Reportable

IN THE SUPREME COURT OF INDIA CIVIL APPELLATE JURISDICTION

CIVIL APPEAL NO. 3089 OF 2006

M/s. Som Datt Builders Ltd.           …Appellant

Versus State of Kerala     …Respondent

AND

CIVIL APPEAL NO. 3090 OF 2006

State of Kerala                …Appellant Versus

 M/s. Somdatt Builders Ltd.              …Respondent

JUDGEMENT

R.M. Lodha, J.

These two appeals by special leave arise from the  

Judgment and Order dated June 3, 2005 passed by the High  

Court of Kerala and hence were heard together and are being  

disposed of by this common judgment.

2. The  State  of  Kerala  represented  by  the  Chief  

Engineer,  National  Highway,  Public  Works  Department  

awarded a contract to M/s. Som Datt Builders Limited (for short,  

‘contractor’) relating to road work of National Highway-47. The  

works were : (i) four laning and strengthening of Alwaye-Vyttila;  

(ii) four laning and strengthening of Vyttila-Aroor and (iii)  four  

laning of Aroor-Cherthala stretches. The terms and conditions  

mentioned in the special and general conditions of the contract  

(Sections  IV  &  III  respectively)  were  integral  part  of  the  

conditions  specified  in  the  contract.  Under  the  contract,  the  

contractor was to complete the works within forty-two months.  

That the work could not be completed within the agreed period  

is not in dispute. It is also an admitted position that the time for  

completion of work was extended on two occasions; in all by 25  

months. The case of the contractor is that the extension of time  

was not for any fault of theirs and as a matter of fact they had to  

continue  the  site  office  in  Cochin;  that  they  also  incurred  

additional expenditure in relation to their  work at Cochin and  

that further expenditure towards equipment ownership charges  

in respect of the machinery worth crores of rupees continued to  

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be  employed  for  the  work.  The  contractor,  therefore,  raised  

claims  under  diverse  heads  before  the  Engineer  on  

February 22, 1998. According to the contractor,  the Engineer  

took decision concerning claim no. 1 but the said decision was  

not implemented and regarding other claims, no decision was  

taken  necessitating  the  contractor  to  seek  reference  of  the  

dispute to arbitration.

3. On January 11, 1999 an arbitral tribunal comprising  

three Arbitrators was constituted and all claims of the contractor  

were referred for adjudication to the arbitral tribunal.

4. On March 20,  1999 the contractor  submitted their  

claim  along  with  supporting  documents  before  the  arbitral  

tribunal.  Claim  no.  1  made  by  the  contractor  related  to  

additional  cost  on  account  of  extended stay  for  reasons  not  

attributable to them. Claim no. 1 as per statement of claim is  

under three heads, namely;  (i)  Equipment ownership charges  

for  Rs.  10,43,49,369/-;  (ii)  Site  over-heads  for  Rs.  

9,16,31,609/-;  and  (iii)  Head  Office  over-heads  for  Rs.  

2,45,68,507/-- totaling Rs.22.05,40,405/-.

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Claim no. 4B amounting to Rs. 3,33,924.69 related  

to additional expenditure incurred due to change in foundation  

from well foundation to open foundation.

Claim no.  5  in  the  sum of  Rs.  2,85,93,625/-  was  

raised  by  the  contractor  towards  compensation  for  the  loss  

suffered on account of strikes by various local unions, bundh  

and interference by police and other authorities.

Claim no.  6  for  Rs.  2,46,817/-  was raised by the  

contractor for reimbursement of the provident fund contributed  

by the contractor @ 10%.

5. The statement of defence was submitted on behalf  

of  the  State  Government  along  with  supporting  documents  

before the arbitral tribunal on October 30, 1999.

6. The contractor submitted its rejoinder on November  

27, 1999 while an additional statement of defence was filed by  

the State Government on March 17, 2001.

7. The arbitral tribunal passed its award on December  

20, 2003. As regards, claim no. 1, the arbitral tribunal awarded  

an amount of Rs. 7,61,41,460/-. The arbitral tribunal awarded a  

sum of Rs. 2,86,985.23 towards claim no. 4B; Rs. 1,00,26,900/-  

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towards claim no. 5 and Rs. 2,31,821/- towards claim no. 6. It is  

not necessary to deal with the other claims as they are not the  

subject matter of these two appeals.

8. A petition under Section 34 of  the Arbitration and  

Conciliation Act,  1996 (for  short,  ‘Act,1996’)  was filed by the  

State of Kerala before the District judge, Ernakulam for setting  

aside the award dated December 20, 2003 on diverse grounds,  

inter alia, that the award was not a reasoned award.

9. The  2nd Additional  District  Judge,  Ernakulam  to  

whom the case was transferred, dismissed the petition filed by  

the State of Kerala vide his judgment and Order dated February  

23, 2005.  He held that there were sufficient reasons recorded  

by the arbitral tribunal for allowing each claim.

10. The State of Kerala then approached the High Court  

by  filing  an  appeal  against  the  judgment  and  order  of  the  

2nd Additional  District  Judge  dismissing  their  petition  under  

Section 34 of the Act, 1996.

11. The Division Bench heard the appeal and vide its  

judgment dated June 3, 2005 allowed the appeal in part and set  

aside the award relating to claim nos. 1 and 4B on the ground  

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that the findings thereon do not have supporting reasons being  

violative  of  Sections  28(3)  and  31(3)  of  the  Act,  1996.  The  

Division Bench also set  aside the interest  awarded on these  

two counts claimed under claims 7B and 7C.

12. Both the parties are aggrieved by the judgment of  

the Division Bench. Civil  Appeal No. 3089 of 2006 has been  

preferred by the contractor aggrieved by the said judgment to  

the extent the award relating to claim nos. 1 and 4B has been  

set  aside  whereas  Civil  Appeal  No.  3090  of  2006  is  at  the  

instance  of  the  State  of  Kerala  dissatisfied  with  the  award  

relating to claim nos. 5 and 6.

13. It  is appropriate that few clauses of  Conditions of  

the Contract referred to by the Learned Senior Counsel during  

the course of arguments are noticed by us first.

14. Clause 1.1 (a)(i) defines ‘Employer’ as follows : “EMPLOYER”  means  the  Governor  of  the  State  (India) or his successors in office and assigns.  The  Chief  Engineer-in-charge  of  the  Project  will  be  the  assignee for the Project.“

15. Clause 1.1 (a)(iv) defines ‘Engineer’ thus :

”ENGINEER” means the Superintending Engineer of  the  PWD, appointed  as  the  Project  Director  of  this  Contract  or  any  other  person  appointed  by  the  Employer, by notice in writing to the Contractor, to act  in replacement of the Engineer.”

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16. The procedure for claims is set out in clauses  

53.1 to 53.5 which read thus :  

“53.1 Notwithstanding  any  other  provision  of  the Contract,  if  the Contractor  intends to  claim any  additional payment pursuant to any Clause of these  Conditions  or  otherwise,  he shall  give  notice  of  his  intention to the Engineer, with a copy to the Employer,  within 28 days after the event giving rise to the claim  has first arisen.

53.2 Upon  the  happening  of  the  event  referred to in Sub-Clause 53.1,  the Contractor  shall  keep such contemporary records as may reasonably  be  necessary  to  support  any  claim  he  may  subsequently  wish  to  make.  Without  necessarily  admitting the Employer’s liability, the Engineer shall,  on receipt of a notice under Sub-Clause 53.1, inspect  such  contemporary  records  and  may  instruct  the  Contractor to keep any further contemporary records  as are reasonable and may be material to the claim of  which  notice  has  been  given.  The  Contractor  shall  permit  the  Engineer  to  inspect  all  records  kept  pursuant to this Sub-Clause and shall supply him with  copies thereof as and when the Engineer so instructs.

53.3 Within 28 days or such other reasonable time  as may be agreed by the Engineer, of giving notice  under Sub-Clause 53.1, the Contractor shall send to  the Engineer an account giving detailed particulars of  the amount claimed and the grounds upon which the  claim is  based.  Where  the  event  giving  rise  to  the  claim has a continuing effect, such account shall be  considered  to  be  an  interim  account  and  the  Contractor  shall,  at  such  intervals  as  the  Engineer  may reasonably require, send further interim accounts  giving the accumulated amount of the claim and any  further  grounds  upon  which  it  is  based.  In  cases  where interim accounts are sent to the Engineer, the  Contractor shall send a final account within 28 days of  the end of the effects resulting from the event.  The  Contractor shall, if required by the Engineer so to do,  copy  to  the  Employer  all  accounts  sent  to  the  Engineer pursuant to this Sub-Clause.

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53.4 If the Contractor fails to comply with any of the  provisions of this Clause in respect of any claim which  he  seeks  to  make,  his  entitlement  to  payment  in  respect thereof shall not exceed such amount as the  Engineer  or  any  arbitrator  or  arbitrators  appointed  pursuant  to  Sub-Clause  67.3  assessing  the  claim  considers  to  be  verified  by  contemporary  records  (whether  or  not  such  records  were  brought  to  the  Engineer’s  notice  as  required  under  Sub-Clauses  53.2 and 53.3).

53.5 The  Contractor  shall  be  entitled  to  have  included  in  any  interim  payment  certified  by  the  Engineer  pursuant  to  Clause  60  such  amount  in  respect  of  any  claim  as  the  Engineer,  after  due  consultation  with  the  Employer  and  the  Contractor,  may consider due to the Contractor provided that the  Contractor  has  supplied  sufficient  particulars  to  enable the Engineer to determine the amount due. If  such  particulars  are  insufficient  to  substantiate  the  whole of the claim, the Contractor shall be entitled to  payment in respect of such part of the claim, as such  particulars may substantiate to the satisfaction of the  Engineer. The Engineer shall notify the Contractor of  any determination made under this Sub-Clause, with  a copy to the Employer.”  

17.  As regards settlement of dispute, the relevant  

clauses are 67.1 to 67.4 which provide as follows:

“67.1 If  a  dispute  of  any  kind  whatsoever  arises  between  the  Employer  and  the  Contractor  in  connection with, or arising out of, the Contract or the  execution of the Works, whether during the execution  of  the Works or  after  their  completion  and whether  before or after repudiation or other termination of the  Contract,  including  any  dispute  as  to  any  opinion,  instruction,  determination,  certificate  or  valuation  of  the Engineer, the matter in dispute shall,  in the first  place,  be referred in writing to the Engineer,  with a  copy  to  the  other  party.  Such  reference  shall  state  that it is made pursuant to this Clause. No later than  

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the  eighty-fourth  day  after  the  day  on  which  he  received  such  reference  the  Engineer  shall  give  notice  of  his  decision  to  the  Employer  and  the  Contractor. Such decision shall state that it is made  pursuant to this Clause.

Unless the Contract has already been repudiated or  terminated,  the  Contractor  shall,  in  every  case,  continue  to  proceed  with  the  Works  with  all  due  diligence and the Contractor and the Employer shall  give  effect  forthwith  to  every  such  decision  of  the  Engineer unless and until the same shall be revised,  as hereinafter provided, in an amicable settlement or  an arbitral award.

If either the Employer or the Contractor be dissatisfied  with any decision of the Engineer, or if the Engineer  fails  to  give notice  of  his  decision on or  before the  eighty-fourth day after the day on which he received  the  reference,  then  either  the  Employer  or  the  Contractor may, on or before the seventieth day after  the day on which he received notice of such decision,  or on or before the seventieth day after the day on  which the said period of 84 days expired, as the case  may be, give notice to the other party, with a copy for  information  to  the  Engineer,  of  his  intention  to  commence arbitration, as hereinafter provided, as    to the matter in dispute.  Such notice shall establish the  entitlement of the party giving the same to commence  arbitration,  as  hereinafter  provided ,  as to  such  dispute  and,  subject  to  Sub-Clause  67.4,  no  arbitration  in  respect  thereof  may  be  commenced  unless such notice is given.

If the Engineer has given notice of his decision as to a  matter in dispute to the Employer and the Contractor  and no notice of intention to commence arbitration as  to  such  dispute  has  been  given  by  either  the  Employer  or  the  Contractor  on  or  before  the  seventieth  day  after  the  day  on  which  the  parties  received  notice  as  to  such  decision  from  the  Engineer,  the  said  decision  shall  become final  and  binding upon the Employer and the Contractor.

67.2………..

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67.3…………..

67.4 Where neither the Employer nor the Contractor  has given notice of intention to commence arbitration  of  a dispute within the period stated in Sub-Clause  67.1 and the related decision has become final and  binding,  either  party  may,  if  the  other  party  fails  to  comply with such decision,  and without  prejudice to  any  other  rights  it  may  have,  refer  the  failure  to  arbitration in accordance with Sub-Clause 67.3. The  provisions  of  Sub-Clauses  67.1  and  67.2  shall  not  apply to any such reference.”       

18.          Mr. V.A. Mohta, learned senior counsel for the  

contractor  submitted  that  the  High  Court  was  not  

justified  in  holding  that  no  reasons  have  been  

assigned by the Arbitral Tribunal in support of their  

award in respect of claim nos. 1 and 4B. He referred  

to : definitions of ‘Employer’ and ‘Engineer’; clause  

7.1 ; communication dated April 23, 1998 from the  

Project  Director  to  the  Chief  Engineer,  PWD,  

National  Highways  (which  according  to  him  is  a  

decision by the Engineer  as regards claim no.  1)  

and the communication dated May 11,  1998 from  

the Chief Engineer to the Director General (Road),  

Ministry  of  Surface  (Transport),  New  Delhi  and  

submitted  that  delay  in  completion  of  work  is  

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admitted by the Employer to be not attributable to  

the  contractor  and,  therefore  no  further  reasons  

were required to be given by arbitral tribunal while  

passing an award for claim no. 1. Mr. V.A. Mohta  

also submitted that High Court erred in setting aside  

the award in respect of claim no. 4B even though  

valid reasons have been given in support of the said  

claim  by  the  arbitral  tribunal  and  the  same  are  

clearly  discernible  from  the  award  itself.  In  the  

alternative, learned senior counsel submitted that if  

at all the High Court felt that there are no reasons in  

support of the award, it ought to have remitted the  

matter to the arbitral tribunal to give further reasons.  

In this regard, he relied upon Section 34(4) of the  

Act, 1996.

19. On the other hand, Mr. T.L.V. Iyer, learned senior  

counsel  for  the  respondent  supported  the  view  of  the  High  

Court  insofar  as  claim  nos.  1  and  4B  are  concerned.  He,  

however, assailed the High Court’s view with regard to claim  

nos. 5 and 6 and submitted that the award in respect of these  

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two claims are not supported by reasons and award is legally  

flawed to that extent.

20. It  is true that communication dated April  23, 1998  

sent  by the Project  Director  to the Chief  Engineer,   National  

Highways  does  deal  with  claim  no.  1  submitted  by  the  

Contractor on February 22, 1998 and he recommended overall  

equipment  ownership  charges  and  site  over–heads   for  12  

months  and  further  recommended  the  claim  for  

Rs.13,01,42,462/-.  It  is  also  seen  that  the  Chief  Engineer  

(employer) vide his communication dated May 11, 1998 to the  

Director  General  (Road),  Ministry  of  Surface  (Transport)  

referred to the aforesaid communication of the Project Director  

as  a  ‘decision’  under  clause  67.1  by  the  Engineer  and  

requested  the  Ministry  of  Surface  (Transport)  to  settle  the  

contractor’s claim.  Concededly, the aforesaid two documents  

are referred to by the arbitral tribunal in the award and arbitral  

tribunal  has also noticed  the arguments advanced on behalf of  

the parties in support of their respective stand but reasons are  

not at all  discernible  in support of its finding that the period of  

completion was extended by the respondent for 18 ½ months  

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due  to  reasons  not  attributable  to  the  contractor.   Having  

perused the  award carefully,  we have not been able to find  

reasons in support of claim no. 1. The position is no better in  

respect  of  award for claim no. 4B.  As a matter of   fact,  no  

reason   whatsoever  has   been  assigned  for  awarding  that  

claim.

21. Section 31(3) mandates that the arbitral award shall  

state  the  reasons  upon  which  it  is  based,  unless  –  (a)  the  

parties have agreed that no reasons are to be given or (b) the  

award is an arbitral award under Section 30. That the present  

case is not covered by clauses (a) and (b) is not in dispute. In  

the circumstances, it was obligatory for the arbitral tribunal to  

state reasons in support of its award in respect of  claim nos. 1  

and  4B.  By  legislative  mandate,  it  is  now  essential  for  the  

arbitral  tribunal  to give reasons in support  of the award. It  is  

pertinent to notice here that Act, 1996 is based on UNCITRAL  

Model Law which has a provision of stating the reasons upon  

which  the  award  is  based.  In  Union  of  India v.  Mohan  Lal  

Capoor1,  this  Court  said,  ‘reasons are the  links  between the  

1 (1973) 2 SCC 836

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materials  on  which  certain  conclusions  are  based  and  the  

actual conclusions’.

22. In  Woolcombers  of  India  Ltd.  v. Woolcombers  

Workers Union and Another2, this Court stated :

“…The giving of reasons in support of their conclusions by  judicial and quasi-judicial authorities when exercising initial  jurisdiction  is  essential  for  various  reasons.  First,  it  is  calculated to prevent unconscious unfairness or arbitrariness  in reaching the conclusions. The very search for reasons will  put the authority on the alert and minimise the chances of  unconscious infiltration of personal bias or unfairness in the  conclusion. The authority will adduce reasons which will be  regarded as fair and legitimate by a reasonable man and will  discard irrelevant or extraneous considerations….”

23. In  S.N.  Mukherjee  v.  Union  of  India3,  the  

Constitution Bench held that recording of reasons  :

(i) guarantee consideration by the authority; (ii) introduce clarity  

in the decisions; and (iii) minimise chances of arbitrariness in  

decision making.

24. Learned senior counsel for the contractor referred to  

a  decision  of  Delhi  High Court  in  the  case of  Delhi  Electric   

Supply Undertaking v.  Victor Cable Industries Limited & Anr.4  

and submitted that where the arbitrator has referred to facts of  2 AIR 1973 SC 2758 3 (1990) 4 SCC 594 4 2006 (1) Arb. LR-297 (Delhi)

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the  case  and  has  noticed  some reasoning  which  in  view of  

Arbitrator  was  sufficient  to  arrive  at  conclusion  for  granting  

relief,  award  cannot  be  stated  to  be  unreasoned.  He  also  

referred to yet another decision of Delhi High Court in the case  

of  M/s.  Kumar  Construction  Company v.  Delhi  Development  

Authority& Anr5 wherein it has been observed that the Arbitrator  

is  not  expected  to  write  elaborate  judgment  and  where  

Arbitrator has noticed contentions of the counsel, it cannot be  

said that Arbitrator failed in stating reasons for the award.

25. The requirement of reasons in support of the award  

under Section 31(3) is not an empty formality.  It guarantees fair  

and  legitimate consideration  of the controversy  by the arbitral  

tribunal.  It is true that arbitral tribunal is not expected to write  

judgment like a court nor it is expected to give elaborate and  

detailed reasons in support of its finding/s but mere noticing the  

submissions  of  the  parties  or  reference  to  documents  is  no  

substitute for reasons which the arbitral  tribunal is obliged to  

give.   Howsoever  brief  these  may  be,  reasons  must  be  

indicated in  the award as that  would reflect  thought  process  

leading to a particular conclusion. To satisfy the requirement of  5 64 (1966) DLT 553

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Section  31(3),  the  reasons  must  be  stated  by  the  arbitral  

tribunal upon which the award is based; want of reasons would  

make such award legally flawed. In what we have discussed  

above,  it  cannot  be  said  that  High  Court  was  wrong  in  

observing that no reasons have been assigned by the arbitral  

tribunal as to whether the period of completion extended by the  

employer for 18 ½ months was due to reasons not attributable  

to the claimant. However, in our view, the High Court ought to  

have given the arbitral tribunal an opportunity to give reasons.  

This course is available under Section 34(4) of the Act which  

reads thus :  

“1……….  2……….  3………..  4.  On receipt  of  an application  under  sub-section(1),  the  Court may, where it is appropriate and it is so requested by a  party,  adjourn  the  proceedings  for  a  period  of  time  determined  by  it  in  order  to  give  the  arbitral  tribunal  an  opportunity  to  resume  the  arbitral  proceedings  or  to  take  such other  action as in  the opinion of  arbitral  tribunal  will  eliminate the grounds for setting aside the arbitral award.”

 26. We are informed by the learned senior counsel for  

the  claimant  that  all  the  three  persons  constituting  arbitral  

tribunal  are  available  and  if  award  is  remitted  to  them  for  

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recording reasons, there should not be any impediment in their  

doing so. This course appears to us to be fair and reasonable.  

27. The award under claim no. 5 is inter-related to claim  

no. 1. Objections to Claim no. 6 may also be re-examined by  

the Additional District Judge now since petition under Section  

34 is being restored to the file of that court.

28. We, accordingly,  dispose of these two appeals by  

the following order:  

(i) The judgment of the High Court dated June 3,  

2005 and the  judgment  dated  February  23,  2005  

passed  by  the  2nd Additional  District  Judge,  

Ernakulam are  set aside.

(ii) The petition (O.P. Arb. 71/2004) by the State  

of  Kerala  against  the  award dated  December  20,  

2003  is  restored  to  the  file  of  the  2nd Additional  

District  Judge,  Ernakulam  for  fresh  hearing  and  

consideration of the objections in respect of claim  

nos. 1, 4B, 5 and 6.

(iii) However,  the  2nd Additional  District  Judge,  

Ernakulam shall first remit the award to the Arbitral  

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Tribunal for stating their reasons in support of claim  

nos. 1 and 4B and after receipt of  the reasons from  

the arbitral tribunal  proceed with  the hearing   and  

disposal of objections .

(iv) Parties shall bear their own costs.

……………………J (Tarun Chatterjee)

…….……………..J         (R. M. Lodha)

New Delhi September 17, 2009

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