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CASE NO.: Appeal (civil)  5244-5246 of 2003

PETITIONER: Food Corporation of India                         

RESPONDENT: M/s A.M. Ahmed & Co. and Anr.                 

DATE OF JUDGMENT: 31/10/2006

BENCH: Dr. AR. Lakshmanan & Altamas Kabir

JUDGMENT: J U D G M E N T

Dr. AR. Lakshmanan, J.

The appellant - Food Corporation of India (hereinafter  called the ’FCI’) preferred the above appeals against the  judgment and final order dated 13.08.2002 passed by the  Division Bench of the High Court of Judicature at Madras in  OSA Nos. 157-159 of 1997 whereby the High Court dismissed  the appeals filed by the FCI and passed a decree in terms of  the Award together with interest @ 12% p.a. from the date of  the decree till the date of the payment.    The present dispute and differences arise out of the  contract relating to the work of clearing, stevedoring,  forwarding, exporting, handling and transport contract and  delivery of foodgrains, sugar, flour, for the users, gift,  hospital/suppliers and other commodities and gunny/twine  bales imported at the Port of Tuticorin at the FCI Storage  Godowns in and around Tuticorin for a period of two years  from the date of contract i.e. 08.04.1981 in pursuance of Work  Order No. SPC.1(1)/80 dated 20.04.1981 issued by the Senior  Regional Manager, FCI, Madras. The respondent- contractor/claimant submitted his offer on 20.02.1981along  with covering letter. On 07.04.1981, a communication was  issued by the FCI to the claimant accepting their offer which  had been reduced through negotiation to 397% ASOR.   According to the FCI, a perusal of the said tender document  shows that in addition to cargo handling work at the Port, the  respondent-contractor had to perform various other duties  including unloading of food grains from railway wagons,  machine-stitching of food grain bags, loading into trucks and  other vehicles, etc. etc.  According to the FCI, the tender  agreement did not provide for any escalation clause and also  stated that other than the rates agreed between the parties,  the contractor would not be entitled to any other payments.   On 01.09.1981, the Tamil Nadu Government issued a  notification in the Gazette notifying the settlement arrived at  between the Port Users and Cargo Handling labour of  Tuticorin Port regarding implementing of the settlement dated  04.01.1981.  The respondent, by his letter dated 07.09.1981  to the FCI, pointed out the revision of wages and asked the  FCI to review its case for revision of rates and pass necessary  orders for revising the rates.  The claim for escalation made by  the respondent was rejected by the FCI by its letter dated  14.03.1984.  The respondent filed O.P. No. 49 of 1986 in the  Subordinate Court, Tuticorin for appointment of an Arbitrator  in the dispute regarding escalation.  The said Court passed an  order appointing an Arbitrator in the matter.  The High Court

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of Madras modified the order passed by the Subordinate Court  and directed the Managing Director of the FCI to appoint an  Arbitrator in terms of contract between the parties.  The  special leave petition filed against the aforesaid order was  dismissed by this Court on 05.05.1989.  The special leave  petition was filed by the FCI being aggrieved by the finding  that the dispute between the parties was an arbitrable  dispute, since the only question to be determined was  payment of escalation which was not provided for in the  contract, therefore, could not have been referred to arbitration. Following the dismissal of the special leave petition, the  FCI appointed respondent No.2 \026 Mr. B.S.Hegde Joint  Secretary and Legal Advisor Government of India as Sole  Arbitrator.  Respondent No.1 filed Statement of Claim raising  several claims.  The FCI filed a counter claim.  The Arbitrator,  on 10.04.1992, passed the Award awarding a sum of  Rs.57,10,517/- and Rs. 22,84,207/- under claims (i) and (ii)  respectively with interest @ 9% p.a. from 08.08.1989 till date  of the award and future interest @ 12% p.a. till date of decree  or realization.  The FCI filed O.P.No. 350 of 1992 under Section 14(2) of  the Arbitration Act praying for a direction to the Arbitrator to  file the Award before the High Court so as to enable it to  challenge the same.  Respondent No.2 filed the Award before  the Sub-Court Tuticorin on 30.06.1992.  The claimant filed a  petition before the Subordinate Court for making the Award  rule of Court and a decree in terms of the Award.  The Division  Bench of the Madras High Court in appeal preferred by the  FCI against the dismissal of O.P. No. 350 of 1992 directed  withdrawal of the O.P. filed before the Tuticorin Court to the  High Court.  The FCI, upon being informed by the Registry of  the High Court regarding transfer of OPs and their re- numbering as O.P.Nos. 441 and 441A of 1993, filed objections  to the Award under Sections 30 and 33 of the Arbitration Act  which was numbered as O.P. No. 697 of 1993.  A learned  Single Judge of the High Court dismissed the objections filed  by the FCI by holding the same to be time-barred and made  the Award as rule of Court and passed decree in terms of the  Award.  The FCI preferred an appeal to the Madras High Court  which was dismissed by the Division Bench of the said Court  on 14.07.1997.  The High Court, vide judgment and order in  special leave petition Nos. 21377-21379 of 1997, set aside the      dismissal and remanded the matter back to the Division  Bench of the High Court for disposal on merits.  The Division  Bench, after dismissing the objections filed by the FCI, passes  a decree in terms of the Award together with interest @ 12%  p.a. from the date of the decree till the date of the payment.   Aggrieved by the dismissal of the appeal by the High Court,  the FCI preferred the above appeals.  We heard Mr. K. Mohan, learned senior counsel and ASG  appearing for the appellant and Mr. R. Anand Padmanabha,  learned counsel for respondent No.1. Mr. K. Mohan, learned senior counsel appearing for the  appellant, made the following submissions: 1.      In the absence of an escalation clause in the contract,  the Arbitrator could not have awarded any amount  towards escalation and, therefore, the Arbitrator has  erred in awarding and the courts below in upholding  the escalation awarded by the Arbitrator; 2.      The High Court completely erred in not noticing that  Clause 7 of the contract deals with payment of  minimum wages and this is different from the wage  increase in the present case which is not minimum  wages but are wages prescribed through settlement  and, therefore, erred in holding that there was an

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implied provision in the contract to pay the wages; 3.      The High Court ought not to have taken into account  the ex-gratia payment made by the Corporation to  bypass the absence of the escalation clause and in  holding that despite absence of escalation clause, the  contractor would be entitled to escalation.  4.      Relying on the judgment of this Court reported in  (2000) 3 SCC 27 State of Orissa vs. Sudhakar Das  (dead) by LRs submitted that in the absence of any  escalation clause, an arbitrator cannot assume any  jurisdiction to award any amount towards escalation  and, therefore, that part of the award which grants  escalation charges is clearly not sustainable and  suffers from patent error; 5.      Relying on the judgment of this Court reported in  (1990) 4 SCC 647 S.Harcharan Singh vs. Union of  India for the proposition that only when there is  provision for variation the arbitrator can award  escalation and since there was no such clause the  arbitrator has exceeded his jurisdiction; 6.      Associated Engineering Company vs. Govt. of A.P.  reported in 1999 (4) SCC 93 was relied on for the  purpose that the award in question was rendered  beyond the limits of contract and that the arbitrator  cannot depart from the contract and award; 7.      He placed strong reliance on Rajasthan State Mines  and Minerals Limited vs. World Engineering  Enterprises and Others, 1999 (9) SCC 283 for the  very same proposition that the award cannot be  against the stipulation in the contract; 8.      2001 (4) SCC 241 Ramachandra Reddy vs. State of  Andhra Pradesh was cited for the proposition that  the escalation in rates of labour and materials can  only be granted on the basis of agreement; 9.      He also relied on 2002 (1) SCC 659 State of  Rajasthan vs. New Bharat Construction Company  for the proposition that award of 9% interest for the  period 08.08.1989 to 10.04.1992 and 12% interest for  the future is excessive. He placed strong reliance on  para 8 of the said judgment wherein this Court  reduced the rate of interest from 18% and 15% to 6%  through out; 10.     He also drew our attention to the award passed by the  arbitrator, orders passed by the different courts and  also the relevant clauses in the agreement with  reference to the appointment of wages etc.; 11.     Concluding his argument, Mr. Mohan  submitted that  the High Court has completely erred in not noticing  that the award suffers from the gross errors apparent  on the face of the record and that the arbitrator has  not gone into the evidence as to the amount of  enhanced wages actually paid by the respondent to the  workers and has merely awarded an assumed amount  without giving any reason as to how the amount was  arrived at. Mr. Anand Padmanabha, learned counsel, made the  following submissions by way of reply to the arguments  advanced by the appellant’s counsel: 1.      there is no specific bar to the claim for escalation being  made and that the conduct of the FCI when it requested  the claimant to continue their work would amount to  promissory or equitable estoppel; 2.      the claim for escalation is justifiable on the ground that  the claimant could never have anticipated the sudden  wage increase and other statutory obligations imposed by

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the Government under any stretch of imagination while  tendering for the work as early as February, 1981.  It is  further submitted that the claimant had quoted for the  work based on the then prevailing wages at the time of  tender who by providing them with a marginal increase  for feasibility of execution. 3.      The statutory obligation to pay higher wages arose under  the notification published in the Tamil Nadu Gazette  extraordinary published in Part-6 Section 3a dated  01.09.1981 marked as Exhibit-C5. 4.      The above claim of unawareness of increase in wages  consequent to Tuticorin being declared as a major Port  entailing higher wages on par with wages being paid to  dock labour in other major ports. 5.      Owing to the enormous losses that mounted up, the  claimants had represented the matter to the FCI  reiterating the grave and disastrous monetary losses,  sustained by them and requesting for relief by  neutralizing the increased operational cost and its  payment.  Thereafter, the FCI had appointed a series of  committees who had gone into the requests made and  although the committees have recognized the need to  neutralize the increase of extra costs incurred by the  claimants on labour, as it has occasioned by an order of  Government, but to the dismay of the claimant, no  adequate relief was granted by the FCI.  Various  representations were made by the claimants to the  official hierarchy of the FCI as early from 07.09.1981,  06.11.1981, 23.12.1981 during the currency of the  contract and thereafter effective persuasion continued  since then.  Notwithstanding the fact that the FCI  hierarchy was fully convinced to be just and proper in  neutralizing these losses, it was only marginally met with  by the Zonal Manager (South) who had reimbursed a  paltry sum as an interim relief and recommended for  sanction of appropriate escalation to be granted.   Although the claimants were given the sanguine hope for  their entitlement as genuine and reasonable, no final  decision was taken during the tenure of contract  including extended period of three months which the  claimant was called upon to continue for the storage  operations.  6.      Large amounts were expended by the claimants to meet  this extra cost incurred to pay the new wage structure  and additional benefits given to labour as per the  directives of the Government.  The unexpected  expenditure incurred by the wage hike, necessitated  immediate requirement of enormous outlay which  crippled the claimants resources.  Consequently, the  claimants had to raise additional funds from private  sources at exorbitant interest to meet these  contingencies.  Instead of resorting to a cease work out of  frustration in contract by a supervening event which was  not within the contemplation of the parties at the time of  entering into the contract, the claimants had carried on  with the work effectively making enhanced wage  payments in sizable amounts on the strength and faith of  the assurance given by the FCI hierarchy.  The huge  expenditure incurred in mobilizing resources at  exorbitant interest to meet the emergent situation had  created additional burden on the claimants by way of  accumulation of interest alone, owing to the indecisions  of the FCI in settling this matter.  Therefore, the  claimants have claimed to 10% contractor’s profit or  interest as damages as the case may be on the amounts

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claimed for reimbursement.  Ever since 07.09.1991,  various representations submitted by the claimants  seeking redressal of their grievances, the matter  remained pending for want of final decision.  Although  the claims of the claimants were justified and had every  reason for granting the same as recommended by the FCI  officials at, different levels, of late, it has been turned  down and denied to the claimants.  Therefore, disputes  and differences had arisen between the parties to the  subject contract.  7.      The claimants acted upon and carried on the work on the  strength and faith of the assurance given by the FCI to  meet the claimants demand and in the interest of smooth  working of the contract and in order to avoid the  stoppage of work a decision was taken to grant enhanced  rates w.e.f. 01.09.1981. We have carefully considered the rival submissions with  reference to the records, pleadings, judgments and with  reference to the rulings cited by both the sides. This Court, while issuing notice dated 13.12.2002 in the  special leave petition passed the following order "ORDER Learned Attorney General argues that there is no  clause providing for escalation to reimburse the expenses  incurred by the contractor in the contract agreement.  In  spite of the same the Arbitrator has awarded escalation in  expenses.  Issue notice on SLPs as also on the prayer for interim  relief."   In our opinion, the argument of the learned senior  counsel for the FCI that there is no clause in the contract  providing for escalation to reimburse the expenses and,  therefore, the arbitrator had exceeded his jurisdiction has no  substance.  The issue of jurisdiction of the arbitrator to go into  the claim of the claimant towards compensation and  neutralization of the extra expenditure incurred on account of  statutory wage revisions had already concluded in the earlier  proceedings arising out of the application filed by the claimant  firm under Section 20 of the Arbitration Act for appointment of  the arbitrator.  The FCI in the said proceedings specifically  contended that there was no escalation clause in the contract,  the claim of the claimants for compensation on account of  wage revision should not be referred to arbitration and that  the said claim was non-arbitrable.  However, the learned  Subordinate Judge, Tuticorin by order dated 16.02.1987 in  O.P. No. 49 of 1986 rejected the said contention holding that  the said claim was arbitrable.  On appeal filed by the FCI  before the High Court the High Court also confirmed the same  by order dated 01.03.1989 in CMA No. 291 of 1987.  This  Court also dismissed the special leave petition No. 5213 of  1989 filed by the FCI by order dated 05.05.1989.  Thus, the  FCI is barred by res judicata from raising the same issue again  in the present proceedings.  Even on merits, the claimants firm is entitled to be paid  the said compensation, in view of clause 7 of the contract  dealing with payment of wages. PAYMENT OF WAGES TO WORKERS: The contractors shall pay not less than minimum wages  to the workers engaged by them on either time-rate basis or  piece rate basis on the work. Minimum wages both for the  time rate and for the piece rate work shall mean the rate(s)  notified by the appropriate authority at the time of inviting  tenders for the work.  Where such wages have not been so  notified by the appropriate authority, the wages prescribed by

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the Senior Regional manager as minimum wage shall be made  applicable.  The contractors shall maintain necessary records  and registers like wage book and wage slip etc., register of  unpaid wages and Register of fines and deductions giving the  particulars as indicated in appendix VI.  The minimum wages  prescribed for the time being for piece-rate and time-rate  workers are as indicated below:- (1)     Time Rate Worker (Male) : Rs.5.50 (Rupees Five and paise fifty  only per day)         Time Rate Worker (Female) : Rs.5.50 (Rupees Five and paise  fifty only per day) (2)     Piece rate Workers: Rs.5.50 (Rupees Five and paise fifty only  per day)" It is also submitted that in the subsequent  correspondence with the claimant firm also the FCI agreed to  pay the expenditure incurred on account of wage revision. In  this regard, the learned Arbitrator after elaborately considering  the correspondence between the parties has found in the  impugned award as follows:- "Whatever may be the arguments now put forth by the  respondents, from the admitted facts, it is borne out and  evident that the respondents had accepted their  responsibility to compensate the extra expenditure sustained  by the claimants.  Having not made any reservations about  its responsibility to neutralize the extra expenditure of the  claimants by enhancing the contract rates, the respondents  had accepted its liability after an exhaustive study of the  matter, including the aspects of the arguments now put forth  by the respondents and finally accorded sanction for  enhancement in the contract rates.  Since the relief was  meager and inadequate, the claimants again appealed for the  balance due to them which too was not protested or denied  but on the contrary was acted upon.  The respondents  sincerely wanted to know the actual expenditure incurred by  the claimants and its bonafides, for which purpose the  District Officers at Tuticorin were deputed in Oct.81 for  verification of payments vouchers and other relevant records  connected with the discharge of one Vessel prior to  01.09.1981 and one after 01.09.1981.  This aspect is very  relevant and has a direct bearing on the issues relating to  claims I & II.  

It is borne out from the records and argued by the  claimants that soon after the completion of the claimant’s  contract, the next contract was awarded by the Food  Corporation to a Stevedoring Agency for 1297% ASOR for  port operations alone (vide Ex.C24) as against the claimants’  rate of 397% ASOR for port as well as godown and railhead  operations combined, which was offered prior to the  introduction of the new working pattern and increased wages  in labour rates.  According to the claimants, the tenders for  godown operations were separately called for and was  awarded by the Food Corporation at a rate of 777% ASOR  which was the lowest tender received.  The percentage and  the figures of this statement submitted by the claimants are  accepted to be correct by the respondents FCI.  The  claimants reiterated that this will be ample justification and  testimony to prove and establish the rates that prevailed for  the port operations and godown operations in Tuticorin at  the time of execution of the work by the claimants and  thereafter.  The rates are reflected in terms and ASOR by  virtue of the acceptance of these percentage by the Food

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Corporation for the subsequent years’ work obtained as the  lowest offer on the competitive tenders invited by the Food  Corporation.  It was also stated that the other users of  Tuticorin Port viz. M/s SPIC and Railways had also accepted  the revised notification as mandatory and binding on all Port  Users being statutory in character and accordingly had  reimbursed the difference by way of escalated rates fully  neutralizing the excess expenditure incurred by its  contractors.  The claimants had also produced documents by  way of Exhibits to this effect as certificates issued by the  respective organizations for having reimbursed the difference  of escalated rates.  Respondents do not dispute these  aspects, but state that the payment by other Port Users  cannot fasten them with any similar liabilities nor is it  binding on them."

We have carefully perused the award.  The award, in our  view, is not vitiated by any error of fact or law on the face of  the record and that the arbitrator has not committed any  misconduct within the meaning of the Act.  The High Court  has also in para 19 of the impugned judgment correctly  dismissed the objection raised by the FCI on the issue of  absence of any escalation clause in the contract while  rendering the following finding, Raviraja Pandian,J. speaking  for the Bench, held;  "From the payment of wages clause (Clause 1) of the letters  referred to above and also of the fact that, a committee of the  High Officials of the appellant has been constituted to go in  depth of the factual position as to the payment of wage hike  as per the notification dated 01.09.1981 and the further fact  that, the committee has gone into and submitted a report as  to the actual payment and also the interim payment made by  the appellant would clearly prove that, the appellant had by  the above said actions alive to the circumstance of payment  of enhanced wages considered the just demand of increase of  rates and not stick to his stand that there was no escalation  clause in the agreement and as such the claim of the  respondents not maintainable.  Hence, we are of the view  that, the learned counsel for the appellant is not well placed  in the contention that, the arbitrator has mis-conducted  himself and passed an award for escalation of price without  their being any clause for escalation in the contract and the  same has to be rejected and is rejected."

The respondent claimant was awarded the contract for  carrying out the work of clearing, forwarding, stevedoring etc.  from the Ports at Tuticorin for the period and from 08.04.1981  to 07.04.1983.  During the currency of the contract w.e.f.  30.08.1981, the wages of the workmen employed in the cargo  handling was sharply increased to almost three-fold  consequent upon the settlement arrived under Section 12(3) of  the Industrial Disputes Act.  The State Government notified  the same in the Gazette on 01.09.1981.  In view of the  statutory increase in the wages payable to the port labourers,  the claimant made a representation dated 07.09.1981 to the  FCI to revise the rates in respect of the contract besides  pointing out that the Claimant would be constrained to  discontinue the work as the work at the contracted rates  would result in large loss.  The claimant again wrote a letter  on 23.12.1981 to the FCI detailing the handling cost in view of  the revised wage pattern and for early order on the  representation.  In the said letter, the claimant has also  mentioned that it had offered its explanations on 22.12.1981  to the Committee appointed by the FCI and visited the FCI in  this behalf.  The Committee constituted by the FCI made a

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report dated 15.01.1982 to the FCI after inspecting the place  of contract and after examining the issue.  The said Committee  recommended for allowing the escalated rates specified  therein, supplementing with details.  The first respondent  wrote another letter on 19.01.1982 expressing anguish over  the non-grant of relief claimed and inability to carry on the  works from 25.01.1982 as notified in the letter dated  25.12.1982.  The FCI in its reply dated 21.01.1982 stated as  follows:  "The Committee’s report is under examination.  You are  requested not to bring about any stoppage in the work as  contemplated by you as this will complicate matters."

The claimant was also served a phonogram dated  23.01.1982 which reads thus: "Your request for escalation of rates is under consideration  of the Zonal Manager.  Pending decision, request continue  work without stoppage."  

The claimant was acting and carrying on the contract  work without bringing any stoppage of work from 25.01.1982  incurring heavy loss, as it was thus made to believe that it  would be adequately compensated. While the matter stood so, the FCI appointed Mr.  P.N.Chinnaswamy, Joint Manager, New Delhi to look into the  matters relating to the demand of the contractor for increase  in rates consequent upon the implementation of the  settlement arrived at between the representatives of Port Users  and cargo handling labour in Tuticorin which is effective from  01.09.1981.  Mr. Chinnaswamy in his report dated 17.02.1982  under the head "Final Recommendations" stated as follows: "There is definitely a necessity for escalating the rates of the  present contractors.  Contractors were not aware of the  definite shape of matters to take place when they submitted  their tender initially in February 1981.  Enhanced rates of  payment have become statutory as the scheme has also been  published in the Gazette consequent upon settlement of  31.08.1981.." He recommended for 962% over SOR for the  operations at New Port and 1108% over SOR for the  Operations at Old Port at Tuticorin instead of 397% ASOR  originally agreed for both the ports."  

The claimant did not get any response from the FCI even  after the report of Mr. P.N.Chinnaswamy, a letter dated  24.02.1982 was sent to the FCI that it would become  impossible for the contractor to continue the work if the issue  was not settled as the FCI did not keep the promise that the  issue would be settled by 04.03.1982.                             The FCI by its letter dated 28.03.1982 communicated the  contractor as follows: "With reference to your telephonic information given, that  you will be stopping the work from Monday the 29th March,  1982 at the port and at Godowns in the absence of a  decision on your demand for escalation of rates, please be  informed that, our Regional office at Madras have already  taken up the matter with Head Office, New Delhi and a  decision is awaited.  In the meantime please arrange to  continue the work at the port as well as at the godowns  without any interruption."

However, the FCI by its letter dated 13.04.1982 accorded  sanction of 488% of ASOR instead of 397% ASOR in relation to  old port operations and which would workout to an increase of  91% only and 430% of ASOR instead of 397% of ASOR for the  operations at new port and which would come to an increase

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of 31% only . The claimant accepted the same under protest and  without prejudice by its letter dated 17.04.1982 and requested  the FCI, New Delhi for review of the decisions of the above  grant of marginal relief.  It is seen from the records that the contract period was  from 08.04.1981 to 07.04.1983 for a period of two years.   Wage revision came into effect from 01.09.1981.  From  07.09.1981 to 28.02.1984, the contractor made various  representations during the currency of the contract.  The FCI  did not allow the contractor to discontinue the contract work  during the currency of the contract promising that the revision  of wages is under their consideration.  It is stated by the  contractor that they had handled about 1.68 lacs metric tones  of foodgrains at both the ports incurring huge loss and after  the contractor had completed the performance of the contract  the FCI by its letter dated 14.03.1984 informed the contractor  that the request for escalation of rates had not been agreed to  by their Head Quarters, New Delhi which compelled the  contractor to approach the court for redressal of its  grievances.  The Corporation had raised a specific question before the  arbitrator that escalation in rates claimed by the contractor  could not be granted for the simple reason that the agreement  did not provide for any grant of the escalated rates during the  tenure of contract and hence no enhanced rates other than  the rates agreed upon can be granted.  The learned arbitrator  specifically rejected the above contention on the basis of the  subsequent acceptance of responsibility by the FCI.   In our view, the arbitrator has not mis-conducted himself  and that the award has been passed in consonance with the  principles of natural justice.  The High Court of Madras has  also upheld the award of arbitrator rightly holding that there  is no error apparent on the face of the record. As already noticed, the subject matter relates to the  performance of the contract between the periods from  08.04.1981 to 07.04.1983.  Now that 23 years and odd had  already elapsed since the contract period and that the  contractor is being prevented by the FCI to receive the monies  spent by him as awarded by the arbitrator.  It is also seen  from the records that the quantum claimed by the  respondents was never disputed by the FCI and it is an  admitted fact that the wage revision came into force w.e.f.  01.09.1981 and the contractor firm had paid the workers  revised wages from 01.09.1981.  It was argued by Mr. Mohan that the award of interest  @9% for the period 08.08.1989 to 10.04.1982 and 12% for the  future is excessive and in support of the said contention 2002  (1) SCC 659 was relied on.  During the pendency of the appeal,  this Court while granting special leave directed the FCI to  deposit 50% of the awarded amount which cannot be  withdrawn by the respondent-contractor.  It is stated in the  I.A. Nos. 4-6 of 2003 that the FCI had deposited only a sum of  Rs.39,97,362/- on 22.08.2003 which is 50% of the principal  amount in the award and that the FCI had not deposited 50%  of the total amount awarded which includes the principal  amount of Rs.79,94,724/- and interest @ 9% p.a. from  08.08.1989 till date of publication of the award i.e. 10.04.1992  and future award @ 12% p.a. till the date of realization.   Therefore, an application was moved to pass appropriate  orders directing the FCI to deposit the balance of the amount  as per the directions of this Court dated 25.07.2003.  In  clarification of the order dated 25.07.2003, this Court directed  the FCI to deposit half of the amount awarded by the  arbitrator with interest and permitted the contractor to

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withdraw the said amount on furnishing bank guarantee of a  nationalized bank to the satisfaction of the Registrar of this  Court.  3 months time was granted for depositing the amount.  Pursuant to the Court’s order, an amount of  Rs.1,04,10,664/- has been deposited and kept in FD and the  same is renewed from time to time.  Accordingly, the amount  has been released to the contractor on their submitting the  bank guarantee to cover the entire amount.  However, it was  alleged that the bank  guarantee submitted on 12.08.2005 has  since expired on 15.08.2006 and that the contractor has not  taken steps to submit fresh bank guarantee to cover the  amount.  The contractors are liable for the consequences  thereof.  In the circumstances, the FCI prayed for a direction  to produce fresh bank guarantee or to renew the existing bank  guarantee so that the amount is secured as per the directions  of this Court.  On 31.08.2006, the Contractor filed extended  bank guarantee and the validity of the same is up to  15.02.2007.   Two judgments of this Court on escalation and legal  misconduct of the arbitrator can be beneficially referred to,  followed and applied to the case on hand.   The first judgment is in Hyderabad Municipal  Corporation vs. M. Krishnaswami Mudaliar & Mudaliar &  Anr., (1985) 2 SCC 9.  The only question argued by the  counsel for the Hyderabad Muncipal Corporation was that the  respondent contractor was not entitled to claim 20% extra over  and above the rates originally agreed upon between the parties  under the contract.  Under the contract, drainage work in  question was entrusted to the respondent and under the terms  of the contract the work was to be completed by the contractor  within a period of one year.  Admittedly, at the instance of the  Executive Engineer, PWD due to financial difficulties \026 less  budget having been provided for in the year in question,  therefore the respondent-contractor was requested to spread  over the work for two years more that is to say to complete the  same in three years but the contractor was agreeable to  spread over the work for two years as suggested on condition  that extra payment will have to be made to him in view of  increased rates of either material or wages.  The Government  did not intimate to the contractor that no extra payment on  account of increased rates would be paid to him or that he will  have to complete the work on the basis of original rates.  In  fact, no reply was sent by the Government and a studied  silence was maintained by the Government in regard to the  contractor’s demand for extra payment, in spite of several  reminders in that behalf, till the contractor actually completed  the work during the spread over period. After completion of  work, the contractor submitted his final bill claiming 20%  extra over and above the rates originally agreed upon between  the parties.  The Government stated that he was not entitled to  increased rates.  The High Court, after considering the  correspondence exchanged between the parties has taken the  view that the government was liable to make extra payment for  the work done as there was no dispute that the rates of  material, etc. had increased during the extended period of two  years and the contractor was entitled to such extra payment.   This Court, after considering the relevant material on record,  was also of the view that both in equity and in law the  contractor is entitled to receive extra payment and the High  Court was right in deciding the question in contractor’s favour.   This Court held that the liability to make this extra payment  has been properly saddled on the Municipal Corporation. The second judgment is in P.M. Paul vs. Union of India,  AIR 1989 SC 1034.  In this case, the dispute that was referred  to the arbitrator was as to who is responsible for the delay,

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what are the repercussions of the delay in completion of the  building and how to apportion the consequences of the  responsibility.  The arbitrator found that there was escalation  and, therefore, he came to the conclusion that it was  reasonable to allow 20% of the compensation under the claim.   He accordingly allowed the same.  Counsel appearing for the  Union of India submitted before this Court that the arbitrator  had granted a sum of Rs. 2 lakhs as escalation charges and  cost in the absence of escalation clause was not a matter  referred to the arbitrator.  In other words, it was urged that  the arbitrator had traveled beyond his jurisdiction in awarding  the escalation cost and charges.  This Court in paragraphs 11  & 12 of the judgment held thus: 11. 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 completion of the building and now to apportion the  consequences of the responsibility. In the objections filled 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 extention  of time, it has been asserted, the contractor can claim  difference in prices. 12. 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 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  9.1 1.80 for the work under phase II. The total amount  shown was Rs. 5,47,618.50. After discussing the evidence  and the submissions 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 was accordingly allowed the  same. This was a matter which was within the jurisdiction of  the arbitrator and hence, the arbitrator had not  misconducted himself in awarding the amount as he has  done. The above two cases, in our opinion, squarely apply to  the facts and circumstances of the case on hand.   Escalation, in our view, is normal and routine incident  arising out of gap of time in this inflationary age in performing  any contract of any type.  In this case, the arbitrator has  found that there was escalation by way of statutory wage  revision and, therefore, he came to the conclusion that it was  reasonable to allow escalation under the claim.  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 FCI, the Corporation was liable for the consequences of the  delay, namely, increase in statutory wages.  Therefore, the  arbitrator, in our opinion, had jurisdiction to go into this  question.  He has gone into that question and has awarded as  he did.  The Arbitrator by awarding wage revision has not mis- conducted himself.  The award was, therefore, made rule of  the High Court, rightly so in our opinion.

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In our opinion, having considered the totality of the  circumstances, we feel that it would be just and proper to  award interest @9% p.a. throughout instead of 12% as  awarded by the arbitrator for the period in question.  The  amount already received by the claimant will be adjusted  towards the entire claim and the balance amount together  with interest at 9% p.a. shall be paid by the FCI within 2  months from the date of this order failing which the said  balance amount shall carry interest @12% from the date of its  due till realization.  In view of this order in this judgment, the  bank guarantee furnished by the respondent-contractor shall  stand discharged.   The Supreme Court Registry is directed to  do the needful immediately. The impugned judgment of the High Court is modified  accordingly.  The appeals are thus partly allowed as above  leaving the parties to bear their own costs.