1 IN THE HIGH COURT OF BOMBAY AT GOA APPEAL UNDER ARBITRATION ACT NO.10/1996 Board of Trustees of Port of Mormugao having their registered Office at Mormugao, Harbour – Goa. ) ) ) ... Appellant V/s. 1. M/s. Pioneer Engineer Syndicate, a partnership firm registered under Indian Partnership Act, having their registered Office at 116(old No.80), Lloyds Road, Madras – 600 014. ) ) ) ) ) 2. Shri D. H. Rama Rao (Retd.) Chief Engineer, Panakaj Krupa No.3507, (Old 147) 13th Main Road, 4th “T” Block, Jayanagar, Bangalore – 560 041. ) ) ) ) ) 3. Shri J. Raja Rao, (Retd.) Chief Engineer, 1.1.76, Gandhinagar, Hyderabad – 500 380. ) ) ) ... Respondents Mr. V. B. Nadkarni, Senior Advocate with Mr. Y.V. Nadkarni, Advocate for the appellant. Mr. S. G. Dessai, Senior Advocate with Mr. S. D. Padiyar, Advocate for respondent No.1. CORAM : SMT. RANJANA P. DESAI & N.A. BRITTO, JJ. DATE ON WHICH THE JUDGMENT IS RESERVED : 14th JUNE 2006. DATE ON WHICH THE JUDGMENT IS PRONOUNCED : 18th JULY, 2006. 2 JUDGMENT : (Per Smt. RANJANA DESAI, J.) 1. The appellant is a body corporate, constituted under the Major Port Trusts Act, 1963 having its Office at Mormugao, Goa. Respondent 1 is a partnership firm, registered under the Indian Partnership Act. Respondents 2 and 3 are the arbitrators appointed under the terms of the contract dated 12/10/1985 entered into between the appellant and respondent 1 for construction of transit shed, superstructure for multipurpose general cargo berth. In this appeal, the appellant has challenged the judgment and decree dated 26/3/1996 passed by the Civil Judge, Senior Division, Vasco-da-Gama, Goa in Special Civil Suit No.72/91 refusing to set aside the award dated 13/9/1990 passed by respondents 2 and 3. 2. The brief facts which led to the impugned order, are as follows : In or about the year 1984, the appellants invited tenders for construction of transit shed, superstructure, the 3 principal items of work to be carried out being : (a) Construction of the superstructure of the transit shed measuring 140.Om x 55.0m in plan, comprising R.C. Trusses of 55.0m span and 9.5 m rise, the bottom chord being prestressed, supported on R.C. Columns spaced 7.75 m apart and 7.5 m high along with a covered platform 5.0m, wide on one of the longitudinal sides and part of the short sides – complete with precast lateriite blocks (or equivalent approved) side walls, precast R.C. Tiles, R.C. purling covered with AC sheets, flooring and other fixtures as specified, together with associated miscellaneous works including drainage works. The R.C. Columns and the side walls shall be supported upon R.C. pile caps grade beams constructed by other. (b) Construction of a custom office in the North East corner of the transit shed, complete with sanitary, water supply and sewage disposal arrangements. (c) Construction of a retaining wall to support the platform. 4 (d) Electrical works for the transit shed and the Customs Office. 3. The contract for the work was awarded to the respondent 1 vide works order No.CR(P)/D-184(TS)/10818 dated 5/2/1985 for the amount of Rs.1,37,13,845/-. The scheduled date of commencement was 23/5/1985 and with the period of completion of 15 months, the scheduled date of completion was 22/5/1986. The terms on which the contract was awarded were reduced into writing and an agreement stipulating the terms of contract was executed on 12/10/1985 (for convenience, “the said contract”). 4. Clause 19.1 of the said contract reads thus: “19.1. - If any dispute or difference of any kind whatsoever shall arise between the Board of the Engineer and Contractor in connection with or arising out of the contract or the carrying out of the works (whether during the progress of the works after the termination abandonment of or breach of the contract) it shall in the first place be referred to and settled by the Engineer who within a period of 90 days after being requested 5 by either party to do so shall give written notice of his decision to the Board and the Contractor. Save as hereinafter proved such decision in respect of every matter so referred shall be final and binding upon the Board and the Contractor until the completion of the work and shall forthwith be given effect to by the Contractor who shall proceed with the works with all due diligence whether he or the Board requires arbitration as hereinafter provided or not. If the Engineer shall give written notice of his decision to the Board and the Contractor and no claim to arbitration has been communicated to him by either the Board or the Contractor within a period of 90 days from the receipt of such notice the said decision shall remain final and binding upon the Board and the Contractor. If the Engineer shall fail to give notice of his decision as aforesaid within a period of 90 days after being requested as aforesaid or if either the Board or the Contractor be dissatisfied with any such decision then in any such case either the Board or the Contractor may within 90 days notice after receiving notice of such decision or within 90 days (as the case may be) require that the matter or matters in dispute be referred to arbitration as hereinafter provided. All disputes or differences in respect of which the decision (if 6 any) of the Engineer has not become final and binding as aforesaid shall be referred to two arbitrators, one to be appointed by the Board and one by the Contractor or in the case of the said arbitrators not agreeing thereto the award of an umpire to be appointed by the said arbitrators pursuant to and so with regard to the mode and consequence of the reference and in all other respect to conform to the provisions of the Government of India Arbitrator Act, 1940 (Act No.10 of 1940) or any reenactment or statutory modification thereof for the time being in force provided whoever that the umpire will be appointed in writing before entering on the reference. The said arbitrator or umpire shall have full power to open up, review and revive any decision, opinion, direction, certificate or valuation of the Engineer and neither the party shall be limited in the proceedings before such arbitration and umpire to the evidence or arguments put before the Engineer for the purpose of obtaining his said decision. No decision given by the Engineer in accordance with the foregoing provisions shall disqualify him from being called as a witness and giving evidence before the arbitrators or umpire as aforesaid. The arbitrators or umpire shall not enter on the reference until after the completion 7 or alleged completion of the Works unless with the written consent of the Board and the Contractor provided always : (i) That such reference may be opened before such completion or alleged completion in respect of the withholding by the Engineer or any certificate or the withholding of any portion of the retention money to which the Contractor claims in accordance with the conditions set out in Part II in the Clause 15.1.1 to 15.1.7 to be entitled or in respect of the exercise of the Engineer's power to give a certificate under Clause 16.1.1 hereof or in respect of a dispute arising under Clause 21.2 hereof. (ii) That the giving of a Certificate of Completion under clause 9.8 hereof shall not be a condition precedent to the opening of any such reference.” 5. During the course of construction of the said transit shed, certain disputes arose between the appellant and respondent 1 and the disputes were referred for adjudication to respondents 2 and 3 as arbitrators in terms of clause 19.1 of the said contract. Respondent 3 - Shri J. Raja 8 Rao was appointed as arbitrator by respondent 1 and respondent 2 - D.H. Rama Rao was appointed as arbitrator by the appellant. 6. After hearing the parties and after perusing the relevant record, respondents 2 and 3 made their award dated 13/9/1990. The arbitrators awarded to respondent 1 a total sum of Rs.29,96,995.85 with interest at 12% per annum from the date of the award till the date of payment or date of decree whichever is earlier. The arbitrators filed the award in the Court of the Civil Judge, Senior Division, at Vasco da Gama, Goa in terms of Section 14 of Arbitration Act, 1940 `the said Act’ for short). The appellants by their arbitration petition dated 6/9/1991 challenged the validity of the said award. The said petition was filed in the Court of Civil Judge, Sr. Division at Vasco da Gama, Goa and was registered as Special Civil Suit No.72/91. Respondent 1 also filed an application praying for pendente lite interest. The learned Civil Judge, Senior Division, Vasco da Gama, by the impugned judgment and decree rejected the arbitration petition of the appellant. He also rejected the application filed by 9 respondent 1. The award dated 13/9/1990 was made rule of the court and the appellant was directed to pay further interest to respondent 1 at the rate of 12 % per annum on the principal sum as adjudicated by the award and confirmed by the impugned judgment and order from the date of the decree till final payment. It is this judgment and decree which is challenged before us. 7. We have heard at some length Mr. Nadkarni, learned Senior Counsel appearing for the appellant and Mr. Dessai, learned Senior Counsel appearing for the contesting respondent 1. 8. Mr. Nadkarni, the learned counsel for the appellant submitted that the impugned award deserves to be set aside because it is arbitrary, unreasonable and capricious. He submitted that the arbitrators have ignored a long line of Supreme Court judgments in respect of role, powers and jurisdiction of an arbitrator. Mr. Nadkarni contended that it is well settled that the arbitrator is not a conciliator. The arbitrator cannot ignore the law and he 10 cannot act irrationally or independently of the contract. If the award of the arbitrator is shown to be based upon some unsound proposition of law or the findings recorded by the arbitrator are unreasonable and irrational and are not founded on the materials on record, the award must be set aside. In this connection, he referred to the judgment of the Supreme Court in M/s. Sikkim Subha Associates v. State of Sikkim, AIR 2001 SC 2062. 9. Mr. Nadkarni then relied upon the judgment of the Supreme Court in Steel Authority of India Ltd. v. J.C. Budharaja, Government and Mining Contractor, AIR 1999 SC 3275, where the Supreme Court has observed that the Arbitration Act does not give any power to the arbitrator to act arbitrarily or capriciously and his existence depends upon the agreement and his function is to act within the limits of the said agreement. It is further observed that to find out whether the arbitrator has traveled beyond his jurisdiction and acted beyond the terms of the agreement between the parties, agreement is 11 required to be looked into. 10. Mr. Nadkarni then referred to the judgment of the Supreme Court in K.P. Poulose v. State of Kerala and another, AIR 1975 SC 1259, where the Supreme Court has observed that if the arbitrator arrives at a decision by ignoring very material documents which throw abundant light on the controversy to help a just and fair decision, the arbitrator commits a legal misconduct, within the meaning of section 30(a) of the said Act. 11. Mr. Nadkarni also relied upon the judgment of the Supreme Court in New India Civil Erectors (P) Ltd. v. Oil and Natural Gas Corporation, AIR 1997 SC 980, where the Supreme Court has observed that it is axiomatic that the arbitrator being a creature of the agreement, must operate within the four corners of the agreement and cannot travel beyond it, more particularly, he cannot award any amount which is ruled out or prohibited by the terms of the agreement. 12 12. Mr. Nadkarni contended that in this case, the arbitrators have acted in breach of the above settled principles. The arbitrators have ignored the terms of the contract particularly clauses 9.4 and 9.71 read with Part II of the said contract, which provides for liquidated damages. The arbitrators have tried to assume the role of conciliator by misinterpreting the terms of the contract and awarding amount as per their whims and notions. Mr. Nadkarni contended that the arbitrators have misinterpreted sections 73 and 74 of the Indian Contract Act and the award is based upon unsound propositions of law. 13. In this connection, Mr. Nadkarni took us to clause 9.7.1 of the said agreement. It reads thus : Liquidated damages 9.7.1. If the Contractor shall fail to complete the Works within the time 13 for delay prescribed by Clause 9.3 hereof or extended time then the Contractor shall pay to the Board the sum stated in part II as liquidated damages and not as a penalty for such default for every week or part of a week which shall elapse between the time prescribed by Clause 9.3 of extended time as the case may be and the completion of the Works. The Board may without prejudice to any other method of recovery deduct the amount of such damages from any amounts in its hand’s due to which may become due to the Contractor. Provided that the total amount of such damages to be paid shall not exceed the sum stated in Part II. The payment of such damages shall not relieve the Contractor of his obligation to complete the Works or from any other of 14 his obligations or liabilities under the Contract. 14. Clause 9.4 provides for extension of time. It reads thus : Extension of Time for completion 9.4. 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 Engineer shall determine the amount of such extension. Provided that the Engineer 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 15 circumstances have arisen or as soon thereafter as is practicable delivered to the Engineer’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. 15. Part II of the said agreement to which our attention was drawn by Mr. Nadkarni pertains to conditions of contract. The relevant part thereof reads thus : `Liquidated Damages’ 9.7.1. ¼% per week or part thereof of the total value of the contract, subject to the maximum of 5% of the total value of contract. 16 16. Mr. Nadkarni pointed out that the date of completion of the said contract was 22/8/1986. The appellants granted extension to respondent 1 upto 31/10/1986. The appellants did not levy any damages for the period upto 31/10/1986. The arbitrators extended time upto 31/3/1987. The appellants, therefore, made recovery for the period from 1/11/1986 to 31/3/1987 at ¼% per week or part thereof of the total value of the said agreement, subject to the maximum of 5% of the total value of the said agreement. For the period 1/4/1987 till 31/7/1987, the appellants recovered money at the rate of ½% per week subject to the maximum of 10% of the said agreement value. The total amount recovered was Rs.14,92,408.65. Mr. Nadkarni contended that this was done on the basis of the minutes of the meeting held on 13/10/1986 between the appellants and the respondents. Mr. Nadkarni took us to the minutes of this meeting. The minutes indicate that the meeting was convened in the chamber of the Deputy Chairman of Mormugao Port Trust, primarily with a view to assessing the problems and 17 finding out ways and means to complete the work at the earliest. The minutes, inter alia, note that having due regard to the need to have the work completed latest by 31/3/1987 and the financial constraints being experienced by the contractor, counter proposals were suggested. The clause on which heavy reliance was placed by the appellants may be quoted. “Without prejudice to the right of the Mormugao Port Trust to recover liquidated damages as provided in the contract, it was proposed that in the event of PES not completing the work by 31.3.1987 the rate of liquidated damages be raised from the existing ¼% to ½% per week and the ceiling from 5% to 10%. Such a higher liquidated damages was to be levied only in respect of delay, if any, beyond 31.3.1987, earlier period being governed by the existing terms”. 17. Mr. Nadkarni pointed out that the minutes note that Mr. Bhushan, the Managing Director of respondent 1 agreed to the terms proposed by the appellants and 18 undertook to complete the work by 31/3/1987. The minutes were signed by Mr. Bhushan, the Managing Director and Mr. Raghu Prasad, Resident Engineer of respondent 1 and the Deputy Chairman, Chief Engineer, Deputy Chief Engineer and Executive Engineer of the appellants. Mr. Nadkarni contended that respondent 1 was party to these minutes and is bound by it and, therefore, amount of Rs.14,92,408.65 was rightly claimed by the appellants. Moreover, the arbitrators unreasonably held that respondent 1 was entitled to time upto 31.3.87 as it was granted by the arbitrators and the appellant was entitled to recover liquidated damages only for the period beyond 1.4.87 till date of actual completion i.e. 31.7.87 forgetting the fact that in the minutes of meeting held on 13.10.87 the representative of respondent 1 had admitted that respondent 1 is responsible for the delay even prior to 31.3.87. The arbitrators unreasonably calculated liquidated damages at Rs. 2,98,426.89 and awarded a refund of the balance amount recovered i.e. Rs.11,93,986.76 (Rs.14,92,408.65 - Rs.2,98,426.89) on 19 this count and while doing this, they overlooked sections 73 and 74 of the Contract Act and wrongly observed that the appellants had not proved the loss caused to them when there was no such requirement. 18. Mr. Nadkarni contended that the appellants were entitled in law in conformity with section 74 of the Contract Act to the liquidated damages as agreed between the parties in terms of the clauses quoted above at ¼% per week for the period 1/11/1986 to 31/3/1987 and at ½% per week for the period from 1/4/1987 to 31/7/1987 as the same were the estimated damages as agreed between the parties as payable by respondent 1 for the breach of the contract on their part and further no evidence was led by respondent 1 to establish that stipulated condition in clause 9.7.1 of the contract was by way of penalty or that the compensation contemplated in any way was arbitrary. Mr. Nadkarni contended that since the compensation named in the award are pre-estimated damages, the appellant does not have to prove the actual loss suffered by 20 it. 19. Mr. Nadkarni contended that reliance placed by the Court on Fateh Chand v. Balkrishan Dass, AIR 1963 SC 1405 is misplaced because in that case the Supreme Court was considering a penalty clause. He contended that even in Maula Bux v. Union of India AIR 1970 SC 1955, the Supreme Court was considering a penalty clause. Mr. Nadkarni placed heavy reliance on the Judgment of the Supreme Court in Oil & Natural Gas Corporation v. Saw Pipes Ltd., AIR 2003 SC 2629 to which we shall soon advert. Mr. Nadkarni pointed out that in that case, after considering the scope of Sections 74 and 75 of the Indian Contract Act, the Supreme Court observed that if the compensation named in the contract is by way of penalty, the party is entitled to reasonable compensation. But, if the compensation named in the contract for such a breach is genuine pre-estimate of loss which the parties know when they made the contract to be likely to result from the breach of it, there is no question of proving such loss or such party is not required to lead evidence to prove the 21 actual loss suffered by him and burden is on the other party to lead evidence for proving that no loss is likely to occur by such breach. Mr. Nadkarni contended that this judgment is delivered by the Supreme Court after considering its judgments in Fatech Chand and Maula Bux and hence, it holds the field now. According to Mr. Nadkarni, the trial court’s judgment runs counter to the judgment in ONGC’s case. 20. Mr. Dessai, on the other hand, submitted that clause 9.7.1 of the said contract providing for liquidated damages is a penalty clause within the meaning of section 74 of the Contract Act. He submitted that the sum mentioned in the said clause is not pre-estimated, genuine liquidated damages duly agreed by the parties. Mr. Dessai heavily relied on the judgment of the Supreme Court in Feteh Chand’s case. He submitted that in that case, it is held by the Supreme Court that section 74 of the Contract Act lays down an uniform principle as far as stipulation naming liquidated damages and stipulation by way of penalty are concerned. He submitted that it is held by the Supreme Court that the principle of `reasonable compensation’ 22 has to be uniformly applied. He submitted that the judgment in Fateh Chand’s case is still good law. ONGC’s case has made no dent in it. Mr. Dessai submitted that if the present case is examined in the light of the said judgment, the impugned award cannot be faulted. He further submitted that in the Minutes dated 13.10.86, there is no admission made by respondent 1. In any case, the arbitrators have duly considered the minutes and it is not open for this court to sit in appeal over the award. Mr. Dessai submitted that the judgment of the Supreme Court in Sikkim Subba’s case is not applicable to the present case. In that case, the arbitrator had reached his conclusions by throwing overboard well settled norms. It was a case of errors apparent on the face of the award. It was a case of misconduct on the face of the award. Such are not the facts here. He submitted that the impugned award is perfectly legal and in consonance with settled principles. According to Mr. Dessai the learned judge has rightly dismissed the petition. 21. To understand the moot question involved in this case, it is necessary to first refer to Fateh Chand’s case. In 23 that case, it was argued that the covenant which gave to the plaintiff the right to forfeit Rs.2400/- was a stipulation in the nature of penalty and the plaintiff could retain that amount only if he establishes that in consequence of the breach by the defendant he suffered loss and if it was found by the Court that that amount was reasonable compensation for that loss. The Supreme Court found that right to forfeit Rs.2400/- was manifestly a stipulation by way of penalty. The Supreme Court observed that Section 74 of the Contract Act deals with measure of damages in two classes of cases. (i) where the contract names a sum to be paid in case of breach; and (ii) where the contract contains any other stipulation by way of penalty. Since the Supreme Court was dealing with a stipulation by way of penalty, the Supreme Court clarified that measure of damages in case of breach of a stipulation by way of penalty is as per Section 74 of the Contract Act, reasonable compensation not exceeding the penalty stipulated for and the Court has jurisdiction to award compensation as is deemed reasonable in the circumstances, not exceeding the stipulated penalty. It is important to note that while coming to this 24 conclusion, the Supreme