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State of U.P. Vs. Hindustan Construction Co. Ltd. - Court Judgment

LegalCrystal Citation
SubjectArbitration;Contract
CourtAllahabad High Court
Decided On
Case NumberF.A.F.O. No. 349 of 1977
Judge
Reported inAIR1981All314
ActsArbitration Act, 1940 - Sections 30
AppellantState of U.P.
RespondentHindustan Construction Co. Ltd.
Appellant AdvocateStanding Counsel
Respondent AdvocateS.C. Budhwar, Adv.
DispositionAppeal dismissed
Excerpt:
arbitration - legal force of award - section 30 of arbitration act,1940 - in a dispute regarding variations in work as per sub-clause of construction contract - reference to arbitrator - arbitrators reasonably construed relevant clauses - reached at award - award did not mention anything about proposition of law applied - error apparent on face of award - but arbitration award not liable to be set aside as arbitrators had decided dispute referred. - - if however, a specific question is submitted to the arbitrator, and heanswers it, the fact that the answer involves an erroneous decision on point of law, does not make the award bad on its face so as to permit of its being set aside. 107 of 1966, d/- 5-12-1968 (sc). the rule thus is that as the parties choose their own arbitrator to be.....mithal, j. 1. against an award given by the arbitrators the state of u. p. had filed certain objections under ss. 30 and 33 of the indian arbitration act. the objections were dismissed by the court below against which the present appeal has been preferred under section 39 of the act.2. the government of u. p. had invited tenders for the construction of civil works for the prestigious yamuna hydel schems, dehradun, stage-2. the respondent, in collaboration with some other companies, submitted their tenders but as their rates were found to be high, the tender was given to some other tenderer. however the work could not be taken up by those contractors and, therefore, in 1965 the respondent was again approached by the government to enter into a contract on a negotiated basis for carrying out.....
Judgment:

Mithal, J.

1. Against an award given by the Arbitrators the State of U. P. had filed certain objections under Ss. 30 and 33 of the Indian Arbitration Act. The objections were dismissed by the court below against which the present appeal has been preferred under Section 39 of the Act.

2. The Government of U. P. had invited tenders for the construction of civil works for the prestigious Yamuna Hydel Schems, Dehradun, Stage-2. The respondent, in collaboration with some other companies, submitted their tenders but as their rates were found to be high, the tender was given to some other tenderer. However the work could not be taken up by those contractors and, therefore, in 1965 the respondent was again approached by the Government to enter into a contract on a negotiated basis for carrying out the works in question. As a result of the negotiations finally on 5-2-1966 the contract papers were signed wherein it was envisaged that total works of the value of Rs. 15,64,80,298.50 will be executed by the respondent which will have to be completed by 31st March 1971. Although by 31-12-1970 the contractor had already carried out works for the value of Rs. 15.90 crores yet a major part of the contracted work still remained to be done. This escalation in the value of the work was caused due to numerous changes made in the initial design and also due to the variations made in the quantities of various items which the contractor was required to carry out at the works in question.

3. In the deed of contract, there was a clause which made provision for deviation, alteration and addition to the work and it was stipulated therein that the contractor will not be entitled to deviate from the work without the previous written sanction of the Engineer in charge. The Engineer in charge, however, could, during the progress of the work, direct any deviation, alteration or addition to be made from, in or to the works or any part thereof. He could also direct curtailment of certain work and to direct execution of new or substituted work and any such deviation etc. could be directed without vitiating the contract. It was, however, made clear that the variation would not exceed 5% of the total cost of the work without affecting the agreedrates. For variations beyond the aforesaid limit a provision was made in the contract itself wherein a schedule was given to regulate the variation in rates.

4. According to the respondent, the maximum limit up to which these variations could be made by the Engineer in charge was initially 5% without attracting corresponding variation of rates and for the next 15% above or below that, the rates could be varied as laid down in the Schedule given in Clauses 1.11 of the contract, and the Government had no right to make any deduction at all either for this 20% variation or for any variation in excess of it if the total variation was of an order of more than 20%. In this manner, according to the Contractor, the total variation stipulated under the contract could not exceed 20% either way. The Government, however, made certain deductions from the contractor's bills which was objected to by the contractor on the ground that the contract only envisaged variations within the limits set out in the Schedule and any variation going beyond that was not covered by Clause 1.11 (b) at all. In such a case, therefore, Clause 1.11 (b) would not be attracted and the parties could only negotiate about the rates payable in such an eventuality.

5. Since a dispute had arisen between the parties as aforesaid, they referred their dispute to Arbitration. The contractor nominated one Sri P. N. Gadi, former Chief Engineer, M. E. S., as its arbitrator and Sri L, P. Nigam, a retired Judge of the Allahabad High Court was appointed arbitrator by the State of U. P. The two arbitrators then obtained consent of Mr. Justice J. L. Kapoor, a retired Judge of the Supreme Court, to act as an umpire and duly entered upon the reference. During the arbitration proceedings the parties came to a compromise about the amount which was payable for the works already carried out and those which were yet to be executed in future under the contract and in respect of the same G. O. No. 2470-Sa-Kha/ 7623-Sin-3-304-M/74 dated May 4, 1976 was also issued by the Government of U. P. In view of this G. O. a part of the dispute between the parties was thus settled and the terms thereof were set out in the said G. O. Consequently the counsel for the parties gave a statement before the Arbitrators that the claimant (contractor) will not press its claim forpayment at the market rates for the work already executed by it or to be executed in future. The parties, therefore, confined their dispute before the arbitrators to the interpretation of Clause 1.11 (b) only. The arbitrators thus had to decide only whether on a true interpretation of Clause 1.11 (b) of the agreement the Government was entitled to recover any sum by way of a rebate from the contractor's bills (which had already been deducted by it from the bills of the contractor) and if so, at what rate? This depended on the interpretation of Clause 1.11 (b) of the contract.

6. The arbitrators, after hearing both the parties gave their unanimous award on 21/22nd September, 1976 and it was held that if the variations involved in the total value of the work done finally was of the order of more than 20% of the value of the contract no adjustment under Clause 1.11 (b) of the contract could be made. As a result of this award the deductions of amounts from contractor's bills already made became invalid. Aggrieved by this award, the State of U. P. filed objections purporting to be under Sections 30 and 33 of the Arbitration Act which have been rejected by the court below by its order under appeal on 4-7-77. The State of U. P. has now come up in appeal questioning the validity of the award contending that the interpretation given by the arbitrators was, on the face of it, wrong and that it was based on misreading of the terms of the contract, and also that it was perverse. It has, therefore, been claimed that the award was liable to be set aside.

7. Let us first examine the legal aspect. We have already examined that in view of the statement made by the parties' counsel on 23-8-77 before the Arbitrators they had confined their dispute only to the interpretation of Clause 1.11 (b). It was urged that by confining the dispute merely to the interpretation of the clause in the contract that they purported to refer the question of law only for decision by the arbitrators. When parties refer a dispute of this nature for decision by the arbitrators, even though the decision may be erroneous, yet the same is binding on the parties and none of them can wriggle out of the same. We find that the appellant has himself mentioned in its grounds of appeal that the decision of the arbitrators is non-speaking. Therefore, if the interpretation putby the arbitrators on Clause 1.11 (b) was a possible interpretation and was not totally unsustainable the same has to be respected and accepted. The courts cannot set aside such an award merely on the ground that some other view or interpretation of the clause is possible. This question has been considered by the Supreme Court in various cases and we do not think it would be proper to go into the details over again. It will suffice, if we refer to a few cases. The first case is of A. M. Mair & Co. v. Gobardhan Das Sagar Mull : [1950]1SCR792 where it was laid down that as the question before the arbitrators turned upon the true interpretation of the contract and the parties had to take recourse to the contract to establish their claim, it was a dispute under or arising out of contract and thus within the jurisdiction of the arbitrators.

8. In the present case, the parties do not dispute that the matter referred to the arbitrators fell within the scope of the arbitration clause. The dictum of the Supreme Court in A. M. Mair & Co. v. Gobardhan Das Sagar Mull (supra) that 'once the dispute is found to be within the scope of arbitration clause it is no part of the province of the court to enter into the merits of the dispute,' is fully applicable to the facts of the present case. In that case, their Lordships of the Supreme Court had refused to enter into the question whether any error of law or of fact had been committed by the arbitrators or there was any omission on their part to consider any of the matters. They also refused to determine as to what was the true construction of the terms of the contract in order to find out whether the appellants' contention was correct or not. This was held to be a question of law and the decision of the arbitrators was, therefore, held to be binding on the parties.

9. The next case on the point is that of Alopi Parshad & Sons Ltd. v. Union of India : [1960]2SCR793 wherein it was held 'an award of an Arbitrator may be set aside on the ground of an error apparent on the face thereof only when in the award or in any document incorporated with it, as for instance, a note appended by the Arbitrator, stating the reasons for his decision, there is to be found some legal proposition which is the basis of the award and which was erroneous. If however, a specific question is submitted to the Arbitrator, and heanswers it, the fact that the answer involves an erroneous decision on point of law, does not make the award bad on its face so as to permit of its being set aside. In such a case, the decision being of Arbitrators selected by the parties to adjudicate upon those questions, the award will bind the parties.'

10. Similarly in Firm Madan Lal Roshan Lal Mahajan v. Hukum Chand Mills Ltd. : [1967]1SCR105 also the Supreme Court held (at p. 1031) 'the Arbitrator can give a lump sum award. There was no point to give separate award for each claim. His award on both facts and law is final. There is no appeal from his verdict. The court cannot review his award and correct any mistake in his adjudication unless the objection to the legallity of the award is apparent on the face of it.'

11. In the above case relying on the following observation of the Privy Council in Champsey Bhara & Co. v. Jivraj Balloo Spinning & Weaving Co. Ltd., (AIR 1923 PC 66) 'an error in 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 erroneous.'

The Supreme Court went on to observe (at p. 1031):

'In the pesent case the arbitrators gave no reasons for the award. We do not find in the award any legal proposition which is the basis of the award, far less a legal proposition which is erroneous. It is not possible to say from the award that the arbitrator was under a misconception of law. The contention that there are errors of law on the face of the award is rejected.'

12. More recently in Allenberry & Co. Pvt. Ltd. v. Union of India : [1971]3SCR282 the Supreme Court observed thus (at p. 699):

'The question whether a contract or a clause of it is incorporated in the award is a question of construction of the award. The test is, does the arbitrator come to a finding on the wording of the contract? If he does, he can be said to have impliedly incorporated the contract or a clause in it whichever be the case. But a mere general reference to the contract in the award is not to be held as incorporating it. The principle of reading contracts or other documents into the award is not to be encouraged or extended. (See Babu Ram v. Nanhemal, C. A. No. 107 of 1966, D/- 5-12-1968 (SC). The rule thus is that as the parties choose their own arbitrator to be the judge in the dispute between them, they cannot, when the award is good on the face of it, object to the decision either upon the law or the facts. Therefore, even when an arbitrator commits a mistake either in law or in fact in determining the matters referred to him, but such mistake does not appear on the face of the award or in a document appended to or incorporated in it so as to form part of it, the award will neither be remitted nor set aside notwithstanding the mistake.'

13. And, finally in the case of Upper Jamuna Valley Electricity Supply Co. Ltd. v. U. P. Electricity Board : [1973]3SCR107 the Supreme Court was pleased to observe (at p. 685):

'It was well settled that if parties constitute an arbitrator as the sole and final judge of the dispute arising between them, they bind themselves as a rule to accept the award as final and conclusive. An award is ordinarily not liable to be set aside on the ground that either on facts or in law, it is erroneous.'

14. In the light of the principles stated above, therefore, the question that arises for determination in this appeal is as to whether there is an error apparent on the face of the award in the sense that the arbitrators have given the award on the basis of some proposition of law forming part of the award which may be said to be erroneous. A perusal of the award, shows that there is no mention of any proposition of law and it only proceeds to award the amounts under various heads of claims. There is no reasoning given by the Arbitrators on the basis of which they had construed or interpreted Clause 1.11 (b) of the contract. They had plainly made an award stating that no adjustment can be claimed under Clause 1.11 (b) where the variations involved in the total value of the work executed finally is of an order which is more than 20% of the total value of the contract. Thus, there is no room left for the court to try to figure out the process of reasoning that may have been adopted by the arbitrators or to find out whether the reasoning behind the interpretation was correct or not. Itis not wihin the province of the court to find out the correctness or otherwise of such reasoning. As held by the Supreme Court, in the cases already referred to above, the only function of the Court is to see as to whether the arbitrators have decided the dispute which was within the scope of the terms of reference and that the award on its face does not show that it was based on a proposition of law which was erroneous. In the instant ease, we do not find any such infirmity in the award we were not inclined to go into the merits of the award in this case but as the counsel for the appellant has taken pains to show that the award was perverse we have considered it proper to dea] with the merits of the case also.

15. According to the submission made by the learned senior standing counsel, under Clause 1.11 (a) the State had unlimited powers to vary the quantities involved in the work and, therefore, Clause 1.11 (b) cannot be interpreted in a manner so as to limit this power in any way. Such an interpretation, according to him, would be against the very essence of the term 1.11 (a). He further submitted that even if the variations exceed -- 20% the same rates as are provided for highest slab from 15% to 20% -- Variation would be applicable for any quantity which may be in excess over the highest slab.

16. Apart from contending that the award was on a question of law and, therefore, beyond courts' purview the learned counsel for the respondent contested the submissions made by the learned senior standing counsel on merits. First he gave us the rationale behind Clause 1.11 of the contract in order to show that the interpretation given by the arbitrators was not at all perverse and was based on sound reasoning and was founded on the only possible interpretation of the same. According to him the contract undertaken by the respondent was not an ordinary contract which any or every contractor was capable of performing. It was a contract of a very highly technical nature requiring immense resources and engineering skill and expertise. Initially the contract was given to the lowest bidder but he was not able to carry out the work and, therefore, the Government had to approach the respondent for a negotiated contract. A contract of the magnitude which the defendant had undertaken to carry out required huge establishment, expenses even before thework gets started; the arrangement for raw material, skilled and unskilled labour employment of administrative staff, residence for its employees, office establishment and plant and machinery, have to be made. In this type of contract; therefore, a certain minimum financial outlay is involved which remains almost static. Once the initial setup and arrangement is made with an eye on stipulated quantity of work slight variation either way in the total quantity of the work executed finally does not make any appreciable difference so far as the profit of the contractor is concerned. This initial outlay on establishment can be flexible within certain degrees and contractor can undertake larger quantity of work without much increasing his establishment. If the quantity increases or decreases beyond a certain limit then there is a likelihood that the profits of the contractor may increase or decrease with the corresponding variation in the quantity of work executed as he may have to increase his establishment to match the increase in the quantity of work to be executed. The contractor then has to spend more for material used and additional labour may have to be employed. If the quantity of work to be executed decreases he may save the raw material used by him or on the labour engaged for doing the decreased quantity of work but his overhead establishment remains the same and, therefore, his cost-profit ratio will be adversely affected. Due to this reason an increase in contractor's rate was stipulated in the event of decrease in the total quantity of work finally executed. These terms are, therefore, based on sound economic consideration relating to cost-profit ratio and after the two sides had worked out the economies involved Clause 1.11 was introduced in the contract. It is for these reasons that the initial variation of 5% does not contemplate any corresponding variation in the rates payable to the contractor. It is only thereafter that variation is contemplated in the rates in respect of the next 15% of plus minus variation in the total quantity of work finally executed under the contract. The reason why no variation in rates has been provided for any variation in the quantity of work done exceeding 20% of the total value of the contract is also not far to seek. Once the variation in the total quantity of work executed by the contractor exceeds that limit of -- 20% variation that fixed initial establishment cost will also change.The administrative staff, plant and machinery and other items of permanent establishment have to be increased or decreased which will certainly entail extra expenditure or strain to the contractor and his cost-profit ratio will be greatly disturbed. It is for this reason that after providing for variations only up to 20% there is no term in the contract to cover the case when the variation exceeds-- 20%. According to the respondent if such a situation should arise, the term of the contract do not provide for the same and the parties have to, if they so liked, resort to mutual agreement regarding the rates. It was so because an entirely new situation will then arise which could not possibly be foreseen or forejudged by the contracting parties and for that reason must have been left out of the written terms of the contract.

17. In order to appreciate the respective arguments of the parties it is necessary to have Clause 1.11 of the agreementwhich is as under:

'(a) The contractor shall not in any way alter any of the works without the previous written consent of the engineer in charge but the engineer in charge may from time to time and at any time during the progress of the works by any writing, under his hand, direct any deviations, alterations or additions to be made from, in or to the works or any part thereof or may direct the contractor to curtail or to omit any of the work or to execute any new or substituted work or to commence and execute the work or any part thereof in such order and manner as he shall think fit. Any such directions of the engineer in charge and any deviations, alterations, additions and omissions made in pursuance thereof shall not vitiate this contract or be made the ground for any claim for compensation for alleged loss of profit in respect of omitted works and the payments to be made to the contractor shall not be adjusted due to variation in the quantities as a result of such variationexcept as hereinafter provided. Any works so directed to be omitted shall be omitted and any deviations so directed to be made shall be made to the satisfaction of the engineer in charge in the manner as if such works had been originally included in or omitted from the satisfactions except that value of the same, whether by way of addition, or deduction shall be estimated by the engineer in charge according to the schedule of bids where applicable or otherwise treated as an extra item, (b) Provided that deviations. alterations and additions to works as aforesaid will be limited to plus or minus five per cent of the total value of the contract, which value for this purpose shall be Rs. 15,64,80,298.50 (Rs. Fifteen crores sixty-four lacs eighty thousand and two hundred ninety eight and paise fifty only,) For variations beyond this limit of -- 5% of the total value of the contract, all rates will be adjusted for the total work executed finally by the percentage shown herein under:

Variationin value of work beyond 5%

Increasein rate for minus variation

Decreasein rate for plus variation.

2.5%

1.25%

0.63%

5.%

2.50%

1.25%

7.5%

9.75%

1.88%

10.0%

5.00%

2.50%

15.0%

6.25%

3.13%

18. Looking now at the provision contained in Clause 1.11 of the contract, it will be found that Clause (b) of the contract is almost in the nature of a proviso to Clause (a). Clause (a) gives a general power to the Engineer in charge to make variations while Clause (b) provides for certain consequences which will follow when variation is made and also the limitation for the exercise of that power. Sub-Clause (b) itself can be divided into two parts. The first part deals with initial 5% deviation in the work finally agreed as against the total value of the contract, i. e., Rs. 15,80,64.298.50 for which the contractor is not entitled to any variation of its rates. The second part provides that any variation beyond the limit of 5% the contractor's rates will be adjusted, upwards or downwards as the case may be, depending on the total quantity of the work executed finally according to the percentage shown in thetable given at the foot of the clause in the contract. This clause stipulates that adjustment is to be made in accordance with the work which may actually be executed finally and then only the percentage of variation will have to be calculated in order to find out in which slab the case would fall as per the schedule given under Clause (b). The argument of the learned senior standing counsel that the variations even up to 20% are covered by Clause 1.11 and the varied quantity of executed work falling within the various slabs will be paid for accordingly does not appear to be correct. According to him, if the total quantity of work executed by the contractor was 15% above the contracted quantity then according to his interpretation, for the first 5% of this variation payment will be made at the contracted rate, which for the remaining 15% will be paid at the rates given in the Schedule and the remaining work will be paid at the rates given in the next higher slab, and so on. In our view it is not a case in which increase or decrease in rates can be made on a slab basis but what this term provides for is in relation to the total quantity of work done vis-a-vis the total value of the contract and if after final execution of the work it was found that increase or decrease in the work falls in any particular slab as given in the Schedule of Clause 1.11 of the contract then that particular rate will be payable to the contractor. On a plain reading, Clause (b) means that if, for example, the total work executed by the contractor was of the tune of approximately 17 crores while the total value of the contract was approximately Rs. 15,64 crores then the variation comes to nearly 8%. This will, therefore, fall under the second slab of 25% to 5% after leaving out of consideration the first 5% for which no variation in rates was permissible and also the first slab which applies to variations up to 2.5% only. There will be a decrease in the rates of the contractor by 1.25%. The contention of the learned senior standing counsel, therefore, that the variations even up to 20% will have to be made slabwise from the bills of the contractor, does not appear to be correct.

19. Another ingenious argument was then made by the senior standing counsel that in the heading of the first column of the Schedule the words 'variation in value of work beyond 5%' should betaken as the minimum and not as maximum. This argument is, however, not at all tenable, he wants us to completely ignore the word 'beyond'. If we closely examine the various entries in the Schedule no variation in the rate is contemplated if the variation in the work executed is up to 5%, The Schedule provides variation only if it exceeds 5%. Therefore, the moment the variation in the quantity of work becomes even 5.1% the rates have to be either increased or decreased depending upon whether the variation was minus or plus and this has to continue till the variation reaches 2.5%. Thereafter the variation as contemplated in the second slab will apply and this will go on till such time as the variation reaches 15% over and above the initial 5%. If the interpretation as suggested by the learned senior standing counsel is accepted and the entry in the first slab is to be treated as minimum then it would follow that no variation in rates can be claimed if the variation of the quantity of the work was between initial 5% and 2.5% as indicated in the first slab. This will be contrary to the spirit of the term and render the first slab redundant. The heading of column No. 1 says 'variations in value of work beyond 5%' which is by itself suggestive of the fact that unless initial 5% is crossed no variation is to be taken into consideration. If the percentage shown in the table are taken as minimum what would happen if the variation is of only 6%? in that event there will be no variation in the rates for the first 5% and even for the remaining 1% no variation can be allowed as 2.5% would be read as minimum. This is clearly fallacious and goes against the very object of Clause 1.11. We are not impressed by this argument of the standing counsel and it has to be rejected.

20. The learned standing counsel then submitted that there is nothing in the contract which may limit the powers of the engineer in charge from making variation in the work to be executed by the contractor. According to him Sub-Clause (b) of the Clause 1.11 of the contract cannot restrict the powers of the engineer in charge to 'direct any deviation, alteration or addition to be made from, in or to the works or any part thereof or may direct the contractor to curtail or to omit any of the work or to execute any new or substituted work or to commence and execute the work or anypart thereof in such order or manner as he shall think fit.' According to him, in view of the powers which are given to the engineer in charge under Clause 1.11 (a) of the contract it is not possible to read that he has no power to direct variations beyond 20% of the total value of the contract. He further submitted that if the variations go beyond 20% and if there is no specific provision for making variations in the rates in such a case it must be inferred that beyond 20% the same rates shall apply as applicable for the highest slab mentioned in the Schedule and the same is only illustrative in nature. It is true that Clause 1.11 (a) of the contract does give unlimited power to Engineer-in-charge but that power is only to order deviation. It does not control the rates payable for such work. It does not postulate that in spite of the variation in the quantity of the work going beyond 20% he could still insist for paying the same rates as were applicable to the work falling within the scope of the contracted quantity. The contractor will be, justified in claiming variation in the rates in such an event. A power to vary the quantity of work is quite different and distinct from the right of the parties to claim variation in the rates consequent to the variation in the value of the work executed.

21. In view of the above discussion, it is apparent that the contracting parties clearly stipulated that the contract was limited to the quantity of work as mentioned in the contract itself. It was of the total value of approximately 15.64 crores. Clause 1.11 of the contract, however, permitted limited variations which is usual in a contract of a large magnitude. The variation permitted under the aforesaid clause is limited to 15% of the contract No variation of 20% or beyond 20% is permissible under the said clause. The Engineer-in-charge cannot assume jurisdiction to assess the value of the work done by the contractor if the variation is beyond 20% or above, or to apply the rates as set out in Clause 1.11 of the contract. The Arbitrators, in our opinion, reasonably construed the relevant clause and we find no perversity in their finding.

22. Therefore, on a consideration of the merits as well as the legal aspects involved in this appeal it is not possible for us to hold that the State of U. P. was entitled to claim any increase or decreasein rates if the variation in the work finally executed exceeds 20% as has precisely been done by the arbitrators. It was a matter of interpretation of a term in the contract which, according to us, was a question of law. This question of law was referred to the Arbitrators for their decision and after the award has been given the same is not open to challenge by the parties under Sections 30 and 33 of the Arbitration Act. We have already held that the scope of interference by the Court under Sections 30 and 33 of the Act in such cases is very much limited and since we do not find anything therein which may offend against the validity of the award, the same cannot be set aside. The Court below has rightly rejected the objection of the State of U. P. and we fully agree with it.

23. In the result, the appeal fails and is accordingly dismissed with costs.


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