IN THE HIGH COURT OF HIMACHAL PRADESH SHIMLA OMP(M) No.15 of 2000, Arbitration Case No.1 of 2002, Arbitration Case No.2 of 2002 & Arbitration Case No.67 of 2003. Judgments reserved on: Date of decision: 9.1.2007 HPSEB ….Objector/petitioner. -Versus- M/s.SAB Industries Ltd. ….Non-objector/Respondent Coram: The Hon’ble Mr.Justice Deepak Gupta, Judge. Whether approved for reporting? For the Petitioner: Mr.K.D.Sood, Advocate in OMP(M) No.15 of 2000, Arbitration Case No.1 of 2002, Arbitration Case No.2 of 2002. Mr.J.S.Bhogal, Senior Advocate with Mr.Suneet Goel, Advocate in Arb.Case No.67 of 2003. For Respondent: M/s.J.L.Gupta & Kr.Kuldip Singh, Senior Advocates with Mr.K.S.Kanwar, Advocate. Deepak Gupta, J. This judgment shall dispose of four separate objections filed against four separate awards since all these awards are between the same parties and arise out of the same contract and some of the questions involved are common to all the cases. The Objector H.P. State Electricity Board (hereinafter referred to as the Board) had taken up the execution of the Gaj Hydel Project. The Board entered into an agreement with S.A. Builders which was 2 later on re-named as SAB Industries Ltd. (hereinafter referred to as the Contractor). The Board vide Contract No.1 of 89 dated 6.2.1989 awarded construction of various civil works in favour of the contractor. The contract agreement was signed between the parties on 6.2.1989 and the stipulated time for completion of the works was 3 years. The total tendered cost of the project was Rs.4,83,41,997/-. Admittedly 3 time extensions with escalation were granted to the contractor by the Board up to 31.3.1995. Extension was also granted from 1.4.1995 to 30.9.1995 vide letter dated 24.11.1995 but in this letter the Board did not grant escalation and also reserved the right to claim liquidated damages. It is also not in dispute that the contractor applied for extension of time for the period 1.10.1995 to 31.3.1996 but this request was rejected by the Board on 31.5.2000. It is also not disputed that the actual date of completion of the work was 25.3.1996. The final bill was submitted by the Contractor on 26.12.1997/30.12.1997. Various deductions were made by the Board. Disputes arose between the parties even during the pendency of the contract and at various times different disputes were referred to arbitration of different arbitrators. Some of the awards have attained finality but four of the awards have been challenged under Section 34 of the Arbitration and Conciliation Act, 1996 (hereinafter referred to as the Act). Before dealing with the individual cases and the various contentions raised by the parties it would be pertinent to mention that the present objections in all the cases have been filed under the Arbitration and Conciliation Act, 1996(hereinafter referred to as the 3 Act of 1996). Under the Act of 1996 an application for setting aside the arbitral award can be filed under Section 34 and the grounds for setting aside the arbitral award are set out in sub-section (2) of the aforesaid Section which read as follows: “34.Application for setting aside arbitral award.- (1)xxxxxxxxxx (2)An arbitral award may be set aside by the Court only if— (a)the party making the application furnishes proof that— (i)a party was under some incapacity; or (ii)the arbitration agreement is not valid under the law to which the parties have subjected it or, failing any indication thereon, under the law for the time being in force; or (iii)the party making the application was not given proper notice of the appointment of an arbitrator or of the arbitral proceedings or was otherwise unable to present his case; or (iv)the arbitral award deals with a dispute not contemplated by or not falling within the terms of the submission to arbitration, or it contains decisions on matters beyond the scope of the submission to arbitration: Provided that, if the decisions on matters submitted to arbitration can be separated from those not so submitted, only that part of the arbitral award which contains decisions on matters not submitted to arbitration may be set aside; or (v)the composition of the arbitral tribunal or the arbitral procedure was not in accordance with the agreement of the parties, unless such agreement was in conflict with a provision of this Part from which the parties cannot derogate, or, failing such agreement, was not in accordance with this Part; or (b)the Court finds that— 4 (i)the subject-matter of the dispute is not capable of settlement by arbitration under the law for the time being in force, or (ii)the arbitral award is in conflict with the public policy of India. Explanation.- Without prejudice to the generality of sub-clause (ii) of clause (b), 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.” Section 31(3) of the Act of 1996 provides as follows: “31,Form and contents of arbitral award.- (1)&(2) xxxxxxxxxx (3)The arbitral award shall state the reasons upon which it is based, unless---- (a)the parties have agreed that no reasons are to be given, or (b)the award is an arbitral award on agreed terms under section 30.” This section has to be distinguished from the provisions of the Arbitration Act, 1940 under which an award of the Arbitrator could only be set aside on the grounds mentioned in Section 30 of the Act which reads as follows: “30.Grounds for setting aside award.-Any award shall not be set-aside except on one or more of the following grounds, namely:- (a)that an arbitrator or umpire has misconducted himself or the proceedings; (b)that an award has been made after the issue of an order by the Court superseding the arbitration or after arbitration proceedings have become invalid under section 35; 5 (c)that an award has been improperly procured or otherwise invalid.” It is thus clear that though under the Act of 1940 reasons were not necessary but under the Act of 1996 the Arbitral Tribunal must give its reasons for making the award. Various judgments have been cited at the Bar before me. It is not necessary to deal with each and every judgment. Some of the judgments relate to the Act of 1940 and some relate to the Act of 1996. In K.P. Poulose v. State of Kerala and another, AIR 1975 SC 1259, the apex Court while considering the scope of the term mis-conduct in Section 30 of the Act of 1940 held as follows: “6.Under Section 30(a) of the Arbitration Act an award can be set aside when an Arbitrator has misconducted himself or the proceedings. Misconduct under Section 30(a) has not a connotation of moral lapse. It comprises legal misconduct which is complete if the Arbitrator on the face of the award arrives at an inconsistent conclusion even on his own finding or arrives at a decision by ignoring very material documents which throw2 abundant light on the controversy to help a just and fair decision. It is in this sense that the Arbitrator has misconducted the proceedings in this case……” In my opinion, this authority would also apply to Arbitration awards announced under the 1996 Act since if the Arbitrator ignores material documents or totally mis-reads the evidence itself the award would be against the public policy of India. In Indian Oil Corporation Ltd. vs. Indian Carbon Ltd. (1988) 3 SCC 36, the apex Court was dealing with the question as 6 to what is meant by the phrase ‘reasoned award’. Under the 1940 Act it was not incumbent for the Arbitrator to give a reasoned award. However, in case the terms of the arbitration itself laid down that the award should be a reasoned award the arbitrator was bound to give reasons in his award. In this case the Supreme Court held as follows: “10…………The reasons that are set out must be reasons which will not only be intelligible but also deal with the substantial points that have been raised. When the arbitration clause required the arbitrator to give a reasoned award and the arbitrator does give his reasons in the award, the sufficiency of the reasons depend upon the facts of the particular case. He is not bound to give detailed reasons. The court does not sit in appeal over the award and review the reasons. The Court can set aside the award only if it is apparent from the award that there is no evidence to support the conclusions or if the award is based upon any legal proposition which is erroneous.” In Vishwanath Sood vs. Union of India and another, AIR 1989 SC 952, the apex Court held that under the Act of 1940 it was not necessary to give reasons for the award. In Associated Engineering Co., vs. Government of Andhra Pradesh and another, AIR 1992 SC 232, the apex Court while considering the scope of interference held as follows: “….Where it is apparent not by construction of the contract but by merely looking at the contract that the umpire travelled totally outside the permissible territory and thus exceeded his jurisdiction in making the award, it is an error going to the root of his jurisdiction…. 7 ….The arbitrator cannot act arbitrarily, irrationally, capriciously or independently of the contract. He has no power apart from what the parties have given him under the contract. If he has travelled outside the bounds of the contract, he has acted without jurisdiction. But if he has remained inside the parameters of the contract and has construed the provisions of the contract, his award cannot be interfered with unless he has given reasons for the award disclosing an error apparent on the face of it. A conscious disregard of the law or the provisions of the contract from which he has derived his authority vitiates the award. ……If the arbitrator commits an error in the construction of the contract, that is an error within his jurisdiction. But if he wanders outside the contract and deals with matters not allotted to him, he commits a jurisdictional error. Such error going to his jurisdiction can be established by looking into material outside the award. Extrinsic evidence is admissible in such cases because the dispute is not something which arises under or in relation to the contract or dependent on the construction of the contract or to be determined within the award. The dispute as to jurisdiction is a matter which is outside the award or outside whatever may be said about it in the award. The ambiguity of the award can, in such cases, be resolved by admitting extrinsic evidence. The rationale of this rule is that the nature of the dispute is something which has to be determined outside and independent of what appears in the award. Such jurisdictional error needs to be proved by evidence extrinsic to the award.” In Jajodia (Overseas) Pvt.Ltd. vs. Industrial Development Corporation of Orissa Ltd. (1993) 2 SCC 106, the apex Court was considering the question as to what is meant by a speaking or reasoned award. The Court held as follows: 8 “8.If is, we think, necessary first, to clear some cobwebs. A speaking or reasoned award is one which discusses or sets out the reasons which led the arbitrator to make the award. Setting out the conclusions upon the questions or issues that arise in the arbitration proceedings without discussing the reasons for coming to these conclusions does not make an award a reasoned or speaking award. The arbitrator has in the award before us only answered the issues that were framed. He has not discussed or set out the reasons for the answers. The award is, therefore, not a speaking or reasoned award.” This authority will apply as far as the 1996 Act is concerned since this Act itself requires that reasons should be given. In Tarapore & Co. vs. State of M.P., (1994) 3 SCC 521, the Apex Court decided two questions which are germane to the present case and held as follows: “An arbitrator cannot travel beyond the contract, if an arbitrator acts beyond jurisdiction, the same would amount to misconduct because of which the award would become amenable of being set aside by a court……. If an authority would lack jurisdiction in the sense that the subject-matter is not amenable at all to its decision, i.e. the case be of patent lack of jurisdiction acquiescence of the parties would not be material inasmuch as by agreement jurisdiction cannot be conferred….. If a challenge is made to the award on the ground that the arbitrator has no jurisdiction, the only way to test the correctness is to look into the agreement itself because the jurisdiction of the arbitrator flows from the reference and a reference can be only with regard to such disputes which are contemplated by the agreement…… 9 Payment of wages as per the rates fixed under the Minimum Wages Act being statutory obligation and the terms of the contract being silent about payment of minimum wages, as the relevant term speaks of “fair wages”, which concept is different from minimum wages, it must be held that insofar as increased payment on account of rise in the rates of minimum wages is concerned, the parties were not in any sort of agreement—express or implied to reimburse the same. The appellant-contractor paid as per these rates not pursuant to any term of the contract but because of the mandate of law…..” In Rajasthan State Mines & Minerals ltd. vs. Eastern Engineering Enterprises and another, (1999) 9 SCC 283, the apex Court summarised the entire law relating to the objections filed uner the 1940 Act in the following terms: “44.From the resume of the aforesaid decisions, it can be stated that: (a) It is not open to the court to speculate, where no reasons are given by the arbitrator, as to what impelled the arbitrator to arrive at his conclusion. (b) It is not open to the court to admit to prove the mental process by which the arbitrator has reached his conclusion where it is not disclosed by the terms of the award. (c) If the arbitrator has committed a mere error of fact or law in reaching his conclusion on the disputed question submitted or his adjudication then the court cannot interfere. (d) If no specific question of law is referred, the decision of the arbitrator on that question is not final, however much it may be within his jurisdiction and indeed essential for him to decide 10 the question incidentally. In 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, then the finding of the arbitrator on the said question between the parties may be binding. (e) In a case of a non-speaking award, the jurisdiction of the court is limited. The award can be set aside if the arbitrator acts beyond his jurisdiction. (f) To find out whether the arbitrator has travelled beyond his jurisdiction, it would be necessary to consider the agreement between the parties containing the arbitration clause. The arbitrator acting beyond his jurisdiction is a different ground from the error apparent on the face of the award. (g) In order to determine whether the arbitrator has acted in excess of his jurisdiction what has to be seen is whether the claimant could raise a particular claim before the arbitrator. If there is a specific term in the contract or the law which does not permit or give the arbitrator the power to decide the dispute raised by the claimant or there is a specific bar in the contract to the raising of the particular claim then the award passed by the arbitrator in respect thereof would be in excess of jurisdiction. (h) The award made by the arbitrator disregarding the terms of the reference or the arbitration agreement or the terms of the contract would be a jurisdictional error which requires ultimately to be decided by the court. He cannot award an amount which is ruled out or prohibited by the terms of the agreement. Because of a specific bar stipulated by the parties in the agreement, that claim could not be raised. Even if it is raised and referred to arbitration because of a 11 wider arbitration clause such claim amount cannot be awarded as the agreement is binding between the parties and the arbitrator has to adjudicate as per the agreement. This aspect is absolutely made clear in Continental Construction Co. Ltd. vs. State of M.P. (1988) 3 SCC 82, by relying upon the following passage from Alopi Parshad v. Union of India, AIR 1960 SC 588, which is to the following effect: (SCC p.88, para 5) “There it was observed that a contract is not frustrated merely because the circumstances in which the contract was made, altered. The Contract Act does not enable a party to a contract to ignore the express covenants thereof, and to claim payment of consideration for performance of the contract at rates different from the stipulated rates, on some vague plea of equity. The parties to an executory contract are often faced, in the course of carrying it out, with a turn of events which they did not at all anticipate, a wholly abnormal rise or fall in prices, a sudden depreciation of currency, an unexpected obstacle to execution, or the like. There is no general liberty reserved to the courts to absolve a party from liability to perform his part of the contract merely because on account of an uncontemplated turn of events, the performance of the contract may become onerous.” (i) The arbitrator could not act arbitrarily, irrationally, capriciously or independently of the contract. A deliberate departure or conscious disregard of the contract not only manifests the disregard of his authority or misconduct on his part but it may tantamount to mala fide action. 12 (j) The arbitrator is not a conciliator and cannot ignore the law or misapply it in order to do what he thinks just and reasonable; the arbitrator is a tribunal selected by the parties to decide the disputes according to law.” As far as the Act of 1996 is concerned the scope of interference by the Court in an arbitral award under Section 34 of the Act has been the subject matter of a number of decisions. The leading decision on the point is Oil and Natural Gas Corporation Ltd. vs. SAW Pipes Ltd., AIR 2003 SC 2629, wherein after considering the entire law and all the provisions the apex Court held as follows: “30……….Further, for achieving the object of speedier disposal of dispute, justice in accordance with law cannot be sacrificed. In our view, giving limited jurisdiction to the Court for having finality to the award and resolving the dispute by speedier method would be much more frustrated by permitting patently illegal award to operate. Patently illegal award is required to be set at naught, otherwise it would promote injustice. 31.Therefore, in our view, the phrase ‘public policy of India’ used in S.34 in context is required to be given a wider meaning. It can be stated that the concept of public policy connotes some matter which concerns public good and the public interest. What is for public good or in public interest or what would be injurious or harmful to the public good or public interest has varied from time to time. However, the award which is, on the face of it, patently in violation of statutory provisions cannot be said to be in public interest. Such award/judgment/decision is likely to adversely affect the administration of justice. Hence, in our view in addition to narrower meaning given to the term ‘public policy’ in 13 Renusagar’s case (supra(), it is required to be held that the award could be set aside if it is patently illegal. Result would be—award could be set-aside if it is contract to:- (a) fundamental policy of India law; or (b) the interest of India; or © justice or morality, or (d) in addition, if it is patently illegal. Illegality must go to the root of the matter and if the illegality is of trivial nature it cannot be held that award is against the public policy. Award could also be set aside if it is so unfair and unreasonable that it shocks the conscience of the court. Such award is opposed to public policy and is required to be adjudged void.” In the light of the law discussed above each of the matters is being taken up separately. OMP(M) No.15 of 2000: In this case the Arbitrator vide his award dated 7th September, 1999 has awarded a sum of Rs.9,37,128/- in favour of the contractor and has further awarded simple interest @ 12% p.a. on this award amount from the date of reference to the date of the award. The rest of the claims of the contractor were rejected and the claims of the Board were also rejected. The Board has now filed objections to this award. The contractor had laid various claims before the Arbitrator. The Arbitrator awarded claims on account of cement variation for the period October, 1992 to September, 1994 amounting to Rs.7,03,781/-. In addition thereto he has awarded a sum of Rs.1,14,047/- for the claim on account of concrete work in super structure of power house. He has also awarded Rs.1,19,300/- on 14 account of escalation. The total amount awarded is Rs.9,37,128/- on which he has awarded simple interest as aforesaid. The first objection of the Board is with regard to claim amount of cement variation in concrete works. The Arbitrator has come to the conclusion that the cement variation upto September, 1992 has already been awarded in favour of the contractor in the award passed by Er.Kaushal dated 16th August, 1993. This award has been implemented by the Board. The Arbitrator has come to the conclusion that the cement contents have increased in weight by 5% and the labour rate had increased from Rs.15/- as at the time of tendering of work to Rs.22/- and therefore as on October, 1992 he has analysed the rate per bag to be Rs.107.12 per bag and awarded Rs.7,33,781/- on any count. This is a reasoned award and I do not find that the award of the Arbitrator is perverse on this count. Therefore, it calls for no interference. The Arbitrator has awarded a sum of Rs.1,14,047/- on account of concrete works. He while coming to his conclusions made the analysis for the rate of concrete and has analysed the rates in accordance with certain norms. Here also it cannot be said that the award is against the public policy of India and hence this portion of the award is also upheld. The main dispute in the present case relates to Claim No.7 wherein the Arbitrator has awarded escalation and while assessing the escalation has made the calculations by holding that the contractor was bound by the letter of the respondent board dated 7.6.1995. 15 Mr.K.D.Sood learned counsel appearing on behalf of the Board submits that this portion of the award is totally illegal and against the public policy of India. He submits that the said portion of the award is against the judgment delivered by this Court in M/s.Hydel Construction Ltd. vs. HPSEB, 1999 (3) Shim. L.C. 10. It would be pertinent to mention that Clause 19-A of the contract entered into between the parties reads as follows: “CLAUSE-19A: MINIMUM WAGES: (a) The contractor shall pay not less than the minimum wage(s) for Kangra Distt. notified by H.P. Govt. & HPSEB from time to time for various types of labourers engaged by him on the work. (b) The contractor shall, notwithstanding the provision of any contract to the contrary, cause to be paid not less than minimum wage to labourers indirectly engaged on the work, including any labour engaged by his sub-contractors in connection with the said work as such labourers had been in