State Of Rajasthan & Anr vs M/S. Ferro Concrete Construction ...

2. The appellants (also referred to as `employer') invited tenders for the manufacture, laying, testing and commissioning of water pipeline of a length of 37.41 km. under a water supply scheme in Ajmer District. Tenders were received from various tenderers including respondent (hereinafter referred to as the `contractor'). As different tenderers had stipulated different terms and 2 conditions, the tenderers were invited for discussions, and common terms of reference (for short `CTR') were formulated on 22.2.1988 and the original tender conditions stood modified to the extent of the alterations in the CTR.

3. Thereafter the offer of the respondent was accepted and a work order dated 23.8.1988 was issued to him stipulating the period for completing the contract as two years from that date. There was an amendment to the work order on 8.11.1988. The employer and the contractor entered into an agreement dated 11.1.1989 enumerating and stipulating the documents which will form part of the contract and the modifications agreed in regard to certain terms. The value of the work as per the work order was Rs.9,91,94,602.50. Ten percent of the value of work (Rs.99.19 lakhs) which was agreed to be released as mobilization advance, was released to the contractor between 25.1.1989 and 5.5.1989. The contractor created an equitable mortgage over its plant by depositing its title deeds thereto as security for the mobilization advance. By letter dated 15.12.1990, the contractor confirmed that the original title deeds will remain in deposit with the employer till the entire amount of advance was repaid in full with interest.

4. The contract (clause 23 of General Conditions of Contract) provided for settlement of disputes by arbitration. By letter dated 18.6.1990 3 respondent invoked the provision for arbitration and sought appointment of an arbitrator to decide its claims aggregating to Rs.2,01,66,547, arising on account of certain alleged omissions and commissions of the employer. Another dispute was raised in respect of the rate payable for work done subsequent to the due date of completion (22.8.1990). On 22.8.1990 the contractor stopped the work. By that date it had manufactured 15.26 km. of pipes and had laid 11.6 km. out of them and tested only 1.4 km. of pipeline as against the total contracted quantity of 37.41 km. On 13.9.1990 the employer notified the contractor that if he did not resume the work, the balance of the work would be got executed through an alternative agency in terms of the contract, by treating the contract as having been abandoned on 22.8.1990, and recover the excess cost from the contractor.

5. The respondent-contractor sent a reply dated 3.11.1990 stating its efforts to complete the work were rendered futile on account of the delays and breaches on the part of the employer; and it was necessary to enter into a fresh agreement as the tender was not accepted in the manner in which it ought to have been accepted. The contractor did not resume the work. The contractor's stand was that in the absence of an extension of time for completion by mutual consent before the stipulated date for completion, it was not liable to continue the work on the tendered rates. The employer on 4 30.3.1991 made a final demand calling upon the contractor to state whether it was ready to re-start and complete the remaining work and if so to submit a revised time schedule for such completion. As the contractor did not resume the work, the employer initiated steps to get the balance work executed through an alternative agency. In the meanwhile the contractor filed a suit against the appellant in the District Court, Ajmer and obtained a temporary injunction restraining the employer from imposing liquidated damages.

6. The contractor made an application to the District Court, Ajmer, under section 20 read with section 8 of the Arbitration Act, 1940 (Act for short) for filing the arbitration agreement into court and seeking appointment of an arbitrator. The District Court, Ajmer by order dated 27.4.1991 held that it had jurisdiction to appoint an arbitrator but deferred the actual appointment to a future date. The contractor revised its claim to Rs.5,51,90,306/- in the notice of appointment of arbitrator. The employer challenged the order of the District Judge and the High Court allowed the appeal on 9.8.1991 and set aside the order of the District Judge. The contractor in turn approached this Court. On 12.11.1991, this Court recorded the consent of parties for appointment of Mr. B L Mathur as sole arbitrator and directed the employer (Chief Engineer, Public Health Engineering Department, State of Rajasthan) 5 to appoint him as the arbitrator. On being appointed, the arbitrator entered upon the reference and the contractor filed a claim statement before the arbitrator on 13.1.1992 making 43 claims aggregating to Rs.6,21,29,626/-.

7. The employer filed its reply to the claim statement, and also made five counter-claims aggregating for Rs.863,46,505/- before the arbitrator. In the meanwhile, the employer having concluded the arrangements to get the work completed through an alternative agency, on the contractor's failure to resume the work, awarded the work to M/s. Indian Hume Pipes Co. Ltd. on 10.8.1992. On the basis of the contract value in regard to the balance work, the employer revised its counter claim No. 2 relating to extra cost to Rs.6,66,62,000/-and consequently the total of the counter claims stood increased to Rs.11,55,98,388/-.

8. After considering the claims and counter claims, the learned arbitrator made an award dated 21.9.1994. He rejected claim nos. 4, 7,8,10, 14 21,22,23,26,36,36A, 37,38,39,40,41, & 41A,42, & 42A and 43 of the contractor. He awarded the following amounts to the contractor in regard to the remaining claims:

The arbitrator rejected counter claims 1, 2, 4 and 5 of the employer. In regard to counter-claim No. 3 (Rs.79,87,846/- towards refund of mobilization advance with interest), the arbitrator awarded a sum of 7 Rs.59,42,275 with interest at 18% per annum from 18.9.1990 up to the date or decree or payment whichever was earlier.

9. The contractor made an application for making the award, a rule of the court. The employer challenged the award by filing objections under section 30 read with section 33 of the Act. By order dated 17.2.2003, the District Judge, Ajmer allowed the application of the contractor and made the award a rule of the court subject to a modification in regard to the award made on claim No.37A. In place of the award made by the Arbitrator (direction to employer to pay Rs.12072/- per day from the date of award), the District Judge directed that the employer shall return the original title deeds to the contractor and pay the amounts awarded to the contractor after deducting the amount awarded by way of counter-claim (that is Rs.59,42,275/- towards refund of mobilization advance due with 18% interest) within 30 days from the date of decree, failing which, the employer shall pay Rs.12072 per day from the date of decree.

10. The employer filed an appeal (Civil Misc. Appeal No.872/2003) against the said judgment and decree contending that the award ought to have been set aside. The contractor also filed an appeal (Civil Misc. Appeal No. 910/2003) aggrieved by the modification by the Learned District Judge directing compensation of Rs.12,072/- per day only from the date of decree 8 (instead of the date of award). The High court dismissed the appeal filed by the employer by judgment dated 5.2.2007. The High Court allowed the appeal filed by the contractor by judgment dated 30.5.2007 and restored the direction of the arbitrator that the payment of compensation at Rs.12,072/- per day should be from the date of the award itself (21.9.1994). The High Court also granted interest at 18% per annum from the date of the award. Thus the High Court upheld the award.

11. Feeling aggrieved the employer has filed these two appeals by special leave. The first of the appeals (arising out of SLP [C] No.10818/2007) is against the dismissal of its appeal on 5.2.2007. The second of the appeals (arising out of SLP(C)No.22565/2007) is against the judgment dated 30.5.2007 allowing the contractor's appeal. One of the contentions urged by the appellants before the court below was that the Arbitrator did not have jurisdiction to enter upon the reference and make an award, as the appointing authority under the arbitration clause had merely appointed the arbitrator, but had not referred any dispute to him for arbitration. The said contention was rejected by both courts on the ground that when the authority competent to appoint the arbitrator appointed the arbitrator, in pursuance of the agreement reached before this Court to have the pending disputes of both parties settled by arbitration, the employer could not be permitted to raise a technical plea 9 that the arbitrator had no jurisdiction to proceed with the arbitration, in the absence of a further specific reference by the employer. Realising the unsoundness of the said contention, the appellants did not press it before us.

(iv) counter claims 1, 2, 4 and 5.

21. Claim No.37A was linked to mobilization advance. The contractor claimed that it had mortgaged its pipe manufacturing unit in favour of the 21 employer by deposit of title deeds, as security for repayment of the mobilization advance; that the machinery installed in the said factory had not been released by the employer in its favour and as a consequence, it could not be shifted to another place to enable it to start the manufacturing process elsewhere; and that on account of the failure on the part of the employer to release the plant, it had to keep the machinery idle and the employer was therefore liable to reimburse to the contractor the loss of production from 13.1.1992 at the rate of Rs.12,072/- per day. The contractor contended that if it had been permitted to shift its plant and machinery, it would have produced 15 pipes per day valued at Rs.1,20,000/-, that out of which the overhead and profit element was 15% (that is Rs.18,000/- per day); that as there were 306 working days in a year, the loss of profits/overheads would be 18,000 x 306/365 = Rs.15,090/- per day; and that if 20% thereof (Rs.3,018/-) was deducted therefrom towards labour component, the loss of profit per day on account of non-availability of plant and machinery was Rs.12,072 per day. The employer resisted the claim by contending that there was no obligation to release the plant and its title deeds until the mobilization advance was repaid with interest; that the contractor had not repaid the mobilization advance and interest thereon in spite of the award; and therefore the question of compensating any `daily loss' on that account did not arise. The employer also contested the correctness of the 22 assumptions made for calculating the loss.

24. Thus we find that the award under claims 37A was not made on account of any finding of breach on the part of the employer. It was made because the Arbitrator had made an award against the contractor in favour of the employer for Rs.59,42,275 with interest. The Arbitrator was of the view 24 that if that sum was adjusted against the amounts due by the employer, there was no need for the mortgage of the plant to continue and therefore the employer should release the documents of title deposited by way of equitable mortgage, within 30 days from the date of award; and that if the employer failed to do so, the employer should pay to the contractor Rs.12,072 per day from the date of the award till the date of release of the mortgage. Therefore, the said award under claim 37A was made, not on account of any breach committed by the employer, but in respect a breach if made in future after the date of the award. There was no such claim and the award was therefore beyond the reference. Further, the reasoning is very strange and is a classic case of an error apparent on the face of the award and a legal misconduct. The arbitrator rejected the claim No.37A for payment of Rs.12,072/- as compensation for loss of production from 13.1.1992 (which was the subject matter of claim) on the ground that the plant had been mortgaged in favour of the employer and therefore there was no justification for the contractor to claim that it should be permitted to remove and take away the plant when the mortgage subsisted. Having rejected the claim, the Arbitrator evolved a strange reasoning that though there was a subsisting valid mortgage in respect of the mobilization advance with interest in favour of the employer, because he had made an award in favour of the employer for Rs.59,42,275 plus interest, the mortgage came to an end and the 25 employer became liable to return the documents and if it failed to return the documents, the contractor was entitled to damages of Rs.12,072/- per day from the date of award.

23. The arbitrator considered Claim 37A with three other claims - (36, 36A and 37). The particulars of the said claims are:

29. We therefore hold that viewed from any angle, awarding Rs.12,072/- per day as damages, from the date of award under Claim 37A cannot be sustained and the same is liable to be set aside.

reference period and consequently interest will be payable :

35. Therefore, even in regard to claims for damages, interest can be awarded for a prior to the date of ascertainment or quantification thereof if

38. These claims of the contractor have been examined and rejected by the Arbitrator and upheld by the courts below. No ground is made out to interfere with the same.

Re: Counter claims of the employer

39. Out of the five counter-claims of the employer, the Arbitrator has allowed only counter-claim no.(3). Counter-claim no. (3) was for refund of mobilization advance (Rs.79,87,846) with interest and the Arbitrator has awarded Rs.59,42,275/- with interest at the contract rate of 18% per annum up to the date of decree/payment whichever was earlier. Counter-claims 1, 2, 4 and 5 made by the appellant against the contractor have been rejected. They are:

40. We therefore allow these appeals in part and modify the judgments of the courts below as indicated above. Resultantly:

(C) Interest shall be payable at 9% p.a. on Rs.1,34,24,407/- from 3.9.1990 till date of payment. The award on claims 12 & 13 is modified accordingly.

(D) Award of Rs.59,42,275/- in respect of counter-claim no.(3) of appellant with interest at the rate of 18% per annum from the respective dates of release upto the date of payment is upheld. (E) The direction for adjustment of the amount due under counter-

(F) Rejection of claims 4, 7, 8, 10 & 21, 14, 22, 23, 26, 38, 39, 40, 41 & 41A, 42 & 42A and 43 of the contractor and counter-

claims 1, 2, 4, and 5 of the employer are upheld.