Reportable IN THE SUPREME COURT OF INDIA

(Civil Appellate Jurisdiction)

Civil Appeal No. 3185 of 2002

M/s. Sumitomo Heavy Industries Limited   ...Appellant.  

Versus

Oil & Natural Gas Commission of India    ...Respondent.  

J U D G M E N T  Gokhale, J.       

This appeal is directed against the judgment and order dated  

19th December  2001 rendered by a Division Bench of  the Bombay  

High Court in Appeal No. 126 of 2000 confirming the decision of a  

single Judge of that Court dated 29th November, 1999, in Arbitration  

Petition No. 104 of 1998 whereby the High Court has set aside the  

Award dated 27th June, 1995 made by the umpire in an Arbitration  

claim of the appellant against the respondent. The question involved  

in this appeal is as to whether as held by the Division Bench, the  

umpire had failed to apply his mind to the material on record and the  

clauses  of  the  contract  between  the  parties  thereby  rendering  a  

perverse award, or whether his decision was a possible one and the  

High Court had erred in interfering therein.

2. The appellant had entered into a contract with the first  

respondent for installing and commissioning of Well-cum-Production  

Platform Deck and connected system including submarine pipelines on  

a  turn-key  basis  at  its  Bombay  High  (South)  Offshore  Site  for  

extraction  of  oil.  The  appellant  had  appointed  M/s.Mc  Dermott  

International Inc (in short ‘MII’) as the Sub-Contractor in execution  

of this work by a back to back contract to the full knowledge of the  

respondent.  The  appellant  had  sought  from  the  respondent  the  

reimbursement of the Income-tax amount which MII was required to  

pay to the Union of  India under newly added Clause 44BB of  the  

Income Tax Act 1961 (concerning the profits and gains in connection  

with the business of exploration of minerals) and which amount was  

paid  by  the  appellant  to  MII.  The  respondent  had  declined  to  

reimburse the tax amount.  

3. The appellant, therefore, invoked the Arbitration clause in  

the  agreement  between  the  appellant  and  the  respondent.  The  

appellant contended that their liability had arisen due to change of  

law and that under clause 17.3 of the General Conditions of Contract  

forming part of the contract between the parties, the respondent was  

required  to  reimburse  this  amount  since  it  was  in  the  nature  of  

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necessary and reasonable extra cost arising out of change of law.  (In  

the  General  Conditions  of  contract  its  clauses  are  referred  to  as  

sections.) As against this, the submission of the respondent was that  

they were responsible only for the appellant’s tax liability under clause  

23 of the General Conditions, and if at all, it was the responsibility of  

the  appellant  under  clause  13.2.7  thereof  to  take  care  of  the  

obligations of the Sub-Contractor.

4. The two arbitrators appointed by the appellant and the  

respondent  differed  while  deciding  this  claim  of  the  appellant  for  

reimbursement.   This led to Sir Micheal Kerr entering the reference  

as the Umpire who has accepted appellant’s claim, by award dated  

27.6.1995.   By the said award, the umpire directed the respondent to  

pay  the  appellant  the  sum  of  Japanese  Yen  129,764,463/-  with  

interest  at  4.5%  per  annum  from  15.5.1991  to  date  of  award.  

He declared that  in  the event  of  appellant  becoming liable  to pay  

further sums to MII thereafter, due to any assessment of income tax  

on MII under the present sub-contract pursuant to Section 44 BB of  

Income  Tax  Act,  then  Respondent  shall  indemnify  the  appellant  

against  any  such  payment  on  demand.    He  awarded  costs  also.  

The respondent sought setting aside of the award of the umpire by  

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invoking the jurisdiction of a learned single Judge of Bombay High  

Court under Clause – 30 of the Arbitration Act, 1940.  The learned  

single Judge took the view that the said reimbursement by appellant  

to MII was a voluntary act on the part of the appellant and the terms  

of the contract did not require the respondent to reimburse the said  

income-tax amount to the appellant.   The learned single Judge held  

that  the  construction  placed  by  the  umpire  on  clause  17.3  of  the  

agreement was ‘clearly an impossible one’, and therefore, the Court  

would be justified in interfering with the findings and the award.  The  

learned single Judge, therefore, allowed the Arbitration Petition and  

set aside the Award.  

5.  Being  aggrieved  by  this  judgment  and  order,  the  

appellant preferred an appeal,  which came to be dismissed by the  

Division Bench of the Bombay High Court  by its above referred to  

judgment and order dated 19th December, 2001.  The Division Bench  

held that the only possible view of all the clauses of the contract was  

that the respondent could not be held to be liable to the appellant for  

the  income-tax  liability  of  the  sub-contractor  and  that  the  umpire  

exceeded his jurisdiction in allowing appellant’s  claim under Clause  

17.3  of  the  General  Conditions.  The  Division  Bench,  therefore,  

dismissed the appeal by its judgment and order dated 19th December,  

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2001. Being aggrieved by this judgment and order the present appeal  

has been filed by Special Leave.  It may be mentioned at this stage  

that it was submitted on behalf of the respondent before the single  

judge  that  the  revised  assessment  of  the  sub-contractor  was  not  

referable to Clause 44 BB of Income Tax Act, and that the conclusion  

of the umpire be interfered on that ground also.  The submission did  

not  find  favour  with  the  learned  single  judge.   The  respondent  

challenged that finding by filing a cross-appeal and submitted that, if  

the cross-appeal was not maintainable, the respondent be permitted  

to challenge that finding while defending the judgment.  The Division  

Bench overruled this challenge of the respondent to that finding.    

The short facts leading to this appeal are as follows:  

6. On 22nd July,  1982  the  respondent  invited  tenders  for  

installation  and  commissioning  on  turn-key  basis  of  a  Platform  

Complex on its Bombay High (South) Offshore Site. The closing date  

for the bid was 11.10.1982. On the date of closing of the bid, the  

fiscal limit of Indian Income-tax Laws was 12 Nautical Miles in the  

territorial  waters  of  India.  The  work  to  be  done  under  the  above  

mentioned tender was about 100 miles off the coast, and hence, the  

income arising therefrom was not subject to income-tax in India. The  

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appellant had submitted its tender offer on 11th October 1982, which  

was accepted by the respondent and an agreement between the two  

came to be signed on 7th September, 1983 for executing the above  

work for the contract price of J.Y.10,823,237,000/-. Clause – 13.1 of  

the General  Conditions of Contract which provides for this contract  

price  laid  down  that  “the  contract  price  is  the  firm price  without  

escalation  subject  to  the  provisions  of  the  contract”.  The  contract  

clearly  stipulated  that  the  remuneration  provided  to  the  appellant  

under the contract would be tax protected and would be net of all  

taxes.  

7. Consequent  upon signing of  the contract  the appellant  

entered  into  a  sub-contract  with  MII  on  28th December,  1983  for  

execution of a part of a work under the above mentioned contract.  

The  work  was  ultimately  completed  as  per  the  contract  and  the  

respondent certified that the appellant had successfully completed the  

contract and a Certificate of Completion and Acceptance was issued  

on 11th April,  1984. A Discharge Certificate was also issued by the  

respondent on 18th May, 1984.  

8.  The  Government  of  India,  Ministry  of  Finance,  

Department  of  Revenue  issued  a  notification  on  31st March,  1983  

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under  Clauses  6(6)  and 7(7)  of  the  Territorial  Waters,  Continental  

Shelf, Exclusive Economic Zone and other Maritime Zones Act, 1976,  

extending Income Tax Act, 1961 to the Continental Shelf of India and  

the Exclusive Economic Zone with effect from 1.4.1983. Hence, under  

the amended law, the work done under the above mentioned tender  

and the income arising therefrom, became subject to the Income Tax  

Act, 1961. By Finance Act, 1987 Clause 44BB was introduced in the  

Income Tax Act, 1961 with retrospective effect from 1.4.1983. This  

clause  is  a  special  provision  for  computing  profits  and  gains  in  

connection with the business of exploration etc. of minerals.   It is  

obvious that all these changes in law took place after the closing date  

of the bid i.e. after 11th October, 1982.

9.  In July, 1987 the Foreign Tax Division of the Department  

of Revenue, Ministry of Finance issued a circular in respect of turn-key  

projects of foreign contractors engaged in the business of exploration  

of oil and natural gas in India. This circular contained guidelines for  

computing the tax liability under the above referred to Clause 44BB of  

the  Income  Tax  Act,  1961  and  instructions  were  given  to  all  

Commissioners of Income Tax to assess the tax liability accordingly.  

In the year 1988 the above referred to MII was served with income-

tax notices to re-open and revise the assessments already made for  

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the assessment years 1984-85 and 85-86. MII was informed that it  

was required to pay the tax on the income from the respondent for  

the work executed by them at Bombay High (South) Offshore Site.  

MII pointed out that it  had already filed tax returns for these two  

years stating that it had incurred loss, and it was no more liable to  

pay income-tax.  The authorities rejected the objections of MII and a  

tax  liability  was  imposed to  the  tune of  US$ 1,12,447.84  (Rupees  

1,85,23,780/-).  MII  paid  that  amount  and  claimed  it  from  the  

appellant.  The appellant reimbursed the same, and claimed it from  

the  respondent  under  clause  17.3  of  the  General  Conditions  of  

Contract, which provided for situations arising out of change of law.  

The  respondent  did  not  accept  this  claim.  As  pointed  out  earlier,  

respondent contended that they were responsible for the tax liability  

of the appellant alone under clause 23 of the General Conditions of  

Contract, and under clause 13.2.7 thereof it was the responsibility of  

the appellant to meet all the obligations of the Sub-Contractor.   

10.  On  6th March,  1991  the  appellant  served  on  the  

respondent a notice of arbitration under clause 17.2 of the agreement  

between  the  parties  and  filed  their  statement  of  claim  on  13th  

October, 1992. Both the parties appointed their respective arbitrators  

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as  per  the  agreement.  The  two  arbitrators  differed  in  their  

determination,  vide  ‘Reasons  for  conclusions’  dated  4.7.1994  and  

18.7.1994.   Hence, the matter was referred to Sir  Micheal  Kerr as  

Umpire, who gave his award as aforesaid.   

The Relevant Terms of the Agreement entered into between  the Parties.   

11. To understand  the  scope  of  the  controversy  it  will  be  

necessary to refer to the relevant clauses of  the agreement dated  

7.9.1983 between the parties.  

12. Clause  B  of  the  agreement  specifically  states  that  the  

following documents including the annexures listed thereunder shall  

be deemed to form, and will be read and construed as integral parts  

of the contract, and in case of any discrepancy, conflict or dispute,  

they shall be referred to in the order of priority as stated hereunder:

Order of Priority:

1. Agreement

2. Annex. ‘A’ General Conditions of the Contract  

3. Annex.’B’ Scope of Work (as briefly outlined)

4. Annex. ‘C’ Contract Price Schedule   

5. Annex. ‘D’ Project Schedule  

6. Annex. ‘E’ Minutes of Meeting

7. Annex. ‘F’ Contract Specifications & Drawings  

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13.  In  the  present  matter  we  are  concerned  with  the  

provisions of the General Conditions of Contract and the claim of the  

appellant for reimbursement of the amounts paid by the appellant to  

its sub-contractor.  Clause 3.1 deals with Assignment and clause 3.2  

deals with Conditions of Subcontracting. Clauses 3.1 and 3.2(i) read  

as follows:  

“3.0 – ASSIGNMENT AND SUBCONTRACTING:  

     3.1 – Assignment:   

   The Contractor shall not, except with the  previous consent  in writing of  the Company,  transfer or   assign their obligations or interests in the Contract or any  part thereof in any manner whatsoever.”  

   3.2 – Conditions for Subcontracting:  

Concerning the works and facilities covered by  the Contract having to be executed and commissioned on  turnkey basis by the Contractor, the following conditions   shall apply as regards subcontracting of any portion of the   work entrusted to the Contractor.  

(i)  In  case  of  plant,  equipment  and  allied   requirement to be procured, installed and commissioned on  the  platform  structure  for  the  purpose  of  receiving,   processing, pumping, compressing, etc., and also any other  facilities  to  be  provided  thereon,  the  Contractor  shall,   subject to the limitations imposed on him with regard to the   makes/manufacturer  of  certain  plant  and  equipment  specifically stipulated to be procured against this Contract,   be free to sublet the work to the manufacturers/authorized   agents  of  the  respective  plant  and  equipment  for   procurement of the necessary supplies. In respect of those  stipulated items referred to above, the Contractor shall not  arrange alternative makes other than those agreed already  for  procurement  without  the  prior  written  consent  of  the  Company.”   

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14. Clause 5.10.5 lays down that the Contractor shall protect,  

indemnify and hold the Company (ONGC) harmless against all losses  

and claims, including such claims arising out of the negligence of the  

Contractor or its subcontractors, and the particulars of this indemnity  

are specified in this clause.  

15.  Clause  5.11.3.  lays  down  that  the  Contractor  shall  

observe and comply with and shall ensure that all his subcontractors  

also observe and comply with the laws, regulations or requirements of  

any  states  which  are  littoral  states  with  respect  to  any  sea  areas  

comprised at site, and of any international authority or international  

convention  or  other  rule  of  international  law or  custom applicable  

thereto.  This  is  subject  to  the  exception  in  clause  5.11.2  which  

provides as follows:  

“The Contractor shall conform in all respects, and  shall ensure that all his subcontractors also conform in all   respects with the provisions of any statute, ordinance or  laws as aforesaid  except  where  such laws,  statutes  or   ordinances conflict with any laws, statutes or ordinances   of  United  States  of  America  and  Japan,  Contractor   confirms  that  there  is  presently  no  law  or  regulation  which  should  preclude  its  performance  of  the  works  under the Contract.”   

16. Clause  –  13  provides  for  Contract  Price  and  

Payment/Discharge  Certificate.  Clause 13.1 lays  down the Contract  

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Price, which is mentioned earlier.  Clause 13.2 lays down the Payment  

Procedure and sub-clause 13.2.7 provides as follows:  

“13.2.7  –  The  Company  shall  not  be  responsible/obliged  for  making  any  payments  or  any  other  related  obligations  under  this  Contract  to  the  Contractor’s Subcontractor/Vendors. The Contractor shall   be  fully  liable  and  responsible  for  meeting  all  such  obligations  and  all  payments  to  be  made  to  its   Subcontractors/Vendors  and  any  other  third  party   engaged by the Contractor  in any way connected with  the  discharge  of  the  Contractor’s  obligation  under  the  Contract and in any manner whatsoever.   

17. Next  relevant  clause  17  relates  to  Laws/Arbitration.  

Clause  -  17.1  is  on  applicable  laws,  which  lays  down  that  “all   

questions,  disputes  or  differences  arising  under,  out  of  or  in   

connection with this Contract shall be subject to the laws of India.”  

Clause 17.2 provides for arbitration in the event of any dispute and  

for  appointment  of  one  Arbitrator  each  by  the  parties,  that  the  

arbitration will be held at London, and further that the decision of the  

arbitrators  and in  the event  of  their  failing to  arrive at  an agreed  

decision, the decision of the umpire shall be final and binding on the  

parties.  

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18. Clause 17.3 makes the provision in the event of a Change  

in Law. This clause reads as follows:  

“Should there be, after the date of bid closing a   change in any legal provision of the Republic of India or   any  political  sub-division  thereof  or  should  there  be  a  change in the interpretation of said legal provision by the  Supreme Court of India and/or enforcement of any such  legal provision by the Republic of India or any political   subdivision  thereof  which  affects  economically  the  position  of  the  Contractor;  then  the  Company  shall   compensate Contractor for  all necessary and reasonable  extra cost caused by such a change.”   

19. The last clause relevant for our purpose is clause – 23  

which is on Duties and Taxes, and in that Clause the respondent has  

taken care of the Customs Duties and Income-tax which would be  

payable by the appellant.  It reads as follows:  

“23.0 – DUTIES AND TAXES:      

Indian  Customs  Duties,  if  any,  levied  upon  fabricated structures, sub-assemblies and equipment and  all  components  which  are  to  be  incorporated  in  the   Works  under  the  Contract  shall  be  borne  by  the  Company.  The  Company  shall  bear  all  Indian  income  taxes  levied  or  imposed  on  the  Contractor  under  the   Contract,  on account  of  its  or  their  offshore personnel   while  working  at  offshore  or  on  account  of  payments   received by Contractor from the Company for Work done  under the Contract.  Notwithstanding the foregoing, the  Company shall have no obligation whatsoever in respect  of the Contractor’s onshore employees whether they may  be expatriate or nationals.”    

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Question arising for consideration

20. As stated above, the submission of the appellant was that  

the tax liability of MII arose out of change of law and the appellant  

had to reimburse that amount to MII. This affected the position of the  

appellant economically. The reimbursement of the tax liability of MII  

by the appellant was merely the necessary and reasonable extra cost  

arising due to  the change of  law.    There is  no dispute  that  this  

liability of MII arose out of the change of law after the date of bid  

closing.  This  being  the  position,  according  to  the  appellant  the  

respondent was liable to compensate the appellant to that extent.  

21. As  against  this  submission  of  the  appellant,  the  

submission of the respondent was that under clause 23 of the General  

Conditions of Contract, referred to above, the respondent was liable  

to bear all Indian taxes levied or imposed on the appellant under the  

contract on account of the payment received by the appellant from  

the respondent for work done under the contract or on account of its  

off-shore personnel  while working at off-shore.  This Clause states  

that  the  respondent  had  no  obligation  whatsoever  in  respect  of  

appellant’s  on-shore  employees  whether  they  were  expatriate  or  

nationals.  Accordingly to the respondent they had not taken over the  

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liability to pay any taxes which may be due to be paid by the sub-

contractors of the appellant which, according to them was also clear  

from Clause 13.2.7 of the General Conditions of Contract which laid  

down the Payment Procedure and which stated that the respondent  

shall  not be responsible or obliged for making any payment in any  

other related obligations under the contract to the appellant’s sub-

contractors.  

22. As stated earlier, the umpire has taken the view that the  

tax liability of MII reimbursed by the appellant was the necessary and  

reasonable  extra  cost  arising  out  of  change  of  law  and  that  the  

respondent was required to compensate the appellant to that extent  

in  view  of  the  provision  contained  in  Clause  17.3  of  the  General  

Conditions  of  Contract.  The  question  for  decision  is  whether  the  

umpire  exceeded  his  jurisdiction  in  making  the  award  or  whether  

there is an error apparent on the face of the award.  This necessitates  

consideration of the question whether the view taken by the umpire  

on the construction of clause 17.3 was a possible one and in which  

case whether  it  was open to  the High Court  to  interfere  with the  

Award.   Alternatively, the question is whether the view taken by the  

umpire  was  an  impossible  one  and  in  which  case  whether  there  

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was no error in the High Court interfering with the Award rendered by  

the umpire.    

The approach of the Umpire

23. To find an answer to the question we have to see as to  

what  was the  approach adopted by the  umpire.   To decide  as  to  

whether the respondent was liable under the above referred clause  

17.3, the umpire framed three questions.  They are reflected in Para  

6.2 of the award which reads as follows:-

“6.2  ONGC  liability  on  the  true  construction  of  Clause  17.3  effectively  depends  on  the  answers  to  three  questions in the circumstances of this case, of which the first   can be divided into two parts.  These are the following:

(1)Since 11 October 1982, the date of the bid closing,   has there been (a) any (relevant) change in any legal provision   

of the Republic of India; or (b) any (relevant) change in the enforcement of  

any such legal provision by the Republic of  India/

(2) If the answer to (1) (a) or (b) be “yes”, has this   affected economically the position of SHI? (1)  and  (2)  are  of  course  interdependent,  and  the  insertion  of  (“relevant”  is  designed  to  provide  the  necessary connection).

(3) If the answer to (2) is also “yes” have SHI incurred  any “necessary and reasonable extra cost caused by  any changes” as referred to in (1) above? If  the  answer  to  (3)  is  also  “yes”  then  ONGC  are   liable.  If any of the answers are different, then ONGC  are not liable.”

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24. It is seen from the award that before answering these  

three questions the learned umpire went into the issue as to what  

approach  should  be  adopted  while  examining  the  scope  and  

application of clause 17.3.  The respondent submitted that this clause  

was in  the nature  of  an indemnity  and that  it  must  be  construed  

strictly  and narrowly.    This  view is  also accepted by the Division  

Bench.   The Division Bench observed as follows:

“The Umpire further erred in law by refusing to put a   narrow interpretation  on  the  indemnity  clause  17.3.   Clause  17.3 being indemnity clause should not have been given wider   interpretation.   The  indemnity  clause  should  be  construed  strictly  analogously  to  an  exemption  clause.  The  Umpire  overlooked  the  commercial  principle  that  every  business   venture carried its own risk.”

25. The umpire on the other hand observed in Para 6.3.3 as  

follows:

“It  is  self-evident  that  Clause 17.3 is  couched in wide  terms.  This is commercially understable, since it was designed  to cover  a wide and potentially  unforeseeable spectrum- the  possible impact of possible changes in Indian law in the future.   I can therefore see no reason for giving to it any particularly   strict or narrow interpretation.  From the point of view of its   commercial  purpose,  the  contrary  approach  would  be  more  justifiable.  However, in relation to the present facts, it seems   to  me that  this  question  has  no  practical  significance.   The   proper approach is to construe the Clause on the basis of the  ordinary and natural meaning of the words used, in the usual   way, and of course in its context, as already mentioned.”  

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26. The umpire has noted this context in Para 2.2.4 of the  

award.  He noted that the bid made it clear that a large part of the  

contract works were to be fabricated, positioned and installed by MII  

as the named and approved principal sub-contractor of the appellant  

for this purpose.  In para 2.2.4 he referred to the evidence of the  

Project  Manager  of  the  respondent,  the  sub-contract  between  the  

appellant and MII, and the fact of the terms of the proposed sub-

contract  having  been  set  out  in  the  bid  document.   The  umpire  

recorded in Para 2.2.4 as follows:

“The  evidence  of  Mr.  B.L.  Goel,  ONGC’s  Project   Manager,  was  that  MII  had  participated  in  the  Bid   Clarification  meetings  between  ONGC  and  SHI,  and  had  been approved by ONGC as Subcontractors of SHI because  ONGC  were  familiar  with  their  work  and  relied  on  their   expertise.  In this connection SHI placed some reliance on  the fact that under the heading of MII’s “Schedule of Hourly   Rates”, a number of the terms of the proposed Subcontract   between SHI and MII were out set in the Bid, including a   provision which made it clear that, in the same way as in   the Head Contract between SHI and ONGC, the Subcontract   was to be “tax protected”, with the consequence that SHI   would be liable for all Indian tax that might become payable  by  MII.   This  provision,  which  referred  to  MII  as   “Contractor”  and SHI as “Customer”  was in  the  following  terms:

“Any  foreign  (i.e  non-U.S.A.)  taxes  incurred  by  Contractor  and  Contractor’s  employees   and  which  are  imposed  by  or  payable  to  any  foreign  governmental   authority,  whether  by  way  of  withholding,  assessment  or  otherwise, for work performed hereunder shall be borne by  Customer.   Any  such  taxes  which  are  paid  directly  by  Contractor, shall be reimbursed by Customer.”

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As will be seen hereafter, what became Clause 23 in   the  Head  Contract  and  thus  subsequently  also  in  the  Subcontract, was in different terms, but the substance was  the same.”

27. In  this  background,  the  umpire  answered  the  three  

questions and held that there was a relevant change in view of the  

enactment of Clause 44 BB in the Income Tax Act with retrospective  

effect.  The enactment of this clause caused MII to become liable to  

pay the tax which they paid.   Since the appellant  had to pay this  

amount of tax to MII, it did affect economically the position of the  

appellant.  Then the umpire posed a question whether the payments  

made by appellant to MII can properly be described as cost to the  

appellant.   The umpire took the view that the word ‘cost’ is a very  

wide word and that obviously the payments were an ‘extra cost’.   He  

held that when the payment arises under a contractual obligation to  

pay  or  refund  some  other  party’s  tax,  then  such  a  payment  is  

obviously  a  cost  under  the  contract  in  question.   The  cost  was  

therefore ‘necessary cost’  and it  was also ‘reasonable’  since it  was  

only the added tax amount.  He accordingly held that the appellant  

was legally obliged to make this payment to MII in view of the back to  

back contract between the appellant and MII and that the respondent  

was required to reimburse the same to the appellant.

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Consideration of the rival submissions

28. The Division Bench has found fault with the umpire in not  

placing  a  narrow  and  strict  interpretation  on  clause  17.3.  Mr.  

Dushyant Dave learned Senior Advocate appearing for the appellant  

submitted  that  it  would  not  be  right  to  apply  strict  rules  of  

construction  ordinarily  applicable  to  conveyances  and  other  formal  

documents to a commercial contract like the present one and referred  

to and relied upon the judgment of this Court in Union of India vs.  

M/s D.N Revri & Co.  reported in (1976) 4 SCC 147.  As held in  

that  judgment,  he  submitted  that  the  meaning  of  a  contract,  and  

particularly  a  commercial  one,  must  be  gathered  by  adopting  a  

common sense approach and not by a narrow pedantic and legalistic  

interpretation.   The  present  case  relates  to  an  international  

commercial contract and as noted earlier the appellant and MII had  

agreed to subject themselves to the domestic laws of India as well as  

the  International  law  and  conventions.   On  this  background  the  

appellant wanted to safeguard itself in the event of change of law in  

India to which the respondent had agreed.    It was submitted that  

any  narrow  interpretation  of  Clause  17.3  to  exclude  the  

reimbursement of the income tax liability of the sub-contractor will  

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defeat the purpose in providing this safeguard under clause 17.3 and  

will make it otiose.   

29. On the other hand Mr. Vivek Tankha, learned Additional  

Solicitor  General  appearing  for  the  respondent  pressed  for  the  

acceptance of the approach of the Division Bench viz. that clause 17.3  

must be construed as an indemnity clause and that it must be read  

strictly and narrowly.   As far as this submission is concerned, one has  

to note that as per Section 124 of the Indian  Contract Act, a Contract  

of  Indemnity   is  one under which one party promises to save the  

other from loss caused to him by the conduct of the promisor or any  

other person.  Thus in the present case, under clause 5.10.5 of the  

General Conditions of contract, the appellant has given the indemnity  

to the respondent against all losses that the respondent may suffer  

out  of  the negligence of  appellant  or  their  sub-contractor.   Clause  

17.3 thereof does not deal with any such losses.  It makes a provision  

for  compensation in  the event  of  the appellant  being subjected to  

extra  cost  arising  on  account  of  change  of  law.   It  cannot  be  

compared with indemnity for loss due to conduct of the promisor or of  

a third party.   

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30. Mr. Tankha submitted that clauses in the contract have to  

be given a literal interpretation.   He relied upon the judgments of this  

Court in Central Bank of India Ltd., Amritsar vs. Hartford Fire  

Insurance Co. Ltd. AIR 1965 SC 1288 and  Polymat India (P)  

ltd.  vs.  National  Insurance  Co.  Ltd.  (2005)  9  SCC  174  in  

support.  He contended that under the terms of the present contract  

respondent  has  taken up the income tax liability  of  the contractor  

alone, and clause 17.3 would not have the effect of passing on the  

burden of the income tax liability of the sub contractor as well on to  

the respondent.   In this connection we must notice that both these  

judgments are concerning clauses in insurance policies.  In the case  

of  Central  Bank  of  India (supra)  the  concerned  clause  in  the  

insurance policy was “This Insurance may be terminated at any time  

at the request of the Insured.” This Court held that the words “at any  

time” can only mean “at any time the party concerned likes”.   It was  

in this context that this Court held that the intention of the parties is  

to be looked for in the words used.  In  Polymat India (P) Ltd.  

(supra) the question for the consideration was whether as per the  

terms of the insurance policy the goods lying outside the shed were  

covered thereunder.   The terms used in the policy were ‘factory-cum-

godown-cum-office’.   Obviously  the goods lying outside the factory  

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and godown could not be held to be covered under the policy.   This  

Court  held  that  the  interpretation  could  not  be  given  de-hors  the  

context.    

31. There is no difficulty in accepting that the clauses of an  

insurance policy have to be read as they are.  In an insurance policy  

the party which is insured makes a proportionate advance payment to  

the  Insurance  Company  and  gets  an  assurance  to  protect  itself  

against  the  loss  or  the  damage  which  it  might  suffer  in  certain  

eventuality.   Consequently the terms of the insurance policy fixing  

the responsibility of the Insurance Company are read strictly.  Such is  

not the situation in the present case.  Here we are not concerned with  

a clause in an insurance policy.   We are dealing with an International  

Commercial Contract under which the appellant has reimbursed the  

tax liability of their sub-contractor which arose out of change in the  

law after the date of bid closing.   This is stated to have affected the  

position  of  the  appellant  economically  for  which  the  appellant  is  

seeking  equivalent  compensation  from  the  respondent  as  per  its  

construction of  clause 17.3.    When clause 17.3 provides  that  the  

respondent  company  shall  compensate  the  contractor  for  all  

necessary and reasonable extra cost caused by such a change in law,  

affecting  the  contractor  economically,  could  the  claim  for  

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reimbursement made by the appellant from the respondent be held as  

not covered under this clause?   

32. The respondents had contended in the High Court  and  

also before us that it was not necessary for the appellant to reimburse  

this tax amount to MII and that it was only a voluntary payment on  

their part.  It was also submitted that this payment arose out of the  

contract between the appellant and MII and not because of change of  

law as such.  Now, as can be seen from the evidence as narrated  

above, MII became liable to pay this tax amount to the Union of India  

only  because of  the retrospective  change in  the Income Tax Law,  

brought in subsequent to the date of bid closing.  The liability of the  

appellant  to  reimburse  that  amount  to  MII  arose  in  view  of  the  

commitment made by the appellant in their sub-contract to MII.   It  

cannot be ignored that if there was no change of law, this situation  

would not have arisen at all.  It is therefore not possible to treat this  

payment as voluntary, that is, in the absence of any liability.

33. It was canvassed on behalf of the respondent that there  

is no nexus between that payment to MII and the responsibility of the  

respondent.   However, as can be seen from clause 3 of the General  

condition quoted above, the sub-contracting was clearly contemplated  

by the parties and was provided for in their agreement.  The relevant  

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material and evidence placed before the arbitrator clearly shows that  

MII was the principal sub-contractor and has all throughout been in  

picture in the contract between the appellant and the respondent.   In  

fact it is because of the expertise of MII that it was given a pivotal  

role  in  the  execution  of  the  entire  contract.    The  appellant  had  

entered into a back to back contract with MII to the knowledge of the  

respondent.  The  performance  of  their  obligation  under  the  sub-

contract  by  MII,  formed  part  and  parcel  of  appellant’s  obligations  

under  the  Head-contract.  The  respondent  had  taken  up  the  

responsibility for the income tax liabilities of the appellant.   So had  

the appellant taken up the responsibility for the tax liabilities of MII  

and the respondent cannot be said to be ignorant there of.  In any  

case clause 17.3 will have to be given a meaningful interpretation.  It  

is confined only to the necessary and reasonable extra cost, caused  

by change in law occurring after the date of bid closing.  The claim of  

appellant was restricted only to that extent.  It is necessary to note  

that the contract was otherwise completely executed, payments were  

made and the discharge certificate was issued long back.  MII had  

already filed its returns for the two relevant assessment years 1984-

85 and 1985-86.  In 1988 its assessment has been reopened in view  

of the change in law, for which appellant had made the payment and  

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had  sought  reimbursement  from  the  respondent.   In  the  

circumstances  the  submission  of  absence  of  nexus  can  not  be  

accepted.   

34.   In the present matter the Division Bench has observed,  

that the umpire exceeded his jurisdiction in awarding Appellant’s claim  

under clause 17.3 of the agreement and that he has failed to apply  

his mind to the pleadings,  documents and the evidence as well  as  

particular  clause  of  the  contract  to  declare  that  the  award  was  

perverse.   In  fact  as  seen  above,  the  umpire  has  entertained  

appellant’s  claim  only  after  giving  a  meaningful  interpretation  to  

clause 17.3 after considering all the material on record as well as the  

context.   Respondent  had  contended  in  their  arbitration  petition  

before the High Court that it was not permissible to refer to the pre-

contractual negotiations and the documents arising therein.  What the  

umpire has however done is to look into the context with a view to  

understand the text.  As we have noted above the umpire has looked  

into the evidence before him including that of the respondent’s officer  

as to how MII had participated in the bid clarification meetings.  He  

considered the submission of the appellant as to how the sub-contract  

was also tax protected, which was their main plea.    It is true that if  

there is an error apparent on the face of the award or where the  

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umpire  had  exceeded  his  jurisdiction  or  travelled  beyond  the  

reference, the court can interfere.  However in view of what is noted  

above it is not possible to say that the award suffers from any of the  

above defects so as to call for interefence.   

35.  The view canvassed on behalf of the respondent was that  

clause 17.3 ought to be read narrowly like an indemnity clause or  

given a literal interpretation as in the case of an insurance policy.  The  

umpire on the other hand has observed that this clause is couched in  

wide  terms  and  it  was  commercially  understandable  and  sensible,  

since it was designed to cover a wide and potentially unforseeable  

spectrum viz. the likely impact of a possible change in Indian law in  

future.   In the circumstances the approach adopted by the umpire  

being a plausible interpretation, is not open to interfere.  The Division  

bench was clearly  in  error  when it  observed that  the  view of  the  

umpire on clause 17.3 is by no stretch of imagination a plausible or a  

possible view.  Perhaps, it can be said to be a situation where two  

views are possible,  out of which the umpire has legitimately taken  

one.    As recently  reiterated by this Court  in  Steel  Authority of  

India  Limited  versus  Gupta  Brothers  Steel  Tubes  Limited  

reported in (2009) 10 SCC 63 if the conclusion of the arbitrator is  

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based on a possible view of the matter, the court is not expected to  

interfere with the award.   The High Court has erred in so interfering.  

36. Can the findings and the award in the present case be  

described as perverse?   This Court has already laid down as to which  

finding would be called perverse.  It is a finding which is not only  

against the weight of evidence but altogether against the evidence.  

This  court  has  held in  Triveni  Rubber  & Plastics  vs.  CCE AIR  

1994 SC 1341 that a perverse finding is one which is based on no  

evidence or one that no reasonable person would have arrived at.  

Unless  it  is  found  that  some  relevant  evidence  has  not  been  

considered or that certain inadmissible material has been taken into  

consideration the finding cannot be said to be perverse.  The legal  

position in this behalf has been recently reiterated in  Arulvelu and  

Another vs. State Represented by the Public Prosecutor and  

Another (2009) 10 SCC 206.  In the present case, the findings and  

award of the umpire are rendered after considering the material on  

record and giving due weightage to  all  the terms of  the contract.  

Calling the same to be perverse is highly unfair to the umpire.   The  

umpire has considered the fact situation and placed a construction on  

the clauses of the agreement which according to him was the correct  

one.   One may at the highest say that one would have preferred  

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another construction of clause 17.3 but that cannot make the award  

in any way perverse.  Nor can one substitute one’s own view in such a  

situation,  in  place  of  the  one  taken  by  the  umpire,  which  would  

amount  to  sitting  in  appeal.    As  held  by  this  Court  in  Kwality  

Manufacturing  Corporation  versus  Central  Warehousing  

Corporation   reported  in (2009)  5  SCC  142, the  court  while  

considering challenge to arbitral award does not sit in appeal over the  

findings and decision of the arbitrator, which is what the High Court  

has practically done in this matter.  The umpire is legitimately entitled  

to  take  the  view  which  he  holds  to  be  the  correct  one  after  

considering  the  material  before  him  and  after  interpreting  the  

provisions of  the agreement.    If  he does so,  the decision of  the  

umpire has to be accepted as final and binding.

37.  It is an obligation of the parties to a contract that they  

must perform their respective promises, and if a party does not so  

perform,  the  arbitrator  or  the  umpire  has  to  give  the  necessary  

direction if sought.  In that process, they have to give a meaningful  

interpretation to all the relevant clauses of the contract to make them  

effective and not redundant.  The intention of the parties in providing  

a clause like clause 17.3 could not be ignored.  It had to be given a  

due weightage.  This is what the umpire has done and has given the  

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direction  to  the  respondent  to  compensate  the  appellant  for  the  

amount of the necessary and reasonable extra cost caused by change  

in law.  We have no hesitation in holding that the award of the umpire  

is a well reasoned award and one within his jurisdiction, and which  

gives a meaningful interpretation to all  the clauses of the contract  

including clause 17.3.   In the circumstances in our view the High  

Court has clearly erred in interfering with the award rendered by the  

umpire.

38. There is one more submission which has to be referred  

to.  It was canvassed on behalf of the appellant in the High Court and  

before us also that the award rendered by the umpire was one on a  

question of law and on that ground also the Court was not expected  

to interfere with the award.  Mr. Dave took us through the notice of  

intention  to  appoint  the  arbitrator,  the  request  for  arbitration,  the  

summary of issues submitted by the appellant and the draft issues  

submitted by the respondent.   He then contended that appellant’s  

claim  essentially  depended  on  the  interpretation  of  the  clauses  of  

contract which plea was specifically raised through these draft issues  

and this stood on the same footing, as a reference of an issue of law  

for  arbitration.   Amongst  others,  the  judgment  in  M/s  Kapoor  

Nilokheri Co-op Diary Farm Society Ltd. vs. Union of India and  

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Others in  (1973) 1 SCC 708 was relied upon in support  of this  

proposition.  As against that, Mr. Tankha submitted that in paragraph  

23 of M/s Tarapore  & Co.  v. Cochin Shipyard Ltd.  AIR 1984  

SC 1072, the judgment in Kapoor Nilokheri has been read as one in  

the  facts  of  that  case.   He  further  relied  upon  the  judgment  in  

Rajasthan  State  Mines  &  Minerals  Ltd.  vs.  Eastern  

Engineering Enterprises & Anr JT 1999 (7) SC 379 to submit  

that the award of the arbitrator on a question of law is immune from  

a challenge in a Court only when it is rendered on a specific question  

of law referred to him and that the same was not the situation in the  

present matter.   The Division Bench has accepted this submission of  

the  respondent  and  held  that  in  the  present  case  there  was  no  

specific question of law referred to the arbitrators or the umpire.  It  

held that what was referred for arbitration was the determination of  

the  claim  of  the  appellant  against  the  respondent,  and  that  an  

incidental  question  involving  interpretation  cannot  be  said  to  be  a  

specific question of law.    

39. However, we are not required to go into that issue since  

we are otherwise holding that the award was not only a plausible one  

but a well-reasoned award.  In the circumstance the interference by the  

High Court was not called for.  In that view of the matter we allow this  

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appeal and set aside the judgment of the learned single Judge, as well  

as  that  of  the  Division  Bench.   The  award  made by  the  Umpire  is  

upheld  and  there  shall  be  a  decree  in  terms  of  the  award.   The  

arbitration petition filed by the respondent for setting aside the award  

shall stand dismissed with cost.

           ……………………………..J.  

( R.V. Raveendran )

           ……………………………..J.  

( H.L. Gokhale ) New Delhi  

Dated   July 28, 2010

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