*THE HON’BLE SRI JUSTICE A. GOPAL REDDY and THE HONOURABLE SRI JUSTICE G.V.SEETHAPATHY + C.M.A.Nos.2366, 2369 of 2000; 3239 of 2001; 2734, 2367, 2368 of 2000; 240 & 455 of 2001 % 27—04—2010 CT in CMA No.2366 of 2000 # M/S.Tarapore& Company … Appellant vs. $ M/s. HindustanSteelWorksConstruction Ltd. … Respondent ! Counsel for the Appellant : Sri C.V.Mohan Reddy Sr.Counsel ^Counsel for the Respondent : Sri N.SubbaReddy Sr.Counsel <Gist : >Head Note : ? Cases referred 1 AIR 1955 SC 468 2 AIR 1960 SC 588 3 AIR 1963 SC 1685 4 AIR 1984 SC 1072 5 (2002) 4 SCC 45 6 2008(5) ALT 699 7 AIR 2007 SC 509 8 2010 (1) SCJ 237 9 2009 (7) SCJ 380 = 2009(3) Arb.L.R.140 (SC) 10 2010 (2) ALT 655 (DB) THE HONOURABLE SRI JUSTICE A.GOPAL REDDY and THE HONOURABLE SRI JUSTICE G.V.SEETHAPATHY C.M.A.Nos.2366, 2369 of 2000; 3239 of 2001; 2734, 2367, 2368 of 2000; 240 & 455 of 2001 Date of Judgment: 27-04-2010 CT in CMA No.2366 of 2000 Between: M/s. Tarapore & Company ..Appellant and M/s.Hindustan Steel Works Construction Limited. ..Respondent The Court made the following Common Judgment: THE HONOURABLE SRI JUSTICE A.GOPAL REDDY and THE HONOURABLE SRI JUSTICE G.V.SEETHAPATHY C.M.A.Nos.2366, 2369 of 2000; 3239 of 2001; 2734, 2367, 2368 of 2000; 240 & 455 of 2001 Common Judgment: (Per Honourable Sri Justice A.Gopal Reddy) C.M.A.Nos.2366 & 2369 of 2000 by the Tarapore & Company (hereinafter called as “Contractor”) and C.M.A.Nos.240 of 2001 & 2734 of 2000 by the Hindustan Steel Works Construction Limited (hereinafter called as “Employer) are directed against the common order dated 17-01-2000 made in O.P.Nos.69 and 72 respectively; whereas C.M.A.Nos.2367 & 2368 of 2000 by the Contractor and C.M.A.Nos.455 & 3239 of 2001 by the Employer are directed against the common order in O.P.Nos.70 and 71 of 1999 respectively. As all the appeals have common features and raise common issues and law for consideration, they are heard together and disposed of by this common judgment. Brief facts, which give rise to filing the present appeals, are as under: The Employer, who is the principal contractor for construction of Visakhapatnam Steel Plant, invited tenders for construction of civil works in blast furnace zone of Visakhapatnam Steel Plant for Group I, II and III on 29-06-1983 for the balance work abandoned by the earlier contractor. The Contractor submitted his tender excluding the cost of cement and steel to be issued by the Employer after negotiations between the parties. As the Contractor was successful bidder, letter of intent was issued on 16-03-1984 followed by Contract Agreement CANo.HSCL/VSP/Ast/05/02/01/22 was executed on 25-10- 1984 stipulating time is the essence of the contract and the entire work has to be completed within 20 months from the date of issue of letter of intent i.e. by 15-11-1985. The Contractor though earlier commenced the work on 16-03-1984, could not complete in time and sought for extension of time upto 30-03-1987 by letter dated 25-03-1986 complaining that work could not be completed due to the various defaults committed by the Employer. As the Contractor could execute 4.5 crores of work as against 20 crores during 16-03-1984 to 15-12-1985 (within agreed 20 months), the Employer granted extension upto 31-03-1987 by letter dated 26-02-1987 with certain conditions. As the work could not be completed even 31-03-1987, the Contractor sought for further extension of time, complaining the Employer violated terms of letter of intent and agreed conditions, namely, non-issue of drawings non-supply of construction material the Contractor raised a claim on 21-04-1986. On Employer rejecting the same by letter dated 07-06-1986, the Contractor invoked arbitration clause on 28-08-1986 and gave notice appointing Sri K.C.Goyal as arbitrator and calling upon the Employer to inform their nominee within the period. The Employer by its letter dated 18-09-1986 appointed Sri Kartik Prasad before whom claim petition was filed on 20-06-1987 in two parts; Part-I for legality of the grant of extension of time for completion of the contract till 31-03-1987, Part-II for justification of the claims raised under claimant’s letter dated 21-04-1986. Meanwhile, the Employer granted extension upto 31-03-1987 by its letter dated 26-02-1987 incorporating certain conditions. As the work could not be completed within the extended time, the Contractor sought for further extension of time, the second extension was granted upto 30-09-1988 subject to certain conditions. As the work could not be completed within the extended period i.e. 30-09-1988, the contract was rescinded on 19-10-1988 and after rescission of the contract, the Employer filed counter to the claim statement on 08-02-1989 (hereinafter called first reference). After rescission of the contract the Contractor raised a dispute for the second period in which the same arbitrators, viz., K.C.Goyal and Kartik Prasad were appointed to resolve the dispute; the High Court in A.A.O.No.1670 of 1989 dated 27-12-1989 confirmed the order passed by the Subordinate Judge in O.P.No.362 of 1989 dated 09-11- 1989 referring the matter to the arbitrators (hereinafter called second reference). The arbitrators by separate awards dated 26-09-1996, 28-09-1996 respectively awarded the following amounts, some of which are confirmed and some of which are set aside by the lower court as per the table shown below. Sl.No. Claim Arbitrator awarded Court confirmed/set aside in O.P.Nos.69 &72/1999 1 Claim No.1 73,800 Confirmed 2 Claim No.2 96,480 Confirmed 3 Claim No.3 19,400 Confirmed 4 Claim No.4 17,30,968 Modified 5 Claim No.5 10,69,510 Confirmed 6 Claim No.6 Nil 7 Claim No.7 Nil 8 Claim No.8 5,50,000 Set aside 9 Claim No.9 4,95,000 Set aside 10 Claim No.10 Nil 11 Claim No.11 17,15,268 Set aside 12 Claim No.12 Nil 13 Claim No.13 Nil 14 Claim No.14 4,18,000 Set aside 15 Claim No.15 Nil 16 Claim No.16 Nil 17 Claim No.17 Nil 18 Claim No.18 Nil 19 Claim No.19 Deal with interest Modified 20 Claim No.20 Deal with interest Modified Out of five counter claims raised by the Employer, claim No.2, viz., liquidated damages have been withdrawn. With regard to counter claims 1, 3, 4 and 5 the arbitrator held that the same would be decided along with the final bill, which is subject matter of reference No.2. In the second reference the following amounts were awarded. Sl.No. Claim Arbitrator awarded Court confirmed/set aside in O.P.Nos.70 &71/1999 1 Claim No.1 4,81,780 Confirmed 2 Claim No.2 Amount included in the final bill 3 Claim No.3(a) Nil 4 Claim No.3(b) Nil 5 ClaimNo.4 (a) Nil 6 Claim No.4(b) Nil 7 Claim No.5 3,12,980 Confirmed 8 Claim No.6 Nil 9 Claim No.7 Accounted in the final bill Confirmed 10 Claim No.8 Accounted in the final bill 11 Claim No.9 6,08,619 Set aside 12 Claim No.10 59,960 Set aside 13 Claim No.11 Nil 14 Claim No.12 3,57,000 15 Claim No.13 70,000 Confirmed 16 Claim No.14 Nil 17 Claim No.15 Nil 18 Claim No.16 Nil 19 Claim No.17 Nil 20 Claim No.18 27,33,960 Set aside On passing the award, the Employer filed O.P.No.69 of 1999 for setting aside the award dated 26-09-1996 made in first reference which pertains to contract period, and Contractor filed O.P.No.72 of 1999 for making the award as rule of Court. On passing the award under the second reference covering the extension period, the Employer filed O.P.No.70 of 1999 under Section 30 and 33 of the Act to set aside the award; whereas the Contractor filed O.P.No.71 of 1999 for making the award as rule of Court. Though the dispute referred to the arbitrator consists of 20 claims in reference No.1 and 18 claims in reference No.2, only three of the claims + interest are contested in this batch of appeals. Claim Nos.4, 8, 9, 11 which are covered by clause 15(ii)(A). The learned Senior Civil Judge, Gajuwaka by separate orders upheld claim Nos.1, 2, 3 and 5 in its entirely and partly upheld claim No.4 as aforementioned and set aside the award amount insofar as claims 8, 9, 11 and 14 and modified interest under claim Nos.9 and 20 in O.P.Nos.69 and 72 of 1999. Similarly, O.P.Nos.70 and 71 of 1999 he upheld claims 1,5,10 and 13 and sofaras claim Nos.7 and 9 while upholding claim remitted the matter to the Arbitrator as there are arithmetical error in calculation and modified interest awarded by the arbitrator. Questioning the same present appeals have been filed by the Employer and Contractor. Sri C.V.Mohan Reddy, learned senior counsel appearing for the Contractor argued that once specific question of law, viz., provision of clause 15 (ii) (A) is unconscionable or not, is referred to the arbitrator and the arbitrator decided the specific issue, it is not open for the lower Court to set aside the said finding. Even assuming that there is no consensus before the arbitrators to frame a specific issue and the issue has arisen in the course of pleadings, the parties agreed to frame a specific issue, they are bound by the findings. For the said proposition reliance is placed on the following judgments. 1. THAWARDAS PHERUMAL v. UNION OF INDIA[1] 2. M/s. ALOPI PARSHAD AND SONS LTD. v UNION OF INDIA[2] 3. UNION OF INDIA v A.L.RALLIA RAM[3] 4. M/S.TARAPORE & COMPANY v. COCHIN SHIPYARD LTD., COCHIN[4] It was further argued that once the trial Court found specific issue is not referred, it ought not to have gone into merits of the claim. Once the arbitrator gave a finding on the issue, which was specifically referred, the same cannot be interfered. Sri P.Nageswara Sree, learned counsel appearing for the Contractor contend that the lower court is not justified in setting aside claim Nos.8, 9, which were awarded by the arbitrator on the ground clause 15(ii) (A) is valid; when once the validity of the clause is referred to the arbitrator and arbitrator decided that the said clause is unconscionable, the Court cannot interfere with the said decision. Sri N.Subba Reddy, learned senior counsel appearing for the Employer contends that unless there is a consensus ad idem among the parties for making a specific reference by any stretch of imagination, it cannot be held specific question of law with regard to validity of clause 15(ii) (A) is referred to arbitrator. Expected matters are not arbitrable. Therefore, award of any amount on expected matter is liable to be set aside. For the said proposition reliance is placed on GENERAL MANAGER NORTHERN RAILWAYS v. SARVESH CHOPRA[5] and K.MARAPPAN v. SUPERINTENDING ENGINEER, TBPHLC CIRCLE[6]. He further contends that Clause 15(ii)(A) prohibits compensation whatsoever which includes interest also. Therefore, awarding of interest on the awarded amount has to be set aside. He alternatively contends that grant of interest at 12% is excessive and the same has to be reduced to 9% keeping in mind the market rate of interest prevalent. He also contends that under claim No.4 amount of Rs.1,16,625/- admittedly paid which has not been given credit to has to be deducted from the awarded amount. In view of rival submissions made by the counsel, referred to above, the points that arise for consideration in these appeals are: 1. Whether specific question of law with regard to validity of clause 15 (ii)(A) has been referred to the arbitrator and agreement to frame a specific issue will amount to referring the question to arbitrator or not? 2. Whether the Court is justified in setting aside the award in respect of claims 8, 9,11 and 14? 3. Whether the Employer is entitled to give credit to Rs.1,16,625/- under claim No.4 of the award (first award)? 4. Whether the interest awarded by the lower court has to be modified or not? Point No.1 The joint arbitrators on the additional issue held that they have jurisdiction to interpret the provisions of clause 15(ii)(A) and other similar clauses as SPC and the same has been made as specific issue by both the parties to be decided by the arbitrator and accordingly held provisions of clause 15(ii) (A) is unconscionable. Clause 15(ii) (A) reads as under: “In the event of any failure or delay by the Employer (Hindustan Steel Works Construction Ltd.) to handover to the Contractor possession of the land/site necessary for the execution of the work or to give the necessary notice to commence the work or to provide the necessary drawings or instructions or any other delay caused by the Employer due to any other cause whatsoever then such failure or delay shall in any way affect or vitiate the contract or alter the character thereon or entitle the Contractor to damages or compensation therefor, but in any such extensions for the completion date as may be considered reasonable by the Employer.” After receipt of claim statements, the arbitrators by proceedings dated 21-01-1991 framed the following issue. “Whether clause 15(ii)(A) of special conditions of contract and other similar clauses in the contract are unconscionable and one sided and opposed to public policy and therefore not enforceable in view of Section 23 of the Indian Contract Act.” The Employer filed a Memo before the arbitrator on 14-01-1992 stating that during the course of hearing held on 14/15-12-1991 counsel for the Contractor argued that the issue regarding enforceability of clause 15(ii)(A) as being opposed to Section 23 of the Contract Act was framed as a specific issue and the arbitrators have jurisdiction to decide the same and it would amount to referring a pure question of law to the arbitrators. As claim statement was filed on 21-06-1987 to which a counter was filed on 08-02-1989 and in the counter it was specifically made Section 17 (2) (a) is a typographical mistake for clause 15(ii)(A). The respondent has been contending that by virtue of clause 15(ii)(A) of the Special Conditions of Contract and similar other clauses the claim is not tenable and arbitrators are bound to apply the terms of the contract and they cannot declare terms as invalid. Since the pleadings were filed and as the claim was contended as being barred by clause 15(ii)(A), the determination of question became necessary for deciding the claims on merit. In view of assertion by the Contractor and denied by the Employer, framing an issue would become necessary and, therefore, Employer has agreed to frame all the issues, but not for referring whether the clause is invalid or not. The arbitrators decided the additional issue in pages-14 to 28 of their award and held that the provisions of clause 15(ii)(A) is onerous to the Contractor and is unconscionable. In view of the same, we have to see whether a specific question of law with regard to validity of clause 15(ii)(A) has been referred to or not. The reference made to the arbitrator by both the parties do not indicate referring a specific question of law with regard to validity of clause 15(ii)(A) nor it has been asserted by the learned senior counsel appearing for the Contractor that the same has been referred to the arbitrator. What the senior counsel contends is, a specific issue arisen in the course of pleadings by the parties and once the issue is framed and decided, the parties are bound by the decision of the arbitrator. In THAWARDAS PHERUMAL’s case (1 supra) the Supreme Court while considering the power of the Court to remit the award for reconsideration “where an objection to the legality of the award is apparent on the face of it” under Section 16(1)(c) of the Arbitration Act, 1940 and law as applied and expounded by the Privy Council in DURGA PRASADA v. SEWKISHENDAS (AIR 1949 PC 334) held an arbitrator is not a conciliator and cannot ignore the law or misapply it in order to do what be 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 face 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. After noticing the observation of the Supreme Court in M.MAIR AND CO. v. GORDHANDASS SAGARMULL (AIR 1951 SC 9) it was held it is also necessary that the parties should define what the dispute is and agree to refer the dispute so set out and defined to arbitration, or, if they do not, that the Court should compel them to do so. If, therefore, no specific question of law is referred, either by agreement or by compulsion, the decision of the arbitrator on that is not final however much it may be within his jurisdiction, and indeed essential, for him to decide the question incidentally. In para-14 it was held as under: “We stress the word "specifically" because parties who make a reference to arbitration have the right to insist that the tribunal of their choice shall decide their dispute according to law, so before the right can be denied to them in any particular matter, the Court must be very sure that both sides wanted the decision of the arbitrator on a point of law rather than that of the Courts and that they wanted his decision on that point to be final.” In the case of M/S. ALOPI PARSHAD AND SONS LTD. (2 supra) when the Subordinate Judge rejected the application for setting aside the award; in appeal the High Court held certain questions had been specifically referred to the arbitrators, and it was open to the arbitrators to make the award, which they made, on the basis of quantum merit. The High Court further held that there was no specific reference of any questions of law to the arbitrators, and the decision of the arbitrators was not conclusive and was open to challenge, because it was vitiated by errors apparent on the face of the award. The High Court reversed the order passed by the Subordinate Judge, and set aside the award of the arbitrators, holding that there was no "legal basis for awarding any compensation" to the Agents for any loss which they might have sustained. On further appeal, the Supreme Court held if, however, a specific question is submitted to the arbitrator and he answers it, the fact that the answer involves an erroneous decision in point of law, does not make the award bad on its face so as to permit of its being set aside. In para-17 it was held as under: “Was the reference made by the parties to the arbitrators a specific reference, that is, a reference inviting the arbitrators to decide certain question of law submitted to them. If the reference is of a specific question of law, even if the award is erroneous, the decision being of arbitrators selected by the parties to adjudicate upon those questions, the award will bind the parties.” On facts it was held in the reference originally made to the arbitrators by the letter of the Agents and the reply of the Government, a general reference of the dispute was made in terms of clause 20 of the agreement and accordingly upheld view of the High Court that the reference made was a general reference and not a specific reference on any question of law. The award may, therefore, be set aside if it be demonstrated to be erroneous on the face of it. In A.L.RALLIA RAM’s case (3 supra) in para-10 it was held the authority of an arbitrator depends upon the authority conferred by the parties by agreement to refer their differences to arbitration. In para-14 it was held filing of pleadings pursuant to the directions of the arbitrators and agreeing to a trial of the dispute on the issues raised by the arbitrators cannot be regarded as reference of specific questions implying an agreement between the parties that they intended to give up their right to resort to the Courts even if the award was vitiated on account of an error apparent on the face thereof The only permissible inference from the agreement recorded by the arbitrators was that the parties agreed to have the disputes adjudicated on the issues raised and not to submit the issues raised for adjudication…….. In these two letters there is no reference to any specific questions to be referred to the arbitrators: nor can the filing of pleadings in support of their respective cases by the parties pursuant to the direction given by the arbitrators, and the framing of issues arising thereon with the object of focussing the attention of the parties on the questions to be decided for adjudicating upon the dispute amount to a reference on specific question, rendering the award binding upon the parties. The Supreme Court after referring the observation in Thawardas’ case (1 supra) in para-14 held as under: "Therefore, when a question of law is the point at issue, unless both sides specifically agree to refer it and agree to be bound by the arbitrator's decision, the jurisdiction of the Courts to set an arbitration right when the error is apparent on the face of the award is not outset. The mere fact that both parties submit incidental arguments about a point of law in the course of the proceeding is not enough." In M/S. TARAPORE & COMPANY (4 supra) the Supreme Court held 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: "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 the above case, it is undoubtedly true that in the letter dated 29-03-1976 by which the Cochin Shipyard agreed to refer the dispute to the arbitrator, it was in terms stated that the reference is being made without prejudice to the position of the respondent as adopted in the letter meaning thereby without prejudice to its rights to contend that the claim of the appellant is not covered by the arbitration clause. The Supreme Court after considering the reference was of the view that a specific question as to whether the claim of compensation made by the appellant—contractor and demurred and disputed by the respondent would be covered within the scope, ambit and width of the arbitration clause, was specifically referred by the parties for the decision of the arbitrator. Therefore, it is a case where a specific question of law touching upon the jurisdiction of the arbitrator was referred for the decision of the arbitrator by the parties. Even if the view taken by the arbitrator may not accord with the view of the Court about the scope, ambit and width of the arbitration clause, the award cannot be set aside on the ground that there is an error of law apparent on the face of the award. The view taken by the High Court is palpably untenable and appeal has to be allowed and accordingly allowed the appeal. In the case on hand, the Contractor nominated the arbitrator, viz., K.C.Goyal by letters dated 28- 08-1986 and dated 05-01-1987 to arbitrate in the disputes arising out of contract between the parties which is the subject matter of first reference and award dated 26-09-1996. The Employer nominated Sri Kartik Prasad as arbitrator through their letters dated 18-09-1986 and 26-02-1987 to arbitrate the dispute. It is only general reference but a specific reference about validity of clause 15(ii)(A) was not referred to the arbitrators. Similarly, the Contractor appointed Sri K.C.Goyal as arbitrator as their nominee by letter dated 23-10- 1988 to resolve the dispute, which is the subject matter of second reference. The learned Subordinate Judge referred the dispute to