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

2. First respondent Cochin Shipyard Limited (respondent for Short) invited tenders for construction of Building Dock at Cochin. As there was only one tender that of Tarapore and Company, the appellant, the respondent called fresh tenders some where in July, 1971. In December, 1971, the respondent invited tenders for construction of a Repair Dock also at Cochin. There were two tenders for Building Dock, namely, one of the appellant and one by M/s. National Building Construction Corporation, a Government of India undertaking, the value of the tender of the latter being double that of the appellant. For the construction of the Repair Dock, the only tender was of the appellant. In view of the limited number of tenders received, the appellant was invited to negotiate the terms of the tender. The value of the works to be executed was over Rs. 24 crores. In view of the huge investment in the project, the tenders were examined by a committee called the Tender Committee constituted in accordance with the approval of the Ministry of Shipping and Transport for examining and evaluating the tenders received for the Building Dock and the Repair Dock. The Tender Committee taking note of the poor response to the invitation to tender and costly affair note of the poor response to the invitation to tender and costly affair decided to accept the tender of the appellant inter alia for the reasons (i) that works of such complexity and magnitude have not been undertaken before by any Indian contractor, (ii) that the plant and equipment required for the work are not available indigenously, (iii) that if the contractor is to procure the specialised equipment required for this work, there is hardly any assurance that after these works are over, he would find any substantial use for the same, (iv) that excavation and subsequent construction involveg which introduces considerable amount of uncertainty and that during the discussions, the apprehension of the tenders of this kind was voiced and noticed by the Committee, and (v) that RCC Piling also requires highly skilled and complex technical operations and it involves a large element of risk and uncertainty in the work. Both the tenders of the appellant were accepted, and contracts were entered into between the parties. Both the parties while entering into contracts were aware and conscious of the fact that equipment and technicalw would have to be imported involving a huge outlay of foreign exchange.r quoted rates on two alternative basis depending upon whether it had to import equipmentw at its cost involving Rs. 2 crores in foreign exchange or the equipment andw were to be imported by the respondent at its cost and made available for use of the appellant in which case the appellant would be liable to pay hire charges for the pile driving plant at the rate of Rs. 23 per meter of 600 mm dia. RCCu pipe and Rs. 16 per metre of 500 mm dia RCCsitu pipe and at the rate of 300 per tonne of steel sheet pipes driven to be recovered from the running bills payable to the appellantcontractor. The appellant was given to understand by a note in the invitation to tender that foreign exchange in yen credit to the tune of Rs. 38 lacs is earmarked for the purchase of construction equipment, accessories etc. from Japan for works of Building Dock, Repair Dock, the three Quays etc. On January 24, 1973, work order for Building Dock and Repair Dock was issued by the respondent in favour of appellant and in this work order as recommended by the Tender Committee, the respondent adopted the alternative B as set out in the tender, namely, that the contractor was to procure the equipment andw at a cost of about Rs. 2 crores in foreign exchange. In order to make this aspect specific, additional condition No. 31 was incorporated in the works order in order to provide for expense to be incurred and the amount of foreign exchange needed for importing equipment and technical, relevant portion of which reads as underRequisite foreign exchange, for importing piling plant and machinery, spares, technicalw and hiring of experts necessary for both the Dock Works vide Work Order No.I dated January 24, 1973 for Building Dock etc. and Work Order No.I dated January 24, 1973 for Repair Dock etc., amounting to about Rs. 2 crores in all will be made available to the contractor from the Eleventh Yen Credit subject to his getting indigenous clearance and providing detailed justification. The details of such procurement shall be furnished by the contractor as soon as they are finalisedIn view of the huge investment, it was agreed that the respondent would make an advance payment of 75 per cent of the value of old machinery and 90 per cent of the value of new machinery brought to site by the contractor and in order to secure this advance payment, equipment would be hypothecated by the contractor to the respondent and the advance payment were to carry interest at 9 1/2 per cent p.a. on the outstanding balance of advance. The mode of recovery was also specified. The formal contract was signed on January 29, 1973 which included an arbitration clause to which we would turn a little later3. It so happened that the required pile driving equipment including the technicalw against Eleventh Japanese Yen Credit were not available. The respondent also made inquiries in this behalf but without success. Ultimately International Foundation Group, Holland agreed to provide the rate of equipment conforming more or less to the same specification for which clearance was sought and received from the Government of India. After the respondent certified that the equipment andw offered by International Foundation Group, Holland conform to the earlier clearance and that the same equipment being not indigenously available or against Eleventh Japanese Yen Credit, the respondent requested the Government of India to give necessary clearance to the appellant to import the equipment. This approval was received on September 1, 1973 and the foreign exchange to the extend of Rs. 211.80 lakhs equal to 94, 42, 700 Dutch Florins was released in favour of the appellant. The entire imported equipment was received in four consignments between March/July, 1974. During the intervening period, there were variations in the rate of exchange and therefore the foreign exchange cost of equipment alone in terms of rupees worked out at Rs. 177.50 lakhs and of the technicalw fees payable in 11 installments worked out at Rs. 105 lakhs. The customs duty went up by Rs. 21 lakhs as a consequence of the increase in rupee value of the imported equipment in terms of Dutch Florin4. The appellant made a tentative claim in the amount of Rs. 61.27 lakhs from the respondent on account of increase in cost of pile driving equipment and technicalw fees on the ground that the contractor was entitled to be compensated by the respondent for the same. In the letter dated May 28, 1975, the appellant has stated that the tendered rates were based on certain total cost of machines which has since gone up considerably rendering the rates no longer workable. The appellant had provided for a cost of 150 lakhs of rupees for the equipment and the life of the equipment was taken as 12, 000 hours and its probable period of engagement on this job was taken as 8000 hours. On this basiss of the cost of the equipment will be written off by way of depreciation on this job. It was also stated that there is an increase in the fees for the technical. The letter concluded by saying that the loss sustained by the appellant upto May 15, 1975 on account of variation in the rate of foreign exchange was Rs. 61, 27, 317 and requested the respondent to compensate the loss at least upto the tune of Rs. 45 lakhs which is approximately 75 per cent of the loss suffered by the contractor in this behalf. The respondent responded to this letter as per its letter dated July 2, 1975 saying that the letter dated July 14, 1972 of the appellant which forms part of the contract documents clearly recites that the total foreign exchange required by the contractor for the equipment, spares, technicalw and hiring of experts, was expected to be about Rs. 2 crores and that the expenditure incurred by the contractor in this behalf so far has been less then Rs. 2 crores and in the circumstances it was found difficult to accept the position that the tender was based on the assumptions indicated in the letter under reply and that rates for the pile driving should for the future be revised. There ensued further correspondence between the parties. Ultimately, the appellant by its letter dated March 1, 1976 informed the respondent that its claim for compensation for increase in the cost of imported pile driving equipment and technicalw fees has not been entertained for over a year. It was further stated that inasmuch as the dispute has thus arisen between us regarding the above claim, we are invoking the provisions for arbitration in our contracts and referring this dispute to arbitration. On March 17, 1976 Chief engineer of the respondent replied saying that the matter as set out in the letter dated March 1, 1976 invoking arbitration clause is receiving their immediate attention and the appellant will hear shortly in this behalf. On March 29, 1976, the respondent wrote to the appellant denying the claim for compensation of the appellant. Simultaneously the respondent framed three points covering the dispute so raised for reference to and decision by the arbitrator. The letter also sets out as required by Clause 40 a panel of three names from which anyone can be chosen by the appellant as the sole arbitrator. The appellant by its letter dated April 19, 1976 while refuting the contention of the respondent that the dispute would not be covered by Clause 40 i.e. arbitration clause in the contract, stated that the proper course would be to refer the dispute that has arisen between the parties to the decision of the arbitrator and not any particular issue or issues. Ultimately from amongst the three names indicated by the respondent the appellant selected Shri. C. Srinivasa Rao, Chief Bridge, Engineer, Southern Railway, Madras to be the sole arbitrator to decide the dispute. On receipt of this letter the respondent referred the dispute to Shri. C. Srinivasa Rao as sole arbitrator. While referring the dispute to the sole arbitration of Shri. C. Srinivasa Rao, the respondent retained the three points of reference set out in the letter dated March 29, 1976 but added one more. The arbitrator entered upon the reference on June 2, 1976. On being called upon by the arbitrator, the appellant filed its statement of claim on June 16, 1976. The appellant claimed Rs. 2, 03, 47, 266 as per the Schedule to the Statement of Claim on account of increase in the cost of equipment and technicalw fees. The respondent filed its reply to the Statement of Claim on July 19, 19765. The points/disputes referred by the sole arbitrator read as under1. Does the claim of Messrs. Tarapore and Co. on Cochin Shipyard Ltd., for compensation for increase in the cost of imported pile driving equipment and technicalw fees referred to in clauses (2) and (3) hereunder fall within the purview of the first paragraph of Clause 40 of the General Conditions of Contract entered into between the two parties ?2. If the answer to (1) above is in the affirmative, in terms of the provisions of the contract are Messrs. Tarapore and Co. entitled to compensation for increase in the cost of imported pile driving equipment and technicalw fees to be paid to them by Cochin Shipyard Ltd. ? If so, what is the amount ?3. The dispute that has arises between Messrs. Tarapore and Co., and Cochin Shipyard Ltd. regarding the claim of M/s. Tarapore and Co., for compensation for increase in the cost of the imported pile driving equipment and the technicalParties appeared before the arbitrator through there respective counsel. The arbitrator gave his award on July 6, 1977. On Point No. 1 the arbitrator held as underThe claim of Messrs. Tarapore and Company on Cochin shipyard Limited for compensation for increase in the cost of imported pile driving equipment and technicalw fees falls within the purview of the first paragraph of Clause 40 of the General Conditions of Contract entered into between the partiesOn Point No. 2 the arbitrator held that the appellant Messrs. Tarapore and Company are entitled to compensation by the Cochin Shipyard Limited for the increase in the cost of imported pile driving equipment and the technicalw fees by a sum of Rs. 99 lakhs only which amount shall be payable with interest at 9 1/2 per cent per annum from this date till date of payment or decree, whichever is earlier. On Point No. 3, the decision recorded was that it is covered by the decision on Points Nos. 1 and 2. On Point No. 4, on the question of costs, the arbitrator having determined his fees and incidental expenses directed both the parties to bear the same equally. The award was typed on a stamp paper of the value of Rs. 150 at Madras. By his letter dated Nil July, 1977, the sole arbitrator forwarded the award to both parties6. The appellant moved a petition under Section 14 and 17 of the Arbitration Act in the Court of the Subordinate Judge, Ernakulam for filing the award and for making it a rule of the court. On October 7, 1977 the respondent moved O.P. 81 of 1977 being a combined petition under Sections 30 and 33 of the Arbitration Act before the subordinate Judge, Ernakulam praying for setting aside the award. The prayer for setting aside the award was founded on two grounds : (1) that the award is insufficiently stamped and (2) that the Arbitrator has exceeded his jurisdiction by miscontruing Clause 40 of the General Conditions of Contract (arbitration clause for short)7. The learned subordinate Judge noted the fact that the award was originally engrossed on a stamp paper of Rs. 150 but before filing the award in the Court on August 4, 1977, the arbitrator on August 1, 1977 affixed additional stamp of Rs. 14, 722.50 p which would be the requisite stamp under Article 12 read with Article 14 of the Kerala Stamp Act. The learned Subordinate Judge accordingly negatived the contention of the respondent that the award was insufficiently stamped. On the second point, the learned Judge held that the respondent having submitted the question whether the dispute raises by the appellant was covered by the arbitration clause cannot be permitted to controvert the jurisdiction of the arbitrator to decide this dispute and accordingly, negatived the contention of the respondent. The learned Judge after modifying the award of the arbitrator in the matter of interest from 9 1/2 per cent as awarded by the arbitrator to 6 per cent granted the application of the applicant and made the award a rule of the court8. The respondent preferred M.F.A. 409 of 1979 in the High court of Kerala at Ernakulam. A Division Bench of the High Court agreed with the learned Subordinate Judge on the question of insufficiency of stamp. The Division Bench however, after expressing its displeasure about not making a reasoned award by the arbitrator proceeded to examine the contention whether the arbitration clause covers the dispute. The Court held that the question whether the dispute is arbitrable or not cannot be finally decided by the arbitrator because it is a matter relating to his jurisdiction. It was further held that the arbitrator cannot by an erroneous interpretation or construction of the clause confer jurisdiction on himself and the Court can go into the question whether the matter in dispute between the parties is covered by the arbitration clause. The specific contention of behalf of the appellant that once a specific question of law is referred to the arbitrator, the parties are bound by the decision of the arbitrator was negative by the High Court and it was held that as the respondent has joined arbitration under protest, it was not stopped from contesting the question and the award is not binding on it if it can be shown that the arbitration agreement did not cover the dispute raised by the appellant. The Court finally held that even though the arbitration clause was very wide, the dispute as to the compensation for increase in the cost of imported pile driving equipment and technicalw fees would not be covered by the arbitration clause inter alia on the ground that by Clause 26 of the General Conditions of Contract every plant, machinery and equipment had to be provided by the contractor and any rise of escalation in the price of such equipment or machinery cannot be the subject matter of compensation by the respondent. Accordingly, the appeal of the respondent was allowed and the judgment and order of the trial court making the award rule of the court was set aside. The Court directed that the award be returned to the parties. Hence this appeal by the contractor by special leave9. Before we advert to the rival contentions, it would be advantageous to refer to the arbitration clause being Clause 40 of the General Conditions of Tender subject to which the contract was entered into, the relevant portion of which reads as underClause 40. Except where otherwise provided in the contract, all questions and disputes relating to the meaning of the Specifications, Instructions, Designs, Drawings hereinbefore mentioned and as to the quality or workmanship or materials used on the work or as to any other questions, claim, right, matter or thing whatsoever in any way arising out of or relating to the Contract, Designs, Drawings, Specifications, Estimates, Instructions, Orders or these conditions or otherwise concerning the works or the execution or failure to execute the same, whether arising during the progress of the work or after completion or abandonment thereof shall, after written notice by either party to the contract, to the either of them, be referred to the sole arbitration of a person appointed by the Chief Project Officer of the Cochin Shipyard Project or the Administrative Head of the Cochin Shipyard Project at the time of such appointment by whatever designation know, from panel of names given in Annexure IIOver and above the extracted portion, the clause provides for the manner and method of appointing the sole arbitrator, the continuance of the work during progress of arbitration proceedings, the time and place of holding the arbitration proceedings, the power to enlarge the period for making the award and finality to be attached to the award of the arbitrator10. When the arbitration clause was invoked by the appellant, the respondent did contend that the dispute raised by the appellant was not covered by the arbitration clause. After specifying its demur, the respondent formulated the points in dispute on which the arbitrator was invited to give his award. Undoubtedly, the respondent proceeded to formulate the points in dispute between the parties on which the arbitrator was to be invited to give his award without prejudice to its right to contend that the dispute is not covered by the arbitration clause and that the appellant is not entitled to any compensation in respect of the increase in the cost of imported pile driving equipment and technicalw fees. What is the effect of referring the specific question of law to arbitrate with prejudice to ones right to contend to the contrary will be presently examined. The fact remain that on the dispute arising out a claim for compensation on account of the increase in the cost of imported pile driving equipment and technicalw fees, the respondent agreed to refer the dispute under two specific heads to the arbitrator. The dispute so raised have already been extracted. Briefly stated they are : (1) whether the claim for compensation would fall within the purview of the first para of the arbitration clause and (2) if it does the quantum of compensation, if any, to which the appellant would be entitled. Analysing the disputes, let it be made distinctly clear that the appellant asserted that its claim for compensation would be governed by the arbitration clause and the same was specifically denied by the respondent saying that the claim would be beyond the purview of the arbitration clause. On these rival positions, the specific issue was framed whether the claim for compensation would fall within the purview of the first part of the arbitration clause. This was the specific dispute referred to the arbitrator inviting him specifically to decide this dispute. If this issue specifically raises a question as to jurisdiction of the arbitrator to arbitrate upon the dispute set out in Point No. 2, it appears to have been specifically referred to the arbitrator for his decision. Parties, therefore, agreed to submit the specific question even with regard to the scope, ambit, width and the construction of the arbitration clause so as to define its parameters and contours with a view to ascertaining whether the claim advanced by the appellant and disputed by the respondent would be covered by the arbitration clause. Whether upon its true construction the arbitration clause would include within its compass the dispute thus raised between the parties was specifically put in issue because parties were at variance about it. Appellant asserted that its claim to compensation would from the subject matter of arbitration under Clause 40 and the respondent contenting to the contrary. While deciding this dispute, as to the scope, width and ambit of arbitration clauses the dispute, it is not necessary to decide whether the claim was tenable, justified or had any substance in it. That would fall within the second point of reference to the arbitrator which opens with a specific clause that it needs only to be decided if the answer to the first point of reference, namely jurisdiction of the arbitrator under Clause 40 is in the affirmative meaning thereby that the dispute so raised and subsisting between the parties would be covered by the arbitration agreement. In other words, if the dispute is covered by the arbitration agreement, the arbitrator was further required to decide whether there was any substance in the claim made, and if he found some substance in the disputed claim, to ascertain what amount the appellant would be entitled to recover as and by way of compensation from the respondent. The arbitrator was thus required and called upon first to decide whether the dispute is arbitrable as falling within the width and ambit of the arbitration agreement. If the answer is in the affirmative, then along the second point need be examined. If the answer to the first point of reference is in the negative in that if the arbitrator were of the opinion that the dispute is not arbitrable as it would not fall within the scope, width and ambit of the arbitration agreement, it would not be necessary for him to determine whether the appellant was entitled to recover anything by way of compensation. This aspect is being analysed in depth to point out that the parties specifically referred the question of construction of arbitration agreement, its width, ambit and parameterss the dispute raised so as to decide whether the dispute would fall within the purview of the arbitration agreement, in other words the jurisdiction of the arbitrator11. Correspondence placed on record would unmistakably show that a specific question as to the jurisdiction of the arbitrator was specifically referred by the parties to the arbitrator. Appellantcontractor by his letter dated March 1, 1976 to the Chief Engineer of the respondent invited his attention to the claim for compensation for increase in cost of pile driving equipment and technicalw fees raised about a year ago and further invited his attention to the letter dated October 6, 1975 of the respondent informing the appellant that the claim cannot be entertained. The appellant proceeded further to state as underInasmuch as a dispute has thus arisen between us regarding the above claim, we are invoking the provisions for arbitration in our contracts and referring this dispute to arbitrationThe respondent by his letter dated March 17, 1976 informed the appellant that the matter raised in the letter dated March 1, 1976 in the matter of compensation is receiving their immediate attention and the appellant will shortly hear from them in this connection. Thereafter the respondent by his letter dated March 29, 1976 informed the appellant as underWe have dealt with the merits of your claims in the previous correspondence on the subject and we reiterate that no amounts whatever are due to you in respect of these claims. It is also our view that such claim does not fall within the purview of Clause 40 of the General Conditions of Contract and hence does not qualify for arbitrationHowever, in view of your insistence and without prejudice to our position, we propose that, the following be the issues to be referred to arbitration1. Does the claim of M/s. Tarapore and Co., on Cochin Shipyard Ltd., for compensation for increase in the cost of imported pile driving equipment and technicalw fees fall within the purview of the first para of Clause 40 of the General Conditions of Contract entered into between the two parties ?2. If the answer to 1 is in the affirmative in terms of the provisions of the concerned contract, are Messrs. Tarapore and Co. entitled to compensation for increase in the cost of imported pile driving equipment and technicalw fees to be paid to them by Cochin Shipyard Ltd. ? If so, what is the amount ?The respondent proceeded to notify the panel of names and invited the appellant to choose the arbitrator as agreed to between the parties and set out in Clause 40. The appellant by his letter dated April 19, 1976 while reasserting that the claim made by it would be covered by Clause 40 further stated that the proper course would be to refer the dispute that has arisen between the parties on the matter of compensation to the decision of the arbitrator and not any particular issue or issues. It was also suggested that framing of the issues will be the function of the arbitrator after he enters upon the reference and after he has the pleadings of both the parties before him. The appellant also suggested what dispute should be referred to the arbitrator and set it out as underThe decision of the dispute that has arisen between M/s. Tarapore and Co., and the Cochin Shipyard Limited, regarding the claim of M/s. Tarapore and Co., for compensation for the increase in the cost of the imported pile driving equipment and of the technicalThe appellant proceeded to suggest that Shri. C. Srinivasa Rao from amongst the panel be appointed as the sole arbitrator. The respondent by his letter dated April 27/28, 1976 annexing three earlier letters dated March 1, 1976, March 29, 1976 and April 19, 1976 referred the four points hereinbefore set out for the decision of the arbitrator12. This correspondence would unmistakably show that while the appellant wanted a general reference about its claim, it was the respondent who now contests that no specific question of law was specifically referred to the arbitrator for his decision was specific about the points to be referred for the decision of the arbitrator. The first point extracted hereinabove would clearly show that the specific question about the jurisdiction of the arbitrator to arbitrate upon the dispute set out in Points Nos. 2, 3, and 4 was specifically referred to the arbitrator. On the first point, the arbitrator had to decide whether the claim made by the appellant and disputed by the respondent would be covered by Clause 40 i.e. the arbitration clause. In other words, the specific question referred to the arbitrator was about his jurisdiction to arbitrate upon the disputes covered by Points Nos. 2, 3 and 4, if any only if, upon a true construction of (sic) the arbitration clause that is first paragraph of Clause 40, would cover the disputed claim for compensation he can enter into the merits of the dispute and decide it. It is upon the decision on Point No. 1 that the arbitrator would have jurisdiction to decide the dispute involved in Points Nos. 2, 3 and 4. The first point of reference is clearly a specific question of law touching upon the jurisdiction of the arbitrator and this was framed and referred to by none other than, despite the initial objection of the petitioner, the respondent. Therefore, the respondent invited the arbitrator by the specific point of reference which involves a specific question of law touching upon the jurisdiction of the arbitrator to decide the same. This becomes further clear from the fact that both the learned counsel appearing before the arbitrator submitted agreed draft issues for the decision of the arbitrator. The first issue amongst the agreed draft issues reads as underDoes, the claim of the claimant fall within the purview of the first para of Clause 40 of the General Conditions of Contract entered into between the two parties ?This point was not to be incidentally decided while deciding the dispute referred to the arbitrator his jurisdiction to entertain the dispute is questioned. In fact, here by the reference of the specific point of law touching upon the jurisdiction of the arbitrator the parties invited the arbitrator to decide this specific question. It was he who was asked by the submission or terms of reference to decide his jurisdiction first and then proceed to decide the dispute on merits. We referred to Issue No. 1 in the agreed draft issues only to buttress the conclusion that it was at the instance of the respondent that the arbitrator was called upon to decide the question of the scope, ambit and width of arbitration clause the decision on which would confer jurisdiction upon him to decide the dispute as to compensation. In this context it would be advantageous to refer to paragraphs 11 and 12 of thet filed by the respondent before the arbitrator which reads as under11. It is submitted that the claim in question relating to the increase in the cost of machinery and equipment as also technicalw fees payable by the contractors/claimants is fully outside the purview of the contract. There is no liability on the part of the respondent to procure the machinery and equipment or technical knowhow required by the contractor nor was there any liability to pay any part of the cost, whether it be the original assumed cost or the increased cost. The claim thus is completely outside the purview of the contract and it is submitted, therefore, that the same does not fall within the purview of the first paragraph of Clause 40 of the General Conditions of Contract and thus not arbitrable12. It is submitted that the question of arbitrability of the dispute should be decided as a preliminary point before proceeding with the other issuesThe formulation of the specific question of law by the respondent along with its suggestion to decide it as a preliminary issue and becoming a party to the agreed draft Issue No. 1 would conclusively establish that the specific question of law touching upon the jurisdiction of the arbitrator was referred to the arbitrator for his decision. Therefore, the conclusion is inescapable that a specific question of law touching upon the jurisdiction of the arbitrator which is indisputably a question of construction of Clause 40 and therefore a question of law was specifically referred by the parties to the arbitrator for his decision and by the terms of Clause 40 agreed to abide by his decision as final and binding

Court's reasoning:
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