REPORTABLE

IN THE SUPREME COURT OF INDIA

CIVIL APPELLATE JURISDICITION

CIVIL APPEAL NO.5286 OF 2006

M/s. Rashtriya Chemicals & Fertilizers Ltd. …Appellant

                           Versus

M/s Chowgule Brothers & Ors.                       …Respondents

J U D G M E N T

T.S. THAKUR J.

1. This appeal by special leave is directed against an order  

dated 5th April  2006 passed by the High Court of Bombay  

whereby Appeal No.884 of 1997 has been allowed, the order  

passed by a learned Single Judge of that Court set aside and  

the majority award passed by the arbitrators restored.   

2. The  appellant,  a  Government  of  India  undertaking  

invited  tenders  for  allotment  of  clearing,  forwarding,

handling and stevedoring jobs at Mormugao Port initially for  

a period of one year commencing from 15th January 1983  

upto 14th January 1984 but extendable at the option of the  

appellant for a further period of one year on the same terms  

and conditions except statutory increases in the wages of  

Dock labourers referred to in Clause 2.03 of tender notice.  

In response, the respondent submitted a tender which was  

accepted culminating in the issue of a work order dated 10th  

January 1983 in its favour.  It is common ground that the  

appellant  by  its  communication  dated  13th October  1983  

exercised the option available to it in terms of Clause 2.03 of  

the NIT and extended the contract for a further period of  

one year ending 14th January 1985.   

3. The  extension  aforementioned  was  accepted  by  the  

respondent  in  terms  of  its  communication  dated  7th  

December 1983 in which it was inter-alia pointed out that  

statutory revisions in the wages of Mormugao Dock Labour  

Board (for short M.D.L.B.) that had come about during the  

period of one year need be considered while extending the  

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contractual period. In response, the company by its letter  

dated  27th January  1984 pointed  out  that  Clause  2.03  of  

Schedule II of N.I.T. provided for increases on account of  

statutory revisions made upto 15th January 1984 alone to be  

considered  for  purposes  of  granting  rate  escalation.  

Increases in wages that may have been under negotiations  

or  those granted on a later date with retrospective effect  

could  not  consequently  be considered,  said  the appellant.  

The respondent–Company was on that basis called upon to  

furnish documentary evidence regarding increase if  any in  

wages  allowed  by  the  M.D.L.B.  upto  15th January  1984  

without waiting for issuance of any fresh circulars.  

4. It is not the case of the respondents that any revision  

in  wages  effective  as  on  15th January,  1984  was  

demonstrated before the appellant at any time before the  

commencement of the extended contractual period.  What  

was  alleged  by  the  respondent  was  that  pursuant  to  a  

settlement between the M.D.L.B. and the Dock workers the  

respondent had incurred an additional amount of Rs.24.74  

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lakhs  towards  the increase  in  the wages payable  to  such  

workers. A claim for reimbursement of the said amount was  

accordingly made by the respondent-company in terms of a  

legal notice served upon the appellant on its behalf, which  

claim was refuted by the appellant on the strength of Clause  

2.03 of Schedule II to the notice inviting tenders forming  

part  of  the  contract  between  the  parties.  The  appellant  

asserted that the rates at which the contract  was initially  

awarded had to remain firm throughout the period of one  

year from the date of award and were not subject to any  

escalation whatsoever.  Rates for the extended period were  

also similarly to remain firm throughout the extended period  

subject  to  any statutory  revision  upto 15th January,  1984  

being taken into consideration. Any subsequent increase in  

the  wages  payable  to  the  Dock  labourers  granted  

retrospectively  by  the  M.D.L.B.  was  according  to  the  

appellant wholly inconsequential.  

5. Denial of the claim made by the respondent thus gave  

rise to a dispute which was in terms of the contract referred  

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to a panel of three Arbitrators for adjudication. Before the  

Arbitrators,  the appellant  disputed the claim on merits  as  

also on the ground that the same was barred by limitation.  

The  Arbitrators  examined  rival  contentions  urged  before  

them but failed to arrive at a unanimous decision on the true  

and  correct  interpretation  of  Clause  2.03.   Two  awards,  

therefore,  came to be made, one by Shri  R.P. Bhatt  who  

dismissed the claim and the other by M/s R.C. Cooper and  

N.A. Modi who held the respondents entitled to recover from  

the appellant a lump sum amount of Rs.61,73,067.90. It is  

noteworthy that while the award made by Shri  R.P. Bhatt  

was  a  reasoned  Award  that  made  by  the  other  two  

Arbitrators was not.

6. Aggrieved by the majority  Award,  the  appellant  filed  

Arbitration Petition No. 19 of 1993 before the High Court of  

Bombay for setting aside the same. A Single Judge of the  

High Court of Bombay (S.N. Variava, J. as His Lordship then  

was) allowed that prayer and set aside the award holding  

that  the  same  was  contrary  to  clause  2.03  of  the  NIT  

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forming part of the contract executed between the parties.  

Even  the  plea  of  limitation  succeeded  before  the  learned  

Single  Judge  who  held  that  the  claim  made  by  the  

respondents  was  barred  by  time.  Undeterred  the  

respondents assailed the said order before a Division Bench  

of the High Court in Appeal No.884 of 1997 which allowed  

the appeal, set aside the order passed by the Single Judge  

and  restored  the  majority  Award  made  by  the  two  

Arbitrators.  The  High  Court  took  the  view  that  the  

interpretation  placed  upon  Clause  2.03  of  the  contract  

between the parties by the majority of the arbitrators was a  

logical interpretation which could provide a sound basis for  

the Award made by them.   

7. Appearing for the appellant, Shri Shyam Divan did not  

pursue the  challenge  to  the validity  of  the  Award on the  

ground that the claim made by the respondent was barred  

by  limitation.  The  solitary  point  that  was  urged  by  the  

learned counsel was that the High Court had committed an  

error  while  interpreting  Clause  2.03  of  the  contract.  Mr.  

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Divan contended that a plain reading of Clause 2.03 made it  

amply clear that the rates stipulated under the contract were  

to remain firm for the first year notwithstanding any revision  

in the wages payable to the dock workers of M.D.L.B. For  

the second year also the rates were to remain firm, subject  

only to the condition that statutory revisions, if any, of the  

wages  would  be  taken  into  consideration.  What  was  

according  to  Mr.  Divan  evident  from  a  plain  reading  of  

Clause 2.03 was that only such statutory revisions as were  

ordered upto the date of commencement of the contractual  

period were relevant for the purpose of such consideration.  

Any revision made subsequent to the commencement of the  

contractual  period  even  if  retrospective  in  its  application  

would  have  had  no  relevance  for  the  extended  period.  

Inasmuch as the Division Bench had taken a contrary view  

and set aside the order of the learned Single Judge, it had  

not  only  committed  a  mistake  that  was  evident  but  also  

ignored  the  principles  governing  the  construction  of  

documents.  

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8. Appearing  for  the  respondents  Mr.  Ganesh,  learned  

senior counsel on the other hand contended that the power  

of this Court to interfere in an Arbitral Award under Sections  

30 and 33 of the Arbitration Act, 1940 was very limited.  He  

contended that just because an interpretation different from  

the one given by the Arbitrators in support of their award  

was  equally  plausible  did  not  make  out  a  case  for  

interference by the Court. Arbitrators being Judges chosen  

by the parties the view expressed by them would bind the  

parties no matter the same is found to be erroneous and no  

matter  an  alternative  view  was  equally  or  even  more  

plausible.  He  urged  that  Clause  2.03  of  NIT  was  rightly  

interpreted by the Division Bench of the High Court which  

did not call for any interference by this Court.            

9. The validity of the award made by the Arbitrators rests  

entirely upon a true and correct reading of Clause 2.03 of  

the Contract.  That clause is in the following words:

“2.03:  It  is  hereby  agreed  that  if  the  Company gives one month’s notice to extend  

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the contract for a further period of one year  from the expiry or the period mentioned in  Clause 2.01, the contractor shall be bound to  continue to do the work and render services  on  the  same  terms  and  conditions,  as  contained  herein,  during  such  extended  period,  except  for  the statutory  increase in  the  wages  of  Dock  Labour  allowed  by  the  Mormugao  Dock  Labour  Board,  for  which  documentary  evidence  shall  have  to  be  furnished by the contractor......

………………………………………………………………………..

Note: The rates indicated against first and 2nd  

year  above  have  been  taken  from  MDLE’S  Circulars from time to time.  But the rates at  which  the  contact  is  initially  awarded  shall  remain  firm  throughout  the  period  of  one  year from he date of award and shall not be  subject  to  any  escalation  whatsoever.  Similarly, the rates allowed for the extended  period of one year, if any, after considering  the statutory increase, if any, in the wages of  Dock Labour will also remain firm throughout  the extended period of one year and shall not  be  subject  to  any  escalation  whatsoever,  irrespective  of  any  subsequent  increase  in  the  wages  of  Dock  Labour  allowed  retrospectively  by  the  Mormugao  Dock  Labour Board.”  

10. A  careful  reading  of  the  above  especially  the  Note  

appended to Clause 2.03 (supra) leaves no manner of doubt  

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that the rate at which the contract was initially awarded was  

to remain firm throughout the period of one year from the  

date of the award of the contract.  What is significant is that  

for the first year the said rate was unalterable regardless of  

any escalation, revision or other statutory increases made  

during  that  period.  Shri  Ganesh,  learned  counsel  for  the  

respondents  also  fairly  conceded  that  insofar  as  the  first  

year  of  the  contract  was  concerned  the  rates  were  not  

subject to any revision and were to remain firm. If that be  

so, the question is how far is that principle altered by the  

later half of the Note which deals with the rates applicable  

during the extended period of the contract. There are three  

different aspects which stand out from a reading of that part  

of the Note to Clause 2.03. Firstly, the second part of the  

Note dealing with the rates applicable to the extended period  

starts with the word ‘Similarly’. By using that expression the  

Note draws an analogy between the firmness of the rates  

applicable during the first year and those applicable for the  

extended period of second year. The sentiment underlying  

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the Note is  that the parties intend to keep the applicable  

rates firm not only for the first year but also for the second  

year.  

11. The second aspect which emerges from a plain reading  

of the Note is that the rates for the second year had to be  

fixed by taking into consideration the statutory increases, if  

any, in the wages payable to the Dock labourers which rate  

once fixed was also to remain firm and impervious to any  

escalation.  The  only  difference  between  the  first  and  the  

second year rates thus is that the rates were firm even for  

the second year but the same had to be fixed taking into  

consideration  the statutory  increases  in  the wages  of  the  

dock labourers.   

12. The third aspect which in our opinion puts all  doubts  

about the true intention of the parties to rest is that any  

subsequent  increase  in  the  wages  of  the  dock  labourers  

would not result in any escalation of the rates even when  

such revision is allowed retrospectively by the M.D.L.B. What  

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the Note in our opinion envisages is that on the completion  

of  the  first  year  and  at  the  beginning  of  the  extended  

contract  period,  the  rates  applicable  shall  have  to  be  

determined by reference to the revisions that have already  

come into effect as on the date of the commencement of the  

extended period.  It is manifest from a reading of the Note  

that once an option is exercised the rate applicable to the  

extended period shall stand revised taking into consideration  

the  revision  of  wages  if  any.  Any  such  revision  must  of  

necessity be made as on the date of the commencement of  

the extended period. Once that is done the said rate would  

remain firm till  the end of  the second year.  The contract  

does not, in our opinion, envisage settlement or revision of  

the rate by reference to any stage post commencement of  

the  extended  period.  Even  otherwise  a  contract  for  the  

extended  period  could  become  effective  only  if  rates  

applicable to that period are settled or are capable of being  

ascertained. Rates actually determined or determinable by  

reference to 15th January, 1984 the date when the extended  

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period commenced,  could  include revision in  wages made  

upto  that  date.  Any  revision  in  the  wages  of  the  dock  

labourers which the M.D.L.B. may have ordered subsequent  

to 15th January, 1984 would have no relevance even if such  

revision  was  made  retrospectively  from  the  date  of  the  

commencement of the extended period. The Note makes it  

abundantly clear that revision granted retrospectively would  

be of no consequence whatsoever.

13. There is another angle from which the matter can be  

viewed.  As to how the parties understood Clause 2.03 is  

also  an  important  factor  that  needs  to  be  kept  in  mind.  

While  accepting  the  extension  of  the  contract,  the  

respondent-contractor had simply referred to the statutory  

revision  in  the  wages  by  M.D.L.B.  during  the  ‘last  year’.  

Since the letter of acceptance is of 7th December, 1983 the  

statutory revision which the contractor wanted to be taken  

into consideration were revisions before 1983 and not those  

made  at  any  time after  the  extended  period  of  contract.  

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This position is clear from the following lines appearing in  

the letter of acceptance dated 7th December, 1983 :

“However, we would like to inform you that  there  are  lot  of  statutory  revisions  in  the  wages  of  Mormugao  Dock  Labour  Board  during  last  1  year  which  you  will  have  to  consider  while  extending  our  contractual  period.  In this connection, the undersigned  will  call  on your office to discuss the same  personally in near future and we expect your  cooperation in this regard.”

14. The appellant’s letter dated 27th January, 1984 sent in  

reply  to  the  above  made  it  clear  to  the  respondent  that  

Clause 2.03 of the NIT did not envisage escalation on the  

basis of the revision subsequent to 15th January, 1984 even  

if such revisions were already being discussed or negotiated  

by  the  Dock  Workers  with  the  M.D.L.B.  The  following  

passage from the said  communication makes the position  

abundantly clear:

“A  copy  of  clause  2.03  of  Schedule  II  of  N.I.T. is enclosed. From this, it will be very  clear that whatever increases that have been  allowed by M.D.L.B. upto 15.1.84, can only  be  considered  for  the  escalation  purposes,  

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and not those increases in wages which are  under  negotiations,  for  which  M.D.L.B.  circulars  will  be  issued  subsequently  after  15.1.84, with retrospective effect.”        

15. The learned Single Judge of the High Court was, in the  

light of the above, correct in holding that the award made by  

the  Arbitrators  to  the  extent  it  directed  payment  of  the  

additional  amount  was unsustainable.  The Division  Bench,  

however, fell in error in taking a contrary view and holding  

that  the  interpretation  placed  by  the  Arbitrators  was  a  

plausible interpretation.   

16. That brings us to the question whether an Arbitrator  

can make an award contrary to the terms of the contract  

executed between the parties. That question is no longer res  

integra having been settled by a long line of decisions of this  

Court.  While it is true that the Courts show deference to the  

findings  of  fact  recorded  by  the  Arbitrators  and  even  

opinions, if any, expressed on questions of law referred to  

them  for  determination,  yet  it  is  equally  true  that  the  

Arbitrators have no jurisdiction to make an award against  

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the  specific  terms  of  the  contract  executed  between  the  

parties.  Reference  may  be  made,  in  this  regard,  to  the  

decision of this Court in  Steel Authority of India Ltd.  v.  

J.C.  Budharaja,  Government  and  Mining  Contractor,  

(1999) 8 SCC 122 where this Court observed :

“ …….. that it is settled law that the arbitrator  derives authority from the contract and if he  acts in manifest disregard of the contract, the  award  given  by  him would  be  an  arbitrary  one; that this deliberate departure from the  contract  amounts  not  only  to  manifest  disregard of the authority or misconduct on  his part, but it may tantamount to mala fide  action…...”

……  It  is  true  that  interpretation  of  a  particular condition in the agreement would  be  within  the  jurisdiction  of  the  arbitrator.  However, in cases where there is no question  of interpretation of any term of the contract,  but of solely reading the same as it  is and  still the arbitrator ignores it and awards the  amount  despite  the  prohibition  in  the  agreement,  the  award  would  be  arbitrary,  capricious and without jurisdiction.  Whether  the arbitrator has acted beyond the terms of  the  contract  or  has  travelled  beyond  his  jurisdiction would depend upon facts, which  however  would  be  jurisdictional  facts,  and  are  required  to  be gone into  by the court.  The  arbitrator  may  have  jurisdiction  to  entertain  claim  and  yet  he  may  not  have  jurisdiction to pass award for particular items  in  view  of  the  prohibition  contained  in  the  contract  and,  in  such  cases,  it  would  be  a  jurisdictional error….”

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17. It was further observed:

“…..Further,  the  Arbitration  Act  does  not  give  any  power  to  the  arbitrator  to  act  arbitrarily  or  capriciously.  His  existence  depends  upon  the  agreement  and  his  function is to act within the limits of the said  agreement…..”

18. In  W.B. State Warehousing Corporation & Anr.  v.  

Sushil  Kumar Kayan & Ors. (2002) 5 SCC 679,  again  

this Court observed:

“…….  If  there  is  a  specific  term  in  the  contract or the law which does not permit the  parties to raise a point before the arbitrator  and if there is a specific bar in the contract to  the  raising  of  the  point,  then  the  award  passed  by  the  arbitrator  in  respect  thereof  would be in excess of his jurisdiction….”

19. In  Bharat  Coking  Coal  Ltd.  v. Annapurna  

Construction (2003) 8 SCC 154, this Court reiterated the  

legal position in the following words:

“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  

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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.”

20. In MD,  Army  Welfare  Housing  Organisation  v.  

Sumangal Services (P) Ltd. (2004) 9 SCC 619 also this  

Court took the similar view and observed:

“An Arbitral Tribunal is not a court of law. Its  orders  are not  judicial  orders.  Its  functions  are not judicial functions. It cannot exercise  its power ex debito justitiae. The jurisdiction  of  the arbitrator being confined to the four  corners of the agreement, he can only pass  such  an  order  which  may  be  the  subject- matter of reference.

21 Reference may also be made to  the decisions of this  

Court in  Associated Engineering Co.  v. Government of  

Andhra Pradesh & Anr. (AIR 1992 SC 232), Jivarajbhai  

Ujamshi Sheth & Ors.  v. Chintamanrao Balaji  & Ors.  

(AIR 1965 SC 214), State of Rajasthan v. Nav Bharat  

Construction  Co.  (AIR  2005  SC  4430),  Food  

Corporation  of  India  v. Surendra,  Devendra  &  

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Mahendra  Transport  Co.  (2003)  4  SCC  80, which  

sufficiently settle the law on the subject.  

22. That leaves us with the question whether the valid part  

of the award can be saved by severance from the invalid  

part.   Before the Arbitrators the respondent-Chairman had  

quantified  the  claim  at  Rs.27,91,984.29  on  account  of  

escalation of the rates consequent upon statutory increases  

in  the  wages  of  M.D.L.B.  during  the  extended  period  of  

contract.  A  further  sum of  Rs.9,88,713.20  on  account  of  

escalation in the wages of other categories of workers such  

as  Tally  Clerks,  Stichers,  Foreman,  Asst.  Foremen,  

Supervisors  etc.  was  also  made  on  the  same  basis.   In  

addition, a claim for the recovery of Rs.8,63,953/- towards  

the  final  payment  due  and  payable  to  the  claimant  with  

interest @ 18% p.a. on the same was also made.  

23. In the light of the discussions in the earlier part of this  

order the entitlement of the respondent to claim any amount  

on account of  escalation consequent  upon the increase in  

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the wages of M.D.L.B. workers is not established. The first  

two claims mentioned above on account of escalation could  

not,  therefore,  have  been  allowed  by  the  Arbitrators  nor  

could the incidental  claim for payment of interest  on that  

claim be granted. The question then is whether there is any  

lawful justification for disallowing the only other claim made  

by the respondents representing the balance amount due to  

the claimant towards its final bill.  The only defence which  

the appellant had offered to that claim was based on the law  

of  limitation.  That defence having been withdrawn by Mr.  

Divan, we see no real justification for disallowing the said  

claim  especially  when  the  counter-claim  made  by  the  

appellant has been rejected and the said rejection was not  

questioned before the High Court. In fairness to Mr. Divan  

we  must  record  that  he  did  not  seriously  oppose  the  

severance of  the award made by the Arbitrators so as to  

separate  the  inadmissible  part  of  the  claim  based  on  an  

interpretation of Clause 2.03 from the admissible part.

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24. In the result we allow this appeal but only in part and  

to the extent that the award made by the Arbitrators shall  

stand  set  aside  except  to  the  extent  of  a  sum  of  

Rs.8,63,953/-  which  amount  shall  be  payable  to  the  

respondent-contractor with the interest @ 9% p.a. from 1st  

April, 1985 till the date of actual payment thereof.   

25. The  parties  to  bear  their  own costs  through out  the  

proceedings.                                   

…………………………………J. (AFTAB ALAM)

…………………………………J. (T.S. THAKUR)

New Delhi July 7, 2010

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