: 1 : IN THE HIGH COURT OF JUDICATURE AT BOMBAY IN THE HIGH COURT OF JUDICATURE AT BOMBAY IN THE HIGH COURT OF JUDICATURE AT BOMBAY ORDINARY ORIGINAL CIVIL JURISDICTION ORDINARY ORIGINAL CIVIL JURISDICTION ORDINARY ORIGINAL CIVIL JURISDICTION APPEAL NO.227 OF 2001 APPEAL NO.227 OF 2001 APPEAL NO.227 OF 2001 IN IN IN ARBITRATION PETITION NO.280 OF 1999 ARBITRATION PETITION NO.280 OF 1999 ARBITRATION PETITION NO.280 OF 1999 Hindustan Petroleum Corporation Limited, a Company incorporated under the provisions of Companies Act, 1956, and a Government Company within the meaning of Section 617 of the Companies Act, 1956, having its Registered Office at Petroleum House, 17, Jamshedji Tata Road, Mumbai-400 020 and having, inter-alia, a Refinery at Bhikaji Dhanaji Patil Marg, Mahul, Mumbai 400 074. ..Appellants. (Org.Petitioners) v/s. 1. Batliboi Environmental Engineers Ltd., formerly known as Hydraulic and General Engineers Ltd., a company incorporated under the Companies Act having their Registered office at Batliboi House, Govandi (West), Mumbai 400 043. 2. Shri K. Narayanan, Sole Arbitrator, residing at Building No.6-1/2-2, Sector 22, Kopar Khairane, Navi Mumbai 400 701. ...Respondents. (Org.Respondents) Mr.F.Divetre with M.D.Siodia, advs. i/b M/s. Rustamji & Ginwala for the Appellants. Ms.Snehal Shah i/b Dhru & Co. for the Respondent No.1. CORAM: D.K.DESHMUKH & CORAM: D.K.DESHMUKH & CORAM: D.K.DESHMUKH & J.H. BHATIA, JJ. J.H. BHATIA, JJ. J.H. BHATIA, JJ. RESERVED ON: 1st October, 2007. RESERVED ON: 1st October, 2007. RESERVED ON: 1st October, 2007. PRONOUNCED ON: 2nd November,2007 PRONOUNCED ON: 2nd November,2007 PRONOUNCED ON: 2nd November,2007 JUDGMENT: (Per J.H.Bhatia, J.) JUDGMENT: (Per J.H.Bhatia, J.) JUDGMENT: (Per J.H.Bhatia, J.) : 2 : 1. The petitioner has preferred this appeal challenging the dismissal of arbitration petition by the learned Single Judge of this Court, whereby the petitioner had challenged the award passed by the learned Arbitrator granting compensation on different head to the respondent no.1 (hereinafter referred to as the ’Contractor’). 2. Admitted facts are that, the petitioner had invited tenders for construction of sewage water reclamation plant at the petitioner’s refinery at Mahul, Mumbai by tender enquiry dated 20th March, 1991. Tender submitted by the contractor was accepted as per the letter of intent dated 27/2/1992. Parties entered into an agreement for execution of the said contract. Under the agreed terms, the contract value was Rs.5,74,25,000/-. The work was to be completed within 18 months from the letter of intent. Admittedly, within the specified period of 18 months, work was not fully executed and on request made by the contractor, time was extended twice. Work was carried on until 31st March, 1996 and thereafter, the contractor abandoned the work. Admittedly, by that time 80% work was completed and only 20% work had remained uncompleted. On 4-7-1996 the contractor made claims on the petitioner for "extra costs of overheads and profits, extra expenditure on : 3 : machinery, etc." which was allegedly caused due to the delays in completing the works. The contractor indicated by the said letter that they would complete the balance works on the amounts claimed by them being paid. The petitioner called upon the contractor to complete the work. By the said letter the contractor also invoked the arbitration clause and requested for an appointment of arbitrator. By letter dated 5-5-1997, the petitioner called upon the contractor to resume the works and complete the balance work even during the arbitration proceeding as per the terms of the contract. In August, 1997, the respondent no.2 came to be appointed as an arbitrator. The contractor made a claim of Rs.4,68,87,938/- on different heads as follows: SUMMARY i) Claim - 1 Amount (Rs.) Compensation for loss of overheads & profit and also profitability 3,38,38,460.00 ii) Claim - 2 Compensation for the idle machinery and equipment 89,59,615.00 iii) Claim - 3 Compensation for losses incurred due to increased cost of material and labour 26,89,638.00 (iv) Claim - 4 Compensation for carrying out extra : 4 : work (v) Claim - 5 Cost of repairs & rectification to be assessed after the joint inspection. Total 4,68,87,938.00 Total 4,68,87,938.00 Total 4,68,87,938.00 The petitioner denied the claims of the contractor and made counter claim of liquidated damages as per the terms of the contract in view of the delays and non completion of the work. 3. It was claimed by the contractor that the delays were caused in completion of the work due to the faults on the part of the petitioner. The work was expected to be completed within 18 months though in the contract amount, the contractor had taken account of the overheads and profits for a period of 22 months. Even though the contract period was over in August, 1993 on account of the delays on the part of the petitioner, work could not be completed and in spite of that the contractor continued to work till the end of March, 1996. The men and machinery of the contractor remained idle. Even the basic approval for the electrical scheme, with numerous revisions, was kept pending, till the end by the petitioner and, therefore, the work could not have been completed. Even the arrangement with : 5 : M.C.G.B. for the supply of sewage water for purification had not been finalised. The contractor was required to carry out some extra work. Therefore, the contractor made the claim as stated earlier. 4. The petitioner contended that there were no delays on the part of the petitioner. The contractor himself was responsible for the same. It was contended that the contractor can not make any claim because even though the time was essence of the contract, the time was extended on the request of the contractor himself and the contractor had nowhere indicated that he would be claiming any damages or compensation for delay in completion of the work as required under Section 55 of the Contract Act. The petitioner also contended that the contractor is liable to pay an amount of Rs.57.40 lakhs towards the liquidated damages as the work was abandoned by him. Some other counter claims were also made. 5. Admittedly, no oral evidence was led by the parties. Parties relied upon the documentary evidence only. After hearing the parties, the learned Arbitrator awarded compensation as follows: Claim No.1 Rs. : 6 : For loss of profits and loss of overheads 1,57,37,666/- Claim No.2 Compensation for idle machinery and equipment at the rate of Rs.50,000/- per month for a period of 24 months 12,00,000/- Claim No.4 Compensation for extra works The Arbitrator awarded 1,95,000/- in the aggregate for the extra work. The Arbitrator also reduced the amount of the performance guarantee by 50%. Claim No.3 on account of escalation in the cost of material and labour and others was rejected. The counter claims made by the petitioner were also rejected. The arbitrator directed the petitioner to pay the amounts as per the award to the contractor with interest at the rate of 18% per annum from 16-5-1997, i.e., from the date of notice invoking arbitration. Award was actually passed on 23-3-1999. 6. The award was challenged by the petitioner on various grounds while it was supported by the contractor. After hearing the parties, the learned Single Judge dismissed the arbitration petition and thus, the award became rule of the Court. It is contended on behalf of the petitioner/appellant that the claim no.1 on account of loss of profits and loss of overheads is ex- facie unreasonable, perverse and has resulted in a miscarriage of justice. It is contended that an amount of Rs.1,57,37,666/- awarded towards loss of profits and overheads is more than the value of 20% : 7 : remaining work. As 80% work was already completed and only 20% work was remained, if that work would have been completed, the contractor would have received only an amount of Rs.1,14,87,000/- and in spite of having abandoned and having not completed the work, the contractor is awarded compensation, which is much more than the said amount. As per the award, this 20% consists of 10% on account of loss of profits and another 10% on account of loss of overheads and the Arbitrator appears to have made this calculation on total amount of the contract and even more than that. If 20% of the balance work would have been awarded on these two heads, the contractor could not get more than Rs.23 lakhs. It is also contended that interest could not have been awarded from the date of invoking the award because alleged damages were unliquidated and it is the settled position that unliquidated damages do not become debt till they are crystalised and quantified. It is contended that the arbitrator awarded the compensation against the terms of the contract and thus, the Arbitrator acted beyond his jurisdiction, which he got only under the terms of the contract and not otherwise. The parties are bound by the contract and law of contract and the contractor had never indicated that he would be claiming compensation or damages for delays in work while seeking extension of time, as : 8 : required under Section 55 of the Contract Act. Therefore, he cannot claim compensation on that ground. This was ignored by the Arbitrator as well as the learned Single Judge. It is contended that award of Rs.12 lakhs granted on account of machinery lying idle for a period of 24 months is unreasoned and without any basis. It is contended that even though the Arbitrator refers to a site inspection visit, in this respect, no such report of any such visit was made available to the parties, and, therefore, this is perverse and liable to be set aside. The award of Rs.1,95,000/- on account of extra work is clearly against the terms of the contract. It is contended that the contractor made the claim on account of loss of overheads and loss of profits, which was only a camouflage for escalation in prices which is barred by the terms of the contract. 7. The respondent contractor has however supported the award. It is contended that the arbitrator had considered the complete material placed before him and has passed the award after taking into consideration the terms of the contract, correspondence between the parties indicating the delays on the part of the petitioner. It is further contended that under the Arbitration Act, 1996, scope for challenge to the award passed by the Arbitrator is very limited under Section : 9 : 34 of the Act. It is contended that there is no ground made out under Section 34 to assail the award. Further it is contended that the Arbitrator acted within his jurisdiction. It is contended that if the error is committed outside the jurisdiction, it may be challenged but if the error is committed within the jurisdiction by the Arbitrator, that is no ground to challenge the same. The Court does not sit in appeal over the award of the Arbitrator and can not re-appraise the whole evidence to come to a different conclusions. It is contended that the escalation of cost is totally different from the loss of overheads and loss of profits. The learned Arbitrator has rejected the claim on account of escalation being against the terms of the contract but the award on account of loss of profit and loss of overheads is perfectly justified. Therefore, this Court, particularly after the petition challenging the award has been dismissed by the learned Single Judge of this Court, can not interfere in appeal and the appeal is liable to be dismissed. 8. Before dealing with the actual facts of this case, it will be necessary to deal with the objection taken by the learned counsel for the Contractor to the challenge of the petitioner to the award. It is contended that the challenges to an arbitrator’s award : 10 : are much restricted under the Arbitration Act, 1996 in comparison to the challenges, which are available under the Arbitration Act, 1940. It is contended that in the given circumstances objection could be taken only under Section 34(2)(b)(ii), which provides that an application for setting aside the award may be made and the award may be set aside by the Court only if the arbitral award is in conflict with the public policy of India. Explanation to the said proviso reads as follows: "Section 34(2)(b)(ii)- Explanation- Without prejudice to the generality of sub-clause (ii) it is hereby declared, for the avoidance of any doubt, that an award is in conflict with the public policy of India if the making of the award was induced or affected by fraud or corruption or was in violation of section 75 or section 81." We find that this objection was taken before the learned Single Judge, who has dealt with the same in great length. In paragraph 9 of the judgment, the learned Single Judge observed that we can now identify some heads to challenge an award as being an award against the public policy of India. They can be partly summarised as (a) bias (b) jurisdiction of tribunal or the exceeding scope of its authority, (c) member or members not possessing qualification, (d) an award procured by fraud (e) by corruption (f) in violation of : 11 : Section 85 or 81. The learned Single Judge observed that these heads are easily identified challenges available under the head of public policy of India under Section 34(2)(b)(ii). The learned Single Judge dealt with the question as to whether the perverse or malafide or illegal award can be challenged or not. He observed as follows in paragraph 19: " 19. Would, therefore, an award, which is perverse or malafide meaning thereby suffering from legal malafides or arbitrary, be allowed to be executed. Arbitrariness and malafides are the two sides of the same coin. Would an award, which a High Court in the exercise of extra ordinary jurisdiction would quash being in excess of its jurisdiction, be saved. Would that not be destructive of the rule of law. Under Section 28 of the 1996 Act, an Arbitral Tribunal must follow the substantive law of India. What happens if the Arbitral Tribunal does not follow the substantive law or does not apply the law. Would that not amount to an award being contrary to the public policy of India. Outside Section 34(2)(b) there is no other ground to challenge such an award. Can it be the contention that even such an award cannot be interfered with. Such a submission would be destructive of the rule of law. An award contrary to the principles of natural justice and fair play is arbitrary and as such against the public policy of India. An award by an Arbitral Tribunal against which bias is alleged if not waived, is void and, therefore, contrary to public policy. An award by an Arbitral Tribunal having no jurisdiction, or exercising jurisdiction, beyond the scope of its authority or to the very existence of the arbitration agreement would be contrary to the public policy of India. These grounds under the head of public policy are apart from the challenges available under Section 34(2)(a)(i),(ii),(iii),(iv) and (v) and Section 34(2)(b)(i). Another important aspect, unlike : 12 : the Act of 1940, is Section 31(3). Unless the parties otherwise agree, the arbitral award shall state the reasons. What would be the import of this Section in construing the provisions of the expression "public policy of India". Would an award in which reasons are required to be given, if based on extraneous material not on record, or reasons which are perse perverse, or no reasons are given be allowed to be executed, as it does not fall within the expression public policy of India? The Act requires reasons to be given to enable a Court to consider the challenge to an award. It is not an idle or empty formality. In so far as Section 34(2) is concerned, the reasons would be material except in the context of those contentions which were raised before the Tribunal and were rejected at a stage before passing the Award. The reasons if and at all would be material to decide the challenge under Section 34(2)(b)(ii). The Section which provides that the tribunal must give reasons for the Award must be given its legislative intent. It cannot be rendered otiose. Looking at Sections 13, 16, 24 and 29, it would not have been the intent of Parliament, that under the Municipal law, awards which otherwise would not be enforced by Municipal Courts merely because they are awards of a Tribunal can be enforced. This itself would be destructive of the rule of law and constitutional principles. Judgements of Courts, trained to dispose of legal matters are subject to further judicial review. It may be that an Arbitral Tribunal may consist of some experts on occasions. Would an award for example by a retired Judge be holier than a judgment of a sitting Judge. This, therefore, could not have been the legislative intent. On the contrary by introducing the expression "public Policy of India" the challenges are not confined to public policy as understood at the relevant moment, but beyond the momentary needs of the community. They are ever expanding as the needs of the times and the hour." After discussion of the challenges, which are available within Section 34(2)(b)(ii), the learned Single Judge : 13 : finally observed as follows in paragraph 23 of the judgment. "23. Therefore, these would be clear indications that Act of 1996 does not in anyway restrict the challenges which were earlier available under the Act of 1940. On the contrary as discussed earlier by using the expression public policy, Parliament has chosen to provide that new challenges, which were not available when the Act came into force, would be available to Courts of Law at future point of time. Thus the interpretation of public policy as discussed earlier, is neither in conflict with the objects clause of the Arbitration & Conciliation Act, 1996 or Section 5 of the Act of 1996 or the various provisions of the Act itself. Section 5 cannot if the Arbitral Tribunal is subject to the supervisory jurisdiction of the High Court under Article 227 take away that jurisdiction. That is settled law." 9. Arbitrator is creation of the contract between the parties and he gets jurisdiction under the terms of contract. He is expected to interpret and apply provisions of the contract and pass an award accordingly. While passing the award he has to bear in mind the provisions of Section 28 of the Act, which clearly provides that in case of domestic arbitration in India, the Arbitral Tribunal shall decide the dispute in accordance with substantive law for the time in force in India. If the Arbitrator ignores the substantive law in force in India and passes an award, it is bound to cause injustice and is liable to be set aside. For example : 14 : law requires that the claim should be within limitation. If the award is passed on a claim, which is clearly barred by the limitation, that will be against the provisions of law and the award can not be sustained. In the present case, it is the contention of the petitioner that the learned Arbitrator ignored the terms of the contract, relevant documents as well as the provisions of Section 55 of the Contract Act and, therefore, the award is liable to be set aside. It will be necessary to examine the record to find out in the light of this contention. 10. It will be useful to refer to some of the terms of the contract. Admittedly, the work was to be completed within 18 months from the date of letter of intent, which was issued on 27-2-1992. Thus, the work should have been completed by 26-8-1993. Clause (6) of the Contract Act reads as follows: "Clause 6 : Extension of times Clause 6 : Extension of times Clause 6 : Extension of times If the contractor shall desire an extension of the time for completion of the work on the ground of his having been unavoidably hindred in its execution or on any other ground, he shall apply in writing to the Engineer before the expiration of the period stipulated in the tender or before the expiration of 30 days from the date on which he was hindred as aforesaid or on which the cause for asking for extension occurred whichever, is earlier, and the Engineer may, if in his opinion, there are - reasonable grounds for granting an extension, grant such extension as he thinks necessary or : 15 : proper. The decision of the Engineer in this matter shall be final." As per this clause, the contractor could seek extension of time for completion of work by making an application to the petitioner. The contract also provided that no compensation would be payable by the appellant in the event the work was delayed for the reasons not attributed to either of the parties. Clause 5 of the letter from the petitioner inviting tenders, which is applicable to the contract reads as follows: "5. In the event the work is delayed due to reasons not attributable to either party, suitable extension in delivery period will be considered. However no further compensation shall be made for the delayed period." From this it is clear that though extension in period could be considered, no further compensation shall be made for delayed period. Clause 15 of the Contract reads as follows: Clause 15: No compensation for Alteration in Clause 15: No compensation for Alteration in Clause 15: No compensation for Alteration in Restriction of work. Restriction of work. Restriction of work. If it any time after execution of the contract documents, the Engineer shall, for any reason whatsoever; require the whole or any part of : 16 : the work, as specified in the tendered, to be stopped for any period or shall not require the whole or part of the work to be carried out at all or to be carried out by the contractor, he shall give notice in writing of the fact to the contractor who shall thereupon suspended or stop the work totally or partially, as the case may be. In any such case, except as provided hereunder, the contractor shall have no claim to any payment or compensation whatsoever on account of any profit or advantage which he might have derived from the execution of the work in full but which he did not so derive in consequence of the full amount of the work not having been carried out, or an account of any loss that he may be put on account of materials purchased or agreed to be purchased or agreed to be purchased, or for unemployment of labour recruited by him. " From this it is clear that if any part of the work is not required to be carried out by the contractor or is estopped from doing that work, the contractor could not claim any compensation on account of any profit or advantage which, he might have derived from execution of the work in full but which he did not so derive in consequences of full work not having been carried out. 11. Clause 16 of the Contract provides that the contractor shall not be entitled to claim any compensation for the loss suffered on account of the delay by the owner/petitioner in supply of materials where such delay is caused by: "i. Difficulties relating to the supply of : 17 : railways wagons. ii. Force Majeure. iii. Act of God. iv. Act of enemies of the state or any other reasonables cause beyond the control of the Owner." Clause 40 of the Contract provided that the contractor shall not be entitled to any compensation for delay in starting the work. Admittedly, the contract also provided that the contractor will not be entitled to any escalation charges on account of the escalation in cost of material or services. 12. Section 55 of the Contract Act reads as follows: