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CASE NO.: Appeal (civil)  1874 of 2007

PETITIONER: FOOD CORPORATION OF INDIA

RESPONDENT: M/S.CHANDU CONSTRUCTION & ANR

DATE OF JUDGMENT: 10/04/2007

BENCH: TARUN CHATTERJEE & D.K. JAIN

JUDGMENT: J U D G M E N T CIVIL APPEAL NO.    1874        OF 2007 [Arising out of S.L.P. (Civil) No. 3335 of 2006)

D.K. JAIN, J.:

       Leave granted. 2.      Challenge in this appeal, by the Food Corporation of  India (for short "FCI"), is to the final judgment and order  dated 14th October, 2005 passed by the Division Bench of  the High Court of Judicature at Bombay, affirming the  judgment of the learned Single Judge in Arbitration  Petition No.334 of 2004.  By the impugned order, the  award of an amount of Rs.8,23,101/- by the sole  arbitrator against claim No.9 has been upheld. 3.      A brief factual background giving rise to the appeal  is as follows: The FCI undertook construction of godowns at  Panvel, District Raigad and issued notice inviting tenders  for construction of 50000 MT capacity conventional  godowns in 10 units alongwith ancillary work and  services.  Pursuant thereto, the respondents (hereinafter  referred to as the claimants) submitted tender, which was  accepted by the FCI.  A formal contract was executed  between the FCI and the claimants on 19th September,  1984.  As per the terms of the contract, the work was to  be completed within 10 months from 30th day of issue of  the orders and the time was deemed to be of the essence  of the contract. 4.      As the claimants could not complete the work  within the stipulated time, which was once extended, the  FCI issued a show cause notice to them seeking to  terminate the contract. Ultimately the contract was  terminated vide order dated 15th November, 1987.  The  claimants invoked the arbitration agreement and  requested the FCI to appoint an arbitrator.  Since there  was no response from the FCI, the claimants filed a suit  in the High Court for appointment of an arbitrator.  An  arbitrator was appointed, who gave his award on 27th  August, 1998.  As payment in terms of the award was not  made, the claimants again moved the High Court.  The  FCI, in turn, filed a petition in the High Court for setting  aside of the award.  With the consent of parties, the  award was set aside and the matter was remitted to the  Arbitrator for fresh adjudication.   5.      In fresh proceedings before the Arbitrator, the stand  of the claimants, qua Claim No.9 was that the rate quoted

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by them for filling the plinth under floors including  watering, ramming, consolidation and dressing in terms  of item No.1.7 of the Schedule of rates was only for  labour and did not cover "providing or supplying" sand  for the said purpose and yet they were required to supply  sand for filling.  As such the claimants were entitled to be  paid extra for supply of sand.  Accordingly, they made a  claim of Rs.8,23,101/- for providing and supplying  5487.34 cubic meters of sand. 6.      The claim was resisted by the FCI on the ground  that the scope of work, specifications and the item rates  was governed by the terms of the contract and as per  clause (2) of the agreement dated 19th September, 1984,  the claimants were to be paid the "respective amount for  the work actually done by him at the ’Schedule of rates’  as contained in the appended Schedule and such other  sums as may become payable to the contractor under the  provisions of this contract". The contract clearly  stipulated that the work was to be carried out as per  specifications contained in Volume I and II of C.P.W.D.  manual, para 2.9.4 whereof provided that the "Rate"  includes the cost of materials and labour.   Therefore, the  claimants were not entitled to any extra amount for  supply of sand.  The arbitrator gave his award on 31st  December, 2003 accepting the said claim.  For reference,  the relevant portion of the award is extracted below: "According to defence under the provision  of 1967 CPWD specification Vol.I & II, the  nature of the item includes sand also and  not merely the labour charges, similarly  the rate of sand filling is for consolidated  thickness or loose thickness or voids to  any extent and this claim is denied into  to.  Now here the dispute between the two  parties is over the words supplying and  providing and in respect of this item the  particular words are missing whereas as  observed earlier they were being found in  respect of certain other items.  According  to the Claimants since these words were  missing in respect of this item of work,  they took it that the material i.e. sand  would be supplied and, therefore, they  quoted only the labour rate.  The tender  of M/s Gupta and Co. as pointed out to  me, shows that in respect of this item of  work, these words providing and  supplying were used.  It is submitted that  there can’t be two different phrapavlogies  in respect of the same item and as  observed earlier, nothing prevented the  FCI from using those words and not  giving rise of any confusion.  Comparative  statement showing contents and details  of schedule items based on tender  working with PWD Bombay which clearly  provides for rates for quantity of work for  schedule items.  The Claimants here are  trying to establish that their quotations  were based without including the cost of  materials supplied.  If we see the figures  in respect of the items, we find  substantial force in the say of Claimants  that the rate quoted by them is so low  that it could not be in respect of price

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inclusive of cost of sand.  If we see the  wording of specification with Contractor  M/s. Gupta & Co., we find additional  words supplying and providing have been  added under similar items of the  schedule.  Why these words were missing  in case of Claimants is difficult to follow.   The Respondents content that 1967  CPWD’s specification in Vol.I & II covers  the specifications not only for labour  charges but also for providing and  supplying of the materials required.  It is  very difficult to understand this defence,  for if we look at the figures quoted in the  tenders it would make it absolutely clear  that the inclusion of cost of sand could  not have to be in the mind of the  Contractor Claimants.  The figures are  very low and I may be permitted to say  that these figures do not cover the cost of  sand.  There is force in the say of the  Claimant that he did not vouch that he  himself was to supply sand.  Of course, I  must say that there is no very satisfactory  evidence about the quantity of sand used,  its price and amount paid by the claimant  to his suppliers but when the work was  done the FCI was bound to take upon it  to make the payment though it may  appear to be somewhat arbitrary.  I allow  this claim of 8,23,101/- (Rupees Eight  lacs twenty three thousand and one  hundred and one only)."

7.      Being aggrieved, the FCI filed objections against the  award under Section 30 of the Indian Arbitration Act,  1940 praying for setting aside of the award on claim no.9,  but without any success. The learned Single Judge  affirmed the view taken by the Arbitrator that the rate  quoted by the claimant did not include the cost of the  material.  The FCI carried the matter in appeal before the  Division Bench.  Before the Division Bench, the FCI also  attempted to raise the issue of award of interest by the  Arbitrator, which was not permitted on the ground that  the issue was neither taken up before the Arbitrator nor  was raised before the learned Single Judge.  As noted  above, the Division Bench has dismissed the appeal.   Hence, the present appeal. 8.      Learned counsel for the petitioner has submitted  that the claim for supply of sand against Claim No.9 was  patently opposed to the terms of the contract between the  parties.  It is urged that the relevant clause of the  contract is clear, unambiguous and admits of no such  interpretation as has been given by the arbitrator.  It is,  thus, pleaded that the arbitrator has misconducted  himself in awarding additional amount of Rs.8,23,101/-  in favour of the claimants, which part of the award  deserves to be set aside. 9.      On the other hand, learned counsel for the  claimants submitted that it was within the domain of the  arbitrator to construe the terms of contract in the light of  the evidence placed on record by the claimants,  particularly the terms of similar contracts entered into by  the FCI with the other contractors.  It is asserted that the  view taken by the arbitrator being plausible the High

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Court was justified in declining to interfere with the  award. 10.     While considering objections under Section 30 of  the Arbitration Act, 1940 (for short ’the Act"), the  jurisdiction of the Court to set aside an award is limited.   One of the grounds, stipulated in the Section, on which  the Court can interfere with the award is when the  arbitrator has ’misconducted’ himself or the proceedings.   The word "misconduct" has neither been defined in the  Act nor is it possible for the Court to exhaustively define  it or to enumerate the line of cases in which alone  interference either could or could not be made.   Nevertheless, the word "misconduct" in Section 30 (a)  of  the Act does not  necessarily comprehend or include  misconduct or fraudulent or improper conduct or moral  lapse but does comprehend and include actions on the  part of the arbitrator, which on the face of the award, are  opposed to all rational and reasonable principles  resulting in excessive award or unjust result.  (Union of  India Vs. Jain Associates and Anr. .   11.     It is trite to say that the arbitrator being a creature  of the agreement between the parties, he has to operate  within the four corners of the agreement and if he ignores  the specific terms of the contract, it would be a question  of jurisdictional error on the face of the award, falling  within the ambit of legal misconduct which could be  corrected by the Court.  We may, however, hasten to add  that if the arbitrator commits an error in the construction  of contract, that is an error within his jurisdiction.  But,  if he wanders outside the contract and deals with matters  not allotted to him, he commits a jurisdictional error (see:  Associated Engineering Co. Vs. Government of  Andhra Pradesh and Anr.  and Rajasthan State  Mines & Minerals Ltd. Vs. Eastern Engineering  Enterprises & Anr. ).   12.     In this context, a reference can usefully be made to  the observations of this Court in M/s. Alopi Parshad  and Sons, Ltd. Vs. Union of India , wherein it was  observed that the Indian Contract Act does not enable a  party to a contract to ignore the express covenants  thereof, and to claim payment of consideration for  performance of the contract at rates different from the  stipulated rates, on some vague plea of equity.  The Court  went on to say that in India, in the codified law of  contracts, there is nothing which justifies the view that a  change of circumstances, "completely outside the  contemplation of parties" at the time when the contract  was entered into will justify a Court, while holding the  parties bound by the contract, in departing from the  express terms thereof.  Similarly, in The Naihati Jute  Mills Ltd. Vs. Khyaliram Jagannath , this Court had  observed that where there is an express term, the Court  cannot find, on construction of the contract, an implied  term inconsistent with such express term. 13.     In Continental Construction Co. Ltd. Vs. State of  Madhya Pradesh , it was emphasised that not being a  conciliator, an arbitrator cannot ignore the law or  misapply it in order to do what he thinks is just and  reasonable.  He is a tribunal selected by the parties to  decide their disputes according to law and so is bound to  follow and apply the law, and if he does not, he can be set  right by the court provided his error appears on the face  of the award. 14.     In Bharat Coking Coal Ltd. Vs. Annapurna  Construction  while inter alia, observing that the

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arbitrator cannot act arbitrarily, irrationally, capriciously  or independent of the contract, it was observed, thus: "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 parameters of  the contract, his award cannot be  questioned on the ground that it contains  an error apparent on the face of the  record."

15.     Therefore, it needs little emphasis that an arbitrator  derives his authority from the contract and if he acts in  disregard of the contract, he acts without jurisdiction.  A  deliberate departure from contract amounts to not only  manifest disregard of his authority or a misconduct on  his part, but it may tantamount to a mala fide action  [Also see: Associated Engineering Co. Vs. Government  of Andhra Pradesh & Anr. (supra)].  16.     Thus, the issue, which arises for determination, is  whether in awarding Claim No.9, the arbitrator has  disregarded the agreement between the parties and in the  process exceeded his jurisdiction and has, thus,  committed legal misconduct? 17.     For deciding the controversy, it would be necessary  to refer to the relevant clauses of the contract, which read  thus: "1.     GENERAL SPECIFICATIONS: 1.1     The civil sanitary, water supply and road  works shall be carried out as per Central  Public Works Department specification of  works at Delhi 1967 Volume I & II with  correction slips upto date\005\005In the case  of civil, sanitary, water supply and road  works and electrical works should there  be any difference between the Central  Public Works Department specifications  mentioned above and the specifications of  schedule of quantities, the latter i.e. the  specification of schedule of quantities,  shall prevail.  For items of work not  covered in the C.P.W.D. specifications or  where the C.P.W.D. specifications are  silent on any particular point, the  relevant specifications or code of practice  of the Indian Standard Institution shall  be followed. 1.2     Should any clarification be needed  regarding the specifications for any work  the written instructions from the  Engineer-in-Charge shall be obtained."

18.     Paragraph 2.9.4 of the C.P.W.D. specifications  insofar as it is relevant for the present appeal, reads as  follows: "Rate:- It includes the cost of materials  and labour involved in all the operations  described above’."

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19.     From the above extracted terms of the agreement  between the FCI and the claimants, it is manifest that the  contract was to be executed in accordance with the  C.P.W.D. specifications.  As per para 2.9.4 of the said  specifications, the rate quoted by the bidder had to be for  both the items required for construction of the godowns,  namely, the labour as well as the materials, particularly  when it was a turn key project.  It is to be borne in mind  that filling up of the plinth with sand under the floors for  completion of the project was contemplated under the  agreement but there was neither any stipulation in the  tender document for splitting of the quotation for labour  and material nor was it done by the claimants in their  bid.  The claimants had submitted their tender with eyes  wide open and if according to them the cost of sand was  not included in the quoted rates, they would have  protested at some stage of execution of the contract,  which is not the case here.  Having accepted the terms of  the agreement dated 19th September, 1989, they were  bound by its terms and so was the arbitrator.  It is, thus,  clear that the claim awarded by the arbitrator is contrary  to the unambiguous terms of the contract.  We are of the  view that the arbitrator was not justified in ignoring the  express terms of the contract merely on the ground that  in another contract for a similar work, extra payment for  material was provided for.  It was not open to the  arbitrator to travel beyond the terms of the contract even  if he was convinced that the rate quoted by the claimants  was low and another contractor, namely, M/s Gupta and  Company had been separately paid for the material.   Claimants’ claim had to be adjudicated by the specific  terms of their agreement with the FCI and no other. 20.     Therefore, in our view, by awarding extra payment  for supply of sand the arbitrator has out-stepped confines  of the contract.  This error on his part cannot be said to  be on account of misconstruing of the terms of the  contract but it was by way of disregarding the contract,  manifestly ignoring the clear stipulation in the contract.   In our opinion, by doing so, the arbitrator misdirected  and misconducted himself.  Hence, the award made by  the arbitration in respect of claim No.9, on the face of it,  is beyond his jurisdiction; is illegal and needs being set  aside. 21.     Consequently, the appeal is allowed and the  impugned judgment of the High Court, to the extent it  pertains to claim No.9 is set aside.  However, on the facts  and circumstances of the case, there shall be no order as  to costs.