Case: Tarapore &amp; Company Vs. Cochin Shipyard Ltd. Cochin &amp; Anr

that the dispute is covered by the arbitration clause observed that looking to the rival contentions, such a dispute, the determination of which turns on the true construction of the contract, would also seem to be a dispute under or arising out of or concerning the contract. The test formulated was that if in settling a dispute, a reference to the contract is necessary, such a dispute would be covered by the arbitration clause 41. In Ruby General Insurance Co. Ltd. v. Pearey Lal Kumar (1952 SCR 501 , 507 : AIR 1952 SC 119 : 1952 22 Com Cas 111) this Court was concerned with the clause in a policy of insurance which provided that differences arising out of the policy shall be referred to the decision of the arbitrator. In construing this clause, this Court observed as under The test is whether recourse to the contract by which the parties are bound is necessary for the purpose determining the matter in dispute between them. If such recourse to the contract is necessary, the matter must come within the scope of the arbitrators jurisdictionIn Union of India v. Salween Timber Construction (India) (1969 2 SCR 224 : AIR 1969 SC 488 ), this Court observed that the test for determining the question is whether recourse to the contract by which both the parties are bound is necessary for the purpose of determining whether the claim of the respondent firm is justified or otherwise. If it is necessary to take recourse to the terms of the contract for the purpose of deciding the matter in dispute, it must be held that the matter is within the scope of the arbitration clause and the arbitrators have jurisdiction to decide the same. In so stating the proportion of law, reliance was placed on Heyman v. Darwins Ltd. (1942 AC 356, 366), in which it was held that where the parties are at one in asserting that they entered into a binding contract, but a difference has arisen between them whether there has been a breach by one side or the other, or whether circumstances have arisen which have discharged one or both parties from further performance, such differences should be regarded as differences which have arisen in respect of or with regard to or under the contract, and an arbitration clause which uses these, or similar expressions should be construed accordingly. The Court affirmed the decision in Ruby General insurance Co. Ltd. case (1952 SCR 501 , 507 : AIR 1952 SC 119 : 1952 22 Com Cas 111) 42. In Astro Vencedor Compania Naviera S. A. of Panama v. Mabanaft GmbH (1971 2 QB 588 : 1971 2 All ER 1301 : 1971 3 WLR 24), a question arose whether a claim in tort would be covered by the arbitration clause ? It was admitted that the claim for wrongful arrest is a claim in tort. And it was contended that a claim in tort cannot come within the arbitration clause. The Court of Appeal speaking through Lord Denning held that the claim in tort would be covered by the arbitration clause, if the claim or the issue has a sufficiently close connection with the claim under the contract 43. In Gunter Henck v. Andre & CIE S. A. (1970 1 Lloyds Law Reports 235), the Court Queens Bench Division (Commercial Court) held that the words arising out of clearly extend the meaning than would otherwise be applied to the clause were limited to all disputes arising under the contract 44. In the facts before, us, the respondent in para 4 of its counter- statement filed before the arbitrator specifically referred to Clause 16 of the General Condition of Contract and to the Additional Terms and Conditions/Modifications forming part of the contract document. In paragraph 11, it was stated that the claim of the appellant was completely outside the purview of the contract and the same does not fall within the purview of the first paragraph of Clause 40. It was further stated in paragraph 13 that the contract provides for escalation in certain respects and that is the only escalation which is admissible in terms of the contract, and the claim made by the appellant does not come within the escalation clause nor in the agreed formula relating to such escalation. The contractor relied upon Clause 13 of the Additional Terms and Conditions/Modifications which form part of the contract document to sustain its claim. From the pleadings, it clearly transpires that both the parties had recourse to the contract which is admittedly entered into in support of the rival contentions and therefore, the claim made by the appellant would be covered by the arbitration clause, which is of the widest amplitude. It is thus satisfactorily established that the claim made by the contractor would be covered by the arbitration clause 45. Mr. Nariman also wanted us to examine whether the claim made by the arbitrator would be admissible on the principle of quantum merit. It is not necessary to examine this aspect at all in the view which we are taking 46. He also wanted us to adopt an approach that the effort of the Court must be to upheld the award and not to reject it. We consider it unnecessary to dilate upon it 47. The discussion leads to the inescapable conclusion that a specific question of law touching the jurisdiction of the arbitrator was specifically referred to the arbitrator and therefore the arbitrators decision is binding on the parties and the award cannot be set aside on the sole ground that there was an error of law apparent on the on face of the award. It is also established that the claim for compensation made by the arbitrator which led to the dispute was covered by the arbitration clause. The quantum of compensation awarded by the arbitrator was never disputed nor questioned. Therefore, the High Court was clearly in error in reversing the decision of the trial court

Court's decision (1 = petition accepted / positive for appellant, 0 = rejected / negative): 1

Reasoning from the judgment:
1[ds]ng expansion of international trade and commerce, complex questions of private International Law, effect of local laws on contracts between parties belonging to different nations are certainly bound to crop up. Arbitration has been considered a civilised way of resolving such disputes avoiding court proceedings. There is no reason why the parties should be precluded from referring a specific question of law to an arbitrator for his decision and agree to be bound by the same. This approach manifests faith of parties in the capacity of the tribunal of their choice to decide even a pure question of law. If they do so, with eyes wide open, and there is nothing to preclude the parties from doing so, then there is no reason why the Court should try to impose its view of law superseding the view of the tribunal whose decision the parties agreed to abide by. Therefore, on principle it appears distinctly clear that when a specific question of law is referred to an arbitrator for his decision including the one touching upon the jurisdiction of the arbitrator, the decision of the arbitrator would be binding on both the parties and it would not be open to any of the two parties to wriggle out of it by contending that the arbitrator cannot clutch at or confer jurisdiction upon himself by misconstruing the arbitration agreementThe mere fact that both parties submit incidental arguments about a point of law in the course of the proceedings is not enough. This decision is an authority for the proposition that where the parties specifically agree to refer a specific question of law for the decision of the arbitrator, and agree to be bound by it, the Court cannot set aside the award on the ground on an error of law apparent on the face of it even though the decision of the arbitrator may not accord with the law as understood by the Court. If on the other hand, the question of law is incidentally decided by the arbitrator, it is not enough to oust the jurisdiction of the Court to set aside the award on the ground that there is an error apparent on the face of the award25. Mr. Pai on the other hand urged that the jurisdiction of the arbitrator could not be determined by him nor can he arrogate jurisdiction to himself by misconstruction of the contract and thereby clutch at jurisdiction and in such a situation, the Court always retains to itself to set at naught the award on the ground of an error of law apparent on the face of the award. In terms, he stated that the issue about the jurisdiction of the arbitrator has never been parted with by the Court. Generally speaking, common law courts were very reluctant to part with their jurisdiction to set at naught an award on the ground that the arbitrator had no jurisdiction to entertain and decide the dispute. The Court went so far as to say that the arbitrator cannot confer jurisdiction upon himself by deciding in its own favour some preliminary points upon which its jurisdiction rests. In facts, that is a. It cannot be disputed that even the question of jurisdiction of an arbitrator can be the subject matter of a specific reference. If the parties agree to refer the specific question whether the dispute raises is covered by the arbitration agreement, it becomes a specific question of law even if it involves the jurisdiction of the arbitrator and if it is so, a decision of the arbitrator on specific question referred to him for decision even if it appears to be erroneous to the Court is binding on the parties. The decisions relied upon by Mr. Pai do not derogate from this legal position. We may briefly refer to those decisions32. On a conspectus of these decisions, it clearly transpires that if a question of law is specifically referred and it becomes evident that the parties desired to have a decision on the specific question from the arbitrator about that rather than one from court, then the court will not interfere with the award of the arbitrator on the ground that there is an error of law apparent on the face of the award even if the view of law taken by the arbitrator does not accord with the view of the court. This view of law taken in England was stated by this Court to be the same in this country and since the decision in Seth Thawardas case (1955 2 SCR 48  , 53, 54 : AIR 1955 SC 468  ) which follows earlier decisions in England and India, it has not been departed from. The view canvassed for by Mr. Pai that common law courts were very reluctant to part with their jurisdiction has hardly any relevance where a specific question of law including the one touching the jurisdiction of the arbitrator is referred to the arbitrator for his decision. Even if the decision of the arbitrator does not accord with the view of the court, the award cannot be set aside on the sole ground that there is an error of law apparent on the face of itApart from the technical meaning which the expression without prejudice carries depending upon the context in which it is used, in the present case on a proper reading of the correspondence and in the setting in which the term is used, it only means that the respondent reserved to itself the right to contend before the arbitrator that a dispute raises or the claim made by the contractor was not covered by the arbitration clause. No other meaning can be assigned to it. An action taken without prejudice to ones right cannot necessarily mean that the entire action can be ignored by the party taking the same. In this case, the respondent referred the specific question of law to the arbitrator34. In this case, as earlier pointed out a specific question as to whether the claim of compensation made by ther and demurred and disputed by the respondent would be covered within the scope, ambit and width of the arbitration clause, was specifically referred by the parties for the decision of the arbitrator. Therefore, it is 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. Even if the view taken by the arbitrator may not accord with the view of the Court about the scope, ambit and width of the arbitration clause, the award cannot be set aside on the ground that there is an error of law apparent on the face of the award. The view taken by the High Court is palpably untenable and has to be reversed. On this short point, the appeal can be allowed. However, it was strenuously urged by both the sides that the dispute arising out of the claim for compensation made by the appellant on account of the increase in the cost of the pile driving equipment and technicalw fees would or would not be covered by the first paragraph of Clause 40, we would briefly examine the same to point out that it would be coveredIt is thus unquestionably established that the appellant whose tender was accepted after negotiations and scrutiny by the Tender Committee was expected to invest Rs. 2 crores in importing pile driving equipment and technicalw fees. The tender was accepted and a formal contract was entered into on this basis. In works contract of such magnitude, the value whereof was over Rs. 24 crores, and which was being undertaken by an Indian contractor for the first time negotiations prior to the finalisation of the contract and the correspondence leading to the formation of contract supply the basis on which contract was finally entered into. Undoubtedly, if in the final written contract, there is something contrary to the basic understanding during the formative stage of the contract, the written contract would prevail. But if the contract does not indicate to the contrary and the assumptions appeared to be the foundation of the contract, obviously that aspect cannot be overlooked while determining what were the obligations undertaken under the formal contract. It may be recalled that the two alternative rates were quoted by the contractor : (i) the respondent were to import the pile driving equipment and technicalw for its operation, the same would be leased to the contractor at negotiated rates or (ii) the contractor were to import the same the rates to be paid to contractor. The second alternative was accepted by the parties on the fundamental assumption that the investment in this behalf would be Rs. 2 crores. This is the agreed position on which contract was entered into. To continue the narrative, it may be pointed out that this fundamental foundation of the contract was not left to guesswork, but is specifically referred to in the notice inviting tender and in the specifications and modifications as addenda to the General Conditions of Contract. It was clearly understood between the parties that the contractor has to invest roughly Rs. 2 crores in foreign exchange for importing pile driving equipment and technicalw fees without which this work could never have been undertaken and without which it would not have been entrusted at the contractor. The contractor when he quoted his terms must obviously have made appropriate calculations, one of which in this case appears to be that it will have to invest Rs. 2 crores in foreign exchange and this fact files in the face that after the work was over, the imported machinery would depreciate to this extent that it would have hardly any use or utility to the contractor as noticed by the Tender Committee. The rates quoted by the contractor were obviously interrelated to the basic assumption. The fact that such was also the understanding of the respondent may now be pointed out37. From the commencement i.e. from the stage of inviting tenders and through the negotiations and the finalisation of the contract, at every stage, the respondent assured that foreign exchange would be made available from Eleventh Yen Credit. As the equipment was not available from Japan, the availability of Yen Credit became otiose from the contractors point of view. At the instance of an with the active participation of the respondent, the contractor made enquiries in various countries and ultimately procured the necessary equipment and technicalw which was approved by the respondent and imported the same. In the time lag, the price as well as the foreign exchange rates in relation to rupee underwent an upward change, with the result that the contractor had to invest, as made out by it and not seriously controverted before the arbitrator in all Rs. 275.40 lacs for imported pile driving equipment and spares and Rs. 18, 64, 337.61 on technicalw fees and a further sum for higher custom duty. Details of the claim have been set out in Annexure 1 and 2 respectively to the statement of claim submitted by the appellant to the arbitrator. The respondent in itst did not controvert the details of the claim and the expenditure involved under the two heads. The whole of them was concerned with the denial of its liability to compensate the contractor coupled with the contention that the claim would not be covered by the arbitration agreement and therefore, the arbitrator had no jurisdiction to entertain and adjudicate the claim. It may also be mentioned that at no time since the award, the claim. It may also be mentioned that at no time since the award, the respondent ever disputed or questioned the amount awarded by the arbitrator. It is thus satisfactorily established the contractor had to invest something far in excees of Rs. 2 crores which it was expected to invest in foreign exchange for imported pile driving equipment and technicalw fees. The whole contract was concluded on this understanding. Being aware of the fluctuating position in this behalf, the contractor had tendered two alternative rates for completion of the work as pointed out earlier; one based on equipment being imported by the respondent and leased to the appellant and alternatively rates on the basis that the contractor would import pile driving equipment and technical. In respect of the second alternative, which was ultimately agreed to between the parties, it was clearly and unmistakably understood agreed to between the parties that the contractor would have to invest Rs. 2 crores and the rates were corelated to this investment with the knowledge of the fact that when work was completed, the equipment would depreciate to the tune of 75 per cent of its capability and would be hardly of any use to the contractor. The estimated expenditure having far exceeded, a claim for compensation would certainly be tenable at the instance of the contractorn of the clauses of the contract involving works of such magnitude is impermissible. The whole gamut of discussions, negotiations and correspondence must be taken into consideration to arrive at a true meaning of what was agreed to between the parties. And in this case there is no room for doubt that the parties agreed that the investment of the contractor under this head would be Rs. 2 crores and the tendered rates were predicated upon andd to this understanding. When an agreement is predicated upon an agreed fact situation, if the latter ceases to exist the agreement to that extent becomes irrelevant or otiose. The rates payable to the contractor were related to the investment of Rs. 2 crores under this head by the contractor. Once the rates became irrelevant on account of circumstances beyond the control of the contractor, it was open to the contractor to make a claim for compensation. Therefore, it appears satisfactorily established that the claim arose while implementing the contract and in relation to the contractAgain the language of Clause 40 shows that any claim arising out of the contract in relation to estimates made in the contract would be covered by the arbitration clause. If it becomes necessary to have recourse to the contract to settle the dispute one way or the other then certainly it can be said that it is a dispute arising out of the contract. And in this case the arbitration clause so widely worded as disputes arising out of the contract or in relation to the contract or execution of the works would comprehend within its compass a claim for compensation related toe estimates and arising out of the contract. The test is whether it is necessary to have recourse to the contract to settle the dispute that has arisen44. In the facts before, us, the respondent in para 4 of its counterstatement filed before the arbitrator specifically referred to Clause 16 of the General Condition of Contract and to the Additional Terms and Conditions/Modifications forming part of the contract document. In paragraph 11, it was stated that the claim of the appellant was completely outside the purview of the contract and the same does not fall within the purview of the first paragraph of Clause 40. It was further stated in paragraph 13 that the contract provides for escalation in certain respects and that is the only escalation which is admissible in terms of the contract, and the claim made by the appellant does not come within the escalation clause nor in the agreed formula relating to such escalation. The contractor relied upon Clause 13 of the Additional Terms and Conditions/Modifications which form part of the contract document to sustain its claim. From the pleadings, it clearly transpires that both the parties had recourse to the contract which is admittedly entered into in support of the rival contentions and therefore, the claim made by the appellant would be covered by the arbitration clause, which is of the widest amplitude. It is thus satisfactorily established that the claim made by the contractor would be covered by the arbitration clause45. Mr. Nariman also wanted us to examine whether the claim made by the arbitrator would be admissible on the principle of quantum merit. It is not necessary to examine this aspect at all in the view which we are taking46. He also wanted us to adopt an approach that the effort of the Court must be to upheld the award and not to reject it. We consider it unnecessary to dilate upon it47. The discussion leads to the inescapable conclusion that a specific question of law touching the jurisdiction of the arbitrator was specifically referred to the arbitrator and therefore the arbitrators decision is binding on the parties and the award cannot be set aside on the sole ground that there was an error of law apparent on the on face of the award. It is also established that the claim for compensation made by the arbitrator which led to the dispute was covered by the arbitration clause. The quantum of compensation awarded by the arbitrator was never disputed nor questioned. Therefore, the High Court was clearly in error in reversing the decision of the trial court