Full Judgment Text
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PETITIONER:
CONTINENTAL CONSTRUCTION CO. LTD.
Vs.
RESPONDENT:
STATE OF MADHYA PRADESH
DATE OF JUDGMENT07/03/1988
BENCH:
MUKHARJI, SABYASACHI (J)
BENCH:
MUKHARJI, SABYASACHI (J)
RANGNATHAN, S.
CITATION:
1988 AIR 1166 1988 SCR (3) 103
1988 SCC (3) 82 JT 1988 (2) 95
1988 SCALE (1)721
CITATOR INFO :
RF 1988 SC2018 (10)
ACT:
Arbitration Act, 1940-Whether a contractor can claim
extra cost and compensation towards rise in prices of
material and labour on account of delay on the part of other
party to contract in discharge of its obligations and
allotment of work under the contract and invoke arbitration
clause in contract and ask for a reference to arbitrator
under section 20-Of.
HEADNOTE:
%
The petitioner in this application under Article 136 of
the Constitution entered into a contract with the respondent
State for construction work. The contract could not be
completed within the stipulated time because of alleged
gross delay on the part of the State in allotment of work
and discharge of its obligations under the contract. The
petitioner incurred unforeseen expenditure and approached
the Superintending Engineer for payment. Upon refusal of the
Superintending Engineer to pay and also to refer the matter
to arbitration, the petitioner moved the District Judge
under Section 20 of the Arbitration Act, (’the Act’) for the
filing of the arbitration agreement and for reference of the
dispute to arbitration. The District Judge directed the
respondent State to file the agreement, and made a reference
for specific question to the arbitration. The High Court
dismissed the State’s appeal against the order of the
District Judge. Thereafter, an arbitrator was appointed, who
made an award partly allowing the petitioner’s claim. The
award was filed in the Court of the District judge, who made
the award a rule of the court. The respondent appealed to
the High Court. The High Court remanded the matter to the
District Judge for a fresh decision. The District Judge
accepted the respondent’s objections and set aside the
award. The High Court dismissed the appeal of the
petitioner. The petitioner then moved this Court for relief
by this petition for special leave.
Dismissing the petition, the Court,
^
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HELD: The District Judge rightly found that the
question regarding extra-cost was a general question and not
a specific legal question and the decision of the arbitrator
was not final. The arbitrator
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misconducted himself in allowing the claim without deciding
the objection of the State. In view of the specific clauses,
the petitioner was not legally entitled to claim for extra-
cost. The decision of this Court in Seth Thawardas v. Union
of India, [1955] 2 SCR 48 was of no avail on this point. If
no specific question of law is referred, the decision of the
arbitrator on that question is not final however much it may
be within his jurisdiction and indeed essential for him to
decide the question incidentally. The arbitrator is not a
conciliator and cannot ignore the law or mis-apply it in
order to do what he thinks is just and reasonable. The
arbitrator is a Tribunal selected by the parties to decide
their disputes according to law and so he is bound to follow
and apply the law, and if he does not, he can be set right
by the Court provided his error appears on the face of the
award. In this case, the contractor having contracted, could
not go back to the agreement simply because it did not suit
him to abide by it. [111C-F]
The petitioner had argued that since specific issues
had been framed and referred by the District Judge to the
arbitrator, the same had been answered by a non-speaking
award and there was no mistake of law apparent on the face
of the record, and the District Judge had erred in setting
aside the award by looking into the terms of the contract
which neither formed part of the award nor were appended to
it. The Court did not agree. This being a general question,
the District Judge rightly examined the question and found
that the petitioner was not entitled to claim for extra cost
in view of the terms of the contract, and the arbitrator
misdirected himself by not considering this objection of the
State before giving the award. [112B-C]
The limits of the jurisdiction of the Court to
challenge the award are well-settled. While considering the
objection under section 30 of the Act, the Court does not
act as an appellate Court; it can only interfere with the
award if the arbitrator misconducts himself or the
proceedings or if the award has been made after the issue of
an order by the Court superseding the arbitration or if the
arbitration proceedings have become invalid under section
35(c) of the Act, or the award has been improperly procured
or is otherwise invalid. If, a specific question is
submitted to the arbitrator and he answers it, the fact that
the answer involves an erroneous decision in point of law,
does not make the award bad on its face so as to permit it
being set aside. [112E-F; 1l3A]
The High Court was right that the District Judge was
entitled to examine the contract in order to find out the
legality of the claim of the petitioner regarding extra cost
towards rise in prices of material and
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labour. Clauses 2.16 and 2.4 stipulated that the contractor
had to complete the work inspite of rise in prices of
materials and also rise in labour charges at the rates
stipulated in the contract. There was a clear finding of the
arbitrator that the contract was not rendered ineffective in
terms of section 56 of the Contract Act due to the abnormal
rise in prices of materials and labour. This being so and
the contractor having completed the work, it was not open to
him to claim extra cost towards rise in prices of material
and labour. The arbitrator misdirected himself in not
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deciding this specific objection raised by the State
regarding the legality of the extra claims of the
petitioner. It has to be born in mind that there were
specific clauses which barred consideration of extra claims
in the event of price escalation. [113D-F; 114B]
The award was properly set aside by the District Judge
and the High Court was right in the view it took and there
was no ground to interfere. [113G]
Seth Thawardas v. Union of India, [1955] 2 SCR 48; M/s
Alopi Parshad v. Union of India, [1960] 2 SCR 793; Kapoor
Nilokheri Co-operative Dairy Farm Society Ltd. v. Union of
India, A.I.R. 1973 S.C. 1338; Champsey Bhara and Co. v.
Jivraj Balloo Spinning and Weaving Co. Ltd., A.I.R. 1923
P.C. 66; Re. King and Duveen, [1913] 2 K.B. 32; Government
of Kelantan v. Duff Development Co. Ltd., [1923] AC 395;
Bungo Steel Furniture v. Union of India, [1967] 1 SCR 633;
Saleh Mohd. v. Nathoo Mal, 54 I.A. 427; Abosalom Ltd. v.
Great Western, [1933] A.C. 592; Allen Berry & Co. v. Union
of India, [1971] 3 SCR 282 and Tarapare and Company v.
Cochin Shipyard Ltd., Cochin and Anr.,[1984] 2 S.C.C. 680,
referred to.
JUDGMENT:
CIVIL APPELLATE JURISDICTION: Special Leave Petition
(Civil) No. 13180 of 1985.
From the Judgment and order dated 17.4.1985 of the
Madhya Pradesh High Court in Misc. F.A. No. 252 of 1981.
S.N. Kacker and R. Ramachandran for the Petitioner.
The Judgment of the Court was delivered by
SABYASACHI MUKHARJI, J. This is an application under
Article 136 of the Constitution for leave to appeal to this
Court from the judgment and order of the High Court of
Madhya Pradesh dated 17th April, 1985. In order to
appreciate the points involved, it is neces-
106
sary to state that the petitioner entered into a contract
dated 31st March, 1970 with respondent, State of Madhya
Pradesh for the construction of Rip Rap on right bund of
Masonary Dam of Tawa Project. The contract could not be
completed within the stipulated time because of alleged
gross delay on the part of the State, according to the
petitioner, in allotment of work and discharge of its
obligations under the contract. The petitioner incurred
unforeseen expenditure, it is claimed, to the tune of
Rs.5,29,812 and approached the Superintending Engineer for
payment. Upon refusal of the Superintending Engineer to pay
the claim and his refusal to refer the matter to
arbitration, the petitioner moved the learned District Judge
under section 20 of the Arbitration Act, 1940 (hereinafter
called ’the Act’) for filing of the arbitration agreement
and for reference of the disputes to the arbitration. On
24th April, 1976 the learned District Judge allowed the
petitioner’s application and directed the respondent, State
of Madhya Pradesh to file the agreement in Court and made a
reference for specific question to the arbitration. The High
Court on 22nd September, 1976 dismissed the State’s appeal
against the order of the District Judge. Thereafter in
March, 1977 Retired Engineer-in-Chief, P.W.D. Bhopal was
appointed arbitrator. There was an award dated 29th October,
1978 on all the issues referred, partly allowing the
petitioner’s claim. The award was filed in the Court of the
District Judge and the respondent filed objections to the
award under sections 30 and 33 of the Act and the petitioner
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filed replies. The District Judge made the award a rule of
the Court. The respondent appealed to the High Court. The
High Court remanded the matter to the District Judge for
fresh decision. The District Judge accepted the objections
and set aside the award. The High Court by the impugned
judgment dismissed the appeal of the petitioner. It is from
this judgment of the High Court that the petitioner seeks
leave to appeal to this Court.
As mentioned hereinbefore by the impugned judgment and
order of the High Court the award has been set aside. The
agreement contained an arbitration clause. The work,
however, could not be completed within the stipulated time,
the period of contract was extended. The contractor
attributed delay on the part of the State Government whereas
the State Government blamed the contractor. This was a
disputed question. While the work was in progress, the
contractor was required to meet extra expenditure on labour
charges and materials due to revision in wage scales and
escalation of prices. Alterations and substitutions of works
also led to extra expenses. There were certain items for
which rates were not provided but all the same work had to
be done. The contractor therefore, advanced claims
107
for compensation. The Superintending Engineer dismissed the
claims on the ground that the claims were barred under
clause 3.3.15. He also held that some of the claims were not
covered by the contract. The contractor sought to invoke the
arbitration clause but the State sought to oppose on the
ground that the dispute attracting the arbitration clause
had not arisen. It was contended that the claim was barred
by clause 3.3. 15 and it had not been made within the time.
It was contended further that there was only one contract
and there being no separate agreement for extension of
period of the contract the rate as provided in the original
contract alone was permissible. As there was no separate
contract and no reference under clause 3.3.29 could be made
for the enhanced period beyond the period of the contract.
Relevant clauses of the contract were as follow:
"3.3.15 Clause 15. Time limit for unforseen
claims: Under no circumstances whatever shall the
contractor be entitled to any compensation from
Government on any account unless the contractor
shall have submitted claim in writing. to the
Engineer-in-Charge within one month of the cause
of such claim occurring.
3.3.29 Clause 29.
Decision of Superintending Engineer, to be
final except where otherwise specified in the
contract. The decision of the Superintending
Engineer of the Circle for the time being shall be
final, conclusive and binding on all parties to
the contract upon all question relating to the
meaning of the specification, design drawings and
instructions hereinbefore mentioned and as to the
quality of workmanship or material used on the
work or as to any other question, claim, right
matter or thing whatsoever, in any way arising out
of or relating to the contract, designs, drawings,
specifications, estimates, instructions, orders,
or those conditions or otherwise concerning the
work of execution or failure to execute the same,
whether arising during the progress of the work,
or after the completion or abandonment thereof.
Provided that if the contractor is
dissatisfied with the final decision of the
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Superintending Engineer in respect of any matter,
he may within 28 days after receiving notice of
such decision give notice in writing to the
Superintending
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Engineer requiring that the matter may be referred
to the arbitration and furnishing detailed
particulars of the dispute or difference
specifying clearly the point at issue. If the
contractor fails to give such notice within the
period of 28 days as stipulated above the decision
of the Superintending Engineer already given shall
be conclusive and binding on the contractor.
In case an arbitration is to be held it shall
be effected by an arbitrator to be appointed by
the State Government whose decision shall be
final, conclusive and binding.
If the work under the contract has not been
completed when a dispute is referred to
arbitration work shall continue during arbitration
proceedings if it is reasonably possible and no
payment due to contractor should be with held on
account of arbitration proceedings unless it is
required by the arbitrator
3.3.32 Clause 32. Action where no specification:
In case of any class of work for which there
is no such specification as is mentioned in Rules,
such work shall be carried out in accordance with
the specification approved by Superintending
Engineer/Chief Engineer, or application to works
in the district and the event of there being no
such specification, then in such case the work
shall be carried out in all respect in accordance
with the instructions and requirements of the
Engineer-in-Charge.
3.3.33 Clause 33. Definition of work:
The expression "works" or "work" where used
in these conditions shall, unless there by
something either in the subject or context
repugnant to such construction be constructed and
taken to mean the works by or by virtue of the
contract contracted to be executed, whether
temporary or permanent, and whether original,
altered, substituted or additional.
3.3.34 Clause 34. Claim for quantities entered in
the tender or estimate:
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Quantities shown in the tender are
approximate and no claim shall be entertained or
work executed being either more or less than those
entered in the tender estimate."
The learned single Judge as mentioned hereinbefore of
the High Court after exhaustive discussion dismissed the
appeal and upheld the order. Being aggrieved the petitioner
went up in appeal before the Division Bench and the Division
Bench on consideration of the matter dismissed the appeal.
The Division Bench considered the following issues raised
before the District Judge:
1. Whether the contractor had incurred extra costs
towards wetting and washing of stones used in masonry
of Group-II Tawa Masonry Dam?
2. Was the petitioner entitled to payment of this extra
costs of Rs. 1.20,355?
3. Whether the petitioner contractor had to incur extra
cost of material and labour to the tune of Rs.
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14,72,456 within the contract period for executing work
assigned to it?
4. Whether the contractor had incurred extra cost of
Rs.8,84,336 for the work beyond the contract period due
to unforeseen circumstances?
5. Whether the petitioner’s claim on both the counts
was in whole or in part of it was barred by time in
terms of clause 3.3. 15?
6. Whether the contract was rendered ineffective in
terms of section 56 of the Contract Act due to
unexpected change in the market rate of material and
labour charges?
7. Was the claim not entertainable in accordance with
the terms’ of the contract under clause 3.3.32, 3.3.33
and 3.3.34 during the extended period of contract?
8. Was the work delayed because of the presence of
shale-zone in the foundation which factor was not made
known to the contract?
9. Whether the contractor was entitled to extra costs
of damages
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for the delay caused on account of shale-zone?
The Division Bench came to the findings as follows:
1. The contractor did incur expenditure on wetting and
washing of stones in Masonry Group-II, Tawa Masonry Dam
but this was according to agreement.
2. The petitioner is not entitled to the payment of the
extra costs of Rs.1,20,355.
3. The petitioner/contractor did incur an extra cost of
Rs.14,72,456 within the contract period for executing
the assigned work.
4. The petitioner/contractor did incur an extra cost of
Rs.6,81,796 for the work done beyond the contract
period due to unforseen circumstances.
5. The petitioner is entitled to the claim to the
extent of Rs.2,65,000 against Issue No. 3 and
Rs.6,81,796 against Issue No. 4 above and the same is
not barred by time in terms of clause 3.3.15.
6. The contract was not rendered ineffective in terms
of section 56 of the Contract Act due to abnormal rise
in the market rates of materials and labour.
7. The claim under reference cannot be ruled out merely
be cause of the provisions of clause 3.3.32, 3.3.33 and
3.3.34.
8. Yes, the work was delaved due to the presence of
shale-zone in the foundations, a factor which was
unforeseen and was not made known to the contractor.
9. The contractor is entitled to claim extra cost due
to the delay caused on account of the shale-zone in
foundations.
The Division Bench felt that the four factual issues
decided by the District Judge were more or less by the
agreement and therefore, the Division Bench did not deal
with these. So far as three legal issues which were referred
to him, namely, whether the claim was barred under clause
3.3. 15, the contract was rendered ineffective in terms of
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section 56 of the Contract Act due to abnormal rise in the
market rate of material and labour and the claim not
entertainable under clause 3.3.32, 3.3.33 and 3.3.34. The
High Court considered whether the appellant was entitled to
extra cost towards rise in prices of materials and labour
within and beyond the contract period. The Division Bench
noted that the learned District Judge held that since three
legal issues were specifically referred to the arbitrator
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and therefore his decision had become final and binding on
the parties and cannot be re-agitated before the Court.
Regarding the remaining issues, the State had taken
objection while opposing the application under section 20
that the appellant was not entitled to extra cost for
material and labour in terms of the contract but the Court
directed that this matter had to be agitated before the
arbitrator and the application under section 20 could not be
dismissed on the ground that the claim would not ultimately
succeed. The District Judge found and in our opinion rightly
that the question regarding extra-cost was a general
question and not a specific legal question and the decision
of the arbitrator was not final one. The arbitrator
misconducted himself in allowing the claim without deciding
the objection of the State. In view of the specific clauses,
the appellant was not legally entitled to claim for extra
cost. The decision of this Court in Seth Thawardas v. Union
of India, [1955] 2 SCR -18 is of no avail on this point. If
no specific question of law is referred, the decision of the
arbitrator on that question is not final however much it may
be within his jurisdiction and indeed essential for him to
decide the question incidentally. The arbitrator is not a
conciliator and cannot ignore the law or misapply it in
order to do what he thinks is just and reasonable. The
arbitrator is a tribunal selected by the parties to decide
their disputes according to law and so is bound to follow
and apply the law, and if he does not he can be set right by
the Court provided his error appears on the face of the
award. In this case, the contractor having contracted, he
cannot go back to the agreement simply because he does not
suit him to abide by it. The decision of this Court in M/s.
Alopi Parshad v. Union of India, [1960] 2 SCR 793 may be
examined. There it was observed that a contract is not
frustrated merely because the circumstances 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
112
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.
It was argued on behalf of the appellant that since
specific issues 13 were framed and referred by the District
Judge to the arbitrator, the same had been answered by a
non-speaking award, there is no mistake of law apparent on
the face of record and the District Judge erred in setting
aside the award by looking into the terms of the contract
which it was submitted, neither formed part of the award nor
appended to it. We are unable to agree. This being a general
question, in our opinion, the District Judge rightly
examined the question and found that the appellant was not
entitled to claim for extra cost in view of the terms of the
contract and the arbitrator misdirected himself by not
considering this objection of the State before giving the
award.
In Kapoor Nilokheri Co-operative Dairy Farm Society
Ltd. v. Union of India, A.I.R. 1973 S.C. 1338, it was held
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that where an arbitrator is called upon to decide the effect
of the agreement, he has really to decide a question of law,
i.e. Of interpreting the agreement, and hence, his decision
is not open to challenge. This was also a decision against a
reasoned award but since the reference was to a specific
question of law, the decision of the arbitrator, it was
held, was not open to challenge. The limits of the
jurisdiction of the Court to challenge the award are well-
settled. While considering objection under section 30 of the
Act, the Court does not act as an appellate court, it can
only interfere with the award if the arbitrator misconducts
himself or the proceedings or if the award has been made
after the issue of an order by the Court superseding the
arbitration or if the arbitration proceedings have become
invalid under section 35(c) of the Act or the award has been
improperly procured or is otherwise invalid. The Judicial
Committee in Champsey Bhara & Co. v. Jivraj Balloo Spinning
& Weaving Co. Ltd., A.I.R. 1923 P.C. 66 has laid down the
extent of the jurisdiction of the Court to set aside an
award on the ground of an error in making the award. It has
been reiterated that the award of the arbitrator may be set
aside on the ground of an error on the face thereof only
when in the award or in any document incorporated with it as
for instance, a note appended by the arbitrator, stating the
reason for his decision, there is found some legal
proposition which is the basis of the award and which is
erroneous. See also in this connection Re. King & Duveen,
[1913] 2 K.B. 32 and Government of Kelantan v. Duff
Development Co. Ltd., [1923] A.C. 395, if how
113
ever, a specific question is submitted to the arbitrator and
he answers it, the fact that the answer involves an
erroneous decision in point of law, does not make the award
bad on its face so as to permit of it being set aside. See
also the observations of this Court in Bungo Steel Furniture
v.Union of India, [1967] 1 SCR 633. It is well settled that
the contract remained part of the award. The Judicial
Committee in Saleh Mohd. v. Nathoo Mal, 54 I.A. 427
considered an award in which the arbitrator recited a
contract made between the parties and the dispute arising
under it. It was contended that the contract was
incorporated in the award by its reference and so the award
disclosed an error of law in construing the terms of the
contract. But that contention was negatived. It was held
that the reference to the contract in the award was to
earmark the disputes between the parties and was not
incorporated into the award. In Abosalom Ltd. v. Creat
Western, [1933] A.C., 592, it was held that if an award
referred to the terms of a clause in the contract, the
clause though not set out in full must be taken to be
incorporated in it. This Court has reiterated in Allen Berry
& Co. v. Union of India, 119711 3 SCR 282 that mere
reference to the contract in the award is not to be held as
incorporating it.
In the aforesaid light, we are of the opinion, the High
Court was right that the District Judge was entitled to
examine the contract in order to find out the legality of
the claim of the appellant regarding extra cost towards rise
in prices of material and labour. As was pointed out by the
learned District Judge clauses 2.16 and 2.4 stipulated that
the contractor had to complete the work inspite of rise in
prices of materials and also rise in labour charges at the
rates stipulated in the contract. There was a clear finding
of the arbitrator that the contract was not rendered
ineffective in terms of section 56 of the Act due to
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abnormal rise in prices of material and labour. This being
so and the contractor having completed the work, it was not
open to him to claim extra cost towards rise in prices of
material and labour. The arbitrator misconducted himself in
not deciding this specific objection raised by the State
regarding the legality of extra claim of the appellant.
In that view of the matter, the award, in our opinion,
was properly set aside by the learned District Judge and the
High Court was right in not interfering with it.
The question about specific reference on a question of
law was examined by this Court recently in the case of
Tarapore and Comapny v. Cochin Shipyard Ltd., Cochin and
another, [1984] 2 S.C.C. 680. There it was observed that if
the agreed fact situation, on the basis of
114
which agreement was entered into, ceases to exist, the
agreement to that extent would become otiose. If rate
initially quoted by the contractor became irrelevant due to
subsequent price escalation, it was held in that case that
contractor’s claim for compensation for the . excess
expenditure incurred due to the price rise could not be
turned down on ground of absence of price escalation clause
in that regard in the contract. Agreement as a whole has to
be read. Reliance was placed very heavily on this decision
on behalf of the appellant before us.. It has to be borne in
mind that in the instant case there are specific clauses
referred to hereinbefore which barred consideration of extra
claims in the event of price escalation. That was not so in
Tarapore and Company’s case. That made all the difference.
The basis of bargain between the parties in both these two
cases were entirely different.
In the aforesaid view of the matter we are of the
opinion that the High Court was right in the view it took
and there is no ground to interfere. The petition for
special leave fails and is accordingly dismissed.
S.L. Petition dismissed.
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