REPORTABLE
IN THE SUPREME COURT OF INDIA
CIVIL APPELLATE JURISDICTION
CIVIL APPEAL NO. 2479 OF 2009
(Arising out of SLP (C) No.3182 of 2005)
G. Ramachandra Reddy & Co. ... Appellants
Versus
Union of India & Anr. ... Respondents
WITH
CIVIL APPEAL NO. 2536 OF 2009
(Arising out of SLP (C) No.9624 of 2006)
JUDGMENT
S.B. Sinha, J. 1. Leave granted. 2. Jurisdiction of a court to interfere with an arbitral award involving interpretation of a contract is involved in these appeals which arise out of a judgment and order dated 4.10.2004 passed by a Division Bench of the High Court of judicature at Madras allowing an appeal from a judgment and order
2 dated 14.1.2000 passed by a learned Single of the said court making the award made by Respondent No.2 herein a rule of Court. 3. For the work of construction of "Married accommodation for MCPOs/CPOs/POs and Junior Sailors at Naval Air Station, Arakkonam" by the Union of India, an advertisement was issued; pursuant whereto appellant submitted its tender on or about 9/17.7.1988 marked as Exhibit C-2. In its forwarding letter, it was stated :
"We have kept ready all the men and material for
early commencement of the work. The technical
personnel engaged by the firm have the vast
experience in the execution of major building
projects. The total labour component involved in
this work is forty per cent of the scope of the
contract. We can deploy the huge skilled and
unskilled labour force already on our rolls for all
the works along with the machinery for successful
completion of the work positively as per targeted
time schedules of the Department. The latest
ITCC and partnership deed are enclosed as
required."
A post script added thereto reads as under :
"When our tender opened and Rates Read out,
Please Read out over (+) 2.25% under item 1 of
the schedule quoted percentage and total value
considered accordingly." 4. Respondent, by a letter dated 19.7.1988 (marked as Exhibit C-3) replied thereto, stating :
3
"On scrutiny of your forwarding letter the
following comments are made :-
(a) The Labour component in the work is 20 as
included under Special Condition No.17 on
Serial Page 94 of the tender and not 40 as
referred to by you.
(b) In case of acceptance of your tender
mobilization advance of Rs.35.00 lakhs will
be paid against BGBs as per conditions of
the tender.
(c) It is seen that the way the revision has been
made in the quoted percentage for Schedule
‘A’ Part I does not go well with the status of
your firm. However, your tender is being
considered with the reduction of minimum
2.25% over quoted percentage for Schedule
‘A’ Part I as also read out at the time of
opening of tenders wherein your
representative was also present." Yet again on 5.8.1988, appellant in reply thereto, inter alia, stated :
"1. We hereby clarify that our rates are worked
out and quoted taking total labour component
involved in the scope of work as 40%. As such the
department may please evaluate our tenders on the
same basis and consider accordingly.
XXX XXX XXX
After ascertaining this just before dropping the
tender in the tender box, our Managing Partner had
to include an extra at 2.25% towards Turnover
Sales Tax liability and the vertical line in the sign
(+) has been hurriedly put as shown here once
again (+).
4
Thus, our quoted rates for item 1 of the schedule is
18.5% i.e. 16.25% quoted by us in the schedule
and plus 2.25% quotd in the covering letter along
with our tender against item 1 of the schedule. We
regret for the misunderstanding led in this regard."
Offer of the appellant was accepted by the respondents in terms of its letter dated 11.8.1988, the relevant portion whereof reads as under :
"Reference your letter No.Nil dated 9/17.7.1988
forwarding the tender for the above mentioned
work.
2. On behalf of the President of India, I hereby
accept your tender for the work mentioned above
for the Lump Sum of Rs.7,54,03,216.00 (Rupees
Seven Crores Fifty four lakhs three thousand two
hundred and sixteen only).
3. This contract is allotted the number "CA
No.CEMZ/ARK/4 of 1988-89" which will be
quoted by you in all future correspondence in
connection with this contract.
4. The tender enquiry, your tender, the letter
referred to above and this letter shall be the sole
repository of the contract."
With the said letter, the details of amended Lump-sum was appended which reads as under :
"DETAILES OF AMENDED LUMP SUM
i) Lump sum amount originally Rs. 7,67,22,728.00
quoted
ii) Deducted for reduction of (-) Rs. 13,91,512.00
2.25% offered on Schedule ‘A’ Part
I vide your letter No. NIL dated
9/17 July, 88 while forwarding the
tender (i.e. 2.25% on
Rs.6,18,45,000/-)
Note : Consequent on SI (ii) above
the Representing percentage on
Schedule ‘A’ Part I stands amended
to "+ 14%"
Amended Lump Sum Rs.7,54,03,216.00
(Rupees Seven crores fifty four lakhs three thousand two
hundred and sixteen only)" 6. Indisputably, whereas the main letter dated 11.8.1988 was signed by one L.D. Sharma, Brig. Chief Engineer as accepting officer for and on behalf of the President of India, the appendix was signed by some other person for ‘Accepting Officer’. Indisputably, the representative of the appellant also signed the said letter.
The said contract, however was terminated on or about 10.7.1991 7. Disputes and differences having arisen between the parties, the arbitration agreement which formed part of the general condition of the contract as also special condition of contract was resorted to. Respondent No.2 was appointed as the Arbitrator.
Before the learned Arbitrator, appellant put forth eight claims, being :
6
"(a) Dispute regarding additional payment of
2.25% over the quoted rates under item 1 of
Schedule A with an overall effect of 4.5%
over what has been paid to the plaintiff.
(b) Dispute regarding percentage of labour
component in the work with reference to the
escalation in labour rates and for
consequential in labour rates and for
consequential payments to the plaintiff.
(c) Dispute regarding escalation with reference
to the extra payment of labour involved in
construction of high rise building.
(d) Dispute regarding legality of the termination
of the plaintiff’s contract and for
consequential damages.
(e) Dispute regarding release of the plaintiff’s
plant and equipment, together with damages
for the use of the equipment by the
defendant and in default payment of the
market value of the plant and equipment as
on the date of termination, together with the
damages as aforesaid.
(f) Dispute regarding balance payment for the
work done and material supplied by the
plaintiff.
(g) Interest at 24% p.a. on all amounts due to
plaintiff and awarded by the arbitrator from
the date when the cause of action for the
claim arose, till the date of payment to the
plaintiff." 8. Respondent repudiated the said claims of the appellant. Respondent No.2 made and published an award on 17.9.1996. While claims Nos.1 and 5 were allowed in part, claims No.2 and 4 were allowed in toto. Claim No.3
7 was allowed for the amount to which the appellant itself had restricted its claim to.
Counter claim of the first respondent was rejected. 9. First respondent filed an application under Section 30 of the Arbitration Act, 1940 (hereinafter called and referred to for the sake of brevity as ‘the Act’).
A learned Single Judge of the High Court rejected the said objection, opining that the award did not warrant any interference. The learned Single Judge noticed that claim Nos. 5 and 6 had not been disputed by the first respondent and counter claim No.4 was not pressed. It was, therefore, directed payment of a sum of Rs.2,78,17,530.01 p. with further interest @ 6% per annum from the date of decree till the date of realization. The counter claim was also dismissed. 10. First respondent preferred an intra court appeal thereagainst in terms of clause 15 of the Letters Patent of the High Court read with Section 39 of the Act. The Division Bench of the High Court allowed the said appeal in part in respect of three items of claim. The objection in relation to fourth item was also dismissed. 11. Both parties are here before us aggrieved by and dissatisfied with the said judgment.
8 12. The three heads of claim which were allowed by the respondent No.2 in favour of the appellant are as under : (i) Claim of 2.25% over and above the base price as specified in Item
No.1 of Schedule A; (ii) claim of escalation towards labour component whether 40% or 21%;
and (iii) claim towards higher minimum wages paid to the workmen in terms
of a Government of India notification dated 14.10.1986.
The fourth claim which was allowed related to loss of profit allegedly suffered by the petitioner for illegal termination of the contract. 13. Mr. Gurukrishna Kumar, learned counsel appearing on behalf of the appellant, would submit : (1) That the Division Bench of the High Court committed a serious error
in so far as it failed to take into consideration the distinction between
an excess of jurisdiction and an error apparent on the face of the
award and as the respondent’s objection was not in relation to the
exercise of excess jurisdiction by the arbitrator, a strict scrutiny test
should have been applied.
9 (2) The Division Bench of the High Court committed a serious error of
law in so far as it failed to take into consideration that an error
apparent on the face of the award would not entitle it to enter into the
merit of the matter as the same is confined to the award itself or any
note appended thereto. (3) Interpretation of an agreement admittedly being within the realm of
the jurisdiction of the Arbitrator, interference therewith is not
permissible even if the court takes a different view. 14. Mr. B.B. Singh, learned counsel appearing on behalf of the respondent, on the other hand, would urge : 1) As the jurisdiction of the Arbitrator emanates from the contract, he
must exercise the same within the four corners thereof. 2) Interpretation of a contract although fell within the jurisdiction of the
Arbitrator but in construing the same, he could not have ignored any
material document, namely, the final contract entered into by and
between the parties on 11.8.1988 and based his interpretation only on
the basis of letter of the contractor dated 9/17.7.1988 and, thus, he
must be held to have misconducted himself and the proceedings.
10 15. Before adverting to the rival contentions, as noticed hereinbefore, we may briefly notice the reasonings adopted by respondent No.2 in making the award. The learned Arbitrator proceeded on the basis that : (1) The letter of the contractor dated 9/17.7.1988 formed part of the
contract. (2) The intent of the parties must be ascertained from four documents
which formed part of the contract and not de hors the same. (3) Appendix to the letter dated 11.8.1988 having been signed by a person
other than the Accepting Officer who was authorized therefor, the
same was not binding on the appellant. (4) Although the appellant had signed the work order, the same by itself
would not lead to the conclusion that it was estopped and precluded
from questioning the quantum of amount mentioned in the said letter
dated 11.8.1988. 16. In respect of claim No.1, the learned Arbitrator held :
"On a consideration of the letters and the Exhibits
mentioned above, we have to state that a
concluded contract has taken place taking into
consideration the sign (+) mentioned in the
covering letter. Even assuming that there was a
11
mistake on the part of the respondent reading the
covering letter, the contract would remain
unaffected.
The contention of the respondent that when once
the claimant has accepted for the reduction, as is
found in Ex.R.7, which is the contractor’s work
order sheet, and which is signed by the contractor
on 14.9.1988., it has to be concluded that there is
an acceptance for the reduction. This argument of
the learned Counsel for the respondent is not well
founded. An acceptance of the contract will have
to be considered under the terms of Ex.C.5 dated
11.8.88. In the instance case it is common ground
that there is a concluded contract between the
parties and what remains is the interpretation of the
contract, Ex.C.5 it is not the case of the respondent
that Ex.C.5 is a counter offer which was accepted
by the claimant. On the other hand, it is agreed by
the respondent that acceptance of the contract is
solely based on Ex.C.5. The documents filed
before me in this case clearly establish the sigh (+)
which is more particularly referred to in Ex.C.5 as
the sole repository of the contract. (underlining is
mine) In such a case, it has to be concluded that
Ex.R.1 is the clear acceptance of the contract. It
has to be further noted chat as per the terms of
Section 7(2) of the Contract Act, if the proposer
does not insist that his proposal should be accepted
in the prescribed manner, he in fact accept the
acceptance."
In respect of claim No.2, the relevant condition of contract, namely, clause (17) although specified that for the purpose of escalation of the labour component, the value of contract should be taken as 21% but as the appellant claimed 40% in its offer, the same would prevail over the contract, stating :
12
"I state that special condition to the contract that is
clause 17 at Page 4 specifies that for the purpose of
escalation the labour component for the value of
work will be taken as 20% which was later
changed as 21%. Similarly, fuel component which
was shown as 1.5% in the agreement was changed
as 2% and the material component which was
shown in the agreement on page 90 as 60% was
changed into 58%. In other words, the total
component towards labour, material and fuel
comes to 81%. The claimant has not claimed
anything in excess of 81%, for, the escalation
clause in the agreement provides, the escalation for
an amount not exceeding 81% of the value of the
work done. All that he has claimed is, towards
fuel 2%, towards material 39% and towards labour
40%. This change in labour component at 40% is
based on Ex.C.22 (R1) dated 9/17.07.88 which has
become part of the tender bid. This part of the
offer that is tender bid, has been accepted by the
respondent, that is to say, that this 21% mentioned
in the contract has been substituted as 40%. The
claimant has made this fact clear in all his
subsequent letters. In other words, the contention
of the claimant is that the covering letter Ex.C.2
(R1) is part of the tender bid, and since the tender
bid has been accepted without any modification,
the figure 21% in the condition, has, therefore, to
be substituted by 40%. It is on this basis the
claimant claims that the labour component should
be paid at the rate of 40%, while material
component would consequently come at 39% and
the fuel component will remain at 2%."
In respect of claim No.3, it was held that in view of the notification issued by the Central Government dated 14.10.1980, the minimum wages payable to the workmen being over and above 20% the general wages, the
13 same would be payable to all the workmen and not those employed in high rise portions of the building. 17. The Division Bench, however, set aside in part the award in respect of the aforementioned claims stating as under :
"However, we find some substance with regard to
the claim No.4, loss of profit, there was an
admitted delay in handling over the site and supply
of materials. We confirm both the award of the
Arbitrator and the order of the learned Single
Judge with regard to Claim No.4, loss of profit." 18. We may, at the outset, notice the legal principles governing the dispute between the parties. Interpretation of a contract may fall within the realm of the Arbitrator. The Court while dealing with an award would not reappreciate the evidence. An award containing reasons also may not be interfered with unless they are found to be perverse or based on a wrong Proposition of law. If two views are possible, it is trite, the Court will refrain itself from interfering. {See State of U.P. v. Allied Constructions [(2003) 7 SCC 396]}.
In Pure Helium India (P) Ltd. v. Oil & Natural Gas Commission [(2003) 8 SCC 593], this court, upon referring to the decisions in Allied Constructions (supra), K.R. Raveendranathan v. State of Kerala [(1998) 9 SCC 410], H.P. Seb v. R.J. Shah & Co. [(1999) 4 SCC 214], Rajasthan State
14 Mines & Minerals Ltd. v. Eastern Engg. Enterprises [(1999) 9 SCC 283], Food Corporation of India v. Surendra, Devendra & Mahendra Transport Co. [(2003) 4 SCC 80] and Shyama Charan Agarwala & Sons v. Union of India [(2002) 6 SCC 201], opined as under :
"41. The principles of law laid down in the
aforementioned decisions leave no manner of
doubt that the jurisdiction of the court in
interfering with a non-speaking award is limited.
42. The upshot of the above decisions is that if the
claim of the claimant is not arbitrable having
regard to the bar/prohibition created under the
contract, the court can set aside the award but
unless such a prohibition/bar is found out, the
court cannot exercise its jurisdiction under Section
30 of the Act. The High Court, therefore,
misdirected itself in law in posing a wrong
question. It is true that where such prohibition
exists, the court will not hesitate to set aside the
award."
In Sudarshan Trading Company v. Government of Kerala & Anr. [(1989) 2 SCC 38], the law was laid down in the following terms :
"28. It was submitted before us that the High Court
had exceeded its jurisdiction in acting in the
manner it did on these aforesaid aspects. The first
question, therefore, that arises for consideration in
this case is, whether the award in question was a
speaking award or not. In our opinion, the award
was not a speaking award. An award can also be
set aside if the arbitrator had misconducted himself
or the proceedings or had proceeded beyond his
jurisdiction. These are separate and distinct
grounds for challenging an award. Where there are
15
errors apparent on the face of the award it can only
be set aside if in the award there is any proposition
of law which is apparent on the face of the award,
namely, in the award itself or any document
incorporated in the award."
It was furthermore observed :
"29. The next question on this aspect which
requires consideration is that only in a speaking
award the court can look into the reasoning of the
award. It is not open to the court to probe the
mental process of the arbitrator and speculate,
where no reasons are given by the arbitrator, as to
what impelled the arbitrator to arrive at his
conclusion." 19. Jurisdiction of the Court to interfere with an award made by an Arbitrator is limited. One of the grounds therefor is the error apparent on the face of the award. We have noticed hereinbefore some precedents operating in the field.
What is an error apparent on the face of an award and legal misconduct is stated in State of Rajasthan v. Pure Construction Co. Ltd. & Ors. [(1994) 6 SCC 485], in the following terms :
"As reference to arbitration of disputes in
commercial and other transactions involving
substantial amount has increased in recent times,
the courts were impelled to have fresh look on the
ambit of challenge to an award by the arbitrator so
that the award does not get undesirable immunity.
In recent times, error in law and fact in basing an
16
award has not been given the wide immunity as
enjoyed earlier, by expanding the import and
implication of "legal misconduct" of an arbitrator
so that award by the arbitrator does not perpetrate
gross miscarriage of justice and the same is not
reduced to mockery of a fair decision of the lis
between the parties to arbitration. Precisely for the
aforesaid reasons, the erroneous application of law
constituting the very basis of the award and
improper and incorrect findings of fact, which
without closer and intrinsic scrutiny, are
demonstrable on the face of the materials on
record, have been held, very rightly, as legal
misconduct rendering the award as invalid."
It was furthermore stated :
"Error apparent on the face of the record does not
mean that on closer scrutiny of the import of
documents and materials on record, the finding
made by the arbitrator may be held to be
erroneous. Judicial decisions over the decades
have indicated that an error of law or fact
committed by an arbitrator by itself does not
constitute misconduct warranting interference with
the award."
In Trustees of the Port of Madras v. Engineering Constructions Corporation Ltd. [(1995) 5 SCC 531], This Court opined :
"14. ... A note of clarification may be appended,
viz., where the parties choose to refer a question of
law as a separate and distinct matter, then the
Court cannot interfere with the award even if the
award lays down a wrong proposition of law or
decides the question of law referred to it in an
erroneous fashion. Otherwise, the well-settled
position is that an arbitrator "cannot ignore the law
17
or misapply it in order to do what he thinks is just
and reasonable". [See Thawardas Pherumal v.
Union of India]
It was clarified :
20. The proposition that emerges from the
above decisions is this: in the case of a
reasoned award, the court can interfere if the
award is based upon a proposition of law
which is unsound in law. The erroneous
proposition of law must be established to
have vitiated the decision. The error of law
must appear from the award itself or from
any document or note incorporated in it or
appended to it. It is not permissible to travel
beyond and consider material not
incorporated in or appended to the award." 20. We may, however, notice that in Food Corporation of India v. Joginderpal Mohinderpal & Anr. [(1989) 2 SCC 347], referring to a large number of decisions, a Division Bench of this Court held :
"... It has to be borne in mind, however, that
wrong statement or conclusion of law, assuming
even that it was a wrong statement of law, was not
wrong statement of the proposition of law which
was the basis for decision in this award. Error of
law as such is not to be presumed; if there is legal
proposition which is the basis of the award and
which is erroneous as observed in Champsey
Bhara & Co., then only the award can be set
aside."
18 21. Almost to the similar effect is the decision of another Division Bench of this Court in Numaligarh Refinery Ltd. v. Daelim Industrial Company Ltd. [JT 2007 (11) SC 73], wherein it is stated :
"17. We have considered the rival submissions of
the parties. So far as the legal proposition as
enunciated by this Court in various decisions
mentioned above, it is correct that courts shall not
ordinarily substitute their interpretation for that of
the arbitrator. It is also true that if the parties with
their eyes wide open have consented to refer the
matter to the arbitration, then normally the finding
of the arbitrator should be accepted without demur.
There is no quarrel with this legal proposition. But
in a case where it is found that the arbitrator has
acted without jurisdiction and has put an
interpretation on the clause of the agreement which
is wholly contrary to law then in that case there is
no prohibition for the courts to set things right." 22. A contract would warrant construction if the terms thereof are vague and ambiguous. The letter exhibiting the offer of the appellant refers to four different documents including the letter dated 9/17.07.1988 which was marked as Exhibit C-2. Whether in the said letter, the appellant had asked for increase of 2.5% over the base value or deducted 2.5% therefrom is a matter of construction. 23. The learned Arbitrator, it is not correct to contend, has not taken into consideration the ultimate contract. He did take the same into consideration.
19 He, however, was of the opinion that the aforementioned four letters which were said to be the sole repository of the contract formed part thereof.
He, thus, took into consideration the relevant documents for arriving at a finding as to whether they formed part of the contract. Offer of the appellant was accepted. 24. The first claim was in relation to disputes regarding additional payment of 2.25% over the quoted rates under item 1 of Schedule A with an overall effect of 4.5% over what had been paid to the plaintiff. The arbitrator came to the conclusion that the letter dated 9/17.7.1988 (Ex.C.2) does not make out whether the contractor intended to quote the price with +2.25% and therefore, he held that a concluded contract has taken place after taking into consideration the sign (+) mentioned in the above letter. The contract will therefore still be enforced even if it is assumed that there was a mistake on the part of the respondent. The High Court held that it was apparent on the face of record that the contractor intended only to reduce 2.25%, which was seen from Ex.C.5, which was final and concluded, claim no 1 fails for that reason. But as the Arbitrator held that the letter of the contractor dated 9/17.7.1988 formed part of the contract, the claim cannot fail and therefore the award of the Learned Arbitrator, in respect of claim No 1 must be sustained.
20 25. In relation to Claim No.2, the respondent relied on the fact that the claimant received payment only at the rate of 21% towards labour escalation in the several R.A.Rs and therefore, it has to be presumed that the claimant is entitled to only 21%. The Arbitrator opined that the receipt of money at 21% cannot absolve the claimant from claiming at 40% as per the contract, particularly, when it is clearly mentioned in Ex C.2 (R1) that 40% will be the labour component which forms part of the contract, Ex C.5. The High Court held that as the Department themselves gave 21% to the contractor, and only 21% of escalation, which was in consonance with the special conditions, which was apparent on the face of the record, the second claim of escalation of 40% was to be set aside. But, keeping the same principle as applied in relation to Claim No.1, the Arbitrator held that as the covering letter (Ex.C.2) is part of the tender bid, and since the tender bid has been accepted without any modification, the Figure of 21% has to be substituted by 40%. Therefore, in respect of claim No.2, the impugned judgment of the High Court cannot be upheld and the award of the Arbitrator is sustained. 26. The matter might have been different had the respondents in categorical terms rejected the offer made by the appellant as amended by its letter dated 19.7.1988. It did not do it. Thus, the contract remained open for construction.
21 27. We have not been able to persuade ourselves to agree with the reasonings of the Division Bench of the High Court. The award of the learned Arbitrator in respect of claim No.1, therefore, must be sustained. 28. Keeping in view the fact that the same principle would apply in respect of claim No.2 also, the impugned judgment of the High Court cannot be upheld. 29. So far as Claim No.3 is concerned, the claim towards higher minimum wages paid to the workmen is not in dispute. A high rise building is a high rise building, it cannot be divided into two parts.
What would constitute a high rise building was defined. A portion of the building cannot be high rise and a portion would fall within the purview of the said definition. The learned Arbitrator, in our opinion, had rightly opined that the same workers may have to work for constructions of the entire building as it will be impossible for any contractor to employ any workmen to work exclusively for the high rise building. Furthermore, the same workmen may have to work in different parts of the same building at different times. It would lead to an absurd situation if the workmen at one point of time are not paid the 20% of the excess amount and then paid the same and yet again denied the same benefit. Interpretation of the High Court, therefore, that high rise building mean portion of the building, in our
22 opinion, keeping in view the beneficent nature of the provisions, cannot be accepted. 30. The award of the Arbitrator in respect of claim No.4 has been accepted by the Division Bench. Mr. B.B. Singh has drawn our attention to clause 11(c) of the general conditions of contract to contend that in terms thereof, no damages were payable.
The question as to whether damages were payable for illegal termination of contract cannot be a subject matter of contract. The learned Arbitrator has categorically held that not only the termination of contract was illegal, the same was mala fide. Furthermore, the contention raised before us by Mr. Singh has not been raised before the High Court. 31. In any event, there is a delay of 411 days in filing the SLP of the respondent, for which no sufficient explanation has been given. 32. For the reasons aforementioned, the appeal filed by Union of India is dismissed and that of the appellant is allowed. In the facts and circumstances of the case, however, there would be no order as to costs.
.....................................J.
[S.B. Sinha]
.....................................J.
23
[Cyriac Joseph] New Delhi; April 15, 2009