PETITIONER:
TAMILNADU ELECTRICITY BOARD
Vs.
RESPONDENT:
M/S. BRIDGE TUNNEL CONSTRUCTIONS & ORS.
DATE OF JUDGMENT: 18/02/1997
BENCH:
K. RAMASWAMY, S. SAGHIR AHMAD
ACT
HEADNOTE
JUDGMENT
ORDER
Leave granted. Substitution allowed.
These appeals, by special leave, arise from the judgment of the Madras High Court, dated December 20, 1990, made i n O.S.A. Nos. 109 and 110 of 1988.
The admitted facts are that the respondents had entered into an agreement with the appellant to construct interconnecting tunnels for Suruliyar Hydroelectric Project as per specification No. 1138- Schedule-B to the agreement. The initial value of the tender to be awarded was Rs. 47 lakhs and it was revised to Rs. 69 lakhs on January 16, 1975. In the course of execution of the contract, a sum of Rs.92 lakhs was paid to the respondent. The contract was to be completed within a period of 24 months from the date of taking over of the site, i.e., January 18, 1975; thus, it was completed after the expiry of the term, on August 25, 1978. Resultantly, there had arisen a dispute as to the entitlement to further amount towards the work done by the respondent.
On a notice issued by the respondent for appointment of an arbitrator in terms of clause 50 of the contract (arbitrator clause), there was a delay on the part of the appellant i n nomination of the arbitrator. When the respondent exercised the power, after expiry of the time prescribed in the notice, appointing a sole arbitrator, proceedings under Section 33 of the Arbitrator Act, 1940 were initiated by the appellant. One of the objections raised by the appellant in the proceedings under Section 33 was that under the terms of the contract the claim sought to be put up in the notice given by the respondent was not arbitrable. The question was gone into and the court recorded a finding as under:
"If the petitioner had come forward
to raise dispute and if it is
outside the scope of clause 50, the
first respondent itself would come
forward with such a reservation. It
is not as if all disputes would
come within the cope of clause 50
and only those that would come
within the ambit of clause 50 alone
can be decided by the Arbitrators
when such is the clear position on
this aspect; enabling the
petitioner Board to raise a
objection regarding disputes which
may not come within the scope of
clause 50 is not a concession, but
a recognition of a right, which is
available not only to the
petitioner Board but also the first
respondent in the event of the
Board raising any dispute as
against it. Therefore, the first
stipulation is dependent upon the
Arbitrators deciding as to whether
particular dispute would come
within the scope of Section 50 or
not, and only if they consider that
it falls within the scope of
Arbitration clause, they would have
the jurisdiction to decide the
same. In the event of the
Arbitrators holding that any
particular dispute is outside the
Arbitration clause, it is not as if
the first respondent is deprived of
remedies by agitating the same in
Course."
It is also further held that :
"After the award is made, as the
petitioner Board has already
reserved its right, it would enable
the Board to raise this point, in
the event of any need arising for
setting aside the award in Court."
Pursuant thereto, condoning the delay liberty was given to the appellant to nominate an Arbitrator on its behalf which accordingly was done and dispute was referred to arbitration. Arbitrability of some of the claims was disputed as part of no liability. Since the two Arbitrators differed, an umpire was selected by the Arbitrators and he had gone into the question. At this stage, it is relevant to mention that some of the claims made by the respondents relate to excavation of hard rock in the tunnel and the rate of claims.
The relevant clauses of the Contract postulate thus :
"22. Material to be excavated :
The character of the material
through which the tunnel is to be
excavated is indicated i n the
report of the Geologist of the
Geological Survey of India,
attached of this specification as
an appendix. The probable nature of
materials to be excavated is given
in the above report. It is
expressly to be under stood,
however, that the purchaser does
not guarantee the accuracy of the
information and should the
conditions be found to differ from
those indicated, the contractor
shall have no claim against the
purchaser on the grounds of
misrepresentation. Moreover, the
price to be given in the schedule
of prices for excavation work is to
be inclusive and to be held to
cover excavation in the actual
materials encountered.
23. Tunnel Excavation:
a) The tunnel is to be excavated
to such dimensions as to give the
minimum thickness of concrete
lining specified and to suit the
shape and size of cross section of
the tunnel shown on drawing.
b) Excavation is to be carried
out as far as feasible,
simultaneously on all fages. It is
expected, that more of the ground
alone the tunnel will be hard rock
requiring the supports. Except
where the materials penetrated is
hard rock and will safely stand by
itself, the tunnel is to be lined
temporarily with timber supports
and shoring. The timbering is to be
kept as alose to the face of the
heading as possible. Any shoring of
protective arrangements considered
inadequate by the Engineer is to be
strengthened immediately.
g) The type of tunnel section to
be constructed shall be as directed
or approved by the Engineer.
Measurement for payment of tunnel
excavation, will be limited to the
special sectional dimensions and
will be made along the established
centre line of the tunnel and
payment therefore will be made at
the unit bid in the schedule for
excavation of all classes of
tunnel. No additional allowance
above the unit price bid in the
schedule for excavation of all
eclasses of tunnel will be made on
account of the class, nature or
condition of any of the material
encountered."
The rates were mentioned in the Schedule and the respondent had set up the claims raised at rates higher than the contracted rates and twice the rate for the work done after the expiry of the contract period.
Against the claims, objections were raised by the appellant. They have disputed the claim set up by the respondents and requested the Arbitrators to decide on the arbitrability of the items mentioned in the claims of the respondents. The umpire, without going into the details, in a non-speaking award as against the claim of Rs. 2 crores 10 lakhs, has awarded a consolidated sum of Rs. 70.83 lakhs as under :
"I hereby award and direct as
follows:
(1) The Respondent shall pay the
claimant a sum of Rupees Seventy
Lakhs eighty three thousand seven
hundred and ninety three only (Rs.
70,83,793/-) and release the
earnest money deposit and Bank
Guarantees furnished by the
claimant in lieu of Security
Deposit, in full settlement of all
claims and counter-claims."
Calling the award in question, an application to set it aside has been filed. The respondent filed an application to make the award the rule of the court. The civil Court dismissed the petition of the appellant and made the award the rule of the court. On appeal, the Division Bench of the High Court has confirmed the same. Thus these appeals, by special leave.
Shri V.R. Reddy, the learned Additional Solicitor General, contends that the award is illegal on account of omission on the part of the Umpire to give the findings and reasons in support thereof of the arbitrability of the claims. He contends that arbitrability of claim is a jurisdictional issue. The arbitrator cannot clothe himself with the power, in a non-speaking award to award a consolidated sum, without deciding the arbitrability of the claims set up by the respondents including those which are not part of the contract.
Shri Poti, learned senior counsel for the respondents has contended that the award being a non-speaking one in the absence of specific reference directing the Arbitrators to decide the arbitrability of some of the items in the claims set up by the respondent, Umpire was not called upon or obliged to decide the dispute by a speaking order on arbitrability. He reached the conclusion whether or not the dispute or the claim is arbitrable and obviously he was of the opinion that all the claims are arbitrable and he is empowered to decide it either rightly or wrongly. He may be wrong in not expressly giving his decision on arbitrability of some of the claims. However, his decision is within his jurisdiction. He is not required to give any reasons in the award for reaching that decision. When the arbitrator had given a consolidated sum towards all the claims, it would mean that he had considered the arbitrability of some of the claims in terms of the contract and that, therefore, he has not committed any error in reaching that conclusion which is apparent on the face of the record. In the absence of any specific reference for deciding that dispute, even if incidentally he reaches that decision, he gets the jurisdiction and power to decide the question, he gets the otherwise also, the award cannot be assailed o n the ground that he reached a wrong decision without any reasons in support thereof. In that event, it must be deemed that he had considered the non-arbitrability of the items in a nonspeaking ward given by him. He also further contends that i n the absence of any agreement between the parties that the arbitrator would give reasons in support of his decision on the arbitrability of the dispute, he is not called upon to decide the dispute by a speaking award. What is required, therefore, is to be considered is whether the arbitrator reached the decision as to the entitlement to for a specified sum or disentitlement thereof, in his award. Once he specifies the amount to which the respondent is entitled, it must be deemed that he had taken into consideration the arbitrability of all the claims including the claim relating to nonarbitrability of some of the items and had given the award. Thereby, consolidated sum in the award is not subject to attack that the award made by the Arbitrator is vitiated by any error of jurisdiction or error of law apparent on the face of the record. Shri Poti further contends that the contract of arbitration is not part of the record and the umpire had not referred to the agreement as part of the award and that, therefore, it is not open to the court to look into the contract to find out whether the contractor claimed at the rates higher than what were contracted and the umpire has omitted to consider the nonarbitrability of the claims in respect of some of the items. In support thereof, the places strong reliance on the decision of this Court in Tarapore and Co. v. Cochin Shipyard Ltd., Cochin [(1984) 2 SCC 680], in particular, paragraphs 10, 12,33 thereof, and State of A.P. v. R.V. Rayanim [(1990) 1 SCC 433 at 435, para 5].
In view of the respective contentions, the question that arises for consideration is: whether the Umpire was required to give a decision supported by reasons on the nonarbitrability of some of the items in terms of the contract. It is already seen that the Court prior to the proceedings under Section 33 had gone into the question as to the right of the appellant to question the arbitrability of some of the items and had expressly recorded, as seen hereinbefore, that if any objection regarding the dispute is raised, either parties is at liberty to raise the same and avail of decision by the arbitrator and the arbitrator is required to decide the arbitrability of the claim and if he considers that it falls within the scope of the arbitration clause/arbitrability, then he would have the jurisdiction to decide the same. If the decision has been reached by the arbitrator against the appellant, it would be open to the Board to raise that point, in case any need arises for setting aside the said award in the court. Thus, it could be seen that prior to the proceedings under Section 33, the court had left open the umpire had to decide the dispute. In the event of the decision going against the Board, the same is also entitled to question the correctness of the award in a court of law. That order has become final.
In the light of the above facts, the question arises; whether the arbitrator was not obliged to decide the nonarbitrability of some of the items claimed by the respondents before/while giving a non-speaking award and whether a deemed decision could be given credence. In Tarapore Co.’s case relied on by Shri Poti, a Bench of two judges of this court had gone into the question of jurisdiction of the arbitrator to decide the arbitrability of the dispute. In para 10 thereof, it is stated thus :
"What is the effect of referring
the specific question of law to
arbitration without prejudice to
one’s right to contend to the
contrary will be presently
examined."
If this issue specifically raises a
question as to jurisdiction of the
arbitrator to arbitrate upon the
dispute set out in Point No.2, it
appears to have been specifically
referred to the arbitrator for his
decision. Parties, therefore,
agreed to submit the specific
question even with regard to the
scope ambit width and the
construction of the arbitration
clause so as to define its
parameters and contours with a view
to ascertaining whether the claim
advanced by the appellant and
disputed by the respondent would be
covered by the arbitration clause.
Whether upon its true construction
the arbitration clause would
include within its compass the
dispute thus raised between the
parties was specifically put in
issue because parties were at
variance about it."
"The arbitrator was thus required
and called upon first to decide
whether the dispute is arbitrable
as falling within the width and
answer is in the affirmative, then
alone the second point need be
examined. If the answer to the
first point of reference is in the
negative in that if the arbitrator
were of he opinion that the dispute
is not arbitrable as it would not
fall within the scope, width an
ambit of the arbitration agreement,
it would not be necessary for him
to determine whether the appellant
was entitled to recover anything by
way of compensation. This aspect is
being analysed in depth to point
out that the parties specifically
referred the question of
constriction of arbitration
agreement, its width, ambit and
parameters vis-a-vis the dispute
raised so as to decide whether the
dispute would fall within the
purview of the arbitration
agreement, in other words the
jurisdiction of the arbitrator."
Thus, it could be seen that therein that when the question is specifically referred to the arbitrator, the arbitrator is required to decide the question referred to him and decide the point on the question. Then only he gets the jurisdiction to go into the merits. In para 12 of the judgment that point was elaborated holding that :
"The first point extracted
hereinbefore would clearly show
that the specific question about
the jurisdiction of the arbitrator
to arbitrate upon the dispute set
out in Point Nos. 2, 3 and 4 was
specifically referred to the
arbitrator.
On the first point, the arbitrator
had to decide whether the claims
made by the appellant and disputed
by the respondent would be covered
by clause 40, i.e. the arbitration
clause. In other words, the
specific question referred to the
arbitrator was about his
jurisdiction to arbitrate upon the
disputes covered by Points Nos. 2,
3 and 4, if and only if, upon a
true construction of the
arbitration clause that is first
paragraph of clause 40, would cover
the disputed claim for compensation
he can enter into the merits of the
dispute and decide it."
This ratio clearly establishes that the arbitrator gets jurisdiction to decide the dispute on merits only when he is specifically called upon to decide the dispute in terms of the contract.
In Managing Director, J & K Handicraft v. Good Luck Carpets [(1990) 4 SCC 740], the question arose: whether the court could look into the arbitration agreement, find out whether the arbitrator has jurisdiction to decide the dispute though it was not formed part of the award? In para 5, this Court had held that:
"... Here we may point out that the
learned counsel for the respondent
has urged that the agreement
containing the arbitration clause
cannot be looked into even to find
out as to what was the nature of
the dispute contemplated by it with
regard to which a reference to an
arbitrator was contemplated, more
so when the ward was a non-speaking
one. We find it difficult to agree
with this submission for two
reasons: Firstly, the award is not
a totally non-speaking one
inasmuch as it gives as resume of
the incentive scheme and the
agreement between the parties as
also the items of the claim made by
the respondent. Of course, while
fixing the amount found payable by
the appellant, no reasons are
recorded. Secondly, if there is any
challenge to the award on the
ground that the arbitrator had no
jurisdiction to make the award with
regard to a particular item
inasmuch as it was beyond the scope
of reference, the only way to test
the correctness of such a challenge
is to look into the agreement
itself. In our opinion, looking
into the agreement for this limited
purpose is neither tantamount to
going into the evidence produced by
the parties nor into the reason
which weighted with the arbitrator
in making the award."
In fact this Court had gone into merits while deciding the question as to whether the arbitrator was justified in making the award in excess of the jurisdiction with reference to the arbitration agreement and deciding the dispute on that basis.
In U.P. Rajkiya Nirman Nigam Ltd. v. Indure Pvt. Ltd. [(1996) 2 SCC 667] a Bench of three judges [to which both of us were members] had gone into the question whether the arbitrator can go into the question whether there emerged any concluded contract and whether he can get exclusive jurisdiction to decide that question by himself? In an application under Section 33, the learned Single Judge of the High Court had held that the arbitrator has exclusive jurisdiction to decide that question. Reversing that judgment this Court in para 13 had held that "the arbitrability of a claim depends on the construction of the clause in the contract. The finding of the arbitrator/arbitrators on arbitrability of the claim is not conclusive as under Section 33, ultimately it is the court that decides the controversy. It being a jurisdictional issue, the arbitrator/arbitrators cannot clothe themselves with jurisdiction to conclusively decide the issue." In para 15 it is held thus:
"The clear settled law thus is that
the existence or validity of an
arbitration agreement shall be
decided by the court alone,
Arbitrators, therefore, have no
power of jurisdiction to decide or
adjudicate conclusively by
themselves the question since it is
the very foundation on which the
arbitrators proceed to adjudicate
the disputes. Therefore, it is
rightly pointed out by Shri Adarsh
Kumar Goel, learned counsel for the
appellant that they had by mistake
agreed for reference and that
arbitrators cold not decide the
existence of the arbitration
agreement or arbitrability of the
disputes without prejudice to their
stand that no valid agreement
existed. Shri Nariman contended
that having agreed to refer the
dispute, the appellant had
acquiesced to the jurisdiction of
the arbitrators and, therefore,
they cannot exercise the right
under Section 33 of the Act. We
find no force in the contention. As
seen, the appellant is claiming
adjudication under Section 33 which
the court alone has jurisdiction
and power to decide whether any
valid agreement is existing between
the parties. Mere acceptance or
acquiescing to the jurisdiction of
the arbitrators for adjudication of
the disputes as to the existence of
the arbitration agreement or
arbitrability of the dispute does
not disentitle the appellant to
have the remedy under Section 33
through the court. In our
considered view the remedy under
Section 33 is the only right royal
way for deciding the controversy."
Accordingly, it was held that the controversy of arbitrability requires to be decided by the court and not by the arbitrator himself.
In Union of India v. G.S. Atwal & Co. (Asansole) [(1996) 3 SCC 568] a Bench of two Judges, to which one of us, K. Ramaswamy, J. was a member, was to consider the question whether the arbitrator. when he enlarged his scope of award in a non-speaking award, can conclusively decide the dispute and give an award in that behalf? It was held in paragraph 6 that :
"To constitute an arbitration
agreement, there must be an
agreement that is to say the
parties must be ad idem.
Arbitrability of a claim depends
upon the dispute between the
parties and the reference to the
arbitrator. On appointment, he
enters upon that dispute for
adjudication. The finding of the
arbitrator on the arbitrability of
the claim is not conclusive, as
under Section 33 ultimately it is
the court that decides the
controversy. It can hardly be
within the arbitrator’s
jurisdiction to decide whether or
not a condition precedent to his
jurisdiction has been fulfilled.
The arbitrator had has been
fulfilled. The arbitrator had no
power to decide his own
jurisdiction. The arbitrator is
always entitled to inquire whether
or not he has jurisdiction to
decide the dispute. He can refuse
to deal with the matter at all and
leave the parties to go to the
court if he comes to the conclusion
that he has no power to deal with
the matter, or he can consider the
matter and if he forms the view
that the contract upon which the
claimant is relying on and from
which, if established, he alone has
jurisdiction, he can proceed to the
decide the dispute accordingly.
Whether or not the arbitrator has
jurisdiction and whether the matter
is referred to or is within the
ambit of clause for reference of
any difference of dispute which may
arise between the parties, it is
for the court to decide it. The
arbitrator by a wrong decision
cannot enlarge the scope of the
submission. It is for the court to
decide finally the arbitrability of
the claim in dispute or any clause
or a matter or a thing contained
therein or the construction
thereof.:
In Champsey Bhara & Co. v. Jivraj Balloo Spinning & Weaving Co. Ltd. (LR (1922) 50 IA 324 : AIR 1923 PC 66] Lord Dunedin had laid down the dictum as to an error in law on the face of the award, which was accepted and followed by this court in Hindustan Construction Co. Ltd. v. State of J & K. [(1992) 4 SCC 217]. Therein it was held that:
"An error in law on the face of the
award means, in their Lordships’
view, that you can find in the
award or a document actually
incorporated thereto, as for
instance a note appended by the
arbitrator stating the reason for
his judgment, some legal
proposition which is the basis of
the award and which you can then
say is erroneous. It does not mean
that if in a narrative a reference
is made to a contention of one
party, that opens the door to
seeing first what the contention
is, and then going to the contract
on which the parties’ right depend
to see if that contention is sound.
Here it is impossible to say, from
what is shown on the face of the
award, what mistake the arbitrators
made. The only way that the learned
judges have arrived at finding what
the mistake was is by saying:
’inasmuch as the arbitrators
awarded so and so, and inasmuch as
the letter shows that the buyer
rejected the cotton, the
arbitrators can only have arrived
at arbitrators can only have
arrived at that result by totally
misinterpreting Rule 52’. But they
were entitled to give their own
interpretation to Rule 52 or any
other article, and the award will
stand unless, on the face of it,
they have tied themselves down to
some special legal proposition
which then when examined, appears
to be unsound."
The decision has been followed by this Court in all subsequent judgments and the precise scope of the law as to error apparent on the face of the award has been crystalised. But there is a distinction between an error apparent on the face of the award and jurisdictional error in passing the award. In that behalf, in M/s. Sudarsan Trading Co. v. State of Kerala [(1989) 2 SCC 38] Justice Sabyasachi Mukharji, as he then was, had pointed out the distinction on the jurisdictional error and the error on the face of the award. It was stated thus:
"An award may be remitted or set
aside on the ground that the
arbitrator in making it, had
exceeded this jurisdiction and
evidence of matters not appearing
on the face of it, will be admitted
in order to establish whether the
jurisdiction had been exceeded or
not, because the nature of the
dispute is something which has to
be determined outside the award-
whatever might be said about it in
the award or by the arbitrator. It
has to be reiterated that an
arbitrator acting beyond his
jurisdictionis a different ground
from the error apparent on the face
of the award. In Halsbury’s Laws of
England II, 4th edn., Vol.2 para
622 one of the misconducts
enumerated, is the decision by the
arbitrator on a matter which is not
included in the agreement or
reference. But in such a case one
has to determine the distinction
between an error in excess of the
jurisdiction. Whether a particular
amount was liable to be paid or
damages liable to be sustained, was
a decision within the competency of
the arbitrator in this case. By
purporting to construe the contract
the court could not take upon
itself the burden of saying that
this was contrary to the contract
and, as such, beyond jurisdiction.
It has to be determined that there
is a distinction between dispute as
to the jurisdiction of the
arbitrator and the disputes as to
in what way that jurisdiction
should be exercised. There may be a
conflict as to the power of the
arbitrator to grant a particular
remedy."
In "Russel on Arbitration" [Nineteenth Edition] by Anthony Walton, page 99, it is stated as under:
"It can, hardly be within the
arbitrator’s jurisdiction to decide
whether or not a precedent to his
jurisdiction has been fulfilled. It
has indeed several times been said
bluntly that an arbitrator has no
power to decide his own
jurisdiction and in one case where
rules of an institution the
arbitrator such power, the court
will ignore this when asked to
enforce the award, and decide the
question itself. However, an
arbitrator is always entitled to
inquire whether or not he has
jurisdiction.. An umpire faced with
a dispute whether or not there was
a contract from which alone his
jurisdiction, if any, can arise can
matter at all and lease the parties
to go to Court, or he can consider
the matter and if he forms the view
that the contract upon which the
claimant is relying and from
which, if established, alone his
jurisdiction can arise is in truth
the contract, he can proceed
accordingly."
In "Law of Arbitration" by R.S. Bachawat [2nd (1987) Edition] at pages 154-55, it is stated thus:
"An arbitrator cannot by mistake
assume jurisdiction over a matter
on which he has no jurisdiction. If
it is shown by the terms of the
submission or by the extrinsic
evidence that the arbitrator has
adjudicated upon matters outside
the scope of his authority the
award cannot stand, however well
meaning and honest the mistake
might have been. An arbitrator
cannot give himself jurisdiction by
a wrong decision collateral to the
merits as to facts on which the
limits of his jurisdiction depends.
Where it was a condition precedent
to his jurisdiction that the
dispute should have arisen during a
tenancy between the plaintiff and
the tenancy between the plaintiff
and the defendant or in the event
of a collusion if certain works had
been completed, the arbitrator
could not clothe himself with
jurisdiction by a wrong decision n
the preliminary point. The question
is not preliminary point. The
question is not concluded against
any party by a finding of the
arbitrator that he has
jurisdiction. It is for the court
and not for the arbitrator to
decide finally whether or not the
arbitrator has jurisdiction and
that is the law both in India and
in England."
"....The question whether the
matters referred were within the
ambit of the clause for reference
of "any difference or dispute which
may arise between the partners is
for the court to decide".
"....Dispute about the existence or
validity of the contract and as to
the existence of facts which render
it illegal must be determined by
the court and not by the
arbitrator. The arbitrator cannot
by his own finding clothe himself
with jurisdiction. Supposing he
finds that the jurisdiction
agreement is valid such a finding
cannot bind the parties".
It would thus be seen that the arbitrator, while deciding the admitted dispute, subject matter of adjudication, may decide the dispute in reference to the agreement. That would be within his jurisdiction. In such jurisdictional issue, even if an error is committed that may not be an error apparent on the face of the record because the arbitrator, the chosen forum, may commit an error in exercising his jurisdiction. However, if he, by a speaking award, decides it on a wrong proposition of law, it will be an error apparent on the face of record and liable to correction. If the arbitrator decides a dispute which is beyond the scope of his reference or beyond the subject matter of the reference or he makes the award disregarding the terms of reference or the arbitration agreement or terms of the contract, it would jurisdictional error beyond the scope of reference, he cannot clothe himself to decide conclusively that dispute as it is an error of jurisdiction which requires to be ultimately decided by the court. This Court has pointed out the distinction between latent and patent error of jurisdiction in Tarapore Co.’s case thus:
"It has to be seen whether the
terms of the agreement permitted
entertainment of the claim by
necessary implication. It may be
stated that we do not accept the
broad contention of Shri Nariman
that whatever is not excluded
specifically by the contract can be
subject-matter of claim by a
contractor. Such a proposition will
mock at the terms agreed upon.
Parties cannot be allowed to depart
from what they had agreed. Of
course, if something flows as a
necessary concomitant to what was
agreed upon courts can assume that
too as a part of the contract
between the parties."
It would thus be clear that the arbitrator cannot clothe himself conclusively with the jurisdiction to decide or omit to decide the arbitrability of a particular item or the claim made by the parties. When a specific reference has been made to the arbitrator and the parties raise the dispute of arbitrability, with the leave of the court/by a direction of the court in a proceedings under Section 33, he is to decide the arbitrability of the dispute and make a decision of the arbitrability f the dispute and make a decision while giving reasons in support thereof. The decision of the arbitrator in granting a particular sum by a non-speaking award, therefore, hinges upon the arbitrability of a dispute arising under the contract or upon a particular item claimed thereunder. He is required to give the decision thereon. The question of decision by implication does not arise since his jurisdiction to decide to dispute on merits hinges upon his jurisdiction to decide the arbitrability of the dispute. In this case, in view of the finding recorded by the court, which has become final, as referred to earlier, the arbitrator/umpire was enjoined to decide the arbitrabilty of the claims set up by the respondent and disputed by the appellant. Admittedly, the award of the umpire does not contain any decision on arbitrability of the claims.
In Gujarat Water Supply and Sewerage Board v. Unique Erectors [(1989) 1 SCC 532] one of the questions referred was arbitrability of a particular item. It was by the Court stated thus :
"In the instant case, the
arbitrator by virtue of the terms
mentioned in the order of this
court had to decide which of the
disputes were arbitrable and which
were not. It is true that the
arbitrator has not specifically
stated in the award that he had to
decide the question of
arbitrability. The arbitrator has
rested by stating that he had heard
the parties on the point of
arbitrability of the claim and the
counter-claim. He has further
stated that after ’considering all
the above aspects’ and ’the
question of arbitrability or non-
arbitrability’ he had made the
award on certain aspects."
It could be seen that if the arbitrator has indicated his mind in the award that he in fact adverted to the arbitrability or non-arbitrability of the claim and then made the award, it would be indicative of the fact that he had, in fact, applied his mind, considered that question and reached the decision in awarding certain amounts by a non-speaking award including the claim in respect of which arbitrability was in issue.
In Raipur Development Authority v. Chokhamal Contractors [(1989) 2 SCC 721], a Constitution Bench of this Court had gone into the question whether the arbitrator is required to give reasons in a non-speaking award. The Constitution Bench had pointed out in para 35 thus:
"We do not appreciate the
contention, urged on behalf of the
parties who contend that it should
be made obligatory on the part of
the arbitrator to give reason for
the award, that there is no
justification to leave the small
area covered by the law of
arbitration out of the general rule
that the decision of every judicial
and quasi-judicial body should be
supported by reasons. But at the
same time it has to be borne in
mind that what applies generally to
settlement of disputes by
authorities governed by public law
need not be extended to all cases
arising under private law such as
those arising under the law of
arbitration which is intended for
settlement of private disputes."
In para 37 thereof, this Court emphasised the need to make a speaking award and the terms in the contract should postulate such a need when the contract is entered into by the State or its instrumentalities. It was held thus:
"The trappings of a body which
discharges judicial functions and s
required to act in accordance with
law with their concomitant
obligations for reasoned decisions,
are not attracted to a private
adjudication of the nature of
arbitration as the latter, as we
have noticed earlier, is not
supposed to exert the State’s
sovereign judicial power. But
arbitral awards in disputes to
which the State and its
instrumentalities are parties
affect public interest and the
matter of the manner in which
government and its
instrumentalities allow their
interest to be affected by such
arbitral adjudications involve
larger questions of policy and
public interest. Government and its
instrumentalities cannot simply
allow large financial interests of
the State to be prejudicially
affected by non-reviewable - except
in the limited way allowed by the
statute - non-speaking arbitral
awards. Indeed, this branch of the
system of dispute resolution has,
of late, acquired a certain degree
of notoriety by the manner in which
in many cases the financial
interests of government have come
to suffer by awards which have
raised eyebrows by doubts as to
their rectitude and property. It
will not be justifiable for
governments or their
instrumentalities to enter into
arbitration agreements which do not
expressly stipulate the rendering
of reasoned and speaking awards.
Government and their,
instrumentalities should, as a
matter of policy and public
interestif not as a compulsion of
law ensure that wherever they enter
into agreements for resolution of
disputes by resort to private
arbitrations, the requirement of
speaking awards is expressly
stipulated and ensured."
In State of A.P. & Ors. v. R.V. Rayanim & Ors. [(1990) 1 SCC 433], relied on by Shri Poti, the question arose whether the award of escalation charges in a non-speaking award is vitiated by any error apparent on the face of the record? Therein the question of jurisdictional issue had not arisen. On the other hand, on merits, it was contended that there was an error in that behalf. In para 5 it was held that " it was then contended, that the award has purported to grant damages on the basis of escalation of cost and prices and such escalation was not a matter within the domain of the bargain between the parties and having taken that factor into consideration the award was bad." Therefore, the ratio there is an authority supporting the contention on the need of an arbitrator to give a reasoned decision on arbitrability of the contract or claim in dispute.
In this regard, Section 31(3) of the Arbitration and Conciliation Act, 1996, provides thus:
"(3) The arbitral award shall state
the reasons upon which it is based,
unless-
(a) the parties have agreed
that no reasons are to be given, or
(b) the award is an arbitral
award on agreed terms under Section
30."
The Parliament has expressed the legislative judgement that the award shall state reasons upon which it is based unless parties have agreed otherwise or the award is covered on agreed terms under Section 30 of the new Act.
Thus, the law on the award, as governed by the new Act, is other way about of the pre-existing law; it mandates that the award should state the reasons upon which it is based. In other words, unless (a) the parties have agreed that no reasons are to be given or (b) the award is an arbitral award on agreed terms under Section 30 of the new Act, the award should state the reasons in support of determination of the liability/non-liability. Thereby, legislature has not accepted the ratio of the Constitution Bench in the Chokhamal Contractor’s case that the award, being in the private law field, need not be a speaking award even where the award relates to the contact of private parties or between person and the Government or public sector undertakings. The principle is the same, namely the award is governed by Section 31(3).
We have set out the relevant portions of the award. From a reading thereof, it is clear that the arbitrator had considered the claims made on the basis of escalation and damages, in a non-speaking award of the disputes consisting of arbitrable and non-arbitrable claims. He awarded a lumpsum amount of Rs. 70,83,793/-. It is difficult to discern as to what extent the umpire had considered the admissible and inadmissible claims which he adjudged. In such a situation, it is not possible to discern to what extent he had exercised his jurisdiction vis-a-vis of the admissible claims and disallowed the non-arbitrable claims. So, it is not clear whether he exercised his authority either beyond his jurisdiction or in abdication thereof. In either case, it is an error of jurisdiction, the very foundation for his decision.
It is well settled that in the matter of challenge to the award there are two distinct and different grounds, viz., that there is an error apparent on the face of the record and that the arbitrator has exceeded his jurisdiction. In the latter case, the court can look into the arbitration agreement but under the former it cannot do so unless agreement but under the former it cannot do so unless the agreement was incorporated or cited in the award or evidence was made part of the agreement. In the case of jurisdictional error, there is no embargo on the power of the court to admit the contract into evidence and to consider whether or not the umpire had exceeded the jurisdiction because the nature of the dispute is something which has to be determined, outside the award, whatever might be said about it in the award or by the arbitrator. In the case of non-speaking award, it is not open to the court to go into the merits. Only in a speaking award the court can look into the reasoning in the award and correct wrong proposition of law or error of law. It is not open to the court to probe the mental process of the arbitrator and speculate, when no reasons have been given by the arbitrator, as to what impelled the arbitrator to arrive at his conclusion. But in the later case the court, with reference to the terms of the contract/arbitrator/umpire has exceeded his jurisdiction in awarding or refusing to award the sum of money awarded or omitted a consolidated lumpsum.
In fact, in G.S. Atwal & Co.’s case, having noticed that the arbitrator had exceeded his jurisdiction to grant amount de hors the terms of the contract and being a nonspeaking award, the court was unable to speculate as to what extent the award was within the terms of the contract or claims made and to what extent the amount awarded was in respect of non-arbitrable dispute. Accordingly, the order of the civil court was set aside reversing the judgment of the Division Bench of the Calcutta High Court.
Thus considered, we hold that the arbitrator, having been invested with the jurisdiction to decide the arbitrability of certain claims, has committed error of jurisdiction in not considering the arbitrability of the claims and passed a non-speaking award, awarding a sum of Rs. 70.83 lakhs and odd. It is difficult to ascertain as to what extent he has awarded the claims within the contract or the claims outside the contract, of a total claim of Rs. 2.10 crores. Under those circumstances, we are constrained to hold that it is difficult to give acceptance to the award made by the umpire as upheld by the courts below. Equally, we find it difficult to accept the contention that out of a claim of Rs. 2.10 crores, only a sum of Rs. 70.83 and odd was awarded. So, it is not a fit case for interference on the basis of the mere fact that a lesser sum than was claimed has been awarded. An illegal award cannot be upheld to be valid or within jurisdiction.
The question then is : what procedure should be adopted in this behalf? The contention of Shri Poti is that it may be remitted to the umpire for fresh consideration. On the other hand, the contention of Shri V.R. Reddy is that in the event of the conclusion that the arbitrator has exceeded his jurisdiction, the entire award would become invalid and it has to be set at naught. Having given due consideration to the respective contentions, we find force in the contention of Mr. V.R. Reddy. Mr. Poti has stated that though it is found that the award is not valid in law, the party cannot be made to suffer on account of the illegality committed by the umpire. We find no force in the contention. Once a finding recorded that the umpire/arbitrator has committed error of jurisdiction, as stated earlier, two course are open, viz., either to remit the award to the umpire for reconsideration or to set aside the award in toto. We think that the latter course would be appropriate in the facts and circumstances in this case.
Accordingly, we allow the appeals set aside the award of the arbitrator and leave the parties to bear their own costs. If there are no outstanding dues recoverable from the respondents, the security deposit and bank guarantee is required to be refunded to the respondent.