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PETITIONER: TARAPORE & COMPANY

       Vs.

RESPONDENT: COCHIN SHIPYARD LTD. COCHIN & ANR.

DATE OF JUDGMENT06/03/1984

BENCH: DESAI, D.A. BENCH: DESAI, D.A. REDDY, O. CHINNAPPA (J)

CITATION:  1984 AIR 1072            1984 SCR  (3) 118  1984 SCC  (2) 680        1984 SCALE  (1)411  CITATOR INFO :  RF         1988 SC 325  (5)  R          1988 SC1166  (10)  RF         1989 SC 268  (23)

ACT:      Arbitration Act 1940 (Act X of 1940 ) section 16(1)(c), 30 and 33.      Arbitration- Works  Contract-Construction  of  Building Dock and  Repair Dock-Reference  of specific question of law to arbitrator-Arbitrator  framing issue-Parties  agreeing to issue being decided-Award if could be set aside on ground of error of law on face of award.      Interpretation:      Agreement-Works  contract   of  large   magnitude-over- Simplification of clauses impermissible-Agreement Predicated upon and  agreed fact  situation-Situation ceasing to exist- Agreement to that extent rendered irrelevant and otiose.      Words & Phrases:      ‘Without prejudice’-Meaning  of-‘claim arising  out  of contract’-‘Relating to  the contract’-Meaning  of-Clause  40 General Conditions of Contract.

HEADNOTE:      The  appellant  and  the  respondents  entered  into  a contract for the construction of Building Dock. Clause 40 of the General  Conditions of Contract entered into between the parties, provided  that "all questions and disputes relating to the meaning of the Specifications Estimates Instructions, Designs, Drawing  and the  quality  of  the  workmanship  or materials used  in the  work or  as  to  another  questions, claim, right,  matter or thing whatsoever in any way arising out of  or relating  to the contract or otherwise concerning the execution  whether arising  during the  progress of  the work or  after completion  shall be  referred  to  the  Sole Arbitrator etc,"  During the  implementation  of  the  works contract. disputes arose between the parties in respect of a claim for  compensation on  account of  the increase  in the cost of  imported pile-driving equipment and technical know- how fees. Correspondence was exchanged between the Appellant and Respondent  No. 1  and the  dispute was  referred to the Sole Arbitrator.  The point  referred were:  (1) Whether the claim of  compensation for  increase in the cost of imported

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pile driving  equipment and  technical know-how  fees  would fall within  the purview  of the  first para of clause 40 of the General  Conditions of Contract; and (2) if it does, the quantum of  compensation, if  any, to  which  the  appellant would be  entitled  to.  The  arbitrator  entered  upon  the reference and after hearing the parties gave his award. The 119 arbitrator  held   that  the   appellant  was   entitled  to compensation for  the increase  in the cost of imported pile drawing equipment  and technical  know-how fees  by a sum of Rs. 99  lakhs which  amount shall be payable with interest @ 9.1/2% The  award was  typed on  stamp paper of the value of Rs.150/- The  arbitrator forwarded  the award  to  both  the parties.      The appellant moved a petition under sections 14 and 17 of the  Arbitration Act,  in the  Court of  the  Subordinate Judge for  filing the  award and for making it a rule of the Court, while  the respondent moved a petition under sections 30 and  33 for  setting aside the award contending that: (1) the award was insufficiently stamped, and (2) the arbitrator had exceeded  his jurisdiction  by misconstruing  clause 40. The Subordinate Judge negatived both the contentions. It was held that  the  respondent  having  submitted  the  question whether the  dispute raised  by the appellant was covered by the   arbitration   clause;   could   not   controvert   the jurisdiction of  the Arbitrator  to decide  the dispute; and the award  of the  arbitrator was  modified in the matter of interest from 9.1/2 per cent as awarded by the arbitrator to 6 per cent, and the award was made a rule of the Court.      The respondent  preferred an  appeal to the High Court, and a  Division Bench,  agreed with the Subordinate Judge on the question of insufficiency of stamp. It however held that the question whether the dispute was arbitrable or not could not be  finally decided  by the  arbitrator because it was a matter relating to his jurisdiction, and that the arbitrator cannot by an erroneous interpretation or construction of the clause confer jurisdiction on himself and that the court can go into  the question  whether the matter in dispute between the parties  was  covered  by  the  arbitration  clause.  It finally held  that even  though the  arbitration clause  was very wide,  the dispute  as to  compensation for increase in the cost  of imported  pile driving  equipment and technical know-how fees could not be covered by the arbitration clause because under clause 26 every plant, machinery and equipment had to  be provided  by  the  contractor  and  any  rise  or escalation in  the price  of such  equipment  or  machinery, cannot  be   the  subject  matter  of  compensation  by  the respondent. The  appeal was therefore allowed, and the trial court’s order,  making the award a rule of the court was set aside and  directed  that  the  award  be  returned  to  the parties.      In the  appeal to this Court it was contended on behalf of  the   appellant,  that   though  Sec.  16(1)(e)  of  the Arbitration Act  may permit  the court to remit or set aside the award  on the  ground that  there is  an  error  of  law apparent on the face of it, yet where a specific question of law has  been referred  to the  arbitrator for decision, the fact that  the decision is erroneous does not make the award bad on  its face  so as  to permit its being set aside. As a specific question  of law  touching upon the jurisdiction of the arbitrator  was speficially  referred to  the arbitrator for his  decision, the decision of the arbitrator is binding on the  parties and  the court  cannot  proceed  to  inquire whether upon  a true construction of the arbitration clause, the dispute referred to the arbitrator for arbitration would

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be covered  by the  arbitration clause  so as  to clothe the arbitrator with  the  jurisdiction  to  arbitrate  upon  the dispute.      On behalf  of the respondent, it was contended that the jurisdiction  of  the  arbitrator  cannot  be  left  to  the decision of the arbitrator so as to be binding on 120 the parties and it is always for the court to decide whether the arbitrator  had jurisdiction  to decide the dispute, and that the  arbitrator cannot  by  a  misconstruction  of  the arbitration agreement  clothe himself  with or  confer  upon himself the jurisdiction to decide the dispute.      Allowing the Appeal; ^      HELD: 1.  A  specific  question  of  law  touching  the jurisdiction of  the arbitrator was specifically referred to the arbitrator  and therefore  the arbitrator’s  decision is binding on  the parties and the award cannot be set aside on the sole  ground that  there was an error of law apparent on the face of the award. It is also established that the claim for compensation  made by  the contractor  which led  to the dispute was  covered by  the arbitration clause. The quantum of compensation awarded by the arbitrator was never disputed nor questioned. [170E-F]      2. A question of law may figure before an arbitrator in two ways. It may arise as an incidental point while deciding the main  dispute referred  to the  arbitrator or in a given case parties  may refer  a specific  question of  law to the arbitrator for his decision. [137G-H]      Russel: Law  of  Arbitration  Twentieth  Edition  p.22; Halsbury’s Laws  of England  Vol. 2  Para  623  4th  Edition referred to.      3. Arbitration  has been  considered a civilised way of resolving disputes  avoiding court  proceedings. There is no reason why  the parties should be precluded from referring a specific question  of law  to an arbitrator for his decision and agree  to be  bound by the same. This approach manifests faith of  parties in  the capacity  of the tribunal of their choice to decide even a pure question of law. If they do so, with eyes  wide open,  and there  is nothing to preclude the parties from doing so, then there is no reason why the court should try to impose its view of law superseding the view of the Tribunal  whose decision the parties agreed to abide by. On  Principle  it  appears  distinctly  clear  that  when  a specific question  of law  is referred  to an arbitrator for his  decision   including  the   one   touching   upon   the jurisdiction  of   the  arbitrator,   the  decision  of  the arbitrator would be binding on both the parties and it would not be  open to  any of the two parties to wriggle out of it by contending that the arbitrator cannot clutch at or confer jurisdiction upon  himself by mis-construing the arbitration agreement.[138-E-G]      4. If a question of law is specifically referred and it becomes evident  that the parties desired to have a decision on the specific question from the arbitrator rather than one from the  court, then  the court will not interfere with the award of the arbitrator on the ground that there is an error or law apparent on the face of the award even if the view of law taken by the arbitrator does not accord with the view of the court. [147F]      Kelantan Government  v. Duff  Development Co. Ltd. 1923 All E.R.  349: Re  King and  Duveen, [1913]  2 K.B. 32: F.R. Absalom  Ltd.  v.  Great  Western  (London)  Garden  Village Society Ltd., [1933] All E.R. 616; Durga Prasad Chamria 121

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and Anr.  v. Sewkishen  das Bhattar  and Ors: AIR 1949 Privy Council 334;  Seth Thawardas Pherumal v. The Union of India; [1955] 2  S.C.R. 48;  M/s. Alopi  Parshad & Sons Ltd. v. The Union of  India, [1960]  2 S.C.R.  783; Champsey  Bhara  and Company v. Jivraj Balloo Spinning and Weaving Company Ltd .: Law Report  50 I.B. 324; Union of India v. A.L. Rallia Ram., [1964] 3  S.C.R. 164;  M/s.Kapoor Nilokheri.,  Co-op.  Dairy Farm Society  Ltd. v.  Union of  India and Others., AIR 1973 S.C.  1338;   N.  Chellappan   v.  Secretary,  Kerala  State Electricity Board  & Anr.,  [1975]  2  S.C.R.  811;  Produce Brokers Co. Ltd. v. Olympia Oil and Cake Co. Ltd., [1914-15] All E.R.  133; Attorney  General For  Manitoba v.  Kelly and Others., (1922)  H.E.R.  68;  Hirji  Muulji  v.  Cheong  Yue Steamship Co.  Ltd., [1926]  All E.R.  51; Heyman  & Anr. v. Darwins Ltd.,  [1942] 1  All E.R.  337; Jivarajbhai  Ujamshi Sheth &  Ors. v. Chiniamanrao Balaji & Anr., [1954] 5 S.C.R. 480; Dr.  S.B. Dutt  v. University  of Delhi., [1958] S.C.R. 1236; referred to.      5.  The   expression  ’without   prejudice’  carries  a technical meaning  depending upon the context in which it is used. An  action taken  without  prejudice  to  one’s  right cannot necessarily  mean  that  the  entire  action  can  be ignored by the party taking the same. [148F-G]      In the  instant case,  in  the  context  in  which  the expression ’without  prejudice’ is  used, it would only mean that the respondent reserved the right to contend before the arbitrator  that   the  dispute   is  not   covered  by  the arbitration clause.  It does  not appear  that  what  was  a contention  that   no  specific  question  was  specifically referred to  the arbitrator,  On a  proper  reading  of  the correspondence,  and  in  the  setting  in  which  the  term ’without  prejudice’   is  used,  it  only  means  that  the respondent reserved  to itself  the right  to contend before the arbitrator  that a  dispute raised  or the claim made by the contractor was not covered by the arbitration clause. No other meaning can be assigned to it. [148D-E]      6. In  works contract of such magnitude, and which have been undertaken  by an  Indian contractor for the first time negotiations prior  to the  finalisation of  the contact and the correspondence  leading to  the  formation  of  contract supply the  basis on  which the contract was finally entered into. Undoubtedly,  if in  the final written contract, there is something  contrary to the basic understanding during the formative stage  of the contract, the written contract would prevail. But  if the  contract  does  not  indicate  to  the contary and the assumptions appeared to be the foundation of the  contract,   that  aspect  cannot  be  overlooked  while determining what  were the obligations undertaken the formal contract. [151H-152B]      7. Over-simplification  of the  clauses of the contract involving works  of large  magnitude is  impermissible.  The whole gamut  of discussions, negotiations and correspondence must be taken into consideration to arrive at a true meaning of what was agreed to between the parties. [156F]      In the  instant case,  there is  no room for doubt that the parties  agreed that  the investment  of the  contractor under this head would be Rs. 2 crores and the tendered rates were   predicated    upon    and    co-related    to    this understanding.[156G] 122      8. When  an agreement is predicated upon an agreed fact situation, if  the latter  ceases to  exist the agreement to that extent becomes irrelevant of otiose. [156G]      9. Phrases  such as  ’claim arising out of contract’ or ’relating to  the contract’  or ’concerning the contract’ on

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proper construction would mean that if while entertaining or rejecting the  claim or the dispute in relation to claim may be entertained  or rejected after reference to the contract, it is  a claim  arising out  of contract.  The  language  of clause 40  shows that  any claim arising out of the contract in relation  to estimates  made in  the  contract  would  be covered by  the arbitration  clause. If it becomes necessary to have  recourse to  the contract to settle the dispute one way or  the other then certainly it can be said that it is a dispute arising out of the contract. [157F-G]      In the  instant case,  the  arbitration  clause  is  so widely worded  as disputes arising out of the contract or in relation to  the contract  or execution of the works that it would  comprehend,   within  its   compass   a   claim   for compensation related  to estimates  and arising  out of  the contract. [157H]      10. (i)  A dispute, the determination of which turns on the true construction of the contract, would also seem to be a dispute  under arising  out of or concerning the contract. The test  is that  if in  settling a dispute, a reference to the contract  is necessary,  such a dispute would be covered by the arbitration clause.[158D-E]      A.M. Mair & Co. v. Gordhandas Sagarmull., [1950] S.C.R. 792; Ruby General Insurance Co. Ltd. v. Pearey Lal Kumar And Another; [1952] S.C.R. 501; referred to.      ii. Where the parties are at one in asserting that they entered into a binding contract, but a difference has arisen between them  whether there has been a breach by one side or the other,  or whether  circumstances have arisen which have discharged one  or both  parties from  further  performance, such differences  should be  regarded as  differences  which have arisen  ’in respect  of’ or ’with regard to’ of ’under’ the contract, and an arbitration clause which uses these, or similar expressions  should be contoured accordingly. [159B- C]      Union of India v. Salween Timber Construction (India) & Ors., [1969]  2 S.C.R.  224; Heyman  & Anr. v. Darwins Ltd., [1942] A.C. 356 at 366; Astro Vencedor Compania Naviora S.A. of Panama v. Mabanaft G.M.B.H. The Diamianos., [1971] 2 Q.B. 588; Gunter Henck v. Andre & CIE. S.A., [1970] 1 Lloyd’s Law Reports 235; referred to      In the  instant case,  from the  pleadings, it  clearly transpires  that  both  the  parties  had  recourse  to  the contract. It  is satisfactorily  established that  the claim made by  the contractor  would be covered by the arbitration clause. [160B] 123

JUDGMENT:      CIVIL APPELLATE  JURISDICTION: Civil Appeal No. 3023 of 1980.      Appeal by  Special leave  from the  Judgment and  Order dated the  21st August,  1980 of  the Kerala  High Court  in M.F.A. No. 409 of 1979.      F.S.Nariman,   A.N.Haksar,    T.Raghvan,   R.F.Nariman, V.A.Bobde & K.R.Nambiar, for the Appellant.      G.B.Pai,  P.K.Kumar,   A.K.Sharma,  Ashok   Mathur  and Parveen Kumar for the Respondent.      The Judgment of the Court was delivered by      DESAI, J.  In this  appeal  by  special  leave  a  very interesting question  in the  field of  law  of  arbitration which honest  man dread  more than  the dreaded  law  suits’ arises for our consideration.

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    First respondent  Cochin Shipyard Limited (’respondent’ for short) invited tenders for construction of Building Dock at Cochin.  As there  was only one tender that of Tarapore & Company, the  appellant, the respondent called fresh tenders somewhere in  July, 1971.  In December, 1971, the respondent invited tenders  for construction  of a  Repair Dock also at Cochin. There  were two  tenders for  Building Dock, namely, one of  the appellant  and  one  by  M/s  National  Building Construction Corporation, a Government of India undertaking, the value  of the  tender of the latter being double that of the appellant.  For the construction of the Repair Dock, the only tender  was of  the appellant.  In view  of the limited number of  tenders received,  the appellant  was invited  to negotiate the  terms of tender. The value of the works to be executed was  over Rs.  24  crores.  In  view  of  the  huge investment in  the project,  the tenders  were examined by a committee  called   the  Tender   Committee  constituted  in accordance with the approval of the Ministry of Shipping and Transport for  examining and evaluating the tenders received for the  Building Dock  and  the  Repair  Dock.  The  Tender Committee taking note of the poor response to the invitation to tender  and costly affair decided to accept the tender of the appellant  inter alia  for the reasons (i) that works of such complexity  and  magnitude  have  not  been  undertaken before by  any Indian  contractor, (ii)  that the  plant and equipment  required   for  the   work  are   not   available indigenously, (iii) that if the contractor is to procure the 124 specialised equipment  required  for  this  work,  there  is hardly any  assurance that  after these  works are  over, he would find  any substantial  use for  the  same,  (iv)  that excavation and  subsequent construction  involve de-watering which introduces considerable amount of uncertainty and that during the  discussions, the  apprehension of the tenders of this kind  was voiced and noticed by the Committee, (v) that RCC  Piling   also  requires   highly  skilled  and  complex technical operations and it involves a large element of risk and uncertainty  in  the  work.  Both  the  tenders  of  the appellant were  accepted, and  contracts were  entered  into between the  parties. Both  the parties  while entering into contracts  were   aware  and  conscious  of  the  fact  that equipment and  technical know-how  would have to be imported involving a  huge  outlay  of  foreign  exchange.  Appellant contractor quoted  rates on two alternative basis depending- upon whether  it had to import equipment and know-how at its cost involving  Rs. 2  crores in  foreign  exchange  or  the equipment and know how were to be imported by the respondent at its  cost and  made available for use of the appellant in which case the appellant would be liable to pay hire charges for the pile driving plant at the rate of Rs. 23/- per metre of 600  mm dia. RCC cast-in-situ pipe and Rs. 16/- per metre of 500  mm dia. RCC cast-in-situ pipe and at the rate of 300 per tonne  of steel  sheet piles driven to be recovered from the running  bills payable  to the appellant contractor. The appellant  was   given  to  understand  by  a  note  in  the invitation to  tender that foreign exchange in yen credit to the tune  of Rs.  38 lacs  is earmarked  for the purchase of construction equipment,  accessories  etc.  from  Japan  for works of Building Dock, Repair Dock, the three Quays etc. On January 24,1973,  work order  for Building  Dock and  Repair Dock was issued by the respondent in favour of appellant and in this  work order  as recommended by the Tender Committee, the respondent  adopted the  alternative B as set out in the tender, namely,  that the  contractor  was  to  procure  the equipment and  know-how at  a cost  of about Rs. 2 crores in

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foreign exchange.  In order  to make  this aspect  specific, additional condition  No. 31  was incorporated  in the works order in order to provide for the expense to be incurred and the  amount   of  foreign   exchange  needed  for  importing equipment and  technical know-how, relevant portion of which reads as under:           "Requisite foreign  exchange, for importing piling      plant and  machinery, spares,  technical  know-how  and      hiring of  experts necessary  for both  the Dock  Works      vide  Work  Order  No.  13019/1/71-W-II  dated  January      24,1973 for Building 125      Dock etc.  and Work  Order No.  13012/15/71-W-II  dated      January 24,  1973 for  Repair Dock  etc,  amounting  to      about Rs.  2.00 crores in all will be made available to      the contractor  from the 11th Yen Credit subject to his      getting indigenous  clearance  and  providing  detailed      justification. The details of such procurement shall be      furnished  by  the  Contractor  as  soon  as  they  are      finalised."      In view  of the huge investment, it was agreed that the respondent would make an advance payment of 75% of the value of old  machinery and  90% of  the value  of  new  machinery brought to  site by  the Contractor  and in  order to secure this advance payment, equipment would be hypothecated by the Contractor to the respondent and the advance payment were to carry interest  at 9.1/2% p.a. on the outstanding balance of advance. The mode of recovery was also specified. The formal contract was  signed on  January 29,1973  which included  an arbitration clause to which we would turn a little later.      It so happened that the required pile driving equipment including the  technical know-how  against 11th Japanese Yen credit were not available. The respondent also made inquires in   this    behalf   but   without   success.   Ultimately, International Foundation  Group, Holland  agreed to  provide the rate  of equipment  conforming more  or less to the same specification for  which clearance  was sought  and received from the Government of India. After the respondent certified that the  equipment and  know-how offered  by  International Foundation Group.  Holland conform  to the earlier clearance and  that   the  same    equipment  being  not  indigenously available  or   against  11th   Japanese  Yen   Credit,  the respondent  requested   the  Government  of  India  to  give necessary  clearance   to  the   appellant  to   import  the equipment. This  approval was  received on September 1, 1973 and the  foreign exchange  to the extent of Rs. 211.80 lakhs equal to  9,442.700. Dutch Florins was released in favour of the appellant. The entire imported equipment was received in four  consignments   between  March/July  1974.  During  the intervening period,  there were  variations in  the rate  of exchange  and   therefore  the   foreign  exchange  cost  of equipment alone  in terms of rupees worked out at Rs. 177.50 lakhs and  of the  technical know-how  fees  payable  in  11 instalments worked  out at  Rs. 105  lakhs. The  custom duty went up  by Rs. 21 lakhs as a consequence of the increase in rupee value  of the  imported equipment  in terms  of  Dutch Florin. 126      The appellant  made a  tentative claim in the amount of Rs. 61.27  lakhs from  the respondent on account of increase in cost  of pile  driving equipment  and technical  know-how fees on  the ground  that the  contractor was entitled to be compensated by  the respondent  for the  same. In the letter dated  May  28,1975,  the  appellant  has  stated  that  the ’tendered rates were based on certain total cost of machines

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which has  since gone up considerably rendering the rates no longer workable.  The appellant  had provided  for a cost of 150 lakhs  of rupees  for the  equipment and the life of the equipment was  taken as 12,000 hours and its probable period of engagement  on this job was taken as 8,000 hours. On this basis two-thirds  of the  cost  of  the  equipment  will  be written off by way of depreciation on this job.’ It was also stated that  there is  an  increase  in  the  fees  for  the technical know-how.  The letter concluded by saying that the loss sustained  by the appellant upto May 15,1975 on account of variation  in  the  rate  of  foreign  exchange  was  Rs. 61,27,317 and  requested the  respondent to  compensate  the loss atleast  upto  the  tune  of  Rs.  45  lakhs  which  is approximately 75%  of the loss suffered by the contractor in this behalf.  The respondent responded to this letter as per its letter  dated July  2,1975 saying  that the letter dated July 14,1972  of the  appellant  which  forms  part  of  the contract documents  clearly recites  that the  total foreign exchange required  by  the  contractor  for  the  equipment, spares,  technical  know-how  and  hiring  of  experts,  was expected to  be about  Rs. 2 crores and that the expenditure incurred by  the contractor  in this  behalf so far has been less than Rs. 2 crores and in the circumstances it was found difficult to  accept the  position that the tender was based on the  assumptions indicated  in the letter under reply and that the rates for the pile driving should for the future be revised. There  ensued further  correspondence  between  the parties. Ultimately, the appellant by its letter dated March 1,1976  informed   the  respondent   that  its   claim   for compensation for  increase in  the  cost  of  imported  pile driving equipment  and technical  know-how fees has not been entertained for  over a  year. It  was further  stated  that inasmuch as the dispute has thus arisen between us regarding the  above   claim,  we  are  invoking  the  provisions  for arbitration in  our contracts  and referring this dispute to arbitration.’  On   March  17,1976  Chief  Engineer  of  the respondent replied  saying that the matter as set out in the letter dated  March 1,  1976, invoking arbitration clause is receiving their  immediate attention  and the appellant will hear  shortly   in  this   behalf.  On  March  29,1976,  the respondent wrote  to the  appellant denying  the  claim  for compensation of the appellant. Simultaneously the respondent framed three points 127 covering the dispute so raised for reference to and decision by the  arbitrator. The  letter also sets out as required by Clause 40  a panel  of three  names from which anyone can be chosen  by   the  appellant  as  the  sole  arbitrator.  The appellant by  its letter  dated April 19,1976 while refuting the contention  of the respondent that the dispute would not be covered  by Clause  40 i.e.  arbitration  clause  in  the contract, stated  that the  proper course  would be to refer the dispute  that has  arisen between  the  parties  to  the decision of  the arbitrator  and not any particular issue or issues. Ultimately from amongst the three names indicated by the respondent the appellant selected Shri C. Srinivasa Rao, Chief Bridge  Engineer, Southern  Railway, Madras  to be the Sole Arbitrator  to decide  the dispute.  On receipt of this letter the  respondent  referred  the  dispute  to  Shri  C. Srinivasa  Rao  as  Sole  Arbitrator.  While  referring  the dispute to  the sole  arbitration of  Shri C. Srinivasa Rao, the respondent  retained the  three points  of reference set out in  the letter  dated March  29,1976 but added one more. The Arbitrator entered upon the reference on June 2,1976. On being called upon by the Arbitrator, the appellant filed its

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statement of  claim on  June 19,1976.  The appellant claimed Rs. 2,03,47,266  as per  the Schedule  to the  Statement  of Claim on  account of  increase in  the cost of equipment and technical know-how  fees. The  respondent filed its reply to the Statement of Claim on July 19,1976.      The points/disputes referred by the parties to the sole arbitrator read as under:           "1. Does  the claim  of Messrs.  Tarapore & Co. on      Cochin Shipyard  Ltd., for compensation for increase in      the  cost   of  imported  pile  driving  equipment  and      technical know-how  fees referred to in clauses (2) and      (3) hereunder  fall within  the purview  of  the  first      paragraph of  Clause 40  of the  General Conditions  of      Contract entered into between the two parties?           2.  If   the  answer   to  (1)  above  is  in  the      affirmative, in terms of the provisions of the contract      are Messrs. Tarapore & Co. entitled to compensation for      increase in the cost of imported pile driving equipment      and technical  know-how fees  to be  paid  to  them  by      Cochin Shipyard Ltd.? If so, what is the amount ? 128           3. The  dispute that  has arisen  between  Messrs.      Tarapore &  Co., and Cochin Shipyard Ltd. regarding the      claim of  M/s. Tarapore  & Co.,  for  compensation  for      increase in  the cost  of  the  imported  pile  driving      equipment and the technical know-how fees.           4. "Costs"      Parties appeared  before the  Arbitrator through  their respective counsel.  The Arbitrator  gave its  Award on July 6,1977. On Point No. 1, the Arbitrator held as under:           "The claim  of Messrs.  Tarapore  and  Company  on      Cochin Shipyard  Limited for  compensation for increase      in the  cost of  imported pile  driving  equipment  and      technical know-how fees falls within the purview of the      first paragraph  of Clause 40 of the General Conditions      of Contract entered into between the parties."      On Point  No. 2, the Arbitrator held that the appellant Messrs. Tarapore and Company are entitled to compensation by the Cochin  Shipyard Limited for the increase in the cost of imported pile  driving equipment  and the technical know-how fees by  a sum  of Rs.  99 lakhs  only which amount shall be payable with  interest at  9.1/2% per  annum from  this date till date  of payment  or decree,  whichever is earlier’. On Point No.  3, the  decision recorded was ’that it is covered by the  decision on  Points (1) and (2)’. On Point No. 4, on the question  of costs, the Arbitrator having determined his fees and  incidental expenses  directed both  the parties to bear the  same equally. The Award was typed on a stamp paper of the value of Rs. 150/- at Madras. By his letter dated Nil July, 1977,  the Sole Arbitrator forwarded the award to both the parties.      The appellant moved a petition under Secs. 14 and 17 of the Arbitration  Act in  the Court of the Subordinate Judge, Ernakulam for  filing the  award and for making it a rule of the court. On October 7,1977 the respondent moved O.P. 81 of 1977 being  a combined petition under Secs. 30 and 33 of the Arbitration Act  before  the  Subordinate  Judge,  Ernakulam praying for setting aside the  award. The prayer for setting aside the  award was  founded on  two grounds;  (1) that the award is  insufficiently stamped and (2) that the Arbitrator has exceeded his jurisdiction by misconstruing Clause 40 129 of the  General Conditions  of Contract  (Arbitration clause for short).      The learned  Subordinate Judge  noted the fact that the

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award was originally engrossed on a stamp paper of Rs. 150/- but before  filing the  award in the court on August 4,1977, the Arbitrator  on August 1,1977 affixed additional stamp of Rs. 14,722.50  p. which  would be  the requisite stamp under Art. 12  read with  Art. 14  of the  Kerala Stamp  Act.  The learned  Subordinate   Judge   accordingly   negatived   the contention  of   the   respondent   that   the   award   was insufficiently stamped.  On the  second point,  the  learned Judge held that the respondent having submitted the question whether the  dispute raised  by the appellant was covered by the arbitration clause cannot be permitted to controvert the jurisdiction of  the Arbitrator  to decide  this dispute and accordingly, negatived the contention of the respondent. The learned Judge after modifying the award of the Arbitrator in the matter  of  interest  from  9.1/2%  as  awarded  by  the Arbitrator to  6% granted  the application  of the applicant and made the award a rule of the court.      The respondent preferred M.F.A. 409 of 1979 in the High Court of  Kerala at  Ernakulam. A Division Bench of the High Court agreed  with the  learned  Subordinate  Judge  on  the question of  insufficiency  of  stamp.  The  Division  Bench however, after expressing its displeasure about not making a reasoned award  by the  Arbitrator proceeded  to examine the contention  whether   the  arbitration   clause  covers  the dispute. The  court  held  that  the  question  whether  the dispute is  arbitrable or  not cannot  be finally decided by the arbitrator  because it  is  a  matter  relating  to  his jurisdiction. It was further held that the arbitrator cannot by an erroneous interpretation or construction of the clause confer jurisdiction on himself and the court can go into the question whether  the matter  in dispute between the parties is  covered   by  the   arbitration  clause.   The  specific contention on  behalf of  the appellant that once a specific question of  law is  referred to the arbitrator, the parties are bound by the decision of the arbitrator was negatived by the High  Court and  it was  held that as the respondent has joined arbitration  under protest,  it was not estopped from contesting the  question and  the award is not binding on it if it  can be  shown that  the arbitration agreement did not cover the dispute raised by the appellant. The court finally held that  even though the arbitration clause was very wide, the dispute  as to the compensation for increase in the cost of imported  pile driving  equipment and  technical know-how fees would 130 not be  covered by  the arbitration clause inter alia on the ground that  by C1. 26 of the General Conditions of Contract every plant,  machinery and  equipment had to be provided by the contractor  and any  rise or  escalation in the price of such equipment  or machinery cannot be the subject matter of compensation by  the respondent.  Accordingly, the appeal of the respondent  allowed and  the judgment  and order  of the trial court  making the  award rule  of the  court  was  set aside. The  court directed that the award be returned to the parties. Hence  this appeal  by the  contractor  by  special leave.      Before we  advert to the rival contentions, it would be advantageous to refer to the arbitration clause being Clause 40 of  the General Conditions of Tender subject to which the contract was  entered into,  the relevant  portion of  which reads as under:           "Clause 40. Except where otherwise provided in the      contract, all  questions and  disputes relating  to the      meaning of  the Specifications,  Instructions,  designs      Drawings herein  before mentioned and as to the quality

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    or workmanship  or materials  used on the work or as to      any other  questions, claim,  right,  matter  or  thing      whatsoever in any way arising out of or relating to the      Contract, Designs, Drawings, Specifications, Estimates,      Instructions, orders  or these  conditions or otherwise      concerning the  works or  the execution  or failure  to      execute the  same, whether  arising during the progress      of the  work or after completion or abandonment thereof      shall, after  written notice  by either  party  to  the      contract, to  the either  of them,  be referred  to the      Sole Arbitration  of a  person appointed  by the  Chief      Project Officer  of the  Cochin Shipyard Project or the      Administrative Head  of the  Cochin Chipyard Project at      the time  of such  appointment by what ever designation      known, from a panel of names given in Annexure II."      Over  and  above  the  extracted  portion,  the  clause provides for  the manner  and method  of appointing the sole arbitrator, the  continuance of  the work during progress of arbitration proceedings,  the time  and place of holding the arbitration. proceedings,  the power  to enlarge  the period for making  the award  and finality  to be  attached to  the award of the Arbitrator. 131      When  the   arbitration  clause   was  invoked  by  the appellant, the  respondent  did  contend  that  the  dispute raised by  the appellant  was not covered by the arbitration clause.  After   specifying  its   demur,   the   respondent formulated the  points in  dispute on  which the arbitration was invited  to give  his award. Undoubtedly, the respondent proceeded to  formulate the  points in  dispute between  the parties on  which the  Arbitrator was  to be invited to give his award without prejudice to its right to contend that the dispute is  not covered  by the  arbitration clause and that the appellant is not entitled to any compensation in respect of the  increase  in  the  cost  of  imported  pile  driving equipment and technical know-how fees. What is the effect of referring  the  specific  question  of  law  to  arbitration without prejudice  to one’s right to contend to the contrary will be  presently examined.  The fact  remains that  on the dispute arising  out of  a claim for compensation on account of the  increase  in  the  cost  of  imported  pile  driving equipment and technical know-how fees, the respondent agreed to refer  the  dispute  under  two  specific  heads  to  the Arbitrator.  The   dispute  so   raised  have  already  been extracted. Briefly  stated they  are : (1) whether the claim for compensation  would fall within the purview of the first para of  the arbitration  clause and  (2)  if  it  does  the quantum of  compensation, if  any, to  which  the  appellant would be  entitled. Analysing  the disputes,  let it be made distinctly clear  that the appellant asserted that its claim for compensation,  would  be  governed  by  the  arbitration clause  and   the  same   was  specifically  denied  by  the respondent saying that the claim would be beyond the purview of the  arbitration clause.  On these  rival positions,  the specific issue was framed whether the claim for compensation would fall  within the  purview of  the first  part  of  the arbitration clause.  This was  the specific dispute referred to the  arbitrator inviting  him specifically to decide this of dispute.  If this issue specifically raises a question as to jurisdiction  of the  arbitrator to  arbitrate  upon  the dispute set  out in  Point No.  2, it  appears to  have been specifically referred  to the  Arbitrator for  his decision. Parties, therefore,  agreed to  submit the specific question even  with  regard  to  the  scope,  ambit,  width  and  the construction of  the arbitration  clause so as to define its

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parameters and  contours with a view to ascertaining whether the claim  advanced by  the appellant  and disputed  by  the respondent would  be  covered  by  the  arbitration  clause. Whether upon  its true  construction the  arbitration clause would include  within its  compass the  dispute thus  raised between the  parties was  specifically put  in issue because parties were  at variance  about it. Appellant asserted that its claim  to compensation  would form the subject matter of arbitration under Clause 40 132 and  the   respondent  contending  to  the  contrary.  While deciding this  dispute, as  to the scope, width and ambit of arbitration clause  vis-a-vis the  dispute raised, it is not necessary to  decide whether the claim was tenable justified or had  any substance  in it.  That would  fall  within  the second point of reference to the arbitrator which opens with a specific  clause that  it needs  only to be decided if the answer to  the first point of reference, namely jurisdiction of the  arbitrator under  Clause 40  is in  the  affirmative meaning thereby  that the  dispute so  raised and subsisting between the  parties would  be covered  by  the  arbitration agreement. In  other words, if the dispute is covered by the arbitration agreement,  the arbitrator  was further required to decide whether there was any substance in the claim made, and if  he found  some substance  in the  disputed claim, to ascertain what  amount the  appellant would  be entitled  to recover as  and by  way of compensation from the respondent. The arbitrator  was thus  required and  called upon first to decide whether  the dispute  is arbitrable as falling within the width  and ambit  of the  arbitration agreement.  If the answer is  in the  affirmative, then  alone the second point need be  examined. If  the answer  to  the  first  point  of reference is  in the negative in that if the arbitrator were of the  opinion that  the dispute  is not  arbitrable as  it would not  fall within  the scope,  width and  ambit of  the arbitration agreement,  it would not be necessary for him to determine whether  the appellant  was  entitled  to  recover anything by  way  of  compensation.  This  aspect  is  being analysed in depth to point out that the parties specifically referred  the   question  of   construction  of  arbitration agreement, its  width, ambit  and parameters  vis-a-vis  the dispute raised  so as  to decide  whether the  dispute would fall within  the purview  of the  arbitration agreement,  in other words the jurisdiction of the arbitrator.      Correspondence placed on record would unmistakably show that a  specific question  as to  the  jurisdiction  of  the arbitrator was  specifically referred  by the parties to the arbitrator. Appellant  contractor by  his letter dated March 1,1976 to  the Chief  Engineer of the respondent invited his attention to the claim for compensation for increase in cost of pile driving equipment and technical know-how fees raised about a  year ago  and further  invited his attention to the letter dated  6th October,  1975 of the respondent informing the appellant  that the  claim cannot  be  entertained.  The appellant proceeded further to state as under:           "In as  much as  a dispute has thus arisen between      us regarding  the above  claim,  we  are  invoking  the      provisions for 133      arbitration in our contracts and referring this dispute      to arbitration."      The respondent  by his  letter  dated  March  17,  1976 informed the  appellant that the matter raised in the letter dated  March   1,1976  in  the  matter  of  compensation  is receiving their  immediate attention  and the appellant will

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shortly hear  from them  in this  connection. Thereafter the respondent by  his letter  dated March  29,1976 informed the appellant as under;           "We have  dealt with  the merits of your claims in      the previous  correspondence  on  the  subject  and  we      reiterate that  no amounts  whatever are  due to you in      respect of  these claims. It is also our view that such      claim does  not fall within the purview of Clause 40 of      the General  Conditions of  Contract and hence does not      qualify for arbitration.           However, in  view of  your insistence  and without      prejudice  to   our  position,  we  propose  that,  the      following be the issues to be referred to arbitration:           1. Does the claim of M/s Tarapore & Co., on Cochin      Shipyard Ltd.,  for compensation  for increase  in  the      cost of  imported pile  driving equipment and technical      know-how fees fall within the purview of the first para      of Clause  40 of  the General  Conditions  of  Contract      entered into between the two parties?           2. If  the answer  to 1  is in  the affirmative in      terms of  the provisions  of the concerned contract are      Messrs. Tarapore  & Co.  entitled to  compensation  for      increase in the cost of imported pile driving equipment      and technical  know-how fees  to be  paid  to  them  by      Cochin Shipyard Ltd.? If so, what is the amount?           3. "Costs."      The respondent  proceeded to  notify the panel of names and invited the appellant to choose the arbitrator as agreed to between  the parties  and  set  out  in  clause  40.  The appellant  by   his  letter   dated  April   19,1976   while reasserting that  the claim  made by  it would be covered by Clause 40  further stated that the proper course would be to refer the dispute that has arisen between the parties on 134 the matter of compensation to the decision of the arbitrator and  not  any  particular  issue  or  issues.  It  was  also suggested that framing of the issues will be the function of the arbitrator  after he enters upon the reference and after he has  the pleadings  of both  the parties  before him. The appellant also  suggested what dispute should be referred to the arbitrator and set it out as under:           "The decision  of  the  dispute  that  has  arisen      between M/s  Tarapore &  Co., and  the Cochin  Shipyard      Limited, regarding the claim of M/s Tarapore & Co., for      compensation for  the  increase  in  the  cost  of  the      imported pile  driving equipment  and of  the technical      know-how fees."      The  appellant   proceeded  to  suggest  that  Shri  C. Srinivasa Rao  from amongst  the panel  be appointed  as the Sole Arbitrator.  The respondent  by his  letter dated April 27/28, 1976  annexing three  earlier letters  dated March 1, 1976, March  29, 1976  and April  19, 1976 referred the four points herein  before  set  out  for  the  decision  of  the arbitrator.      This correspondence  would unmistakably show that while the appellant wanted a general reference about its claim, it was  the  respondent  who  now  contests  that  no  specific question of  law was specifically referred to the arbitrator for his  decision  was  specific  about  the  points  to  be referred for the decision of the Arbitrator. The first point extracted hereinabove  would clearly  show that the specific question  about   the  jurisdiction  of  the  arbitrator  to arbitrate upon the dispute set out in points Nos. 2, 3 and 4 was specifically  referred to  the arbitrator.  On the first point, the  arbitrator had  to decide whether the claim made

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by the  appellant and  disputed by  the respondent  would be covered by  Clause 40  i.e. the arbitration clause. In other words, the  specific question referred to the Arbitrator was about  his  jurisdiction  to  arbitrate  upon  the  disputes covered by  points Nos.  2, 3  and 4, if and only if, upon a true construction  of the  arbitration clause  that is first paragraph of  Clause 40,  would cover the disputed claim for compensation he can enter into the merits of the dispute and decide it.  It is  upon the decision on point No. 1 that the arbitrator would  have jurisdiction  to decide  the  dispute involved in  points Nos.  2, 3  and 4.  The first  point  of reference is  clearly a  specific question  of law  touching upon the  jurisdiction of the arbitrator and this was framed and referred  to by  none other  than, despite  the  initial objection of  the petitioner, the respondent. Therefore, the respondent invited the arbitrator by the specific point of 135 reference which involves a specific question of law touching upon the  jurisdiction of the arbitrator to decide the same. This becomes  further clear  from the  fact  that  both  the learned counsel  appearing before  the arbitrator  submitted agreed draft  issues for the decision of the arbitrator. The first issue amongst the agreed draft issues reads as under:           "Does the  claim of  the claimant  fall within the      purview of  the purview  of the first para of Clause 40      of the  General Conditions  of  Contract  entered  into      between the two parties?      This point  was not  to be  incidentally decided  while deciding  the   dispute  referred   to  the  arbitrator  his jurisdiction to  entertain the  dispute  is  questioned.  In fact, hereby  the reference  of the  specific point  of  law touching upon the jurisdiction of the arbitrator the parties invited the  arbitrator to decide this specific question. It was he who was asked by the submission or terms of reference to decide  his jurisdiction first and then proceed to decide the dispute  on merits.  We referred  to Issue  No. 1 in the agreed draft  issues only to buttress the conclusion that it was at  the instance  of the  respondent that the arbitrator was called  upon to  decide the question of the scope, ambit and width  of arbitration clause the decision on which would confer jurisdiction  upon him  to decide  the dispute  as to compensation. In  this context  it would  be advantageous to refer to paragraphs 11 and 12 of the counter statement filed by the  respondent before  the  arbitrator  which  reads  as under:           "11. It  is submitted  that the  claim in question      relating to  the increase  in the cost of machinery and      equipment as  also technical  know-how fees  payable by      the contractors/claimants  is fully outside the purview      of the  contract. There  is no liability on the part of      the respondent  to procure  the machinery and equipment      or technical  know-how required  by the  contractor nor      was there  any liability  to pay  any part of the cost,      whether  it   be  the  original  assumed  cost  or  the      increased cost.  The claim  thus is  completely outside      the purview  of  the  contract  and  it  is  submitted,      therefore, that  the same  does  not  fall  within  the      purview of  the first  paragraph of  Clause 40  of  the      General Conditions of Contract and thus not arbitrable.      12. It  is submitted that the question of arbitrability of the  dispute should  be decided  as a  preliminary  point before proceeding with the other issues." 136      The formulation  of the specific question of law by the respondent along  with its  suggestion to  decide  it  as  a

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preliminary issue  and becoming  a party to the agreed draft issue No.  1 would  conclusively establish that the specific question of  law  touching  upon  the  jurisdiction  of  the arbitrator was  referred to the arbitrator for his decision. Therefore, the  conclusion is  inescapable that  a  specific question of  law  touching  upon  the  jurisdiction  of  the arbitrator which  is indisputably a question construction of Cl. 40  and therefore  a question  of law  was  specifically referred by  the parties  to the arbitrator for his decision and by  the terms  of Clause  40  agreed  to  abide  by  his decision as final and binding.      Mr. F.S.  Nariman, learned  counsel for  the  appellant urged that  Sec. 16(1)  (c) may permit the court to remit or set aside  the award on the ground that there is an error of law apparent  on the  face  of  it,  yet  where  a  specific question of  law has  been referred  to the  arbitrator  for decision, the  fact that  the decision is erroneous does not make the award bad on its face so as to permit its being set aside.  Expanding  the  submission,  it  was  urged  that  a decision on  a question of law by an arbitrator may be given in two  different and  distinct  situations;  firstly  where while deciding  a dispute  referred to  him  incidentally  a question of  law may arise which an arbitrator may decide in order to dispose of the reference and if in such a situation any error of law appears on the face of the award, the court can interfere  with the award. But there is an altogether an independent and  a distinct situation in which a question of law might arise such as where the parties to the dispute may frame the  specific question  of law  and reflect  it to the Arbitrator for  his decision. In the later situation, it was urged that  the decision of the Arbitrator even if erroneous would not  permit the  court to  interfere with  the  award. Proceeding along  it was  urged that in this case a specific question of  law  touching  upon  the  jurisdiction  of  the arbitrator was  specifically referred  to the Arbitrator for his decision  and therefore,  the decision of the Arbitrator is binding  on the  parties and  the court cannot proceed to inquire whether  upon a true construction of the arbitration clause.  the   dispute  referred   to  the   Arbitrator  for arbitration would be covered by the arbitration clause so as to clothe  the arbitrator with the jurisdiction to arbitrate upon the dispute.      Mr. Pai,  learned counsel  for the respondent countered by saying that jurisdiction of the arbitrator cannot be left to the decision of the arbitrator so as to be binding on the parties and it is always for the court to decide whether the arbitrator has jurisdiction to decide 137 the  dispute.  Alternatively,  it  was  submitted  that  the arbitrator cannot  by a  misconstruction of  the arbitration agreement clothe  himself with  or confer  upon himself  the jurisdiction to  decide the  dispute. The  court it was said has always retains to itself the jurisdiction to look at the arbitration agreement  to determine  its scope and ambit and if it  is found  that the dispute referred to the arbitrator does not  fall within  the arbitration  agreement, the court must interfere  on the  ground that  the award  disclosed an error of law apparent on the face of it.      The contention may be examined both on principle and on the precedents.      Complexity of  rights and  obligations in  national and international trade  and commerce  would certainly  generate disputes  between  the  parties  and  treated  as  a  normal incident of  commercial life and till commercial arbitration came to  be recognised  as a civilised way of resolving such

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disputes, prolix  and time-consuming litigation was the only method of  resolving such  disputes. As  an  alternative  to court proceedings,  arbitration as  a  method  of  resolving disputes by  domestic tribunal  constituted by the choice of parties became  acceptable. The basic difference between the court proceedings  and the  arbitration is the choice of the tribunal. Ordinarily,  all matters  in which  relief can  be claimed  from   the  court  may  become  subject  matter  of arbitration. Now  if in  a law court incidental questions of law arise  in the  course of  proceeding, the  court has  an obligation to  decide those  questions of  law. But  when it came to  a tribunal  not endowed, with the judicial power of the State but by conferment by the parties to the dispute or which acquires  jurisdiction by  a submission of the parties to the  dispute to invite the decision by the forum of their choice and to be bound by it a question arose whether a pure question of  law if  at all can be referred to an arbitrator for his decision and even if he decides, can the decision be questioned on  the ground that there is an error apparent on the face  of the  award in  deciding the  question.  Now  as stated a  short-while ago,  a question  of  law  may  figure before an  arbitrator in  two  ways.  It  may  arise  as  an incidental point while deciding the main dispute referred to the arbitrator  or in  a given  case  parties  may  refer  a specific question of law to the arbitrator for his decision. There is no more gainsaying the fact that a pure question of law may  and can  be  referred  to  an  arbitrator  for  his decision. Russel on the Law of Arbitration Twentieth Edition at page 22 states as under; 138           "A pure  question of  law may  be referred  to  an      arbitrator; and  where such  a question is specifically      referred his  award will  not be  set aside merely upon      the ground that his decision is wrong."      In Halshury’s  Laws of  England Vol.  2  Para  623  4th Edition the statement of law reads as under:           "If a specific question of law is submitted to the      arbitrator for  his decision and he decide it, the fact      that the  decision is erroneous does not make the award      bad on  its face  so as  to permit its being set aside;      and where  the question  referred for  arbitration is a      question of construction, which is, generally speaking,      a question  of law, the arbitrator’s decision cannot be      set aside only because the court would itself have come      to a different conclusion."      With the  ever  widenings  expansion  of  international trade   and    commerce,   complex   question   of   private International Law, effect of local laws on contracts between parties belonging  to different  nations are certainly bound to crop  up. Arbitration has been considered a civilised way of resolving such disputes avoiding court proceedings. There is no  reason why  the  parties  should  be  precluded  from referring a  specific question  of law  to an arbitrator for his decision  and agree  to  be  bound  by  the  same.  This approach manifests  faith of  parties in the capacity of the tribunal of  their choice  to decide even pure a question of law. If  they do  so, with  eyes wide  open,  and  there  is nothing to preclude the parties from doing so, then there is no reason why the court should try to impose its view of law superseding the  view of  the Tribunal  whose  decision  the parties agreed  to abide  by.  Therefore,  on  principle  it appears distinctly  clear that  when a  specific question of law is  referred to an arbitrator for his decision including the one  touching upon  the jurisdiction  of the arbitrator, the decision  of the arbitrator would be binding on both the

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parties and  it would  not be open to any of the two parties to wriggle  out of  it by  contending  that  the  arbitrator cannot clutch at or confer jurisdiction upon himself by mis- construing the arbitration agreement.      This  conclusion  is  borne  out  by  a  long  line  of decisions both  Indian and  foreign to  which we  would  now turn.      The earliest  case to  which  we  would  refer  is  the decision of the 139 House of  Lords in  Kelanten Government  v. Duff Development Co. Ltd.  in which  Lord Trevethin  in his  speech  said  as under:           "If your  Lordships should  be of opinion that the      award is  bad in  law upon  its face,  it should be set      aside, for  this is  not in  my view,  a submission  to      arbitration of  such a nature that, although the law is      bad upon  the face of the award, the decision cannot be      questioned. That happens only when the submission is of      a specific  question of  law and is such that it can be      fairly construed  to show  that the parties intended to      give up their rights to resort to the King’s courts and      in lieu thereof to submit that question to the decision      of a tribunal of their own."      Same distinction  was also  brought out by Lord Parmoor when he said that ’the principle applicable where a specific question of  law has  been  submitted  to  the  decision  of arbitration is well expressed by Channel, J., in Re King and Duveen, in  which it was said that where a specific question of law  is referred  to an  arbitrator for his decision, the award cannot be set aside on the ground of an error apparent on the  face of  the award  because the  question of law was wrongly decided.’  At a later stage, it was observed that if the court,  before which  it is sought to impeach the award, comes to  the conclusion  that the alleged error in law even if it  can be  maintained,  arises  in  the  decision  of  a question of law directly submitted to the arbitrator for his decision, then  the principle  stated by Channel, J., in Re. King and Duveen applies, is attracted and the parties having chosen their  tribunal, and  not having applied successfully to the  court under  either s. 4 or s. 19 of the Arbitration Act, 1889, are not in a position to question the award or to maintain a  claim to  set it  aside.’ This  decision  is  an authority of  the  proposition  that  where  a  question  of construction is  the very  point referred  for  arbitration, then the  decision of  the arbitrator upon that point cannot be set  aside by  the court  only because  the  court  would itself have come to a different conclusion.      In F.R.  Absalom Ltd.  v. Great Western (London) Garden Village Society  Ltd. the  contention was that the award was bad by  reason of  an error  in law appearing on the face of it. The submission was 140 not before the court and a reference to the pleadings had to be made for the purpose of ascertaining whether any specific question of  law was  in dispute,  and was  referred to  the arbitrator for  his decision.  The pleadings  disclosed that the whole  dispute between  parties was as to the amount due to the  contractor in  respect of the value of the work done and of  the materials  on the  site  upto  and  including  a certain  date.   In  the   background  of  this  fact,  Lord Warrington in  his speech  said that no specific question of construction arose. In order to decide whether the award was bad by  reason of  an error  of law  on the face of it, Lord Russel in  his speech  pointed out  at page  621 that  it is

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essential to keep the case where disputes are referred to an arbitrator in  the decision  of  which  a  question  of  law becomes material  distinct from the case in which a specific question of  law has  been referred  to him  for  decision.’ Thereafter he proceeded to state:           "The authorities  make a clear distinction between      these two  cases and  as they appear to me, they decide      that in  the former case the court can interfere if and      when any error of law appears on the face of the award,      but that  in the  latter case  no such  interference is      possible upon  the ground  that it  so appears that the      decision upon the question of law is an erroneous one.      In reaching  this conclusion,  the decision in Kelantan Government v. Duff Development Co. Ltd. was affirmed. On the facts, it  was found  that no  specific question  of law was referred to the arbitrator for his decision.      In  Durga  Prasad  Chamria  and  Anr.  v.  Sewkishendas Bhattar and  Ors; the award was sought to be set aside inter alia on  the ground  that the award was bad on account of an error of  law apparent  on the face of it. The errors of law relied  upon  were;  (a)  the  arbitrator  had  admitted  as evidence  the   family  settlement   and   the   partnership arrangement of  1916, neither  of which, though each related (it was said) to immoveable property, had been registered as required  by  the  Indian  Registration  Act,  and  (b)  the arbitrator ought  to have  held that  Anardeyi’s suit was in any event  barred by  limitation. The  Privy  Council  first noticed the  issues settled  by Panckridge. J.; amongst them were the two following: 141           "1(b) Is  the agreement dated 16th November, 1916,      relating to  the alleged  family  settlement  valid  or      admissible in evidence?           (9)  Is  the  plaintiff’s  claim  or  any  portion      thereof barred by limitation?,,      After these issues had been settled, the parties agreed to refer  to arbitration  "the outstanding  matters  in  the suit." In  a motion for setting aside the award it was urged that there  was an  error of law apparent on the face of the award both  with regard  as  to  the  admissibility  of  the alleged family  settlement and  about the  suit of  Anardeyi being barred  by limitation. Rejecting the motion, the Privy Council observed as under,           "However,  that   may  be,   their  Lordships  are      satisfied that  the two points of law as to which it is      said the  arbitrators error  vitiates  the  award  were      specifically referred  to him  to decide and if this is      so, it would be contrary to well-established principles      such as  are laid  down in  re King and Duveen and F.R.      Absalom Ltd.  v. Great  West  (London)  Garden  Village      Society Ltd.,  for a Court of law to interfere with the      award even  if the  Court itself  would  have  taken  a      different view  of either of the points of law had they      been before it."      Turning to  the decisions  of our  Court, reference may first be  made to  Seth Thawardas  Pherumal v.  The Union of India 1.  In that  case, the  question was whether the award was bad  on account  of error of law apparent on the face of it, as  provided in  Sec. 16(1)  (c) of the Arbitration Act. Examining this contention, this Court observed as under:           "This covers  cases  in  which  in  error  of  law      appears on  the face  of the  award. But in determining      what such  an error  is, a  distinction must  be  drawn      between  cases   in  which   a  question   of  law   is      specifically referred  and those in which a decision on

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    a question  of law  is incidentally  material  (however      necessary) in  order to  decide the  question  actually      referred. If a question of law is specifically referred      and it  is evident  that the  parties desire  to have a      decision from the arbitrator about that rather then one      from the  Courts, then  the Courts  will not interfere,      though even there, there is authority for the view that      the courts  will interfere  if it  is apparent that the      arbitrator 142      has acted  illegally in  reaching his decision, that is      to say,  if he  has decided on inadmissible evidence or      on principles  of construction  that the  law does  not      contenance or  something of that nature. See the speech      of  Viscount   Cave  in  Kelantan  Government  v.  Duff      Development Co.  at page  409. But that is not a matter      which arises in this case.           The law  about this is, in our opinion the same in      England as  here and  the principles  that govern  this      class of  case have been reviewed at length and set out      with clarity by the House of Lords in F.R. Absalom Ltd.      v. Great Western (London) Garden Village Society and in      Kelantan Government  v. Duff  Development Co.  In Durga      Prasad v.  Sewkishendas the  Privy Council  applied the      law expounded  in Absalom’s  case to  India;  see  also      Champsey Bhara  & Co.  v. Jivraj  Balloo  Spinning  and      Weaving Co.  and Saleh Mahomed Umer Dossal v. Nathoomal      Kessamal. The wider language used by Lord Macnaghten in      Ghulam Jilani  v. Muhammad  Hassan had reference to the      revisional powers  of the  High Court  under the  Civil      Procedure Code  and must  be confined  to the  facts of      that case  where the  question of  law involved  there,      namely,  limitation,   was  specifically  referred.  An      arbitrator is  not a  conciliator and cannot ignore the      law or  misapply it  in order  to do  what he thinks is      just and  reasonable. He  is a tribunal selected by the      parties to  decide their  disputes according to law and      so is  bound to  follow, and  apply the  law, and if he      does not he can be set right by the Courts provided his      error appears  on the  fact of  the award.  The  single      exception  to   this  is   when  the   parties   choose      specifically to  refer a  question of law as a separate      and distinct matter."      The Court  further proceeded  to examine whether in the facts of that case, the arbitrator was specifically asked to construe clause  6 of  the  contract  or  any  part  of  the contract or  whether any  question of  law was  specifically referred. The  Court emphasised  the word  ’specifically’ by pointing  out   that,  parties   who  made  a  reference  to arbitration have  the right  to insist  that the Tribunal of their choice shall decide their dispute according to law, so before the  right can  be denied  to them  in any particular matter, the  court must  be very sure that both sides wanted the decision of the arbitrator on a point of law rather than that of the Courts and that they wanted his decision on that point to  be final.  The Court then proceeded to examine the various clauses  of the  contract and  held that this is not the kind of specific reference on a point of law that 143 the law  of arbitration requires. The Court held that when a question of  law is  the point  at issue,  unless both sides specifically agree  to refer it and agree to be bound by the arbitrator’s decision, the jurisdiction of the Courts to set an arbitration  right when the error is apparent on the face of the  award is not ousted. The mere fact that both parties

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submit incidental  arguments about  a point  of law  in  the course of the proceedings is not enough. This decision is an authority  for   the  proposition  that  where  the  parties specifically agree  to refer  a specific question of law for the decision of the arbitrator, and agree to be bound by it, the Court  cannot set  aside the  award on  the ground of an error of  law apparent  on the  face of  it even  though the decision of  the arbitrator  may not  accord with the law as understood by  the Court. If on the other hand, the question of law  is incidentally decided by the arbitrator, it is not enough to  oust the  jurisdiction of  the Court to set aside the award  on the  ground that there is an error apparent on the face of the award.      In M/s  Alopi Parshad & Sons Ltd. v. The Union of India 1 the  Court reiterated  the observation in Seth Thawardas’s case and  observed that  if a specific question is submitted to the  arbitrator and  he answers  it, the  fact  that  the answer involves  an erroneous decision in point of law, does not make  the award  bad on  its face so as to permit of its being set  aside. In  the facts  of  the  case,  this  Court agreeing  with   the  High  Court  held  that  there  is  no foundation  for   the  view   that  a   specific  reference, submitting a  question of  law for  the adjudication  of the arbitrators, was  made. It  may be  stated in passing that a brief  reference   to  the  claim  put  forward  before  the arbitrator on behalf of the appellants in that case, set out at page  798 of  the report,  would  clearly  show  that  no specific question of law was referred by the parties for the decision of  the arbitrator. Mr. Pai learned counsel for the respondent pointed  out that  the Court  has  also  observed following the  decision of  the Privy  Council  in  Champsey Bhara and  Company v.  Jivraj Balloo  Spinning  and  Weaving Company Ltd  2., that  the extent of the jurisdiction of the court to  set aside  an award  on the  ground of an error in making the award is well-defined. The award of an arbitrator may be  set aside  on the  ground of  an error  on the  face thereof  only   when  in   the  award  or  in  any  document incorporated with  it, as  for instance,  a note appended by the arbitrators, stating the reasons for his decision, there is found  some legal  proposition which  is the basis of the award and which is erroneous. This observation does not help 144 in deciding  the point  under discussion and just after this statement, there follows the observation about the effect of referring a specific question of law for the decision of the arbitrator and  the jurisdiction  of the  Court to set aside the award  on the  ground that  there is  an  error  of  law apparent on the face of it.      In Union of India v. A.L. Rallia Ram 1 this Court after referring to  the decision  in Champsey  Bhara  and  Company reaffirmed that,  the rule  in that  decision does not apply where questions  of law  are specifically  referred  to  the arbitrator for  his decision; the award of the arbitrator on those  questions   is  binding  upon  the  parties,  for  by referring specific  questions the  parties desire  to have a decision from  the arbitrator on those questions rather than from the  Court  and  the  Court  will  not,  unless  it  is satisfied  that   the  arbitrator  had  proceeded  illegally interfere with the decision. After referring to the decision hereinabove examined by us, the Court came to the conclusion that no  specific question  of  law  were  referred  to  the arbitrator’s  the  decision  whereof  is  binding  upon  the parties.      In M/s  Kapoor Nilokheri Co-op. Dairy Farm Society Ltd. v. Union  of India  and Others  2 the  Court agreed with the

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submission on  behalf of  the respondent Government of India that the  appellants having  specifically stated  that their claims are  based on  the agreement  and on nothing else and all that  the arbitrator  had to decide was as to the effect of the  agreement, the  arbitrator had  really to  decide  a question of  law, i.e.  of interpreting  the  document,  the agreement dated  May 6,  1953 and  therefore the decision is not open  to challenge.  In fact, this decision is hardly of any assistance and we leave it at that.      In N. Chellappan v. Secretary, Kerala State Electricity Board & Anr. by a consent order, the umpire was appointed as the sole  arbitrator, and  the  respondent-Board  without  a demur participated  in the proceedings before the umpire and took the  chance of  an award in its favour, this Court said that it  cannot turn  round and  say that  the umpire had no inherent jurisdiction and therefore its participation in the proceedings before  the umpire is of no avail. This decision is not of much assistance on the point under discussion. Mr. Pai on  the other  hand urged  that the  jurisdiction of the arbitrator could  not  be  determined  by  him  nor  can  he arrogate jurisdiction to himself 145 by mis-construction  of the  contract and  thereby clutch at jurisdiction and  in such  a  situation,  the  court  always retains to  itself to  set at naught the award on the ground of an  error of  law apparent  on the  face of the award. In terms, he  stated that  the issue  about the jurisdiction of the arbitrator  has never  been parted  with by  the  Court- Generally speakings,  common law  courts were very reluctant to part  with its  jurisdiction to set at naught an award on the ground  that  the  arbitrator  had  no  jurisdiction  to entertain and  decide the  dispute. The Court went so far as to say  that the  arbitrator cannot confer jurisdiction upon himself by  deciding in  its  own  favour  some  preliminary points upon which its jurisdiction rests. In fact, that is a non-issue. It  cannot be  disputed that even the question of jurisdiction of an arbitrator can be the subject matter of a specific reference.  If  the  parties  agree  to  refer  the specific question  whether the  dispute raised is covered by the arbitration agreement, it becomes a specific question of law even  if it  involves the jurisdiction of the arbitrator and if  it is  so, a  decision of the arbitrator on specific question referred  to him for decision even if it appears to be erroneous  to the  Court is  binding on  the parties. The decisions relied  upon by  Mr. Pai do not derogate from this legal position. We may briefly refer to those decision      In Produce Brokers Co. Ltd. v. Olympia Oil and Cake Co. Ltd., it was held that "if the question which the arbitrator takes upon  himself to  decide is  not in  fact  within  the submission the  award is  a nullity.  The arbitrator  cannot make his award binding by holding contrary to the true facts when the  question which  he affects  to determine is within the submission."  Let us emphasise the ratio of the decision that the  arbitrator takes upon himself to decide a question not within the submission. This would mean that the question of law  was not  specifically referred to the arbitrator for his decision  but  it  was  incidentally  raised.  In  fact, nowhere it  was contended  that any specific question of law was referred  to the  arbitrator and if so what would be its effect on  the binding  character of  the decision  was ever raised in  that case.  In that  case  after  an  answer  was returned to  the Special  Case submitted  for the opinion of the court, the Committee of Appeal unreservedly accepted the said answers  upon the  construction of  the contract  as  a matter of  law apart  from the  custom  of  the  trade,  but

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proceeded further  to hold that there was a long established and well-recognised custom of the trade in cases of re-sales that buyers under the form of contract 146 in question  impliedly agreed  with their  sellers that they would accept  the original shipper’s appropriation if passed on without  delay. On  a motion  by the  buyers to  have the award set  aside, of  which notice was given, the Divisional Court held  that the arbitrators had no jurisdiction to find conclusively the  existence of a trade custom, and the Court of Appeal  on the  authority of precedents but against their own opinion,  affirmed the  decision. The appellant-seller’s company appealed to the House of Lords. Lord Loreburn in his speech observed  that ’these  men of business made contracts and therein  agreed to  arbitrate upon  all disputes arising out of  their contracts.  Yet there  have already been seven distinct stages  of argument  and decision,  four of them in courts of  law, upon  a dispute  arising on those contracts, and the  end is  not yet. I do not know how many more stages there will  be. Parties have a right to prefer what some may consider  the   imperfect  though   expeditious  wisdom   of arbitrators to  the slower  and more  costly justice  of His Majesty’s courts.  It is  to be  regretted when they have to encounter  the  inconveniences  of  both  methods  with  the advantage of  neither." Approaching  the  matter  from  this angle, the  appeal was  allowed  and  the  decision  of  the Committee of Appeal, taking note of the custom of the trade, allowed the award to stand. This decision can in no way help the respondent.      In Attorney  General For Manitoba v. Kelly and Others 1 it was  observed that  "Whenever there  is a  difference  of opinion between the parties as to the authority conferred on an umpire  or arbitrator  under  an  agreed  submission  the decision rests  ultimately with  the court  and not with the umpire or arbitrator." This is predicated upon a proposition that common  law courts  were reluctant  to part  with their jurisdiction to  set at  naught an  award if  the arbitrator confers jurisdiction  upon himself  by deciding  in his  own favour some  preliminary point  upon which  his jurisdiction rests.      Mr. Pai  also referred  to the  decisions of  the Privy Council in  Champsey Bhara  & Co.  and Hirji Mulji v. Cheong Yue Steamship  Co. Ltd.  Both  these  decisions  are  of  no assistance on the question about the reference of a specific question of  law  touching  upon  the  jurisdiction  of  the arbitrator for  his decision  and its  effect. In  fact. the decision in  Champsey Bhara’s  case clearly turns upon as to what constitutes an error of law apparent on the face of the award. 147      The next case referred to was Heyman & Anrs. v. Darwins Ltd. It  reasserts that  as a  rule  the  arbitrator  cannot clothe himself with jurisdiction.      Turning to  the decisions  of this Court, reference was first  made   to  Jivarajbhai   Ujamshi  Sheth   &  Ors.  v. Chintamanrao Balaji & Anr. Shah, J. speaking for himself and Justice Sarkar at page 499 observed that ’this is not a case in which  the arbitrator  has committed a mere error of fact or law  in reaching  his conclusion on the disputed question submitted for  his adjudication.  It is a case of assumption of jurisdiction  not possessed  by him, and that renders the award, to  the extent to which it is beyond the arbitrator’s jurisdiction, invalid".  It may  be pointed  out that  these observations are  in the  context of  the facts of that case and there  was no  contention  before  the  court  that  any

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specific question  of law  touching upon the jurisdiction of the arbitrator  was referred  to for  his  decision  by  the parties.      The last  decision in  this context referred to was Dr. S.B.  Dutt   v.  University  of  Delhi.  In  that  case  the arbitrator gave  by his  award a  direction to  enforce  the contract of personal service. This was stated as an error of law apparent  on the face of the award and the award was set aside. Again it may be pointed out that the reference to the point set  out in  the letter of reference extracted at page 1240 clearly  spells out  that no  specific question  of law touching  upon   the  jurisdiction  of  the  arbitrator  was referred to the arbitrator for his decision.      On  a   conspectus  of   these  decisions,  it  clearly transpires  that  if  a  question  of  law  is  specifically referred and  it becomes evident that the parties desired to have a decision on the specific question from the arbitrator about that  rather than  one from court, then the court will not interfere with the award of the arbitrator on the ground that there  is an  error of  law apparent on the face of the award even  if the  view of law taken by the arbitrator does not accord  with the  view of  the court.  This view  of law taken in  England was stated by this Court to be the same in this country and since the decision in Seth Thawardas’s case which follows earlier decisions in England and India, it has not been  departed from.  The view  canvassed for by Mr. Pai that common  law courts were very reluctant to part with its jurisdiction has  hardly  any  relevance  where  a  specific question of 148 law including  the one  touching  the  jurisdiction  of  the arbitrator is  referred to  the arbitrator for his decision. Even if  the decision of the arbitrator does not accord with the view  of the court, the award cannot be set aside on the sole ground  that there  is an  error of law apparent on the face of it.      Before we conclude on this point we must take note of a contention of Mr. Pai that the respondent cannot be estopped from contending  that the  arbitrator had no jurisdiction to entertain the  dispute  as  the  respondent  agreed  to  the submission without prejudice to its rights to contend to the contrary. It  is undoubtedly  true that  in the letter dated March 29,  1976 by  which the respondent agreed to refer the dispute to  the arbitrator,  it was in terms stated that the reference is being made without prejudice to the position of the respondent  as adopted  in the  letter  meaning  thereby without prejudice to its rights to contend that the claim of the appellant  is not  covered by the arbitration clause. In the context  in which  the expression ’without prejudice’ is used, it  would only  mean that  the respondent reserved the right to  contend before  the arbitrator that the dispute is not covered  by the  arbitration clause.  It does not appear that what  was reserved  was a  contention that  no specific question of law was specifically referred to the arbitrator. It is  difficult to  spell out  such a  contention from  the letter. And  the respondent  did raise the contention before the arbitrator  that he had no jurisdiction to entertain the dispute as  it would  not  be  covered  by  the  arbitration clause.  Apart   from  the   technical  meaning   which  the expression ’without  prejudice’ carries  depending upon  the context in which it is used, in the present case on a proper reading of  the correspondence  and in  the setting in which the term is used, it only means that the respondent reserved to itself  the right to contend before the arbitrator that a dispute raised  or the  claim made by the contractor was not

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covered by  the arbitration  clause. No other meaning can be assigned to  it. An  action taken without prejudice to one’s right cannot  necessarily mean that the entire action can be ignored by  the party  taking the  same. In  this case,  the respondent referred  the specific  question of  law  to  the arbitrator. This  was according  to the  respondent  without prejudice to  its right  to contend  that the  claim or  the dispute is  not  covered  by  the  arbitration  clause.  The contention  was   to  be   before  the  arbitrator.  If  the respondent wanted  to assert  that it had reserved to itself the right  to contend  that no  specific question of law was referred to the arbitrator, in the first instance, it should not have made the reference in the terms in which it is made but should have agreed to the proposal of the appellant 149 to make  a general  reference. If  the appellant insisted on the reference  of a specific question which error High Court appears to  have committed,  it could  have declined to make the reference  of a  specific question  of law  touching his jurisdiction and  should have taken recourse to the court by making an  application under  Sec. 33 of the Arbitration Act to have  the effect  of the arbitration agreement determined by the  court. Not only the respondent did not have recourse to an  application under Sec. 33 of the Arbitration Act, but of its  own it  referred a  specific question  of law to the arbitrator for his decision, participated in the arbitration proceeding invited  the arbitrator  to decide  the  specific question and  took  a  chance  of  a  decision.  It  connote therefore, now be permitted to turn round and contend to the contrary on  the nebulous  plea that  it  had  referred  the claim/dispute to  the sole  arbitrator without  prejudice to its right to contend to the contrary. Therefore, there is no merit in the contention of Mr. Pai.      In  this  case,  as  earlier  pointed  out  a  specific question as to whether the claim of compensation made by the appellant-contractor  and   demurred  and  disputed  by  the respondent would  be covered  within the  scope,  ambit  and width of  the arbitration  clause, was specifically referred by  the   parties  for   the  decision  of  the  arbitrator. Therefore, it  is a  case where  a specific  question of law touching  upon   the  jurisdiction  of  the  arbitrator  was referred for  the decision of the arbitrator by the parties. Even if the view taken by the arbitrator may not accord with the view  of the  court about  the scope, ambit and width of the arbitration clause, the award cannot be set aside on the ground that there is an error of law apparent on the face of the award.  The view  taken by  the High  Court is  palpably untenable and  has to  be reversed. On this short point, the appeal can  be allowed. However, it was strenuously urged by both the sides that the dispute arising out of the claim for compensation  made  by  the  appellant  on  account  of  the increase in  the cost  of the  pile  driving  equipment  and technical know-how fees would or would not be covered by the first paragraph  of Clause  40, we would briefly examine the same to point out that it would be covered.      In  order   to  ascertain   whether   the   claim   for compensation for  increase in  the  price  of  pile  driving equipment and  technical know-how  fees would  be covered by the arbitration  clause, it is necessary briefly to refer to the negotiations and discussions leading to the formation of the contract  for construction  of the  Repair Dock  and the Building Dock. The value of the works to be executed was 150 over Rs  24 crores. In respect of the construction of Repair Dock, there  was only  the tender  of the  appellant and  in

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respect of the Building Dock, there were two tenders: one of the  appellant   and  another   by  M/s   National  Building Construction Corporation,  the tendered  value of the latter being  double   that  of   the  former.   Indisputably,  the respondent had a very limited or realistically no choice. In such a  situation the  Tender Committee  took notice  of the fact of  the poor  response to the invitation to tender. The Committee took  notice of  such salient features of the work being the  complexity and  magnitude  of  the  works  to  be undertaken by any Indian Contractor and the non-availability of plant  and equipment  required for  the  works  and  more especially  that  if  the  contractor  was  to  procure  the specialised equipment  required for  the  works,  there  was hardly any  assurance that  after the  works were  over, the machinery  would   be  so   much  depreciated  to  have  any substantial  use  or  utility  to  the  contractor.  In  the invitation  to  tender,  it  was  indicated  that  requisite foreign exchange  for importing  pile driving  equipment and machinery, spares  and technical know-how amounting to about Rs 2 crores in all would be made available to the contractor from the  11th Yen Credit from Japan, subject to his getting indigenous clearance  and providing  detailed justification. Annexure IV  to the  General Conditions  of Contract clearly specifies  that  the  tenderers  while  quoting  shall  give separately the  full details of the equipment for which they would be  requiring foreign  exchange assistance.  And  they shall also  indicate the  financial implication  if any, for providing not  providing  the  foreign  exchange  assistance indicated for the various equipments. Two things emerge from recital of  the facts  herein enumerated  in the  course  of formation  of  the  contract:  (1)  that  the  pile  driving equipment will  have to  be imported  from outside India and technical know-how fees will have to be paid both in foreign currency and  (2) this would necessitate investment of about Rs 2  crores by the contractor. The contractor in his letter dated July  14,1972 specifically  invited the  respondent to confirm the  modifications in  the terms  of contract as set out therein.  In paragraph 31 (E) (1), the contractor states that  all   foreign  exchange  for  the  equipment,  spares, technical know-how  and hiring  of experts shall be provided to the contractor and that the total foreign exchange on all these accounts  will be  about Rs  2 crores.  A sort  of  an assurance was  thus extended to the contractor that the same would be made available to him from the 11th Yen credit from Japan. This is not disputed. It is also an admitted position that  the   necessary  equipment,   machinery,  spares   and technical know-how  were not  available from  Japan and  the availability of the 11th 151 Yen credit  from Japan  lost all  significance. Further  the respondent by  its  letter  dated  January  24,1973  to  the appellant while  accepting the  tender of  the appellant  on behalf of  Cochin Shipyard  Limited specifically  stated  as under:           "You shall  provide at  your cost all construction      plant and  machinery (including  that requiring import)      for all  items of  work including  RCC piling and Steel      Sheel Piling Works. Departmental machinery likely to be      made available  for issue to the Contractor shall be as      in Annexure IV of the General Conditions of Tender.           You shall  furnish an  inventory of  all plant and      machinery proposed  to be  used on  the works including      items of imported machinery with probable date of their      availability at  site for  use on the work. This should      match with  the Detailed Working Programme indicated as

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    above."      At this  stage a  reference to the additional Terms and Conditions/Modifications  to   the  General  Conditions  and Specifications of  the Departmental  Tender Documents, would be advantageous. It reads as under:           "All Piling  Equipment shall  be procured  by  the      Contractor      ......................................................      Selection of  equipment will  be done by the Contractor      in consultation  with the  Cochin Shipyard authorities.      No hire  charges for  the  equipment  procured  by  the      Contractor    is     payable    to     the     Shipyard      ...............................................Requisie      foreign  exchange,   for  importing  piling  plant  and      machinery, spares,  technical know-how  and  hiring  of      experts necessary  for both  the Dock  Works, vide Work      order.... for  Repair Dock  etc., amounting to about Rs      2.00 crores  in all  will  be  made  available  to  the      Contractor from  the 11th  Yen credit  subject  to  his      getting indigenous  clearance  and  providing  detailed      justification"      It  is   thus  unquestionably   established  that   the appellant whose  tender was  accepted after negotiations and scrutiny by the Tender Committee was expected to invest Rs 2 crores in  importing pile  driving equipment  and  technical know-how fees. The tender was accepted and a formal contract was entered  into on  his basis.  In works  contract of such magnitude, the  value whereof  was over  Rs. 24  crores, and which was being undertaken by an Indian contractor for 152 the first time negotiations prior to the finalisation of the contract and  the correspondence leading to the formation of contract supply  the basis  on which  contract  was  finally entered into. Undoubtedly, if in the final written contract, there is  something  contrary  to  the  basic  understanding during the  formative stage  of the  contract,  the  written contract  would  prevail.  But  if  the  contract  does  not indicate to  the contrary and the assumptions appeared to be the foundation  of the contract obviously that aspect cannot be overlooked  while determining  what were  the  obligation undertaken under  the formal  contract. It  may be  recalled that  the   two  alternative   rates  were   quoted  by  the contractor: (i)  the respondent  were  to  import  the  pile driving equipment  and technical know-how for its operation, the same  would be  leased to  the contractor  at negotiated rates or  (ii) the  contractor were  to import  the same the rates be  paid to the contractor. The second alternative was accepted by  the parties  on the fundamental assumption that the investment  in this behalf would be Rs 2 crores. This is the agreed  position on  which contract was entered into. To continue the  narrative, it  may be  pointed out  that  this fundamental foundation  of the  contract not  left to  guess work, but is specifically referred to in the notice inviting tender  and  in  the  specifications  and  modifications  as addenda to  the  General  Conditions  of  Contract.  It  was clearly understood  between the  parties that the contractor has to  invest roughly  Rs. 2 crores in foreign exchange for importing pile driving equipment and technical know-how fees without which this work could never have been undertaken and without which  it would  not  have  been  entrusted  to  the contractor. The  contractor when  he quote  his  terms  must obviously have  made appropriate  calculations, one of which in this case appears to be that it will have to invest Rs. 2 crores in  foreign exchange  and this fact flies in the face that after  the work  was over  the imported machinery would

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depreciate to  this extent that it would have hardly any use of utility  to the  contractor  as  noticed  by  the  Tender Committee. The rates quoted by the contractor were obviously interrelated to the basic assumption. The fact that such was also also  the understanding  of the  respondent may  now be pointed out.      The respondent  by its  letter dated  July 31,  1973 to Industrial Adviser  (HME), Directorate  General of Technical Development requested  him to  issue necessary  clearance to the appellant  for import  of the  equipment set  out in the Annexure to  the letter  on the  ground that  the  appellant tried its  level best to get the equipment from the Japanese sources, but they could not get positive restive 153 response for such equipments. They had also tried their best to get  suitable offers  from U.  K., U. S. A. USSR, Canada, West Germany  and Holland.  It was also pointed out that the respondent itself  also made  independent enquiries in Japan for getting  suitable offers for the above equipment without success. Thus  it becomes clear that to the knowledge of the respondent, the  11th  Yen  Credit  became  irrelevant.  The Government of  India by its letter dated September 1,1973 to the respondent  conveyed its  approval to the release of the foreign exchange in favour of the appellant to the extent of Rs 211.80  lakhs (Rupees  two crores eleven lakhs and eighty thousand  only)  equivalent  to  DFL  9,  442,  700  at  the specified exchange  rate. Thereafter  the appellant  by  its letter  dated  May  28,1975  amongst  others  requested  the respondent to  take note of the fact that the tendered rates were based on certain total cost of machines which has since gone up considerably rendering the rates no longer workable. The contractor  proceeded to point out the utter irrelevancy of the  rates in  view of  the  higher  outlay  of  imported machinery and  technical know-how.  It pointed  out the loss sustained by  the contractor  and requested for compensation in this  behalf. This  was followed by the letter dated July 1, 1975 by the contractor to the respondent, emphasising the fact that  the tendered  rates  had  become  unworkable  and unrealistic owing to the increase in the. cost of equipment. know-how etc.  as a  result of  the increase  in the foreign exchange rate  of Dutch Guilders as related to the Rupee. In response to  the last  letter the  respondent replied by its letter dated  July 2, 1975, relevant portion of which may be extracted:           "In this  connection, a  kind reference is invited      to your letter dated the 14th July, 1972 (which forms a      part  of   the  contract  documents)  wherein  you  had      indicated that  the total  foreign exchange required by      you for  the equipment,  spares, technical know-how and      hiring of  experts, was  expected  to  be  about  Rs  2      crores. From  the data  enclosed with your letter under      reply, it is seen that the foreign exchange expenditure      incurred by you so far in connection with this contract      had been  less than  Rs 2 crores. In the circumstances,      it is difficult to accent the position that your tender      was based  on assumptions indicated by you and that the      rates for pile driving should now be revised."      This letter  furnishes proof,  if one  was needed  that parties were  ad idem  that the investment for imported pile driving equipment  and foreign  exchange know-how  would  be about Rs 2 crores. The 154 respondent does not contest the claim for compensation under this head  as is now sought to be done on the ground that as the  contractor   had  to   provide  imported  pile  driving

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equipment and  technical know-how,  the  respondent  is  not entitled to  compensation even  if the  initial estimate has been found  to be unrealistic. On the contrary the claim for compensation is disputed and controverted on the ground that the foreign  exchange expenditure incurred by the contractor so far  in connection  with imported  pile driving equipment and technical  know-how has been less than Rs 2 crores. From this correspondence,  it would  emerge that both the parties were agreed  that the  contractor would  have to invest Rs 2 crores  in  foreign  exchange  for  importing  pile  driving equipment and  technical know-how  which could  only be used after approval  of the same by the respondent. The appellant by its  letter August  9, 1975  contended that escalation of expenditure under this head is taken care of in the contract and more  specifically in  clauses 13  and 16  of the  works order. We  would have  occasion to  refer to these clauses a little later.  The respondent  by its  letter  dated  August 29,1975 reasserted  its position  that the  foreign exchange element of  the expenditure incurred by the contractor works out to  Rs 1.96 crores, which is less than the figure of Rs. 2 crores  that  was  expected  to  be  invested  in  foreign exchange which  was to  be provided  by the  contractor, The respondent also  referred to  the assessment  of expenditure made by the contractor as per its letter dated July 14,1972. This has  already been  referred to  by us.  The  respondent further asserted  that the  estimate so  made till that date has not  been exceeded  and therefore, any argument based on fluctuation in the exchange rate is not valid or tenable. It may be  repeated that the refusal to entertain the claim for compensation was  predicated upon  the estimates  having not exceeded the  basic minimum of Rs 2 crores by the contractor on which rates were worked out and agreed, and not that such claim cannot  be entertained  under  the  contract.  By  its letter dated  September 18,1975,  the contractor  reiterated its position.  In its  letter dated  October  6,  1975,  the respondent when  it was  faced with  the situation  that the expenditure incurred under this head in foreign exchange had risen to  Rs 214.33  lacs i. e. it had exceeded the expected investment of  Rs. 2  crores under  this head, took a summer assault and  stated that  the respondent  had  at  no  stage stated that  the contractor  was ’not  entitled to any claim because the  amount of foreign exchange has not yet exceeded Rs 200  lakhs’. One  has merely to call attention to the two letters dated  July 2,  1975 and August 29 1975 to reach the conclusion that  the  respondent  has  gone  back  upon  its original position  and having  found  that  the  expenditure under this head has 155 gone up  beyond the estimated expenditure made a volte face, the two  positions so  adopted being  entirely  inconsistent with each  other Thereafter,  the  matter  was  referred  to arbitration.      From the  commencement i.e,  from the stage of inviting tenders and through the negotiations and the finalisation of the contract,  at every  stage, the  respondent assured that foreign exchange  would be  made  available  from  11th  Yen Credit. As  the equipment  was not available from Japan, the availability  of   Yen  Credit   become  otiose   from   the contractor’s point  of view. At the instance of and with the active participation  of the  respondent the contractor made enquiries in  various countries  and ultimately procured the necessary  equipment   and  technical   know-how  which  was approved by  the respondent  and imported  the same.  In the time lag, the price as well as the foreign exchange rates in relation to  rupee underwent  an  upward  change,  with  the

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result that  the contractor had to invest, as made out by it and not  seriously controverted before the arbitrator in all Rs. 275.40  lakhs for  imported pile  driving equipment  and spares and Rs. 18,64, 337.61 on technical services-cum-know- how fees  and a  further sum for higher custom duty. Details of the  claim have  been  set  out  in  Annexures  1  and  2 respectively to  the statement  of claim  submitted  by  the appellant to  the arbitrator.  The respondent in its counter statement did  not controvert  the details  of the claim and the expenditure  involved under  the two heads. The whole of the counterclaim  was  concerned  with  the  denial  of  its liability to  compensate the  contractor  coupled  with  the contention that  the claim  would  not  be  covered  by  the arbitration agreement  and therefore,  the arbitrator had no jurisdiction to  entertain and  adjudicate the claim. It may also be  mentioned that  at no  time since  the  award,  the respondent ever disputed or questioned the amount awarded by the arbitrator.  It is  thus satisfactorily established that the contractor  had to invest something far in excess of Rs. 2 crores which it was expected to invest in foreign exchange for imported  pile driving  equipment and technical know-how fees.   The   whole   contract   was   concluded   on   this understanding. Being  aware of  the fluctuating  position in this behalf,  the contractor  had tendered  two  alternative rates for  completion of  the work  as pointed  earlier; one based on  equipment being  imported by  the  respondent  and leased to the appellant and alternatively rates on the basis that the  contractor would import pile driving equipment and technical know-how.  In respect  of the  second alternative, which was  ultimately agreed  to between the parties, it was clearly and unmistakably understood between the partiest had 156 the contractor  would have  to invest  Rs. 2  crores and the rates were  co-related to this investment with the knowledge of the  fact that  when work  was completed,  the  equipment would depreciate  to the  tune of  75% of its capability and would be  hardly of any use to the contractor. The estimated expenditure having  far exceeded,  a claim  for compensation would  certainly   be  tenable   at  the   instance  of  the contractor.      The High  Court quoted  clauses 16,  26 and  31 in  its judgment but  did not  dilate upon  the  provisions  of  the clauses so as to correlate them with its decision. Clause 16 envisaged a  situation where  since  the  formation  of  the contract any  fresh law  is enacted which has the bearing on the price  of materials  incorporated in  the  works  and/or wages of  labour, the terms of contract shall accordingly be varied. Clause  26 provided for supply of materials, plants, tools, appliances  etc. by the contractor. Clause 2 provides for the  liability of the contractor to supply construction, plant and machinery including the items to be imported and a further obligation  is cast  on the  contractor  to  furnish inventory of  the same.  Clause 31  amongst others, provided that the  pile driving  equipment shall  be procured  by the contractor, and  the selection of equipment shall be done by the contractor,  in consultation  with the respondent. These clauses were  presumably referred  to in  the context  of an argument that the price escalation clause does not cover the claim  for   compensation  for   additional  expenditure  on imported plant  and machinery and technical know-how because the contract  substantially provides  for  the  same  to  be supplied by  the contractor.  In  our  opinion,  this  over- simplification of  the clauses  of  the  contract  involving works of such magnitude is impermissible. The whole gamut of discussions, negotiations  and correspondence  must be taken

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into consideration  to arrive  at a true meaning of what was agreed to  between the parties. And in this case there is no room for  doubt that  the parties agreed that the investment of the  contractor under this head would be Rs. 2 crores and the tendered  rates were  predicated upon  and co-related to this understanding.  When an agreement is predicated upon an agreed fact  situation, if  the latter  ceases to  exist the agreement to  that extent  becomes irrelevant or otiose. The rates  payable   to  the  contractor  were  related  to  the investment of Rs 2 crores under this head by the contractor. Once the rates became irrelevant on account of circumstances beyond the  control of  the contractor,  it was  open to the contractor to  make a  claim for compensation. Therefore, it appears satisfactorily  established  that  the  claim  arose while implementing  the contract  and  in  relation  to  the contract. 157      The next  question is  whether this  claim made  by the contractor and  disputed by  the respondent would be covered by  the  arbitration  clause.  The  arbitration  clause  has already been  extracted. Even  the High  Court  admits  that clause 40 is very widely worded. It inter alia provides that all questions  and disputes  relating to  the meaning of the Specifications Estimates,  Instructions,  Designs.  Drawings hereinbefore  mentioned   and  as  to  the  quality  of  the Workmanship or  materials used  on the work or as to the any other questions  claim, right, matter or thing whatsoever in any way arising out of or relating to the contract---------- ----------------- or  otherwise concerning  the works or the execution--------------------------whether  arising   during the progress of the work or after completion---------------- --------shall be  referred to  the Sole Arbitrator etc." The scope, width  and the  ambit of the Arbitration clause is of widest amplitude and any claim arising out of or relating to the contract  or  otherwise  concerning  the  works  or  the execution  thereof  would  be  covered  by  the  arbitration clause. The material portion of clause 40 which would assist us in  deciding the  questions is  ’claim’ right  matter  or thing whatsoever  in any  way arising  out of or relating to the    contract-----------------------------estimates     or otherwise  concerning  the  works  or  the  execution  etc." Briefly stated  any claim  arising out of or relating to the contract, estimates or otherwise concerning the works or the execution  thereof  would  be  covered  by  the  arbitration clause. The  question to be posed is "does the claim made by the contractor  arise out  of or  relates to  the  contract, estimates, or  is otherwise  concerning works  for execution thereof ? Phrases such as ’claim arising out of contract’ or "relating to  the contract’  or ’concerning the contract’ on proper construction would mean that if while entertaining or rejecting the  claim or the dispute in relation to claim may be entertained  or rejected after reference to the contract, it is a claim arising out of contract. Again the language of cl. 40  shows that  any claim arising out of the contract in relation to  estimate made  in the contract would be covered by the  arbitration clause.  If it becomes necessary to have recourse to  the contract  to settle  the dispute one way or the other than certainly it can be said that it is a dispute arising  out   of  the   contract.  And  in  this  case  the arbitration clause  so widely worded as disputes arising out of the  contract or in relation to the contract or execution of the  works would  comprehend. Within  its compass a claim for compensation related to estimates and arising out of the contract. The  test is  whether  it  is  necessary  to  have recourse to  the contract  to settle  the dispute  that  has

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arisen. 158      We may now turn to some decision to which our attention was drawn.  The first case we would like to refer to is A.M. Mair & Co. v. Gordhandass Sagarmull. The Court was concerned with the  arbitration clause  drawn  up  as;  "all  matters, question, disputes,  differences and/or  claims, arising out of  and/or   concerning,  and/or  in  connection  and/or  in consequence of,  or relating  to,  the  contract  etc."  The question arose  whether the  due date under the contract was extended within  the time,  earlier reserved. The arbitrator held that  the due date of the contract has been extended by a mutual  agreement and  the respondents were held liable to pay a  sum of  Rs. 4,116 together with interest at the rates specified in the award. It was contended that the dispute is not covered  by the  arbitration clause.  This  Court  while holding that  the dispute  is  covered  by  the  arbitration clause observed  that looking to the rival contentions, such a dispute,  the determination  of which  turns on  the  true construction of  the contract,  would  also  seem  to  be  a dispute under  or arising out of or concerning the contract. The test  formulated was  that if  in settling  a dispute, a reference to the contract is necessary, such a dispute would be covered by the arbitration clause.      In Ruby  General Insurance  Co. Ltd v. Pearey Lal Kumar And Another  this Court  was concerned  with the clause in a policy of  insurance which provided that differences arising out of  the policy  shall be referred to the decision of the arbitrator. In  construing this  clause, this Court observed as under:           "The test  is whether  recourse to the contract by      which the  parties  are  bound  is  necessary  for  the      purpose of  determining the  matter in  dispute between      them. If  such recourse  to the  contract is necessary,      them the  matter must  come within  the  scope  of  the      arbitrator’s jurisdiction."      In  Union  of  India  v.  Salween  Timber  Construction (India) &  Ors.  this  Court  observed  that  the  test  for determining the question is whether recourse to the contract by which  both the  parties are  bound is  necessary for the purpose of  determining whether  the claim of the respondent firm is  justified or  otherwise. If it is necessary to take recourse to  the terms  of the  contract for  the purpose of deciding the  matter in  dispute, it  must be  held that the matter is within 159 the scope of the arbitration clause and the arbitrators have jurisdiction  to   decide  the   same.  In  so  stating  the proportion of  law, reliance  was placed on Heyman & Anr. v. Darwins Ltd.  in which  it was  held that ’where the parties are at  one in  asserting that  they entered  into a binding contract, but  a difference  has arisen between them whether there has been a breach by one side or the other, or whether circumstances have  arisen which have discharged one or both parties from further performance, such differences should be regarded as  differences which  have arisen in respect of or ’with regard to, or ’under’ the contract, and an arbitration clause which  uses these,  or similar  expressions should be construed accordingly.  The Court  affirmed the  decision in Ruby General Insurance Co. Ltd. case.      In Astro  Vencedor Compania  Naviera S. A. of Panama v. Mabanaft G.  M. B. H. The Diamianos a question arose whether a claim  in tort would be covered by the arbitration clause? It was  admitted that  the claim  for wrongful  arrest is  a claim in  tort. And  it was  contended that  a claim in tort

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cannot come  within the  arbitration clause.  The  Court  of Appeal speaking  through Lord Denning held that the claim in tort would  be covered  by the  arbitration clause,  if  the claim or  the issue has a sufficiently close connection with the claim under the contract.      In Gunter  Henck v.  Andre &  CIE.  S.  A.3  the  Court (Queen’s Bench  Division (Commercial  Court) help  that  the words ’arising  out of clearly extend the meaning than would otherwise be  applied to  the clause were it limited to ’all disputes arising under the contract.      In the facts before us, the respondent in para 4 of its counter-statement filed  before the  arbitrator specifically referred to  clause 16 of the General Conditions of Contract and to  the Additional  Terms and  Conditions  Modifications forming part  of the  contract document. In paragraph 11, it was stated  that the  claim of  the appellant was completely outside the  purview of  the contract  and the same does not fall within the purview of the first paragraph of Clause 40 160 it was further stated in paragraph 13 that contract provides for escalation  in certain  respects and  that is  the  only escalation which  is admissible in terms of the contract and the claim  made by  the appellant  does not  come within the escalation clause nor in the agreed formula relating to such escalation. The  contractor relied  upon Clause  13  of  the Additional Terms  and Conditions  Modifications  which  form part of the contract document to sustain its claim. From the pleadings, it  clearly transpires  that both the parties had recourse to the contract which is admittedly entered into in support of  the rival  contentions and  therefore, the claim made by  the appellant  would be  covered by the arbitration clause, which  is  of  the  widest  amplitude,  It  is  thus satisfactorily  established  that  the  claim  made  by  the contractor would be covered by the arbitration clause.      Mr. Nariman also wanted us to examine whether the claim made by  the arbitrator would be admissible on the principle of quantum merit. It is not necessary to examine this aspect at all in the view which we are taking.      He also  wanted us to adopt an approach that the effort of the  court must  be to uphold the award and not to reject it. We consider it unnecessary to dilate upon it.      The discussion leads to the inescapable conclusion that a specific  question of law touching the jurisdiction of the arbitrator was  specifically referred  to the arbitrator and therefore the  arbitrator decision is binding on the parties and the  award cannot  be set  aside on the sole ground that there was an error of law apparent on the face of the award. It is  also established that the claim for compensation made by the  arbitrator which  led to  the dispute was covered by the arbitration  clause. The quantum of compensation awarded by  the   arbitrator  was  never  disputed  nor  questioned. Therefore, the High Court was clearly in error reversing the decision of the trial court. 161      Accordingly this appeal succeeds and is allowed and the Judgment of the High Court is set aside and the Judgment and order of  the Subordinate  Judge, Ernakulam  dated March 30, 1979 is restored with costs throughout- N.V.K.                                       Appeal allowed. 162