Reportable

IN THE SUPREME COURT OF INDIA

CIVIL APPELLATE JURISDICTION

CIVIL APPEAL NOS. 2764 OF 2009

(Arising out of SLP [C] Nos.10818 of 2007)

State of Rajasthan & Anr. … Appellants

Vs.

M/s. Ferro Concrete Construction Pvt. Ltd. … Respondents

WITH

CA No. 2767/2009 [@ SLP (C) No.22565/2007]

J U D G M E N T

R.V.RAVEENDRAN, J.

Leave granted. Heard learned counsel.

2.The appellants (also referred to as ‘employer’) invited tenders for the

manufacture, laying, testing and commissioning of water pipeline of a length

of 37.41 km. under a water supply scheme in Ajmer District. Tenders were

received from various tenderers including respondent (hereinafter referred to

as the ‘contractor’). As different tenderers had stipulated different terms and

1

conditions, the tenderers were invited for discussions, and common terms of

reference (for short ‘CTR’) were formulated on 22.2.1988 and the original

tender conditions stood modified to the extent of the alterations in the CTR.

3.Thereafter the offer of the respondent was accepted and a work order

dated 23.8.1988 was issued to him stipulating the period for completing the

contract as two years from that date. There was an amendment to the work

order on 8.11.1988. The employer and the contractor entered into an

agreement dated 11.1.1989 enumerating and stipulating the documents

which will form part of the contract and the modifications agreed in regard

to certain terms. The value of the work as per the work order was

Rs.9,91,94,602.50. Ten percent of the value of work (Rs.99.19 lakhs) which

was agreed to be released as mobilization advance, was released to the

contractor between 25.1.1989 and 5.5.1989. The contractor created an

equitable mortgage over its plant by depositing its title deeds thereto as

security for the mobilization advance. By letter dated 15.12.1990, the

contractor confirmed that the original title deeds will remain in deposit with

the employer till the entire amount of advance was repaid in full with

interest.

4.The contract (clause 23 of General Conditions of Contract) provided

for settlement of disputes by arbitration. By letter dated 18.6.1990

2

respondent invoked the provision for arbitration and sought appointment of

an arbitrator to decide its claims aggregating to Rs.2,01,66,547, arising on

account of certain alleged omissions and commissions of the employer.

Another dispute was raised in respect of the rate payable for work done

subsequent to the due date of completion (22.8.1990). On 22.8.1990 the

contractor stopped the work. By that date it had manufactured 15.26 km. of

pipes and had laid 11.6 km. out of them and tested only 1.4 km. of pipeline

as against the total contracted quantity of 37.41 km. On 13.9.1990 the

employer notified the contractor that if he did not resume the work, the

balance of the work would be got executed through an alternative agency in

terms of the contract, by treating the contract as having been abandoned on

22.8.1990, and recover the excess cost from the contractor.

5.The respondent-contractor sent a reply dated 3.11.1990 stating its

efforts to complete the work were rendered futile on account of the delays

and breaches on the part of the employer; and it was necessary to enter into a

fresh agreement as the tender was not accepted in the manner in which it

ought to have been accepted. The contractor did not resume the work. The

contractor’s stand was that in the absence of an extension of time for

completion by mutual consent before the stipulated date for completion, it

was not liable to continue the work on the tendered rates. The employer on

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30.3.1991 made a final demand calling upon the contractor to state whether

it was ready to re-start and complete the remaining work and if so to submit

a revised time schedule for such completion. As the contractor did not

resume the work, the employer initiated steps to get the balance work

executed through an alternative agency. In the meanwhile the contractor

filed a suit against the appellant in the District Court, Ajmer and obtained a

temporary injunction restraining the employer from imposing liquidated

damages.

6.The contractor made an application to the District Court, Ajmer, under

section 20 read with section 8 of the Arbitration Act, 1940 (Act for short) for

filing the arbitration agreement into court and seeking appointment of an

arbitrator. The District Court, Ajmer by order dated 27.4.1991 held that it

had jurisdiction to appoint an arbitrator but deferred the actual appointment

to a future date. The contractor revised its claim to Rs.5,51,90,306/- in the

notice of appointment of arbitrator. The employer challenged the order of

the District Judge and the High Court allowed the appeal on 9.8.1991 and set

aside the order of the District Judge. The contractor in turn approached this

Court. On 12.11.1991, this Court recorded the consent of parties for

appointment of Mr. B L Mathur as sole arbitrator and directed the employer

(Chief Engineer, Public Health Engineering Department, State of Rajasthan)

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to appoint him as the arbitrator. On being appointed, the arbitrator entered

upon the reference and the contractor filed a claim statement before the

arbitrator on 13.1.1992 making 43 claims aggregating to Rs.6,21,29,626/-.

7.The employer filed its reply to the claim statement, and also made five

counter-claims aggregating for Rs.863,46,505/- before the arbitrator. In the

meanwhile, the employer having concluded the arrangements to get the work

completed through an alternative agency, on the contractor’s failure to

resume the work, awarded the work to M/s. Indian Hume Pipes Co. Ltd. on

10.8.1992. On the basis of the contract value in regard to the balance work,

the employer revised its counter claim No. 2 relating to extra cost to

Rs.6,66,62,000/-and consequently the total of the counter claims stood

increased to Rs.11,55,98,388/-.

8.After considering the claims and counter claims, the learned arbitrator

made an award dated 21.9.1994. He rejected claim nos. 4, 7,8,10, 14

21,22,23,26,36,36A, 37,38,39,40,41, & 41A,42, & 42A and 43 of the

contractor. He awarded the following amounts to the contractor in regard to

the remaining claims:

S.

No.

Claim No. Description of claim Amount

claimed

Rs.

Amount

awarded

Rs.

5

1. 1 Loss of profitability due to late

release of mobilization advance

83,49,913 33,06,500

2. 2 & 16 Refund of excess sales tax

deducted

2,94,142 2,94,142

3. 3 & 15 5% amount withheld for testing

of pipeline

14,70,956 14,70,956

4. 5 & 18 Excess recovery of security

deposit

13,28,457 13,28,457

5. 6 & 17 Price escalation 58,83,854 43,47,520

6. 9 & 19 Refusal of employer for re-

designing pressure pipes from

higher into lower.

10,11,354 6,95,910

7. 11 & 20 Slow progress due to reduction of

width of trench

21,32,496 21,07,195

8. 24 Refund of deduction for want of

BG renewal

4,31,926 4,31,926

9. 27 & 28 Gap pipes fitted 2,60,200 67,098

10. 29 Payment for 8 kg pipes but paid

for 6 kg pipes

1,17,150 1,12,294

11. 30 Refunds for paint of specials 9,759 9,759

12. 31 Deduction from running bill for

pipes

22,385 22,385

13. 32 Refund for deduction for

insufficient refilling

46,569 46,569

14. 33 Less measurement of pipe 1,15,738 1,15,738

15. 35 with

25

34

Difference in final bill

Less payment re: sand bedding

Payment for excavation

1,47,00,000

7,31,676

2,50,740

23,74,458

16. 37A Idle charges for machinery, staff

etc.

12,072 per

day from

13.1.92

12,072 per day

from date of

award, if the

factory was not

released from

mortgage

security within

30 days.

17. 12 & 13 Interest (pre-reference, pendente

lite and future)

18% per

annum

18% per annum

The arbitrator rejected counter claims 1, 2, 4 and 5 of the employer. In

regard to counter-claim No. 3 (Rs.79,87,846/- towards refund of

mobilization advance with interest), the arbitrator awarded a sum of

6

Rs.59,42,275 with interest at 18% per annum from 18.9.1990 up to the date

or decree or payment whichever was earlier.

9.The contractor made an application for making the award, a rule of

the court. The employer challenged the award by filing objections under

section 30 read with section 33 of the Act. By order dated 17.2.2003, the

District Judge, Ajmer allowed the application of the contractor and made the

award a rule of the court subject to a modification in regard to the award

made on claim No.37A. In place of the award made by the Arbitrator

(direction to employer to pay Rs.12072/- per day from the date of award),

the District Judge directed that the employer shall return the original title

deeds to the contractor and pay the amounts awarded to the contractor after

deducting the amount awarded by way of counter-claim (that is

Rs.59,42,275/- towards refund of mobilization advance due with 18%

interest) within 30 days from the date of decree, failing which, the employer

shall pay Rs.12072 per day from the date of decree.

10.The employer filed an appeal (Civil Misc. Appeal No.872/2003)

against the said judgment and decree contending that the award ought to

have been set aside. The contractor also filed an appeal (Civil Misc. Appeal

No. 910/2003) aggrieved by the modification by the Learned District Judge

directing compensation of Rs.12,072/- per day only from the date of decree

7

(instead of the date of award). The High court dismissed the appeal filed by

the employer by judgment dated 5.2.2007. The High Court allowed the

appeal filed by the contractor by judgment dated 30.5.2007 and restored the

direction of the arbitrator that the payment of compensation at Rs.12,072/-

per day should be from the date of the award itself (21.9.1994). The High

Court also granted interest at 18% per annum from the date of the award.

Thus the High Court upheld the award.

11.Feeling aggrieved the employer has filed these two appeals by special

leave. The first of the appeals (arising out of SLP [C] No.10818/2007) is

against the dismissal of its appeal on 5.2.2007. The second of the appeals

(arising out of SLP(C)No.22565/2007) is against the judgment dated

30.5.2007 allowing the contractor’s appeal. One of the contentions urged by

the appellants before the court below was that the Arbitrator did not have

jurisdiction to enter upon the reference and make an award, as the appointing

authority under the arbitration clause had merely appointed the arbitrator,

but had not referred any dispute to him for arbitration. The said contention

was rejected by both courts on the ground that when the authority competent to

appoint the arbitrator appointed the arbitrator, in pursuance of the agreement

reached before this Court to have the pending disputes of both parties settled

by arbitration, the employer could not be permitted to raise a technical plea

8

that the arbitrator had no jurisdiction to proceed with the arbitration, in the

absence of a further specific reference by the employer. Realising the

unsoundness of the said contention, the appellants did not press it before us.

12.On the contentions urged, the question that arises for consideration is

whether there is any legal misconduct or error apparent on the face of the

award, in regard to the award of the Arbitrator in respect of (i) claims 1 and

37A; (ii) claims 12 & 13; (iii) claims 2 & 16, 3 & 15, 5 & 18, 6 & 17, 9 &

19, 11 & 20, 24, 27 & 28, 29, 30, 31, 32, 33, 35 (with claim nos. 25, 34); and

(iv) counter claims 1, 2, 4 and 5.

13.Section 30 of the Act inter alia provides that an award can be set aside

on the ground that an arbitrator had misconducted himself or the

proceedings, or that the award had been improperly procured or is otherwise

invalid. An error apparent on the face of the award, is a ground for setting

aside the award under section 30 or for remitting the award to the Arbitrator

under section 16(1)(c) of the Act. In Champsey Bhara & Co. vs. Jivraj

Balloo Spinning & Weaving Co. Ltd. [AIR 1923 PC 66] the Privy Council

explained the term ‘an error of law on the face of the award’ thus :

“An error of law on the face of the award means that you can find in the

award or a document actually incorporated thereto as for instance, a note

appended by the arbitrator stating the reasons for his judgment, some legal

proposition which is the basis of the award and which you can then say is

erroneous.”

9

It was well settled that under the Arbitration Act, 1940, an award was not

open to challenge on the ground that the arbitrator has reached a wrong

conclusion or failed to appreciate facts, as under the law, the arbitrator is

made the final arbiter of the dispute between the parties. While considering

the challenge to an award, the court will not sit in appeal over the award nor

re-appreciate the evidence for the purpose of finding whether on the facts

and circumstances, the award in question could have been made. When there

is no allegation of moral misconduct against the arbitrator with reference to

the award, and where the arbitration has not been superseded, there were

only two grounds of attack. First was that there was legal misconduct on the

part of the arbitrator in making the award. Second was that there was an

error apparent on the face of the award. This Court explained the principles

relating to interference with awards under the 1940 Act in State of

Rajasthan v. Puri Construction Co. Ltd. [1994 (6) SCC 485] thus :

“Similarly, an award rendered by an arbitrator is open to challenge within

the parameters of several provisions of the Arbitration Act. Since the

arbitrator is a judge by choice of the parties, and more often than not, a

person with little or no legal background, the adjudication of disputes by

an arbitration by way of an award can be challenged only within the

limited scope of several provisions of the Arbitration Act and the

legislature in its wisdom has limited the scope and ambit of challenge to

an award in the Arbitration Act. Over the decades, judicial decisions have

indicated the parameters of such challenge consistent with the provisions

of the Arbitration Act. By and large the courts have disfavoured

interference with arbitration award on account of error of law and fact on

the score of mis-appreciation and misreading of the materials on record

and have shown definite inclination to preserve the award as far as

possible. As reference to arbitration of disputes in commercial and other

transactions involving substantial amount has increased in recent times,

the courts were impelled to have fresh look on the ambit of challenge to an

10

award by the arbitrator so that the award does not get undesirable

immunity. In recent times, error in law and fact in basing an award has not

been given the wide immunity as enjoyed earlier, by expanding the import

and implication of “legal misconduct” of an arbitrator so that award by the

arbitrator does not perpetrate gross miscarriage of justice and the same is

not reduced to mockery of a fair decision of the lis between the parties to

arbitration. Precisely for the aforesaid reasons, the erroneous application

of law constituting the very basis of the award and improper and incorrect

findings of fact, which without closer and intrinsic scrutiny, are

demonstrable on the face of the materials on record, have been held, very

rightly, as legal misconduct rendering the award as invalid. It is necessary,

however, to put a note of caution that in the anxiety to render justice to the

party to arbitration, the court should not reappraise the evidences

intrinsically with a close scrutiny for finding out that the conclusion drawn

from some facts, by the arbitrator is, according to the understanding of the

court, erroneous. Such exercise of power which can be exercised by an

appellate court with power to reverse the finding of fact, is alien to the

scope and ambit of challenge of an award under the Arbitration Act.

Where the error of finding of facts having a bearing on the award is patent

and is easily demonstrable without the necessity of carefully weighing the

various possible viewpoints, the interference with award based on

erroneous finding of fact is permissible. Similarly, if an award is based by

applying a principle of law which is patently erroneous, and but for such

erroneous application of legal principle, the award could not have been

made, such award is liable to be set aside by holding that there has been a

legal misconduct on the part of the arbitrator. In ultimate analysis, it is a

question of delicate balancing between the permissible limit of error of

law and fact and patently erroneous finding easily demonstrable from the

materials on record and application of principle of law forming the basis

of the award which is patently erroneous.”

Keeping the said principles in mind let us examine the various claims.

Re : Claim 1 :

14.The contractor claimed that the mobilization advance had to be

released to it immediately on entrustment of work, to enable it to set up the

factory for manufacturing the pipes. It was contended that prompt release of

mobilization advance was crucial and fundamental to the contract as

11

manufacture of pipes depended upon setting up a factory for that purpose.

Even assuming that the mobilization advance could be released in three

instalments, as per modified terms and conditions, the contractor contended

that there was inordinate delay on the part of the employer in releasing the

instalments, that too, in five instalments. It was further contended that if the

mobilization advance had been released immediately on award of the work,

it would have set up a factory and commenced production within three

months; that in view of the delay, it lost production for a period of eight

months that is nearly one third of the contract period, and that as a

consequence they were not able to execute the work of the value of

Rs.5,56,66,086/- and the loss of profits and overheads on the said amount at

a standard 15% was Rs.83,49,913/- and it was entitled to that amount as

compensation for the breach by the employer. The calculation of the said

loss of profit and overheads in claim no.(1) was as follows :

Amount of Contract (with ZVV) Rs.9,91,94,602.00

Payment already received from the

Department Rs. 2,88,28,516.00

------------------------

Balance Rs. 7,03,66,086.00

------------------------

Amount due to contractor against work

Done Rs.1,47,00,000.00

------------------------

Balance Rs. 5,56,66,086.00

------------------------

Loss of Profitability & overheads @ 15% Rs. 83,49,913.00

12

(0.15 x 5,56,66,086) ------------------------

15.The employer resisted the said claim contending that having regard to

the relevant conditions in the work order and the contract agreement, the

mobilization advance had to be released in three instalments against Bank

Guarantees; that the second and third instalments had to be released only on

production of the certificate of a chartered accountant on the utilization of

the previously paid amount and on verification of the department of the

progress; and that the mobilization advance was released in instalments in

terms of contract and there was no delay no breach on their part.

16.We may refer to the relevant provisions of the contract in this behalf.

Clause 8 of the Special Conditions relating to establishment of factory at site

provided thus :

“Establishment of factory at site :

The contractor, if he so desires, may establish the pipe factory at site to

avoid transportation of pipes. All material and equipment and land

required for the purpose shall be arranged by the contractor at his own

cost. The department may assist him in acquisition of land. However, the

work should not be delayed on this account. The firm should commence

and continue to supply the pipes etc. from their existing set up till the

factory at site is established. As already stated, the supply of pipes etc.

should commence within 30 days, from the award of contract.”

13

The above clause was superseded by clause 3 of the Common Terms of

Reference which is extracted below :

“Mobilisation advance (for PSC Pipes only)

10% of the contract value shall be given against Bank Guarantee as

mobilization advance at a simple interest rate of 18%. Recovery of

mobilization advance shall be effected from 1

st

Running Bill on pro-rata

basis in a way that complete mobilization advance is recovered by the time

75% work is complete. Interest shall also be recovered alongwith recovery

of capital mobilization advance. The assets built by the contractor out of

mobilization advance so made will be mortgaged to the department. In

case work is left in-complete, liquidated damages will be imposed as per

terms of the document and the assets built by the contractor for

manufacturing pipe will become the property of the department. Such

assets can be used by the department for the purpose of completing the

remaining work.”

In the subsequent work order issued on 23.8.1988, clause 5.1 relates to

mobilization advance. While para (a) of clause 5.1 was a reproduction of

clause (3) of the Common Terms of Reference, the following was added as

para (b) in clause 5.1 of the work order :

“The mobilization advance is being given for establishment of factory at

site. In case the factory is not established in 3 months period the

mobilization advance shall be recovered by way of the Bank Guarantee

given in lieu of the mobilization advance.”

By letter of amendment dated 8.11.1988 issued by the employer, several

clauses of the work order including clause 5.1(b) were amended/replaced.

Para 5.1(b) as replaced is extracted below :

14

“The mobilization advance is being given for establishment of factory at

site. The mobilization advance shall be paid in three instalments of which

the second and third instalment shall be paid on production of the

certificate of the Chartered Accountant about utilization of the previously

paid amount and on verification by the department of the progress towards

setting up of the factory.”

This was followed by an agreement executed by both parties on 11.1.1989

and clause (7) thereof extracted below dealt with mobilization advance :

“Mobilisation advance:

10% of the contract value shall be given as mobilization advance @ 18%

simple interest subject to production of Bank Guarantee from any of the

Nationalised Bank equal to the amount of such advance. The recovery of

such advance shall be effected from 1

st

running bill on prorate basis in

such a way that recovery of this advance is made by the time when 75% of

the work is completed. Amount of interest is recoverable along with the

recovery of principal amount.

(b) The assets built by the contractor out of the mobilization advance shall

be mortgaged with the Government. Such assets will not be mortgaged

with any other agency for any purposes.

(c)In case contractor fails to complete the work in specified time, the

contractor shall pay the compensation as liquidated damages as per the

terms and conditions of the contract and the assets built by the contractor

for manufacturing of pipes will be the property of the government and the

department will have right to use it as government property for completion

of remaining work. x x x x x

17.The arbitrator held that clause 8 of the special conditions of contract

stood superseded by clause 3 of the Common Terms of Reference which

required the mobilization advance to be released in one instalment and not in

three instalments. He held that clause 5(1)(b) inserted by the amendment to

the work order dated 8.11.1988 was an unilateral incorporation by the

15

employer and was not binding on the contractor. He further held that the

employer ought to have released the mobilization advance along with the

work order dated 23.8.1988, and the employer had abnormally delayed the

release of mobilization advance by a total period of 8.5 months by releasing

it in instalments. He held that there was a clear delay of about 8 months and

during that period the contractor could have executed one third of the work

of the value of Rs.330,64,867.50, and as the contractor was prevented from

executing the said work on account of the delay, the contractor was entitled

to 10% of the said amount, that is Rs.33,06,500/- as loss of profit. The said

sum was therefore awarded to the contractor under claim (1).

18.There is no doubt that clause 8 of the special conditions of

contract has to be read with clause 3 of the CTR. It is true that Clause

3 of CTR did not contemplate the mobilization advance being released in

three instalments. But the CTR was followed by work order dated 23.8.1988

which was followed by amendment dated 8.11.1988 which specifically

stated that the mobilization advance shall be paid in three instalments of

which the second and third instalments shall be paid on production of a

certificate of the Chartered Accountant about utilization of the previously

paid amounts and on verification by the department towards progress of the

factory. The arbitrator has held that the said clause was unilaterally

16

introduced and therefore is not binding by the contractor. On the face of it

this is erroneous. After the work order, the parties have executed a bilateral

agreement dated 11.1.1989 which specifically states at para 2 and para 6 that

the work order dated 23.8.1988 and subsequent amendment to the work

order dated 8.11.1988 shall be deemed to be a part of the contract and will

bind both the parties. The agreement dated 11.1.1989 itself contains a

detailed clause (clause 7) relating to mobilization advance in addition to

what was earlier agreed in regard to mobilization advance. Therefore

obviously the clauses relating to mobilization advance in the amendment to

work order dated 8.11.1988 and the agreement dated 11.1.1989 had to be

read in addition to the earlier provision relating to mobilization advance

contained in the CTR. Clause 5(1)(b) of the work order, as amended,

specifically provided that the contractor had to provide a Bank guarantee for

the mobilization advance. Sub-clause (b) of clause 7 of the agreement dated

11.1.1989 provided that assets built by the contractor by utilizing the

mobilization advance should be mortgaged to the employer. Sub-clause (c)

of clause 7 provided that if the contractor fails to complete the work, the

assets built by the contractor would become the property of the employer

and the department could use it as government property for completion of

the remaining work. Sub-clause (d) of clause 7 provided that if the

contractor failed to establish the factory within three months of payment the

17

mobilization advance, the said advance would be recovered by enforcing the

bank guarantee given in lieu of the mobilization advance. Thus it is evident

that the mobilization advance had to be released only against a bank

guarantee to be furnished by the contractor.

19.If according to the contractor, the mobilization advance had to be

released in a single instalment and if the contractor wanted the entire

mobilization money to be released in one lump sum instead of in three

instalments, it ought to have given a single bank guarantee for the entire

sum. But strangely the contractor did not give such a bank guarantee. It gave

four bank guarantees for Rs.40 lacs on 21.5.1989, Rs.25 lacs on 1.2.1989,

Rs.15 lacs on 17.2.1989 and Rs.25 lacs on 23.3.1989. It is thus evident that

the contractor had also proceeded on the basis that the condition in

clause 5(1)(b) of the work order amendment letter dated 8.11.1988

governed the payment of mobilization advance. We find that the

mobilization amount corresponding to first bank guarantee was released

within two days; mobilization amount corresponding to second guarantee

was released in seven days; and mobilization amount corresponding to third

guarantee, was partly released in 12 days and the balance in two months.

The amount corresponding to the second and third bank guarantees had to be

released only after the contractor produced a certificate in regard to the

18

utilization of the earlier advance. It is seen that in regard to the first

mobilization advance the certificate was produced on 7.2.1989 and on the

same day the second instalment was released. Insofar as third instalment, the

certificate was only received on 4.4.1989. Therefore it cannot be said that

there was delay or breach on the part of the employer in releasing the

mobilization advance. If at all there was any delay, the delay was on the part

of the contractor. The fact that release of mobilization advance was

governed by clause 5(1)(b) of the work order (as amended on 8.11.1988) and

clause 7 of the agreement dated 11.1.1989 was totally overlooked by the

arbitrator by proceeding on the basis that mobilization advance was

governed by the CTR alone. The Arbitrator committed a legal misconduct

by ignoring the terms of contract, that is the agreement dated

11.1.1989,which specifically provided that in addition to the CTR, the work

order and amendment to work order dated 8.11.1988 would also form part of

the contract. The Arbitrator also overlooked the fact that additional provision

regarding mobilization advance was introduced in the agreement itself.

Therefore the mobilisation advance was governed by the terms in the CTR,

the work order, the amendment to the work order dated 8.11.1988 and

agreement dated 11.1.1989 read together. If so read, it was clear that there

was no breach on the part of the employer and the contractor was itself

responsible for the delay. If so, the question of compensating the contractor

19

on that score does not arise.

20.There is yet another aspect. The contractor claimed compensation on

the basis that he could not do work of the value of Rs.5,56,66,086/- in view

of the delay and he was entitled to 15% thereof namely Rs.83,49,913/- as

compensation. But the arbitrator made an award in respect of the claim on

the ground that there was delay in releasing the mobilization advance and

during that period of delay, one third of the contract work could have been

done and the value of the work that could have been done was

Rs.3,30,64,867, and 10% thereof was the loss of profit. Firstly, there was no

such plea. Secondly, we have already held that the delay relating to

mobilisation advance, was not on the part of the employer. Thirdly, even if

there was delay, it was nobody’s case that no work was done or that the

contractor had suffered loss for non-execution of the work during the

contract period. Therefore we are of the view that the award of

compensation of Rs.33,03,500/- towards claim no.(1) is liable to be set

aside.

Re : Claim 37A :

21.Claim No.37A was linked to mobilization advance. The contractor

claimed that it had mortgaged its pipe manufacturing unit in favour of the

20

employer by deposit of title deeds, as security for repayment of the

mobilization advance; that the machinery installed in the said factory had

not been released by the employer in its favour and as a consequence, it

could not be shifted to another place to enable it to start the manufacturing

process elsewhere; and that on account of the failure on the part of the

employer to release the plant, it had to keep the machinery idle and the

employer was therefore liable to reimburse to the contractor the loss of

production from 13.1.1992 at the rate of Rs.12,072/- per day. The contractor

contended that if it had been permitted to shift its plant and machinery, it

would have produced 15 pipes per day valued at Rs.1,20,000/-, that out of

which the overhead and profit element was 15% (that is Rs.18,000/- per

day); that as there were 306 working days in a year, the loss of

profits/overheads would be 18,000 x 306/365 = Rs.15,090/- per day; and that

if 20% thereof (Rs.3,018/-) was deducted therefrom towards labour

component, the loss of profit per day on account of non-availability of plant

and machinery was Rs.12,072 per day. The employer resisted the claim by

contending that there was no obligation to release the plant and its title deeds

until the mobilization advance was repaid with interest; that the contractor

had not repaid the mobilization advance and interest thereon in spite of the

award; and therefore the question of compensating any ‘daily loss’ on that

account did not arise. The employer also contested the correctness of the

21

assumptions made for calculating the loss.

22. The contractor deposited the title deeds relating to the plant by way

of mortgage of deposit of title deeds, in terms of the contract and specifically

agreed that the original deeds will remain in deposit with the employer till

the entire mobilization advance was repaid with interest. It is also not in

dispute that though a mortgage security was created on the plant, it

continued to be in the possession, enjoyment and control of the contractor,

as the employer did not take over physical possession of the plant at any

point of time.

23. The arbitrator considered Claim 37A with three other claims – (36,

36A and 37). The particulars of the said claims are:

Claim 36

Compensation for idling machinery, labour,

staff due to delay and wrong decisions

(for the period up to 12.1.1992) Rs.48.21 lacs

Claim 36 A

Compensation for idling machinery, staff &

Labour etc. from 13.1.1992 Rs.6370 per day

Claim 37

Compensation for loss of production in the

Factory (for the period upto 12.1.1992) Rs.61.48 lacs

Claim 37A

Compensation for loss of production in the

22

Factory from 13.1.1992 Rs.12,072 per day

The arbitrator held that none of the four claims was maintainable as the

factory built out of mobilization advance had been mortgaged in favour of

the employer. As a consequence he did not award any amount in respect of

the four claims. But strangely he directed payment of Rs.12,072 per day

from the date of award not because he held that there was any loss of

production as a consequence of any breach by the employer, but on the

following reasoning:

“After perusal of the arguments of the parties and the evidence on record, I

come to the finding that it is a case of real hardship to the claimants for

having been denied the use of the factory and machinery elsewhere in their

business venture, but because of legalities involved, such as mortgage, the

claimants cannot be given the benefit of any award. Had the assets of

factory built out of mobilization advance not being mortgaged in favour of

the respondent I would have considered making an award in favour of the

claimants. In view of the fact that I have allowed counter claim No.3 of

the respondent for balance amount of mobilization advance in full along

with interest, there is no reason why the assets built out of mobilization

advance should continue to remain mortgaged with the respondents. I

therefore direct the respondent to release the documents relating to

mortgage as mentioned above within a period of 30 days from the date of

this award failing which the claimants shall be entitled to an award of

Rs.12,072 per day from the date of this award till the date of release of

mortgage. No award in favour of the claimants for the period I entered

upon, reference to the date of the publication of the award.”

[emphasis supplied]

24.Thus we find that the award under claims 37A was not made on

account of any finding of breach on the part of the employer. It was made

because the Arbitrator had made an award against the contractor in favour of

the employer for Rs.59,42,275 with interest. The Arbitrator was of the view

23

that if that sum was adjusted against the amounts due by the employer, there

was no need for the mortgage of the plant to continue and therefore the

employer should release the documents of title deposited by way of

equitable mortgage, within 30 days from the date of award; and that if the

employer failed to do so, the employer should pay to the contractor

Rs.12,072 per day from the date of the award till the date of release of the

mortgage. Therefore, the said award under claim 37A was made, not on

account of any breach committed by the employer, but in respect a breach if

made in future after the date of the award. There was no such claim and the

award was therefore beyond the reference. Further, the reasoning is very

strange and is a classic case of an error apparent on the face of the award and

a legal misconduct. The arbitrator rejected the claim No.37A for payment of

Rs.12,072/- as compensation for loss of production from 13.1.1992 (which

was the subject matter of claim) on the ground that the plant had been

mortgaged in favour of the employer and therefore there was no justification

for the contractor to claim that it should be permitted to remove and take

away the plant when the mortgage subsisted. Having rejected the claim, the

Arbitrator evolved a strange reasoning that though there was a subsisting

valid mortgage in respect of the mobilization advance with interest in favour

of the employer, because he had made an award in favour of the employer

for Rs.59,42,275 plus interest, the mortgage came to an end and the

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employer became liable to return the documents and if it failed to return the

documents, the contractor was entitled to damages of Rs.12,072/- per day

from the date of award.

25.The arbitrator noticed the fact that the plant and machinery was

mortgaged by deposit of title deeds in favour of the employer and that the

contract was that “the original documents will remain in deposit with the

employer till the amount of advance is repaid with full interest.” The

arbitrator in fact makes an award for return of Rs.59,42,276 in favour of the

employer with interest at 18% per annum from 1.9.1990 to 17.9.1990 and

interest at 18% per annum on Rs.59,42,275/- from 18.9.1990 till date of

decree or payment, whichever was earlier. Therefore evidently until the

amount of Rs.59,42,275/- with interest was paid by the contractor to the

employer, the mortgage would continue. If the mortgage continued, there

was no obligation on the part of the employer to return the documents; and if

there was no obligation on the part of the employer to return the documents,

the contractor could not complain that the documents were wrongly held by

the employer nor could it claim loss of production as a result of employer

wrongly withholding the documents.

25

26.It is of some interest to note that as per the award of the arbitrator,

made under claim 37A, on a claim that was never made, the amount that

would become due at Rs.12,072/- from 21.9.1994 to date will be

approximately Rs.6,42,70,000/-. We have a strange situation where the

arbitrator makes an award in favour of an employer directing the contractor

to refund the employer Rs.59,42,275/- with interest at 18% per annum from

18.9.1990 upto date of decree/payment and then even though the said

payment was not made, awards damages to the contractor which works out

to Rs.6,42,70,000/- to the contractor. This to say the least is legal

misconduct and an error apparent on the face of the award.

27.We may also refer to another aspect. A sum of Rs.12,072/- per day

was claimed as damages by the contractor in a two line calculation without

any supporting evidence or document. As noticed above, the claim was on

the basis that the contractor would have manufactured 15 pipes per day of

the value of Rs.1,20,000/- and that the profit and overhead element out of it

would have been 15% or Rs.18,000/- per day. By taking the working days as

306 in a year and deducting 20% of labour component, the loss of profit per

day was calculated to be Rs.12,072/- per day. There is no evidence to show

that the contractor was at any point of time manufacturing 15 pipes a day of

the value of Rs.8000/- each or that he would have made a profit of 15% on

26

the cost thereof. The claim is made on the ground that it is disabled from

manufacturing that many number of pipes elsewhere. There is no evidence

that it had other contracts where it was required to manufacture that number

of pipes or that it could not manufacture the required pipes for want of plant

and machinery. Nor is there any evidence as to the value of the plant and

machinery that had been mortgaged to the employer and what would be the

cost of an alternative plant with a capacity to manufacture 15 pipes per day.

If the plant and machinery was of the value of say Rs.25 lakhs, or if the

contractor could install another similar plant at a cost of Rs.25 lakhs, then

the loss at best would be interest on Rs.25 lakhs and not anything more. In

fact even though there is no evidence, while making claim nos.36 and 37 the

contractor has given value of the plant and machinery as Rs.36,84,161/-.

Even assuming the said figure to be true, at best the blocked up investment

was only Rs. 36,84,161/- and the loss would be around 1% thereon per

month by way of interest which would be Rs.36,841/- per month. What is

more strange is nowhere in the award the arbitrator considers the validity of

the claim of Rs.12072 per day nor accepts the said claim as valid or correct.

In a reasoned award if the claim of a contractor is equated to proof of the

claim, then it is obviously a legal misconduct and an error apparent on the

face of the award. While the quantum of evidence required to accept a claim,

may be a matter within the exclusive jurisdiction of the arbitrator to decide,

27

if there was no evidence at all and if the arbitrator makes an award of the

amount claimed in the claim statement, merely on the basis of the claim

statement without anything more, it has to be held that the award on that

account would be invalid. Suffice it to say that the entire award under this

head is wholly illegal and beyond the jurisdiction of the arbitrator, and

wholly unsustainable.

28.Learned counsel for the contractor submitted that though there was an

award in favour of the employer for refund of mobilization advance of

Rs.59,42,275/- with interest, there was a larger award in its favour

aggregating to about Rs.1.67 crores and interest and it was legitimately

entitled to adjust the sum of Rs.59,42,275/- with interest towards the amount

due by the employer under the award namely Rs.1.67 crores with interest

and therefore as on the date of the award the liability towards mobilization

advance stood wiped out on account of the same being adjusted towards the

amount claimed by him and therefore as on the date of the award, the

liability to refund the mobilization advance ceased. This contention is not

sound. The mobilization advance amount was an ascertained sum due to the

employer from the contractor, with a specific provision for interest. There

was a specific contract for continuation of the mortgage until the said

amount was paid. On the other hand the amounts that allegedly became due

28

to the contractor under the award were mostly towards damages and

escalation in prices validity of which were under challenge and there was no

provision in the contract for payment of interest thereon. As noticed above

at best the arbitrator could have directed return of the documents of title to

the contractor and could not have directed payment of damages at the rate of

Rs. 12072/- per day.

29.We therefore hold that viewed from any angle, awarding Rs.12,072/-

per day as damages, from the date of award under Claim 37A cannot be

sustained and the same is liable to be set aside.

Re : Claim Nos. 12 and 13 :

30.The contractor claimed pre-reference interest at 18% per annum on all

its claims from the date of claim to date of arbitrator entering upon the

reference (18.6.1990 to 15.12.1991), as also pendente lite interest from

16.12.1991 to 21.9.1994 and future interest from the date of award till

date of payment or decree whichever was earlier. The Arbitrator awarded the

following interest : (a) pre-reference interest on all sums awarded except

claim no.(1), from 3.9.1990 (date of contractor’s application under section 8

and 20 of the Act) to 15.12.1991 at 18% per annum; (b) pendente lite

29

interest on all sums awarded including claim No. 1, from 16,12.1991 to

21.9.1994 at 18% per annum; and (c) future interest on all sums awarded

from 22.9.1994 till date of decree or payment whichever is earlier at the rate

of 18% per annum. The District Court did not award any post decretal

interest, but the High Court, however, granted interest from the date of

decree till date of payment at 18% per annum.

31.The appellants contend that there was no provision in the contract for

payment of interest on any of the amounts payable to the contractor and

therefore no interest ought to be awarded. But this Court has held that in the

absence of an express bar, the arbitrator has the jurisdiction and authority to

award interest for all the three periods – pre reference, pendente lite and future

(vide decisions of Constitution Bench in Secretary, Irrigation Department,

Government of Orissa vs. G. C. Roy – 1992 (1) SCC 508, Executive Engineer,

Dhenkanal Minor Irrigation Division vs. N. C. Budharaj – 2001 (2) SCC 721

and the subsequent decision in Bhagawati Oxygen vs. Hindustan Copper Ltd –

2005 (6) SCC 462). In this case as there was no express bar in the contract in

regard to interest, the Arbitrator could award interest.

32.The appellant next contended that in regard to claims in the nature of

damages, as contrasted from ascertained sums due, interest becomes payable

only on quantification and therefore award of interest prior to the date of

30

arbitrator’s award was illegal. It is no doubt true that the position of law

earlier was that in regard to award of damages, interest was not payable

before quantification by a court. This was on the assumption that in so far as

damages are concerned, there is no liability till determination of the quantum

of damages. We may refer to a decision of the Bombay High Court in Iron

& Hardware (India) Co. v. Firm Shamlal & Bros [AIR 1954 Bombay 423],

where Chagla CJ, speaking for the Bench, stated the principle thus :

“In my opinion it would not be true to say that a person who commits a

breach of the contract incurs any pecuniary liability, nor would it be true

to say that the other party to the contract who complains of the breach has

any amount due to him from the other party……As already stated the only

right which he has is the right to go to a Court of law and recover

damages. Now, damages are the compensation which a Court of law gives

to a party for the injury which he has sustained. But, and this is most

important to note, he does not get damages or compensation by reason of

any existing obligation on the part of the person who has committed the

breach. He gets compensation as a result of the fiat of the Court.

Therefore, no pecuniary liability arises till the Court has determined that

the party complaining of the breach is entitled to damages. Therefore,

when damages are assessed, it would not be true to say that what the Court

is doing is ascertaining a pecuniary liability which already existed. The

Court in the first place must decide that the defendant is liable and then it

proceeds to assess what that liability is. But till that determination there is

no liability at all upon the defendant.”

33.The legal position, however, underwent a change after the enactment

of Interest Act, 1978. Sub-section (1) of section 3 of the said Act provided

that a court (as also an arbitrator) can in any proceedings for recovery of any

debt or damages, if it thinks fit, allow interest to the person entitled to the

debt or damages at a rate not exceeding the current rate of interest, for the

whole or part of the following period, that is to say, --

31

(a)if the proceedings relate to a debt payable by virtue of a written

instrument at a certain time, then, from the date when the debt is

payable to the date of institution of the proceedings;

(b)if the proceedings do not relate to any such debt, then, from the date

mentioned in this regard in a written notice given by the person entitled

or the person making the claim to the person liable that interest will be

claimed, to the date of institution of the proceedings.

Sub-section (3) of section 3 made it clear that nothing in that section shall

apply to any debt or damages upon which interest is payable as of right, by

virtue of any agreement; or to any debt or damages upon which payment of

interest is barred, by virtue of an express agreement. The said sub-section

also made it clear that nothing in that section shall empower the court to

award interest upon interest. Section 5 of the said Act provides that nothing

in the said Act shall affect the provisions of section 34 of Code of Civil

Procedure 1908.

34.The position regarding award of interest after the Interest Act, 1978

came into force, can be stated thus :

(a) where a provision has been made in any contract, for interest on

any debt or damages, interest shall be paid in accordance with the

such contract.

(b) where payment of interest on any debt or damages is expressly

barred by the contract, no interest shall be awarded.

(c) where there is no express bar in the contract and where there is

also no provision for payment of interest then the principles of

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section 3 of Interest Act will apply in regard to the pre-suit or pre-

reference period and consequently interest will be payable :

(i) where the proceedings relate to a debt (ascertained sum)

payable by virtue of a written instrument at a certain time,

then from the date when the debt is payable to the date of

institution of the proceedings;

(ii) where the proceedings is for recovery of damages or for

recovery of a debt which is not payable at a certain time,

then from the date mentioned in a written notice given by

the person making a claim to the person liable for the claim

that interest will be claimed, to date of institution of

proceedings.

(d)payment of interest pendente lite (date of institution of proceedings to

date of decree) and future interest (from the date of decree to date of

payment) shall not be governed by the provisions of Interest Act, 1978

but by the provisions of section 34 of Code of Civil Procedure 1908 or

the provisions of the law governing Arbitration as the case may be.

35.Therefore, even in regard to claims for damages, interest can be

awarded for a prior to the date of ascertainment or quantification thereof if

(a) the contract specifically provides for such payment from the date

provided in the contract; or (b) a written demand had been made for payment

of interest on the amount claimed as damages before initiation of action,

from the date mentioned in the notice of demand (that is from the date of

demand or any future date mentioned therein). In regard to claims for

ascertained sums due, interest will be due from the date when they became

due. In this case, interest has been awarded only from 3.9.1990, the date of

33

the petition under Section 20 of the Act for appointment of arbitrator. We

find no reason to alter the date of commencement of interest.

36.In regard to the rate of interest, we are of the view that the award of

interest at 18% per annum, in an award governed by the old Act (Arbitration

Act, 1940), was an error apparent on the face of the award. In regard to

award of interest governed by the Interest Act, 1978, the rate of interest

could not exceed the current rate of interest which means the highest of

the maximum rates at which interest may be paid on different classes of

deposits by different classes of scheduled banks in accordance with the

directions given or issued to banking companies generally by the Reserve

Bank of India under the Banking Regulation Act. Therefore, we are of the

view that pre-reference interest should be only at the rate of 9% per annum.

It is appropriate to award the same rate of interest even by way of pendente

lite interest and future interest upto date of payment.

Re: Claims 2 and 16, 3 and 15, 5 and 18, 6 and 17, 9 and 19, 11 and 20,

24, 27, and 28, 29, 30, 31, 32, 33, 35 (with 25 and 34) of the contractor.

37.Claims 9 & 19, 27 & 28, 29, 33, 35 (with 25 & 35) are for payment

for work done by the contractor. Claims 2 & 16, 3 & 15, 5 & 18, 24, 30, 31

34

and 32 are for release/refund of amounts withheld or excess deductions.

Claims 6 & 17 are for escalation in prices. Claims 11 & 20 are for

compensation for slow progress due to reduction of width of trench. The

arbitrator has awarded certain amounts against these claims by examining

the material placed before him and the terms of contract. He has also

assigned reasons for awarding the amount against these claims. Courts can

not sit in judgment over the award of the arbitrator, nor re-appreciate the

evidence. The awards on these claims do not suffer from any infirmity which

can be the basis for interference either under Section 30 or under Section 16

of the Arbitration Act, 1940. Neither want of jurisdiction, nor legal

misconduct, nor any inconsistency nor error apparent on the face of the

award are made out in regard to awards made in regard to these claims. The

awards in regard to these claims are therefore upheld.

Re : Claims 4, 7, 8, 10, & 21, 14, 22, 23, 26, 38, 39, 40, 41 & 41A, 42 &

42A, 43 of the contractor

38.These claims of the contractor have been examined and rejected by

the Arbitrator and upheld by the courts below. No ground is made out to

interfere with the same.

35

Re: Counter claims of the employer

39.Out of the five counter-claims of the employer, the Arbitrator has

allowed only counter-claim no.(3). Counter-claim no. (3) was for refund of

mobilization advance (Rs.79,87,846) with interest and the Arbitrator has

awarded Rs.59,42,275/- with interest at the contract rate of 18% per annum

up to the date of decree/payment whichever was earlier. Counter-claims 1, 2,

4 and 5 made by the appellant against the contractor have been rejected.

They are:

Counter

claim No.

Brief description of counter claim Amount of

counter claim

1 Liquidated damages Rs.99,19,460/-

2 Extra cost in getting work completed through

another agency

Rs.6,66,62,000/-

4. Interest on payments made to the contractor

and not utilized

Rs.2,17,42,168/-

5. Costs Rs.2,50,000/-

Counter-claims 1, 2, & 4 have been considered by the arbitrator and rejected

by the arbitrator on the ground that the delays/breaches were on the part of

the appellant and therefore, the question of claiming these amounts does not

arise. Rejection of counter-claim (5) is consequential. As noticed above, the

court does not sit in appeal over the award of the arbitrator and cannot re-

appreciate the evidence to arrive at a different conclusion. The award on

these items do not attract any of the grounds on which award could be set

aside. Therefore, rejection of these claims is also not open to interference.

36

40.We therefore allow these appeals in part and modify the judgments of

the courts below as indicated above. Resultantly:

(A) The award of Arbitrator on claim no.(1) (Rs.33,06,500/-) and

claim 37A (Rs.12,072/- per day from 21.9.1994 till date of

payment) are set aside.

(B) The award of Arbitrator on claims 2 and 16, 3 and 15, 5 and 18,

6 and 17, 9 and 19, 11 and 20, 24, 27 and 28, 29, 30, 31, 32, 33,

35 (with 25 & 24) aggregating to Rs.1,34,24,407/- is upheld.

(C) Interest shall be payable at 9% p.a. on Rs.1,34,24,407/- from

3.9.1990 till date of payment. The award on claims 12 & 13 is

modified accordingly.

(D) Award of Rs.59,42,275/- in respect of counter-claim no.(3) of

appellant with interest at the rate of 18% per annum from the

respective dates of release upto the date of payment is upheld.

(E) The direction for adjustment of the amount due under counter-

claim no.(3) calculated as on 21.9.1994, against the amounts

found due to the contractor calculated as on 21.9.1994 is

upheld. Consequently, the appellant shall release the title deeds

deposited in regard to the plant/machinery of the contractor.

37

The contractor will be entitled to remove the plant, if it is not

already done.

(F) Rejection of claims 4, 7, 8, 10 & 21, 14, 22, 23, 26, 38, 39, 40,

41 & 41A, 42 & 42A and 43 of the contractor and counter-

claims 1, 2, 4, and 5 of the employer are upheld.

(G) Parties to bear their respective costs.

………………………..J.

(R. V. Raveendran)

New Delhi; ………….…………….J.

April 22, 2009. (Lokeshwar Singh Panta)

38