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CASE NO.: Appeal (civil)  8337-8339 of 1997

PETITIONER: Union of India                                                   

RESPONDENT: M/s. V. Pundarikakshudu and Sons and Anr.        

DATE OF JUDGMENT: 09/09/2003

BENCH: CJI & S.B. SINHA.

JUDGMENT: J U D G M E N T

S.B. SINHA, J :

                The appellant and the first respondent herein entered into a  contract for construction of an auditorium complex at Willington  Nilgiris for a sum of Rs. 64,79,982.95.  The work commenced on 16.3.1979  and was to be completed on 15.3.1981.  However, there had been amendment  to the said agreement owing to increase in the scope of work. An extra  time of six months was also given to the contractor in terms of the said  amendment. The time for completion of the contract was extended from  16.9.1981 to 30.6.1982 and 1.7.1982 to 31.12.1982.  The contract amount  was also increased, because of the aforementioned amendment therein  owing to increase in the scope of work, to Rs. 85.10 lakhs.  Although  the period of contract was over and the appellant did not grant any  further extension, the same was purportedly terminated by the appellant  herein on 28.2.1983, i.e., after the due date for completion of work,  namely, 31.12.1982.  Disputes and differences having arisen, the  arbitration agreement was invoked by the Respondent No.1 and the claims  and counterclaims of the parties were referred to one Brigadier M.M.L.  Sharma who was appointed by the Engineer-in-Chief of the appellant.   Before the arbitrator the first respondent submitted a claim for a total  sum of Rs. 23,59,534.72 comprising 23 claims whereas the claim of the  appellant herein amounted to Rs. 90,58,167.42 comprising 8 claims.

       The sole arbitrator awarded a sum of Rs. 14,31,463/- in favour of  the first respondent and a sum of Rs. 33,95,000/- in favour of the  appellant herein.  The award was filed in the District Court of  Nilgiris.   

       Original Petition No. 29 of 1986 was filed by the respondent No. 1  herein under Sections 15, 16, 30 and 32 of the Arbitration Act praying  to very modify or set aside to claim No. 1 under ’B’ Claim of the  Government in Award dated 6.2.1986 and confirm the award in Claim ’q’ of  the contractor made including the interest and decree in favour of the  petitioner or in the alternative to set aside the award dated 6.2.1986.  

       Original Suit No. 31 of 1986 was filed by the first respondent for  passing a judgment and decree in terms of the award passed in favour of  the Plaintiff in claims serial No. ’A" claims of the contractor by the  2nd defendant and directing the first respondent to pay the plaintiff Rs.  14,31,462 whereas Original Suit No. 47 of 1986 was filed by the Union of  India for a decree and judgment in terms of the Award for a sum of Rs.  33,95,000/- with interest at 18% per annum with costs.

       The learned District Judge upheld the said objections of the first  respondent holding: as the arbitrator made an award in favour of the

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first respondent presumably upon arriving at a finding that the  appellant herein was responsible for causing delay in completion of the  contract; the award made in favour of the appellant must be held to be  inconsistent therewith.  

       It was further held that the appellant herein ’pushed in’ some  calculation sheets on the last date of hearing which was accepted by the  arbitrator without assigning any reason and without prior intimation to  the first respondent which amounted to misconduct on the part of the  arbitrator.  The Court further took into consideration the fact that the  Union of India admittedly caused 1654 days’ delay in accepting the  designs and as the said admission was not taken into consideration by  the arbitrator, that part of the award was vitiated.

       The District Judge further held that having regard to the fact  that the arbitrator had awarded compensation to the first respondent on  various items including Claim A towards additional amount claimed due to  escalation in prices of materials and men at 25% of the work done at the  contract rates, loss sustained due to under-utilisation of cantering and  shuttering materials, loss sustained due to underutilization,  compensation for loss sustained on overheads due to prolongation of  work, the impugned award cannot be sustained.  

       The learned District Judge furthermore laid emphasis on the claim  towards extra expenditure incurred in dismantling of work done due to  delays in decisions wherefor a sum of Rs. 12,500/- was awarded stating:

"...Therefore it is clear that there was a delay on  the part of the department in taking decisions.   Because of the delay in taking decisions, the  Arbitrator has awarded the amount for delay solely on  the part of the contract.  I failed to understand why  the sole arbitrator should have awarded Rs.12,500/  under claim No.V(a) of the contractor.  

       Referring to clause 54 of the Contract, the District Judge said:

"...Therefore condition 54 makes it abundantly clear  that if there was any default on the part of the  contractor the Union of India has got every right to  impound the materials of the contractor, and at any  time sell the materials and appropriate the proceeds  towards any losses.  Curiously enough under claim  No.VI the Arbitrator has passed an award stating that  the materials should be returned to the contractor.   The approximate costs of the materials has been given  as Rs.3,71,000/- by the contractor.  Once again, it  has to be stated that if the sole Arbitrator has come  to the conclusion that the default was on the part of  the contractor, he is not justified in directing the  Union of India to hand over the materials.  Since he  has come to the conclusion that the Union of India is  responsible for the breach of contract, the sole  arbitrator has directed the Union of India to return  the materials as the Union of India cannot take  recourse under condition 54 of the General conditions  of the contract IAFW 2249.  On the background of this  we have now considered the amount awarded to the Union  of India under claim No.1, 2 and 4 under claim No.1  Rs.33,64,000/- has been awarded by the sole arbitrator  towards extra expenditure involved to complete the  incomplete item of work left by the defaulting

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contractor.  Once again going back to contractor is  claim under claim No.6n it is clear that the findings  of the (end of the original’s 31st page) arbitrator  under claim No.V of ’A’ claim of the contractor and  claim 1 of ’B’ of the Government of India is  inconsistent.  Since the arbitrator has already come  to the conclusion that the breach of contract was due  to the 1st respondent and has directed the Union of  India to return the materials to the contractor, the  sole arbitrator should not have awarded Rs.33,64,000/-  towards excess expenditure involved to complete the  incomplete items of work left by the defaulting  contractor.  On the face of it the arbitrator awarded  Rs.33,64,000/- under claim No.1 of ’B’ claim of the  Government is not sustainable.

       Since the award of Rs.3,95,000/- by the sole  arbitrator is inconsistent and is a misconduct, the  order of the Arbitrator in respect of claim No.1 of  ’B’ claim of the Union of India in the award dated  6.3.1986 has to be set aside."     

           Aggrieved thereby three appeals being A.A.O. No. 364 of 1995,  A.A.O. No. 366 of 1995 and A.A.O. No. 367 of 1995 were filed by the  appellant against the order of District Court dated 21.2.1994 in O.P.  No. 29/86, O.S. No. 31 of 1986 and O.S. No. 47/86 respectively.

       By reason of the impugned judgment dated 6.1.1997 the said appeals  were dismissed.

       It, however, appears that the appellants herein also filed S.L.P.  (Civil)....8317-8318/97 arising out of the judgment and order dated  06/01/97 in Appeal Nos. 242/95 and 243 of 1995 of the High Court of  Madras questioning the award made in favour of the first respondent  herein.  The same was dismissed by this Court by an order dated  24.11.1997.

       Mr. N.N. Goswami, the learned senior counsel appearing on behalf  of the appellant would submit that the High Court as also the District  Judge committed a manifest error in setting aside the award made by the  arbitrator in favour of the appellant in so far as it failed to take  into consideration that the award was a non-speaking one.          The learned counsel would contend that the appellant could be  blamed for making delay in the matter and completion of job till 1982  but no finding has been arrived at nor could be arrived at on the basis  of materials on records that thereafter it was at fault.  No material  has been shown in the impugned judgments which support the views taken  by the courts below that the appellant was responsible for the delay  caused beyond 31.12.1982.  Mr. Goswami would urge that the District  Judge had no jurisdiction to analyse the materials on records as if it  has an appellate jurisdiction over the award of the arbitrate.  The  learned counsel would contend that the jurisdiction of the High Court in  setting aside an award being limited, the impugned judgments cannot be  sustained.  In support of the said contention, strong reliance has been  placed on M/s. Sudarsan Trading Co. Vs. Government of Kerala and Another  [(1989) 2 SCC 38].

       Mr. M.N. Rao, the learned senior counsel appearing on behalf of  the respondent, per contra, would submit that a finding of fact has been  arrived at to the effect that the award of the arbitrator was  inconsistent.  The learned counsel would submit that while considering

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the validity or otherwise of an award the Court is not precluded from  considering the totality of the circumstances.  It was pointed out that  having regard to the fact that the appellant admitted the delay of 1654  days on its part, the same ought to have been taken into consideration  by the arbitrator, which was relevant for resolution of the dispute  between the parties.  The claims raised by the appellant basing on the  purported breach of contract on the part of the first respondent herein  must be held to be mala fide.  The learned counsel has placed strong  reliance in support of his contention on Dandasi Sahu Vs. State of  Orissa [(1990) 1 SCC 214].

       The short question which arises for consideration in these appeals  is as to whether the District Judge and the High Court, Madras exceeded  their jurisdiction in passing the impugned judgments.

       It is not in dispute that the claims and counterclaims of the  parties centred round determination by the arbitrator as to whether the  appellant or the first respondent had committed a breach of contract.   The power of the appellant to terminate the contract and to put forth  the claim for extra expenditure involved to complete the incomplete  items of work left out by the first respondent revolved round the issue  as to whether it was a defaulter or not.  The appellant could terminate  the contract and get the work completed through another agency entitling  it to lay the said claim, but its justifiability therefor indisputably  would depend upon the interpretation of clause 54 of the Contract.  The  said clause empowers the appellant to cancel the contract, only if the  contractor "fails to complete the works, work order and items of work,  with individual dates for completion, and clear the site on or before  the date of completion".  Thus, the ’failure’ must be on the part of  the contractors and not by reason of acts of omissions and commissions  of the appellant herein.

       The following was furthermore contained in the said clause:

"The Government shall also be at liberty to use the  materials, tackle, machinery and other stores on Site  of the Contractor as they think proper in completing  the work and the Contractor will be allowed the  necessary credit.  The value of the materials and  stores and the amount of credit to be allowed for  tackle and machinery belonging to the Contractor and  used by the Government in completing the work shall be  assessed by the G.E. and the amount so assessed shall  be final and binding.

In case the Government completes or decides to  complete the works or any part thereof under the  provision of this condition, the cost of such  completion to be taken into account in determining the  excess cost to be charged to the contractor under the  condition shall consist of the cost or estimated cost  (as certified by G.E.) of materials purchased or  required to be purchased and/ or the labour provided  or required to be provided by the Government as also  the cost of the Contractor’s materials used with an  addition of such percentage to cover superintendence  and establishment charges as may be decided by the  C.W.E., whose decision shall be final and binding."

       The said clause could, thus, be invoked only on default on the  part of the contractor and not otherwise.

       Apart from the findings of the District Judge, as noticed

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hereinbefore, the High Court also came to conclusion that the contract  could not have been terminated after the date of completion of work  holding:

"...Misconduct as defined under Section 30 is not a  moral lapse.  If the Arbitrator on the face of the  award arrives at an inconsistent conclusion, it would  also amount to misconduct as per the decision reported  in Poulose vs. State of Kerala (AIR 1975 SC 1259).   Therefore, the finding of the learned District Judge  that there is an inconsistent conclusion by the  arbitrator who has admitted the delay on the part of  the Government in my opinion well-founded.  It is more  so, when the Government has not chosen to set aside  that portion of the award which implies that there is  delay on the part of the Government."

       The High Court further opined:

"Clause 54 of the agreement provides for  utilization of the materials machinery., tackle etc.  for completion of the incomplete work and sell the  same at any time and appropriate the sale proceeds  towards the loss which may arise from the cancellation  of the contract.  In the case on hand, the  cancellation of the contract is after the expiry of  the time contended for completion of the contract.   The materials, machineries etc. were ordered to be  returned to the contractor or pay the costs of the  same to the contractor.  The non-utlisation of the  materials has not been taken into consideration by the  Arbitrator.  It is contended that no payment was made  to the machineries and the contract was at liberty to  take in back the machineries and therefore the non- utilisation of the materials cannot be said to be a  conduct which would absolve the liability of the  Government.  But, this contention is not tenable since  when the contractor has attempted to remove the  materials on the work it has been prevented and a  complaint has also been lodged with the police.   Therefore, awarding certain sum towards loss sustained  by the Government on account of the delay said to have  been committed by the contractor, is inconsistent with  the award granted in favour of the contractor to get  back the materials or value thereof from the  Government.  When the order of the Arbitrator is  inconsistent, it amounts to a misconduct.  Therefore,  the learned District Judge has rightly set aside the  claim No.1 under ’B’ claim of the Government and I am  of the opinion that it is not a matter to be  interfered with this Court."    

       It is not the case of the appellant that the contractor was  allowed to work after 31.12.1982 on grant of further extension for the  completion of the work. The rights and obligations of the parties were,  thus, required to be considered as on the said date and not thereafter.   The fact that there had been delay of 1654 days on the part of the  appellant in accepting the designs and there had been an amendment of  the Schedule of the work stands admitted.   

       The question as to whether one party or the other was responsible  for delay in causing completion of the contract job, thus, squarely fell  for consideration before the arbitrator.  The arbitrator could not have

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arrived at a finding that both committed breaches of the terms of  contract which was ex facie unsustainable being wholly inconsistent.   Clause 54 of the contract could be invoked only when the first  respondent committed breach of the terms of the contract.  An action in  terms thereof could be taken recourse to in its entirety or not at all.  If one part of the award is inconsistent with the other and furthermore  if in determining the disputes between the parties the arbitrator failed  to take into consideration the relevant facts or based his decision on  irrelevant factors not germane therefor; the arbitrator must be held to  have committed a legal misconduct.

       In Bharat Coking Coal Ltd. Vs. M/s. Annapurna Construction (Civil  Appeal Nos. 5647-48 of 1997) disposed of on 29th August, 2003 this Court  noticed:

"So far as these items are concerned, in our opinion,  the learned sole arbitrator should have taken into  consideration the relevant provisions contained in the  agreement as also the correspondences passed between  the parties.  The question as to whether the work  could not be completed within the period of four  months or the extension was sought for on one  condition or the other was justifiable or not, which  are relevant facts which were required to be taken  into consideration by the arbitrator.

       It is now well settled that the Arbitrator  cannot act arbitrarily, irrationally, capriciously or  independent of the contract.         In Associated Engineering vs. Govt. of A.P.   [(1991) 4 SCC 93], this Court clearly held that the  arbitrators cannot travel beyond the parameters of the  contract. In M/s. Sudarsan Trading Co. v. The Govt. of  Kerala [(1989) 2 SCC 38], this Court has observed that  an award may be remitted or set aside on the ground  that the arbitrator in making it had exceeded his  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 been determined outside the award, whatever might  be said about it in the award by the Arbitrator. This  Court further observed that an arbitrator acting  beyond his jurisdiction is a different ground from the  error apparent on the face of the award.          There lies a clear distinction between an error within  the jurisdiction and error in excess of jurisdiction.  Thus, the role of the arbitrator is to arbitrate  within the terms of the contract. He has no power  apart from what the parties have given him under the  contract. If he has travelled beyond the contract, he  would be acting without jurisdiction, whereas if he  has remained inside the parameter of the contract, his  award cannot be questioned on the ground that it  contains an error apparent on the face of the  records."

       It was held that if the arbitrator has committed a jurisdictional  error, the court can intervene.  This Court in Bharat Coking Coal Ltd.  (supra) noticed its earlier decision in K.P. Poulose Vs. State of Kerala  [(1975) 2 SCC 236] wherein it was observed that the case of legal  misconduct would be complete if the arbitrator on the face of the award  arrives at an inconsistent conclusion even on his own finding or arrives

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at a decision by ignoring the very material documents which throw  abundant light on the controversy to help a just and fair decision.

In Union of India vs. Jain Associates and Another [(1994) 4 SCC  665], this Court upon following K.P. Poulose (supra) and Dandasi Sahu  (supra) held :

"8. The question, therefore, is whether the umpire  had committed misconduct in making the award. It is  seen that claims 11 and 12 for damages and loss of  profit are founded on the breach of contract and  Section 73 encompasses both the claims as damages. The  umpire, it is held by the High Court, awarded  mechanically, different amounts on each claim. He also  totally failed to consider the counter-claim on the  specious plea that it is belated counter-statement.  These facts would show, not only the state of mind of  the umpire but also non-application of the mind, as is  demonstrable from the above facts. It would also show  that he did not act in a judicious manner objectively  and dispassionately which would go to the root of the  competence of the arbitrator to decide the disputes."

       In Dandasi Sahu (supra) this Court held that the award suffering  from non-application of mind by the arbitrator is liable to be set  aside.  It was held:

"In this connection we have to keep in mind that we  are concerned with a situation where the arbitrator  need not give any reason and that even if he commits a  mistake either in law or in fact in determining the  matter referred to him, where such mistake does not  appear on the face of the award, the same could not be  assailed. The arbitrator, in the case of a reference  to him in pursuance of an arbitration agreement  between the parties, being a person chosen by parties  is constituted as the sole and the final judge of all  the questions and the parties bind themselves as a  rule to accept the award as final and conclusive. The  award could be interfered with only in limited  circumstances as provided under Sections 16 and 30 of  the Arbitration Act. In this situation we have to test  the award with circumspection. Even with all this  limitations on the powers of court and probably  because of these limitations, we have to hold that if  the amount awarded was disproportionately high having  regard to the original claim made and the totality of  the circumstances it would certainly be a case where  the arbitrator could be said to have not applied his  mind amounting to legal misconduct."

       In M/s. Sudarsan Trading Co. (supra) this Court clearly held that  the Court can look to the agreement where the question arises as to  whether an award may be remitted or set aside on the ground that the  arbitrator in making it has exceeded its jurisdiction.  Drawing  distinction between the disputes as to the jurisdiction of the  arbitrator and the dispute as to in what way that jurisdiction should be  exercised, this Court opined:

"The next question on this aspect which requires  consideration is that only in a speaking award the  court can look into the reasoning of the award. It is

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not open to the court to probe the mental process of  the arbitrator and speculate, where no reasons are  given by the arbitrator, as to what impelled the  arbitrator to arrive at his conclusion. See the  observations of this Court in Hindustan Steel Works  Construction Ltd. v. C. Rajasekhar Rao ((1987) 4 SCC  93). In the instant case the arbitrator has merely set  out the claims and given the history of the claims and  then awarded certain amount. He has not spoken his  mind indicating why he has done what he has done; he  has narrated only how he came to make the award. In  absence of any reasons for making the award, it is not  open to the court to interfere with the award.  Further-more, in any event, reasonableness of the  reasons given by the arbitrator, cannot be challenged.  Appraisement of evidence by the arbitrator is never a  matter which the court questions and considers. If the  parties have selected their own forum, the deciding  forum must be conceded the power of appraisement of  the evidence. The arbitrator is the sole judge of the  quality as well as the quantity of evidence and it  will not be for the court to take upon itself the task  of being a judge on the evidence before the  arbitrator. See the observations of this Court in MCD  v. Jagan Nath Ashok Kumar ((1987) 4 SCC 497)."  

       In that case the Court was concerned with the first issue and not  the second one wherewith we are concerned herein.  In the fact situation  obtaining therein the court distinguished a large number of authorities  placed before it holding:

"But, in the instant case the court had examined the  different claims not to find out whether these claims  were within the disputes referable to the arbitrator,  but to find out whether in arriving at the decision,  the arbitrator, had acted correctly or incorrectly.  This, in our opinion, the court had no jurisdiction to  do, namely, substitution of its own evaluation of the  conclusion of law or fact to come to the conclusion  that the arbitrator had acted contrary to the bargain  between the parties."

       Such is not the position here.

       In this case the District Judge as also the High Court of Madras  clearly held that the award cannot be sustained having regard to the  inherent inconsistency contained therein.  The arbitrator, as has been  correctly held by the District Judge and the High Court, committed a  legal misconduct in arriving at an inconsistent finding as regard breach  of the contract on the part of one party or the other.  Once the  arbitrator had granted damages to the first respondent which could be  granted only on a finding that the appellant had committed breach of the  terms of contract and, thus, was responsible therefor, any finding  contrary thereto and inconsistent therewith while awarding any sum in  favour of the appellant would be wholly unsustainable being self  contradictory.  

The Union of India while accepting the award made in favour of the  first respondent must be held to have accepted the finding that it  committed a breach of contract and the said finding has attained  finality and would operate as res judicata in view of the decisions of  this Court in Sheodan Singh Vs. Daryao [(1966) 3 SCR 300].  

       Furthermore, as noticed hereinbefore, the appeal preferred by the

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appellant against the award of the arbitrator made in favour of the  first respondent herein has been dismissed.

       In Premier Tyres Limited Vs. Kerala State Road Transport  Corporation [1993 Supp (2) SCC 146] this court held:

"The question is what happens where no appeal is  filed, as in this case from the decree in connected  suit. Effect of non-filing of appeal against a  judgment or decree is that it becomes final. This  finality can be taken away only in accordance with  law. Same consequences follow when a judgment or  decree in a connected suit is not appealed from.  5. Mention may be made of a Constitution Bench  decision in Badri Narayan Singh v. Kamdeo Prasad Singh  (AIR 1962 SC 338 : (1962) 3 SCR 759 : 23 ELR 203). In  an election petition filed by the respondent a  declaration was sought to declare the election of  appellant as invalid and to declare the respondent as  the elected candidate. The tribunal granted first  relief only. Both appellant and respondent filed  appeals in the High Court. The appellant’s appeal was  dismissed but that of respondent was allowed. The  appellant challenged the order passed in favour of  respondent in his appeal. It was dismissed and  preliminary objection of the respondent was upheld.  The Court observed,  "We are therefore of opinion that so long as the order  in the appellant’s Appeal No. 7 confirming the order  setting aside his election on the ground that he was a  holder of an office of profit under the Bihar  Government and therefore could not have been a  properly nominated candidate stands, he cannot  question the finding about his holding an office of  profit, in the present appeal, which is founded on the  contention that that finding is incorrect."  

       As the appellant failed to get that part of the award which was  made by the arbitrator in favour of the first respondent, set aside, the  basic conclusion of the High Court cannot be faulted.  The Court upon  setting aside the whole award could have remitted back the matter to the  arbitrator in terms of Section 16 of the Act or could have appointed  another arbitrator, but at this juncture no such order can be passed as  the award in part has become final.           For the reasons aforementioned, we are of the opinion that the  impugned judgment does not suffer from any legal infirmity.  These  appeals are, therefore, dismissed. No costs.