* THE HON’BLE SRI JUSTICE V.V.S. RAO AND THE HON’BLE SRI JUSTICE B.N.RAO NALLA CIVIL MISCELLANEOUS APPEAL Nos.1666 AND 1824 OF 2001 AND CIVIL REVISION PETITION Nos.2893 AND 2939 OF 2001 % 30.12.2009 Between: M/s.G.V.Malla Reddy & Co., represented by its Managing Partner Sri G.V.Malla Reddy … Appellant AND A.P.State Trading Corporation Limited, represented by its Vice-Chairman & Managing Director, Hyderabad And another … Respondents Counsel for the Appellant: Sri N.Subba Reddy, for Sri P.Vinayaka Swamy Counsel for the Respondents: Sri E.Madanmohan Rao < Gist: > Head Note: ? CITATIONS: 1. (1984) 4 SCC 59 : AIR 1984 SC 1703 2. AIR 1989 SC 1034 3. 1989 (2) ALT 320 (DB) 4. (1999) 8 SCC 122: AIR 1999 SC 3275 5. (2002) 4 SCC 45: AIR 2002 SC 1272 6. (2007) 2 SCC 453: AIR 2007 SC 509 7. (1999) 9 SCC 610 8. (1991) 4 SCC 93: AIR 1992 SC 232 9. (1999) 9 SCC 283: AIR 1999 SC 3627 10. (2001) 5 SCC 629 11. AIR 1977 SC 1481 12. (1999) 3 SCC 500 13. 1996 (3) ALT 1137 (DB) 14. (1992) 1 SCC 508 : AIR 1992 SC 732 15. (2005) 6 SCC 462 : AIR 2005 SC 2071 16. 2009 (3) Arb.LR 140 (SC) 17. (1999) 4 SCC 327 THE HON’BLE SRI JUSTICE V.V.S.RAO AND THE HON’BLE SRI JUSTICE B.N.RAO NALLA CIVIL MISCELLANEOUS APPEAL Nos.1666 AND 1824 OF 2001 AND CIVIL REVISION PETITION Nos.2893 AND 2939 OF 2001 .12.2009 Between: M/s.G.V.Malla Reddy & Co., represented by its Managing Partner Sri G.V.Malla Reddy … Appellant AND A.P.State Trading Corporation Limited, represented by its Vice-Chairman & Managing Director, Hyderabad And another … Respondents THE HON’BLE SRI JUSTICE V.V.S.RAO AND THE HON’BLE SRI JUSTICE B.N.RAO NALLA CIVIL MISCELLANEOUS APPEAL Nos.1666 AND 1824 OF 2001 AND CIVIL REVISION PETITION Nos.2893 AND 2939 OF 2001 COMMON JUDGMENT: (per Hon’ble Sri Justice V.V.S.Rao) These four matters which arise out of common order, dated 19.01.2001 in arbitration O.P.Nos.318 and 365 of 1991 passed by the Court of I Senior Civil Judge, City Civil Courts, Hyderabad. These two O.Ps., were filed in connection with the arbitration award, dated 06.07.1991 by Andhra Pradesh State Trading Corporation (Corporation, for brevity) and M/s.G.V.Malla Reddy and Company (Contractor, for brevity), a firm, in that, the former seeking to set aside the award and the latter praying to make the award rule of the Court. By impugned common Judgment, learned senior civil Judge set aside the award insofar as three claims are concerned and thus partly allowing the petitions filed by Corporation as well as the contractor. The work of construction of Telugu Vanijya Bhavanam at A.C.Guards, Hyderabad, was taken up by Corporation. After due tender process, the work was entrusted to the contractor under agreement, dated 18.06.1987, which vide clause 65 of General Conditions of Contract (GCC) provides for settlement of disputes by arbitration. The contract period is eighteen (18) months, to be completed by 28.12.1988. The site was handed over to the contractor on 26.06.1987 and there was slow progress. The contractor blamed the Corporation and therefore, he insisted prevailing market rates for the work already done after completion of agreement period. He also requested for extension of period at revised rates. The Corporation then terminated contract on 19.01.1989. The disputes which arose were referred to sole arbitrator. Before the arbitrator, contractor made XXII claims. After adjudicating the same, the arbitrator allowed claim Nos.III, IV, VI, VII, VIII, XI and XII. These are payment of security deposit, refund of fixed security deposit, compensation for water brought from outside, compensation for dismantled distilled fabrication, compensation for cement brought from outside, loss of profit and refund of deductions made towards further security deposit. The arbitrator also partly allowed claim Nos.I, II, V and XXI. These are payment of third running bill, payment for work done after submission of third bill, cost of borewell and interest at 21% per annum. The other reliefs being claim Nos.IX, X, XIII to XX and XXII were rejected. These are compensation for steel brought from outside, overhead charges, loss of advance paid to labour, loss of advance paid to metal supplier, loss of advance paid to brick supplier, loss due to slow progress, increase in labour charges and metal cost, increase in minimum wages, compensation for expenses incurred for removing materials from the site and the amounts due under final bill. The counter claims made by Corporation were totally rejected. The contractor filed O.P.No.365 of 1991 under Section 17 of Arbitration Act, 1940 to make the award rule of the Court in terms thereof with interest at 18% per annum. The Corporation filed O.P.No.318 of 1991 praying the Court to set aside the award and to remit back the portion of the award relating to the counter claims for fresh consideration. As noticed supra, both these O.Ps., were partly allowed and the award was made rule of the Court except in respect of three claims and interest thereon. Aggrieved by the same, C.M.A.No.1666 of 2001 and C.R.P.No.2939 of 2001 are filed by contractor and C.M.A.No.1824 of 2001 and C.R.P.No.2893 of 2001 are filed by Corporation. Though Corporation filed the appeal and revision against the entire award, submissions are made before us in relation to claim Nos.I, V and XI. Even out of these, Sri N.Subba Reddy, learned counsel for Corporation pressed and made submissions on claim No.XI which deals with loss of profit and also touched upon other claims which are mainly the payments towards work done or pending bills or refund of security deposit, fixed deposit etc. The contractor mainly insisted upon the award of interest. Indeed, it is not denied before us that the contractor did not contest the rejected claims before the Court below. Therefore, having regard to the settled position in law that the questions of fact recorded by arbitral tribunal cannot be ordinarily interfered and having perused the material available on record, we are not inclined to interfere with the award or the Judgment of Court below insofar as claims I to V are concerned. We nevertheless mainly advert to question of loss of profit and award of interest in view of the fact that some of the claims allowed by arbitrator were set aside by Court below, and there is no serious dispute about this. To appreciate the position that emerges in these appeals as of now in relation to the claims made, awarded as well as decreed, we may summarise these aspects in the following table. Sl. No Claim No. Claim description Amount Claimed Rs. Amount Awarded Rs. Amount Decreed Rs. 1 I Payment of third running bill 5,65,889 4,32,215 4,32,215 2 II Payment for work done after submission of third running bull 1,55,000 41,863 41,863 3 III P a y m e n t of Security Deposit 5,13,500 5,13,500 5,13,500 4 IV Refund of F.S.D 90,670 90,670 90,670 5 V Cost of Borewell 25,300 10,000 Set aside 6 VI Compensation for water brought from outside source 27,750 27,750 Set aside 7 VII Compensation for steel fabrication dismantled 3,155 3,155 3,155 8 VIII Compensation for cement brought from outside 42,000 42,000 Set aside 9 XI Loss of profit 25,15,000 27,15,000 27,15,000 10 XII R e f u n d of deductions made towards made towards further security deposit 30,000 30,000 30,000 11 XXI Interest 21% p.a. 1 8 % p.a. from 10.3.1989 to 6.1.1990, and 6.7.1991 to till the date of decree S e t aside interest on Claim No.XI Learned counsel, as mentioned above, concentrated on the question of loss of profit and award of interest. They made elaborate submissions and also relied on number of precedents. A reference to the arguments and precedents may be made as and when we take up these two aspects. Award towards loss of profit Learned counsel for Corporation submits that the award of arbitrator is vitiated by misconduct in the sense that the arbitrator ignored clause 12 of GCC and awarded loss of profit. He would urge that clause 12 of GCC only permits extension of time and prohibits any claim for compensation, and breach of contract by Corporation does not have any bearing on the question. Clause 12, according to him, would disentitle any claim for compensation for execution of works. In his counter arguments, contractor’s counsel submits that clause 12 of GCC and clause 40.1 of agreement only deal with a situation where the work is completed after obtaining extensions and bars the contractor from claiming compensation by way of escalation, overhead charges etc during the extension period. These two clauses have no application when there is breach of contract by contractor and as a result thereof, the contractor is put to loss of profits. In view of these submissions, it is necessary to read clause 12 of GCC and clause 40.1 of agreement itself. 12. The contractor shall be entitled to any compensation or loss suffered by him on account of delays in commencing or executing the work whatever the cause of delays may be or in procuring Government controlled or other building materials or in obtaining water and power connections for construction purpose. The employer shall not be liable for any claim in respect thereof. Suitable extension to time will be given to the contractor if the delay occurs on the part of the employers. The contractor is responsible for procuring the safe storage of all materials. All materials shall be approved by the Architects before putting in place. 40.1 Should the amount of extra or additional work of any kind or other special circumstances of any kind whatsoever which may occur, be such, as fairly to entitle the Contractor to an extension of time for the completion of the work, the Architect shall recommend the period of such extension, if any the owner on such recommendations of the Architect may grant the necessary extension, provided that the Architect is not bound to take into account any extra or additional work or other special circumstances, unless the contractor has, within 28 days after such work has been commenced or such circumstances have arisen or as soon thereafter as is practicable, deliver to the Architect’s Representative full and detailed particulars of any claim to extension of time, to which he may consider himself entitled in order that such claim may be investigated at the time. However, no compensation by the owner shall be payable to the contractor for such extension of time beyond the relevant clause of the contract. In clause 12, there is a glaring typing error, in that the word ‘not’ is missing in the first sentence of the clause, but there is no denial that it is a typing mistake and it does not make any difference in understanding the same. Be that as it is, clause 12 of GCC and clause 40 of agreement are to the effect that in case the work is not completed or extra/additional work of any kind comes up, contractor would be entitled for extension of time and Corporation is not liable to pay any compensation to the contractor for extension of time beyond the stipulated time for completion of the contract. If delay occurs either in commencing or executing the work due to procurement of Government controlled building materials, or obtaining water and power connections for the construction purpose, the contractor would be entitled only for suitable extension of time and he cannot claim any compensation. Counsel for rival parties do not deny the purport of these clauses that the contractor would not be entitled for compensation. When does clause 12 of GCC or clause 40.1 of agreement not attracted? At this stage, we may refer to the relevant factual basis which supports the view that the total value of the work is about Rs.2.05 crores. The parties entered into agreement on 18.06.1987 and the work has to be completed by 28.12.1988 within a period of eighteen (18) months. Part of the site was handed over on 26.06.1987. As found by the arbitrator, the failure to hand over complete site, delay in giving water connection, delay in supply of electricity, delay in supply of cement as per agreement, delay in payment of bills and delay in ordering extra items of work, attributable to Corporation. By the due date only the work worth about Rs.24 lakhs should be completed. As extra work was entrusted, for which extra rates were not fixed and as delays were occasioned by the breach of terms of the contract by Corporation, the work could not be completed. On 05.12.1988, the contractor addressed Superintending Engineer of the Corporation seeking extension of time from 05.12.1988 to 04.04.1990, at revised and escalated rates. The Superintending Engineer sent a letter on 19.01.1989 terminating the contract and there was a breach of contract. By that date, balance of work valued at Rs.1.81 crores remains to be completed. In view of this, the contractor claimed normal profit of 15% on the balance value. The arbitrator, on considering the facts, came to the conclusion that the breach of contract was committed by the Corporation by causing various delays and defaults and terminated the contract, and accordingly awarded loss of profit at 15%, having regard to the decisions of Supreme Court in M/s.A.T.Brij Paul Singh v State of Gujarat[1] and P.M.Paul v Union of India[2] and Government of Andhra Pradesh v E.C.Techno Industries[3]. Learned counsel for Corporation relied on Steel Authority of India Ltd. v J.C. Budharaja, Govt. and Mining Contractor[4], General Manager, Northern Railway v Sarvesh Chopra[5] and Ramnath International Construction (P) Ltd. v Union of India[6]. In Steel Authority of India Limited (supra), respondent obtained a contract for construction of tailing-cum-storage reservoir at iron ore project of the appellant. The contract has to be completed within a period of two years. Clause 5 (vi) of General Conditions of Contract (GCC) provided as follows: “Failure or delay by the Corporation to hand over to the Contractor possession of the lands necessary for the execution of the work, or to give the necessary drawings, instructions or any other delay by the Corporation which due to any other cause whatsoever shall in no way affect or vitiate the contract or alter the character thereof or entitle the Contractor to damages or compensation therefor provided that the Corporation may extend the time for completion of the work by such period as it may consider necessary and proper.” Clause 32 was to the following effect: “Site for execution of work will be available as soon as the work is awarded. In case it is not possible for the Corporation to make the entire site available on the award of work the Contractor will have to arrange his working programme accordingly. No claim whatsoever for not giving the entire site on award of work and for giving the site gradually will be tenable.” The contractor after contract period, raised a claim of about Rs.18,00,000/- as damages for delay in handing over work sites. On reference, the arbitrators gave award with modification with regard to interest. SAIL was unsuccessful before High Court. Before the Supreme Court, it was contended that the award is without jurisdiction. Accepting the plea of SAIL, the apex Court relied on clause 32 of the contract and clause 5 (vi) of GCC and observed as under. Clause 32 of the agreement specifically stipulates that no claim whatsoever for not giving the entire site on award of work and for giving the site gradually will be tenable and the Contractor is required to arrange his working programme accordingly. Clause 39 further stipulates that no failure or omission to carry out the provisions of the contract shall give rise to any claim by the Corporation and the Contractor, one against the other, if such failure or omission arises from compliance with any statute or regulation of the Government or other reasons beyond the control of either the Corporation or the Contractor. Obtaining permission from the Forest Department to carry out the work in the wildlife sanctuary depends on statutory regulations. Clause (vi) of the general conditions of the contract also provides that failure or delay by the Corporation to hand over to the Contractor possession of the lands necessary for the execution of the work or any other delay by the Corporation due to any other cause whatsoever would not entitle the Contractor to damage or compensation thereof; in such cases, the only duty of the Corporation was to extend the time for completion of the work by such period as it may think necessary and proper. These conditions specifically prohibit granting claim for damages for the breaches mentioned therein. It was not open to the arbitrator to ignore the said conditions which are binding on the contracting parties. By ignoring the same, he has acted beyond the jurisdiction conferred upon him. It is settled law that the arbitrator derives the authority from the contract and if he acts in manifest disregard of the contract, the award given by him would be an arbitrary one. This deliberate departure from the contract amounts not only to manifest disregard of the authority or misconduct on his part, but it may tantamount to mala fide action. (emphasis supplied) In Sarvesh Chopra (supra), work of construction and widening of a railway bridge was entrusted to respondent. The disputes, which arose in relation thereto with reference to six claims of contractor, were sought to be referred to arbitrator. A single Judge of Delhi High Court referred two claims to arbitration holding that four claims being “excepted matters” within the meaning of clause 63 of GCC, were not liable to be referred to arbitration. The Division Bench however disagreed and referred the matters to arbitrator. The Supreme Court speaking about the scope of clause disentitling the contractor for any compensation, held as follows. Each of these clauses provides for such claims being not capable of being raised or adjudged by employing such phraseology as “shall not be payable”, “no claim whatsoever will be entertained by the Railways”, or “no claim will/shall be entertained”. These are “no claim”, “no damage”, or “no liability” clauses. The other category of claims is where the dispute or difference has to be determined by an authority of the Railways as provided in the relevant clause. In such other category fall such claims as were read out by the learned counsel for the respondent by way of illustration from several clauses of the contract such as General Conditions Clause 18 and Special Conditions Clauses 2.4.2(b) and 12.1.2. The first category is an “excepted matter” because the claim as per the terms and conditions of the contract is simply not entertainable; the second category of claims falls within “excepted matters” because the claim is liable to be adjudicated upon by an authority of the Railways whose decision the parties have, under the contract, agreed to treat as final and binding and hence not arbitrable. The expression “and decision thereon shall be final and binding on the contractor” as occurring in clause 63 refers to the second category of “excepted matters”. (emphasis supplied) In Ramnath International Construction (P) Ltd (supra), the Government of India awarded the contract of construction of aircraft hangar, airtech hangar and connected works as well as road works to the appellant. Disputes in the execution of contract were referred to arbitrator, who passed awards. On appropriate applications, learned single Judge rejected the cases to set aside and made awards rule of the Court. Division Bench partly allowed appeals of Government, aggrieved by which, the contractor filed appeals before Supreme Court. Clause 11(c) of the contract provided that no claim in respect of compensation or otherwise, howsoever arisen, as a result of extensions granted shall be admitted. One of the questions before Supreme Court was whether arbitrator committed legal misconduct in ignoring clause 11(c). Answering the question in the affirmative, apex Court dismissed appeals placing reliance on Ch. Ramalinga Reddy v Superintending Engineer[7] and Associated Engineering Co. v Government of Andhra Pradesh[8] observing as under. Clause (C) provides that where extensions have been granted by reason of the delays enumerated in Clause (A) which were beyond the control of the contractor, or on account of the delays on the part of the employer specified in Clause (B), the contractor is not entitled to make any claim either for compensation or otherwise, arising in whatsoever manner, as a result of such extensions. After enumerating certain delays, sub- clause (viii) of Clause (A) specifically mentions delay on account of any other cause beyond the control of the contractor. The causes for delays specified in clause A, thus, encompass all delays over which the contractor has no control. This will necessarily include any delays attributable to the employer or any delay for which both the employer and the contractor are responsible. The contract thus provides that if there is any delay, attributable either to the contractor or the employer or to both, and the contractor seeks and obtains extension of time for execution on that account, he will not be entitled to claim compensation of any nature, on the ground of such delay, in addition to the extension of time obtained by him. Therefore, the claims for compensation as a consequence of delays, that is claim 24 of Hangar Contract and claims 13 to 16 of Road Contract are barred by clause 11(C). We have briefly referred to the fact situation obtaining in the three apex decisions referred to hereinabove. Those were the cases wherein the contract was completed or the contractor sought reference to arbitration in respect of certain items of work beyond the scope of arbitration. These cases do not involve termination of contract by one party. Therefore, we cannot countenance the submission of the counsel for Corporation with regard to the claim for loss of profit made by contractor. On that ground, the award cannot be said to have vitiated or the contractor can be said to be committed misconduct. As held by Supreme Court in Rajasthan State Mines & Minerals Ltd. v Eastern Engg. Enterprises[9] and Sikkim Subba Associates v State of Sikkim[10], if the arbitrator has passed a reasoned award on appreciation of facts and law, it is not open to the Court to interfere with the award probing into the mental process of arbitrator to speculate the reasons for and against the award. It is also reiterated in these decisions that if the arbitrator ignored the law or misapplied it, it amounts to arbitrary adjudication and therefore, the Court can interfere in such matters. To say the least, no such ground exists in the award impugned before us calling for interference. Considering the exchange of correspondence between the contractor and the Corporation during the subsistence of contract and at or about the termination, came to the conclusion that delays occurred for the number of breaches committed by Corporation, when the contractor sought for extension of time, the agreement was cancelled. Therefore, any interference is not called for. The next aspect of the matter is award of loss of profit at 15% per annum. The law appears to be well settled that loss of profit can be validly claimed by contractor as and when there is breach of contract by employer. In Hudson’s treatise on ‘Building and Engineering Contracts’ (tenth edn., by I.N.Duncan Wallace, 1970), it is pointed out that in completing contracts, a percent of profit varies from contractor to contractor and in Great Britain, as per the evidence given in litigation it ranges between 3% to 7% of the total prime cost of the project. In Mohd.Salamatullah v Government of Andhra Pradesh[11], Supreme Court indicated that award amount of 15% towards loss of profit or towards quantum of damages would be justified. In Brij Paul Singh (supra), Supreme Court while upholding the principle that the contractor would be entitled to claim damages for loss of profit which he expected to earn by undertaking the works contract, observed as under. It was not disputed before us that where in a works