2024 INSC 17 1| Civil Appeal No. 8067 of 2019

REPORTABLE

IN THE SUPREME COURT OF INDIA

CIVIL APPELLATE JURISDICTION

CIVIL APPEAL NO. 8067 OF 2019

S.V. SAMUDRAM …APPELLANT (S)

VERSUS

STATE OF KARNATAKA & ANR …RESPONDENT (S)

J U D G M E N T

SANJAY KAROL J.

1. The issue arising for consideration in this Civil Appeal, which

lays challenge to a judgment and order dated 7

th February, 2017

passed by the High Court of Karnataka (Dharwad Bench) in MFA

No. 24507 of 2010 (AA) under Section 37(1) of the Arbitration and

2| Civil Appeal No. 8067 of 2019

Conciliation Act, 1996

1, is whether the High Court was justified in

confirming the order dated 22

nd April, 2010 under Section 34 of the

Arbitration & Conciliation Act, 1996 passed by the Senior Civil

Judge, Sirsi, in Civil Misc. No. 08/2003, whereby the award passed

by the learned Arbitrator was modified and the amount awarded

was reduced.

FACTS

2. As borne out from the judgments rendered by the Courts

below, the facts, are:-

2.1 Mr. S.V. Samudram

2 is a registered Class II Civil Engineering

Contractor and had secured a contract from the Karnataka State

Public Works Department to construct the office and residence of

the Chief Conservator of Forests at Sirsi for an amount of Rs. 14.86

Lakhs.

2.2 The said contract was entered into between the parties on 29

th

January, 1990 with the stipulation that the possession of the

construction site would be handed over to the Claimant-Appellant

on 8

th March, 1990 and the work allotted was to be completed on or

1

A&C Act, for short.

2

Hereinafter, the Claimant-Appellant

3| Civil Appeal No. 8067 of 2019

before 6

th May 1992 i.e., 18 months from the date of the agreement

excluding the monsoon season.

2.3 It is undisputed that the work as allotted could not be

completed by the Claimant-Appellant, for which, he held the

authorities of the State responsible as they allegedly did not clear

his bills, repeatedly at every stage and also due to delays caused by

change of site and in delivery of material for such construction.

2.4 For settlement and adjudication of disputes, the parties to the

contract resorted to the arbitral mechanism and resultantly, in

Arbitration Petition dated 31

st May, 2002, Mr. S.K Angadi, Chief

Engineer (Retd.) stood appointed as the Arbitrator on 30

th July,

2002.

PROCEEDINGS BEFORE THE LEARNED ARBITRATOR

3. Pursuant thereto, the Claimant-Appellant herein filed his

claim before the learned Arbitrator totalling to Rs.18,06,439/- along

with an interest payable thereupon @ 18% per annum, payable

from 9

th March, 1994 till date of payment.

4. Having heard both sides, the three primary issues identified

were:-

4| Civil Appeal No. 8067 of 2019

(a) inordinate delay in handing over of site for performance

of contract;

(b) non-supply of working drawings and designs; and

(c) delay in supply of materials.

5. For each of these issues, the learned Arbitrator, upon

examination of the evidence before him found the Respondents

liable. A précis of the reasoning adopted, is as under:-

S.No. Point of

Consideration

Reasoning

1 Delay in

handing over

the entire site

for total

performance of

the contract.

1) Non handling over the entire site in time is

one of the reasons which resulted in non-

completion of the work within the stipulated

time of 18 months.

There is a delay of 9 months in handing over

possession of complete site.

Possession of office building was handed over

on 07.03.1990

Possession of quarters building was handed

over on December 1990.

2 Delay in supply

of working

drawings,

designs, etc.

1) Drawing showing typical excavation plan

for footings, details of columns were issued to

claimant during September 1990, with a delay

of 6 months

2) The drawing of R28 was not supplied by

April 1991 but on 1

st

July 1991. There was a

delay of 3 months.

3) Drawing showing the details of 1

st

floor slab

of the office of the Conservator of Forest was

found to be prepared by 13.10.1992 but

5| Civil Appeal No. 8067 of 2019

supplied on 01.11.1992 i.e. after expiration of

contract on 06.05.1992.

4) The drawings with details of lintel beams,

roof beams, slab, etc of quarters was prepared

by 05.10.1991 & supplied on 15.10.1991 but

the changed site for construction was handed

over to claimant on 14.02.1991.

3 In the matter of

delay in supply

of materials

On study of documentary evidence, he found

adequate steel & cement required for the work

was not supplied by the respondent in time.

6. As such, against a total of 11 claims, amounts were awarded

against 9 claims. The summary of the award is extracted as under:-

SUMMARY OF THE AWARD

S.No. Description of Claim Amount of

Claim

Award

Amount

1 Payment on loss of Oh. and

incidentals

Rs. 83,300/- Rs. 83,300/-

2 Payment on loss of Profit Rs. 83,300/- Rs. 83,300/-

3 Payment on Idle labour Rs. 1,77,300/- Rs. 1,77,300/-

4 Payment on idle machinery Rs.98,500/- Rejected

5 Payment of extra expenses on

procurement of water at the

changed site of work

Rs.24,000/- Rejected

6 Payment of extra expenses on

shuttering, centring, fabrication

done earlier subsequently

dismantled.

Rs.15,800/- Rs.15,800/-

7 Payment on revised rates on the

work executed beyond the

originally stipulated time

Rs.11,33,000/- Rs.9,67,300/-

8 Payment on refund of freek rates

recovered in work bills

Rs.33,469/- Rs.33,469/-

9 Payment on refund of security

deposit

Rs.57,770/- Rs.57,770/-

10 Payment of interest, pre

arbitration, pendente lite and

@18% p.a. on all

amounts due

Payment of

interest @ 18%

6| Civil Appeal No. 8067 of 2019

future interest from claim No.1

to 9 from,

09.03.94 till the

date of payment

p.a. on all

amounts due

from 09.3.94 till

the date of

payment

11 Cost of Arbitration Rs.1,00,000/- Rs.50,000/-

PROCEEDINGS UNDER SECTION 34 OF THE A&C ACT

7. Assailing the same, the Respondent preferred a petition under

Section 34 of the A&C Act in which the learned Civil Judge, Sirsi,

found 2 points to be arising for his consideration which he recorded

as: –

“1. Whether the petitioner made out the proper grounds that

the award passed by the arbitrator is not supported by sound

reasonings and it is in arbitrary nature and it is liable to be

set aside?

2. What order?”

8. The award passed by the learned Arbitrator was modified and

the Respondents were directed to pay Rs.3,71,564 (25% of tender

amount) along with Rs.10,000/- as costs towards the arbitration @

9% interest. The reasons supplied for such modification, as they

come forth upon a perusal of the judgement are:-

8.1 The change in site of the residential quarters was barely at the

distance of 200m from the earlier site. Even if there was a change in

site, the work of constructing the office building could have begun

as there was no change in that regard but he had not even started

7| Civil Appeal No. 8067 of 2019

excavation in order to lay down a foundation. Therefore, the

question of loss of payment to the labourers and materials collected

for construction, does not arise and the losses allegedly suffered by

the Claimant-Appellant were “only at his imagination”.

8.2 On the machinery being idle, it was not explained as to how

many days the same was idle. It is “for his whims and fancies the

petitioner is claiming as if he has sustained loss”.

8.3 So far as the claim for water facilities, the contention of the

Respondents has been accepted that per the agreement, the

Claimant-Appellant was to look after the same and therefore,

Respondents would not be liable therefor.

8.4 Since it is the Claimant-Appellant who did not complete the

construction in time, he could not make a claim for the rates for the

year 1989–90 and cannot claim interest thereupon.

8.5 No evidence to lend support to the contention of the Claimant-

Appellant that there was a delay in supplying the material. On

which material being supplied, was there a delay, is unexplained.

Counter allegation, instead is that even after clearing all bills, the

Claimant-Appellant had not picked up speed on the work. All the

correspondence is only to escape payment of penalty.

8| Civil Appeal No. 8067 of 2019

8.6 The only delay is of handing over of the site of the residential

house. The same was done on 7

th March, 1990. The Claimant-

Appellant has not explained that despite such handing over of

possession by August 1990, no excavation work for the foundation

had commenced.

8.7 For the changes in design, it is observed that since the

changes were minor it does not require any extra payment. The

same would only be payable if there was duplication of

work/removal of earlier construction as per the alteration.

8.8 The cost of arbitration being awarded at Rs.50,000/- is “at

exorbitant rate.” Even if the argument of delay and laches on part of

the Department is accepted, “it cannot be ruled out that the

Department always in right path” and the extent of the same cannot

be accepted.

8.9 It was also observed that there was a justification for the

learned Arbitrator to award an amount which is almost equal to the

amount of tender, that too on such a high rate of interest which

causes an undue encumbrance on the exchequer.

8.10 The remaining critical observations stand dealt with

subsequently.

9| Civil Appeal No. 8067 of 2019

PROCEEDINGS UNDER SECTION 37 OF THE A&C ACT

9. The High Court, vide its judgement under challenge before us,

has confirmed the modification of the arbitral award as has been

done by the learned Civil Judge, Sirsi, dismissing the application on

part of the Claimant-Appellant.

9.1 It has been observed that the primary dispute is in respect of

claim No. 7 which is the grant of revised rates of the escalated cost

of work. The High Court has held that the view of the Arbitrator that

the Department is solely responsible for the breach of the contract,

cannot be accepted as the shift in venue was only in respect of the

residential quarters and not for the office complex.

9.2 The estimation of cost is based on the tender notification

relating to the year 1989-90. Costs in the year 1992 could not be

expected to have risen hundred percent as claimed. Nothing is

reflected on record to show, what precluded the Claimant-Appellant

from commencing the work of the office building. It is on this

ground that the claim of escalation of the Claimant-Appellant be

allowed by the learned Arbitrator, has been termed as perverse and

contrary to the public policy.

10| Civil Appeal No. 8067 of 2019

9.3 Findings of delay being solely on account of the Department,

cannot be countenanced and the quantification of damages in

respect thereto is unreasonable. “It would be a case of misconduct

on the part of the arbitrator amenable to Section 34 of the Act”

9.4 Claim No. 3 in respect of idle labour being allowed to the tune

of Rs.1,77,300/- “shocks the conscience of the court.” It is so

because there was no basis for the labour to be idle.

9.5 The award of Rs.50,000/- towards cost of arbitration is

excessive. It was further observed that escalation of costs cannot be

granted on “assumptions and presumptions” and , therefore,

awarding the claims, that too almost equal to the tender amount,

cannot be sustained.

10. The learned Civil Judge, Sirsi, to restate, modified the award

passed by the learned Arbitrator reducing the amount awarded as

also interest thereupon, i.e., Rs.14,68,239/- @ 18% to only 25% of

the tender amount which equals to Rs.3,71,564/- and the interest

percentage thereon was reduced to 9%. This was found to be

justified by the learned Single Judge.

CONSIDERATION AND CONCLUSION

11| Civil Appeal No. 8067 of 2019

11. It is in this background, that we are required to consider

whether the modification of the arbitral award as carried out by the

learned Civil Judge as confirmed by the High Court, was justified

within law?

12. It would be useful to examine the expositions of this Court on

the scope to interfere with arbitral awards under Sections 34 & 37

of the A&C Act.

13. The Judgment and Order of the learned Civil Judge was dated

22

nd April 2010.

14. The position as to whether an arbitral award can be modified

in the proceedings initiated under Sections 34/37 of the A&C Act is

no longer res integra. While noting the provisions, more

specifically, Section 34(4) of the A&C Act; the decisions rendered by

this Court, including the principles of international law enunciated

in several decisions recorded in the treatise “Redfern and Hunter on

International Arbitration, 6

th Edition”, this Court in National

Highways Authority of India v. M. Hakeen and Another

3,

categorically held that any court under Section 34 would have no

jurisdiction to modify the arbitral award, which at best, given the

same to be in conflict with the grounds specified under Section 34

3

(2021) 9 SCC 1 (2-Judge Bench)

12| Civil Appeal No. 8067 of 2019

would be wholly unsustainable in law. The Court categorically

observed that any attempt to “modify an award” under Section 34

would amount to “crossing the Lakshman Rekha”.

15. On the exact same issue we may also note another opinion

rendered by this Court in Dakshin Haryana Bijli Vitran Nigam

Limited v. Navigant Technologies Private Limited

4 in the

following terms:-

“44. In law, where the court sets aside the award passed by

the majority members of the Tribunal, the underlying disputes

would require to be decided afresh in an appropriate

proceeding. Under Section 34 of the Arbitration Act, the court

may either dismiss the objections filed, and uphold the award,

or set aside the award if the grounds contained in sub -

sections (2) and (2-A) are made out. There is no power to

modify an arbitral award. In McDermott International

Inc. v. Burn Standard Co. Ltd. [McDermott International

Inc. v. Burn Standard Co. Ltd., (2006) 11 SCC 181] , this Court

held as under : (SCC p. 208, para 52)

“52. The 1996 Act makes provision for the supervisory role of

courts, for the review of the arbitral award only to ensure

fairness. Intervention of the court is envisaged in few

circumstances only, like, in case of fraud or bias by the

arbitrators, violation of natural justice, etc. The court cannot

correct errors of the arbitrators. It can only quash the award

leaving the parties free to begin the arbitration again if it is

desired. So, the scheme of the provision aims at keeping the

supervisory role of the court at minimum level and this can be

justified as parties to the agreement make a conscious

decision to exclude the court's jurisdiction by opting for

arbitration as they prefer the expediency and finality offered

by it.”

(Emphasis Supplied)

4

(2021) 7 SCC 657 (2-Judge Bench)

13| Civil Appeal No. 8067 of 2019

16. The principle stands reiterated as late as 2023 in Larsen Air

Conditioning and Refrigration Company v. Union of India &

Others

5.

17. We may notice certain principles to be considered in

adjudication of challenges to arbitration proceedings of this nature.

It is a settled principle of law that arbitral proceedings are per se

not comparable to judicial proceedings before the Court ( Dyna

Technologies Private Limited v. Crompton Greaves Limited

6).

The Arbitrator’s view, generally is considered to be binding upon the

parties unless it is set aside on certain specified grounds. In the

very same decision taking note of the opinion as is in “Russel on

Arbitration”, reiterated the need for the Court to look at the

substance of the findings, rather than its form, stood reiterated and

the need for adopting an approach of reading the award in a fair

and just manner, and not in what is termed as “an unduly literal

way”. All that is required is as to whether the reasons borne out

are intelligible or not for adequacy of reasons cannot stand in the

way of making the award to be intelligibly readable.

5

2023 SCC On Line 982 (2-Judge Bench)

6

(2019) 20 SCC 1 (3-Judge Bench)

14| Civil Appeal No. 8067 of 2019

18. Emphasizingly, it is reiterated that if the view taken by the

Arbitrator is a plausible view, no interference on the specified

grounds is warranted (Konkan Railway Corpn. Ltd. v. Chenab

Bridge Project

7).

19. It is also a settled principle of law that an award passed by a

technical expert is not meant to be scrutinised in the same manner

as is the one prepared by a legally trained mind (Delhi Airport

Metro Express Private Limited v. Delhi Metro Rail Corporation

Limited

8).

20. We are dealing with an award passed on 18

th February, 2003,

prior to the amendment brought in Section 34 by virtue of the

Arbitration and Conciliation (Amendment) Act, 2015. For the

purpose of ready reference the relevant portion of the amended and

the unamended provisions are extracted as under :-

“Prior to 2015 Amendment

34. Application for setting aside arbitral award. -

(1) Recourse to a court against an arbitral awärd may be made

only by an application for setting aside such award in

accordance with sub-section (2) and sub-section (3).

(2) An arbitral award may be set aside by the court only if-

…

(v) the composition of the Arbitral Tribunal or the arbitral

procedure was not in accordance with the agreement of the

7

(2023) 9 SCC 85 (Three Judge Bench)

8

(2022) 1 SCC 131 (Two Judges Bench)

15| Civil Appeal No. 8067 of 2019

parties, unless such agreement was in conflict with a

provision of this Part from which the parties cannot derogate,

or, failing such agreement, was not in accordance with this

Part; or

(b) the court finds that—

(i) the subject-matter of the dispute is not capable of

settlement by arbitration under the law for the time being in

force, or

(ii) the arbitral award is in conflict with the public policy of

India.

Explanation.-Without prejudice to the generality of sub -

clause (ii), it is hereby declared, for the avoidance of any

doubt, that an award is in conflict with the public policy of

India if the making of the award was induced or affected by

fraud or corruption or was in violation of Section 75 or Section

81.

(Emphasis supplied)

Post 2015 Amendment

34. Application for setting aside arbitral award .—(1)

Recourse to a Court against an arbitral award may be made

only by an application for setting aside such award in

accordance with sub-section (2) and sub-section (3).

(2) An arbitral award may be set aside by the Court only if—

…

(b) the Court finds that—

(i) the subject-matter of the dispute is not capable of

settlement by arbitration under the law for the time being in

force, or

(ii) the arbitral award is in conflict with the public policy of

India.

[Explanation 1.—For the avoidance of any doubt, it is clarified

that an award is in conflict with the public policy of India,

only if,—

(i) the making of the award was induced or affected by fraud

or corruption or was in violation of Section 75 or Section 81;

or

(ii) it is in contravention with the fundamental policy of Indian

law; or

(iii) it is in conflict with the most basic notions of morality or

justice.

Explanation 2.—For the avoidance of doubt, the test as to

whether there is a contravention with the fundamental policy

16| Civil Appeal No. 8067 of 2019

of Indian law shall not entail a review on the merits of the

dispute.]

[(2-A) An arbitral award arising out of arbitrations other than

international commercial arbitrations, may also be set aside

by the court, if the court finds that the award is vitiated by

patent illegality appearing on the face of the award:

Provided that an award shall not be set aside merely on the

ground of an erroneous application of the law or by

reappreciation of evidence.]”

21. In so far as the state of the law prior to such Amendment is

concerned, the situation stands encapsulated by this Court, in DDA

v. R.S Sharma

9 where the grounds whereby courts may intervene

against arbitral award, were listed.

22. Observations of this Court in Associate Builders v. DDA

10 are

also of note. It was held:

“15. This section in conjunction with Section 5 makes it clear

that an arbitration award that is governed by Part I of the

Arbitration and Conciliation Act, 1996 can be set aside only

on grounds mentioned under Sections 34(2) and (3), and not

otherwise. Section 5 reads as follows:

“5. Extent of judicial intervention .—Notwithstanding

anything contained in any other law for the time being in

force, in matters governed by this Part, no judicial authority

shall intervene except where so provided in this Part.”

16. It is important to note that the 1996 Act was enacted to

replace the 1940 Arbitration Act in order to provide for an

arbitral procedure which is fair, efficient and capable of

meeting the needs of arbitration; also to provide that the

tribunal gives reasons for an arbitral award; to ensure that

the tribunal remains within the limits of its jurisdiction; and

to minimise the supervisory roles of courts in the arbitral

process.

9

(2008) 13 SCC 80 (2 Judge Bench)

10

(2015) 3 SCC 49 (2 Judge Bench)

17| Civil Appeal No. 8067 of 2019

17. It will be seen that none of the grounds contained in sub-

section (2)(a) of Section 34 deal with the merits of the decision

rendered by an arbitral award. It is only when we come to the

award being in conflict with the public policy of India that the

merits of an arbitral award are to be looked into under certain

specified circumstances.”

(Emphasis Supplied)

23. As it is evident from the extracted provisions, as above that

prior to the Amending Act, it was open for the Court to examine the

award as to whether it was in conflict with, (a) public policy of

India; (b) induced or affected by fraud; (c) corruption; and (d) any

violation of the provisions of Section 75 and 81 of the A&C Act.

24. In the instant case, the only provision under which the award

could have been assailed was for it to have been in conflict with the

public policy of India. This concept has been elaborately considered

by this Court in Associate Builders (supra); Ssangyong

Engineering and Construction Company Limited v. National

Highways Authority of India

11, in the following terms:-

25. In Associate Builders (supra) the Court observed-

“19. When it came to construing the expression “the public

policy of India” contained in Section 34(2)(b)(ii) of the

Arbitration Act, 1996, this Court in ONGC Ltd. v. Saw Pipes

Ltd. [(2003) 5 SCC 705 : AIR 2003 SC 2629] held: (SCC pp.

727-28 & 744-45, paras 31 & 74)

“31. Therefore, in our view, the phrase ‘public policy of India’

used in Section 34 in context is required to be given a wider

meaning. It can be stated that the concept of public policy

11

(2019) 15 SCC 131 (Two Judges Bench)

18| Civil Appeal No. 8067 of 2019

connotes some matter which concerns public good and the

public interest. What is for public good or in public interest or

what would be injurious or harmful to the public good or

public interest has varied from time to time. However, the

award which is, on the face of it, patently in violation of

statutory provisions cannot be said to be in public interest.

Such award/judgment/decision is likely to adversely affect the

administration of justice. Hence, in our view in addition to

narrower meaning given to the term ‘public policy’

in Renusagar case [Renusagar Power Co. Ltd. v. General

Electric Co., 1994 Supp (1) SCC 644] it is required to be held

that the award could be set aside if it is patently illegal. The

result would be—award could be set aside if it is contrary to:

(a) fundamental policy of Indian law; or

(b) the interest of India; or

(c) justice or morality, or

(d) in addition, if it is patently illegal.

Illegality must go to the root of the matter and if the

illegality is of trivial nature it cannot be held that award is

against the public policy. Award could also be set aside if it

is so unfair and unreasonable that it shocks the conscience

of the court. Such award is opposed to public policy and is

required to be adjudged void.”

(Emphasis supplied)

26. Ssangyong Engineering (supra) followed the observations of

Associate Builders (supra). To efficiently encapsulate the extent

thereof particularly in the context of Indian awards, we may refer

only to para 37 where it has been held:-

“37. Insofar as domestic awards made in India are

concerned, an additional ground is now available under

sub-section (2-A), added by the Amendment Act, 2015, to

Section 34. Here, there must be patent illegality appearing

on the face of the award, which refers to such illegality as

goes to the root of the matter but which does not amount to

mere erroneous application of the law. In short, what is not

subsumed within “the fundamental policy of Indian law”,

namely, the contravention of a statute not linked to public

policy or public interest, cannot be brought in by the

19| Civil Appeal No. 8067 of 2019

backdoor when it comes to setting aside an award on the

ground of patent illegality.”

27. The position in Associate Builders (supra) was recently

summarised as hereinbelow recorded by Indian Oil Corpn. Ltd. v.

Shree Ganesh Petroleum

12

“42. In Associate Builders, this Court held that an award

could be said to be against the public policy of India in, inter

alia, the following circumstances:

42.1. When an award is, on its face, in patent violation of a

statutory provision.

42.2. When the arbitrator/Arbitral Tribunal has failed to

adopt a judicial approach in deciding the dispute.

42.3. When an award is in violation of the principles of

natural justice.

42.4. When an award is unreasonable or perverse.

42.5. When an award is patently illegal, which would include

an award in patent contravention of any substantive law of

India or in patent breach of the 1996 Act.

42.6. When an award is contrary to the interest of India, or

against justice or morality, in the sense that it shocks the

conscience of the Court.”

JUDGMENT PASSED UNDER SECTION 34 A&C ACT

28. A perusal of the judgment and order of the learned Civil

Judge, in the considered view of this Court, does not reflect fidelity

to the text of the statute. Nowhere does it stand explained, as to,

under which ground(s) mentioned under Section 34 of the A&C Act,

did the Court find sufficient reason to intervene. In fact, quite

12

(2022) 4 SCC 463 (2-Judge Bench)

20| Civil Appeal No. 8067 of 2019

opposite thereto, the Court undertook a re-appreciation of the

matter, and upon its own view of the evidence, modified the order.

29. As the above extracted judgment shows, merits of the award

are only to be gone into, if the award is demonstrated to be contrary

to the public policy of India. The reasons recorded by the learned

Civil Judge for modifying the arbitral award, as reflected from a

perusal thereof, have been recorded in an earlier section of the

judgment. None of those reasons even so much as allude to the

award being contrary to the public policy of India, which would

enable the court to look into the merits of the award.

30. We have carefully perused the award passed by the Arbitrator

in which he has not only referred to and considered the materials

on record in their entirety but also, after due application of mind,

assigned reasons for arriving at this conclusion, either rejecting,

accepting or reducing the claim set out by the Claimant-Appellant.

Noticeably, during the arbitral proceedings none of the parties

raised any objection to the Arbitrator adjudicating the dispute, be it

on any ground, including bias. Each one of the claims stands

separately considered and dealt with.

31. We find that the view taken by the Arbitrator is a plausible

view and could not have been substituted for its own by the Court.

21| Civil Appeal No. 8067 of 2019

32. The reasons assigned by the Court under Section 34 of the A

&C Act, to our mind, are totally extraneous to the controversy, to

the lis between the parties and not borne out from the record. In

fact, they are mutually contradictory.

32.1 In awarding an amount of 25% of the tender amount

(incorrectly recorded as “over the tender amount” in some parts of

the judgment of the learned Civil Judge, Sirsi) in favour of the

Claimant-Appellant, the Court has ipso facto accepted that the

Claimant-Appellant had not breached the terms of the contract. In

fact, the Court appears to have accepted the Claimant’s contention

of delay in handing over the site drawings and supply of materials.

The Court while noticing the change in the drawings, resorted to, a

misadventure by observing that the changes in the drawings were

“only minor” in the dimension of beam which as we find the Court

have contradicted itself by recording the same to have been “noticed

as essential in the execution of the contract”. The Court, in our

considered view had no business to state that the Claimant is

claiming the amount is from the pocket of the concerned engineer

or his property.

“…Whether the claimant is claiming the such amount is

from the pocket of concerned Engineers or from his property,

whey should so much amount be paid from exchequer

22| Civil Appeal No. 8067 of 2019

amount, it is heavily cast on the tax payer, that has to be

consider by the court…”

32.2 Further observations as we extract hereunder, justifying the

interference in the award, in our considered opinion, are totally

scandalous: -

“…Admittedly the arbitrator who is retired Engineer after

retirement there will be no holding on the department, when

the claimant is going to benefit so much amount there will be

benefit to the arbitrator…”

32.3 The Court imputed its personal knowledge in assigning

reasons by observing :-

“…Even in this case also if the report of the arbitrator is

accepted as it is, it is heavy burden on the exchequer not on

the department…”

32.4 The reasoning given by the Court in interfering with the award

which is extracted immediately hereafter, in our view, is

preposterous: -

“…It is the common sense and the general observation,

whenever the work is entrusted to any contractor to put up

the construction what they do is, they use to start excavation

to lay a foundation. It is not the case of the 2

nd

opponent

regarding digging at original spot or laying any foundation for

construction of the residential house. So, under such

circumstances the alleged loss pleaded by the opponent No.2

is only at his imagination.”

23| Civil Appeal No. 8067 of 2019

32.5 For it is no business of the Court to consider the burden on

the exchequer. All that is required by the Court is to see as to

whether the contracting parties have agreed to bind themselves to

the terms with the only supervisory jurisdiction of the Court to

consider breach thereof, in the light of the grounds specified under

Section 34.

32.6 To our mind, the court lost sight of the fact that the civil

contract was composite in nature that is having contracted both of

the building of the office and residence together. In these

circumstances, the contractor could not have commenced work of

part of the project when the complete site and the drawings were

not handed over to him. In the absence of the parties have agreed

otherwise, work could not have commenced. Hence, observation of

the court, advisory in nature, for the contractor to have commenced

the work for one part of the contract is unwarranted and uncalled

for, in fact perverse.

32.7 The other observation that there was a delay on the part of the

contractor in completing the work or speeding up the work does not

reflect in the record. They are nothing short of mere conjectures.

This is more so in view of the absence of invocation of the

24| Civil Appeal No. 8067 of 2019

arbitration clause or initiation of the proceedings thereunder on the

part of the Respondent against the contractor as also not raising

any counter claims for adjudication by the Arbitrator.

32.8 Accounting for the legal position, the court could have at best

set aside the award and could not modify the same.

32.9 We also notice the learned Arbitrator, to have accepted the

contention of the Claimant-Appellant that there was a delay in

supply of drawings, which in turn caused delay in placing the

orders for steel and other such requirements. The Civil Judge had

disagreed therewith on a mere reference to “Ex. R 38 to 95” showing

prompt supply. There is no discussion whatsoever . Another

instance is noteworthy. It was observed that the question of

idleness of the labour does not arise if there was another building to

be constructed, and therefore, such claim cannot be paid. This is a

clear instance of the court supplanting its view in place of the

Arbitrator, which is not a permissible exercise, and is completely

de-hors to the jurisdiction under Section 34.

33. As such, the modification of the arbitral award by the learned

Civil Judge, Sirsi, does not stand scrutiny, and must be set aside.

JUDGMENT UNDER SECTION 37 A&C ACT

25| Civil Appeal No. 8067 of 2019

34. Moving further, we now consider the judgment impugned before

us, i.e., the order of the High Court upholding such modification,

under the jurisdiction of Section 37 of the A&C Act.

35. It has been observed by this Court in MMTC Ltd. v. Vedanta

Ltd.

13

“14. As far as interference with an order made under Section

34, as per Section 37, is concerned, it cannot be disputed that

such interference under Section 37 cannot travel beyond the

restrictions laid down under Section 34. In other words, the

court cannot undertake an independent assessment of the

merits of the award, and must only ascertain that the exercise

of power by the court under Section 34 has not exceeded the

scope of the provision. Thus, it is evident that in case an

arbitral award has been confirmed by the court under Section

34 and by the court in an appeal under Section 37, this Court

must be extremely cautious and slow to disturb such

concurrent findings.”

(Emphasis Supplied)

36. This view has been referred to with approval by a bench of

three learned Judges in UHL Power Company Ltd v. State of

Himachal Pradesh

14. In respect of Section 37, this court observed:-

“16. As it is, the jurisdiction conferred on courts under

Section 34 of the Arbitration Act is fairly narrow, when it

comes to the scope of an appeal under Section 37 of the

Arbitration Act, the jurisdiction of an appellate court in

examining an order, setting aside or refusing to set aside an

award, is all the more circumscribed.”

13

(2019) 4 SCC 163 (2 Judge Bench)

14

(2022) 4 SCC 116 (3-Judge Bench)

26| Civil Appeal No. 8067 of 2019

37. This Court has not lost sight of the fact that, as a consequence

to our discussion as aforesaid, holding that the judgment and order

under Section 34 of the A&C Act does not stand judicial scrutiny,

an independent evaluation of the impugned judgment may not be

required in view of the holding referred to supra in MMTC Ltd.

However, we proceed to examine the same.

38. We may also notice that the circumscribed nature of the

exercise of power under Sections 34 and 37 i.e., interference with

an arbitral award, is clearly demonstrated by legislative intent. The

Arbitration Act of 1940 had a provision (Section 15) which allowed

for a court to interfere in awards, however, under the current

legislation, that provision has been omitted.

15

39. The learned Single Judge, similar to the learned Civil Judge

under Section 34, appears to have not concerned themselves with

the contours of Section 37 of the A&C Act. The impugned judgment

reads like a judgment rendered by an appellate court, for whom re-

examination of merits is open to be taken as the course of action.

40. We find the Court to have held the award to be perverse and

contrary to public policy. The basis for such a finding being the

15

Larsen Air Conditioning and Refrigration Company v. Union of India and Others 2023 SCC

OnLine 982 (2-Judge Bench)

27| Civil Appeal No. 8067 of 2019

delay on the part of the contractor in completion of the work which

“could have been avoided”. Significantly, as we have observed

earlier such a finding is not backed by any material on record.

41. What appears to have weighed with the court is that the

factoring of the cost escalation between the years 1989-90 and

1992 by 100% was exaggerated. But then equally, there is no

justification in granting lump sum escalation by 25% of the

contract value. Well, this cannot be a reason to modify the award

for the parties are governed by the terms and conditions and the

price escalation stood justified by the petitioner based on cogent

and reliable material as was so counted by the Arbitrator in partly

accepting and/or rejecting the claims.

42. In our considered opinion, the court while confirming the

modification of the award committed the very same mistake which

the Court under Section 34 of the A&C Act, made.

The Court under Section 37 had only three options:-

(a) Confirming the award of the Arbitrator;

(b) Setting aside the award as modified under Section 34; and

(c) Rejecting the application(s) under Section 34 and 37.

28| Civil Appeal No. 8067 of 2019

43. The learned single Judge has examined the reasoning adopted

by the learned Arbitrator in respect of certain claims (claims 3 and

7, particularly) and held that allowing a claim for escalation of

cost, was without satisfactory material having been placed on

record and is “perverse and contrary to the public policy”.

However, it appears that such a holding on part of the Judge is

without giving reasons therefor. It has not been discussed as to

what the evidence was before the learned single Judge to arrive at

such conclusion. This is of course, entirely without reference to the

scope delineated by various judgements of this Court as also, the

statutory scheme of the A & C Act.

44. Having referred to J.G Engineers (P) Ltd. v. UOI

16 and more

particularly para 27 thereof, it has been held that the award

passed by the learned Arbitrator is “patently illegal, unreasonable,

contrary to public policy.” There is no reason forthcoming as to

how the holding of the learned Arbitrator flies in the face of public

policy.

ON INTEREST

45. On the issue of interest, we notice that the Arbitrator has

awarded interest @ 18% p.a., w.e.f. 09 March 1994 which stood

16

(2011) 5 SCC 758 (2 Judge Bench)

29| Civil Appeal No. 8067 of 2019

reduced to 9%. The transaction being commercial in nature, we see

no reason as to why the claimant could not be entitled to interest in

terms of the rate quantified by the Arbitrator which includes the

period of pre-arbitration, pendante lite and future. We notice this

Court to have stated in Hyder Consulting (UK) Ltd. v. State of

Orissa

17

, through S.A. Bobde, J. (as His Lordship then was)

speaking for the majority as under:

“4. Clause (a) of sub-section (7) provides that where an award

is made for the payment of money, the Arbitral Tribunal may

include interest in the sum for which the award is made. In

plain terms, this provision confers a power upon the Arbitral

Tribunal while making an award for payment of money, to

include interest in the sum for which the award is made on

either the whole or any part of the money and for the whole or

any part of the period for the entire pre-award period between

the date on which the cause of action arose and the date on

which the award is made... The significant words occurring in

clause (a) of sub-section (7) of Section 31 of the Act are “the

sum for which the award is made”. On a plain reading, this

expression refers to the total amount or sum for the payment

for which the award is made. Parliament has not added a

qualification like “principal” to the word “sum”, and therefore,

the word “sum” here simply means “a particular amount of

money”. In Section 31(7), this particular amount of money

may include interest from the date of cause of action to the

date of the award.

… ….

7. Thus, when used as a noun, as it seems to have been used

in this provision, the word “sum” simply means “an amount of

money”; whatever it may include — “principal” and “interest”

or one of the two. Once the meaning of the word “sum” is

clear, the same meaning must be ascribed to the word in

clause (b) of sub-section (7) of Section 31 of the Act, where it

provides that a sum directed to be paid by an arbitral award

17

(2015) 2 SCC 189 (3-Judge Bench)

30| Civil Appeal No. 8067 of 2019

“shall … carry interest …” from the date of the award to the

date of the payment i.e. post-award. In other words, what

clause (b) of sub-section (7) of Section 31 of the Act directs is

that the “sum”, which is directed to be paid by the award,

whether inclusive or exclusive of interest, shall carry interest

at the rate of eighteen per cent per annum for the post-award

period, unless otherwise ordered.

…

9. The purpose of enacting this provision is clear, namely, to

encourage early payment of the awarded sum and to

discourage the usual delay, which accompanies the execution

of the award in the same manner as if it were a decree of the

court vide Section 36 of the Act.”

(Emphasis Supplied)

46. Keeping in view the aforesaid observations of this Court, it

cannot be doubted that the Claimant -Appellant is entitled to

interest. We find that the learned Arbitrator, as hitherto observed,

has awarded 18% interest and the same st ood reduced by the

Courts below to 9% without any legal basis therefor. In exercise of

our powers under Article 142, we deem it appropriate to, in order to

ensure substantial justice, inter se the parties, of awarding interest

@ 9 % p.a. from the date of award pendante lite and future, till date

of payment.

CONCLUSION

47. In the absence of compliance with the well laid out parameters

and contours of both Section 34 and Section 37 of the A&C Act, the

impugned judgement(s) referred to in Para 1 (supra) are required to

31| Civil Appeal No. 8067 of 2019

be set aside. Consequently, the award dated 18

th February 2003 of

the learned Arbitrator is restored, for any challenge thereto has

failed.

48. The appeal is allowed with a direction to the State of

Karnataka to expeditiously pay the amount. No costs.

…………….……..J.

(ABHAY S. OKA)

…………………….J.

(SANJAY KAROL)

Place : New Delhi;

Dated: 4

th

January 2024.