IN THE HIGH COURT OF JUDICATURE AT MADRAS DATE: 20-07-2010 CORAM: THE HONOURABLE MRS. JUSTICE PRABHA SRIDEVAN AND THE HONOURABLE MR. JUSTICE G.M. AKBAR ALI O.S.A.No.177 of 2009 and M.P.No.1 of 2010 Union of India Rep. by the Chief Engineer Madras Zone, Island Grounds Chennai – 600 009 … Appellant Vs. 1. M/s. Atlanta Limited “Atlanta” B-22, V.M. Road Vile Parle (West) Mumbai – 400 049 2. Mr. Justice P.R. Gokulakrishnan (Retd.) Sole Arbitrator Former Chief Justice of Gujarat No.14, Anna Avenue, Bakthavatchalam Nagar Extn Adar, Chennai – 600 020 … Respondents For appellant : Mr.M.Ravindran, Addl. Solicitor General Assisted by Mr. A. Muralidharan, SCGSC For respondents : Mr. B.T. Seshadri for R1 R2- Arbitrator Original Side Appeal filed U/or 36 rule 1 of OS Rules of r/w U/clause 15 of the letters patent against the order passed by this Court in O.P.No.663 of 1999 dated 19-01-2009. JUDGMENT (Judgment of the Court was delivered by PRABHA SRIDEVAN,J.) The appellant entered into a contract with the claimant herein for construction of runway and allied works at Naval Air Station, Arakkonam (Works in short). The contract provided for an arbitration clause. The dispute arose between the parties. One might say that https://hcservices.ecourts.gov.in/hcservices/ the claimant laid the foundation for the dispute right from day one. An award was passed on 24-06-1999 for a sum of Rs.14,12,50,907.50p together with interest. The counter claim filed by the appellant was dismissed. The appellant therefore, moved an application under Section 34 of the Arbitration Act. It was dismissed and therefore, this appeal has been filed. The appellant will be referred to as “the appellant” and the respondent as “the claimant”. 2. The contract was entered into on 16-11-1988. The value of the contract was Rs.19,58,94,190/-. The time for completion was 21 months. The date of handing over of site was 24-11-1988. The date of commencement of work was 24-11-1988 and the date of completion work was agreed to be 23-08-1990. However, by periodic extensions which were granted time was extended up to 04-03-1992. According to the claimant because the site was full of slush, he wanted the date of the commencement to be reckoned from 01-01-1989. There were incessant rains and there were periodic changes made by the appellant, in fact some changes were made as late as August 1991 and January 1992, the supply of petroleum products were affected due to Gulf crisis all of which were reasons for extension of time, to be granted for a further period. Therefore, according to the claimant it was an illegal termination of contract, since the extension of time granted upto 31-03-1991 was not adequate or commensurate with the requirement of the claimant. The claimant contended they were entitled to escalation of labour charges. According to the claim, the calculation made by the appellant for the surface area excavation and the actual excavation was wrong. According to the claimant, the contract agreement dealt with “existing ground levels” and therefore, computation should be made according to that. The appellant had initially made payment as per the correct calculation, thereafter made a deduction to the detriment of the contractor because the Accepting Officer reviewed the earlier decision. According to the claimant, they were entitled to payment for the work done in cutting and filling LCN 5 which was extra work not contemplated in the contract. This relates to rate for extra work of earthwork beyond lip cutting. According to the claimant, the plan site was changed which resulted in extra expenditure in moving the machinery from the changed site to the place of operation. Though the claimant had the machineries required to perform the contract the appellant insisted upon procurement of certain other machineries which resulted in extra cost and on that head there was a claim. The machineries that were used by the claimant-contractor were illegally retained by the appellant contrary to Clause 34 read with Clause 54 in the conditions of the contract and the machineries also became worthless and therefore, the contractor made a claim both for value of machineries and idle hire charges. There was a claim for settlement of final bill and also for interest for pre-reference, pendente lite and post award periods. https://hcservices.ecourts.gov.in/hcservices/ 3. According to the appellant, without any justification, the claimant requested the commencement of the contract to be fixed from 01-01-1989, when he had already entered upon the site and the reason for change on the ground that the soil was slushy was not justifiable. Whenever the claimant asked for extension it was given immediately and the clause relating to extension of time makes it clear that it is not arbitrable and therefore, this claim fell within “the excepted matters”. According to the appellant, the service area escalation is governed by Clause 3.2.2 where the payment is made on the basis of the square metre calculation and the deep excavation made as per Clause 3.2.5 where the calculation is made in accordance with cubic metre. According to the appellant, there was a mistake in calculation initially; it was made clear that the calculation can be made only in accordance with 3.2.2 and 3.2.5 and there cannot be double payment. 4. As regards the claim for cutting and filling LCN 5, the case of the appellant is that the contract required the runway to be free of water logging and whatever had to be done was a part of the contract. No specific work order was issued for cutting the LCN 5 upto sub-base-level and to fill it and therefore, no claim can be made as though it was extra work. 5. As regards the computation of labour escalation it was contended that it is governed by Clause 18.2.6 and any interpretation of these clauses is not arbitrable. 6. As regards change in location of plant site, the case of the appellant is that the plant’s site was only a shed and the machineries could not have been housed in those sheds and therefore, the contention of the contractor that he had to move those machines from the shed to the site is far-fetched and cannot be accepted. 7. As regards purchase of machinery, it was contended that when he applied for the contract, the contractor indicated that these machineries were in his possession and therefore, it is totally unjustified to claim any amount contending that he had to incur extra cost to hire machinery. 8. As regards the claim made for value of machinery and hiring charges it was submitted that in this particular case, there were several orders of various Division Benches of the Court which gave instructions to the claimant to remove the machinery and if the claimant did not remove it, it was the claimant’s own fault. According to the appellant, the claimant is not entitled to interest at the rate awarded. https://hcservices.ecourts.gov.in/hcservices/ 9. Briefly these were the issues argued before us. The claimant had not challenged the Arbitrator’s rejection of various other heads of claim. 10. As many as 33 issues were framed by the learned Arbitrator. But here we are concerned with only the following issues: “1. What were the causes and which party was responsible for non- completion of the work within the time stipulated for its completion including the extended time? 2. Whether the extension of time granted upto 31.3.1992 was adequate and commensurate with the delays caused by the factors considered in issue No.1 above? 3. Whether the termination of the contract by the respondent was wrongful and illegal as stated by the claimant? 4. What is the correct interpretation of the provision of the agreement in respect of excavation over areas in hard/dense soil provided in Sl.No.4 of Schedule ‘A’ of the agreement and as to how the rates for such excavation have to be calculated regarding item 1 in Claim No.1 of the claimant’s statement of claims? 4(a) Is the respondent estopped from changing the decision of the Garrison Engineer and also its confirmation by its Accepting Officer in respect of item 1 in claim No.1? 4(b) Is the claimant entitled to receive an additional sum of Rs.21,36,545.20 as claimed in item 1 of claim No.1? 4(c) Is the claimant entitled to a sum of Rs.4,77,314.62 for the escalation of the labour charges, Rs.91,060.62 for the escalation charges of the materials and Rs.2,289.16 for the escalation in respect of fuel charges for the claim in item 1 in claim No.1? 4(d) Is the claimant entitled to claim interest from 17th April 1990 till the date of payment of the amount he claims in respect of item No.1 in claim No.1? … 11. Is the claimant entitled to the money amounting to Rs.5,57,19,445.02 withheld due to erroneous computation of escalation in the labour cost payment due under agreed terms as claimed in item 8 of claim No.1? 11(a). Is this claim not arbitrable as contended by the respondent? 14. Whether the contract indicated any location for plant site? 14(a). If there is any change in the location of the plant site, is https://hcservices.ecourts.gov.in/hcservices/ the claimant entitled to the sum of Rs.3,15,01,479.42 as claimed in item 1 of claim No.2 on that count? .. 16. Was the use of the machineries mentioned in Items 3(a), (B) and (C) by the claimant due to their own volition in order to achieve the quality of the work as per the contract and if not so whether they are entitled to the claim they have made in items 3(a), (b) and (c) amounting to Rs.1,37,17,375.30? 17. Is the claimant entitled to Rs.25,45,88,460.40 for the loss of his overheads and profit, loss of idle hire charges of machinery and equipment, loss on account of missing parts, loss suffered due to wrongful and illegal encashment of Bank Guarantee and for compensation of extra expenditure incurred due to price rise during the extended period as claimed in his Claim No.3? 17(a). Is the claimant entitled to the amount claimed by him in Claim No.3(a), (B) and (d) since these amounts claimed are for the work done during the extended period? 17(b). Did the claimant suffer a loss of Rs.85,00,000/- due to wrongful and illegal encashment of Bank Guarantee as claimed in claim 3(c); If yes, to what relief? 18. Is the claimant entitled to Rs.1,39,40,647.52 in settlement of final and the past interest on the final bill with effect from 1- 1-1993 upto 6-11-1995 at the rate of 18% per annum which amount works to Rs.73,56,479-70 and in all the alleged final bill totaling to Rs.2,12,97,127.22 as claimed in claim No.4? … 32. Is the respondent entitled to interest past, pendente lite and future as claimed by him in claim No.14?” Mr. M. Ravindran, learned Additional Solicitor General appearing for the appellant and Mr. B.T. Seshadri, learned counsel for claimant made their oral submissions and also filed written submissions. They cited judgments to support their case. 11. First we will refer to the cited judgments. The learned Additional Solicitor General relied on the following judgments: (i) 1999 (9)SCC 283(Rajasthan State Mines & Minerals Ltd., Vs. Eastern Engineering Enterprises) In this case, the parties entered into an agreement on a turnkey basis for excavation, removal, transportation etc., at the specified dump yards in the ‘D’Block of the Jhamarkotra Mines. The matter went to arbitration. The proceedings are governed by the 1940 Act. The District Judge made the award the rule of Court. https://hcservices.ecourts.gov.in/hcservices/ “22. Further, in the present case, there is no question of interpretation of clauses 17 and 18 as the said clauses are so clear and unambiguous that they do not require any interpretation. It is both, in positive and negative terms by providing that the contractor shall be paid rates as fixed and that he shall not be entitled to extra payment or further payment for any ground whatsoever except as mentioned therein. The rates agreed were firm, fixed and binding irrespective of any fall or rise in the cost of the work covered by the contract or for any other reason or any ground whatsoever. It is specifically agreed that the contractor will not be entitled or justified in raising any claim or dispute because of increase in cost of expenses on any ground whatsoever. By ignoring the said terms, the arbitrator has travelled beyond his jurisdiction as his existence depends upon the agreement and his function is to act within the limits of the said agreement. This deliberate departure from the contract amounts not only to manifest disregard of the authority or misconduct on his part but it may tantamount to mala fide action. “(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 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 wider arbitration clause such claim amount cannot be awarded as 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. (supra) by relying upon the following passage from M/s. Alopi Parshad v. Union of India MANU/SC/0114/1988 : [1988]3SCR103 which is to the following effect: 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 event 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. (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; https://hcservices.ecourts.gov.in/hcservices/ the arbitrator is a tribunal selected by the parties to decide the disputes according to law.” (ii) 1999 (8) SCC 122 (Steel Authority of India Ltd., Vs. J.C. Budharaja, Government and Mining Contractor) This case also arose under 1940 Act and this relates to the construction of a reservoir for the Megha Taburu Iron Ore Project. The matter went before the Arbitrators. The Supreme Court held that the arbitrator’s existence on the agreement and he must act within the limits of the said agreement and cannot ignore the law to do what he thinks is just and reasonable. “17. It is to be reiterated that to find out whether the arbitrator has travelled beyond his jurisdiction and acted beyond the terms of the agreement between the parties, agreement is required to be looked into. It is true that interpretation of a particular condition in the agreement would be within the jurisdiction of the arbitrator. However, in cases where there is no question of interpretation of any term of the contract, but of solely reading the same as it is and still the arbitrator ignores it and awards the amount despite the prohibition in the agreement, the award would be arbitrary, capricious and without jurisdiction. Whether the arbitrator has acted beyond the terms of the contract or has travelled beyond his jurisdiction would depend upon facts, which however would be jurisdictional facts, and are required to be gone into by the court. Arbitrator may have jurisdiction to entertain claim and yet he may not have jurisdiction to pass award for particular items in view of the prohibition contained in the contract and, in such cases, it would be a jurisdictional error. For this limited purpose reference to the terms of the contract is a must. Dealing with similar question this Court in New India Civil Erectors (P) Ltd. v. Oil and Natural Gas Corporation, MANU/SC/0221/1997 : [1997]2SCR86 held thus: “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. In this case, the agreement between the parties clearly says that in measuring the built-up area, the balcony areas should be excluded. The arbitrators could not have acted contrary to the said stipulation and awarded any amount to the appellant on that account.” (iii) 1999 (4) SCC 491 (Food Corporation of India Vs. Sreekanth Transport) This case dealt with the legality of adjudication of “excepted matters”. The Supreme Court observed that any Government or Governmental agencies’ contract. Some matters are excluded from the https://hcservices.ecourts.gov.in/hcservices/ purview of arbitration and the agreement records that the decision of a Senior Officer, being the adjudicator, shall be final and binding. This is what is popularly known as “Excepted matters”. “2. At the outset, it is pertinent to note that in the usual Governmental contracts, the reference to which would be made immediately hereafter, there is exclusion of some matters from the purview of arbitration and a senior officer of the Department usually is given the authority and power to adjudicate the same. The clause itself records that the decision of the senior officer, being the adjudicator, shall be final and binding between the parties - this is what popularly known as 'excepted matters' in a Government or Governmental agencies' contract. 3. 'Excepted matters' obviously, as the parties agreed, do not require any further adjudication since the agreement itself provides a named adjudicator - concurrence to the same obviously is presumed by reason of the unequivocal acceptance of the terms of the contract by the parties and this is where the courts have found out lacking in its jurisdiction to entertain an application for reference to arbitration as regards the disputes arising therefrom and it has been the consistent view that in the event the claims arising within the ambit of excepted matters, question of assumption of jurisdiction of any arbitrator either with or without the intervention of the court would not arise; The parties themselves have decided to have the same adjudicated by a particular officer in regard to these matters: what are these exceptions however are questions of fact and usually mentioned in the contract documents and forms part of the agreement as such there is no ambiguity in the matter of adjudication of these specialised matters and termed in the agreement as the excepted matters.” (iv) AIR 1991 SC 957(M/s. Prabartak Commercial Corporation Ltd., Vs. The Chief Administrator Dandakaranya Project) This case deals with clauses relating to dispute over rates of payment whether the agreement was that the decision of the Superintending Engineer was final. The Supreme Court held that the dispute regarding rates is not arbitrable; the reference and the award is without jurisdiction. (v) 2007 (4) SCC 697 (Food Corporation of India Vs. Chandu Construction and another) “12. In this context, a reference can usefully be made to the observations of this Court in Alopi Parshad and Sons, Ltd. v. Union of India MANU/SC/0057/1960 : [1960]2SCR793 , wherein it was observed that 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 Court went on https://hcservices.ecourts.gov.in/hcservices/ to say that in India, in the codified law of contracts, there is nothing which justifies the view that a change of circumstances, "completely outside the contemplation of parties" at the time when the contract was entered into will justify a Court, while holding the parties bound by the contract, in departing from the express terms thereof. Similarly, in The Naihati Jute Mills Ltd. v. Khyaliram Jagannath MANU/SC/0348/1967 : [1968]1SCR821 , this Court had observed that where there is an express term, the Court cannot find, on construction of the contract, an implied term inconsistent with such express term. 13. In Continental Construction Co. Ltd. v. State of Madhya Pradesh MANU/SC/0114/1988 : [1988]3SCR103 , it was emphasised that not being a conciliator, an arbitrator cannot ignore the law or misapply it in order to do what he thinks is just and reasonable. He 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.” (vi) The respondents relied on 2001 (5) SCC 691 where the Supreme Court held that if the Arbitrator took a view which was plausible then Courts cannot interfere unless view of arbitrator is vitiated by a manifest error or is wholly improbable or perverse. (vii) 2003 (7) SCC 396(State of U.P. Vs. Allied Constructions) In this case the contractor made a claim on account of loss sustained due to flooding of the work area. It was contended that in view of the force majeure clause no claim can be made. The Supreme Court held that since there was no evidence led before the Arbitrator that the rain unprecedented and that is why the loss was sustained such finding of facts cannot be interfered with. (viii)2004 (5) SCC 109 (Bharat Coking Coal Ltd. Vs. L.K. Ahuja) Here again, the Supreme Court held that once the Arbitrator has applied the mind to the pleadings and the evidence adduced before him, the Court cannot reappraise the matter as if it is an appeal. “The contention put forth on behalf of the appellant that there is absolutely no material to make a claim by the contractor in this regard cannot be accepted because these extra items have been mentioned in the measurement book and which clearly indicated that the work had been executed and he treated that the entry in the measurement book will itself amount to order in writing in terms of clause 11 of the agreement and, therefore, allowed the claim. In these circumstances, it cannot be said that the item claimed for extra works referred to in the final bill is the same as the claim under claim No.6 for extra works wherever such a situation has arisen the arbitrator has examined the same, say for example, in regard to petrol, oil and lubricant, he has separately, treated the same. If https://hcservices.ecourts.gov.in/hcservices/ appropriate pleadings had been raised, the arbitrator would have certainly considered this aspect and in the absence of the same we think that the view taken by the arbitrator in this regard cannot be interfered. Only two items which had been allowed by the arbitrator which have been adverted to by us as a sum of Rs.49,513.02 which was still to be paid and a sum of Rs.91,013.72 as extra items of works which was disclosed in the measurement book. Therefore, we find no infirmity on this aspect of the claim.” (ix) 2005 (6) SCC 462 (Bhagawathi Oxygen Ltd., Vs. Hindustan Copper Ltd.) “36. The last question relates to payment of interest. The Arbitrator awarded interest to BOL at the universal rate of eighteen per cent for all the three stages, pre-reference period, pendente lite and post award period. It is not disputed that in the arbitration agreement there is no provision for payment of interest. The learned single Judge as well as the Division Bench were right in observing that the Arbitrator, in the facts and circumstances, could have awarded interest. The Arbitrator had granted interest at the