Allowed

Konkn Railway Corporation Ltd. v. Patel Engineering Co.Ltd.

Bombay HC19 Aug 2004ARBP/493/2003

Case brief

AI extract

What is this about?

This petition under Section 34 challenged an arbitral award primarily on the ground of the tribunal's constitution and specific claims. The court held that the court has jurisdiction to appoint arbitrators under Section 11(6) despite the party's failure to follow the contract, and rejected the challenge regarding the tribunal's constitution. The court also set aside parts of the award where arbitr

What did the court decide?

The petition dismissing the challenge to the constitution of the arbitral tribunal and the challenge to certain specific claims in the award was allowed in part and dismissed in part. Specific claims

Konkn Railway Corporation Ltd. Vs Patel Engineering Co.Ltd. — Arbitration | Bombay HC (2004)

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IN THE HIGH COURT OF JUDICATURE AT BOMBAY
ORDINARY ORIGINAL CIVIL JURISDICTION

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ARBITRATION PETITION NO.493 OF 2003

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Konkan Railway Corporation Ltd. )
having its Corporate office at )
Belapur Bhavan, Plot No.6,)
Section 11, C.B.D., Belapur,)
Navi Mumbai - 400 614)..Petitioners.
Vs.
Patel Engineering Company Ltd. )
P.B.Box No.8357, Jogeshwari (W) )
Mumbai - 400 102)..Respondents.

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Mrs.Kiran Bagalia with Ms.Asha Bhambwani with Latika
Panakshari, Advocate for the Petitioners.

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Mr.Aspi Chinoy, Senior counsel with Z.Andhyarujina
i/b.M/s.B.Munim & Co.,Advocate for the
Respondents.

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CORAM: S.J.VAZIFDAR, J.
DATE OFRESERVING
THE JUDGMENT:6TH JULY, 2004
DATE OFPRONOUNCING
THE JUDGMENT: 19TH AUGUST, 2004

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ORAL JUDGMENT :

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This is a Petition under section 34 of the
Arbitration and Conciliation Act, 1996 to set aside
an award dated 19th May, 2003 passed by the Arbitral
Tribunal in respect of the disputes and differences
between the parties. The award held the Respondent

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to be entitled to recover a sum of Rs.3,04,71,013.06
together with interest thereon at 18% per annum.

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INTRODUCTION

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2. The Respondent invited tenders for the

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construction of a tunnel in connection with one of
its projects. The Petitioner’s tender was accepted.
An agreement in writing dated 27th November, 1991 for
the performance of the work for a total contractual
cost of Rs.6,81,02,517/- was entered into between the
parties. The work was to be carried out in
accordance with the said agreement, the schedule
annexed thereto and in conformity with the printed
schedule of rates, Special Conditions and the General
Instructions which were incorporated therein by
clause 5. These documents in turn incorporated other
documents including the General Conditions of
Contract for works.

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The date of commencement of the work was 29th
October, 1991 and the scheduled date of completion
thereof was 28th April, 1994. The work was not
completed by the scheduled date. It was
substantially completed on 30th September, 1995. The

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Respondent issued a certificate dated 14th March,
1996 which specified the date of completion as 10th
March, 1996.

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3. The Respondent contended that despite its having
completed the work satisfactorily the Petitioner
failed to pay various amounts due to it under the
contract and made unauthorised deductions from its
final bill. The Petitioner having failed to settle
the final bill the Respondent by its letter dated 1st
July, 1998 requested the Petitioner to refer the
disputes to arbitration in accordance with clause 63
of the General Conditions of Contract.

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4. I will refer to the arbitration clause shortly.
Before doing so however it is necessary to note that
the Petitioner having failed to respond to this
request the Respondent filed Arbitration Petition
No.321 of 1998 in this Court under section 11 of the
Arbitration and Conciliation Act, 1996 (hereinafter
referred to as the 1996 Act). By an order dated 24th
December, 1998 two of the arbitrators were appointed.
The two arbitrators then proceeded to appoint the
presiding arbitrator. That is how the arbitral
tribunal was constituted.

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5.The Petitioner applied to the arbitral tribunal
to hear its objection regarding the validity of the
constitution of the arbitral tribunal as a
preliminary issue. The arbitral tribunal by its
order dated 8th October, 2002, which has also been
challenged in the Petition, rejected the objection
and proceeded with the hearing of the reference on
merits.

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6.Mrs.Bagalia, the learned counsel appearing on
behalf of the Petitioner, impugned the order dated
8th October, 2002 and the award in so far as it
related to certain claims. The Petitioner’s
challenge to the award thus falls under two parts.
The first relates to the constitution of the arbitral
tribunal and the other to some of the claims awarded
by the arbitrators.

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CHALLENGE TO THE CONSTITUTION OF THE ARBITRAL
TRIBUNAL :

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7. Mrs.Bagalia contended that the arbitral tribunal

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was not constituted in accordance with the provisions
of the arbitration clause in the contract. The
composition of the arbitral tribunal not being in
accordance with the agreement of the parties, the
award, she submitted, was liable to be set aside
under Section 34(2)(v) of the 1996 Act. The
submission is not well founded.

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8.Clause 63 of the General Conditions of Contract
pertaining to arbitration reads as under :

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"DEMAND FOR ARBITRATION :

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63.1.1In the event of any
dispute or difference between the
parties hereto as to the
construction or operation of this
contract, or the respective
rights and liabilities of the
parties on any matter in
question, dispute or difference
on any account, or as to the
with-holding by the Corporation
of any certificate to which the
Contractor may claim to be
entitled to, or if the
Corporation fails to make a
decision within a reasonable
time, then and in any such case,
save the "excepted matters"
referred to in clause 62 of these
conditions, the Contractor after
90 days but within 180 days of
his presenting his final claim on
disputed matters, shall demand in
writing that the dispute or
difference be referred to
arbitration.

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63.1.2Thedemandfor
arbitration shall specify the
matters which are in question,
dispute or difference. Only such
dispute(s) or difference(s) in
respect of which the demand has
been made shall be referred to
arbitration and other matters
shall not be included in the
reference.

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63.1.3If the Contractor
does not prefer his specific and
final claims in writing, within a
period of 90 days of receiving
the intimation from the
Corporation that the final bill
is ready for payment, he will be
deemed to have waived his claims
and the Corporation shall be
discharged and released of all
liabilities under the contract in
respect of these claims."

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ARBITRATION

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63.3(a) Matters in question,
dispute or difference to be
arbitrated upon shall be referred
for decision to:-

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i) A Sole Arbitrator who
shall be an Officer of
the Corporation nominated
by the Chairman and
Managing Director of the
Corporation in that
behalf in cases where the
claim in question is
below Rupees Five Lakhs
and where the issues
involved are not of a
complicated nature. The
Chairman & Managing
Director shall be the
sole judge to decide
whether or not the issues
involved are of a
complicated nature.

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ii) Two Arbitrators, who
shall be Corporation
Officers of equal status
to be appointed in the
manner laid down in
Clause 63.3(b) for all
claims of Rupees Five
Lakhs and above, and for
all claims irrespective
of the amount or value of
such claims if the issues
involved are of a
complicated nature. The
Chairman & Managing
Director shall be the
sole judge to decide
whether the issues are of
a complicated nature or
not. In the event of the
two Arbitrators being
divided in their opinions
the matter under dispute
will be referred to an
Umpire to be appointed in
the manner laid down in
Clause 63.3(b) for his
decision.

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63.3.(b) For the purposes of
appointing two Arbitrators as
referred to in Clause 63.3(a)(ii)
above, the Corporation will send
a panel of more than three names
of officers of the appropriate
status of the Corporation to the
Contractor, who will be asked to
suggest a panel of three names
out of the list so sent by the
Corporation. The Chairman and
Managing Director will appoint
one Arbitrator out of this panel
as the Contractor’s nominee, and
then appoint a second Arbitrator
of equal status as the
Corporation’s nominee either from
the panel or from outside the
panel ensuring that one of the
two Arbitrators so nominated is
from the Accounts Department.

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Before entering upon the
reference the two Arbitrators
shall nominate an Umpire who
shall be an officer of the
Corporation to whom the case will
be referred to in the event of
any differences between the two
Arbitrators."

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9.Mrs.Bagalia submitted that the procedure
prescribed in the arbitration clause was admittedly
not followed while constituting the arbitral
tribunal. There is no dispute that the arbitral
tribunal appointed in this case is different from the
one that may have been constituted had the procedure
prescribed by clause 63.1.1 been followed. That
however, by itself, does not answer the question.

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10.Admittedly, despite the Respondent’s repeated
requests the Petitioner failed to act in accordance
with clause 63.3(b). By its letter dated 28th July,
1997 the Respondent invoked the arbitration clause
and requested the Petitioner to initiate proceedings
in terms of clause 63.3. The request was repeated by
the Respondent’s letters dated 22nd February, 1998
and 1st July, 1998. Despite the aforesaid letters
the Petitioner failed and neglected to initiate
action in accordance with clause 63 for about a year.
It is in these circumstances that the Respondent

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ultimately filed an application under section 11(6)
requesting Chief Justice and/or his designate to take
the necessary measure for securing the appointment of
the arbitrators. By the order dated 24th December,
1998, a learned single Judge of this Court,
designated by the Chief Justice under the 1996 Act,
appointed two of the arbitrators. Considering the
nature of the disputes the learned Judge appointed a
retired Executive Director of the Madhya Pradesh
Electricity Board and a chartered accountant. The
order records that the parties had no objection to
the appointment of the said two arbitrators on the
ground of independence or impartiality. They in turn
appointed the presiding arbitrator.

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11.The order dated 24th December, 1998 was
challenged by the Petitioner by Special Leave
Petition No.4311 of 1999. Mrs.Bagalia stated that
the Supreme Court, following its earlier judgments,
held that an order under section 11 was an
administrative order and no appeal therefore lies
against such an order. It is apparently for this
reason that the Petitioners challenged the
constitution of the arbitral tribunal under section
16 of the 1996 Act.

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12.Section 11 of the 1996 Act so far as is

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relevant for this case, reads as under :

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"11.Appointment of arbitrators.-

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(2)Subject to sub-section (6),
the parties are free to agree on
a procedure for appointing the
arbitrator or arbitrators.

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(6)Where, under an appointment
procedure agreed upon by the
parties, -

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(a)a party fails to act as
required under that
procedure; or

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(b)the parties, or the two
appointed arbitrators,
fail to reach an agreement
expected of them under that
procedure ; or

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(c)a person, including an
institution, fails to
perform any function
entrusted to him or it under
that procedure,

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a party may request the Chief
Justice or any person or
institution designated by him to
take the necessary measure,
unless the agreement on the
appointment procedure provides
other means for securing the
appointment.

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(7)A decision on a matter
entrusted by sub-section (4) or
sub-section (5) or sub-section
(6) to the Chief Justice or the
person or institution designated
by him is final.

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(8)The Chief Justice or the
person or institution designated
by him, in appointing an
arbitrator, shall have due regard
to -

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(a) any qualifications required of the arbitrator by the agreement of the parties ; and

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(b) other considerations as are likely to secure the appointment of an independent and impartial arbitrator.

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(10)The Chief Justice may make
such scheme as he may deem

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appropriate for dealing with
matters entrusted by sub-section
(4) or sub-section (5) or
sub-section (6) to him".

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13.Mrs.Bagalia contended that the expression "to
take the necessary measure" mandates the Chief
Justice or his designate compelling the parties to
comply with the agreed procedure and nothing more.
In the present case therefore, according to her, the
order under section 11 could only have compelled the
Petitioner to take steps for the appointment of the
arbitrators in accordance with clause 63. The Chief
Justice or his designate did not have the
jurisdiction or the power to appoint arbitrators
except strictly in accordance with the arbitral
clause.

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14.The submission is unfounded. Firstly, it is
contrary to the language of section 11. Secondly,
even assuming the submission to be well founded the
constitution of the arbitral tribunal cannot be
faulted for it is not contrary to the provisions of
the 1996 Act. While the first aspect is supported by
a judgment of the Supreme Court the second is
expressly covered by another judgment of the Supreme
Court.

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15.Section 11(6) comes into operation when the
party to the arbitration agreement fails to appoint
an arbitrator in accordance with the procedure agreed
upon by the parties. Had the legislature intended an
order of the nature suggested by Mrs.Bagalia the
language and the entire scope of section 11(6) would
have been different. There is nothing in the section
that either expressly or even impliedly curtails the
scope or ambit of the expression "to take the
necessary measure". If I were to accept
Mrs.Bagalia’s submission I would be adding in section
11(6) after this expression, words to the effect "by
compelling the party so failing to comply with the
agreed procedure", which I am not entitled to do.

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16. The submission is contrary to the judgment of
the Supreme Court in Datar Switchgears Ltd. v. Tata
Finance Ltd. (2000) 8 Supreme Court Cases 151, where
it is held that if a party fails to make an
appointment within 30 days of the demand by the other
party and even till that other party makes an
application under section 11 it forfeits its right to
make an appointment as per the agreed procedure. The
Supreme Court held as under :

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"19. So far as cases falling
under Section 11(6) are concerned
- such as the one before us - no
time limit has been prescribed
under the Act, whereas a period
of 30 days has been prescribed
under Section 11(4) and Section
11(5) of the Act. In our view,
therefore, so far as Section
11(6) is concerned, if one party
demands the opposite party to
appoint an arbitrator and the
opposite party does not make an
appointment within 30 days of the
demand, the right to appointment
does not get automatically
forfeited after expiry of 30
days. If the opposite party
makes an appointment even after
30 days of the demand, but before
the first party has moved the
court under Section 11, that
would be sufficient. In other
words, in cases arising under
Section 11(6), if the opposite
party has not made an appointment
within 30 days of demand, the
right to make appointment is not

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forfeited but continues, but an
appointment has to be made before
the former files application
under Section 11 seeking
appointment of an arbitrator.
Only then the right of the
opposite party ceases. We do
not, therefore, agree with the
observation in the above
judgments that if the appointment
is not made within 30 days of
demand, the right to appoint an
arbitrator under Section 11(6) is
forfeited." (emphasis supplied)

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17.It is thus clear that even if the appointment is
not made within the time stipulated, the right to
appoint does not get automatically forfeited provided
the same is exercised before the other party moves an
application under section 11. But, if the
appointment is not made within time the right to
appoint stands forfeited upon the other party making
an application under section 11. Mrs.Bagalia did not
dispute this to be the effect of the judgment. She
however submitted that the judgment ought not to be
considered as binding on me for two reasons.

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18.Firstly, she submitted that the question did not
arise before the Supreme Court and that the Supreme
Court therefore did not really either hear the

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parties or apply its mind to the question. I am
afraid this is an argument which merely requires to

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be stated to be rejected. I am unable to understand
the basis on which Mrs. Bagalia made the submission.
The question squarely arose before and was answered
by the Supreme Court. This is clear inter-alia from
paragraphs 11 and 18 which are as follows :

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"11. The question then arises
whether for purposes of Section
11(6) the party to whom a demand
for appointment is made, forfeits
his right to do so if he does not
appoint an arbitrator within 30
days. Learned Senior Counsel for
the appellant contends that even
though Section 11(6) does not
prescribe a period of 30 days, it
must be implied that 30 days is a
reasonable time for purposes of
Section 11(6) and thereafter, the
right to appoint is forfeited.
Three judgments of the High

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Courts from Bombay, Delhi and
Andhra Pradesh are relied upon in
this connection."

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"18. In the present case, the
respondent made the appointment
before the appellant filed the
application under Section 11 but
the said appointment was made
beyond 30 days. Question is
whether in a case falling under
Section 11(6), the opposite party
cannot appoint an arbitrator
after the expiry of 30 days from
the date of demand ?"

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19.In answering the question whether the right of
appointment stands forfeited if made beyond 30 days,

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the Supreme Court considered when that right stands
forfeited. It did not accept the extreme contention
that it stands forfeited on the expiry of 30 days.
While arriving at this conclusion the Supreme Court
also held that the right would stand forfeited upon
the expiry of 30 days and after an application under
section 11 is made. I do not understand how then it
can be contended that the question was not present to
the minds of the learned Judges of the Supreme Court.
This was the ratio-decidendi of the judgment. It was
most certainly not a casual observation.

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20.The contention that the observations of the
Supreme Court are at the highest merely obiter does
not advance the Petitioner’s case either. Even
assuming that they are merely obiter-dicta, it is
well settled that obiter-dicta of the Supreme Court
is binding on the High Courts.

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21.This view is also supported by the judgment of
the Supreme Court in G. Ramchandra Reddy and Co. v.
Chief Engineer, Madras Zone, Military Engineering
Service, AIR 1994 Supreme Court, 2381. This was a
decision under section 20 of the Arbitration Act,
1940. Even in that case which was under section 20

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of the 1940 Act, the Supreme Court held that a party
not availing of its right to appoint an arbitrator in
accordance with an arbitration agreement, would
forfeit the power to appoint an arbitrator. The
Supreme Court held thus in paragraph 6 :

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"6.Thus when the notice was
given to the opposite contracting
party to appoint an arbitrator in
terms of the contract and if no
action had been taken, it must be
deemed that he neglected to act
upon the contract. When no
agreement was reached, even in
the court between the parties,
the court gets jurisdiction and
power to appoint an arbitrator.
Even if S.8(a) per se does not
apply, notice was an intimation
to the opposite contracting party
to act upon the terms of the
contract and his/its
non-availment entails the
forfeiture of the power to
appoint an arbitrator in terms of
the contract and gives right to
the other party to invoke the
court’s jurisdiction under S.20.
In the instant case the
respondent did not appoint an
arbitrator, after the notice was
received. The respondent averred
in the written statement that it
was under consideration. Even
before the learned single Judge
he did not even state that he was
willing to appoint an arbitrator.
The learned singled Judge rightly
exercised the power under S.20(4)
of the Act and appointed the
arbitrator. The Division Bench,
therefore, was not right in
holding that the respondent has

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by giving option to the appellant
to agree for appointment of an
arbitrator out of the five named
persons had left it to the
appellant to appoint an
arbitrator and allowing appellant
to appoint an arbitrator. On the
other hand, the appointment of an
arbitrator made by the learned
single Judge must be deemed to
have been approved by us."

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The observations in this case apply a fortiorari
to a case under section 11(6) of the 1996 Act which
confers an express power of appointment on the Chief
Justice or his designate in a similar situation.

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22. In view of the Petitioner’s failure to act in
accordance with clause 63 in the appointment of
arbitrators, it must be held that it forfeited its
right of appointment in accordance with the said
clause.

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23.In the circumstances, it must also be held that
the Petitioner forfeited its right to insist on the
appointment in accordance with the procedure
prescribed by clause 63. The Petitioner having
forfeited its right to the appointment of arbitrators
in accordance with the procedure prescribed, the
submission that the Chief Justice or his designate
under section 11 is nevertheless bound to merely

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direct the appointment of the arbitrators in
accordance with the agreed procedure, is ex-facie
unsustainable. It would be illogical and contrary to
common sense to suggest that the party that forfeits
its right to the appointment as per the agreed
procedure is entitled to have that very right which
stands forfeited to be enforced in an application by
the other side under section 11.

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24.The fallacy of Mrs.Bagalia’s submission can be
demonstrated by a simple illustration. The Chief
Justice or his designate acting under section 11
cannot in any event name the arbitrator even if he
were to adopt the procedure under clause 63. He can
only direct the party to act in accordance with the
procedure. What would happen if that party did not
comply with the order ? If I were to accept

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Mrs.Bagalia’s submission, the answer to the question
would be: ‘nothing’. This would render section
11(6) redundant. Surely this could not have been the
intention of the legislature.

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25.To this dilemma, Mrs.Bagalia’s contention was
that if despite the order under section 11(6)

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directing the party to act in accordance with the
prescribed procedure a party failed to do so, then on
a further application the Chief Justice/ his
designate could make an appointment otherwise than in
accordance with the agreed procedure. This answer
exposes the fallacy in Mrs.Bagalia’s principal
submission. It establishes that there is no
jurisdictional bar to the Chief Justice/his designate
making an appointment otherwise than in accordance
with the agreed procedure in the first instance
itself. Once again, had this been the intention, the
section would have been differently worded. The
section itself would have provided for both the
steps.

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26.The fallacy in Mrs.Bagalia’s submission arises
from confusing the question of the existence of power
under section 11(6) with that of the manner of
exercise of that power by the Chief Justice/his
designate. The Chief Justice/his designate is not
bound in the first instance, to appoint the
arbitrator/s himself and is entitled to give the
party another opportunity of making the appointment
in accordance with the agreed procedure. Speaking
for myself, I may well afford the party another

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opportunity to exercise its right of appointment if I
were convinced that there were no circumstances which
ought to disentitle it from being given a further
chance to make an appointment as per the agreed
procedure. But, that is a question relating to the
manner of exercise of jurisdiction and not one
relating to the existence of jurisdiction to deny
that right. If the Chief Justice or his designate in
the first instance itself makes the appointment
otherwise than in accordance with the procedure
prescribed, it cannot be said to be an order without
jurisdiction or contrary to section 11(6).

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27.Mrs.Bagalia invited my attention to an order
passed by the Chief Justice’s designate in an
application under section 11 in the case of Jesmajo
Industrial Fabrications Karnataka Pvt. Ltd. v.
Indian Oil Corporation Ltd., 2004(1) R.A.J. 24(Bom)
As it is not a judgment Mrs.Bagalia adopted the
reasoning in paragraphs 12 and 13 which read as
under:

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"12.In the instant case, as we
have noted earlier, the power to
secure appointment is of the
Chief Justice or his designate.
The Chief Justice or the

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designate does not decide the
right of the parties but only
secures an appointment. There is
no power under Section 11 of the
Act of 1996, as for example under
Section 8(b) of the Arbitration
Act, 1940. The power under
Section 11 is a measure to secure
appointment of the Arbitrator in
the course of exercising
administrative powers. That can
only be to give effect to
arbitral clause by nominating
Arbitrator so as to enable the
parties to go to the forum of
their choice. To my mind, there
is nothing to indicate that the
Chief Justice or his designate
where the clause provides for
arbitral procedure for nominating
Arbitrator even in case of
failure to make nomination can
completely give a go bye to the
arbitral clause and appoint
another person as Arbitrator even
when the person or authority
named is available. In the first
instance,it would be to give
effect to the agreement between
the parties. An administrative
authority does not displace the
terms of the contract unless
power is conferred by statute and
it is expressly required to be
dealt. Otherwise, the
administrative authority can only
give effect to the provisions of
the contract, by directing the
parties to arbitration in the
manner provided. The manner
provided normally should be by
securing the appointment in terms
of the contract between the
parties. Where the terms of the
agreement do not provide for
securing the nomination as per
explanation under Sections 11(3)
and 11(6), then to secure the
nomination under Section
11(6)(c), to secure nomination by

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normally directing the named
authority to secure the
appointment within a time frame
failing which to make the
appointment.

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.Thus on a close look at the
provisions of Sections 8 and 20
of the Act of 1940, that there
are specific provisions for
appointment by consent of the
parties or otherwise by the
Court. Such power under Section
11(6) of the Act of 1996 is
concerned on the Chief Justice or
his designate who will act
administratively. Under the Act
of 1996, what the Chief Justice
or a designate would do is to
secure the constitution of the
Tribunal by proper measure such
as to direct the authority to
nominate Arbitrator in those
cases like Section 11(6)(c),
where the contract so provides
otherwise to constitute the
Tribunal by nominating an
Arbitrator like in case of
Sections 11(6)(c) and (b). There
is no other power in the
administrative authority whether
in the Chief Justice or his
designate.

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13.To sum up the following
propositions emerge :

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(1)The Chief Justice or his
designate even if the authority
or institution named does not
nominate the Arbitrator which is
required to be done or to
constitute the arbitral tribunal,
will ordinarily direct the
authority or institution to
nominate the Arbitrator and
effectively constitute the
arbitral tribunal. This is more
so in the case of public bodies
and corporation, where failure on

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the part of an official holding
howsoever a high post, shall not
result in that body being saddled
with an arbitral tribunal not in
terms of the contract it entered
into or was entered on its
behalf.

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(2)It is only in the event, for
some good reason that the
Arbitrator cannot be named or the
tribunal constituted in terms of
the contract, shall the Chief
Justice or designate nominate the
Arbitrator or constitute the
arbitral tribunal beyond the
terms of the contract."

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28.Proposition 1 itself indicates that it is not
that the Chief Justice or his designate lacks the
jurisdiction to appoint arbitrators otherwise than in
conformity with the agreed procedure. It only states
that "ordinarily" the Chief Justice or his designate
should direct the authority or institution to
nominate the arbitrator in accordance with the
procedure. This therefore relates to the manner of
exercise of the discretion conferred by section
11(6). It does not deny the jurisdiction or the
power to do otherwise.

¶116

29.Moreover, in the facts and circumstances of this
case, there is good reason for the designate of the
Chief Justice to have constituted the present

¶117

: 25 :

¶118

arbitral tribunal. As stated above, despite the
three letters the Petitioner failed and neglected to
activate the prescribed procedure for about a year.
The Chief Justice’s designate was therefore justified
in not affording the Petitioner another opportunity.
Even assuming that in the facts of this case I may
have been inclined to afford the Petitioner another
opportunity of following the agreed procedure, I am
unable to state that the exercise of discretion by
the Chief Justice’s designate was unjustified and
that he constituted an improper or an illegal
arbitral tribunal. Thus, both in law and on merits
this point ought to be decided against the
Petitioner.

¶119

30.Similarly, Mrs.Bagalia relied upon an order
passed under section 11 by the designate of the Chief
Justice of the Kerala High Court in the case of Bel
House Associates (P) Ltd. v. General Manager,
Southern Railway 2001(2) RAJ., 127 (Ker). The
learned Judge followed the decision of the Madhya
Pradesh High Court which held that the Chief Justice
or his designate has merely to take necessary
measures for enforcing the procedure laid down in the
agreement and cannot make any appointment but to

¶120

: 26 :

¶121

enforce or compel the party to make the appointment
in accordance with the agreed procedure.

¶122

31.With respect, I am unable to agree with this
view. There is no machinery by which the Chief
Justice or his designate exercising power under
section 11(6) can enforce or compel a party to make
an appointment in accordance with the agreed
procedure. Mrs.Bagalia was unable to show me a
single provision in the 1996 Act in this regard.
Indeed, this observation is contrary to the order
itself for in the ultimate analysis the learned Judge
directed the Respondent to appoint an arbitrator in
accordance with the agreed procedure within two
months and further provided that in the event of the
Respondent failing to do so it would be open to the
Petitioner to seek further orders from the Court for
appointment of an arbitrator. Let me carry this
matter one step further. What if the Respondent had
failed to comply with this direction ? The
Petitioner would have made another application.
Would the Chief Justice/his designate on this further
application have had the jurisdiction to appoint an
independent arbitrator ? If the earlier reasoning of
the learned Judge were to be accepted, all that the

¶123

: 27 :

¶124

Petitioner would be left with would be liberty in a
series of orders to make an application for the
appointment of arbitrators in the event of the
Respondent’s failure to comply with the directions.
This would render the provisions of section 11(6)
nugatory. This could never have been the intention
of the legislature. The result would enable a
defaulting party to ensure that the proceedings are
still-born.

¶125

32.The words "unless the agreement or the procedure
provides other means for securing the appointment",
Mrs.Bagalia submitted, support her contention. They
do not. These words follow the duty cast on the
Chief Justice/his designate "to take the necessary
measure" where a party has failed to comply with the
procedure. Clause 63 does not provide any other
means for securing the appointment. It is silent on
this aspect. If indeed it had provided other means
for securing the appointment, it may not have been
necessary, depending upon the nature of such
alternate provision, for the party to even make an
application under Section 11.

¶126

33.Mrs.Bagalia’s contention that the difference in

¶127

: 28 :

¶128

the language in sub-section (6) of section 11 on the
one hand and the language in sub-sections (3), (4)
and (5) on the other indicate that the jurisdiction
under section 11(6) is, to use her expression, "more
curtailed" is also unfounded. The provisions in
sub-sections (3), (4) and (5) pertain to a different
situation altogether. There is nothing in these
sub-sections that aid the construction of sub-clause
(6).

¶129

34.In her written submissions, Mrs.Bagalia
raised another argument I am not sure she did at the
hearing. The argument presumes that the Chief
Justice/his designate while making such an
appointment under sub-section (6) decides the
validity of the arbitration clause because by doing
so he holds that the agreement does not secure the
appointment of an independent and impartial
arbitrator. The basis of the argument is itself
fallacious. It proceeds on the erroneous presumption
that an arbitration agreement which does not provide
other means of securing the appointment is invalid.
Mrs.Bagalia has not cited a single provision of law
to substantiate the proposition based or which she
founded the submission. The basis itself being

¶130

: 29 :

¶131

erroneous the main submission is unfounded.

¶132

35.Mrs.Bagalia strongly contended that such orders
would not be in the interest of and would do
injustice to public bodies and corporations. These
are the observations in the above order as well.
Public bodies and corporations no doubt have their
own difficulties. These difficulties may be taken
into consideration by the Chief Justice or his
designate while exercising discretion under section
11(6). But, there is no rule of interpretation that
requires such circumstances to be taken into
consideration while interpreting statutory
provisions. Section 11(6) is a statutory provision
not merely for public bodies and corporations. The
interpretation thereof cannot in any manner or to any
extent depend upon their difficulties.

¶133

36.No fault can be found with the constitution of
the arbitral tribunal. One of the arbitrators is a
Chartered Accountant and the other an engineer. The
Presiding Officer is a former Chief Justice of this
Court. Mrs.Bagalia made a statement that the
Petitioner is not pressing the ground of bias against
the Presiding Officer of the Arbitral Tribunal. In

¶134

: 30 :

¶135

any event no case of bias was made out. It is
unfortunate that the ground was at all taken. Clause
63 also requires the Chairman and Managing Director
to ensure that one of the two arbitrators is from the
Accounts Department. A proper and more appropriate
arbitral tribunal could not have ben constituted in
the present matter. He has, if I may say with
respect, passed the order in conformity with the
provisions of section 11(6) and 11(8) of the 1996
Act. There is nothing to suggest that the arbitral
tribunal was either not appropriate or not competent
to decide the differences and disputes between the
parties.

¶136

37.Mrs.Bagalia then submitted that the costs
contemplated by the Petitioner while entering into
the agreement were far lower than the costs actually
incurred in the arbitration proceedings and that
therefore the arbitrator’s fees should be scaled
down. This argument is unfounded and unfair to the
learned arbitrators. They were appointed pursuant to
the order of the Chief Justice’s designate in an
application under section 11. No application to
scale down their fees was ever made even before them.
It would be a travesty of justice to require the

¶137

: 31 :

¶138

arbitrators to return their fees for no fault of
theirs. The application is rejected.

¶139

38.Secondly, even assuming that the constitution of
the arbitral tribunal is not in accordance with the
agreement between the parties, it would not vitiate
the award for that reason alone. The challenge, to
succeed, must also establish that the agreement
between the parties is in conflict with a provision
of Part I of the 1996 Act from which the parties
cannot derogate. This has been so held by the
judgment of the Supreme Court in Narayan Prasad Lohia
v. Nikunj Kumar Lohia & Ors., (2002)3 Supreme Court
Cases, 572. I noticed the judgment only after the
arguments were concluded. I, therefore, invited both
the counsel to make their submissions in respect of
this judgment before delivering my judgment. The
Supreme Court held thus :

¶140

"In our view, Section 34(2)(a)(v)
cannot be read in the manner as
suggested. Section 34(2)(a)(v)
only applies if "the composition
of the Arbitral Tribunal or the
arbtiral procedure was not in
accordance with the agreement of
the parties". These opening
words make it very clear that if
the composition of the Arbitral
Tribunal or the arbitral
procedure is in accordance with

¶141

: 32 :

¶142

the agreement of the parties, as
in this case, then there can be
no challenge under this
provision. The question of
"unless such agreement was in
conflict with a provision of this
Part" would only arise if the
composition of the Arbitral
Tribunal or the arbitral
procedure is not in accordance
with the agreement of the
parties. When the composition or
the procedure is not in
accordance with the agreement of
the parties then the parties get
a right to challenge the award.
But even in such a case the right
to challenge the award is
restricted. The challenge can
only be provided the agreement of
the parties is in conflict with a
provision of Part I from which
the parties cannot derogate. In
other words, even if the
composition of the Arbitral
Tribunal or the arbitral
procedure is not in accordance
with the agreement of the parties
but if such composition or
procedure is in accordance with
the provisions of the said Act,
then the party cannot challenge
the award. The words "failing
such agreement" have reference to
an agreement providing for the
composition of the Arbitral
Tribunal or the arbitral
procedure. They would come into
play only if there is no
agreement providing for the
composition of the Arbitral
Tribunal or the arbitral
procedure. If there is no
agreement providing for the
composition of the Arbitral
Tribunal or the arbitral
procedure and the composition of
the Arbitral Tribunal or the
arbitral procedure was not in
accordance with Part I of the

¶143

: 33 :

¶144

said Act then also a challenge to
the award would be available.
Thus so long as the composition
of the Arbitral Tribunal or the
arbitral procedure are in
accordance with the agreement of
the parties, Section 34 does not
permit challenge to an award
merely on the ground that the
composition of the Arbitral
Tribunal was in conflict with the
provisions of Part I of the said
Act. This also indicates that
Section 10 is a derogable
provision."

¶145

It is not even the Petitioner’s case that the
agreement is not in conformity with the provisions of
Part I of the 1996 Act from which the parties cannot
derogate. Indeed, the contention itself would be
unsustainable. Mrs.Bagalia was unable to respond to
the ratio of this judgment. There is nothing in the
arbitration clause which suggests that it is contrary
to any of the provisions of the 1996 Act. Much less
is there anything to suggest that the arbitration
clause is contrary to a provision of the 1996 Act
from which the parties cannot derogate. In the
circumstances, even on this ground the challenge to
the constitution of the arbitral tribunal under
section 34(2)(v) is rejected.

¶146

39.The challenge to the order dated 24th

¶147

: 34 :

¶148

December, 1998 constituting the arbitral tribunal
under section 11(6) and the order of the arbitral
tribunal dated 8th October, 2002 regarding the
challenge thereto is therefore rejected.

¶149

CHALLENGE TO THE AWARD ON MERITS

¶150

40.I will now consider the challenge in the
petition to some of the claims. Mrs.Bagalia
challenged the award in respect of claim Nos.1, 2(two
parts), 7, 8(item 5) and 10. She also challenged the
award of interest. I have upheld the challenge in
respect of claim Nos.1, 2(one part), 7, 8(item 5) and
10. I will first consider the challenge to the
award in respect of claim no.2(one part) and the
award of interest which I have rejected.

¶151

CLAIM NO.2 (FREEZING INDICES AS ON JUNE 1994)

¶152

41. Claim No.2 pertains to escalation (Price
Variation). The total amount awarded in respect of
this claim is Rs.52,82,772/-. Mrs.Bagalia challenged
the award in respect of two items in Claim No.2. One

¶153

: 35 :

¶154

item was decided in the Petitioner’s favour and in
respect of another Mrs.Bagalia did not press the
Petition. I will here deal with the challenge
pertaining to the item under reference only. I will
deal with the challenge to the other item of Claim
No.2 separately for in respect thereof I have upheld

¶155

the challenge.

¶156

42. Mrs.Bagalia challenged the award in so far as
the learned arbitrators held that the Petitioners’
freezing indices as of June, 1994 for the purpose of
calculating the escalation on the extended period of
the contract were not correct and not in conformity
with the provisions of Clause 28.10 of the Special
Conditions of Contract. This challenge is not well
founded.

¶157

43.The Petitioner contended that as per the
extension granted by the Petitioner, no escalation
was payable after 1st July, 1994. Hence indices were
frozen after 1st July, 1994 in respect of calculation
of escalation for the extended period. This the
Petitioner contended was as per Clauses 28.10.2.1 and

¶158

: 36 :

¶159

28.10.2.2 of the Special Conditions of Contract.

¶160

44.If Clauses 28.10.1 and 28.10.2 are to operate
the freezing of the indices was justified. But, the
learned arbitrators having come to the conclusion
that the respondent was not in default, the said
clauses do not come into operation. This is clear
from clause 28.10.2 which precedes these clauses. It
reads as under :

¶161

"28.10.2 However, where extension
of time has been granted due to
contractors failure underpenalty
clause of the General Conditions
of the contract, price adjustment
shall be done as follows :"
(emphasis supplied)

¶162

Let me now consider how the arbitrators arrived
at their conclusion.

¶163

45.By a letter dated 27th May, 1995 three
extensions were granted by the Petitioner to the
Respondent as under :-

¶164

"1.Thedateofthe
completion of the above contract
was 28th April 1994. Vide this
office letter of even No. dated
09.05.1994, currency of the

¶165

: 37 :

¶166

contract was extended as under :

¶167

i).From29.04.1994to
30.06.1994 with price escalation
and without any liquidated
damages i.e. under Clause
no.28.10.1 of Special Conditions
of Contract forming Annexure I of
the contract document.

¶168

ii).From01.07.1994to
31.10.1994 without any price
escalation and without any
liquidated damages i.e. under
Clause No.28.10.2 of the
Special Conditions of Contract
document.

¶169

iii).From01.11.1994to
30.11.1994 without any price
escalation and with a liquidated
damages of Rs.50,000/- (Rs.Fifty
thousand only) per month under
Clause no.28.10.2 of Special
Conditions of Contract forming
Annexure I of the contract
document.

¶170

2.Considering the present
condition of works, Chief
Engineer, Ratnagiri (South) has
granted further extension beyond
30.11.1994 up to 31.05.1995
without any escalation and with
liquidated damages of Rs.50,000/-
per month."

¶171

46.It is important to note that the recovery of
liquidated damages, as noted by the arbitrators, had
been waived by the Respondent in respect of the
periods mentioned in paragraphs 1(i) and 1(ii) in the
above letter i.e. between 29th April, 1994 to 30th
June, 1994 as well for the period from 1.7.1994 to

¶172

: 38 :

¶173

31.10.1994. The learned arbitrators further noted

¶174

that the Petitioner had submitted a note dated 16th
March, 1995 prepared by the Deputy Chief Engineer-II
for obtaining the approval of the Chief Engineer for
grant of extension in time for completion, paragraph
4 whereof reads as under :-

¶175

"4.The above tunnel was
successfully completed on 3.1.95.
For the left over work, M/s.Patel
Engineering have submitted a
detailed programme vide their
letter no.178/1/1278 dated
20.02.95 (SN-391).The entire
tunnel was completed without any
accident with accurate alignment
and smooth profile. The quality
of workmanship was appreciated by
various officials including CMD."

¶176

47.It is important at this stage to note Clause
16.4 of the contract which reads as under:-

¶177

"16.4The time of completion of
the works by the date or the
extended date fixed for
completion shall be deemed to be
the essence of the contract and
if the contractor shall fail to
complete the works within the
time prescribed,the Corporation
shall, if satisfied that the
works can be completed by the
contractor within a reasonably
short time thereafter, be
entitled, without prejudice to
any other right or remedy
available in that behalf to

¶178

: 39 :

¶179

recover by way of ascertained and
liquidated damages a sum
equivalent to one percent of the
contract value of the works for
each week or part of the week
that the contractor is in default
and allow the contractor such
further extension of time as the
Engineer may decide. If the
Corporation is not satisfied that
the works can be completed by the
contractor or in the event of the
failure on the part of the
contractor to complete the works
within the further extension of
time allowed as aforesaid, the
Corporation shall be entitled,
without prejudice to any other
right or remedy available in that
behalf, to appropriate
Contractor’s Security Deposit and
rescind the contract under clause
61.1 of these conditions whether
or not actual damage is caused by
such default." (emphasis
supplied)

¶180

48.The learned arbitrators came to a finding of
fact that the Respondent was not in default.
Firstly, this is a finding of fact after considering
various aspects including the aforesaid letter dated
16th March, 1995 and the fact that the Petitioner had
itself waived the levy of liquidated damages. I am
unable to say that the finding is at all erroneous.
The learned arbitrators rightly held that liquidated
damages are different from penalty and that therefore
the extensions granted without the payment of
escalation and/or with levy of liquidated damages

¶181

: 40 :

¶182

were not justified by the terms of the contract.

¶183

49.In the circumstances, Clause 28.10.2 does not
come into operation against the Respondent. Clause
28.10.2 would come into operation only in the event
of there being a failure on the part of the
contractor i.e. the Respondent.

¶184

50.In the circumstances, the challenge to the
award in regard to this claim fails.

¶185

Re: INTEREST

¶186

51. Mrs.Bagalia challenged the grant of interest by
the arbitrators at 18% per annum on the ground that
under clause 15.4 of the General Conditions of
Contract, no interest is payable by the Petitioner to
the Respondent.

¶187

52. Mr.Chinoy submitted that it is not open to the
Petitioner to raise this question as it has not been
raised in the Petition. The only ground of challenge
in this regard he contended was that interest at 18%

¶188

: 41 :

¶189

per annum was exorbitant [ground (n)]. Mrs.Bagalia
on the other hand relied upon ground (q) in the/check
Petition to contend that the award had been
challenged on the ground that it was contrary to the
contractual provisions as well. It is not necessary
to decide whether Mrs.Bagalia is entitled to raise
this point in view of the pleadings, for I have
decided to uphold the award in this regard on merits.

¶190

53. Clause 15.4 of the General Conditions of
Contract reads as under :

¶191

" INTEREST ON AMOUNTS

¶192

15.4 No interest will be payable
upon the earnest money or the
security deposit or amounts
payable to the Contractor under
the contract, but Government
Securities deposited in terms of
sub-clause 15.1 above will be
repayable with interest accrued
thereon as paid by the
Government."

¶193

54(a).The learnedarbitrators expressly
referred to the clause and, in fact, construed it.

¶194

In doing so, they relied upon the judgment of the
Supreme Court in the case of Board of Trustees for
the Port of Calcutta v. Engineers-De-Space-Age

¶195

: 42 :

¶196

(1996)1 Supreme Court Cases, 516. In that case,
there was a similar clause i.e. clause 13(g) of the
contract which read as under :

¶197

"No claim for interest will be
entertained by the Commissioners
with respect to any money or
balance which may be in their
hands owing to any dispute
between themselves and the
Contractor or with respect to any
delay on the part of the
Commissioners in making interim
or final payment or otherwise."
(emphasis supplied)

¶198

54(b). The contention urged on behalf of the
Appellant in that case was that the clause contained
an absolute prohibition against the payment of
interest on account of any delay on the part of the
Commissioner in making interim or final payment or
otherwise (emphasis supplied). In support of this
contention, counsel in that case, as did Mrs.Bagalia
in this case, relied upon the judgment of the Supreme
Court in Associated Engineering Company v.
Government of Andhra Pradesh & Anr. AIR 1992 Supreme
Court, 232 to contend that an arbitrator has to
function within the terms of the contract, shall not
act de-hors the contract, that he has no powers to
travel beyond the contract and if he does so he would

¶199

: 43 :

¶200

be acting without jurisdiction. The Supreme Court
noted the observations in paragraphs 26 and 29 of
that judgment. Having done so, the Supreme Court
held as under :

¶201

"4. We are not dealing with a
case in regard to award of
interest for the period prior to
the reference. We are dealing
with a case in regard to award of
interest by the arbitrator post
reference. The short question,
therefore, is whether in view of
sub-clause (g) of clause 13 of
the contract extracted earlier
the arbitrator was prohibited
from granting interest under the
contract. Now the term in
sub-clause (g) merely prohibits
the Commissioner from
entertaining any claim for
interest and does not prohibit
the arbitrator from awarding
interest. The opening words "no
claim for interest will be
entertained by the Commissioner"
clearly establishes that the
intention was to prohibit the
Commissioner from granting
interest on account of delayed
payment to the contractor.
Clause has to be strictly
construed for the simple reason
that as pointed out by the
Constitution Bench, ordinarily, a
person who has a legitimate claim
is entitled to payment within a
reasonable time and if the
payment has been delayed beyond
reasonable time he can
legitimately claim to be
compensated for that delay
whatever nomenclature one may
give to his claim in that behalf.

¶202

: 44 :

¶203

If that be so, we would be
justified in placing a strict
construction on the term of the
contract on which reliance has
been placed. Strictly construed
the term of the contract merely
prohibits the Commissioner from
paying interest to the contractor
for delayed payment but once the
matter goes to arbitration the
discretion of the arbitrator is
not, in any manner, stifled by
this term of the contract and the
arbitrator would be entitled to
consider the question of grant of
interest pendente lite and award
interest if he finds the claim to
be justified. We are, therefore,
of the opinion that under the
clause of the contract the
arbitrator was in no manner
prohibited from awarding interest
pendente lite."

¶204

54 (c).The least that must be said of the award
is that it is not possible to state that the view
taken by the arbitrators of clause 15.4 is ex-facie
unsustainable or not a plausible view. Nor is it
possible to state that the arbitrator’s reliance upon
the above judgment is unfounded. Indeed, clause
13(g) in Board of Trustees For The Port of Calcutta
is similar to clause 15.4. Indeed, and it is
important to note that the Supreme Court did not
negative the contention that the bar contained an
absolute prohibition. The bar in clause 13(g) is at
least as wide as the one in clause 15.4.

¶205

: 45 :

¶206

54(d). The only difference is that clause 13(g)
provides that no claim of interest will be
entertained by the Commissioners. That, to my mind,
makes no difference. It can hardly be contended that
in clause 13(g) the reference to the Commissioner was
to the incumbent of the Calcutta Port Trust
personally. It obviously refers to the Calcutta Port
Trust itself.

¶207

55. There is yet another difficulty in the
Petitioner’s way. Let me assume that Mrs.Bagalia’s
interpretation of clause 15.4 to the effect that
there is, under it, a total ban on the Petitioner’s
liability to pay interest is correct. I have already
held that the arbitrators’ view is not one which is
not plausible or one which can be said to be ex-facie
unsustainable. Especially in view of the judgment of
the Supreme Court, the view taken by the arbitrators
is certainly one of the plausible views. In that
view of the matter, in any event, it would not be
open for me under section 34 to set aside the award.
In Board of Trustees for the Port of Calcutta (supra)
the Supreme Court further held as under :

¶208

: 46 :

¶209

"5. Looked at from another
point, if there was a dispute as
to whether under this term of the
contract the arbitrator was
prohibited from awarding interest
pendente lite, that was a matter
which fell within the
jurisdiction of the arbitrator,
as the arbitrator would have to
interpret sub-clause (g) of
clause 13 of the contract and
decide whether that clause
prohibits him from awarding
interest pendente lite. In that
case it cannot be said that the
arbitrator had wandered outside
the contract to deny to him
jurisdiction to decide the
question regarding payment of
interest pendente lite. Even if
we were to accept the contention
urged by the learned counsel for
the appellant placing reliance on
paragraphs 26 and 29 of the
Associated Engineering Co. case
we think, that the arbitrator was
well within his jurisdiction in
awarding interest pendente lite."

¶210

Thus, in no view of the matter can the award in
this regard be set aside.

¶211

56(a). A similar question fell for consideration in
U.P.Hotels v. U.P.State Electricity Board (1989) 1
SCC, 359. In that case, while awarding a certain
claim the Umpire construed a judgement of the Supreme
Court in Indian Aluminium Co. Ltd. v. Kerala State
Electricity Board, (1975) 2 SCC, 414. For the

¶212

: 47 :

¶213

purpose of construing section 49 of the Electricity
(Supply) Act, 1948, the Umpire at length construed
the provisions of section 49 in the light of the
judgment of the Supreme Court in the Indian Aluminium
Companies case. The Supreme Court rejected the
challenge to the award in the following manner :

¶214

"17. It appears that the main
question that arises is: whether
the decision of this Court in
Indian Aluminium case was
properly understood and
appreciated by the learned Umpire
and whether he properly applied
the agreement between the parties
in the light of the aforesaid
decision. It was contended that
the question was whether the sums
payable under clause 9 included
discounts. On the aforesaid
basis it was contended that there
was an error of law and such
error was manifest on the face of
the award. Even assuming,
however, that there was an error
of construction of the agreement
or even that there was an error
of law in arriving at a
conclusion, such an error is not
an error which is amenable to
correction even in a reasoned
award under the law. Reference
may be made to the observations
of this Court in Coimbatore
District P.T. Samgam v. Bala
Subramania Foundry, where it was
reiterated that an awarrd can
only be set aside if there is an
error on its face."

¶215

"27. In the instant case, the
view taken by the Umpire on the

¶216

: 48 :

¶217

interpretation of the agreement
between the parties in the light
of the observations of this Court
in Indian Aluminium Co. case was
at best a possible view to take,
if not the correct view. If that
was the position then such a
view, even if wrong, cannot be
corrected by this Court on the
basis of long line of decisions
of this Court. In the aforesaid
view of the matter it is
necessary to examine the
aforesaid decision in the Indian
Aluminium Co. case.
.................................
.................................
The Umpire was right. In our
opinion, the Umpire committed no
error in arriving at such
conclusion. Furthermore, such a
conclusion is certainly a
possible view of the
interpretation of the decision of
this Court in Indian Aluminium
Co. case, if not the only view.
We need go no further than that."

¶218

"28. We are, therefore, of the
opinion that the view taken by
the Umpire on Section 49 was a
possible view in the light of the
decision of this Court in Indian
Aluminium case. In the premises,
a question of law arose certainly
during the course of the
proceedings. Such a question has
been decided by the Umpire on a
view which is a possible one to
take. Even if there was no
specific reference of a question
of law referred to the Umpire,
there was a question of law
involved. Even on the assumption
that such a view is not right,
the award is not amenable to
interference or correction by the
courts of law as there is no
proposition of law which could be
said to be the basis of the award

¶219

: 49 :

¶220

of the Umpire, and which is
erroneous."

¶221

56(b).The reasoning of the Supreme Court in
the above case squarely applies to the present case.
The learned arbitrators construed the judgment of the
Supreme Court in Board of Trustees For The Port of
Calcutta while arriving at their conclusion. I have
already held that it cannot be stated that the
construction placed by the learned arbitrators is
irrational, absurd or not plausible.

¶222

57. Faced with this situation, Mrs.Bagalia contended
that the entire body of law consisting inter-alia of
the judgments of the Supreme Court and the various
High Courts which lay down the principle embodied in
paragraph 5 of the judgment of the Supreme Court in
Board of Trustees for the Port of Calcutta set out
above are no longer good law in view of the
Arbitration and Conciliation Act, 1996 and in view of
the judgment of the Supreme Court in Oil & Natural
Gas Corporation Ltd. v. Saw Pipes Ltd. (2003)5
Supreme Court Cases, 705.

¶223

58.I am unable to accept this contention. I have
recently rejected a similar contention in Arbitration

¶224

: 50 :

¶225

Petition No.152 of 2004. In paragraphs 15 to 19, I
have held as under :

¶226

"15. Mr.Kotwal however
submitted that the judgment of
Supreme Court in Smita
Conductors Ltd. as well as all
the judgments of the Supreme
Court and the High Courts on
this point should be deemed to
be no longer good law in view
of the Arbitration and
Conciliation Act, 1996 and in
view of the judgment of the
Supreme Court in Oil & Natural
Gas Corporation Ltd. v. Saw
Pipes Ltd. (2003)5 Supreme
Court Cases, 705. According to
him, the judgment mandates that
when an award is challenged on
the ground that the
arbitrator’s interpretation of
a term in the contract is
incorrect, the Court must
construe the clause itself and
then set aside the award if its
interpretation of the term is
different from that of the
arbitrators even if the Court
comes to the conclusion that
the arbitrator’s interpretation
is plausible and arrived at
after due consideration
thereof.

¶227

16. The submission is
unfounded. The judgment in Oil
& Natural Gas Corporation Ltd.
v. Saw Pipes Ltd. does not
either expressly or even
impliedly support Mr.Kotwal’s
submission.

¶228

17. In Olympus Superstructures
Pvt. Ltd. v. Meena Vijay
Khetan & Ors. (1999)5 Supreme

¶229

: 51 :

¶230

Court Cases 651 the Supreme
Court held in paragraph 17 as
under :

¶231

"17. Section 34 of the
Act is based on Article
34 of the UNCITRAL Model
Law and it will be
noticed that under the
1996 Act the scope of the
provisions for setting
aside the award is far
(sic more or) less the
same as under Section 30
or Section 33 of the
Arbitration Act of 1940."

¶232

18. Mr.Kotwal’s submission is
contrary to the judgment of the
Supreme Court in the above
case. To accept Mr.Kotwal’s
submission would be to
radically alter the statutorily
and judicially circumscribed
limits to the Court’s
jurisdiction to interfere with
arbitration awards. It would
indeed confer a first appellate
court’s power on a court
exercising jurisdiction under
Section 34 of the 1996 Act.
There is nothing in the 1996
Act which indicates such an
intention on the part of the
legislature. That the
intention is to the contrary is
clear inter-alia from the
Arbitration and Conciliation
Bill, 1995 which preceded the
1996 Act which stated as one of
its main objectives the need "
to minimise the supervisory
role of Courts in the Arbitral
process".

¶233

19. In the circumstances, the
aforesaid principles laid down
consistently by the Supreme
Court and the various High
Courts cannot be said to be no

¶234

: 52 :

¶235

longer good law in view of the
1996 Act. Nor can it be said
that the observations of the
Supreme Court in Oil & Natural
Gas Corporation v. Saw Pipes
Ltd. (supra) have expressly or
impliedly rendered the
aforesaid judgments and the
principles contained therein no
longer good law in view of the
1996 Act. The principles apply
with equal force under the 1996
Act. In view thereof, the
Petitioner’s challenge to the
award in this regard must
fail."

¶236

I found no reason to persuade me to take a
different view on this aspect of the matter.

¶237

59.It is important to note that Mrs.Bagalia did not
contend that the judgment in Board of Trustees for
the Port of Calcutta does not support the view of the
learned arbitrators. In fact, on this aspect there
was no response from Mrs.Bagalia.

¶238

60(a).Mrs.Bagalia however relied upon the
judgment of the Supreme Court in Oil and Natural Gas
Corporation Ltd. versus Saw Pipes Ltd., (2003) 5
Supreme Court Cases 705 in respect of her contention
that the award of interest was unsustainable. The
question under consideration in O.N.G.C. v. Saw
Pipes was however not the same as one that was

¶239

: 53 :

¶240

decided by the Supreme Court in Board of Trustees for
the Port of Calcutta. In that case the clause
provided that no interest will be paid on disputed
claims. In that case, the Arbitral Tribunal had
arrived at a conclusion that the Appellant had
wrongly withheld/deducted certain amounts payable by
it to the Respondent on account of the delay in
supply of goods and on account of excise duty, sales
tax and freight charges as and by way of liquidated
damages and thereafter arrived at a conclusion that
the said amount was deducted from the undisputed
invoice amount and that therefore, the claim of the
Respondents cannot be held to be a disputed claim.
The Supreme Court held as under :-

¶241

"72.It is apparent that the
claim of the contractor to
recover the said amount was
disputed mainly because it was an
agreed term between the parties
that in case of delay in supply
of goods the appellant was
entitled to recover damages at
the rate as specified in the
agreement. It was also agreed
that the said liquidated damages
were to be recovered by paying
authorities from the bills for
payment of the cost of material
submitted by the contractor. If
this agreed amount is deducted
and thereafter the contractor
claims it back on the ground that
the appellant was not entitled to

¶242

: 54 :

¶243

deduct the same as it has failed
to prove loss suffered by it, the
said claim undoubtedly would be a
"disputed claim". The
arbitrators were required to
decide by considering the facts
and the law applicable, whether
the deduction was justified or
not. That itself would indicate
that the claim of the contractor
was "disputed claim" and not
"undisputed". The reason
recorded by the arbitrators that
as the goods were received and
bills are not disputed,
therefore, the claim for
recovering the amount of bills
cannot be held to be "disputed
claim", is, on the fact of it,
unjust, unreasonable,
unsustainable and patently
illegal as well as against the
expressed terms of the contract.
As quoted above, clause 34.4 in
terms provides that no interest
would be payable on "disputed
claim". It also provides that in
which set of circumstances,
interest amount would be paid in
case of delay in payment of
undisputed claim. In such case,
the interest rate is also
specified at 1% per month on such
undisputed claim amount. Despite
this clause, the Arbitral
Tribunal came to the conclusion
that it was undisputed claim and
held that in law, the appellant
was not entitled to withhold
these two payments from the
invoice raised by the respondent
and hence directed that the
appellant was liable to pay
interest on wrongful deductions
at the rate of 12% p.a. from
1-4-1997 till the date of filing
of the statement of claim and
thereafter having regard to the
commercial nature of the
transaction at the rate of 18%

¶244

: 55 :

¶245

p.a. pendente lite till
payment."

¶246

60(b).The Supreme Court construed the clause and
held that the amount which was withheld by the
Appellant constituted a disputed claim. I am not
prepared to accept Mrs.Bagalia’s contention that the

¶247

judgment in Board of Trustees for the Port of
Calcutta must be deemed to have been overruled by the
judgment in O.N.G.C. versus Saw Pipes. The Supreme
Court did not in that case consider the questions
that was decided in Board of Directors for the Port
of Calcutta. The judgment was not even referred to
in O.N.G.C. versus Saw Pipes. The reliance
therefore upon the judgment of the Supreme Court in
Oil and Natural Gas Corporation Ltd. versus Saw
Pipes Ltd. is not well founded.

¶248

61.The judgment of the Supreme Court in State of
U.P. v. Harish Chandra (1999) 1 S.C.C. 63 relied
upon by Mr.Chinoy is of no assistance to him. The
judgment construed the clause which in that case was
different from clause 15.4 in the present case. The
judgment therefore is of no assistance in construing
clause 15.4.

¶249

: 56 :

¶250

62.The rate of interest at 18% per annum was not
seriously challenged and indeed it cannot be. The
agreement is silent in this regard. The arbitrators
had the jurisdiction to grant interest at that rate
under section 37 of the 1996 Act.

¶251

63. In the circumstances, the challenge to the award
in so far as the arbitral tribunal has awarded
interest is rejected.

¶252

CLAIMS IN RESPECT OF WHICH THE AWARD IS SET ASIDE

¶253

64. Before I deal with the award in respect of the
remaining claims, it would be convenient to refer to
the authorities cited by Mr.Chinoy and Mrs.Bagalia
pertaining to the scope and ambit of interference by
a Court in respect of an award, under Section 34 of
1996 Act.

¶254

65. Mr.Chinoy relied upon various judgments of the

¶255

Supreme Court essentially in respect of the
submission that since the interpretation of the
contract is a matter for the arbitrator to determine,

¶256

: 57 :

¶257

the Court cannot substitute its decision regarding
the interpretation of the Contract. The Court cannot
substitute the decision of the arbitrator regarding
interpretation of the contractual provision once it
is found that this dispute was conceded to the
arbitrator. Thus, he submitted, even if in fact the
arbitrators had interpreted the relevant clauses of
the contract and the Court was of the view that the
interpretation is erroneous, the Court cannot touch
the award if it is within the jurisdiction of the
arbitrators to interpret the contract. He relied
upon the following judgments and the observations
therein :

¶258

(a).In Sudarshan Trading Co. versus Government of
Kerala, (1989) 2 SCC 38, it was held as under :-

¶259

"What is the interpretation of
the contract is a matter for the
arbitrator and on which the Court
cannot substitute its own
decision"

¶260

(b).In Hindustan Construction Company Ltd.
versus State of J. & K., (1992) 4 SCC 217, it was
held as under :-

¶261

: 58 :

¶262

"Even if in fact the arbitrators
had interpreted the relevant
clauses of the contract in making
their award on the impugned items
and even if the interpretation is
erroneous, the court cannot touch
the award as it is within the
jurisdiction of the arbitrators
to interpret the contract".

¶263

(c).Mr.Chinoy also relied upon the judgment in
H.P. State Electricity Board v. R.J. Shah & Co. :
(1999) 4 S.C.C. 214. I will deal with this judgment
in some detail while dealing with the award in
respect of Claim No.2 (Value of "R").

¶264

66.I have proceeded on the basis that the
judgments have not been rendered no longer good law
either in view of the 1996 Act or in view of the
judgments in O.N.G.C. versus Saw Pipes Ltd (supra).

¶265

67.Considering the grounds on which I have set
aside the award in respect of certain claims, it
would be convenient at this stage itself to refer to
the judgments of the Supreme Court in two cases
relied upon by Mrs.Bagalia.

¶266

(a). In Associates Engineering versus State of
Andhra Pradesh, AIR 1992 SC 232, the Supreme Court

¶267

: 59 :

¶268

found that the arbitrators had admittedly awarded a
claim contrary to the formulae expressly stipulated
in the contract. It is true, as Mr.Chinoy pointed
out, that there was no question of the Supreme Court
interpreting the contract in that case for the
parties agreed there that the award was on a basis
other than the one provided by the contractor. It is
pertinent to note however, for the purpose of this
judgment, that the award in that case did not seek to
construe or interpret the contractual provision. The
Supreme Court noting the fact that the formulae
provided by the contract was different from the
formulae applied by the arbitrators held : "this
question is reached not by construction of the
contract but by merely looking at the contract". The
Supreme Court further held in paragraph 26 as under:-

¶269

"26.The arbitrator cannot act
arbitrarily, irrationally,
capriciously or independently of
the contract. His sole function
is to arbitrate in terms of the
contract. He has no power apart
from what the parties have given
him under the contract. If he
has travelled outside the bounds
of the contract, he has acted
without jurisdiction. But if he
has remained inside the
parameters of the contract and
has construed the provisions of
the contract, his award cannot be

¶270

: 60 :

¶271

interfered with unless he has
given reasons for the award
disclosing an error apparent on
the face of it."

¶272

(b).In Rajasthan State Mines & Minerals Ltd.
versus Eastern Engineering, AIR 1999 SC 3627, the
Supreme Court held as under :-

¶273

26.In a concurring judgment,
Hidayatullah, J. after
considering the decision in
Champsey Bhara and Company’s case
(supra) observed that "the first
point is therefore to decide what
were the limits of the
arbitrator’s action as disclosed
by the reference and the deed of
partnership and then to see what
the arbitrator has actually done
and not what he may have stated
loosely in his award. This is
the only way in which the excess
of jurisdiction can be found. If
the interpretation of the deed of
partnership lies with the
arbitrator, then there is no
question of sitting in appeal
over his interpretation, in view
of the passage quoted above from
Champsey’s case but if the
parties set limits to action by
the arbitrator, then the
arbitrator had to follow the
limits set for him, and the court
can find that he has exceeded his
jurisdiction on proof of such
action."

¶274

Summarising its decision, the Supreme Court in

¶275

: 61 :

¶276

paragraph 44 (f), (h) and (i) held as under :-

¶277

"44 (f) : To find out whether
the arbitrator has travelled
beyond his jurisdiction,it would
be necessary to consider the
agreement between the parties
containing the arbitration
clause.Arbitrator acting beyond
his jurisdiction - is a different
ground from the error apparent on
the fact of the award.

¶278

(h)The award made by the
Arbitrator disregarding the terms
of the reference or the
arbitration agreement or the
terms of the contract would be a
jurisdictional error which
requires ultimately to be decided
by the Court. He cannot award an
amount which is ruled out or
prohibited by the terms of the
agreement. Because of specific
bar stipulated by the parties in
the agreement, that claim could
not be raised. Even if it is
raised and referred to
arbitration because of wider
arbitration clause such claim
amount cannot be awarded as
agreement is binding between the
parties and the arbitrator has to
adjudicate as per the agreement.
This aspect is absolutely made
clear in Continental Construction
Co.Ltd. (AIR 1988 SC 1166)
(supra) by relying upon the
following passage from M/s.
Alopi Prashad v. Union of India
(1960) 2 SCR 793 : (AIR 1960 SC
588) which is to be following
effect :-

¶279

."There it was observed
that a contract is not frustrated
merely because the circumstances

¶280

: 62 :

¶281

in which the contract was made
altered. The Contract Act does
not enable a party to a contract
to ignore the express covenants
thereof, and to claim payment of
consideration for performance of
the contract at rates different
from the stipulated rates, on
some vague plea of equity. The
parties to an executory contract
are often faced, in the course of
carrying it out, with a turn of
event which they did not at all
anticipate, a wholly abnormal
rise or fall in prices, a sudden
depreciation of currency, an
unexpected obstacle to execution,
or the like. There is no general
liberty reserved to the courts to
absolve a party from liability to
perform his part of the contract
merely because on account of an
uncontemplated turn of events,
the performance of the contract
may become onerous."

¶282

(i)The arbitrator could not
act arbitrarily, irrationally,
capriciously or independently of
the contract. A deliberate
departure or conscious disregard
of the contract not only
manifests the disregard of his
authority or misconduct on his
part but it may tantamount to
mala fide action."

¶283

CLAIM NO.1

¶284

68.The Respondent claimed various amounts in
respect of its Running Bill Nos.66, 67 and 68. The
Petitioner contended that Bill Nos.66 and 67 were
passed but payments in respect thereof had not been

¶285

: 63 :

¶286

released as the amounts thereunder were to be
adjusted towards recoveries due from R.A. Bill No.68
which was the final bill.

¶287

69.The recoveries were on various counts. The
one that I am concerned with in this case is the
recovery made towards steel not recovered. The
Petitioner adjusted an amount of Rs.13,60,005/-
towards shortage on account of steel issued to the
Respondent. The Respondent did not deny that amounts
were to be recovered on this account by the
Petitioner but contended that the same should be at
the normal issue rate as against the rate at which
the Respondent sought to recover the same viz. at
the then prevailing market rates. The learned
arbitrators have permitted the Petitioner to recover
the amounts for this item, only in the sum of
Rs.8,07,469/-.

¶288

70.Clause 42.5.1 of the Special Conditions of
Contract reads as under :

¶289

"42.5.1 Recovery for scrap /
unaccounted steel :

¶290

Recovery for the scrap and
unaccounted steel shall be
regulated on the following

¶291

: 64 :

¶292

basis :-

¶293

`Type` `------------------`	`M.S.Road` `---------------`	`Structural` `Sections &` `Plates` `---------------`	`Rate of` `recovery` `-----------`
`i) Irrecoverable` `wastage for` `which no` `charges will` `be levied`	`NIL`	`Up to maxi.of` `2% of the` `weight based` `on approved` `DOD/drawings`	`NIL`
`ii)Recoverable` `wastage`	`up to 6% of` `the total` `weight of` `rods of the` `particular` `section used` `in work`	`A further 6%` `of the weight` `based on` `approved DOD/` `drawings`	`At 75%` `of the` `prevai-` `-ling` `market` `rate*`
	`Beyond` `6% as` `Above`	`Beyond 8% as` `above`	`At twice` `the` `prevai-` `-ling` `Market` `rates*` `(emphasis` `supplied)`

¶294

*for the relevant section at final accounting stage."

¶295

 -----------------------------------------------------------

¶296

 71.The finding of the arbitrators is as follows :

¶297

"..... It is to be stated that
provision of recovery at double
the market rates was intended to
be a deterrent against pilferage
or theft of steel sections when
it was a controlled commodity and
the market price of steel was
much higher, when compared with

¶298

: 65 :

¶299

the departmental issue rate.
This was no longer true and steel
was easily available in the
market. In any case the Claimant
is agreeable to the recovery at
market rate plus 20% departmental
charges amounting to
Rs.8,07,469/-. We are of the
opinion that this is a just and
equitable figure and as such we
hold that recovery for
unaccounted steel be made for an
amount of Rs.8,07,469/- only."

¶300

72.The award is ex-facie unsustainable. The
arbitrators were not called upon to decide whether the
intention behind the clause was outdated. They were
not called upon to decide whether the purpose behind
the clause was no longer in existence. In fact they
were not called upon to decide the purpose of the
clause at all. They had no mandate from the parties
to decide such questions. They therefore had no
authority or jurisdiction to decide these questions.

¶301

73.In order to see what the jurisdiction of the
arbitrator is, it is open to the Court to see what
dispute was submitted to him (Associated Engineering
Company v. Government of Andhra Pradesh, AIR 1992
Supreme Court, 232, paragraphs 28 and 29). For this
purpose the Court may look into documents including
the contract and the reference made to the

¶302

: 66 :

¶303

arbitrators. (See H.P.State Electricity Board v.
R.J.Shah & Company (1999) 4 Supreme Court Cases, 214).
I therefore went through the statement of claim in
this regard. What is surprising is that the parties
did not even put this aspect in issue. There is not a
whisper therein inviting the arbitrators to decide
these questions.

¶304

74.It is important to note that the arbitrators
have not even attempted to state that the clause as
read, does not support the recovery sought to be made
by the Petitioner. It was not for the arbitrators to
go into the question of the purpose of the contractual
provision specially when neither party invited them to
do so. They had quite simply to decide the matter in
accordance with the contractual provision which they
failed to do. The arbitrators having noted the clause
deliberately disregarded and ignored it and made the
award contrary to the express terms of the contract.
That they have done so is clear from the last sentence
quoted above, where the arbitrators state that their
award is on the basis of the Respondent’s suggestion,
which they perceived to be "just and equitable".
This, they were clearly not entitled to do. The award
in this regard is clearly contrary to several

¶305

: 67 :

¶306

judgments of the Supreme Court (See for instance in
Alopi Prasad v. Union of India, A.I.R. 1960 Supreme
Court, 588).

¶307

75.Mr.Chinoy did not meet this case during the
hearing. But obviously, as stated in the written
submissions filed on behalf of the Respondent, this
was through inadvertance. The written submissions
however only make matters worse for the Respondent and
in fact support the conclusion I have come to. The
written submissions do not even attempt to support the
reasoning of the arbitrators.

¶308

76.It is not contended in the written

¶309

submissions that the arbitrators construed the clause.
It is not even contended that the calculation was
based on an implied construction of the clause. It is
not contended that the arbitrators were entitled to
overlook or disregard the clause for any reason. Nor
is it contended that the clause for some reason did
not continue to operate. It is stated that the
Respondent contended in the statement of claim that
the steel was not "unaccounted" having been used in
ancilliary works. But, this was neither the finding
nor the reasoning furnished by the arbitrators. The

¶310

: 68 :

¶311

finding was in fact to the contrary, as the
arbitrators did not permit a part of the deduction.
The arbitrators therefore did not base their award on
what the Respondent contends in the written
submission.

¶312

77.In awarding this claim the arbitrators
travelled outside the boundary of the contract and
clearly exceeded their jurisdiction. They also
adjudicated upon aspects that were not referred to
them.

¶313

78.The award, in so far as it permits recovery
of only Rs.8,07,469 and not Rs.13,60,005 is set aside.
The Petitioner shall be entitled to recover a sum of
Rs.13,60,005/- in respect of scrap unaccounted steel.

¶314

Re: CLAIM NO.2 (VALUE OF ‘R’)

¶315

79.The other item in claim no.2 in respect of
which the award was challenged was in respect of the
arbitrators having reduced the value of the variable
‘R’ in the formula specified in the contract for

¶316

: 69 :

¶317

calculating escalation.

¶318

80.Clauses 28.4 and 28.6 read as under :-

¶319

"28.4The percentage component
of various items in the contract
on which variation in prices
shall be admissible shall be as
given in the table below. In the
event of Corporation arranging
for supplies of
explosives/detonators at fixed
prices as stated in clause 43
hereof, the relevant percentage
components mentioned hereunder
will not be considered for any
price variation.

¶320

---------------------------------
Description ofPercentage
Componentcomponent
for tunnel
works

¶321

`Labour`	`45%`
`Fuel`	`15%`
`Explosives`	`15%`
`Detonators`	`5%`
`Other materials`	`5%`
`Fixed component`	`15%`
`(which` `will`
`not be considered`
`for any price`
`variation)`

¶322

28.6The amount of variation

¶323

: 70 :

¶324

in prices in the several
components (labour, material
etc.) shall be worked out by the
following formulae :

¶325

`R`	`X`	`(I-Io)`	`P`
`i) L = --`	`--`	`------X---`
`Io`			`100`
`R`	`X`	`(W-Wo)`	`Q`
`ii) M = --`	`--`	`------X---`
`Wo`			`100`
`R`	`X`	`(F-Fo)`	`Z`
`iii) U = --`	`--`	`------X---`
`Fo`			`100`
`R`	`X`	`(E-Eo)`	`S`
`iv) X = --`	`--`	`------X---`
`Eo`			`100`
`R`	`X`	`(D-Do)`	`T`
`v) N = --`	`--`	`------X---`
`Do`			`100`

¶326

L = Amount of price variation in
Labour

¶327

M = amount of price variation in
materials

¶328

U = Amount of price variation in
fuel

¶329

X = Amount of price variation in
explosives

¶330

N = Amount of price variation in

¶331

: 71 :

¶332

Detonators

¶333

R = Gross value of the work done
by the contractor as per on
account bill (s) excluding cost
of materials supplied by
Corporation at fixed price. This
will also exclude specific
payment, if any, to be made to
the consultants engaged by the
Contractors (such payment will be
indicated in the contractors
offer). (emphasis supplied)

¶334

.Of the variables in the above formula, we

¶335

are concerned only with ‘R’. It is unnecessary
therefore to set out the particulars of the other
variables.

¶336

81.The main difference between the parties in
respect of ‘R’ as stated out by the arbitrators was:-

¶337

"a.Computation of value of
"R" whether the same is equal to
the gross value of work or any
deductions to be made from the
gross bill."

¶338

82.Mrs.Bagalia submitted that the arbitrators
computed the variable "R" contrary to the express
provision in Clause 28.6. The submission is well
founded.

¶339

: 72 :

¶340

83.The Petitioner calculated the value of "R"

¶341

expressly in accordance with Clause 28.6, by
excluding the cost of material supplied by the
Petitioner at fixed prices. The arbitrators however
held :

¶342

"For calculation of price
variation for labour, fuel and
other material, gross value of
the work done as per on account
bills be taken in computation as
"R"." (emphasis supplied)

¶343

A mere reading of clause 28.6 shows that this is
not permissible. Let me summarise what I will
presently demonstrate :-

¶344

i) The arbitrators in fact expressly construed
the clause correctly by holding that "R" is
definedas gross value of work done excluding
the cost of materials supplied by the
Corporation at fixed price. (Paragraph 2.5
of the award).

¶345

ii) This construction is not only correct but is

¶346

the only possible construction. This
construction is arrived at not by

¶347

: 73 :

¶348

interpreting the clause but by merely looking
at the clause (As did the Supreme Court in
Associated Engineering (supra) paragraph 23).

¶349

iii) The basis of the award extracted in sub-para
(a) above is not only contrary to the express
language of clause 28.6 but is in fact
contrary to the arbitrators construction of
clause 28.6.

¶350

iv) Even assuming by some process of reasoning
that the arbitrators did not construe clause
28.6 as held by me above, the award cannot be
upheld for the basis of the award quoted in
sub-para (a) above is neither supported by
nor a consequence of any interpretation of
clause 28.6 on the part of the arbitrators.

¶351

Other than what I have referred to in clause
(i) above the award is totally silent on the
aspect of the interpretation of clause 28.6.
In that case it must necessarily be held that
the arbitrators did not even attempt to
construe or interpret the clause.

¶352

: 74 :

¶353

v) That the arbitrators noted the clause and the
submission of the parties regarding the
interpretation thereof does not ipso-facto
justify the conclusion that the arbitrators,
sub-silentio, interpreted the clause.

¶354

vi) The arbitrators considered the deductions
provided by the contract as illogical.
Indeed the logic of the provisions/deductions
were not even in issue before the learned
arbitrators. I will shortly demonstrate that
the finding of the learned Arbitrators :
"These deductions are not very logical
...................." referred not to the
deductions made by the Petitioners being
illogical as being contrary to clause 28.6
but to the contractual provision itself being
illogical.

¶355

84.Clause 28.6 is so clear that it does not
admit of two views. I asked Mr.Chinoy by what
process of reasonings would another interpretation be
possible. In other words, I asked him on what basis
could it be contended that while considering the
value of "R", the cost of the material supplied by

¶356

: 75 :

¶357

the Petitioner at a fixed price should not be
excluded. He was able to furnish none.

¶358

85.Mr.Chinoy submitted however that the award
was not open to challenge under Section 34 as,
according to him there was a dispute regarding the
import and effect of the value of "R" ; that the
arbitrators’ interpretation thereof was expressly
sought ; that the arbitrators’ interpreted the
clause after treating it as a point of interpretation
and only thereafter accepted the Respondent’s
interpretation.

¶359

86.I will assume that there was a dispute
regarding the import or effect of the clause. I will
also assume that the parties were not ad-idem about
the interpretation of the clause. I will further
assume that the arbitrators were called upon to
interpret the clause. I cannot however, assume that
the arbitrators interpreted the clause as suggested
by Mr.Chinoy. They quite plainly did not. This is
clear from paragraph 2.5 of the award. As I have
decided to set aside the award in this regard, it is
only fair that I set out the entire paragraph. It
reads as under :-

¶360

: 76 :

¶361

"2.5In the instant case,
explosives and detonators are
supplied by the Respondent at
fixed prices in accordance with
the provisions of the contract
and as such no price variation is
payable for these items.
Formulae given under Clause 28.6
are to be adopted only in case of
labour, fuel and other materials.
Percentage of these components is
given under Clause 28.4. It is
to be noted that these
percentages are for the gross
value of the work executed. The
confusion arises only because
under Clause 28.6, "R" is defined
as gross value of the work done
by the contractor as per on
account bill (s) excluding the
cost of materials supplied by
Corporation at fixed prices.
Respondent has supplied at fixed
prices explosives and detonators.
If the value of these items is
reduced from the amount of the
gross value of the work done,
percentage of labour, fuel and
other material get automatically
reduced and the total of all the
components would no longer be 100
; i.e. reduction in value of R
would automatically mean
reduction in the percentage of
the components specified under
Clause 28.6. During oral
submissions, the Claimant stated
that in the initial stages, the
Respondent has computed and paid
the escalation amounts on the
basis of the gross value of bill
taken as R but at a later date
they started making deductions
for the supply of explosives and
detonators. These deductions are
not very logical as assumingthat
the Contractor has procured these
items from the market at a fixed

¶362

: 77 :

¶363

price, the value of R for
computation of labour, fuel and
other materials shall have to be
considered all inclusive,
although the Claimant would not
get any escalation for explosives
and detonators. In view of this
we are of the opinion that for
calculation of price variation
for labour, fuel and other
materials gross value of work
done as per on account bills be
taken in computation as "R"."
(emphasis supplied)

¶364

87.The entire reasoning is aimed only at
indicating why the contractual provision is not
logical. The arbitrators in the first sentence
emphasised above state that "confusion arises"
because of the definition of "R". They do not state
why the confusion arises.

¶365

88.It is crucial to note that in that sentence
the arbitrators expressly note that "R is defined as
gross value of work done..........excluding the cost
of material supplied". They thus noted the fact that
clause 28.6 required the cost of material supplied to
be excluded from the value of ‘R’. This was the
arbitrators’ interpretation. At no stage in the award
have they interpreted the clause otherwise. If it is
held that this was not the interpretation of the
arbitrators then I am afraid that the arbitrators

¶366

: 78 :

¶367

have not interpreted the clause at all. Other than
this sentence there is nothing else in the award that
can be considered an exercise of interpretation.

¶368

89.In the second sentence emphasised above, the
arbitrators attempted to demonstrate why according to
them the contractual provision is absurd. The
opening words in that sentence, "If the value of
these items is reduced from the amount of gross value
of the work done .....................", establishes
this clearly. The arbitrators do not in this
sentence say that the value of those items is not to
be reduced as per clause 28.6. They merely state the
consequence of reduction as per the clause. The
sentence therefore does not indicate even an attempt
at interpreting the clause. The second sentence
emphasised in the paragraph therefore merely
indicates the arbitrators’ reasons for the deductions
contractually provided being illogical. There is not
one sentence in the entire award which states either
expressly or even impliedly that the construction of
the clause does not warrant the deductions.

¶369

90.The thirdsentenceemphasised above
therefore clearly is the arbitrators opinion that the

¶370

: 79 :

¶371

value of ‘R’ as provided in the contract is not
logical and not that the Petitioner’s deductions were
not logical as being contrary to the clause.

¶372

91.Mr.Chinoy did not dispute the fact that the
arbitrators had held that the clause was not logical.
Mr.Chinoy was also unable to show me any part of the
award which indicates that the clause had been so
interpreted as to lead to the conclusion in the award
I have quoted in paragraph 83 herein.

¶373

92.Mr.Chinoy, however, submitted that I must
assume that the clause had been construed in view of
certain facts. He stated that the arbitrators had
extracted in paragraph 2 a part of the statement of
claim where the Respondent had stated that reduced
payment was based on the Petitioner’s improper
interpretation of the contract provisions. The
arbitrators in paragraph 2.1 referred to the
Petitioner’s reply thereto by relying upon the
aforesaid provisions to contend that while taking the
value of "R" all costs of material supplied by the
Petitioner at fixed prices are to be deducted. In
paragraph 2.3, the arbitrators have recorded that as
there were discrepancies in the statements submitted

¶374

: 80 :

¶375

by the Petitioner, the arbitrators directed both the
parties to jointly prepare the statements for
calculating the escalation payable and the amount
actually paid as escalation. Pursuant to the
directions, the parties submitted their calculations.
A joint note was signed by both parties stating their
rival claims. The note further stated that "the main
difference is on the following issues" :-

¶376

."(a). Computation of value of "R" whether the
same is equal to gross value of work or any
deductions to be made from the gross bill".

¶377

93.In paragraph 2.4 the arbitrators stated that
the "computations made by the Respondent and the
claimant have to be decided on the correct
interpretation of the contractual provision". They
thereafter set out the relevant clauses which I have
set out above. All that paragraph 2.4 indicates is
that the arbitrators stated that the computations
made by the parties have to be on the correct
interpretation of the contractual provisions. They
however did not followed up the same by interpreting
the contractual provisions as suggested by Mr.Chinoy.

¶378

: 81 :

¶379

94.Mr.Chinoy submitted that it cannot be
contended that the arbitrators were oblivious of
clause 28.6. I agree. He submitted that the
arbitrators had in fact referred to the contractual
provisions in the award. That is clear. Therefore,
he submitted, I must presume that the arbitrators in
fact construed the clause. At the cost of repetition
it is imperative to reiterate that the only reference
to interpretation of clause 28.6 is in the first
emphasised sentence of paragraph 2.5 of the award set
of earlier in this judgment, where the arbitrators
interpretated the clause correctly and in conformity
with the Petitioner’s submission. However, despite
the same they proceeded to make the award contrary
thereto on the basis that the deductions provided
therein were not quite logical.

¶380

95.Merely because the arbitrators referred to
the contractual provisions and to the contentions of
either side, it would not justify the conclusion that
the arbitrators construed the contractual provisions.
Nor would it justify the conclusion that the
arbitrators did not disregard the contractual
provisions. The contention that once it is found
that the arbitrators have noticed the relevant

¶381

: 82 :

¶382

provision in the contract and stated that the
interpretation thereof is required it follows
ipso-facto in all cases that the arbitrators have in
fact interpreted the clause is unsustainable. The
contention has less force when the arbitrators are
required to give a reasoned award as in the present
case. In the facts of this case the contention has
no force for the reasons I have already given. In
the present case the arbitrators despite having noted
the relevant clauses did not even attempt to construe
them. They have nowhere stated that they construed
the clause. And this, after having correctly
construed the clause to expressly exclude the said
costs. They referred to but disregarded the clause
and made an award contrary to the express provisions
thereof.

¶383

96.Mr.Chinoy referred to paragraph 2.3 of the
award for two reasons. Firstly he submitted that the
note signed by both parties constituted a specific
reference as to the interpretation of the clause in
the course of a general reference by the parties.
This would be less than fair to the Petitioner. It
was for the convenience and as per the directions of
the arbitrators that the note was prepared. This is

¶384

: 83 :

¶385

clear from the second sentence in paragraph 2.3. The
parties did not do so voluntarily. In fact the third
sentence in paragraph 2.3 makes it clear that it was
pursuant to these directions that the parties
submitted the note. In the circumstances, I reject
the contention that the note constitutes a specific
reference as to the interpretation of the clause.

¶386

97 (a).Mr.Chinoy relied upon the judgments of the
Supreme Court I have referred to earlier in support
his submissions which I have also set out earlier.
He placed particular reliance upon the judgment in
H.P.State Electricity Board v. R.J.Shah & Co. :
(1999) 4 Supreme Court Cases, 214.

¶387

(b).In that case, the Appellant’s contention was
that the contract was an item rate contract. It was
only in respect of those items which crossed the
deviation limit of 20% that revised market rates were
to be paid. It was further submitted that on a
correct interpretation of clause 12-A, the
arbitrators had no jurisdiction to revise the rates
of any item merely because the overall value of the
contract had been exceeded by 20% and that the
contract permitted increased rates for individual

¶388

: 84 :

¶389

items only if there was a deviation in respect of the
individual items by more than 20%. Mr.Chinoy relied
upon paragraph 21 of the judgment, where the Supreme
Court held, following the earlier decisions of the
Supreme Court in Sudarshan Trading Company versus
Government of Kerala, 1989 (2) S.C.C. 38, that once
there is jurisdiction as to the contract, what is the
interpretation of that contract, is a matter for the
arbitrator and on which the Court cannot substitute
its own decision. Mr.Chinoy then relied upon
paragraphs 25, 26 and 27 of the judgment which read
as under :-

¶390

"25.Fromtheaforesaid
decisions of this Court, and the
last one in particular, it is
clear that when the arbitrator is
required to construe a contract
then merely because another view
may be possible the court would
not be justified in construing
the contract in a different
manner and then to set aside the
award by observing that the
arbitrator has exceeded the
jurisdiction in making the award.

¶391

26.In order to determine
whether the arbitrator has acted
in excess of jurisdiction what
has to be seen is whether the
claimant could raise a particular
dispute or claim before an
arbitrator. If the answer is in
the affirmative then it is clear
that the arbitrator would have
the jurisdiction to deal with

¶392

: 85 :

¶393

such a claim....................

¶394

27.Inthiscase the
arbitration clause is widely
worded. The dispute which was
referred to the arbitrators,
inter alia, related to the
construction of the contract.
The contract did visualise the
contractor raising a claim for
revision of rates. The dispute
was as to when such a claim could
be raised. According to the
appellant herein this being an
item rate contract the revision
of rates could take place only in
accordance with clause 12-A when
there was a deviation of more
than 20 per cent with regard to
individual items. On the other
hand the terms of the contract,
according to the claimant,
permitted a claim being made of
revision in rates if there was an
increase of 20 per cent of the
total value of the contract. The
disputed before the arbitrators,
therefore, clearly related to the
interpretation of the terms of
the contract. The said contract
was being read by the parties
differently. The arbitrators
were, therefore, clearly called
upon to construe or interpret the
terms of the contract. The
decision thereon,even if it be
erroneous, cannot be said to be
without jurisdiction. It cannot
be said that the award showed
that there was an error of
jurisdiction even though there
may have been an error in the
exercise of jurisdiction by the
arbitrators".

¶395

(c).The judgment is of no assistance to Mr.Chinoy
for it proceeded on the basis that the arbitrators

¶396

: 86 :

¶397

had interpreted the clause. The Supreme Court did
not find that the arbitrators had failed to construe
the clause. Nor did the Supreme Court find that the
arbitrators had made an award contrary not merely to
the contractual provision but also contrary to the
arbitrators own construction thereof and which
construction was correct. It must also be remembered
that it was a decision under the 1940 Act and a case
in which the Supreme Court was dealing with a
non-speaking award. In the present case, the
arbitrators were bound to give reasons. The only
reason in the award which I can decipher is that the
contractual provision is illogical. The judgments
are therefore of no assistance to Mr.Chinoy in view
of what I have held.

¶398

98.The mere fact that the Petitioner may have
made the payments at one stage without making the
aforesaid deductions can be of no assistance. If a
clause is susceptible to two interpretations, this
may be one factor to be taken into consideration
while interpreting the clause. Mr.Chinoy’s entire
argument was therefore based on an erroneous
presumption that the arbitrators had interpreted the
clause. Founding himself on this erroneous basis he

¶399

: 87 :

¶400

submitted that the interpretation of the arbitrators
cannot be challenged on the ground that another view
is possible.

¶401

99.Had the clause been clear and to be
interpreted in the manner contended by the
Respondent, it may have been one thing. But to my
mind, the clause is clearly contrary to what the
Respondent now contends it ought to be.

¶402

100.The award in this regard is therefore set
aside. The amount shall be calculated in accordance
with clause 28.6 i.e. excluding in the value of ‘R’
the cost of materials supplied by the Petitioner at
fixed prices.

¶403

Re: CLAIM NO.7

¶404

101.The Respondent made this claim before the
arbitrators in respect of "Tunnel Hazards". The
Respondent in the course of the proceedings abandoned
this basis and required the determination of the
claim on the entirely different basis of "Tunnel

¶405

: 88 :

¶406

over-breaks". This without even an amendment of the

¶407

reference.

¶408

102.As I intend setting aside the award in so far
as the arbitrators have granted a part of this claim,
I will set out the statement of claim in this respect
in its entirety.

¶409

"S.C.-15 Claim No.7 : Tunnel
Hazards

¶410

Despite adequate precautions
taken by the contractor during
the tunnel excavation, excessive
overbreaks had occured in the
tunnel due to concealed joints
fractures and other natural
weaknesses in the rock strata.
In such a case the rock breaks
along the plane of the concealed
joints, which is weaker than the
plane of opening desired to be
created during excavation.
Therefore the actual overbreak
was much larger than 10% payable
to the contractor and this
created special hazards in the
tunnel.

¶411

Under clause 50.2.5 of the
Special Conditions of Contract,
the excavation and removal of
debris connected with the tunnel
hazards and not due to the
contractor’s fault is payable
separately at a rate to be
mutually negotiated.

¶412

The claimant has claimed a rate
of Rs.150 per cubic meter for the
additional overbreak, as stated

¶413

: 89 :

¶414

in letter 100/178/1/4199 dated
24.07.1996. (Annexure 31). But
the Respondent failed in settling
the claim. The amount payable
for the additional overbreak
quantity of 15816.949 cubic meter
@ Rs.150 per cubic meter is
Rs.23,72,542/-. The claimant
also claims interest thereon @ 25
per cent per annum from
24-07-1996 upto the date of
payment. The claimant humbly
requests the Hon’ble Arbitrators
to kindly award the same in its
favour."

¶415

103. It is important to note at this stage itself
that in the rejoinder to the Petitioner’s reply to
this claim the Respondent has done nothing more than
repeating and reiterating what is stated in paragraph
15 above in its statement of claim. It is clear
therefore that the claim was specifically for tunnel
hazards.

¶416

104. The arbitrators accepted the Petitioner’s case
that a claim for tunnel hazards under clause 50.2.5
of the Special Conditions of Contract was
unsustainable. They rightly held that the procedure
provided under clause 7.1 and 7.2 of the

¶417

specifications for tunnelling were not followed.
That the procedure was not followed was conceded by
the Respondent as recorded in the award. The

¶418

: 90 :

¶419

arbitrators held in paragraph 7.5 of the award as
follows :

¶420

"7.5 After going through all the
relevant provisions in the
contract agreement and the facts
brought out by the Claimant and
the Respondent during their
written and oral submissions, we
find that this claim does not
fall under "Tunnel Hazards" as
the procedure laid down in the
agreement was not followed by the
Claimant. As such the Claimant’s
request for a mutually negotiated
rate as provided under clause
50.2.5 can not be applied".

¶421

Thus, the claim as pleaded by the Respondent
stood rejected and, if I may add, rightly so. Having
come to this conclusion the arbitrators ought merely
to have rejected the claim and nothing more.

¶422

105. The Respondent, realizing the sheer
unsustainability of its claim, abandoned it for
another as recorded in paragraph 7.2 of the award.
The Respondents contended, without any pleadings,
that it is actually a case of over-breaks. They
further contended that the excessive over-break was
due to the Petitioner having decided to do away with
the lining of the tunnel in almost 90% of the length

¶423

: 91 :

¶424

and having kept it unlined or treated by guniting.
The Respondent contended that they were therefore
required to finish the excavated surface of the
tunnel in such a manner that all intrusions were
removed and that this was not expected by it at the
time of submission of the tender.

¶425

106. This new plea could not have been entertained
by the arbitrators as the parties had not submitted
the same to arbitration. They had no jurisdiction to
do so. No claim for over-breaks was made. In fact,
the statement of claim indicates that the Respondent
had deliberately sought to side-track the provisions
of the contract under which it could have claimed
over-breaks and sought to make a claim for tunnel
hazards. The reason is not too far to see. Under
clause 50.2.1 the rate payable for over-breaks is
specified. It is clearly stated that for over-breaks
beyond 10% there shall be no payment. Clause 50.2.2
reiterates this making it amply clear. There was
therefore a bar to the payment for over-break beyond
10%. This is the obvious reason why the claimant
made a claim for tunnel hazards. They however
realised during the course of the arbitration that
the claim for tunnel hazards would be unsustainable

¶426

: 92 :

¶427

for the reasons I have already mentioned. They
therefore, before the arbitrators, sought to base
their claim for over-breaks, a claim they had never
made.

¶428

The arbitrators have not held or observed that it
was a mistake in drafting. They had not held or
observed that in sum and substance the claim as made
in the statement of claim was actually for
over-breaks and not for tunnel hazards. Indeed, all
this was not even the Respondent’s case.

¶429

107. Despite the same, the learned arbitrators
proceeded to adjudicate the matter as a case of
over-breaks, a case which I have just observed, was
not even pleaded. The award therefore deals with a
dispute which was not even referred to the
arbitrators. The arbitrators therefore had no
jurisdiction to deal with the monetary claim contrary
to the basis on which the claimant had made it.

¶430

108. The fact that in their written submissions the
Petitioner may have dealt with this case is totally
irrelevant. The arbitrators having permitted the
Respondent to argue such a case and the fact that the

¶431

: 93 :

¶432

Respondent had referred to it in their written
submissions, made it necessary for the Petitioner to
respond to the same. That will not confer
jurisdiction upon the arbitrators. To hold to the
contrary would be grossly unfair to the Petitioner.

¶433

109. This is how the learned arbitrators dealt with
the matter after having expressly rejected the
Respondent’s claim on the basis of which it was made:

¶434

"However, we find that the
Respondent has made deviations by
not providing lining for most
part of the tunnel and therefore
the contractor was required to
provide the smooth surface of the
excavated tunnel profile. This
could not have been envisaged by
the contractor at the time of
quoting his rates. Therefore we
are convinced that he had to put
in extra efforts by way of
removing intrusions from the
excavated surface of the tunnel.
This may be in our opinion the
cause of excessive over breaks.
We are unable to appreciate that
the excess over breaks are the
result of the improper survey
made by the contractors
especially in view of the
appreciation of the quality of
the work accorded by the
Respondents as is evident from
para 2.7 above."

¶435

The subsequent part deals with the quantification

¶436

: 94 :

¶437

of the claim which is really irrelevant for the
present purpose. The sentence I have emphasised
above, in fact, indicates that the arbitrators had
not even determined the cause of excessive
over-breaks. The use of the word "may" adds to the
fact that this issue was never before the
arbitrators. The arbitral tribunal therefore decided
a question not referred to it. This they could not
have done (Associated Engineering Company v.
Government of Andhra Pradesh, A.I.R. 1992 Supreme
Court, 232, paragraph 28).

¶438

110.Mr.Chinoy sought to support the award on claim
No.7 on the basis of the judgment of the Supreme
Court in Tarapore and Company versus Cochin Shipyard
Ltd. Cochin (1984) 2 SCC, 680. The learned
arbitrators however clearly did not base their award
either upon the judgment in Tarapore’s case or upon
the ratio thereof. The judgment of the Supreme Court
would not apply to the facts of this case. I shall
deal with the judgment in Tarapore’s case in greater
detail while dealing with the award in respect of
claim No.8 (5). What I have observed qua Tarapore’s
case in respect of Claim No.8(5) applies equally to
Claim No.7. Suffice it to state at this stage that

¶439

: 95 :

¶440

the fact situation which was the basis of the
judgment in Tarapore’s case was not even part of the
reference before the learned arbitrators. In fact
the claim as founded in the statement of claim was
itself abandoned. The statement of claim was not
even amended to refer a dispute of the nature that
constituted the basis of the decision in Tarapore’s
case.

¶441

111.The judgment in Tarapore’s case is therefore of
no assistance to the Respondent. It did not form the
basis of the Respondent’s claim. The Respondent did
not aver any facts or make any submissions of the
nature dealt with by the Supreme Court in Tarapore’s
case. Indeed, at the cost of repitition, it must be
noted that even the basis of the claim as pleaded in
the statement of claim was abandoned. The matter
therefore was not even referred to arbitration. The
arbitrators therefore were neither called upon to nor
decided the claim on the basis of Tarapore’s case or
on the basis of facts or principles of law similar
thereto.

¶442

112.Mr.Chinoy had submitted that no ground had been
made in the Petition challenging the award relating

¶443

: 96 :

¶444

to tunnel over-breaks and that the ground relied upon
in the Petition viz. ground (q) was merely a general
ground not adequate to entitle the Petitioner to
challenge the award in this regard. He further
submitted that the material facts regarding this
ground of challenge have not been pleaded. He
therefore submitted that the Petitioner was not
entitled to challenge the award in respect of Claim
No.7. The submission is unfounded.

¶445

113.The Petitioner had taken out a Notice of Motion
being Notice of Motion No.1734 of 2004 for amendment
of the Petition. I dismissed that Notice of Motion
on the ground that if the amendments sought
constituted a new challenge it was barred by
limitation in view of the judgment of this Court in
Pushpa M. Mulchandani v. Admiral R. Tahiliani
(2001) LJ Soft 74. On the other hand, if it was
covered by an existing ground or was merely an
amplification of an existing ground, the Petitioner
would be at liberty to urge the same. I had made it
clear to the Respondent that they were at liberty to
deal with this ground of challenge including by
filing a further affidavit or fresh documents. The
Respondent however did not choose to file any further

¶446

: 97 :

¶447

affidavit or documents. In ground (q) the Petitioner
had expressly taken the ground that the arbitrators
had while making the award ignored the mandate of the
contract. It was further stated that the same
amounted to re-writing the contractual terms which
they had no power to do. The Respondent thereafter
illustrated this contention by furnishing two
examples. The examples pertained to Claim No.1 and
Claim No.10. The illustrations were prefaced with
the words : "This amounts to re-writing of contract
terms which no Court has the power e.g." (emphasis
supplied). It is thus clear that the challenge on
this ground was not restricted to Claim No.1 and
Claim No.10.

¶448

114.In the circumstances, these grounds formed the
basis of the challenge in respect of all the claims.
It was not necessary for the Petitioner in such
circumstances to set out the claim numbers. Having
challenged all the claims on this ground, it was
again not mandatory for the Petitioner to press its
challenge in respect of all claims. Indeed, in the
affidavit in reply to the petition there is no

¶449

grievance of ground (q) being vague. Nor was the
Petitioners in any manner called upon to specify the

¶450

: 98 :

¶451

claims it intended to challenge. It often happens
that various grounds are taken in pleadings, only
some of which are finally pressed.

¶452

115.The Petitioner also expressly referred to the
agreement, the award and the reference before the
arbitrators. These documents read with the ground
of challenge constitute all the material facts
necessary to raise the challenge. It was not
suggested by Mr.Chinoy that any other material facts
were necessary. He based his entire argument on the
fact that in ground (q) Claim No.7 was not
specifically mentioned. This would be a
hyper-technical view of the matter.

¶453

116.In the circumstances, the judgments in (i) Union
of India v. Popular Construction Co. : (2001) 8
SCC 470 (ii) Pushpa M. Mulchandani v. Adiral R.
Tahiliani : (2001) LJ Soft 74 and (iii) Bijendra
Nath Srivastava v. Mayank Srivastava & Ors. (1994)
6 SCC 117 relied upon by Mr.Chinoy are of no
assistance to him. Nor does the reliance upon Rule
803C of the High Court (Original Side) Rules carry
the matter further. The rule requires the material
facts to be stated. As I have already held, the

¶454

: 99 :

¶455

material facts have been stated. The grievance that
the Petitioner having failed to mention specifically
Claim No.7 in ground (q) would deprive the Respondent
of being given notice that the Petitioner would urge
its challenge to the award in respect thereof is also
of no substance for I had expressly permitted the
Respondent to file further affidavits or documents,
if they so desired, in respect thereof. They
declined the offer.

¶456

The award in respect of Claim No.7 is therefore
set aside.

¶457

RE. CLAIM NO.8 (5) :-

¶458

117.The Respondent claimed various amounts under the
head of "operation of imported tunnel machines". The
Petitioner supplied certain imported machines for
tunnel excavation . The Respondent’s case was that
various operational characteristics and requirements
of the machines were not known to them and could not

¶459

: 100 :

¶460

be foreseen at the tendering stage, as a result
whereof, the actual cost of operation was higher than
provided for in the contract. The Respondent for
this reason requested the Petitioner for various
reliefs including an increase in the rate for tunnel
excavation with imported machines. The Petitioner
admitted these facts but granted only partial relief.
The Respondent had no option but to accept the same
to enable it to tide over its financial stringency.
It was therefore the Respondent’s case that its
acceptance of the limited reliefs granted by the
Respondent’s letter dated 7th January, 1994 was not
voluntarily acted upon but under compelling
circumstances and under duress. It is in these
circumstances that the Respondent signed the
supplementary agreement dated 23.4.1994. The
Respondent continued agitating its claim for various
reliefs over and above those which were granted under
the supplementary agreement.

¶461

I am at present concerned with only one of the
items viz. item No.5 which reads as under :-

¶462

"5.The unit rate of tunnel
excavation with the use of the
imported machines should be

¶463

: 101 :

¶464

increased from Rs.245.10 per cum.
(215x1.14) to Rs.615/- per cum as
requested in letter 178/1/746
dated 06.08.1993 (Annexure 10).
The amount claimed is 68,576 cum
@ Rs.(615-245.1) =
Rs.2,53,66,262/-."

¶465

118.There are various aspects which require
consideration with respect to the challenge to the
award in respect of this claim. I have set aside the
award in the ultimate analysis as it is contrary to
the provisions of the contract and based only on what
the arbitrators perceived to be fair and equitable.

¶466

119.Mrs.Bagalia firstly contended that the claim
pertained to an excepted matter and was therefore not
arbitrable in view of Clause 37 read with 62 of the
General Conditions of Contract. It was also
contended that the Respondent had accepted
unconditionally the subsidiary agreement and as such
there was no case for increasing the rate in this
regard. It was further contended that as per the
supplementary agreement, it had already extended to
the Petitioner various facilities which aggregated to
a sum of Rs.90.50 per cum over and above the agreed
rate of 245.10 per cum. The Petitioner disputed the
quantum of Rs.615.00 per cum. claimed by the

¶467

: 102 :

¶468

Respondent. I have negatived all these contentions.
I have however come to the conclusion that the award
is contrary to the provisions of the contract and
made without jurisdiction.

¶469

120.Thefirstquestionthatrequires

¶470

consideration is whether the claim was an excepted
matter and therefore not arbitrable in view of
clauses 37 and 62 of the General Conditions of
Contract which read as under :-

¶471

"RATES FOR EXTRA ITEMS OF WORKS :

¶472

37.Any item of work carried
out by the Contractor on the
instructions of the Engineer
which is not included in the
accepted Schedule of Ratesshall
be executed at the rates agreed
upon between the Engineer and the
Contractor before the execution
of such items of work, and the
Contractor shall be bound to
notify the Engineer at least
seven days before the necessity
arises for the execution of such
items of work that the accepted
Schedule of Rates does not
include a rate or rates for the
extra work involved. In the
event of no such agreement being
arrived at,the Corporation shall
be entitled to execute the extra
works by other means and the
Contractor shall have no claim
for loss or damage that may
result from such procedure.
Provided always that if the

¶473

: 103 :

¶474

Contractor commences work or
incurs any expenditure in regard
thereto before the rates shall be
determined as lastly hereintofore
mentioned, then and in such a
case the Contractor shall only be
entitled to be paid in respect of
the work carried out or
expenditure incurred by him prior
to the date of determination of
the rates as aforesaid, according
to the rates as shall be fixed by
the Engineer. However, if the
Contractor is not satisfied with
the decision of the Engineer in
this respect he may appeal to the
Chief Engineer, supported by an
analysis of the rates claimed.
The Chief Engineer’s decision
after hearing out the position
shall be final and binding on the
Contractor and the Corporation."
(emphasis supplied)

¶475

"MATTERS FINALLY DETERMINED BY THE CORPORATION :

¶476

62.Alldisputesor
differences of any kind whatever
arising out of or in connection
with the contract, whether during
the progress of the works or
after their completion and
whether before or after the
determination of the
contract,shall be referred by the
Contractor to the Corporation and
the Corporation shall within a
reasonable time after the receipt
of the Contractor’s
representation make and notify
decisions thereon in writing.
The decisions, directions and
certificates given and made by
the Corporation, or by the
Engineer on behalf of the
Corporation, with respect to any
matters decision of which is
specially provided for by Clauses
17, 21.5, 37, 43 (a), 53.2,

¶477

: 104 :

¶478

60.2, and 61.1 (b) of these
conditions (which mattes are
referred to hereinafter as
"excepted matters") shall be
final and binding on the
Contractor, provided further that
"excepted matters" shall stand
specifically excluded from the
purview of the arbitration clause
and shall not be referred to
arbitration".

¶479

121.The Petitioner’s submission is ex-facie
unsustainable. Clause 37 no doubt is one of the
excepted matters under clause 62. But, clause 37
only applies in respect of items of work carried out
by the contractor which are not included in the
schedule of rates. The Respondent rightly submitted
that in the original bill of quantities, item 1 (i)
provided for excavation with imported machines. The
item under the column "Description of work" reads as
under :-

¶480

"(i) as imported machines and
plants loaned by the Corporation
vide Appendix "B" to
Spl.Conditions of Contract".

¶481

The quantum was stated to be 1,28,000 cum. The

¶482

basic rate per unit was stated to be Rs.215. The
Respondent had agreed to carry out all the items of

¶483

: 105 :

¶484

work listed in the above Schedule at the basic rate
indicated against each item plus 14%.

¶485

122.The learned arbitrators, therefore, rightly
held that this item forms a part of the original work
provided in the bill of quantities. They therefore
further rightly held that the item cannot be termed
as an extra item and is not an excepted matter under
clauses 37 and 62. The view taken by the arbitrators
cannot be faulted for any reason.

¶486

123.The second aspect pertains to the merits of
this claim. It involves a consideration of five
questions.

¶487

124 (a).The first question on merits, is
whether the parties were aware at the time of
invitation of tenders about the actual specifications
and operating characteristics of the equipment
imported by the Respondent.

¶488

(b).The arbitrators have held that it was clear
from various documents that neither party was aware
at the time of invitation of tenders about the actual
specifications and operating characteristics of the

¶489

: 106 :

¶490

equipment imported by the Petitioner. This was an
important aspect of the matter, for unless the same
was established, the Respondent would not have been
entitled to maintain its claim.

¶491

(c).This was essentially a question of fact. It
is important to note that the finding of fact has not
been challenged in the petition. The averments in
the statement of claim that:

¶492

"Various operational
characteristics and requirements
of the machines were not known,
neither could be foreseen at the
tendering stage and provided for
in the contract, and the actual
cost of operation was much
higher than provided for in the
contract."

¶493

were not denied by the Petitioner in its reply
thereto. They were not denied in the correspondence
which was referred to in the statement of claim and
in the award. Nor was any attempt made before me to
challenge this fact. There was no scope therefore
for the Petitioner to deny the same.

¶494

125 (a).The second question that fell for
consideration was whether the supplementary agreement

¶495

: 107 :

¶496

was entered into by the Respondent under compelling
circumstances or under duress.

¶497

(b).The learned arbitrators considered the entire
correspondence leading to the execution of the
subsidiary agreement in the course of which the
Respondents had asserted their right inter-alia in
respect of this claim. The Petitioner, it has been
observed, had conceded these demands to a certain
extent. The same is evidenced by the subsidiary
agreement. It is the Petitioner’s own case that on
this count, it in fact granted a package of reliefs
to the Respondent. This aspect, therefore, is
admitted. The only dispute is regarding
quantification of the relief granted which is not
material on this aspect of the matter.

¶498

(c).In this view of the matter, the learned
arbitrators came to the conclusion that the
Respondent had no choice but to accept the package
as, if it had not agreed to the same, it had either
to face termination of the contract for
non-performance in accordance with the terms of the
agreement or to continue to work under serious
financial constraints which may have eventually

¶499

: 108 :

¶500

turned into total financial loss. In view of this,
the learned arbitrators held that the subsidiary
agreement was not executed by the Respondent
voluntarily and was executed in compelling
circumstances and under duress.

¶501

(d).This conclusion of the learned arbitrators is
again one of fact after considering various documents
on record. No fault can be found with this finding.
This is not a case where the arbitrators have not
given any reasons. It is well settled that the
reasonableness of the reasons given by an arbitrator
in making an award cannot be challenged. Even if on
the same evidence some Court might have arrived at a
different conclusion from the one arrived at by the
arbitrators that by itself is no ground for setting
aside the award of an arbitrator (See U.P.Hotels v.
U.P.State Electricity Board (1989) 1 SCC 359
paragraph 17.)

¶502

(e).Further, as Mr.Chinoy rightly pointed out,
there is no ground challenging this finding of the
arbitrators. Indeed, no serious attempt was made
before me to challenge this finding of fact.

¶503

: 109 :

¶504

126 (a).There is an additional facet which
relates to this question. Mrs.Bagalia submitted that
the arbitrators had no jurisdiction to decide whether
or not the subsidiary agreement was entered into
under duress. She submitted that under Section 19-A
of the Indian Contract Act, 1872, only a Civil Court
can decide such an issue. Section 19-A of The Indian
Contract Act reads as under :-

¶505

"19A. Power to set aside
contract induced by undue
influence. - When consent to an
agreement is caused by undue
influence, the agreement is a
contract voidable at the option
of the party whose consent was so
caused.

¶506

.Any such contract may be
set aside either absolutely or,
if the party who was entitled to
avoid it has received any benefit
thereunder, upon such terms and
conditions as to the Court may
seem just." (emphasis supplied)

¶507

She based her submission in view of the words
"upon such terms and conditions as to the Court may
seem just". She submitted therefore, that Section
19-A of the Indian Contract Act confers jurisdiction
and right to exercise the discretion only upon Civil
Courts and not upon an arbitral tribunal.

¶508

: 110 :

¶509

(b).The submission is not well founded. There is
nothing in Section 19-A of the Indian Contract Act to
preclude the question from being determined by
arbitration. The mere use of the term "Court" in
section 19-A does not necessitate such an
interpretation.

¶510

(c).For instance, Section 20 of the Specific
Relief Act reads as under :-

¶511

"20. Discretion as to decreeing
specific performance. - (1) The
jurisdiction to decree specific
performance is discretionary, and
the courtis not bound to grant
such relief merely because it is
lawful to do so; but the
discretion of the court is not
arbitrary but sound and
reasonable, guided by judicial
principles and capable of
correction by a court of appeal.

¶512

(2)The following are cases
in which the courtmay properly
exercise discretion not to decree
specific performance -

¶513

.................................
(emphasis supplied)

¶514

(d).It has been held, both by this Court as well

¶515

as the Supreme Court, that a dispute in respect of a
claim for specific performance can be referred to

¶516

: 111 :

¶517

arbitration. In (1999) 5 S.C.C., 651, Olympus
Superstructures Pvt.Ltd versus Meena Vijay Khetan and
Ors., the Supreme Court held as under :-

¶518

"31.Thispointbecomes
relevant because if the
arbitrators cannot grant specific
performance, a point can be
raised under Section 34(2)(b)(i)
that the subject-matter of the
dispute is not capable of
arbitration.

¶519

32.One of the points raised
in the grounds in this Court is
that the grant of specific
performance is discretionary and
the discretion to grant or not to
grant specific performance has
been conferred by the Specific
Relief Act, 1963 on the civil
court and hence the arbitrator
cannot be deemed to have been
empowered to grant such a relief.

¶520

33.We may point out that the
Punjab High Court in Lakshmi
Narain v. Raghbir Singh, the
Bombay High in Fertiliser Corpn.
of India v. Chemical
Construction Corpn. and the
Calcutta High Court in Keventer
Agro Ltd. v. Seegram Comp.
Ltd. have taken the view that an
arbitrator can grant specific
performance of a contract
relating to immovable property
under an award. No doubt, the
Delhi High Court in P.N.B.
Finance Ltd. v. Shital Prasad
Jain has however held that the
arbitrator cannot grant specific
performance. The question arises
as to which view is correct.

¶521

: 112 :

¶522

34.In our opinion, the view
taken by the Punjab, Bombay and
Calcutta High Courts is the
correct one and the view taken by
the Delhi High Court is not
correct. We are of the view that
the right to specific performance
of an agreement of sale deals
with contractual rights and it is
certainly open to the parties to
agree - with a view to shorten
litigation in regular courts - to
refer the issues relating to
specific performance to
arbitration. There is no
prohibition in the Specific
Relief Act, 1963 that issues
relating to specific performance
of contract relating to immovable
property cannot be referred to
arbitration. Nor is there such a
prohibition contained in the
Arbitration and Conciliation Act,
1996 as contrasted with Section
15 of the English Arbitration
Act, 1950 or Section 48(5)(b) of
the English Arbitration Act, 1996
which contained a prohibition
relating to specific performance
of contracts concerning immovable
property.

¶523

35.Itisstatedin
Halsbury’s Laws of England, 4th
Edn., (Arbitration, Vol.2, para
503) as follows :

¶524

"503. Nature of the
dispute or difference. -
The dispute or difference
which the parties to an
arbitration agreement
agree to refer must
consist of a justifiable
issue triable civilly. A
fair test of this is
whether the difference
can be compromised
lawfully by way of accord
and satisfaction (Cf.Bac

¶525

: 113 :

¶526

Abr Arbitrament and Award
A)".

¶527

Reference is made there to
certain disputes like criminal
offences of a public nature,
disputes arising out of illegal
agreements and disputes relating
to status, such as divorce, which
cannot be referred to
arbitration. It has, however,
been held that if in respect of
facts relating to a criminal
matter, say, physical injury, if
there is a right to damages for
personal injury, then such a
dispute can be referred to
arbitration (Keir v. Leeman).
Similarly, it has been held that
a husband and a wife may refer to
arbitration the terms on which
they shall separate, because they
can make a valid agreement
between themselves on that matter
(Soilleux v. Herbst, Wilson v.
Wilson and Cahill v. Cahill).

¶528

36.Further, as pointed out
in the Calcutta case merely
because there is need for
exercise of discretion in case of
specific performance, it cannot
be said that only the civil court
can exercise such a discretion.
In the above case, Ms.Ruma Pal,
J. observed :

¶529

"... merely because the
sections of the Specific
Relief Act confer
discretion on courts to
grant specific
performance of a contract
does not mean that
parties cannot agree that
the discretion will be
exercised by a forum of
their choice. If the
converse were true, then
whenever a relief is

¶530

: 114 :

¶531

dependent upon the
exercise of discretion of
a court by statute e.g.
the grant of interest or
costs, parties could be
precluded from referring
the dispute to
arbitration."

¶532

We agree with this reasoning. We
hold on Point 3 that disputes
relating to specific performance
of a contract can be referred to
arbitration and Section
34(2)(b)(i) is not attracted. We
overrule the view of the Delhi
High Court. Point 3 is decided
in favour of the respondents."

¶533

(e).The observations of the Supreme Court apply
with equal force to a case under section 19A of the
Indian Contract Act. Agreements falling thereunder
are not ipso-facto void. They are merely voidable.
A party may therefore even choose not to avoid such
an agreement. There is nothing in the Indian
Contract Act that suggests that questions falling
within the ambit of section 19A thereof are not
arbitrable. Nor is there anything in the 1996 Act
that suggests the same. In the circumstances, it
must be held that the learned arbitrators had
jurisdiction to decide whether or not the subsidiary
agreement was entered into under duress.

¶534

127 (a).

¶535

The third and an important aspect is

¶536

: 115 :

¶537

the consequence of the above findings. The
arbitrators thus far found that neither party was
aware at the time of invitation of tenders about the
exact specifications and operating characteristics of
the equipment imported by the Petitioner and that the
subsidiary agreement was entered into under duress.
The only basis on which the Petitioner could
successfully defend the Respondent’s claim was to
establish that in these circumstances, the original
contractual provisions would operate. This was in
fact Mrs.Bagalia’s submission. According to her if
the subsidiary agreement is to be disregarded, then
the only consequence would be that the parties would
be relegated to their rights under the original
agreement. In that event, the rate provided was
Rs.245/- per cum. Admittedly, this rate and an
additional amount under the subsidiary agreement has
already been paid.

¶538

(b).Mrs.Bagalia’s submission is well founded.
This is the only logical consequence of the
subsidiary agreement having been held to be
non-est. Mr.Chinoy in fact did not dispute this
conclusion. His attempt at supporting the award was
on an altogether different basis which I shall deal

¶539

: 116 :

¶540

with shortly.

¶541

(c).The arbitrators then had no jurisdiction to
make an award contrary to the terms of and the rate
specified in the contract which was Rs.245/- per cum.

¶542

128.It is necessary now to see the basis on which
the learned arbitrators awarded the claim. After
dealing with the facts of the case, which I have
referred to above, all that the arbitrators stated
was :-

¶543

"We therefore feel that the
issues raised by the claimant
in this claim forequitable and
fair relief deserves our due
consideration" (emphasis
supplied).

¶544

This was the only basis on which the arbitrators
thereafter proceeded to compute what according to
them would be the "equitable and fair" quantum which
they determined to be Rs.1,59,09,632/-. That the
award cannot be sustained on this basis, is
established by the judgment of the Supreme Court in
M/s.Alopi Parshad and Sons Ltd. versus Union of
India, AIR 1960 Supreme Court 588. (The judgment has

¶545

: 117 :

¶546

been followed and the relevant extracts therefrom
have been cited in the subsequent decisions of the
judgments which have been cited by the learned
counsel before me.) The arbitrators are bound by the
contractual provisions. It is not open to them to
ignore the contractual provisions and award
amounts of the basis of what they perceive to be
equitable and fair de-hors the contract. This is
well established by the judgments of the Supreme
Court I have referred to earlier.

¶547

129.The learned arbitrators granted the award only
on the basis of what they perceived to be equitable
and fair. In M/s.Alopi Parshad and Sons Ltd. versus
Union of India, the Supreme Court held in paragraphs
19, 20, 21 and 22 thus :-

¶548

"(19).The original agreement
dated May 3, 1937, was modified
by the supplementary agreement
dated June 20, 1942, and the
arbitrators have held that the
modified agreement was binding
upon the Agents. By the
agreement as modified, a graded
scale was fixed for the
establishment and the
contingencies to be paid to the
Agents, and also for the mandi
charges and overhead expenses.
The arbitrators still proceeded
to award an additional amount for

¶549

: 118 :

¶550

establishment and contingencies
and an additional amount for
mandi charges. By cl.14(a), read
with cl.12(b) (2) of the
agreement, the rate at which
establishment and contingency
charges were to be paid, was
expressly stipulated, and there
is no dispute that the Government
of India have paid to the Agents
those charges at the stipulated
rate for ghee actually purchased.
The award of the arbitrators
shows that the amount actually
received from the Government,
totalled Rs.6,04,700-9-0,
whereas, according to the
accounts maintained by the
Agents, they had spent
Rs.6,77,542-0-3. Granting that
the Agents had incurred this
additional expenditure under the
head ‘establishment and
contingencies’, when the contract
expressly stipulated for payment
of charges at rates specified
therein, we fail to appreciate,
on what ground, the arbitrators
could ignore the express
covenants between the parties,
and award to the Agents amounts
which the Union of India had not
agreed to pay to the Agents. The
award of the arbitrators,
awarding additional expenses
under the head of establishment
and contingencies, together with
interest thereon, is on the face
of it erroneous.

¶551

(20)Before the arbitrators, a
number of arhatias, who supplied
ghee to the Agents, appeared and
produced extracts from their
books, showing the amounts
actually due to them from the
latter. Detailed charts, showing
the total amount due under each
head of expenditure to each
arhatia, were produced. The

¶552

: 119 :

¶553

arbitrators were satisfied that
the statements produced,
reflected a general rise in
prices and cost of labour.
Taking into consideration the
fact that the other persons were
buying ghee at rates considerably
in excess of the stipulated
rates, the arbitrators held that
the Agents were entitled to be
reimbursed to the extent of
Rs.11,27,965-11-3. But the terms
of the contract, stipulating the
rate at which the financing and
overhead charges were to be paid
under cl.13(a) read with
cl.12(b), remained binding so
long as the contract was not
abandoned or altered by mutual
agreement, and the arbitrators
had no authority to award any
amount in excess of the amount
expressly stipulated to be paid.
Mr.Chaterjee, on behalf of the
Agents, submitted that the
circumstances existing at the
time when the terms of the
contract were settled, were
"entirely displaced" by reason of
the commencement of hostilities
in the Second World War,and the
terms of the contract agreed upon
in the light of circumstances
existing in May, 1937, could not,
in view of the turn of events
which were never in the
contemplation of the parties,
remain binding upon the Agents.
This argument is untrue in fact
and unsupportable in law. The
contract was modified on June 20,
1942, by mutual consent, and the
modification was made nearly
three years after the
commencement of the hostilities.
The Agents were fully aware of
the altered circumstances at the
date when the modified schedule
for payment of overhead charges,
contingencies and buying

¶554

: 120 :

¶555

remuneration, was agreed upon.
Again, a contract is not
frustrated merely because the
circumstances in which the
contract was made, are altered.

¶556

(21).Section 56 of the Indian
Contract Act provides that :

¶557

."A contract to do an act
which, after the contract is
made, becomes impossible, or by
reason of some event which the
promisor could not prevent,
unlawful, becomes void when the
act becomes impossible or
unlawful."

¶558

Performance of the contract had
not become impossible or
unlawful; the contract was in
fact performed by the Agents, and
they have received remuneration
expressly stipulated to be paid
therein. The Indian Contract Act
does not enable a party to a
contract to ignore the express
covenants thereof, and to claim
payment of consideration for
performance of the contract at
rates different from the
stipulated rates, on some vague
plea of equity.

¶559

."The partiesto an
executory contract are often
faced, in the course of carrying
it out, with a turn of events
which they did not at all
anticipate - a wholly abnormal
rise or fall in prices, a sudden
depreciation of currency, an
unexpected obstacle to execution,
or the like. Yet this does not
in itself affect the bargain they
have made. If, on the other
hand, a consideration of the
terms of the contract, in the
light of the circumstances
existing when it was made, shows

¶560

: 121 :

¶561

that they never agreed to be
bound in a fundamentally
different situation which has now
unexpectedly emerged, the
contract ceases to bind at the
point- not because the court in
its discretion thinks it just and
reasonable to qualify the terms
of the contract, but because on
its true construction it does not
apply in that situation. When it
is said that in such
circumstances the court reaches a
conclusion which is ‘just and
reasonable’ (Lord Wright in
Constantine Steamship Line Ltd.
v. Imperial Smelting Corporation
Ltd., 1942 AC 154 at p.186) or
one‘which justice demands’ (Lord
Sumner in Hirji Mulji v. Cheong
Yue Steamship Co. Ltd., (1926)
AC 497 (510) this result is
arrived at by putting a just
construction upon the contract in
accordance with an
‘implication........... from the
presumed common intention of the
parties’ : speech of Lord Simon
in British Movietonews Ltd. v.
London and District Cinemas Ltd.
1952 AC 166 at pp.185 and 186.
(emphasis supplied)

¶562

(22).There is no general
liberty reserved to the courts to
absolve a party from liability to
perform his part of the
contract, merely because on
account of an uncontemplated turn
of events, the performance of the
contract may become onerous.
That is the law both in India and
in England, and there is, in our
opinion, no general rule to which
recourse may be had, as contended
by Mr.Chatterjee, relying upon
which a party may ignore the
express covenants on account of
an uncontemplated turn of events
since the date of the contract.

¶563

: 122 :

¶564

Mr.Chatterjee strenuously
contended that in England, a rule
has in recent years been evolved
which did not attach to contracts
the same sanctity which the
earlier decisions had attached,
and in support of his contention,
he relied upon the observations
made in British Movietonews Ltd.
v. London and District Cinemas
Ltd., 1951-1 KB 190 at p. 201.
In that case, Denning, L.J., is
reported to have observed :

¶565

..............no matter
that a contract is framed in
words which taken literally or
absolutely, cover what has
happened, nevertheless, if the
ensuing turn of events was so
completely outside the
contemplation of the parties that
the court is satisfied that the
parties, as reasonable people,
cannot have intended that the
contract should apply to the new
situation, then the court will
read the words of the contract in
a qualified sense; it will
restrict them to the
circumstances contemplated by the
parties; it will not apply them
to the uncontemplated turn of
events, but will do therein what
is just and reasonable."

¶566

But the observations made by
Denning, L. J., upon which
reliance has been placed,
proceeded substantially upon
misapprehension of what was
decided in Parkinson and Co.
Ltd. v. Commissioners of Works,
1949-2 KB 632, on which the
learned Lord Justice placed
considerable reliance. The view
taken by him was negatived in
appeal to the House of Lords in
the British Movietonews case -
(1952) A.C. 166 - already
referred to. In India, in the

¶567

: 123 :

¶568

codified law of contracts, there
is nothing which justifies the
view that a change of
circumstances, "completely
outside the contemplation of
parties" at the time when the
contract was entered into, will
justify a court, while holding
the parties bound by the
contract, in departing from the
express terms thereof. 1949-2 KB
632 was a case in which on the
true interpretation of a
contract, it was held, though it
was not so expressly provided,
that the profits of a private
contractor, who had entered into
a contract with the Commissioners
of Works to make certain building
constructions and such other
additional constructions as may
be demanded by the latter, were
restricted to a fixed amount only
if the additional quantity of
work did not substantially exceed
in value a specified sum. The
Court in that case held that a
term must be implied in the
contract that the Commissioners
should not be entitled to
require work materially in excess
of the specified sum. In that
case, the Court did not proceed
upon any such general principle
as was assumed by Denning, L.J.,
in 1951-1 KB 190."

¶569

Mr.Chinoy’s contention which I shall now deal
with really is one which falls within the scope of
the part that I have emphasised above. There are
neither any facts pleaded, nor submissions made to
the effect that for some reason the agreement in the
present case ceased to bind the parties because on

¶570

: 124 :

¶571

its true construction it did not apply in that
situation. The award in this respect must therefore
be set aside on the basis of the ratio in Alopi
Parshad’s case.

¶572

130.Mr.Chinoy did not seriously attempt to
support the reasonings of the learned arbitrators in
this respect, to wit he did not contend that the
Respondent was entitled to the amounts in these facts
on the basis of their being "equitable and fair".
Realising his difficulty, Mr.Chinoy sought to sustain
the award on the basis of the judgment of the Supreme
Court in Tarapore’s case. He relied upon only a few
observations of the Supreme Court in paragraph 38 of
the judgment. It is necessary however, to deal with
the judgment in greater detail as it forms the sole
basis on which Mr.Chinoy sought to support the award
in this respect.

¶573

131.It is important to note that in Tarapore’s
case, the Supreme Court proceeded on a particular
fact situation. The Respondent invited tenders for
construction of a dock. There were only two tenders
in respect of a part of the work and in respect of
another part of the work, the Petitioner was the only

¶574

: 125 :

¶575

tenderer. The value of the work was over Rs.24
crores. In view of the enormity of the work a tender
committee was constituted which took note of the fact
that works of such complexity and magnitude had not
been undertaken before by any Indian contractor ;
that the plant and equipment required for the work
were not available indigenously and that the
contractor was to procure specialised equipment
required to execute the work. The Supreme Court
noted that both the parties while entering into the
contracts were aware and conscious of the fact that
the equipment and technical know-how would have to be
imported involving a huge outlay of foreign exchange.
It was further noted that the Appellant was given to
understand by the Respondents in the invitation to
tender itself that the foreign exchange in yen credit
to the tune of Rs.38 lacs was earmarked for the
purchase of the equipment from Japan.

¶576

The construction commenced on 29th January,
1973. Admittedly, for reasons which are not relevant
for the present purpose, the yen credit was not
available. After a delay of about seven months, the
equipment was obtained from Holland. During this
period there was a drastic variation in the rate of

¶577

: 126 :

¶578

exchange and therefore the foreign exchange cost of
the equipment and technical know-how as well as
customs duty increased enormously. The Supreme Court
noted that "a sort of an assurance was thus extended
to the contractor that the amount of Rs.2 crores to
be invested by the Appellant would be made available
to it from the yen credit which ultimately was not
available." At pages 710 and 711, the Supreme Court
summed up the facts situation thus :-

¶579

"It is thus unquestionably
established that the appellant
whose tender was accepted after
negotiations and scrutiny by the
Tender Committee was expected to
invest Rs.2 crores in importing
pile driving equipment and
technical know-how fees. The
tender was accepted and a formal
contract was entered into on this
basis. In works contract of such
magnitude, the value whereof was
over Rs.24 crores, and which was
being undertaken by an Indian
contractor for the first time
negotiations prior to the
finalisation of the contract and
the correspondence leading to the
formation of contract supply the
basis on which contract was
finally entered into.
Undoubtedly, if in the final
written contract, there is
something contrary to the basic
understanding during the
formative stage of the contract,
the written contract would
prevail. But if the contract
does not indicate to the contrary

¶580

: 127 :

¶581

and the assumptions appeared to
be the foundation of the
contract, obviously that aspect
cannot be overlooked while
determining what were the
obligations undertaken under the
formal contract. It may be
recalled that the two alternative
rates were quoted by the
contractor ; (i) the respondent
were to import the pile driving
equipment and technical know-now
for its operation, the same would
be leased to the contractor at
negotiated rates or (ii) the
contractor were to import the
same the rates to be paid to the
contractor. The second
alternative was accepted by the
parties on the fundamental
assumption that the investment in
this behalf would be Rs.2 crores.
This is the agreed position on
which contract was entered into.
To continue the narrative, it may
be pointed out that this
fundamental foundation of the
contract was not left to
guesswork, but is specifically
referred to in the notice
inviting tender and in the
specifications and modifications
as addenda to the General
Conditions of Contract. It was
clearly understood between the
parties that the contractor has
to invest roughly Rs.2 crores in
foreign exchange for importing
pile driving equipment and
technical know-how fees without
which this work could never have
been undertaken and without which
it would not have been entrusted
to the contractor. The
contractor when he quoted his
terms must obviously have made
appropriate calculations, one of
which in this case appears to be
that it will have to invest Rs.2
crores in foreign exchange and

¶582

: 128 :

¶583

this fact flies in the face that
after the work was over, the
imported machinery would
depreciate to this extent that it
would have hardly any use or
utility to the contractor as
noticed by the Tender Committee.
The rates quoted by the
contractor were obviously
interrelated to the basic
assumption. The fact that such
was also the understanding of the
respondent may now be pointed
out."(emphasis supplied)

¶584

At page 712, the Supreme Court reiterated that
the parties were ad-idem about this fundamental basis
on which the contract was entered into. What is even
more important to note is that this was the accepted

¶585

position between the parties. It is in this
background that the Supreme Court made the
observations in the last four sentences of paragraph
38 relied upon by Mr.Chinoy. In order to consider
the judgment in its proper perspective it is
necessary however to read paragraphs 37 and 38 in
their entirety.

¶586

"37.From thecommencement
i.e. from the stage of inviting
tenders and through the
negotiations and the finalisation
of the contract, at every stage,
the respondent assured that
foreign exchange would be made
available from Eleventh Yen

¶587

: 129 :

¶588

Credit. As the equipment was not
available from Japan, the
availability of Yen Credit became
otiose from the contractor’s
point of view. At the instance
of and with the active
participation of the respondent,
the contractor made equities 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 lacs
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
respectively to the statement of
claim submitted by the appellant
to the arbitrator. The
respondent in its
counter-statement did not
controvert the details of the
claim and the expenditure
involved under the two heads.
The whole of the counter-claim
was concerned with the denial of
its liability to compensate the
contractor coupled with the
contention that the claim would
not be covered by the arbitration
agreement and therefore, the
arbitrator had no jurisdiction to
entertain and adjudicate the
claim. It may also be mentioned
that at no time since the award,
the respondent ever disputed or
questioned the amount awarded by
the arbitrator. It is thus

¶589

: 130 :

¶590

satisfactorily established that
the contractor had to invest
something far in excess of Rs.2
crores which it was expected to
invest in foreign exchange for
imported pile driving equipment
and technical know-how fees. The
whole contract was concluded on
this understanding.Being aware of
the fluctuating position in this
behalf, the contractor had
tendered two alternative rates
for completion of the work as
pointed out earlier ; one based
on equipment being imported by
the respondent and leased to the
appellant and alternatively rates
on the basis that the contractor
would import pile driving
equipment and technical know-how.
In respect of the second
alternative, which was ultimately
agreed to between the parties,it
was clearly and unmistakably
understood between the parties
that 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 tune of 75 per
cent of its capability and would
be hardly of any use to the
contractor.The estimated
expenditure having far exceeded,
a claim for compensation would
certainly be tenable at the
instance of the contractor.

¶591

38.The High Court quoted
Clauses 16, 26 and 31 in its
judgment but did not dilate upon
the provisions of the clauses so
as to co-relate them with its
decision. 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

¶592

: 131 :

¶593

materials incorporated in the
works and/or wages of labour, 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
furnish inventory of the same.
Clause 31 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 argument that
the price escalation clause does
not cover the claim for
compensation for additional
expenditure on imported plant and
machinery and technical know-how
because the contract
substantially provides for the
same to be supplied by the
contractor. In our opinion, this
over-simplification of the
clauses of the contract involving
works of such magnitude is
impermissible. The whole gamut
of discussions, negotiations and
correspondence must be taken into
consideration to arrive at a true
meaning of what was agreed to
between the parties. And in this
case there is no room for doubt
that the parties agreed that the
investment of the contractor
under this head would be Rs.2
crores and the tendered rates
were predicated upon and
co-related to this understanding.
When an agreement is predicated
upon an agreed fact situation, if

¶594

: 132 :

¶595

the latter ceases to exist the
agreement to that extent becomes
irrelevant or otiose. The rates
payable to the contractor were
related to the investment of Rs.2
crores under this head by the
contractor. Once the rates
became irrelevant on account of
circumstances beyond the control
of the contractor, it was open to
the contractor to make a claim
for compensation. Therefore, it
appears satisfactorily
established that the claim arose
while implementing the contract
and in relation to the contract."
(emphasis supplied).

¶596

132.The judgment of the Supreme Court in
Tarapore’s case was based on the fact situation
established in that case. It is not that every
change in the fact situation as contemplated by the
parties during the formation of the contract gives
rise to a claim. It would depend on the facts of
each case. It would depend on the extent of the
change. It would depend upon the intention of the
parties to be gathered from all the facts and
circumstances of the case. Such a case is a mixed
one, of law and facts. It would necessitate a
submission or reference to the arbitrators on all
these questions. It cannot be decided afresh in a
Petition under section 34.

¶597

: 133 :

¶598

133.No such case was even made out either in the
statement of claim or otherwise. To leave no room
for doubt, I went through the entire statement of
claim. The Respondent did not even remotely suggest
that the fact situation contemplated by it formed the
fundamental basis of the contract. The Respondent
did not suggest that the contract was predicate only
on this basis. Nor had the Respondent suggested that
the parties were ad-idem about the fundamental basis
on which the contract was entered into. The
Respondent did not suggest that in the event of a
change in the fact situation contemplated by it
regarding the operational characteristics of the
imported machinery, it would not have entered into
the contract. There is a suggestion to this effect
in annexure 10 to the statement of claim.
Significantly the pleading to that effect is not
there in the statement of claim.

¶599

134.It is possible that the Respondent may have a
good case in respect of its claim had the statement
of claim considered various aspects which are absent
therein. It is probable that the Respondents did not
refer the most important aspect of its claim to the
arbitrators. It is however equally possible that had

¶600

: 134 :

¶601

such a reference been made by the Respondent the
Petitioner may have had a valid defence thereto.
There is however no room for conjecture. The fact of
the matter is that the basis on which Mr.Chinoy
sought to support the award was totally absent in the
reference before the arbitrators. The award relating
to this claim must therefore be set aside.

¶602

135.The fourth aspect relates really to fixing a
fair rate. There is a detailed discussion in the
award regarding various rates which were placed
before the arbitrators. It is not necessary to set
out the same as ultimately the arbitrators accepted
the rates derived by the Petitioner as they were of
the view that the same were based on actual instances
and were therefore, considered to be more realistic
than the rates analysis supplied by the parties based
on theoretical assumptions. They observed that no
useful purpose would be served in going into
theoretical assumptions and then arrive at the rate.
This approach can hardly be faulted. It certainly
cannot be interfered with in exercise of powers under
section 34 of the 1996 Act.

¶603

136.The fifth and last aspect pertains to the

¶604

: 135 :

¶605

arbitrators, adding 25% towards the overheads and
profits to the rate of Rs.406.47 per cum. This was
on the finding that the Respondent had not added for
overheads and profits which a contractor is entitled
to. The rest was merely a matter of computation
involving giving credit to the Petitioner for the
original rate as well as the benefit granted by the
Petitioner to the Respondent under the supplementary
agreement. I may add over here that the rate arrived
at by the learned arbitrators has not been challenged
and indeed a challenge to the same would be
unsustainable. I have already held that the original
rates no longer applied. Logically therefore the 14%
addition to the rate in the original contract also
would no longer apply.

¶606

137.In the circumstances, the challenge to the
award in respect of the said claim is upheld. The
award in this respect is set aside.

¶607

RE. CLAIM NO.10 :

¶608

138.The Respondent, before the arbitrators,

¶609

: 136 :

¶610

contended that during the course of the work there

¶611

was abnormal break-down of electric power at all
three working points of the tunnel which disrupted
the work excessively, and beyond any reasonable
imagination. The effect of the break-down resulted
in prolongation of the execution of the work that
increased over heads and idle labour costs. The
Respondent, therefore, claimed an amount of
Rs.62,82,000/- together with interest.

¶612

139.Relying upon Clauses 10.4.1 and 10.4.8 of the
Special Conditions of Contract the Petitioner
contended that though it was to provide electric
power at sub-stations, under clause 10.4 of Special
Conditions of Contract, it was not responsible for
any power failure, shut down, break-down etc.

¶613

Clauses 10.4.1 and 10.4.8 read as under :-

¶614

"10.4.1The Corporation
will provide LT three phase power
supply at 415 Volts of 200 KVA
at a distance of about 200 meters
from both tunnel faces by
availing of HT Supply either at
11KV or 22KV from the respective
Electricity Board and by
installing substations at these
locations."

¶615

"10.4.8. The Corporation do not
hold themselves responsible for

¶616

: 137 :

¶617

any power failure, power
shut-down, break down of the
substation equipment, etc. and
the delay that may arise as a
result of interruption to power
supply. Contractors are advised
to keep their own stand-by D.G.
sets".

¶618

140.Once again as I intend setting aside the

¶619

award in respect of this claim, it is but fair that I
set out the relevant part of the award in detail.
Paragraph 10.5 reads as under :-

¶620

"10.5It is clear from the
provisions of the contract that
the arrangement of taking
connections to the Substation
from the local Electricity Board
was to be made by the
Respondents. The claimant was to
avail power supply from the
Substations to be maintained by
the Respondents. As such the
Claimant was responsible only for
maintenance of power supply
onwards from the substations
operated by the Respondents. The
Claimant had no privity of
contract with the Electricity
Board and the Claimant had to
rely on the efforts to be made by
the Respondent, who was the
customer of the Electricity
Board. For power failures up to
and including the local stations,
the responsibility was squarely
that of Respondent and the
Electricity Board. Provisions in
Clause 10.4.8 can not shift this
responsibility to the Claimant as
they had no agreement with the
Electricity Board. It may also
be stated that stand-by D.G.
sets are to be provided to take

¶621

: 138 :

¶622

care of emergencies for lighting
or for de-watering but they can
not substitute source of power
supply that may be required to
carry out operation of equipment.
It is quite clear to us that the
delay caused due to power failure
or low voltage problems is not
attributable to the Claimant. It
was clearly attributable to the
local Electricity Board, which
had entered into an agreement
with the Respondent and not with
the Claimant."(emphasis supplied)

¶623

141.The entire portion of the award extracted
above, except the emphasised sentence, contains a
mere narration of facts. The emphasised sentence
merely states that Clause 10.4.8 "cannot shift the
responsibility for supply of power upto and including
the local sub-station to the claimants as they had no
agreement with the Electricity Board." The question
of shifting the responsibility did not arise at all.
It was in fact irrelevant. The Petitioner did not
contend that the Respondent was responsible for the
same. All that it contended was that under clause
10.4.8 it was not responsible for the same. Thus the
arbitrators had by no means attempted to even
consider Clause 10.4.8 or the effect thereof.

¶624

142.Even assuming that the emphasised sentence is
correct as a matter of fact viz. that Clause 10.4.8

¶625

: 139 :

¶626

cannot shift the responsibility for power failures
upto and including the local sub-stations to the
claimant, the arbitrators have failed to consider the
effect of Clause 10.4.8 that expressly provides that
the Petitioner is not responsible for the same
either. Merely because the Respondent is not
responsible for something, it does not necessarily
follow that the claimant would be responsible for the
same. The arbitrators were required to decide
whether the Petitioner was or was not responsible for
the power break-downs. They were not required or
even called upon by either of the parties to decide
whether there was any shifting of the responsibility
under clause 10.4.8.

¶627

143.It is important to note that the award
correctly does not state that the Petitioner is
responsible for power break-downs because it was
required to arrange the connection from the
Electricity Board to the sub-station. Had this been
stated it would have been patently absurd and
contrary to clause 10.4.8 which is clearly to the
contrary. The claimants are absolved from any
responsibility on the express terms of the contract.
The contract was thus not even sought to be construed

¶628

: 140 :

¶629

by the learned arbitrators. This is understandably
so, because Clause 10.4.8 is not capable of two
interpretations.

¶630

144.Once again the mere fact that the learned
arbitrators noted the clause and the submission of
the parties, it does not follow ipso-facto that they
construed the contractual provision. The arbitrators
clearly ignored the mandate of the contract.

¶631

In the circumstances, the award in this
respect is set-aside.

¶632

145.I find in the written submissions tendered on
behalf of the Petitioner a challenge to the award in
respect of two other claims under the captions
"Ventilation Ducts" and "Maintenance of the Road".
Written submissions are for the assistance of the
Court in respect of submissions made during the
hearing. They are not to enable parties to add to
such submissions. The award in respect of these
claims was not challenged during the hearing. They
cannot now be challenged in the written submissions.

¶633

146.The parties shall compute the amount due

¶634

: 141 :

¶635

under the award in accordance with this judgment.

¶636

The Petition is accordingly disposed off.

¶637

There shall be no order as to costs.

¶638

Parties to act on an ordinary copy of this
judgment duly authenticated by the Associate/Court
Stenographer.

Konkn Railway Corporation Ltd. v. Patel Engineering Co.Ltd.

Case brief

What is this about?

What did the court decide?

Konkn Railway Corporation Ltd. v. Patel Engineering Co.Ltd.

Case brief

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What did the court decide?

What the court decided

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