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PETITIONER: P.M. PAUL

       Vs.

RESPONDENT: UNION OF INDIA

DATE OF JUDGMENT16/01/1989

BENCH: MUKHARJI, SABYASACHI (J) BENCH: MUKHARJI, SABYASACHI (J) RANGNATHAN, S.

CITATION:  1989 AIR 1034            1989 SCR  (1) 115  1989 SCC  Supl.  (1) 368 JT 1989 (1)   299  1989 SCALE  (1)221

ACT:     Arbitration   Act   1940:  Sections  14,  17,   30   and 33--Award-Setting  aside of--Whether arbitrator has  miscon- ducted himself or proceedings--Adjudicating upon matter  not subject matter of adjudication-Legal misconduct.

HEADNOTE:     The appellant, a contractor entered into a contract with the  respondent  for  the construction of  a  building.  The contract  consisted of two phases. The date of  commencement of  both the phases was March 10, 1979, the date of  comple- tion  of Phase I was June 9, 1980 and that of Phase  II  was November  9, 1980. Dispute arose about the handing  over  of the  site.  The appellant’s case was that the site  was  not handed  over as stipulated and consequently the  work  could not  either  be commenced or completed  as  stipulated.  The respondent  asserted  that the appellant had  abandoned  the work and committed a breach of contract. This was negated by the appellant.     As  the contract provided for settlement of disputes  by an  arbitrator, the appellant filed a suit for the  appoint- ment of an arbitrator.     The  matter came up in appeal to this Court, and one  of its former Judges was appointed as an arbitrator. The  Arbi- trator  entered upon the reference, examined the  documents, heard  the  parties, considered the evidence,  and  made  an award after inspecting the sites.     The  respondent aggrieved by the award filed a  petition and contested the same. It was contended that the arbitrator had  travelled beyond his jurisdiction in awarding a sum  of Rs.2  lakhs  as escalation cost and charges  in  respect  of claim I. Disposing of the Civil Miscellaneous Petition the Court,     HELD:  1. It is well-settled that an award can  only  be set  aside under section 30 of the Arbitration Act,  if  the Arbitrator  has  misconducted  himself  or  the  proceeding. [121C-D] 116     2. Adjudicating upon a matter which is not the  subject- matter  of   adjudication,  is a legal  misconduct  for  the Arbitrator. [121D]

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   3. Escalation is a normal incident arising out of gap of time  in this inflationary age in performing  any  contract. [121F]     In  the instant case, the dispute that was  referred  to the arbitrator was, as to who was responsible for the delay, what are the repercussions of the delay in completion of the building,  and  how  to apportion the  consequences  of  the responsibility.  After discussing the evidence and the  sub- mission  of  the parties to the  contract,  the  arbitrator, found  that  it was evident that there was  escalation  and, therefore, he came to the conclusion that it was  reasonable to  allow 20% of the compensation under claim I, he  accord- ingly  allowed the same. This was a matter which was  within the  jurisdiction of the arbitrator, and the arbitrator  had not  misconducted himself in awarding the amount as  he  has done. [121D-E, G-H; 122A]     4.  Once It was found that the arbitrator had  jurisdic- tion  to find that there was delay In execution of the  con- tract  due to the conduct of the respondent, the  respondent was  liable for the consequences of the delay,  namely,  in- crease in prices. [122C-D]

JUDGMENT:     CIVIL   APPELLATE  JURISDICTION::  Civil   Miscellaneous Petition No. 265 19 of 1988.                       IN Civil Appeal No. 2632 of 1987.     From  the  Judgment  and Order dated  10.6.1985  of  the Kerala High Court in W.P. No. 210 of 1985 in O.P. No. 897 of 1984. Mrs. Baby Krishnan for the Appellant. A.K. Srivastava and C.V.S. Rao for the Respondent. The Judgment of the Court was delivered by     SABYASACHI  MUKHARJI,  J.  This is  an  application  for making  the award dated 17th February, 1988 passed by Mr  V. Khalid, a former Judge of this Court, in a dispute  referred to him by this Court’s order dated 6th October, 1987,  final and to give consequential directions thereupon. 117     On 7th April, 1979 there was a contract for construction of  the building in question. The contract consisted of  two phases. The date of commencement of both the phases was 10th March, 1979: the date of completion of phase-l was 9th June, 1980 and for phase-Il 9th November, 1980. The dispute  arose about the handing over of the site. According to the  appel- lant, the site was not handed over to him as agreed upon and therefore,  the work could not either be commenced  or  com- pleted as stipulated. He, therefore, accused the  respondent of obstructionist tactics also. According to the respondent, however, the claims put forward by the appellant were imagi- nary  excuses to gain time and that he put  forward  various demands  for extension of time and for payment of  compensa- tion to which he was not entitled.     Clause  70  of the general conditions  of  the  contract provided  for  settlement of disputes  by  arbitration.  The appellant  resorted  to this clause and addressed  a  letter dated 13th September, 1980 to the Chief Engineer, South West Zone,  Cochin, informing him that if the said disputes  were not settled to his satisfaction within 15 days from the date of  receipt  of the notice, he would be  taking  appropriate steps  to  refer the disputes to arbitration  in  accordance with  the  said clause. This request of  the  appellant  was turned down by the Chief Engineer, as according to him, work

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was  in  progress and the question  of  granting  reasonable extension  of time was under examination. Dissatisfied  with this, the appellant took the matter to the Engineer-in-Chief by  his letter dated 14th October, 1980 calling upon him  to appoint an Engineer Officer as the sole arbitrator to  adju- dicate  upon the disputes between the parties. This  request was  not  acceded to. The relationship between  the  parties became strained.     The respondent asserted that the appellant had abandoned the  work and committed breach of contract. Thereafter,  the appellant vide a notice dated 4th October, 1982 called  upon the Engineer-in-Chief to appoint an Engineer Officer as  the sole   arbitrator.   After   further   correspondence,   the Engineer-in-Chief by his letter dated 9.6.1983 appointed one Mr. K.C.S. Rao, Chief Engineer, Poona Zone, as the  arbitra- tor  in  respect of the disputes. Mr Rao,  it  is  asserted, entered  into reference. The appellant asserted that Mr  Rao was incompetent to function as arbitrator for it was he  who had  terminated the contract when he was officiating as  the Chief Engineer of Sought West Zone.     Aggrieved  by this appointment, he filed a suit  in  the Court of Subordinate Judge, Cochin, seeking leave to  revoke the authority of the appointed arbitrator under section 5 of the Arbitration Act. 118 (hereinafter referred to as ’the Act’), and for  appointment of another person as arbitrator under section 12 of the Act. It is not necessary to set out the various stages of litiga- tion  thereafter. Ultimately, the matter came to this  Court and by an order passed by this Court on 25th August, 1987 in Civil Appeal No. 2632/87, it was observed as follows :--               "Having regard to the facts and  circumstances               of  the case, we are of the opinion  that  all               the  disputes mentioned in the Paper  Book  be               arbitrated  by a former retired Judge of  this               Court.  We accordingly appoint Mr. Justice  v.               Khalid  (Retd.) a former Judge of this  Court,               as the Arbitrator. The Arbitrator will  decide               his  remuneration  as he thinks  fit  and  the               parties will pay the same in equal shares. The               parties  will also bear the costs and  charges               of  holding  the  proceedings  including   the               remuneration and other assistance of Stenogra-               phers  etc. Councel for both the parties  have               no  objection  to  the  aforesaid  order.  The               learned  Arbitrator will enter into  reference               within  a  fortnight from the receipt  of  the               copy  of  the order and will  make  the  award               within  four months thereafter. Costs  of  the               parties  in the Arbitration  proceedings  will               abide by the decision of the Arbitrator".     The arbitrator entered upon the reference, examined  the documents, heard the parties and considered the evidence. He made his award after inspecting the sites on 20th  December, 1987  and 21st January, 1988. The claims of  the  appellants contractor were as follows: "1. On account of losses caused due to increase in prices of   materials and cost of labour and transport during the   extended period of contract from 9.6.80 work for   under phase I and from 9.11.80 for work under   phase-II.                                                5,47,612.15 2. On Account of work done under the contract including fully executed and partly executed items at the origi- nally agreed rates and for the cost of materials lying at

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site and taken over by the Department as well as for the value of machinery, tools and plants lying over the site and taken over by Department.                                                7,27,095.01 3. On account of losses caused due to added and  infructuous expenditure on overheads, establishments, and 119 supervision during the extended period of contract upto 3.12.81, the date of termination.           1,28,864.00 4. On account of losses caused by way of gains prevented due  to unlawful repudiation of the contract by the  Depart- ment  and the consequent termination of the contract by  the contractor.                                 1,04,424.58 5.  (a)  Release of Bank Guarantee for  Rs.  1,25.000  (Bank Guarantee No. G/19/80 dated 28.4.80 issued by the State Bank of India, Willingdon Island, Conchin-3). (b) Refund of the retention amounts recovered by the Department from the Running Account Bills.     Amount not                                                indicated 6.Interest on all the amounts due and payable. @18% PA from                                                9.12.81 till                                                actual date                                                of payment or                                                realisation". The claims on behalf of the respondent, were as under: "1.  Excess  cost which had to be borne  by  the  Department 19,16,198.82  on account of the defaults of  the  contractor and subsequent cancellation of the contract after  adjusting other amounts due from the contractor under this contract. 2. Cost of reference to Arbitration           7,000.00"     The arbitrator by his award asked the respondent to  pay the following:               "(a)  On claim No. I, a sum of  Rs.2,00,216.18               with  interest at 10% from 9.12.1981 till  the               date of this Award.               (b)  On claim No. 11, a sum of  Rs.2,47,269.69               with  interest at 10% from 9.12.1981 till  the               date of this Award.               (c) Claim No. III--Disallowed.               (d) Claim No. IV--Disallowed.               (e)  On  claim  No. V(a),  the  respondent  is               directed to               120               refund the Bank Guarantee sum of Rs.  1,25,000               to the Cliamant with interest at 10% from  the               date  of the encashment till the date of  this               Award.               II.  The  remuneration of  the  Arbitrator  is               Rs.75,000. Rs.50,000 has already been deposit-               ed.  The claimant and the Respondent  are  di-               rected  to.  remit the  balance  equally  (Rs.               12,5000 each) to the Arbitrator to his  Madras               address  by  Account payee  Draft  within  two               weeks  of receipt of the notice under  Section               14 of the Arbitration Act, 1940.                    11I. The respondent is directed to pay to               the  Claimant by  way of cost Rs.  17,500  to-               wards Arbitrator’s remuneration                and  Rs. 10,000 towards Advocates’  fees  and               cost.               IV. The respondent is directed to suffer their               cost.               V.  The  counter claims preferred by  the  Re-               spondent against the Claimant are disallowed."     A petition was filed on behalf of the respondent, where-

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in it was stated as follows:               "Regarding  petitioner’s claim No. 1,  in  the               absence  of any escalation clause, it  is  not               permissible  to  the Arbitrator to  grant  any               escalation price as sought by the  petitioner.               On the other hand, if the work is not complet-               ed within the specified time, he has got right               to ask for extension of time. Failure to grant               extension  of time, the contractor  can  claim               difference  of  prices. That is not  the  case               here.  Extension of time was granted  and  the               Arbitrator  after considering the  contentions               put-forth  before him has granted 20%  of  the               escalation  price which is not  in  accordance               with  the  terms of the contract.  Though  the               term of the contract envisages that the entire               site should be handed over in-time for comple-               tion of the work entrusted to him as  referred               to above in civil works before starting of the               work,  the  contractor is required to  put  up               some  preliminary  work like  construction  of               temporary store sheds, temporary office  which               requires sometime and within that time if  the               other area or the site is not handed over  the               contractor  has  got  grievances  to  complain               against the Department. Further, by not  hand-               ing  over the site how much damage or loss  is               sustained has not been               121               apprised off. Therefore, it is submitted  that               Claim No. 1 of the Contractor should have been               considered  as outside the scope of  the  con-               tract  and hence the arbitrator  has  exceeded               his jurisdiction."     Mr Ashok Srivastava, counsel appearing for the Union  of India, submitted before us that this is a reasoned award and the  learned arbitrator had granted a sum of Rs.2  lakhs  as escalation  charges and costs. Mr Srivastava tried  to  urge that  the right to get escalation charges and costs  in  the absence  of escalation clause was not a matter  referred  to the arbitrator. In other words, it was urged that the  arbi- trator had travelled beyond his jurisdiction in awarding the escalation cost and charges. It is difficult to accept  this objection for reason more than one.     It  is well-settled that an award can only be set  aside under section 30 of the Act, which enjoins that an award  of an arbitrator/umpire can be set aside, inter alia, if he has misconducted himself or the proceeding. Adjudicating upon  a matter which is not the subject-matter of adjudication, is a legal  misconduct for the arbitrator. The dispute  that  was referred to the arbitrator was, as to who is responsible for the  delay, what are the repercussions of the delay in  com- pletion  of  the building and how to  apportion  the  conse- quences  of the responsibility. In the objections  filed  on behalf  of  the respondent, it has been stated that  if  the work was not completed within the stipulated time the  party has  got a right for extention of time. On failure to  grant extension of time, it has been asserted, the contractor  can claim difference in prices.     In  the instant case, it is asserted that the  extension of  time was granted and the arbitrator has granted  20%  of the escalation cost. Escalation is a normal incident arising out  of gap of time in this inflationary age  in  performing any contract. The arbitrator has held that there was  delay, and he has further referred to this aspect in his award. The

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arbitrator  has  noted that Claim I related  to  the  losses caused  due to increase in prices of materials and  cost  of labour and transport during the extended period of  contract from 9.5. 1980 for the work under phase I, and from  9.11.80 for  the  work under phase II. The total  amount  shown  was Rs.5,47,618.50.  After discussing the evidence and the  sub- missions the arbitrator found that it was evident that there was  escalation  and, therefore, he came to  the  conclusion that  it  was reasonable to allow 20%  of  the  compensation under Claim I, he has accordingly allowed the same. This was a matter which was within the jurisdiction of the arbitrator and, hence, the arbitrator had not mis- 122 conducted himself in awarding the amount as he has done.     It  was  submitted  that if the contract  work  was  not completed  within the stipulated time which it appears,  was not  done  then the contractor has got a right  to  ask  for extension  of time, and he could claim difference in  price. This  is precisely what he has done and has obtained a  por- tion  of the claim in the award. It was submitted on  behalf of the Union of India that failure to complete the  contract was  not  the  case. Hence, there was no  substance  in  the objections raised. Furthermore, in the objections raised, it must  be within the time provided for the application  under section 30 i.e., 30 days during which the objection was  not specifically  taken, we are of the opinion that there is  no substance  in this objection sought to be raised in  opposi- tion to the award. Once it was found that the arbitrator had jurisdiction  to find that there was delay in  execution  of the  contract  due  to the conduct of  the  respondent,  the respondent  was  liable for the consequences of  the  delay, namely,  increase in prices. Therefore, the  arbitrator  had jurisdiction to go into this question. He has gone into that question and has awarded as he did.     Claim  I is not outside the purview of the contract.  It arises as an incident of the contract and the arbitrator had jurisdiction.  In  that view of the  matter  the  objections raised  against  the award, cannot be  sustained.  No  other objection was urged before us. The award, therefore, must be made  the  rule of the Court and there will be a  decree  in terms  of the award, and the respondent is directed  to  pay Rs.  17,500 as the arbitrator’s remuneration and Rs.  10,000 as advocates’ fees and costs. The Civil Miscellaneous Petition is disposed of accordingly. N.V.K.                               Petition disposed of. 123