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i18

TARAPORE.& COMPANY ·. . v,

COCHIN SHIPYARD LTD. COCHIN & ANR.

March 6, 1984

. [D.A. DBSAI AND 0. CHINNAPPA REDUY, JJ.J

Arbitration Act 1940 (Act X of 1940) section 16(/)(c), 30 and 33.

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Arbitration-Works conlract~Construction of BNilding Dock and Repair Dock-Reference _of specific question 'of law to arbitrator-Arbitrator framing "issue-Parties agreeing to issue being decided-=-Award 1f could be set aside on ground of error. of law on. face of award.

Interpretation:.

Agreement-Works contracr of large magnitude-Over-Simplification of clauses impermissib/e.-Agreement predicated upon and agreed fact silllation- Situation ceasing to exist-Agreement to that extent rendered irrelevant and otiose.

Words & PhraseJ:

.'Without prejudice'-Meaning of-' claim arising out of contract'-'Relating to the contract'-Meaning of___.;.C/auie 40 General Conditions of Contract.

The appelJant and the resi;>ondents entered into a contract for the construction of Building 1)ock; CJ a use 40 _of the General Conditions of Contract entered into between -the parties, provided that "all questions and dispute\ relating to the meaning of the Specifications Estimates Instructions, Designs,

Drawing-----nd the quality of the workmenship or materials used in tlte work or its to any Other questions, claim, right, matter or thing whatsoever in any way <irising out_ of or relating to the" contract or otherwise concerning the execution whether arising during the progress of the work or ofter completion- ---shall be-referred to the Sole Arbitrator etc~" During the. implefilentation of the works contract, disputes arose between the partis-in respect of a laim for compensation on account of the increase in the cost of imported pile-diving equipment and teclmic31 know-how fees. Correspondence was exchanged 'bet ween the Appellant and Respondent No. 1 and the dispute was referred to the

Sole Arbitrator. The polnt referred were: (1) Whether the c1airn of compen sation for increase in the cqst of im-portcd pile driving equipinent and technical know-bow fees would fall within the purview of the first para of clause 40 of the General .Conditions of COntract ; and (2), if it does, the quantum of con1pensatin. if aQy~ to which the appeUallt would be entitled to. The arbitrator entered upon the reference and after hearing the parties. gave bis award. The

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TARAPORE CO. JI. COCHIN SHIPYARD 119

arbitrator hel, d that the appellant was entitled to compensation for the increase in the cost of in1ported pile drawing equipment and technical know-how fees by a sum of Rs. 99 lakhs which amount shall be payable with interest@ 9'J/2% The award was typed orl stamp paper of the value of Rs. 150/-. The arbitratC!r

forwarded the award to both the parties .

. The appellant moved 3. petition under' sections 14 and 17 of the Arbitration Act, in the Court.Of the Sub.orCinate Judge for filing the award and for making it a rule of the Court, while the respondent moved a petition , under sections 30 and 33 for setting aside the award contending that: (-1) the aw"ard was insufficiently stamped, and (2) the arbjtrator had exceeded his jurisdiction by miscon .. struing clause 40. The s'ubordinate Judge negatived both the coil.tentions. Jt. was held that the respondent having submitted the question ,.., hether the dispute raised by the appellant was covered by the arbitration clituse ; could not controvert the jurisdiction of the Arbitrator to decide the dispute ; and the awrd of the arbitrator was modified in the matter of interest frOm 9'1 /2 per "cent as awarded by the ar'Qitrator to 6 per cent, and the award was made a fuie of the Court.

The respondent preferred an appeal to the Rish Court, and a Division Bench, agreed with the Subordinate Judge on the question of insufficiency of stamp. It however held that the question whether th~ dispute was arbitrable or not could not be finally decided ~Y the arbitrator because it was a matter relating to-his jurisdiction, and that the arbitrator cannot by an erroneous interpretation or construction of the clau:e confer jurisdiction on himself and that the court can go into the qµestion whether the matter in dispute between the parties was covered by the arbitration clause_. It finally held tha, t even though the arbitration clause was very wide, the dispute as to compensation for increase in the cost of impo_rted pile diiving equipment and technic3.I know-how fees could not be covered by the arbitration clause because under clause 26 every plant, machinery and equipment had to be provided by the contractor and any rise or escalation in the price Of suCh equip!nent or machinery, cannot be the subject matter of compensation. by the respondent. The apt)e_al wai therefore allowed, and,.the trial court's order, ma_kiog the award a rule of the court was set aside and

dirted that the award be returned to the parties.

In. the appeal to this Court it was contended on beh'l)f of the appellant, that though Sec. 16( l)(e) of the Arbitrlllion Act may permit the court to remit or set aside-the award on the ground that there is an error of law , ap193.rent on the face of it, yet where a specific question of law has been referred to the arbitrator for deciion, the fact that the-deciion is 'ei-roneous does not make the award bad on its face so as tO permit its being set aside.. As a specific question of law touching upon the jurisdiction of the arbitrator was speficially referred to the arbitrator for his decision, the decision of the arbitrator is binding on the parties and the court cannot proceed to inquire whether upon a true construction of the arbitration clause, the dispute referred to the arbitrator for arbitration would be covered by the arbitration clause so as to clothe the arbitrator with the jurisdiction to arbitrate upon the dispute.

On behalf of the respondent, it was contended that the jurisdiction or the arbitrator cannot be left to the decision of the arbitrator so as to be binding on

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, SUPREME COURT REPORTS [1984] 3 s.c.R..

the parties and it is always for the court to decide whether the arbitrator had jurisdiction to decide the dispute, and that the arbitrator cannot by a miscon- , structioo of the, arbitration agreement clothe himsClf with or confer upon himself the jurisdiction to decide the dispute.

Allowing the Appeal ; ..

HELD : 1. A specific question of law touching the jurisidiction of the arbitratOr was specifically referred to the arbitrator and therefore the arbitrator's decision is binding on ~}le parties and the award cannot be s.et aside on the sole . ground that there was an error of law apparent on the face of the award. 1t is also established that the claim for compensation made by the contrctor which led to the dispute VflS covered by the arbitration clause. The quantum of com~ pensation awarded by the arbitrator .was never disputed nor questioned. [170EFl

2. A question of law may fiure before an "Brbitrator in two wiys. It may arise as an incidental point "'.hile deciding the main disput~ referred to the ar"itratOr or in a given case parties may refer a specific question of law to the arbitrator for his decision. [137GH]

Russel : Law of Arbitration. Twentieth Edition p. 22 ,· Halsbury's Laws of England Vol. 2 Para 623 4th Edition referted to.

3. Arbitration has been considered a civilised. way of resolving disputes avoiding court proceedings. There is no reason why the parties should be precluded from .referring a specific question of law to an ar bitratoi for his decision and agree to be bound by the same. This approach manifests faith of parties ill the capacity ofthe tribunal of their choice to decide even a pllre question of law. If they do so, with eyes wide open, and there is nothing to • preciude the parties from doing. sq. then there is no reason why the 'court s4ould iry to impose its view of law superseding the view of the Tribunal whose decision the parties agreed to. abide by. On-principle it appears distinctly clear that wben a specific question of la"w is referred o an arbitrator for -bis decision including the one. touching upon the jurisdiction of the arbitrator. the decision of the arbitrator would be bindi'ng on both the pa'rties and it would not be open to any of the two pafties to wriggle out of it by contendiOg that the arbitrator cannot clutch at.or confer jurisdictiOn upon himself by mis-construing the arbi .. tration agree!llent. [I 38E' G J . ·

4. If a question 'of law is specifically 1eferred and it becomesevident th; t the parties desired to have a decision on the f!'ecific question from the arbitrator rather than one from the cOurt, then the court will not i[herferf with the award of the arbitrator on the ground that there is an error or 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. [147F]

Kelantan Government v. Duff Development Co. Ltd. 1923 All E.R. 349: Re Kins and Duveen, [1913]-2 K.B. 32: F.R. Absa/om Ltd. v. Great Western (London)Garden Village Society Ltd., (1933] All E.R. 616; Durga Prasad Chamria

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TARAPORB'co. v. COCHIN SHIPYAjtD 121

. and Anr. v. Sewkishendas Bhattar and Ors: AIR 1949 Privy Council 334; Seth

ThawardasPherumalv. The Union of ludia; (1955] 2 S.C.R. 48; M/s. Alopi Parshad & Sons Ltd. v. Tbe Union of India, (1960] 2 S.C.R. 783; Champsey Bhara and Company v. Jivraj Balloo Spinning and Weaing Company Ltd. : Law Report 50 J.B. 324; Union ofJndia v. A.L. Rallia "Ram., (1%4] 3 S.C.R. 164; Mis. Kapoor NiloJc.heri., Co-op. Dairy Farm Society Ltd. v. Union of lndia and Others., AIR 1973 S.C. 1338; N. Chellappafl v. Secretary, Kewla State Electricity Board & Anr., [1975] 2 S.C.R. 811; Produce Brok@rs Co. Ltd. v. Olympia Oil and Cake Co. ltd., (1914-15] All E.R. 133; Attorney General For Manitoba v: Kelly and Others .. (1922) Hll E.R. 68; Hirji Mulji v. CJieong Yue Steamship Co.Ltd., (1926] All E.R. 51; lfeyman & Anr. v. Dmwins Ltd., (1942] 1 All E.R._ 337; Jivarajbhai Ujamshi Sheth & Ors. v. Chiniamanrao Balaji & Anr., (1954] 5 S.C.R. 480; Dr. S.B. Dutt v. University of Delhi., [195,8] S.C.R. 1236; referred to.

5. The expression 'Without prejudice' carries a technical meaning depending upon the context in which it is used.

An action taken without prejudice to one's right cannot" necessarily mean that the entire action1 can be ignored, by the party taking the same. [148F-G]

In the instant case, i'n the context in which the expressioa iwithout prejudice9

is used, it would only mean that the respondent reserved the right tO contend before the arbitrator that the dispute is not covered by ihe arbitration clause .. Jt does not appear that. what was a contention that no specific question

\\;3-S specifically referred to the arbitrator, On a. proper reading of the corresporidence, and in the setting in which the term 'wiihout prejudice' is used; it only means that the respondent reseived to itself the right to contend before the arbitrator that a dispute raised or , the claim made by the contractor was not covered by the arbitration clause. N9 other me" '1•.ng :can be assigned to it.·

[1480-E]

6. In works contract of such magnitude, and which have been undertaken by an Indian Contractor for the first time negotiations prior to the finalisation of the contact and the correspondence leading to the formation of cOntract supply the basis on which the contract was finally entered into. Undoubtedly, if in the final written contract, .thei:,.e is something contrary to the basic understanding _ during the formative stage of the contract, the written contract would prevail.

Buf if the co"ntract does not indicate to the contary and the assumptions appeared to be the found{ltion of the contract, that aspect cannot be overlooked while determining what were the obligations undertaken the formal contract. [151U-!52Bl

7. Over-simplification of the clauses of the contract involving works of large magnitude is impermissible. kThe whole gamut of discussions, negotiations and correspondence must be taken into consideration to arrive at a true nicaning of what was agreed to between the parties. [156F]

In the instant 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 and co-related _to this understanding. [156G]

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SUPREME COURT REPORTS [1984] 3 s.c.R..

When ri agreemet is predicated. upon an agreed fact situatin, if the latter cea5es to exist the agreement to that extent becomes irrelevant of otiose. [1560]

9. Phrases suGh as 'claim arising out of contract' ot. 'relating to the con- tract' or 'Concerniti:g the cotract' -on proper construction would mean that if whiieintertaining or rejecting the claim or ihe dispute in relation to claim ma:Y be entertained or rejected after reference 10 the contract, it is a claim arising out of contract. The language of clause 40 shows that. any claim arising out of the contract -iri relation to estimates made in the contract would be covered by the arbitration clause. If it becomes necessary to have recolirse to th6 contract to settle the dipllte One way or the other then certainly it can be said that it is a dispute arising out of the con"act. [157F-G]

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In the instant case, the .arbitration clause is so widely worded as disputes arising out of .the contract. or in relation tq the cont'ract or execution of the works that "it would comprehend, within its cOmpass a claim for cOmpensation related to estimates and arising out of the cOntract: [157H] ·"""'(

10 (i) A dispute, the determination of which turns on the true construction of the contract,.. wou!d also seem to. be a dispute under arisin~ out or.:or concerning the contract. The test is tf\at if in setling a dispUt~, a reference to the contract is necessary, such a dispute would be covered by. the arbitration clause. [158D-E]

A.M. Mair & Ca. v. Gordhandas Sqgarmu/l., [1950] S.C.R, 792; Ruby Gef!eral Insurance Co. Ltd. v. Pearey' Lal Kumar And Another; [1952] S.C.R. 501; referred to.

ii. Where the parties .are at one in asserting that they entered into a bindin.s contract, but a difference has arisn between them whether there bas been a breach by one side or the other, or whether circumstances hnve arisen which have dischar.ged one ·or both parties from further petformance; such .differences should be "regarded as differences which have arisen 'in.respect of' or

'With regard to' of 'under' the contract, and an arbitration clause which uses these, or similar expressions should be contrue~ acc0rdingly. "[1~9B-~]


In the instant case, from the pleadings, it clearly transpires that both the parties had recoutse to the contract. It is satisfactorily established that the. claim made by the contractor would be covered by the arbitration clause. [160B]

tARA!'oRE Co. V•COCHIN SHIPYARD (Desai J.) 123

CIVIL APPELLATE JURISDICTION : Civil Appeal No. 3023 of 1980.

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Appeal by Special leave from the Judgment and Order dated the 21st August, 1980 of the Kt; rala High Court in M.F.A. No. 409 ' of 1979.

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< F.S. Nariman, A.N. Haksar, T. Raghvan, R.F. Nariman, V.A. Bobde & K.R. Nambiar, foi"the Appellant.

G.B. Pai, P.K. Kumar, A.K. Sharma, As/wk Mathur and

Paveen Kumar for the Respondent.

The Judgment of the Court was .delivered by

DESAI, J. In this appeal by. special I.eave a very interesting

.,_ question ih the field oflaw of arbitration which 'honest man dread more, than the dreaded law suits' arises for our cnsideration.

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 & . Company,· the appellant, the respondent called fresh tenders somewhere 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 Construcfion Corpbration, a Government oflndia 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. 1n view or th~ limited nuinber of tenders. received, the appellant was invited to negotiate the terms of tender. The v_alue 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 conslituied in accordance with the approval of the Ministry of Shipping and Transport for examining and evaluating the tenders

rceived for the Building Dock and the Repair Dock. The Tender Committee taking note of the poor response to the invitation to tender and costiy affair decided to accept the tender of the appellant inter alia for the reasons (i) that works of such complexity and magnitude have not bee.n undertaken before by any Indian contrac-; tor, (ii) that the plant and equipment required for the work are not available indigenously, (iii) that if the contractor is to procure the

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~UPREME COURT REPORTS (19s4j 3 s.c.a.

specialised equipment rquired for this work, there is hardly any assurance that after these works are over, he would find any substantial use for the sai:ne, (iv) that excavation. and subsequent cons-·

tructio~ involve de-watering which introduces considerable amount of uncertainty and tht 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 eiement 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 anc\ conscious

~ of the fact that equipment and technical know-how would. have to

be imported involving a huge outlay of foreign exchange. Appellantcontractor quoted rates . on t.wo aiternative basis depending-upon whether it had to import equipment and know-how at its cost invol- . ving Rs. 2 crores in foreign exchange or the equipment and knowhow wer.e tci be imported by the respondent at.its cost and made available for use of the appellant in which case the appellant would be liable t.o pay hire charges for the pile. driving plant at the rate of Rs. 23/- per metre of 600 mm dia. RCC cast-in-situ pipe' and Rs. 16/- per metre of 500 mm di:\.

RCC cast-in-situ pipe and at the. rate of 300 per .tonne, of steel sheet piies driven to be recovered ' from the running bills payable to the appellant.contractor. The -

E ·. appellant was gjven to understand b:t a. note in the invitation to • tender that foreign exchange in yen credit to th;: tune of Rs. 38 lacs is earmarked for the purchase of construction equipment, accessories etc. from Japan for works of Building Dock, Repair Dock1 the three Quays etc. On January 24, 1973, work order for Building Dock

and Repair Dock was .issued. by the respondent in favour of appel- . !ant and in this .work order as recommended by the Tender Committee, the respondent adopted the' alternative B as set out iri the ten-· der, namely, that the contractor was to procure the equipment and know-how 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 the expense to be illcurred and the amount of foreign exchange needed for im~ porting equipmept and technical kllow-how, relevant portion . of

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.wl!ich reads as under : '

"Requisite foreign exchange, for importing piling plant ·. · >>and machinery, spares, technicaf, know-how and> hiring of experts necessary for both the.Dock Works vide Work Order ·.

No. 130l9/l/71-W-II dated Janual'J 24, 1973 for Building.

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TARAPORECO. v. COCHIN SHIPYARD (Desai J.) 125

Dock etc. and Work Order No. 13012/15/71-W-II dated January. 24, 1973 for Repair Dock. etc., amounting to about Rs 2.00 crores in all wiUbe made availa\>le to the contractor

fom the 11th Yen Credit subject to his getting indigenous clearance and providing detailed justification. The details of such procurement shall befnrnished by the t:ontractor as soon as they are finalised."

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In view of the huge investment, it was agre.ed that the respondent would make an.advance payment of75% of the value of old . machinery and 90% of the value of new machinery brought to site by the Contractor and in -0rder to secure this advance payment, equipment would be hypothecated by the Contractor (o the respon- dent and the advanoe payment were to carry interest at 9.1/2% 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 later.

 It so happened that the required pile driving equipment including the technical know-how against 1 lth Japanese Yen credit were not available. The respondent also made inqulres 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 and know-how ofiei:ed by International Foundation Group. Holland conform to the earlier cleara11ce and that the same equipment being not indigenously available or against 11th Japanese Yen Credit, the respondent requested the Government of India to give necessary clearance to the appellant to import the equipmeat. This approval was received on Septembet 1, 1973 and the foreign exchange to the extent or Rs 211.80 lakhs equal to 9,4%2.700. 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 ut at Rs. 177.50 lakhs and of the technical know-how fees payable in 11 instalments worked out at Rs. 105 lakhs. The custom duty went up by .Rs. 21 lakhs as a consequence of the increase in rupe_e value

• 0f the imported equipment in terins of Dutch F1orlu, . . . ' . . . .

SUPREME COURT REPORTS


The appellant made .a tentative claim in the amount of Rs. 61.27 lakhs from therespondent on account of increase in cost of pile driving equipment and technical know-how fees on the ground that the contracto{ was entitled to be compensated by the respondent foi,)he same. In. the letter dated May 28,1975, the appellant bas 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 l&l'Pellant' had .provided for a cost of I 50 lakhs of rupees for the equipment and ihe life of the equipment was !akin as 12,000 hours and its probable period of engagement on this job was taken as 8,000 hours. On this basis' two-thirds 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 know-how.

The letter concluded by saying that the loss sustain.ed by the appellant upto May 15,1975 on account of variation in the rate of foreign exchange was Rs. 61,27,'3!7 and requested the'.respondent to compensate the loss aileast upto the tune of Rs. 45 lakhs which is approximately 75% of the loss suffered by the contractor in this behalf. The respondent 'responded to this letter as per its letter daied 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 ex-· change required by the contractor for the equipment, spares, technical know-bow. and hiring of exprts, was expected to be about Rs. 2 crores and that the expenditure incurred by the contractor in this behalf. so far has been less than Rs. 2 crores and in the circum- .stancesit was found difficult to accept the position that the tender was based on the assumptions indicated in the letter under reply and that the rates for the pile driving should for the future he 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 eqµipment and technicai know-how fees has not been entertained for over a year. It was further stated that 'inasmuch as the dispute has thus arisen between us re&ardiflg the above claim, we are invoking the provisions for arbitration in our contracts and ret; erring this dispute to arbitration.' On March 17, 1976 Chief Engineer of the respondant replied saying that the matter as set out in the letter dated March 1,1976 invoking arbitration clause is receiving tlieir immediate attention and the appellant will hear shortly in this be))alf. On March 29,1976, the respondent wrote to the .appellant denying the claim for compensation of the

appellant. Simultaneously the 'respondent framed three point8

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TARAPORE co. v. COCHIN SHIPYARD (Desai J.) 127

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

1~19_76 :Vhile 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 betwee.n the parties' to the decisfon of the a.rbitrator a11d not any particular issue or issues.

Ultimately froni amongst the three names indifated by the respondent the appellant selected .Shri C. Srinivasa Rao, Chief Bridge Engineer, Southern Railway, Madras to be the Sole Arbitrator to tlecide 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 19,1976. The appellant claimed Rs. 2,03,47,.266 as per th., Schedule to the Statement of Claim on account of increase in the cost ofeq'uipment and technical know-how fees. The respondent filed its reply to the

Statement of Claim on July 19,197,,

' Thepoints/disputes referred by the parties to the sole arbitrator read as under ;

"!. Does the claim of Messrs. Tarapore & Co. on Cochin Shipyard Ltd., for compensation for increase in the cost of im, Ported pile driving equipment and technical knowhow 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 affirmtive, in terms of the provisions of the contract are Messrs .. Tarapore & Co. entitled to compensation for increase in the cost of im- . ported pile driving equipment and technical know-how fees to be paid to them by Cochin Shipyard Ltd.? If so, what s

the amo11nt ~

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SUPR~ME COURT REPORTS


3. The dis1mte t.hat has arisen between Messrs. Tarapore & Co., and Cochin Shipyard Ltd.· regarding the claim of M/s. Tara pore & Co., for compensation for increase in the cost of the imported pile driving equipment and the technical know-how fees. • ,4. "Costs'~

Parties appeared before the Arbitrator through their respective counsel. The Abitrator gave its Awatd on July 6,1977. On Point No. 1, the Arbitrator' held as under:

• "The claim of Messrs. Tarapore and Company on Cochin Shipyard Limited for compensat.ion for increase in the cost of imported pile driving equipment and technical know-how fees falls within the purview of the first paragraph of Clause 40 of the General Conditions of Contract entered into between the parties."

On 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 cpst of i111ported pile driving equipment and the.. technical know-how fees by a sum of Rs. 99·1akhs only which amount shall be payable with interest at 9.1/2% per 'annum from this date till date of payment or decree, whichever i~ earlier'. On Point No. 3, the decision recorded was 'that it jg covered by the decision on Points (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 eq:ually. '(he Award was typed on a stamp paper of the valµe of Rs .. 150/- at Madras. j3y his letterdated Nil July, 1977, the Sole Arbitrator foFWarded the award to both the parties."

The appellant moved a petition under Secs. 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 Secs. 30 and 33 of the Arbitratioo Act before the Subordinate Judge, Ernakulam praying for setting aside the award. The prayer for setting aside the award was fonnded on two groui1\ls; {l) that the award is insufficien!lY stamped and (2) that the

fl, r1;>itrator has exceeded bis iuriuliction by misconstruin(l Clause 40

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TARAPORE co. v. COCHIN SHIPYARD (Desai J.) 129 . .

of the General Conditions of Contract (Arbitration clause for

short),

The learned Subordinate Judge noted the fact that the award was originaJly engrossed on a stamp paper of Rs. 150/- but before filing the award in the court on 'August 4, 1977, the Arbitrator on August f,1977 affixed additional stamp of Rs. 14,722.50 p. which would be the requisite stamp under Art. 12 read with Art. J 4 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 Jdge held that the respondent having subn:iitted the question whether the dis-' pute raised by the appellant was covered by the arbitration clause cannot be permitted to controvert lhe jurisdiction of the Arbitrator . to decide this dispute and accordingly, negatived the. contention of the respondent. The learned Judge after modifying the award of

t, he Arbitrator in the matter of int, rest from 9.1/2% as awarded by

• D the Arbitrator to 6% granted the application of the applicant and . made the award a rule of the cpurt.

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 exl?ressingits displeasure about not making a reasoned award by the Arbitrator proceeded to examine the C()ntent.ion whethei; the arbitration claUfe covers the dispnte. 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 arbltrawr cannot by an erroneous interpretation or construction of the clause confer jurisdiction on himself and the court c.an go into the question whether the matter in disp)lte between the parties is covered by the arbitration clause. The specific contention ort behalf of the appellant that once a specific question of law is referred to the arbitrator, the parties are bound by the de.cision of the arbitrator was negatived by the High Court and it was held that as the reiipondent has joined arbitration under protest, it was not estopped from contestinjl the question and the award is not binding Qn it if it can be shown that the arbitration agreement did not cov.er 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 an<l technical kn_owhow fees woutd

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~\!PREME COURT REPORTS ·

[1984}3 S.C.R.

not be covered by the arbitration clau>e inter.alia on the ground that by Cl. 26 of the General Conditions of Contract every plant, .

machinery and equipment had to be provided by the contrator and any rise nr escalation in the price of su.ch equipment or machinery cannot be the subject matter of compensation by the respondent.

Accordingly, the appeal of the respondent was allowed and the )ud$ment 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 Jeave.

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 ; vas entered into, the relevant portion of which reads as Ul)der ;

"Clause 40.

Except where otherwise provided in the contract, all questions and disputes relating to the meaning of the Specifications, Instructions, designs Drawings hereinbefore mel)tioned 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, Speci, ficatioqs, Estimates, Instructions, Orders or these conditions or otherwise concerning the works or the execution or failure .· . . to execut.e the same,. whethe.r arising during the progress of the work Qr after completion or abandonment thereof shall, after. written notice by eitJ; ier 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.Jhe time of such appointment by whatever designation known, from a panel of names given in Annexure II."

Over and above the extfacted portion, the clause provides for the manner and metho'd of appointing tlie sole arbitrator, the continuance ofthe 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 Arbitrator.

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TARAPORE co. v. COCHiN SHIPYARD (Desai J.) 131

When the arbitration clause was invoked by the appellant, the respondfnt did contend that 'the dispute raised by the appellant was not covered 1!J the arbitration clause. After. specifying its demur, the respondent formulated the points in dispute on which the arbitration was invited to give his award. Undoubtedly, the respondent proceeded to formulate the points in dispute betwee.n 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 entiled to any compensation in respect of the increase in the cost of imported pile driving equipment and technical know-how fees. What is the eifect of referring the specific question of law to arbitration without prejudice to one's right to co(itehd to the contrary will be presently examined. The fact remains that on the. dispute arising out of a claim for compensation on account of the increase in the cost of imported pile driving equipmet. and technical know-how 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 compention would fall within the pµrview 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.

Analysin~ the dis, puies, let it be made distinctly c!eAr tht the appellant asserted that its claim for compensation would be governed by the arbitration clause and the same wa• specifically denied by the respondent saying that t\Je claim would be beyond the pµrview of the arbitration claus;.· 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 arbitratoin 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 t.o the Arbittator for his decision. Parties, therefore, agreed to submit the specific ques- • tion 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 variane about i\. 'Appellant asserted that its claim to compensation would form the subject matter] of arbitration under Clause 40

• .


(1984] 3 S.C.R.

and the respondent contending to the contrary. While deciding this dispute, as to th~ scope, width and ambit of arbitration clause vis:a•vis the dispute raised, it is not necessary to decide whether the Claim was tenable justified or had any substance in it. 'fhat would fall within the second point of reference to the arbitra, tot which opens with a spific 'clause that it needs onJy to be de.cided if the answe.r to the first point of reference, namely jurisdiction of the arbitrator under Clause 40 is in the affirmative meaning thereby that the.dispute so,; aised and subisting between the Nrties-would be covered by the arbiration agreement. In other words, if the dispute is covered by)he arbitration agreement, the arbitrator was further required to decide whether there was any substanc;, 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 up0n first to decide whether the dispute is arbitrable as falling witlfin the width and ambit •or the arbitration . agreement. If the answer is in the affirtnative, then alone the second, point need be examined. If the answer to the first point ofreference is in the negative in that if the arbitraior weie of the opinion that the dispnte is not arbitrable as it would not fa II within the sc't>pe, width afld ambit,· of• the arbitration agreement, it would not be necessary for him to determine wiether the l>ppellant was entitled to recover anything by way of compensation. This aspect is beg analysed in depth to point out that the parties specificall~ referred. . . the question of construction . of arbitration agreement, its idth, ambit and parameters vis-a-vis the dispute raised so as to decide whether the dispute wuld fall within the purview of the arbitration agreement, in. other wrds the jurisdiction of the arbitrator ..

Correspondence placed on record would unmistakably show. that a specific questionas to the jurisdiction of the arbitr.ator was specifically referred by the parties to the arbitrator. Appellant- . contractor by his letter dated March .J, 1976 to the Chief Engit1:eer

of the respondent invited his attention to the claim for compeµsation for.increase in cost of pile driving equipment and technical know-how fees raised about a year.ago and further invited his attention to the Jetter dated 6th October, 197~ of the respondent infprming the appellant that the claim cannot' be entertained. The app2Jlant proceeded further to state as under: _ . '

"Inasmuch as a dispute has. thus arisen between us regarding the above claim, we are invokills die provisions for ·

)'i. '• ·"'

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hRAPORE co. v. COCHIN SHIPYARD (Desai f) 133

arbitration in our contracts and referring this dispute to arbitration." ~

The respondent by bis 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 shor\ly hear f1om them in this connection.

Thereafter the respondent by his letter dated March 29,1976 informed the appellant as under; • "We have dealt with the merits of your claims in the . previous correspo!ltlence on the' subject and we reitera!e that no amounts whatever are dve 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 arbitration.

However, in view of your insistence and without

D prejudice to our position, we propose that, the following be the issues to be referred to arbitration: '

1. Does the claim of M/s Tarapore & Co., on Cochin Shipyard Ltd., for compensation for increase in the cost of imported pile driving equipment and technical know-how fees fall within the purview of the first para of CJause-40 of the General Conditions of Contract entered into between the two parties?

' 2. If the answer to I is in the affirmative in terms of • the provisions. of the concerned contract, are Messrs.

Tarapore Co. entitled to compensation for .increase in the cost of imported rile driving equipment and technical knowhow fees to be paid to them py Cochin Shipyard, Ltd.? If so, what is the amount? ·

3. "Costs."

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 whil~ 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 thep arties on

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SUPREME COURT REPORTS [1984i 3 s.c.R..

the matter of compensation to the decisio11 of the arbitrator and not any partfoular issue or issues. It was also sugg<; sted that framing of the issues will bethe funttio11 of the arbitrator after he enters upon the reference and after he has the pleadings of both the partie3 before him. The appellant also suggested what dispute should be . . . referred to the arbitrator and set it out as under:

"The decision of the dispute that has arisen between M/s Tarapore & Co., and the Cochin Shipyard Limited, regarding the claim of Mfs Tan.ore & Co., for compensation • for the increase in the cost of t\Ie imported pile driving . equipment and of the technical know-how fees."

The appellant proceeded to ; uggest 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 ihree earlier letters dated March I, 1976, March 29, 1976 and April 19, 1976 referred the four points herein before set out for the decision of the arbitrator. \ ..

This correspondence would unmistakably show that while the appellant wanted a general reference about its claim, it was the respondent w_ho 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. Te first , roint extracted hereinabove would clearly show that the specific question about the jurisdiction of the arbitrator to arbitrate , .\ipon the dispute set out in points Nos. 2, 3 and 4 was specifically

refered to the arbitrator .. On the first point, the arbitrator_ had to decide whether the claim made by the appellant and disputdd 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-.nd 4, if and only"if,_upon a true construction of the arbitration clause that is first paragraph of Clause 4_0, 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. I that the arbitrator would have jurisdiction to decide the dispute involved in points Nos. 2, 3 and 4. The1 first point of reference is clearly a specific question of law touching upon the jurisdiction of the arbitrator and this was framed anp 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 -

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TARAPORE co. v. COCHIN Sl{IPYARD (Desai, J.) 135

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 under:

"Does the claim of the claimant fall within the purview of the purview of the firs\ 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 io the arbitrator his jurisdiction to entertain the dispute js questioned. In fact, hereby : 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 l:iuttress the conclusion that it was at the. instance of the respendent that the arbitrator was called upon to decide the question of the scope, ambit and width of arbitration clause the decision on wh\Ch 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 the counter statement filed by the respondent before the arbitrator which reads as under:

"11. It is submitted that the claim in question relating to the increase in the cost of machinery and equip ment as also technical know-how fees payble 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 para)lfaph of Clause 40 of the General Conditions of Contract and thus not arbitrable .

12. It is submittedthat the question of arbitrability of the ·.dispute should be 'decided as a preliminary point before proceeding with the other issues."

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SUPREMB?COURT REPORTS (1984] 3 s.c.R..

The formulation of the specific question of law by the respon dent along with its suggestion to dec.ide it as a preliminary issue and .becoming a party to the agreed draft issue No .. I would conclusively establish. that the specific question of law touching upon the jurisdiction of the arbitrator was referred to the arbitrator for his

deision. Therefore, the conclusion is lnescapable that a specific question of law touching upon the jurisdiction of the arbitrator which is indisputably a question construction of Cl. 40 and therefore a question 6f law was specifically referred by the parties to the arbitrator for his decision and

0 by the terms of Clause 40 agred to ' abide by his decision as final andibinding.

Mr. F.S. Nariman, learned counsel for theappellant urged "that Sec. 16(1) (c) may permit the court to remit or set aside the award on the ground that there is an error of law apparent on the face of it, yet where a specific question of law has been referred to the arbitrator for decision, the fact that the decision is erroneous does not make the award bad on its face so as to permit its being set"aside.

Expanding the submission, it was urged that a decisibn on a question of law by an arbitrator may be given in two different and distinct situations; firstly where while deciding a dispute referred to him incidentally. a question of law may arise which an arbitrator )llay decide in order to dispose of the refefence and if in such a situation any error of law appearson the face of the award, the curt can interfere with the award. But.there is an altogether an independent and a distinct situation in which a question of law might arise such . as where the parties to the dispute may frame the specific question of iaw and refer it to the Arbitrator for his decision. In the later situation, it was urged that the decision of the Arbitrator even if

errneous would not permit the court to interfere with the award.

Proceeding along it was urged that in thi.s case. a specific question of Jaw touching upon the jurisdiction of the arbitrator was specifically referred to the Arbitrator for his decision and therefore, the decision of the Arbitrator is binding on the parties and the court cannot proceed to inquire whether upon a true construction of the arbitra tion clause. the dispute referred .to the Arbitrator for arbitration would be covered by the" arbitration clause so as to clothe the arbitrator with the jurisdiction to arbitrate upon.the ; disl'ute.

Mr. Pai, lear11ed counsel for the respondenfcountered by saying that jurisdiction oNhe arbitrator cannot be left to the decision of tbe "arbitrator so s to be binding on the parties and it is always for the court to decide whether the arbitrator has jurisdiction to decid.e

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TARAl>OkE co. l' COCHIN SHIPYARD (Desai, J.) 1~1 . .

the dispute. Alternatively, it was submittec\ .that the arbitrator cannot by a misconstruction of the arbitration agreement clothe , himself with or . confer upon himself the jurisdiction to decide the dispute. The court it was said has always retains to itself the jurisdiction to look at the arbitration agreement to determine its scope and ambit and if it. is found that the dispute referred to the, arbitrator does not fall within the arbitration agreement,. the court . must interfere on the ground that the award disclosed an error of law apparent on the face of it.

The contention may be examinecJ. both on principle.and on the

precedents.

Complexity of rights and obligations in national and international trade and commerce would certainly generate disputes between tjl.e parties and treated as a normal incident of commercial life artd till commercial arbitration came to be s:cognised as a civilised way of resolving such disputes, prolix and time-consuming litigation was the only method of resolving such disputes. As an alternative , to court proceedings, arl;>itration as a method ofresolving <\isputes by domestic tribunal constituted by the choice of parties became acceptable. The basic difference between -the court proceedings and the arbitration is the choice of the tribunal. Ordinarily, all matters in which relief can be claimed from the court may become subject matter of arbitration. Now if in a iaw court incidental questions of law arise in the course of proceeding, the court has an obligation to decide those questions of law. But when it came to a tribunal not endowed, with the judicial power of the State but by conferment by the. parties to the dispute or• which acquir.es jurisd

0 iction by a submission of the parties to the dispute to invite the decision by the forum of their choice and to be bound by it a que.stion arose whether a pure question of law if at afl can be referred to an arbitrator for his decision and even if he_ decides, can the decisiop be questioned on the ground that there is an error apparent on the face of the award in deciding the questipn. Now as stated a short while ago, a question of law may figure before an arbivator in two ways. It may arise as an incidental point while deciding the main dispute referred to the abitrator or in a given case parties may refer a specific question of law to the arbitrator for his decision. There is no more gainsaying the fact l!.at a pnre .question of law may and can be referred t'o an arbitrator for his decision. Russel on the Law of Arbitration Twentieth Edition at page 22 states as under .

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SUPJ(EME COURT REPORTS

. (1984) 3 S.C.R.

"A pure 'question of law may be referred to an arbitrator; and where such a question is specifically referred his award win not be set asjde merely upon the ground that his decision is wrong."

In Halsbury's Laws bf England Vol. 2 Para 623 4th Edition the statemept of law reads as under:

"If 'a specific question of law 'is submitted to the arbitrator for his decision and he decide it, the fact that the decision is erroneous does not make tlie award bad on its face c so as to .. permit its being 'set aside; and w.here the question referred for arbitration is a question of construction, which is, gencraUy , speaking, a _question of law, the arbitrator's decision cannot be set aside only because the court would itself have come to a different conclusion."

• With the ever widenings expansion of international trade and commerce, complex question of private International Law, effect of local laws on contracts between parties belonging to different.nations are certainly bound to crop up. l\rbitration has been considered a civilised way of resolving such dispute~ 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 pure a question of law. If they do so, with eyes wide open, nd 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

' . . -viey; of the Tribun; tl whose decision the parties agreed to abide by.

Therefore, on principle it appears distinctly clear that when a specific question oflaw is referred io an arbitrator for his decision including the one touching upon the jurisdiction of the arbitrator, th~ decision' o\'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 conten ding that the arbitrator cannDt clutch at or confer jurisdiction upon. himself by rllis-construing the arbitration agreement. ·

This conclusion is borne out by a long' line of decisions both, Indian and foreign to which we would now turn. . .

The earliest case to which we would reff is the decision of the

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TARAPO; E co. v. COCHIN SHIPYARD (Desai,};) 1~9 • House of Lords in KeTanten Government v. Duff Development Co.

Ltd.' in which Lord Trevethin in his speech said as uuder:

"lf your Lordships should be of opinion that the award is bad in law upon its face, it should be set aside, for ihis is not in my view, a submission to arbitration of such a nature that, although the law is bad upon the face of the awan; j, the decision cannot be questioned. That happens only wheri the ·. submission is of a sp1cific question of law and is such that it can be fairly construed to show that' the parties intended to give up their rights td reort to the King's courts and in Jieu thereof to submit that question to the decision of a tribunal . of their own."

Same distinction was also brought out"y Lord Parmoor when he said that 'the principle applicable where a specific question of law has been-submitted to the decision of arbitration is well expressed by Channell, J., in Re King and Duveen,2 in which it was said that where aspecific question of 'law is referred to an arbitrator for nis decision, the award cannot be set asid.e. on the ground of an error apparent. on the face of the award because the question ?f Jaw was wrongly decided.' At .a later stage, it was observed that if the court, before which it is sougqt to impeach the award, comes to the conclusion that the alleged error in law even if it can be maintained, arises in the decision of a question ot .law directly submitted to the, •arbitrator for his decision, t.hen '.he principle stated by-Channel, J., in Re. King and Duven apphes, 1s attracted and the parties having chosen their tribunal, and not having applied successfully to the court under; either s. 4 ors. 19 of the Arbitration Act, 1889, are not in a position to .question the award or to maintain a claim to set it aside.' This decision is an authority of the propositidn tha.t where' . a question of construction is the very point referred fo~ arbitration; then the decis.ion of the arbitrator upon thai point cannot be set aside by the court only because the court would itself have cometo a different conclusion. ·

In F, R. Absalom ltd. v. Great Western (London) Garden Village Society Ltd.' the contention was that the award was bad by reason of an error in law appearing on the face of it. 'l; he submission was

(!) [1923) All E.R. 349

. (2) [1913) 2 K.B. 32

(3) [1933] AU E.R. 616

• 140 - . St!PRBMB Coukt REPORtS (1984] 3 s.c.k . • not before the court and a reference to the pleadings had to be made. for the purpose of ascertaining whether any specific question of law • was in dispute, and Wa3 referred io the arbitrator for his decision.

The pleadings disclosed that the whole dispute between parties was as to the am.ount due to the contractor in respect of the value of the work done and of the materials on the site urio and including a certain pate. In tlie background of this fact, Lord Warrington in his speech said that no specific question of construction arose.

In order to. decide whether.the ii.ward was bad It\! reason of an error of Jaw on the face of it, Lord Russel in his peech pointed out at page 621 that it is essential to keep the case where disputes are referred Jo an arbitrator 1n the decision of , which a question of law. becomes material distinct from the case in which a pecific question oflaw has been referred to him /or decision.' Thereafter he proceeded to state: .

"The authorities make a clear distinction between

these two cases and as they appear to me, . they decide that

in the former case the court can interfere. if and when any error of law appears on the' face of the award; but that in the

lattr case no such interference is._ possible upon the ground that it so appears that the decision upon the question of law is an erroneous one.

In reaching this conclusion;' the decision in Ke I an tan Govern ment v. Duff Development Co. Ltd. was affirmed. On the facts, ff it was found that no specific question of law as referred to tlie arbitrator for his decision.

In /Jurga Prasad Chamria _and Anr. v. Sewkishendas Bhattar !ind Ors'; the award was sought to be set aside inter alia on the ground that t!11l award was bad on account of an error of law. appar, ent on the face' of it. The errors 'of law relied upon were; (a) the arbitrator J:iad • admitted as evidence the family settlement and the partnership arrangement of 1916, neither of which, though each' related (it was said) to immoveable property, had been registered as required by the Indiaµ Registration Act, and (b) the arbitrator. • ought to have held that Anardeyi's suit was in any event barred by limitation. The Privy Council first noticed the issues settled by fanckridge. J.; amongstthem were the two following:

(I) A.I.R, 1949 (P.C.) 334

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TARAPORE co.iv. COCHIN SHIPYARD (Desai, J.) 141

"l(b) Is' the agreement dated 16th November, 1916, relating to the alleged family settlement valid or admissible in evidence? .

(9) Is the plaintiff's ·claim or any portion thereof barred Jjy limitation?,, After tnese issues had been settled, the parties agteed to refer to arbitration "the outstanding matters in the suit." In a motion for setting aside the award jt was urged that there was an error of law apparent on the face of the award both with regard as to the admissibility of the alleged faily settlement and about the suit of Anardeyi being barred by limitation. Rejecting the motion, the Privy 'council observed as under,

• ·"However, tl:iat may be, their Lordships are satisfied that the two points oflaw as to which it is said the arbitrators error vitiates the award were specfically referred to him to

decid~ and if this' is so, it would be <:ontrary to well-established principles such as are laid down in re King and Duveen D and F.R. Absa/om Ltd. v. Great West (London) Garden Village Society Ltd., for a Court of law to interfere with the award even if tlie Court itself would have taken a different view of eitherofihe points of iaw had they been before it."

Turning to the decisions of our Court, reference may first be made to Seth Thaward1~ Pherumal v. The Union of India'. Jn that case, the question was_ whether the award was -bad on account of error of law apparent on the face of it, as provided in Sec. 16(!) (c) . of the Arbitration Act.

Examining this contention, this Court observed as under: ·

"This covers cases in which in errOi of law appears on , the face of the award. But in determinin!!'what such an error is, a distinction must'be drawn between cases in which a question of law is specifically referred and those in which a decision . . on a question oflaw is incidentally material (however necessary) in order to decide the question actually referred. If a question of law is'specifcally referred and it is evident that•' the parties desire to have a decision from the arbitrator about that rathei'then one from the Courts, then the Courts will not , interfere, though even there, there is authority for the view that the courts will interfere if it is apparent that the arbitrator


G' :1

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[1984) 3 S.C.R.

has. acted illegally in reaching his decision, tht is to say, if he has decided on foadmissible evidence or on principles of construction that the law does 1,1ot contenance o, r something of that nature. See the speech of Viscount Cave in Ke/antan Government v. Duff Development Co. at page 409. But that is not a matter which arises in this case.

The law about this is, in our opinion the same in England as here and the pril)ciples that govern this class of case have been reviewe.d at length and set out with clarity by . the House of Lords in F.R. Absalom Ltd. v. Great Western (London) Garden Village Society and in Ke/antan Government v'. Duff Deefopment Co. In Duiga Prasad v. Sewkiii.· hendas the Privy Council applied the, law expounded in Absa/om's case tci India; see also Chainpsey Bhara & Co. v.

Jivraj Ba/loo Spinning and.Weaving Co. and Saleh Mahomed

Umer Dossa/ v. Nathooma/ Kessamal. The wider language used by Lord Macnaghten in Ghu/am Jiliini v. M uhmmad .Hassan<b.aci reference to the revisionail powers of the. High Court under the Civil Procedure Code and must be. confined to the facts of that case where the question of !aw involved there, namely, limitation, was spec!ficaUy referred.

An arbitrator is not a conciliator and cannot ignore the law or mi; apply it in.order to do what he thinks is just and reasonable.

He is a tribunal selcted by the parties to decide their disputes according to law and so is b01md to follow, and apply the Jaw, and ifhe does not he can be set right by the Courts provided his er•or appears on.the fact of' the .• award. The single exception to this is when the. parties choose specifically to refer a question of law l\S a seperate and distinct matter."

• p - .

The Court fl)rther proceeded to examine whether in the facts . 'Of that . case, the arbitrator was speci'fically asked to construe

clause 6 of the contr>ll:t or any part of the"contract or whether any question of law was specifically referred. The Court emphasised . the word 'specifically' by pointing out tha_t, parties who made a reference to arbitration have the right fo insist that the Tribunal of their choice shall decide their dispute according to Jaw, so before the 'right., i:an be denied to them in any particufar matt_er, the court must be very sure that both sides wanted the decision of the arbitrator on a point of Jaw rather than that of the Courts 'and that they wanted his decision on that point to be final. . The Conrt then proceeded to examine the various clauses of the contract and held tllat tl1is is not the kind of specific reference on a point of law that

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TARAPORE.CO. v. COClflN SlflPYARD (Desai, J.) • 143

_ the law of aritration requires. The C_ourt held that when a. question of law is the point at issue, unless both sides specifically agree . to refer it and agree "to be bound by the arbitrator's decision, the jurisdiction of the Courts to set an arbitration right when the error is apparent on the face of the award is not _ousted. The mere faCt , that both parties submit incidental arguments about a point of law -

 in the course of the proceedings is no~ 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 arbitratot, and agree to be bound by it, the _Cciurt cannot set aside the award on the ground of an error oflaw apparent on the face of it even though the decision of the arbitrator may not acsord with the law as understood by the C"ourt. 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 award. ·

In M/s Alopi Par shad & Sons .Ltd. v. The Union 'of India'

the Court reiterated the observation in Seth Thawardas's case and 'D observed that if a specific question is submitted to the arbitrato~- and he answers it, the. fact that the answer involves an erronous decision in point of law, does-not make the award bad on its_ face so as io permit of its being set aside. _In the facts of the case, this Court agreeing with the High Court held that ther'e is no foundation-for the view that a specific reference, submitting a question of law for the adjudication of the arbitrators, was made. It may be st3cted in passing that a brief reference to the claim put forward before the arbitator on behalf of.the appellants in th.at case, set out . at page 798 of the report, would clearly, show that no specific question -of law was referred by the parties for .the decision of the arbitrator. Mr. Pai learned counsel for the respondent pointed out that the Court has also observed following the deCision, of the Privy , Council in Chatnpsey Bhara and Company v. Jiv.aj Bal/60 Spinning and Weaving Company Ltd'., that 'theextent of the jurisdiction of the court to set aside an award on the grouµd of an error in making the award is well-defined. The award of an arbitrator may be set, . aside on the ground of an etror on the face thereof only when in the award 011in any document incorporated with it, as for instance, a note appended by the . arbitrators, stating the reasons for_ his decision, there is found some legal proposition which is the basis of the award and which is erroneous. This observation does not help

(I) J[1960]'2 S.C.R. 793 __

(2) Law Report$Q l-A 324

.. • 144


(19&4) 3 S.C.R • • in deciding the point under discussion and just after this statement, there follows the obsevation about the effect of referring a specfficquestion of Jaw for the decision of the airbitrator and the jurisdiction-of the Cort to set aside 'the award on the grol!nd 'that !herds an error of law apparent on the face of it. ' .. .In Union of Indiav: A.L. Ra//ia Ram1 this Court after referring to the decision in Champs.y '/Jhara and Coinpany reaffirmed that, the rule in that decision does not apply where questions of law are-specifically referred to the arbitrator for hii decision; the award of the arbitrator on those questions is binding upon the parties, for by referring specific questions tlw parties desire to -have a decision from the arbitrator on tho§e questipns raiher than frqm the Court and the Court will not, unless it is satisfied that the arbitr.ator had proceeded illegally interfere with the decision. After referring . to the decl- . sion hereinabove examined by' us, the Court came to the conclusion that no specific question of Jaw wer.e referred to the arbitrator's the decision whereof is binding upon the parties. .

In M/s Kapoor Nilokheri Co-op. Dairy Farm Society Ltd. v. • • Union of India and Others• the Court agreed with the submission .on behalf of the respondent Government of India that the appellants having specifically stated that their clais are bsed on the agreement and on '.nothing else and all that the arbitrator bad to decide . was as to the effect of the agreement, the arbitrator bad really to decide a question . of law, i.e. of interpreting the document, the agreement dated May 6, 1953 and therefore the decision is not open to Challenge. In fact, this decision is hardly of any assistance and we leave it' at that.

In N' Chellappan v. Secretary, Kera/a State Electricity Board & Anr•. by a consent order, the umpire was _appointed as the sole arbitrator, and the respondent-Board without a demur participated in the proceedings before the umpire and took the chance of an award in its favour, this Court said hat it cannot turn round and say that the umpire. bad no inherent jurisdicti6n and therefore its participation in the proceedings before the, um.pi re is of no avail. This decision is not of much assistance on the point!undet discussion. Mr. Pai

on the other band urged that the jl/risdiction of the afbitator could not be determined by him nor can he arrogate jurisdiction to himself

(I) (1964] 3 S.C.R. 164

(2) A.LR. 1973 S.C. 1338

(3) (1975) 2 S.C, R:1*!1

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• TARAPORB co. v. COCHIN sHiPYARD (Desai, J.) 145, , by mis-construction 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. 111 terms, he stated that the issue about the jurisdiction of the arbitrator has never been parted with by . the Court-Generally speakings, common law courts were very reluctant . to part with its 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 himseif by deciding in its own favour some preliminary points upon which its jurisdiction rests. In fact, that is a non-issuse. It cannot be dispute.d that even the question of jurisdiction of an arbitrator can be the aubject matter of a specific reference.

If.the parties agree to refer the specific question w)lether th~ dispute raiseq is covered by the arbitration agreement, it becomes a specific question of law even if it involves the jurisdjction of the arbitraor _and if it is so, a. decision of.the arbitrato_r 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

rfer to those decision

In Produce Brokers Co. Ltd~ v. Olympia Oil aniJCake Co. Ltd.,1

it was held that "if the question which the arbitrator takes upon himself to decide is not in fact within the' submission the awa_rd is a nullity. The arl/itrtor annot make his award binding by. holding contrary to the true fac.ts when the question which he !lffects to

determine is within the submiision." Let us emphasise the ratio of the decision that the arbitrator takes upon himself to decide a question not within the submission. This would mean that the question of law was not specifically referred to thy arbitrator for his decision but it was incidentally raised. In fact, nowhere .it was contended that ariY specific question of law was referred to the arbitrator and if so what would be its effect on the binding character of the d.ecision was. ever raised in that case. In that cllse after an

answer was returned to the Special Case submitted for the opinion of the court, the Committee of Appeal unreservedly accepted the said answers upon the construction of the contract as a matter of

lawapart from the custom of.the trade, but proceeded further to hold that there was a long established and well-recognised custom of the trade .in cases of re-sales that buyers under the forrn of contract

(I) [1914-!Sl AU ~R 133


[1984] 3 S.C.R, • in question impliedly' agreed with their sellers tlrat they would accept the original Shipper's appropriation if passed on without delay. On a motion by the buyers to have the award. set aside, of which notice was glven, the Divisional Court held that the arbitrators had no . . jurisdiction to find conclusively the existence of a trade custom, and the Court of Appeal on the authority of prr.cedents bui against their own opinion, affirmed the decision. The appellant-seller's company appealed to the House of Lords. , Lotd Loreburn in his speech -

observed that 'these men of business made contracts and therein agreed to arbitrate upbn all disputes arising out of 'their contracts.

Yet there Iiave already been seven distinct stages of argument and decision, four of them in courts of law, upon a dispute arising on those contracts, and the end is not .yet. I do not know how many more stages there will be. Pa1ties have a right to prefer .what some may consider the imperfect though expeditious wisdom of arbitrators to the slower and more .costly justice of His Majesty's courts. It is to be regretted when they have to encounter the inconveniences of both methods with the advantage 01. neither." Approaching the matter from this angle, the appealwa:s allowed and the decision of. the 9ommittee of Appeal, taking note of the custom of th~ trade, allowed the award to stand. This decision can in no way help the respondent.

In Attorney Oeneral For Manitoba v. Kelly and Others1 it was observed that "Whenever therels. a difference of opinion between the parties as to the. authorify cqnferred oh an umpire or arbitrator under an agreed submission the decision rests ultimately with the court and not with the umpire or arbitrator." This is predicated upon a proposition that common ll!w courts were reluctant to part with their jurisdiction to set, atnaught an award if th~ arbitrator confers jurisdiction upon himself by deciding in his own favour some preliminary point 'Upon which his jurisdiction rests.

Mr. Pai also referred to the decisions of.the Privy Council in Champsey Bhara & Co, and Hirji Mu/ji v. Cheong Yue Steamship Co.

Ltd.• Both these decisions. are of no assistance on the question about the reference of a specific question of law touching upon the jurisdiction of the arbitrator fr his deeision and its effect. Jn fact. the decision in Champsey Bhara' s case clearly turns upon as to what constitutes an error of Jaw apparent on the face of the award . •

(1) [1922] All. E.R. 69

(2) [1926] All. ER SJ

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TARAPORE co. y. COCHIN SHIPYARD (Desai, J.) 141

The next case referred to was Heyman & Anrs. v. Darwins Ltd.1 It reasserts that as a rule the arbitrator cannot clothe himself with jurisdiction. ~-

Turning to the decisions of this Court, .reference was first made to Jivarajbhai Ujamshi Sheth & Ors. v. Chintamanrao Balaji & Anr.• Shah, J. speaking for himself and Jilstice Sarkar at page 499 observed . that 'this is not a case in which the arbitrator Jias committed a mere error of fact or law in -reaching his conclusio11 on the disputed question >Submitted for his adjudication. It is a case of assumption of jurisdiction not poss_essed by him, and that renders the award1 tci the extent to which it is beyond the arbitrator's jurisdiction, invalid".

It may be pointed out that these observations are in the context of

tlie facts of that case and there was no contention before the cou.rt that any specific qu, estion of law touching upon the jurisdiction of the arbitrator was referred to-for his:decision by the parties.

The last decision in this context referred to was Dr. S:B. Dutt

v. University q{ Delhi.8 In that case the .arbitrator gave by his award a direction to enforce the contract of personal service. This _ wautated as an error of law apparent on the face of the award and

the award was set aside. Again it may be pointed out that tpe

reference to the the point set out in the .letter of reference extracted at page 1240 clearly spells out that no specific question oflaw touching upon the jurisdiction of the arbitrator was referred to the arbitrator for his decision.

' On a conspectus of these decisions, it clearly transpires that if a question of law is specificially referred .and it becomes evident that the parties desired to have a decision on the specific question from _ th_e arbitrator about 'that rathr than one from court, then the court will noi interfere with the award of the arbitrator on the ground that th'ere is an error of law apparent on the face of the award even if the view of taw 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's case which follows earlier decisions in England and India, it has not been departed from.

Th_e view canvassed for by Mr. Pai that common law courts were very reluctant to part with

its jurisdiction has hardly any relevance where a specific qu, estion of

(I) [1942! (I) All E.R. 337.

(Q) [1964] S SCR 480.

(3) (195?1 SCR 1236'

• 148

. SUPREME COURT REP OR TS [1984) 3 s.C.R.

. 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 doi'l not ac.cord 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 it.

Before we conclude on this 'pojnt we must take note 6f a contention of Mr. Pa.i that the respondent cannot be 'estopped from contending that the arbitrator had no jurisdiction lo entertain the dispute as the respondnt agreed to the submission without prejudice to its rights to contend t, o _the contrary .. It is undoubtedly true that 'in the letter dated March 29,1976.by which the respondent agreed to refer the dispute to the arbitrator. it was in ternis stated that the reference is being made without prejudice to the positi.on of the resppndent as adopted in the ltter meaning thereby without prejudice to its rights to contend that the claim of the appellant is not covered by the arbitration clause. In the context in which the expression 'without prejudice' is us.ed, it would only mean that the respondent

reserved the right to contend before the arbitratpr that the dispute is not covered by the arbitration clause. It does not appear that what was reserved as a contention that, no specific question of law was specifically referred to the arbitrator. It is difficult to spell out , such a contention from the letter. And the respondent did raise the contention before the arbitrator .that he had no jurisdiction to entertain the dispute as it would not be covered by the arbitration clause. Apatt 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 l?roper reading of the _correspondence .and-in the setting in which the term is used, it only means that the re.spondent reservedto itself the right to contend before the arQ, jtartor that a dispute raised or the claim made by the 'contractor was not . covered by the arbitration clause. No other meaning can be as'signed to it. An action taken wihout prejudice to one's right cannot • necess.arily mean that the entire action can be ignored by the party taking the same. In this case, the respondent referred the specific . question of )aw to the qrbitrator. This WflS according to .the respondent without ptejudice to its right to. contend that the c.Jaim or the dispute. is not covered by the arbitration clause. The contention was to be before the arbitrator. If the respondent warited to sscrt that it had reserved t9 itself the right 'to con!e.nd that no specific question of law was referred to the arbitrator, in .the first instance, it should not have made the reference in the terms in which it is made but should have agreed to the proposal of tile appellant

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tARAPORE co. v. COCHIN SHIPYARD (Desai, J,) 149

to make a general reference. If the appellant insisted on the reference of a spcifi:c .question which error High Court appears to have committed, it could have declined to make .the reference <Of a specilkquestion of iaw touching his jurisdiction and should have taken recourse to the. court by making an appi'ication under Sec . 33 of the Arbitration Act to have the. effect of the arbitration agreement determined by the court. Not only the re'spondent did not have recourse to an application under Sec .. 33 of the Arbitration Act, but ofits own it referred a specific question of Jaw to the arbitrator for his decision, participated. in the arbitration proceeding ini(ed, the arbitrator to decide the spedfic question and fook a chance of a decision. It cannot therefore, now be permitted to turn round. and contend to the contrary on the nebulous plea that it had referred the, claim/dispute to the sole arbitrator without prejudice to its right . to contend to the contrary. Therefore, there is no merit in the contention of Mr. Pai. •

, In this case, as earlie~ pointed out a _specific question as to whether the claim of compe!lsation made by the appellant-contractor and demurred arid disputed by the respondent wQuld be covered within the scope, ambit and width of the arbitratioi. clause, wa~ specifically referred by the parties for the decision of\the arbitrator.

Therefore, it is a case where a specific question 'of law touching upon , Jhe jurisdiction of the arbitrator was referred for the decision of the arbitartor by the parties.' Even if the view taken by the arbitrator may qot accord with the view of the.court about the scope, ambit and wi<!!h of the arbitration clause, the award cannot be set aside

on the ground that there is an efror of law apparent on the face of the award. The view taken by the High Court is palpably untenable a.nd has to be reversed. On this short paint, the appeal can be all6wed ... 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 piie driving equipment and technical know-how fees would or would not, be covered by the first Pilragraph of Clause 40, we would briefly examine the same to point out that it would be covered.

In order to ascertain whether 'the claim for compensation for incr_ease iu the price of pile driving equipment and technical knowh9w fees would be covered by the arbitration clause, it is necessary briefly to refer .to the negotiations and discussions leading to the formation of the contract for construction of the Repair Dock and the Building Dock. The value of the works to be executed was

150 SUPREME'couRT REPo~'rs [1984j s.C.R .

. A over Rs 24 crores. In respect of the construction of Repair Oock,

there was only the tender of .the appellant land. in respect of the Building Dock,. there were two tenders:· one of the appellant and another by M/s National mji!ding Construction Corporation, the tendered valueo of the latter being double . that of. the former.

Indisputably, tqe respondent had a very limited or realistically no .• B choice. In such a situation the Tender Committee took notice of the fact of the. pol:lr response to the invitation to tender. The

Committee took notice of such salient features of the work being the complexity and magnitude of the works to be undei'taken by any Indian Contra9tor and the non-availability of plant and equipment C required for the works and, more especially that if the contractor ·

was to procure the specialised equipment required for the works, there was hardly any assurance that after the works were over, the machinery would be so much depreciated to have a11y substantial •use or utility to the contractor. Iri the 'invitation to te.nder, it was indicated that requisite foreign exchange for importing pile driving equipment and machinery, spares and technical know-how amounting to about Rs 2 crores in all would be made available to the contractor from the 11th Yen Credit from Japan, subject to his getting indi: genous cloorance and providingd.etailed justdication. Annexure IV to the General Conditions of Contract clearly. specifies that the tendereis while quoting shall give separately the full details' of the E equipment for which they would be requiting foreign exchange

 assistance. And they shall also idicate the financial implication if any, . for providing not providing the foreign exchange assistance indicated for th~ various equipments. Two things emerge from recital of the facts' herein enumerate<; l i'n the course of formation of. tbe contract: (1) that the pile driving equipment will have to be F imported from outside India and technical know-how fees will. have to be paid both in foreign currency and (2) this would necessitate investment of about Rs 2 crores by the contractor. The_ contractor in his letter dated July 14,1972 specifically invited the rospondent to confirm the modifications in the terms of contract as set out therein.

G Jn paragraph 31 (E) (!), the contractor states that all foreign exchangefor the equipment, spares, technical know-how and hiring of experts shall be provided to the contractor and that the total foreign exchange on all these accounts will be about Rs 2 crores. A sort of an assurance was thus extended to the contractor thatthe same wquld .be made available to him from the 11th Yen credit from H Japan. This is.not disputed. It is also an admitted position that , the neeessary equipment, machinery, spares and technical know-how were not available from Japan and the availability of the I Ith

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!AkAl>oRilcp. ~. cocit1N sarPYARD (Desai, J.) 151

Yen credit from Japan lost all significance. Further the respondent A by its letter dated January 24, 1973 to the appellant while accepting the tender of the appellant.on behalf of Cochin Shipyard Limited specifically stated as under:

''You shall provide at your cost all construction' plant and machinery (including that requiring import) for all items of work including RCC piling and Steel Sheel Piling Works.

1 Departmental machinery likely to be made. available for issue to the Contractor shall be as -in Annexure IV of the General Conditions of Tender.

You shall furnish an inventory. of all plant and machinery propos.ed to be used. on the works including items of imported machinery with probable date of their availability at site for use or! the work. This should match with the Detailed Working Programme indicated as above."

At this stage a reference to the.addition~! Terms and Condi- Q tions/Modifications to the General Conditions and Specifications of

t~~ Departmental Tender Documents, \(ould be advantageous. It _reads as under: • ·

"All Piling Equipment shall . be procured by the Contractor ........................ .... 1 •........... ; ......................... . ............. Selection of equipment will be done by the Contractor

i11 consultation . with the Cochin Shipyard authorities. No hire charges for the equipment procured by the. Contractor is payble to the Shipyard .................................................. .. ................ Requisite foreign exchange, for importing piling plant and machinery, spares, technicai know'-how and hiring of experts necessary for both the Dock Works, videWork Order ........ for Repair Dock etc., amounting to about Rs 2.00 crores in.all will be m1de available to the Contractor from the ! Ith Yen credit subject to his getting indigeous clearance and proyiding detailed.justification" .

It is thus unquestionably established that the appellant whose tender was accepted after negotiations and scrutiny by the Tender Commitee was expected to invest Rs 2 crores in importmg pile driving equipme)Jt and technical know-how fees. The tender was accepted and a formal contract was entered into on his basis. 1n"

works contract of such magnitude, the value whereof was over Rs. 24 crores, and which was being undertaken by an Indian contractor for

ff

SUPREME COURT REPORTS [1~84] 3 s.c.R.. j

the first time negotiations prior to the finalisation of the contract and tlie correspondence leading to the formation of contract supply the basis on which contract was finally entered into. Undoubtedly, . if in th'e final written contract, there . is something contrry to the basic understanding during the formative stage of the contract, the written oiltract would. prevail. But if the contract does not indicate 1

to the contray and the assumptions appeared to be the foundation of the contract obviously that aspect cannot be overlooked while determining what were the obligation undertken under th, 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 technical _know-how for its optration, the same would be leased to the contractor at negotiated fates or (ii) the contractor were to impor.t the same the rates be paid to the contractor. The second alternative was accepted by the parties on the f1mdamental 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 not left to guess work, but is specifically referred to in the.notice inviting tender and in Ille specification$ and modifcations as addenda to the General Comlitions of Contract. It was clearly understood between .the parties that the contractor has to invest roughly Rs. 2 crares in foreign, ' exchange for iporting pile driving equipment and technical knowhow fees without which this work could never have been .undertaken and without which it wonld not have been entrusted . to the contractor. The contractor when be quote his terms must obvimrsly ·. 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 flies in the face that aftrer the work ws over the imlJor"ted machinery would depreciate to this extenfthat it would h.ave hrdly any use of utility to the contractor s noticed by the Tender Committee. The rates quoted by the contractor were obviously interrelated to the basic assumption. The fact that such was also also the understanding of the respondent may now be pointed out.

The respondent by its letter dated July 31, 1973 to Industrial Adviser (HME), Directorate General of Technical Development requested him .to issue necessary clearance to the appellant fot import of the equipment set out in the Annexure to the letter on the ground that the appellant tried its level best to get the equipment from the Japaneses sources, butthey could not get positive resitive . ' . '

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TARAPORE co. v. cocillN SHIPYARD (Desai, J.) 153

response for such equipments. They had also tried their best to get

.sitable offers from U. K., U. S. A., USSR, Canada, West Germany and Holland. It l"as also pointed aut that the respondent itself also made independent enqujries in Japan for getting suitable offers for tl1e above equipment without success. Thus it . becomes clear' that to the knowledge of the respondent, the 11th Yen Credit became irrelevapt. The Government of India by its letter dated September 1,1973 to the respondent conv(>yed its approval to the release of; the foreign exchange in favour of the appellant to the extent of Rs 2 ILSO lakhs (Rupees two crores eleven lakhs and eighty thousand only) equivalent to DFL 9, 442, 7.00 at the specified exchange rate. Therafer the appellant by its letter. dated May 28,1975 amongst others requested tjie responde.nt to take note of the fact that the tendered tales were based ou certain total cost of machfoes which Iias since gone up considerably rendering the rates' no longer . " workable; The contractor proceeded to point out the utter irrelevancy of the rates in view of the higher outlay of imported. machinery and technical know-how. It pointed out the loss sustained by the contractor and requested fqr compensatfon in this behalf.

This was followed by the letter dated Jnly I, 1975 by the contractor io the respondeht, emphasising thefact that ihe tendered rates had become - unwofkable and unrealistic owing to the increse in the cost of equipment. know-how etc. as a result of the increase in the foreign

exchange rate of Dutch Guilders as related to the Rupee. In response to the last letter the respondent replied by. its, letter dated July 2, 1975, relevant portion of which may be extracted:

"In this connection, a kind reference is invited to your letter dated the 14lh July, 1972 (which forms a part of the contract documents) wherein you had indicated that the rota/ foreign exchang~. required by you for the equipment; spares, 'technical know-how and hiring of experts, was expected to be about Rs 2 crores. From the d.ata enclosed with your . letter under reply, it is seen that the foreign exchange.expenditure incurred by you SO far in connection With this Contract had been less than Rs 2 crores. In the circumstances; it is difficult to accent the position that your tender was based on assumptions indicated by you and that the rates for pile driving should now be revised.:'

This letter furnishes proof, if one was needed that parties were ad idem that the investment for imported pile driving equipment and foreign exchange know-how would be about Rs 2 crores. The

SUPR~ME COURT REPORTS [19&4i 3 s.c.k. •

respondent does not .contest the claim for ompensation under this head as is npw sought to. be done on the ground that as the contractor had to provide imported pile drivjng equipment and technical know-how, the respondent is not entitled to compensation even _if the initial estimate has been found to - be unrealistic .. On the contrary the claim for compensation 1s disputed and controverted on the'gr0und that the foreign exchange expenditure incµrred by the' contractor so far in connection with imported pile driving equipment and technical know-how has been less than Rs 2 crores. From this correspondence, it. wolud emerge that both the parties were agreed that the.contractor wonld have to invest Rs 2 crores in foreign exchange for importing pile driving equipment and technical know-how wh.ich could only be used after approval of the same by. the respondent. The appellant by its letter August 9; 1975 contended. that

escalation of expenditure under this head is taken care of in the contract .and more speCifically in clauses 13 and 6 o( the works

order: W'e would have occasion t~ refer to these clauses. a little latet.

The respondent by its letter dated August 29, 1975 reasserted its

position that the foreign exchange element of the expenditure incurred by the contractor works-out to Rs 1.96 crores, which is foss than the figure of Rs. 2 crore.s that was expected to be invested in foreign exc4ange-which was to be provided by the contracto.r, .

The respondent.also referred to th~ assessmnt of e.<penditure made by the contractor as per its letter dated July 14,1972. This has already been referred to by us. The respondeni further asserted that the estimate so ma'!te till that date has not been exceeded and tJ1eiefore, any argument based on fluctuation in the exchaqge rate is not valid or tenable. It may be repeated that the refusal to entertain the claim for compensation was predicated upon. the. estimates having not exceeded the basic. minimum of Rs. 2 crores by the contractor on which rates were worked out and agreed, and not that such claim cannot be entertained under the contract. By its Jetter dated September 18;1975, the contractor reiterated it~· position; In its letter dated October 6, 1975, the respondent when it was faced with the situation that the expenditure incurred under this head in foreign ex- change had risen to Rs 214.33 lacs i. e. it had exceeded the expected investment of Rs. 2 croresunder this head, took !I summerasult ; rnd stated that therespondent had at no stage stated that the contractor was 'not entitled to'any claim because the amount of foreign exchange has not yet exceeded Rs 200 Iak!).s'. One has merely to call attention to the two letters dated July '2, 1975 and August 29 1975 to reach the conclusion that tJie respondent has gone back upon its original vositio11 and having found that the expenditure under this head has

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'rARAPORB co. Y. COCHIN SHIPYARD (Desai, J.) BS •

tgone up beyond the estimated expenditure made a volte face, the two positions. so adopted being entirely inconsistent with' each other Tl; tereafter, the matter was referred to arbitration. .

From the commencement i.e. from tl\e 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 11th Yen Credir.

As the equipm3nt was not available from Jap11'n, the availabilty of Yen Credit becqme otios" .from the contractor's point of view. At the instanc, e of and with the active participation of the respondent, the contractor made enquiries in various countries and ultimately procured the necessary equipment and technical know--how 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 lakhs for imported pile driving equipment and spares and Rs. 18,64, 337.61 on technical services-cum-know-how fees and a further sum for higher custom duty. Details of the claim have been set out in Annexures 1 and 2 reSf>ectivel~ to the statement of claim submitted by 'the appellant to the arbitrator. The respondent in its counterstatement did not controvert the details of the claim and the expenditurejnvolved under the two heads-_ The whole of the counter claim' was concerned with the denial of its liability io compensate the contractvr coupled with the contention that the claim would not be covered by the arbitration agreement and therefore,· ihe arbltator ,

had no jurisdiction to entertain and adjudicate the claim. ·· It may also be mentioned that at, no time since the award, the res;))n1n t ever disputed or questioned the amount awarded "by the arbitrator.· It is thus satisfactorily established that the contractor had to invest something far in excess of Rs. 2 crores which it was expected to invest. ih foreig~ exchange for imported pile drivijig equipment and techmcal know-ho_w fes. The whole contract was concluded on this understanding. Being aware of the fluctuating position in this b_ehalf, the contractor l:ad tendered two alternative rates for comple

hon of the, work as pomted earlir ; one based on equipment being

imorted by the respondent and leased to the appellalJt and alterna~1ely rats on the basis that the contractor would import pile dnvmg equrp, ment and technical know-how. In respect of the second alternative, which was ultillllitely agreed to between the parties 1 was clearly and unmistakably understood between. the partiest hl .. • •

:.Cl.

SuPREME COURT REPORTS [! 984] 3 s.c.k

the contractor would have to invest Rs. 2 crores and the rates were co-related to this investment with the knowledge of the fact that when work was completed, the equipment would' depreciate to the tnne of 75% of its capability and WQnld be hardly of an¥ use to the contractor. The estimated expenditure having far exceeded, a claim for compensation would certainly be tefiable .at the instance of the contractor. . .

The High Court quoted clauses 16, 26 hnd 31 in its judament • 0 but did nof dilate upon the provisions of the clauses so a:; to corelate them with Its decisiatl. Clause 16 envisaged a situation where .. since the formation of the 'contract any fresh law is enacted which has the bearing on the price of materials incorporated in the works and/or wages oflabour, the terms of contract shall accordingly be varied. Clause 26 provided for supply of materials, plants, tools, appliances etc. by the contractor. Clause 2 provides for the liability of the contractor to supply construction, plant 'and machinery .. including the items .to be imported and a further obligation. is cast on the contractor to Juruish inventory of the same.

Clause 3·1 amongst others, provided that the pile driving equipment shall be procured by the contractor, and the selection of equipment shall be done by the contractor, in consultation with the respondent. These clauses were presumably referred to in the context of. an arguwent that the pnce escalationdause does not cover the claim for compensation for dditional expenditure on imported plant and machinery and technic)ll know-how because the contract substantially provides for the s.ameto bl supplied by the contractor.' In our opinion, this over-simplification of the clauses of the contract involving works pf 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 rate& were predicated upon and co-related_ to t)lis undt!standing. When an . ag, eement is predicated upon ati agreed fact situation, if the latter ceases to exist the agreement to that extent becomes irrelevant or otiose. The rat.es j'layable to J, he contractor were r.elated to the investment of Rs 2 crores under this head by the contractor. Once the rates bec!lme 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 est4blished that-the claim arose . while iWplementing t.he contract and in_ relation to the contract.

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TAR.I.PORE co. v. cocl!iN sHiPYARD (Desai, J.) 157 • The next question is whetherlhis claim made by the contractor and disputed by the respondent wpuld be ccivered by the arbitratfon clause. The arbitration clause has already been extracted. Even the High Court admits th<1t clause 40 is very widely worded. It inter alia provides that.all questions and disputes relating to the meaning of the Specifications Estimates, InstructiOns, Designs. Drawings bereinbefore mentioned and as to the quality of the Workmanship or matelials. used on the work or as to the any other questions claim, right, matter or thing whatsoever .in any. way arising out of or relating to the contract---:--..._-:-_ or otherwise concerning the . works or the execution---'---whether arising during the progress of the work or after completion----'--;---shall be referred to the Sole Arbitrator etc." The scope; width and the ambit of the Arbitration clause is of widest amplitude and any claim arising out of or relating to the contract or otherwise concerning the works or the execution thereof would be covered by the arbitration clause.

The material portion of clause 40 which would assist us in deciding the questions is .'claim' right matter or thing whatsoever in any way arising out of or relating to the contract~---------·-- . estimates or otherwise concerning the works or-the execution. etc." Briefly stated any claim arising out of or relating to the contract, estimates or otherwise concerning the works or the execution thereof would be covered by the arbitration clause. The question to be, posed is ."does the claim made by the contractor arise outof or relates to the contract, estimates, or is otherwise <:oncerning works for execution thereof? Phrases such as 'claim arising out of contract' or "relating to the contract' , or 'concerning te contract' on proper constrnction • would mean that if while entertaining or rejecting the claim or the dispute in relation to C:1; tim may be entertained or rejected after . ,, reference to the contract, it is a claim arising out of contract. Again

the language of cl. 40. shows that any claim arising out of the contract in relation to estimate 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 bther than 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 !o the contract or execution of the.works would comprehend.

Within its compass a claim for compensation related to estimates .and arising out ofthe'contract.

The test is whether it is necessary to have recourse to the contract to settle.the dispu.te that'has arise.n.'

VJ (See Russel onJ\rbitration 20th ed. pag< 85/

158 SUPREME COURT RllPORTS

[1~84] 3 S.C~R.

We may now tum to some. decision to which our attention was drawn. The first case we would like to.refer to is A. M. Mair & Co. v.

Gordhanda.•s Sagarmull.' The Court was concerned with the arbitra tio.n clause drawn up as ; "all matters, question, disptes, differences •

and/or claims, arising out of and/or concerning, and/or in connection and/or in consequence of, or relating fo, the contract etc."

The question arose whether the due dateuJJder the contract was extended within the time, earlier reserved. The arbiirator held that the due date of the contract has been extend.ed by a mutual agree ment and the respondents were held liable to pay a sum of .Rs. 4,116 together with .interest at the rates specified in the award. It was contended that the, dispute is not covered by the arbitration clause.

This Court whilli holding that the dispute is covered by the arbi.trar tion clause observed that looking to the rival contentions, such a dispute, the determination of which turns on the true coristr-uction 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 cove.red by the arbitration clause: •

In Ruby General lns.urance Co. Ltd v. Pearey Lal Kumar AIJa .Another, this Court was concerned with the clause in a. policy of insurance .which provided that differences .arising out of the policy .11hall 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 wh.ich the parties are bound is necessary for the purpose of determining the matter .in dispute between them .. If such F recourse to the contract is necessary, then the matter must come within the scope of the arbitrtor's jurisdiction."

In Union af India v. Salween Timber Cou; truction (lndia) & Ors.• this Court observed that the test for determining the question is whether recpurse 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

ff (1) [i950]S.C.R. 792.

(2} ]19521 S.C.R. 501. .

(3) [1%9] 2 S.C.\l. µ4,

TAll.APORB CO. v. COCHIN SHIPYARD (Desai, J.) 159

the scope of the arbitratron clause and the aiitrators have jurisdiction A to decide the same. In so stating the proportion of [aw, reliance was placed on Heyman & Anr. v. Danvins Ltd.'. in which it was held that 'where the parties are atone in asserting that they entered into . • a' binding contract, but a difference l!as arisen between them whether there has been a breach by one side or the other, or whether circum- B stances have arisen which have discharged one or both parties froln further performance, such differences should be regarded as differences which have arisen in resp\'Ct of or 'with .regard to, or 'under' the contract, .and an arbitration clause whicl\ uses these, or. similar expressions should be construed accordingly. The Court affirme.a,. the decision in Ruby General lnsurance Co. Ltd. case. c

In Astro Vencedor Compania Naviera S. A. of Panama v. Mabanaft G. M. B. H. The J)iamianos' a question arose whether a claim in tort would be covered by the arbitration clause? It was admitted that "1'e claim for wrongful arres\ is a claim in tort. And D it was contended that a claim in to1 t cannot come within the arbitration clause. The Court of Appeal speaking through Lord Denning held that the claim in tort would be co".ered by the arbitration clause, if the claim or the issue has a sufficiently close connection with the claim under the contract.

In Gunter ilenck v. Andre & ClE. S. A.' the Court (Queen's 'BenchDivisb n (Commerci'al Court) help thit the words 'arising out

of clearly extend the mooning than would otherwise be applied to the clause were it limited: to 'all disputes arising under the onfract. F

In the facts before .us, th~ respond en~ n para t of its counter• slatement filed before 'the arbitrator spec1f1ca!ly referred to clause. 16 of the General Conditions of Contract and to the AaditiOnal Terms and Conditions Modifications forming part of 'the contract G document. In paragarph II, it was stated that th~ 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

O> [19421 A.c. 3S6 @ 366.

(2) (19711 2 Q.B, 588.

(3) (1970) I Lloyd's Law Reports 235, ..

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SUPREME CO:URT REPORTS

(1984) 3 S.C.l\o

. it was further stated in paragraph 13 that contract provides for escalation in certain respects and that is the only escalation which is admissible in terms of. the contract d the claim made by the appellant does not come within the escalation clanse nor in the agreed. formula relating to such escalatjon. The contratcor relied

- upon Clause 13 of the Additional Terms and Coditions Modfications ' . . which form part of the contract document to sustain its claim. From the pleadings, it clarly transpires that both the parties had recourse to the contract which is admittedly entered into in support. of. the

. C rival contentions and , therefore, the , claim made by the appellant

. would be covered by the arbitration clause, which is of the widest .amplitud.e, It is thus satisfactorily esfablished that the claim made by tlie contractor would be covered by the arbitration clause.

Mr. Nariman also wanted us to examine whether ihe claill) made by the arbitrator would •. be admissible on the principle of quantu#i meriut. lt is not necessary to exmine this aspect at all° in the view which we are taking.

He also wanted us to adopt an approach that the effort of the court must be to uphold the award and not to reject it. We, consider it llnnecessary to dilate upon it .

The discussion leads to the .ine.scapable conclusion that a specific question.if law touching the jurisdiction of the arbitrator was specifically referred to the arbitrator and therefore the arbitrator decision is binding on the parties and the award cannot be st aside . on the sole ground that there was an erro~ Qf law apparent on . the 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 qU:estioned. Therefore, the High Court was clearly in error reversing the decision of the trial 901,1rt.

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TARAPORE CO. v. COCHIN SHIPYARD (Dei, J.) 161

Accordingly this appeal succeeds and is allowed and the Judgment of the High Court is set aside and the Judgment atid order of the Subordinate Judge, Ernakulam dated March 30, 1979 is restored with costs throughout-

N.V.K. 'Appeal gllowed . •

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