* THE HON’BLE SRI JUSTICE V.V.S. RAO AND THE HON’BLE SRI JUSTICE B.N.RAO NALLA CIVIL MISCELLANEOUS APPEAL No.53 of 2002 CIVIL MISCELLANEOUS APPEAL No.854 of 2008 AND CIVIL REVISION PETITION No.2437 of 2004 % 14.12.2009 Between: K.Niranjan, S/o.Late Sri K.Satyanarayana … Appellant AND Osmania University, Hyderabad and others …Respondents Counsel for the Appellant: Sri K. Prabhakar Counsel for the Respondents: Sri Deepak Bhattacharjee < Gist: > Head Note: ? CITATIONS: 1. AIR 1960 SC 588: (1960) 2 SCR 793 2. (1926) AC 497 3. (1942) AC 154 4. (1952) AC 166 5. (1988) 3 SCC 82: AIR 1988 SC 1166 6. AIR 1990 AP 294 7. AIR 1923 PC 66 8. (1991) 4 SCC 93: AIR 1992 SC 232 9. (1997) 11 SCC 75: AIR 1997 SC 980 10. (1999) 9 SCC 283: AIR 1999 SC 3627 11. (1999) 9 SCC 610 12. 1989 Supp (1) SCC 368 13. (1999) 8 SCC 122: AIR 1999 SC 3275 14. (2001) 4 SCC 241: AIR 2001 SC 1523 15. (2002) 4 SCC 45: AIR 2002 SC 1272 16. (2007) 2 SCC 453: AIR 2007 SC 509 THE HON’BLE SRI JUSTICE V.V.S. RAO AND THE HON’BLE SRI JUSTICE B.N.RAO NALLA CIVIL MISCELLANEOUS APPEAL No.53 of 2002 CIVIL MISCELLANEOUS APPEAL No.854 of 2008 AND CIVIL REVISION PETITION No.2437 of 2004 14.12.2009 Between: K.Niranjan, S/o.Late Sri K.Satyanarayana … Appellant AND Osmania University, Hyderabad and others … Respondents THE HON’BLE SRI JUSTICE V.V.S. RAO AND THE HON’BLE SRI JUSTICE B.N.RAO NALLA CIVIL MISCELLANEOUS APPEAL No.53 of 2002 CIVIL MISCELLANEOUS APPEAL No.854 of 2008 AND CIVIL REVISION PETITION No.2437 of 2004 COMMON ORDER: (Per Hon’ble Sri Justice V.V.S.Rao) The two civil miscellaneous appeals and civil revision petition are filed against the common order dated 06.2.2001 in O.P.Nos.382 and 459 of 1994. The work of construction of building for library was entrusted by Osmania University (OU) to Sri K.Niranjan (hereafter called, Contractor). The disputes arose out of the contract works and the matter was referred to a sole arbitrator who passed reasoned award on 15.6.1994. The contractor filed a petition under Section 17 of Arbitration Act 1940 (the Act, for brevity), to make award rule of the Court and OU filed another petition under Sections 30 and 33 of the Act to set aside the award. By impugned judgment, the Court below confirmed the award except claim No.2, and therefore, OU as well as the contractor are in appeal before this Court. The details are as follows. Sl. No. O.P. Number CMA/CRP No. Appellant/Petitioner 1. O.P.No.372 of 1994 CMA No.53 of 2002 K.Niranjan 2. O.P.No.459 of 1994 CMA No.854 of 2008 The Vice Chancellor, Osmania University and another 3. O.P.No.459 of 1994 CRP No.2437 of 2004 K.Niranjan OU entered into agreement dated 06.10.1978 for awarding the contract at an estimated cost of Rs.26,74,116/- for construction of library building at OU campus. The site was handed over on 19.11.1978. The work is to be completed within nine months after handing over of the site. Under the agreement, OU agreed to supply cement for the works. Both the parties blamed each other for slow progress. OU granted extension of time in two spells upto 31.1.1990 and upto 21.8.1990 and allowed the contractor to complete the work. The work was completed on 31.5.1990 and building was handed over on 31.7.1990. The Earnest Money Deposit and security deposit were returned and the final bill was allegedly paid. During the course of execution, disputes arose and the contractor after unsuccessfully requesting OU for appointment of arbitrator, filed O.P.No.165 of 1992. A retired Chief Engineer was appointed as arbitrator by V Additional Judge, City Civil Court, Hyderabad. The arbitrator entered reference on 18.10.1993 and issued notice to parties. After receiving notice, the contractor raised six claims. The same was opposed by OU by filing rebuttal statements. On consideration of the rival positions, the arbitrator passed award partly allowing claim Nos. 1, 2 and 3 and rejecting claim Nos.4, 5 and 6. The OU filed O.P.No.372 of 1994 to set aside the arbitral award dated 15.6.1994 and contractor filed O.P.No.459 of 1994 to make the award rule of the Court. Be it made clear, the contractor did not file any petition to set aside the award insofar as the same rejected claims 4, 5 and 6. As noticed supra, the Court below partly allowed contractor’s O.P. making the award rule of the court to the extent of claims 1, 2, 3 and 6. The details of claims, arbitral award thereon and relief granted by the Court below are shown in the table below. Claim No. Claim for Amount claimed Amount awarded by arbitrator Civil Court decree No.1 Payment of escalation of steel prices Rs.2,55,475 Rs.1,83,465+ Interest of Rs.88,477 Affirmed No.2 Increase in wages, materials etc., during extension period Rs.1,35,000 Rs.1,05,688 Set aside the award No.3 Interest for eight months at 18% per annum Rs.34,200 Rs.23,123 Affirmed No.4 Interest on EMD as on September 1991 Rs.18,953 Rejected Affirmed No.5 Interest on FCD amount Rs.28,200 Rejected Affirmed No.6 Arbitration costs Rs.5,000 Rs.5,000 Affirmed Insofar as claims 1, 2, 3 and 6 are concerned, OU has not filed CRP. The contractor filed CRP and CMA aggrieved by the judgment of civil Court in rejecting the claim No.2 and setting aside the award to that extent. The OU filed CMA No.854 of 2008 against O.P.No.459 of 1994 (which was filed by the contractor to make the award rule of the Court). Having regard to the provisions of Section 17 of the Act, an appeal would not lie against the order of Court making the award rule of the Court. Therefore, in these matters essential question is with regard to the judgment of the Court below setting aside the award of the arbitrator insofar as the claim No.2, which is concerned with escalation charges during the extension period. Indeed learned Counsel for contractor and learned Standing Counsel for OU made elaborate submissions touching upon the said question though incidentally other factual disputes are also adverted to. In the background of this case as above, we are required to consider the question whether arbitral award is vitiated for the reason that learned arbitrator travelled beyond the scope of contract and awarded escalation charges during extension period. In his claim petition, the contractor made claim No.2, which reads as under. Claim No.2:- Increase in wages, material cost and transportation charges etc., during the extended period of work: The contractor has to incur additional expenses for the balance of 50% work valuing 13.5 lakhs done during the extended period. On account of the respondents delay there was more than 10% increase in the wages, material cost, transportation charges etc. As such a sum of Rs.1,35,000/- is due and payable with interest on this account. In their rebuttal statement, OU opposed claim No.2, which reads as under. Objection with regard to claim No.2: The contractor/ claimant had claimed an amount of Rs.1,35,000/- stated to have been incurred by him additionally on the work during the extended period on account of increase in wages, costs of materials and transportation charges etc. In this regard, it is submitted that the claim of the claimant is not justified in view of the clause 59 of PS to APSS (B-17) and also as per clause 3.27 of the agreement any claims due to variation in the prices of any materials or articles including petrol, diesel, grease, etc., or due to any other accounts will not be entertained. Hence this claim is not tenable. In fact the claimant did not produce any evidence as such about any excavation in the price of any commodity. The effect of escalation in prices if any is clearly on account of delay and negligence on the part of contractor/claimant. The contractor submits that notwithstanding clause 59 of Preliminary Specifications (PS) in the Andhra Pradesh Detailed Standard Specifications (APDSS) (marked as Ex.B17 before the arbitrator) and also as per clause 3.27 of the agreement, the contractor is entitled towards increase in wages, material costs and transportation charges during the extended period. This is refuted by learned Standing Counsel for OU. There is no dispute that the contractor procured the work under agreement No.270/1988-89, dated 06.10.1988 at an estimated cost of Rs.26,74,116/-. The period of completion of work is three months from the date of handing over of the site. Clause 2.01 of the agreement provided that, “all the quoted rates will hold good till completion of the work even if extension of contract period granted by University Engineer subject to clause 3.11”. Further clause 3.27 is to the following effect. “claims due to variation in prices of any material or articles including the petrol, diesel, grease, etc., or due to any other account will not be entertained.” As per the contract, work is to be completed by August 1989. It was not done. On 01.4.1989, contractor addressed a letter giving the following reasons for delay in progress of the work. (i) In 25 column pits hard rock is met with and Deputy Commissioner of Police permitted to do blasting work only between 4.00 am to 6.00 am and because of the time restriction, it took two months to complete excavation work. (ii) Due to power cut by the Government, material could not be provided for RCC work in time. (iii) There was abnormal increase in prices of steel. (iv) There were restrictions imposed by Traffic police on movement of vehicles. The OU granted extension of time vide letter of Deputy Executive Engineer dated 08.3.1989 but the work was not completed again. The said officer also addressed letters on 18.3.1989, 05.4.1989, 08.6.1989, 04.8.1989 pointing out that only 50% value of the work was completed by the end of July and entire work was to be completed by 18.8.1989. On 12.2.1990 yet another letter was sent by the contractor alleging delay on the part of OU in giving mark out for toilets, giving colour choice for entire building, not making cement available from 05.2.1990 and that doors and window shutters costing about Rs.2,00,000/- were kept aside for non-payment of advance. The OU sent letter refuting these allegations on 20.3.1990. Ultimately the work was completed by July 1990 about one year after due date. The contractor then sent notice raising claims, in vain. He filed O.P.No.165 of 1992 for appointment of sole arbitrator and the same was allowed by Court of V Additional Judge on 12.8.1993 appointing a retired Chief Engineer of R&B Department, as arbitrator. As noticed supra, arbitral tribunal allowed claim No.2 to a tune of Rs.1,05,678/- being 10% of the value of the work done beyond the agreement. While allowing the claims, the arbitrator observed that OU committed breach of contract in many ways and that there is no clause in the agreement disentitling the contractor for escalation in prices. Whether the arbitral tribunal exceeded jurisdiction and travelled beyond the contract and whether interpretation of clause 3.27 of agreement read with clause 59 of APDSS by arbitral tribunal is erroneous. Be it noted that as per clause 3.02 of Conditions of Contract, the contract work will be carried out in accordance with APDSS. Therefore clause 59 of APDSS becomes relevant and it reads as under. P.S.59. Delays and extension of time: - No claim for compensation on account of delays or hindrances to the work from any cause whatever shall lie, except, as hereinafter defined. Reasonable extension of time will be allowed by the Executive Engineer or by the officer competent to sanction the extension for unavoidable delays, such as may result from causes, which, in the opinion of the Executive Engineer, the undoubtedly beyond the control of the contractor. The Executive Engineer shall assess the period of delay or hindrance caused by any written instructions issued by him, at twenty five per cent in excess of the actual working period so lost. In the event of the Executive Engineer failing to issue necessary instructions and thereby causing delay and hindrance to the contractor, the latter shall have the right to claim an assessment of such delay by the Superintending Engineer of the Circle whose decision will be final and binding. The contractor shall lodge in writing with the Executive Engineer a statement of claim for any delay or hindrance referred to above, within fourteen days from its commencement, otherwise no extension of time will be allowed. Whenever authorized alterations or additions made during the progress of the work are of such a nature in the opinion of the Executive Engineer as to justify an extension of time in consequence thereof, such extension will be granted in writing by the Executive Engineer or other competent authority when ordering such alterations or additions. (emphasis supplied) The above clause is self-explanatory and does not require analysis. Ascribing ordinary meaning to the terminology used in clause 59, it becomes clear that whenever reasonable extension of time is granted, the contractor shall have no claim for compensation on account of delays or hindrances to work from any cause. It cannot be ignored that, “delay or hindrance to the work from any cause whatever” should be given broad meaning and the contractor who willingly accepts to do the work cannot be allowed to turn around and plead anything contrary to clause 59. This is made clear by clause 60, which is to the effect that the time shall be considered as essence of the contract, and it is always open to the Executive Engineer to advise the contractor in writing to adhere to rate of progress and demand compliance. If the contractor neglects to comply with such demand, it shall be lawful for Executive Engineer even to determine the contract. Therefore, the contractor cannot ignore the advice given by the Executive Engineer under clause 60 and complete the work beyond stipulated time and claim compensation on the ground that there are abundant causes for delay in the work. The question whether a building contractor can seek extension of time and claim compensation by way of escalation during the period of extension has been subject matter of various decisions of this Court as well as Supreme Court. These primarily deal with the effect and purpose of clause 59 and there are also decisions, which deal with other clauses similar to clause 59. We will deal with these decisions one after the other. In Alopi Parshad & Sons Ltd. v. Union of India[1], appellant was awarded contract for purchasing ghee required for the use of Army personnel. Under clause 12 of the agreement, Government agreed to pay the rates specified but during World War-II, there was enormous increase in the demand by Government. The original agreement regarding remuneration was revised. Thereafter, agents demanded enhanced remuneration, establishment and contingency charges. The Government terminated the agreement. To resolve the dispute, arbitration was initiated. Four claims were raised. The arbitrators did not agree on the decision and the matter went to Umpire, who came to the view that the agreement was valid and that claim No.1 is untenable, claims 2 and 3 did not arise out of agreement, and claim No.4 was outside the scope of the agreement. The award was filed in the Court of Subordinate Judge, Delhi. The suppliers prayed to set aside the award on the ground that the umpire was guilty of misconduct. The Subordinate Judge held that umpire was in error in not considering claims 3 and 4. He also held that award was vitiated on account of misconduct, in that, suppliers were not allowed sufficient opportunity. The matter went before the High Court of East Punjab, which confirmed the order passed by the Court of Subordinate Judge. Letters Patent Appeal was also dismissed. In the meanwhile, the suppliers requested Government of India for fresh arbitration. Accordingly the matter was again referred to arbitration. An award was passed for an amount of about Rs.13,00,000/- with future interest. The application of Government of India under Sections 30 and 33 of Arbitration Act was rejected. The High Court reversed the order passed by the Subordinate Judge and set aside the award, observing that the arbitrator cannot decide the disputes outside the scope of the agreement. Referring to Hirji Mulji v Cheong Yue Steamship Co. Ltd.[2], Constantine Steamship Line Ltd v Imperial Smelting Corporation Ltd.[3] and British Movietonews Ld. v London and District Cinemas Ld.[4], it is held thus. The Indian 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. Yet, this does not in itself affect the bargain they have made. If, on the other hand, a consideration of the terms of the contract, in the light of the circumstances existing when it was made, shows that they never agreed to be bound in a fundamentally different situation which has now unexpectedly emerged, the contract ceases to bind at that point — not because the court in its discretion thinks it just and reasonable to qualify the terms of the contract, but because on its true construction it does not apply in that situation. When it is said that in such circumstances the court reaches a conclusion which is ‘just and reasonable’ or one ‘which justice demands’, this result is arrived at by putting a just construction upon the contract in accordance with an ‘implication ... from the presumed common intention of the parties’.” (emphasis supplied) In Continental Construction Co. Ltd. v State of M.P.[5], the contract for construction of bund of masonary dam of Tawa project was entrusted to Continental. The contract could not be completed within stipulated time. An unforeseen expenditure of about Rs.5,00,000/- was incurred. When approached, Superintending Engineer refused to refer the matter to arbitration. The District Court appointed a retired Chief Engineer as arbitrator. An award was passed partly allowing the claim. The District Judge made the award rule of the Court, aggrieved by which, appeal was filed. The High Court of Madhya Pradesh allowed the appeal and remanded the matter to District Court, who set aside the award. High Court dismissed appeal mainly on the ground that clause 3.3.15 disentitles the contractor to any compensation and that even if there is extension of time for completion of contract, no compensation can be claimed. The relevant clause read that, “under no circumstances whatever shall the contractor be entitled to any compensation from government on any account unless the contractor shall have submitted claim in writing to the Engineer-in-Charge within one month of the cause of such claim occurring.” In appeal, the apex Court while holding that the contractor was not entitled to claim extra costs towards rise in prices of material and labour in the extended period observed thus. 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 the question incidentally. The arbitrator is not a conciliator and cannot ignore the law or misapply it in order to do what he thinks is just and reasonable. The arbitrator is a tribunal selected by the parties to decide their disputes according to law and so is bound to follow and apply the law, and if he does not he can be set right by the court provided his error appears on the face of the award. In this case, the contractor having contracted, he cannot go back to the agreement simply because it does not suit him to abide by it. In State of Andhra Pradesh v M/s. Associated Engineering Enterprises, Hyderabad[6], a Division Bench of this Court consisting Hon’ble Jeevan Reddy and Neeladri Rao, JJ, (as their Lordships then were) considered clause 59 of APDSS and its binding nature on arbitrator. Referring to Section 55 of Indian Contract Act, 1972, the Division Bench held that in view of the bar created by clause 59, arbitrator had no power to award compensation for the delay in handing over of site to the contractor. Reliance was placed on an unreported judgment dated 19.4.1992 in AAO No.677 of 1991 and CRP No.385 of 1992 wherein it is laid down as under. We find it difficult, therefore, to say that clause 59 has no application to the present case. The words "from any cause whatever", occurring in clause 59, are wide enough to take in delays and hindrances of all types, caused by the department, or arising from other reasons, as the case may be. Thus, by virtue of clause 59, the contractor is precluded from claiming any compensation on account of delays or hindrances arising from any cause whatever, including those arising on account of the acts or omissions of the departmental authorities...... . (emphasis supplied) The Division Bench then referred to decision of Privy Council in Champsey Bhara & Co., v Jivraj Balloo Spinning & Weaving Co. Ltd.[7] and laid down as below. Applying the principle of the above decision to the facts of the case before us, it must be held that clause 59 bars a claim for compensation on account of any delays or hindrances caused by the department. In such a case, the contractor is entitled only to extension of the period of contract. Indeed, such an extension was asked for, and granted on more than one occasion. (The penalty levied for completing the work beyond the extended period of contract has been waived in this case). The contract was not avoided by the contractor, but he chose to complete the work within the extended time. In such a case, the claim for compensation is clearly barred by clause 59 -of the APDSS which is admittedly, a term of the agreement between the parties. (emphasis supplied) I n Associated Engineering Co. v Government of Andhra Pradesh[8] in the execution of contract for cement concrete lining in connection with Nagarjuna Sagar dam disputes arose between the contractor and company. Fifteen claims were raised including escalation, extra expenditure and extra lead for water. The arbitrator passed award in respect of claim No.III dealing with escalation of cost of material, payment of extra lead for water and extra expenditure for flattening canal slopes. The award was made rule of the Court. This Court however set aside decree in respect of claims 3, 6 and 9. A contention was raised before the Supreme Court that the arbitrator exceeded the terms of the contract and travelled beyond the same. There was no clause in the contract for payment of any amount towards escalation. In this background, Supreme Court came to the conclusion that the arbitrator travelled beyond the terms of the contract and thereby acted arbitrarily, irrationally and capriciously. The relevant observations in the judgment are as follows. The arbitrator cannot act arbitrarily, irrationally, capriciously or independently of the contract. His sole function is to arbitrate in terms 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. … … … An arbitrator who acts in manifest disregard of the contract acts without jurisdiction. His authority is derived from the contract and is governed by the Arbitration Act which embodies principles derived from a specialised branch of the law of agency (see Mustill & Boyd's Commercial Arbitration, Second Edition, p.641). He commits misconduct if by his award he decides