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CASE NO.: Appeal (civil)  4806 of 2000

PETITIONER: K.N. Sathyapalan (Dead) By Lrs.

RESPONDENT: State of Kerala & Anr.

DATE OF JUDGMENT: 30/11/2006

BENCH: Dr.AR. Lakshmanan & Altamas Kabir

JUDGMENT: J U D G M E N T

ALTAMAS KABIR,J.

       The appellant entered into an agreement with the  State of Kerala on 10th October, 1985 whereunder he was  entrusted with the construction work of the Chavara  Distributory from Ch.7440M to 9440M and 10475M to  14767M. Disputes having arisen between the parties, the  matter was referred to arbitration.   The Superintending  Engineer, Siruvani Project, Palghat, .the designated Arbitrator  in terms of the contract, was appointed as the sole Arbitrator.   By his award, which was published on 2nd September, 1989,  the Arbitrator awarded a total sum of Rs. 42,21,000/- with  12% interest per annum from the date of the award.   Upon  the passing of the award the appellant herein filed O.P. (Arb.)  40/89 in the court below under Section 17 of the Arbitration  Act for passing a decree in terms of the award.   The State of  Kerala filed a petition under Section 30 of the Act challenging  the award and for setting aside the same.    The application filed by the State was dismissed and  aggrieved thereby the State of Kerala preferred an appeal in  the High Court of Kerala at Ernakulam, being MFA No. 980 of  1990 C. The appellant herein raised claims under 12 different  heads but the Arbitrator allowed only claims (a), (e), (g), (i) and  (k). Although, in the memorandum of appeal, the entire award  in favour of the appellant had been challenged, but the  arguments were addressed only with regard to claims under  heads (a), (g), (i) and (k).   A preliminary objection was raised  in the appeal that the Superintending Engineer, who had been  appointed as the Arbitrator and had entered on the reference,  had been suspended from service for gross mal-practice, and  the Government had informed all concerned that the  Arbitrator was not to continue with the reference.  The  Arbitrator retired on superannuation while he was under  suspension and the award was made after his retirement.    According to the State of Kerala, in the circumstances, the  award passed by the Arbitrator was without jurisdiction. The aforesaid objection being preliminary in nature, the  same was taken up first for consideration and it was held by  the High Court that such an objection was without any merit.   The Arbitrator, who was working as Superintending Engineer  was placed under suspension on 31st May, 1989.  As per an  agreement between the parties on 14th February, 1989, the  time for making and publishing the award was extended upto  14th June, 1989.  Even after the Arbitrator was suspended  from service, both sides had agreed on 14th June, 1989 to

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extend the time further for making and publishing the award  upto 14th October, 1989.  The Arbitrator retired from service  while under suspension on 30th June, 1989.   In the light of  the said facts, the High Court agreed that the court below  could not revoke the authority of the Arbitrator, which could  only be done under Section 5 of the Arbitration Act, with the  leave of the Court.  Accordingly, the preliminary objection  raised on behalf of the State of Kerala that the Arbitrator had  no authority to continue with the arbitration after his  suspension or retirement, was rejected by the High Court. Claim (a) of the appellant herein involved the claimant’s  entitlement to get compensation for interruption of work by  anti-social elements and failure of the Department in removing  such miscreants from the sites which caused the claimant  heavy financial losses by way of idle men and machinery,  plant and equipment.   The claim made under the aforesaid  head was for a sum of Rs.11,40,000/-.  The Arbitrator was  satisfied that there was interruption of work by anti-social  elements and that the State had failed to remove such  obstruction from the site.   Accordingly, the Arbitrator  awarded a sum of Rs. 7,30,000/- under this claim. Claim (g) was confined to the question as to whether the  claimant was entitled to compensation for the losses suffered  by him on account of price escalation of materials that had  taken place during the extended period of completion when  such extension of time was necessitated by departmental  failure, although there was no provision for escalation of costs  in the contract.  Under the said clause the appellant claimed  an amount of Rs.39,90,198/- but was awarded a sum of  Rs.11,70,000/- over and above the amount as per the rates in  the agreement for the work done after the original period of  contract till 9th February, 1987. Claim (i) was confined to the question regarding the    claimant’s entitlement  for      compensation for the losses  purported to have been suffered by him because the  Department was unable  to hand over  a suitable quarry which   resulted in the claimant having to bring  rubble and metal  from far off places involving additional transportation costs.   The Arbitrator came to a positive finding that the claimant had  procured rubble from quarries situated at different places.   According to the initial estimate, the quarry  ought to have   been  within 25 Kms. from the place of work, but  from the  evidence it would be  clear that the nearest quarry from which  the claimant had to  procure  rubble would be about 47 Km.  away from the site of the work.  The other quarries were even  further away from the  work site.  It was the definite finding of  the Arbitrator that the average extra lead involved would be  not less than 22 Kms. and accordingly while the claimant had  claimed a  sum of   Rs.24,86,574/-, the Arbitrator  awarded a  sum of Rs.13,35,000/- under this head for the work executed  up to 9th February, 1987. The other claim which was pressed by the appellant was  claim (k)  relating to losses suffered by him  on account of  non-availability of a suitable dumping yard for dumping  excess earth.  While a claim for a sum of Rs.13,72,554/- was  made in this regard, the Arbitrator awarded   a sum  of  Rs.6,62,000/- under this head. The agreement relating to the handing over of the site to  the claimant was executed on 10th October, 1985 and on 25th  October, 1985, the respondents instructed the claimant to  start the work and to complete the same within the agreement  period of eleven months.  However, while the period of  completion of  eleven months for the whole work was to expire  on 24th September, 1986, the  same could not be completed on  the scheduled dates and under clause 50 of the  General

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Conditions of Contract extension of time was sought by the  appellant for  completing the work.  Clause 50 of the General  Conditions of Contract provides that if failure  to complete the  work was the result of delays on the part of  Government in  supplying  materials  or equipment it had undertaken to  supply under the contract or from delays in handing over sites  or from  increase in the quantity of the work  to be done under  the contract or  force majeure, an appropriate extension of  time would be given.  Finding that the said clause was  operative, the respondents extended the time of completion  but while doing so made it conditional that such extension of  time would be subject  to execution of a Supplemental  Agreement to the effect that the contractor would not be  eligible for any enhanced rate for the work done during  the  extended period.  According to the appellant, he had no option  but to sign the agreement,  though under protest, since he had  undertaken to complete the work. The appellant appears to have moved to the site  and  commenced the work on 1st November, 1985 but he was  not  allowed to proceed with the work because of external  interference involving law and order problems created by local  miscreants and anti-social elements under cover of union  activities.  Although, initially such a claim was denied on  behalf of the  respondents and the law and order situation was  said  to be only a  labour dispute between the claimant and  his workers, ultimately from the evidence the Arbitrator came  to the finding that the issue was one of law and order which  could only have been controlled by the Governmental agencies. The Arbitrator also came to a finding that in order to  maintain peace at the work site, the claimant had to keep the  entire  local work force in the muster rolls and to pay wages    when the actual work was done with  bull dozers.  The  Arbitrator was satisfied that although the  claimant had aimed  to complete the work within the  original period, he was faced  with adverse site conditions which are not  usually met with at  construction sites. The Arbitrator was also satisfied with  the  claimant’s  contention that  adequate space had not been provided for  dumping the excess earth which had to be conveyed to   distant places for dumping.  On assessment of the evidence  and the ground realities under which the claimant was  constrained to execute the Supplemental Agreement, the  Arbitrator  was convinced  that the claim made by the  claimant under the different heads could not be brushed  aside. Apart from the preliminary  objection taken with regard  to the competence of the Arbitrator to complete the  arbitration  proceedings and to publish his award, it was  also contended  before the Arbitrator that the State  had no responsibility in  settling the disputes between the claimant and his employees  and it was  really  due to the non-cooperation of the claimant  that a  settlement could not be arrived at with the workers.  It  was contended that  under such circumstances   claim (a)  could not be granted.           It was also contended that there was no provision in the  Agreement by which the  Department could be made liable to   compensate  any loss sustained by the contractor because of  intervention of third parties.  It was contended that it is one  thing to say that the State is responsible  for maintaining  law  and order  and on the other  hand to make the State liable  under the terms of the Agreement to compensate the  contractor for losses allegedly  suffered during   the period of   disturbance. On consideration of the case made out on behalf of the  respective parties, the Arbitrator made  his award in respect of

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each of the several heads of claims on the losses actually  suffered by the appellant while trying to carry out  and  complete the tender work.  The Arbitrator filed his award   before the Subordinate Judge, Kottarakkara, on which  a   decree was passed in terms of the award but modifying the   appellant’s claim for interest.    The respondents preferred an  appeal to the High Court  of Kerala at Ernakulam.  The stand taken before the Arbitrator was reiterated by  the parties before the High Court of Kerala at Ernakulam in  the said  appeal.   In addition, arguments were addressed on    the scope of interference by the High Court in an award  passed by the Arbitrator, which award was a speaking award.   On looking into the Agreement, the High Court was of the view  that the Arbitrator had exceeded his jurisdiction in granting   claim (a). The  High Court felt that the Arbitrator had travelled  outside the Agreement and had  acted without jurisdiction in  granting such claim. Even in respect of claim (g), the High Court took note of  the fact that by virtue of  the Supplemental Agreement which  had to be executed for extension of  the original period of   completion  of the work, the appellant herein was not entitled  to enhanced rates during the extended period.  In respect of  claim (g) also, the High Court found that the Arbitrator had  travelled outside the terms of the  contract and had mis- conducted himself.     Admittedly, the original Agreement did not contain a  clause for escalation of rates.  On the other hand, the  Supplemental Agreement contained a specific provision that  the  contractor would carry out all further works within the  extended period at the  rates and in the manner  agreed to in  the Agreement and would not claim any enhanced rate for  such item of work on account  of the extension of time  either  due to the increase in the rate of labour or materials or   on  any  other ground whatsoever.  The High Court took the view  that although the Arbitrator had come to a finding that the  appellant had to execute the Supplemental Agreement under  the force of circumstances, there was no material before the  Arbitrator in support of such contention.  On such finding  also, the High Court held that the Arbitrator had acted beyond  his jurisdiction in allowing claim (g). The award of the Arbitrator against claim (i) also met the  same fate and the High Court held that the Arbitrator had  travelled outside the contract in granting such claim and thus  mis-conducted himself. The only claim which was allowed by the High Court was  claim (k). The High Court accordingly set aside the judgment and  decree of the court below  to the extent it  affirmed  the award  as far as claims (a), (g) and (i) are concerned.       The said order of the High Court is the subject-matter of  the present  appeal. Appearing for the appellant, Mr.Dushyant Dave, learned  senior advocate,  urged  that the High Court  while reversing  the award under claims (a), (g) and (i) had failed to take into  consideration the finding of the Arbitrator that the appellant  had suffered heavy losses on account of the law and order  problem which had been  created at the work site and that he  had been compelled to complete the work under duress.   Reference was made to the letter dated 7th September, 1985  addressed by the appellant to the Superintending Engineer,  K.I.P.(RB) Circle, Kottarakkara, regarding extension of time to  complete the work under tender with the hope that the  Department  would  reciprocate his gesture  and consider the  special circumstances under which he had  given his consent  for extension  of the period for  completion of the work.

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Reference  was also made to another letter dated 24th   September, 1986 written by the appellant to the said  Superintending Engineer informing him of the problems that  were being faced  for completion of the work and requesting   that his accounts be settled and that he be freed from the  entanglements. The last letter referred to by Mr. Dave was written by the  appellant to the said Superintending Engineer on  30th  September, 1986 indicating that  he was carrying out the   work despite all the difficulties although the same was not a  solution to the genuine problems being faced by him  as  indicated in the earlier letters. It was urged that having regard to the ground  realities, it  was within the powers of the Court to  grant relief on account  of  escalation of costs in interrupted projects, although there  may not be any specific provision for such escalation in the  contract itself. In support of his submissions, Mr. Dave firstly  referred  to the decision of this Court in P.M. Paul vs. Union  of India,  1989 Supp.(1) SCC 368, wherein a dispute arose regarding  payment of escalated costs.  By an order of this Court, the  dispute between the parties was referred to a retired Judge of  this Court to ascertain who was responsible for the delay in  completion of the building,  what was the repercussions of the  delay  and how the  consequences were to be apportioned.  It  had been contended therein that in the absence of any  escalation clause it was not permissible for the Arbitrator    to  grant any escalation price  sought by the contractor.  The  Arbitrator,  however,  noted that the claim related to the losses  caused due to  increase in prices of materials and costs  of  labour and transport during the extended period of the  contract and accordingly allowed 20 per cent of the  compensation sought.  The question before this Court was  whether  the Arbitrator had travelled beyond his jurisdiction in  awarding escalation  costs and charges.  This Court came to a  finding that the  Arbitrator had not mis-conducted himself in  awarding  the amount as he had done.   Once it was found  that there was delay in execution of the contract due to the  conduct of the respondent, respondent was liable for the  consequences  of the delay, namely, increase in prices.  It was  held that the claim was not outside the  purview of the  contract and arose as  an incidence of the contract  and  the  Arbitrator had  jurisdiction to make such award. Reference was then made to  the decision of this Court in   T.P. George vs. State of Kerala And Anr.,  (2001) 2 SCC  758, where a similar situation arose  and the contractor was  compelled  to execute a Supplemental Agreement.  Although, a  question was raised as to whether the Supplemental  Agreement   debarred the contractor from  pursuing his  claims, the Arbitrator allowed the claims  which were however  set aside by the High Court.  This Court in appeal held that  the High Court had erred in setting aside the award regarding  those claims notwithstanding the fact that the Supplemental  Agreement had been executed between the appellant and the  State Government.  The grant of interest by the Arbitrator,  which had been  disallowed by the High Court, was also  allowed by this Court.   Mr. Dave contended that even  in the absence of any  escalation clause, if it is found that the  escalation of costs  had been occasioned by circumstances which were not   anticipated at the initial stage and was attributable to the  respondents, there was no reason  why the Arbitrator could  not take notice of the ground reality and to award escalation  costs.  It was urged that had the respondents provided for the  rubble to  be obtained for the work from the quarry at

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Mannady, the appellant would not have had to bear  the extra  transportation charges for bringing such rubble from far away  quarries.  The same applied to  providing a suitable place for  dumping of excess earth and the failure of the respondents to   maintain the law and order problem that had been created at  the site. The submissions advanced on behalf of the appellant  were strongly opposed on behalf of the State Government  with  particular reference to the award in respect of claims (a) and  (g) since the  Original Agreement did not provide for such  escalation and the  Supplemental Agreement which had been  executed clearly stipulated  that no extra rates would be  allowed.  It was contended that the Department  had never  failed to       perform its contractual obligations, and,  in any  event, the delay in completing the work was  not on account   of any  neglect on the part of the State but on account of   labour trouble  involving the appellant  and his workmen at  the site. Mr. Jayant Muth Raj, who appeared for the State,  contended that as had been observed by this Court as far back  as in 1960 in M/s. Alopi Parshad & Sons Limited vs.  The  Union of India, reported  in (1960) 2 SCR  793,   provision for  payment of charges at rates specified had been made in the  contract and the arbitrators could not ignore the express  covenants  between  the  parties and  award  amounts not  agreed to be paid.   It was  observed further that a contract is  not frustrated merely because the circumstances in which it is  made is altered and that the Courts have no general power to  absolve a party from the performance of his part of the  contract merely because its performance has become  onerous  on account of an unforeseen turn of events.   According to Mr.  Muth Raj the award made in the instant  case could not also  be justified  on the basis of quantum meruit   since such a  concept would be applicable  when services are rendered  but  the price thereof  is not fixed  by a contract. Mr. Muth Raj also referred to  various other decisions of  this Court, including  the decision in State of U.P. vs. Patel  Engg. Co. Ltd. And Ors., reported in (2004) 10 SCC 566, where  a question arose as to whether on the basis of a modified  contract which specifically excluded payment of freight  charges, claims for  variation  in payment of such charges  could be awarded by the arbitrator.  It was held that the  arbitrators had exceeded their jurisdiction in awarding freight  charges in respect of steel and handling transportation  charges and that the District Judge had rightly held that the  same was not sustainable inasmuch as the claimant was not  entitled to such freight charges.  It was urged that when no  provision had been  made in the contract for escalation of  costs and the Supplemental Agreement entered   into between  the parties specifically provided that the contractor would not  claim any enhanced  rate  for the work performed during the  extended period of the contract, the  Arbitrator had wrongly  allowed  some of the claims made by the appellant  on account  of escalation of costs and the High Court had rightly  disallowed the same. The question which we are called upon to answer in the  instant appeal is  whether in the absence  of any price  escalation clause in the  Original Agreement and a specific  prohibition to the contrary in the Supplemental  Agreement,  the appellant could have made any claim on account  of  escalation of costs and whether the Arbitrator exceeded his  jurisdiction in allowing such claims as had been found by the  High Court. Ordinarily, the parties would be bound by the terms  agreed  upon in the contract, but in the event  one of the

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parties to the contract is unable to fulfil  its obligations under  the contract which has  a  direct bearing on the  work to be  executed by the other party, the Arbitrator is vested with the  authority to  compensate the second party for the extra costs  incurred by him as a result of the failure  of the first party to   live up to its obligations.  That is the  distinguishing  feature   of cases  of this nature and M/s. Alopi Parshad’s case (supra)  and  also Patel Engg.’s case (supra).  As was pointed  out by  Mr. Dave, the  said principle was recognized  by this Court in  P.M. Paul’s (supra) , where  a reference was made  to a retired  Judge of this Court  to fix responsibility for the delay in  construction of the building and the repercussions  of such  delay.  Based on the findings of the learned Judge, this Court  gave its approval to the excess amount awarded by the  arbitrator on account of increase in price of materials and  costs of labour and transport during the extended period of  the contract, even in the absence of any escalation clause.   The said principle was reiterated    by this Court in T.P.  George’s  case (supra). We have intentionally set out the background in which  the  Arbitrator made his award in order to examine the  genuineness  and/or validity of the appellant’s claim under  those heads which  had been allowed by the Arbitrator.  It is  quite apparent that the appellant was prevented by unforeseen  circumstances from completing the work within the stipulated  period of eleven months and that such delay could have been  prevented  had the State Government  stepped  in to maintain  the law and order problem which had been  created at the  work site.  It is also clear that the rubble  and metal, which  should have been  available at the  departmental quarry at  Mannady, had to be obtained from quarries  which were  situated at  double the distance, and even more, resulting in  doubling of the transportation charges.  Even the space for  dumping of excess earth was not provided by the respondents  which compelled the appellant to dump the excess earth at a  place which  was  far away from the work site entailing extra  costs for the same. In the aforesaid circumstances, the Arbitrator appears to  have acted within  his jurisdiction in allowing  some of the  claims on account of escalation of costs which  was referable  to the execution of the work during the extended period.   In  our judgment, the view taken by the High Court was on a rigid  interpretation of the  terms of  contract and the Supplemental  Agreement executed between the parties, which was not  warranted by the turn of events.   We accordingly allow the appeal and set aside the order  passed by the High Court and restore the award made by the  Arbitrator. There will, however, be no order as to costs.