ten claims which are as follows. 1. Loss due to idle labour and machinery caused by stoppage of work, interruptions, non issue of work estimates, withdrawal of work permits etc., 2. Loss due to overhead charges for prolonged period of contract, 3. Idle charges for labour and equipment from the date of blast to the date of demobilization, as per orders of HPCL, 4. Demobilization and Remobilization charges, 5. Removal and transportation of debris after the blast with men and machinery as ordered by HPCL, 6. Payment of interest for delay in payment of running account bills, 7. Payment of interest for delay in payment of final bill, 8. Refund of crane hire charges deducted by HPCL from RA Bill No.21, 9. Escalation of item rates for the period from 01.12.1998 to 06.2.1999, and 10. Dewatering charges. HPCL filed reply and counter claim before the arbitrator claiming interest on advance granted by HPCL and amounts towards expenses for arbitration proceedings. They contended that the parties agreed for revisions in the contract being Revision Nos.I, II, III, IV, IVA, V, VI, VII, VIII and that ICL gave an undertaking that they would not have any other claims or claim with regard to works whatsoever. They also relied on change order(s) issued from time to time. Learned Arbitrator passed award on 05.9.2001. Claim Nos.8 and 9 were allowed and claim No.7 was partly allowed. Claim Nos.1, 2, 3, 4, 6 and 10 were rejected. ICL withdrew claim No.5. The summary of the award passed by the Hon’ble arbitrator reads as under. 1. An amount of Rs.25,10,957/- is awarded to the claimants M/s.Indwell Constructions Ltd., vide claim Nos.7, 8 & 9. 2. This amount shall be paid by the respondents to the claimants within a period of 40 days from the date of this award failing which the award amount attracts interest @ 11% from the 31st day till the date of payment. HPCL filed O.P.No.1654 of 2001 under Section 34 of the Act seeking to set aside the award in respect of claim No.8. ICL filed O.P. No.603 of 2003 praying the District Court to set aside the findings of the arbitrator with regard to claim Nos.1 to 4, 6 and 10, and also modify the rate of interest in respect of claim No.7. Learned District Judge by common order dated 10.5.2005 dismissed both the O.Ps. HPCL therefore filed CMA No.874 of 2005 against O.P.No.1654 of 2001 and ICL filed CMA No.876 of 2006 against O.P.No.603 of 2003. Learned Counsel for ICL though raised various contentions for some time fairly submitted that ICL does not press the appeal. Therefore nothing survives in CMA No.876 of 2006. CMA No.874 of 2005 is limited to the award of Hon’ble Arbitrator as confirmed by District Court only in relation to claim No.8. Learned Counsel for HPCL and learned Counsel for ICL made submissions at length. They also relied on precedents to which a reference may be made at appropriate place. The only point that falls for consideration is whether Hon’ble Arbitrator and learned District Judge committed any error in allowing the claim No.8 made by ICL before the arbitrator. Before considering this, it is necessary to briefly indicate the scope of power of the District Court under Section 34(2) of the Act, which enables to set aside the arbitral award. A perusal of Section 34(2) of the Act would show that an award may be set aside by the Court on the grounds of procedural non- compliance (let us say, procedural grounds) and/or on grounds which are of substantial in nature (substantive grounds). The substantive grounds may include procedural grounds but not vice versa for obvious reasons. Section 34(2)(a)(iii) and (iv) of the Act broadly fall under the category of procedural grounds. These are non- service or improper service of notice of appointment of arbitrator or non-service of improper service of notice of arbitral proceedings. In a given case, when an arbitrator is appointed under Section 11(6) of the Act without notice to a party, it can also be a ground to set aside such an award. Similarly if the arbitrator proceeds without giving notice or it is proved that proper notice was not given to the party, it is a ground to set aside arbitral award. In addition to this, Section 34(2)(a)(v) of the Act contemplates a situation where the composition of arbitral Tribunal or arbitrary procedure is not in accordance with agreement of the parties or where the composition of arbitral Tribunal or arbitral Tribunal is in conflict with any of the provisions of Part-I of the Act. Many situations in which arbitrary procedure is not in accordance with agreement can be visualized like less number of members constituting arbitral Tribunal than agreed number; constituting arbitral Tribunal at a place not agreed to by the parties and a procedure evolved by the arbitral Tribunal, which places one of the parties at an unfair and disadvantageous position. As noticed supra, substantive grounds for setting aside arbitral award are contained in Section 34(2)(a)(i), (ii) and (iv) of the Act. They are self-explanatory and read as under. 34. Application for setting aside arbitral award.– (2) An arbitral award may be set aside by the Court only if – (a) the party making the application furnishes proof that – (i) a party was under some incapacity, or (ii) the arbitration agreement is not valid under the law to which the parties have subjected it or, failing any indication thereon, under the law for the time being in force; or (iv) the arbitral award deals with a dispute not contemplated by or contains decisions on matters beyond the scope of the submission to arbitration: Provided that, if the decisions on matters submitted to arbitration can be separated from those not so submitted, only that part of the arbitral award which contains decisions on matters not submitted to arbitration may be set aside; From the language of Section 34(2)(a) of the Act, there cannot be any doubt that an arbitral award can be set aside by the Court only if the party making an application in accordance with Section 34 (2) and (3) of the Act furnishes proof making out a case for setting aside the arbitral award. Section 34(2)(b) of the Act casts a duty on the Court to set aside an arbitral award if the subject matter of the dispute is not capable of settlement by arbitration and under the law or the arbitral award is in conflict with the public policy of India. Thus the burden lies on the party making an application to prove the procedural grounds and/or substantive grounds for setting aside the arbitral award as contemplated under Section 34(2)(a) of the Act. But after an objective enquiry, the Court on its own may set aside the award if any of the grounds mentioned in Section 34(2)(b) of the Act are satisfied in a given case. These two also fall in the category of substantive grounds. In addition to above procedural and substantive grounds for setting aside an award of arbitral Tribunal, there are other grounds evolved in precedent law. These include error or fact apparent on the face of record, error of law apparent on the face of record, perversity in relation to each of these errors and bias. Even while testing the arbitral award on these grounds, the Court has certain limitations. This branch of law has also been evolved by interpretative process adopted by the Courts. We may refer some of the decisions cited before us. In ONGC Ltd., v Saw Pipes Ltd.[1], Supreme Court held as below. "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 be whether such award could be set aside. Similarly, under sub- section (3), the 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 the 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 a 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 appears 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 the 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." "…., 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 case it is required to be held that the award could be set aside if it is patently illegal. The 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." The above dictum was followed in Hindustan Zinc Ltd v Friends Coal Corporation[2], and the principle that the Court can consider if the award is against specific terms of the contract and interfere if it is patently illegal, was reiterated. In Numaligarh Refinery Ltd. v Daelim Industrial Co. Ltd.[3], Supreme Court explained further thus. So far as the legal proposition as enunciated by this Court in various decisions mentioned above, it is correct that Courts shall not ordinarily substitute its interpretation for that of the arbitrator. It is also true that if the parties with their eyes wide open have consented to refer the matter to the arbitration, then normally the finding of the arbitrator should be accepted without demur. There is no quarrel with this legal proposition. But in a case where it is found that the Arbitrator has acted without jurisdiction and has put an interpretation of the clause of the agreement which is wholly contrary to law then in that case, there is no prohibition for the Courts to set things right. I n G.Ramachandra Reddy v Union of India[4], Supreme Court considered scope of interference by the Court while dealing with petitions filed under Section 30 of the Arbitration Act, 1940. Noticing relevant case law, the apex Court set out legal principles in the following terms: the Court while dealing with an award would not reappreciate the evidence. The award containing reasons also may not be interfered with unless they are found to be perverse or based on wrong proposition of law. If two views are possible, it is trite, the Court will refrain itself from interfering. In Delhi Development Authority v R.S. Sharma[5], Supreme Court referred to Grid Corporation of Orissa Ltd., v Balasore Technical School[6], Northern Railway v Sarvesh Chopra[7], State of Rajasthan v Nav Bharat Construction Co.,[8], Hindustan Zinc Ltd., (supra) and laid down the following principles. (a) An Award, which is (i) contrary to substantive provisions of law ; or (ii) the provisions of the Arbitration and Conciliation Act, 1996 ; or (iii) against the terms of the respective contract ; or (iv) patently illegal, or (iv) prejudicial to the rights of the parties, is open to interference by the Court under Section 34(2) of the Act. (b) 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; (c) The Award could also be set aside if it is so unfair and unreasonable that it shocks the conscience of the Court. (d) It is open to the Court to consider whether the Award is against the specific terms of contract and if so, interfere with it on the ground that it is patently illegal and opposed to the public policy of India. There is no denial that the principles as above would govern the case on hand. The claim No.8 made by the ICL before the arbitrator reads as under. Returning of Crane Hire charges recovered in the R.A. Bill No.21 The respondent HPCL had deducted from Running Account Bill No.21 an amount of Rs.13,61,475/- (Rupees Thirteen lakhs sixty one thousand four seventy five only) towards hire charges of cranes. This is not justified since the contract terms specify deployment of 10 MT Escort Crane as per Annexure-II attached to the schedule of rates of the contract document (copy enclosed). This is included as details of equipment “To be deployed” by the claimant. In this connection the claimant had written a number of letters to the respondent not to charge since the claimant were required to deploy 10 MT Escort Crane only and these cranes were deployed as per terms of contract. The claimant therefore request to return the amount recovered on this account i.e. Rs.13,61,475/- (Rupees Thirteen lakhs sixty one thousand four seventy five only) with interest. “The Learned arbitrator may be pleased to pass an award of Rs.13,61,475/- (Rupees Thirteen lakhs sixty one thousand four seventy five only) in favour of the claimant under this head of claim.” In their reply and counter claim, claim No.8 was repudiated by HPCL in the following terms. VIII. Reply to Claim No.8 of the Claimant:- The contractor was to produce cranes suitable for the job. The SCC Cl.13.1 states the no construction equipments shall be supplied by the owner. This is also reinforced in the letter of acceptance and the cover page of Schedule of Rates which states that “the rates are inclusive of material ……… Tools and tackles … … …” The vendor had only given and inclusive list of equipment including 10 MT Crane but in reality HPCL supplied 30 MT, 150 MT and 300 MT cranes for the work which was used by the vendor on understanding and he would pay for the same at the market rates. Since this went into dispute, the matter was discussed between the claimant and the respondent and an understanding was arrived at (contract/notatio). This is found by way of Letters dated 20.7.1998 and 29.8.1998 of the Claimant and Revision Order No.4 issued pursuant to the same. These are enclosed and form part of this Reply as Annexure-R/5. These would go to show that escalation upto a particular limit was agreed (without prejudice) even during the contractual period when there was a bar on escalation in the interest of the work since it formed a part of the composite settlement of the issues raised by the Claimant and this limited escalation (making other terms and conditions applicable – including the bar on escalation continue to be applicable) vide revision 4 was given after considering all these aspects such as permits, dewatering, increase in rates, etc. Hence, the claimant having agreed not to raise any further or extra claims if the escalation is given to him in his said letters, he cannot now seek or maintain this claim and hence the claim should be rejected. The relevant portion of the said letters are quoted below: (quotation of letter omitted) This goes to show that the claimant and respondent have agreed that 75 hours would be free issue of crane by HPCL and balance would be charged and accordingly the amount of money was charged and hence this claim should be disallowed. In fact, this claim cannot be allowed unless the settlement between the parties/and the no claim certificate set aside by a court. The learned arbitrator may dismiss the claim. The revision order/change order, which has been extracted by HPCL in their counter before the arbitrator, reads as under. Civil and Structural works for off sites or VREP-II This change order is issued to incorporate the following terms and conditions: 1. Upward revision in unit rates by 8% for work done during the period 21.4.1998 to 29.8.1998. 2. Upward revision in unit rates by 17% for work done during the period 29.8.1998 to 30.11.1998. 3. Issue of Crane free of charge to M/s.Indwell Constructions Ltd., for a maximum period of 75 hours only. NOTE: In addition to the Liquidated Damages Clause as existing in the contract (i.e. @ 0.5% per week or part thereof a maximum of 5% of total contract value) an additional LD @ 1% per week or part thereof subject to a maximum of 10%, but this part of LD clause is applicable only on the unexecuted portion of the work remaining on the last day of the contract and for reasons solely attributable to M/s.Indwell. All other terms and conditions remain unchanged. Strong reliance is placed on the above changed order by HPCL to contend that the use of crane by ICL beyond 75 hours would attract crane charges and therefore, deduction of Rs.13,61,475/- is as per the contract as modified by the changed order. The submission cannot be accepted. Though the changed order indicates the issue of crane free of charge for a maximum period of 75 hours, it is silent as to the modalities for supply of crane subsequent to 75 free hours. It is also silent as to the charges leviable by HPCL for the use of crane during the allotted payment period. Dealing with this aspect, Hon’ble Arbitrator came to the following conclusions. An examination of the records does not reveal the existence of any prebid correspondence requiring the usage of 300T crane or requiring the Claimants to provide the same or any hiring charges towards the same to be recovered from the Claimants. It is not very unusual that higher capacity cranes of the owner are provided to the contractors for implementing major projects like this. In such a case, either the cranes are provided on free issue basis or on chargeable basis clearly informing the contractors or minuted at the appropriate meetings specifying the amount of hire charges and other details. In the absence of any correspondence from the respondents confirming the hire charges and acceptance of the claimants to pay such crane hire charges, it would be grossly improper to recover and keep such huge amount clearly indicating arbitrariness on the part of the respondents. Thus, it is just and fair to refund the crane hiring charges of Rs.13,61,475/- recovered from the running account bill No.21 dated 25.1.1999. It is also very reasonable to pay the interest at 11% on this amount for the period from 31.3.1999, the date of payment of R.A. Bill No.21 upto 31.8.2001 working to Rs.3,61,925/-. (emphasis supplied) The above finding is based on the contract and appreciation of facts. When the Hon’ble Arbitrator observed that in the absence of communication clearly informing the contractor specifying the amount of hire charges and other details, it would be grossly improper to recover hire charges. An inference was drawn by arbitrator based on the factual situation, which again flows from the correspondence between the parties, which form part of the contract. Therefore, even if second view is possible, it is not permissible for the Court under Section 34 of the Act to take a different view nor the conclusion reached by the arbitrator can be said to be vitiated by error apparent on the face of record or perverse. There is no dispute that after issue of changed order dated 28.8.1998 HPCL did not inform ICL about crane charges after supply of crane for 75 hours on free of cost. This itself would show that any deduction of crane charges, which are not disclosed earlier, would be illegal. Indeed any contract, which is vague, cannot be enforced in law. In that view of the matter, this Court does not find any ground to interfere with the order of learned District Judge, Visakhapatnam. In the result,