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Salwan Construction Co. Vs. Union of India - Court Judgment

LegalCrystal Citation
SubjectArbitration
CourtDelhi High Court
Decided On
Case NumberSuit Appeal No. 222-A of 1974 and Leave Application Appeal No. 2340 of 1974
Judge
Reported inILR1977Delhi748
ActsArbitration Act, 1940 - Sections 30
AppellantSalwan Construction Co.
RespondentUnion of India
Advocates: S.L. Watel and; S.C. Dhanda, Advs
Cases ReferredIndia. In Bhowanidas v. Harasukhdas
Excerpt:
.....of--grounds to set aside award--`escalation'--meaning of.; in the presetn cast the arbitrator has awarded compensation to the builders. but he has not enunciated the principles, the validity of which can be tested on the basis of laws applicable to breaches of contract the arbitrator awarded compensation to the extent that he considered right in his discretion withou indicating his reasons :; that such a decision by the arbitrator cannot be held to be erroneous on the face of the record. the court will never know his thought-processes and the reasons which impelled him and weighed with him in arriving at the conclusion he did. the artitrator has stated his conclusion. the deductive and the inductive processes of reasoning, which men as rational creatures generally employ have but been..........it is a good index of the rise in prices. the supreme court has held that the arbitrator can award 'compensation to the extent that he considered right in his discretion without indicating his reasons'[sec bungo steel (supra)]. (25) it will be noticed that though the claim of the builders was for 45.21 per cent the arbitrator did not award them what they had claimed. the builders had claimed rs. 8,18,136.89. the arbitrator awarded only rs. 5,20,198.77. how did he reach this conclusion we do not know. he has not indicated his reasons. counsel suggested that the working of the arbitrator's mind can be seen from the award. i do not agree. in the recitals the arbitrator has referred to the claim made before him. but recitals are not reasons. in the operative portion the arbitrator has.....
Judgment:

Avadh Behart Rohatgi, J.

(1) Taiwan Construction Company is a firm of builders and contractors (the builders). They entered into an agreement with the respondent Union of India for the construction of a multi-storeyed office building in New Delhi.

(2) Union of India had invited tenders for this work. The work was confined to the construction of ground, first, second, third and fourth floors. The Government in its invitation for tenders had quoted their estimated cost of work. According to them this work was to cost Rs. 41,17,513.

(3) The builders submitted their tender quoting 15.46 per cent above the estimated cost. Their tender was accepted, being the lowest. An agreement in writing was executed. Work was awarded to the builders on January 6, 1970.

(4) In terms of the contract building work was to be commenced by the builders within 15 days from the date of the award of the work. The work was to be completed within a period of 18 months, that is, by July 20, 1971.

(5) The builders started the work. But the work could not be completed by the stipulated date because of the breach of contractual obligations on the part of the Union of India. In their letters dated June 2, 1971 (C-15), July 26, 1971 (C-17) and July 26, '1971 (C-18) the builders wrote to the Government that they were unable to complete the work within the stipulated time as there was delay ' on the part of the Government in giving them possession of the site and in the supply of drawing and because the work had to be suspended by reason of some acts and omissions of the Government. They also said that since the time had expired the work could not be continued except on increased rates as per the price prevailing in the market.

(6) The Government did not accept this stand of the builders. They said that the builders were contractually bound to do the work at the stipulated rates and that all that they, the builders, could ask for was extension of time in terms of the contract which could be given if the Government were satisfied that there was a case for extension.

(7) The result of the correspondence was that nothing was decided. The builders went on with the work. They completed the work. Then they made their claim for Rs. 8,18,136.89.

(8) The ground of the claim was this. In respect of the fifth and sixth floors of this very building the Government had invited tenders in the month of June and July 1971. This firm of builders again submitted their tender. The estimated cost given by the Government was Rs. 7,87,188. The builders quoted in their tender 60.70 per cent above the estimated cost as their rates. The highest tender which the Government received was for 66 per cent above the estimated cost. But since the builders' tender was the lowest it was accepted by the Government on August 9, 1971. The builders claimed that for the work of the ground, first, second, third and fourth floors which remained undone till July 20, they would charge from the Government 45.21 per cent over and above the contracted rates. The figure of 45.21 was arrived at by taking the difference of the second contract and the first contract i.e. 60.70 per cent and 15.49 per cent. The value of the work which remained to be done after July 20, 1971 was of the order of Rs. 18,09,637. The builders claimed an amount of Rs. 8,18,136.89 in addition to the sum of Rs. 18,09,637. The Government did not accept the claim. The contract contained the usual arbitration clause. It is clause 25. It is a very long clause. I will not read the whole of it. In so far as it is material it says :

'EXCEPT where otherwise provided in the contract all questions and disputes relating to the meaning of the specifications, designs, drawings and instructions herein before mentioned and as to the quality of workmanship or materials used on the work or as to any other question, claim, right, matter or thing whatsoever, in any way arising out of or relating to the contract, designs, drawings, specifications, estimates, instructions, orders or these conditions or otherwise concerning the works, or the execution of failure to execute the same whether arising during the progress of the work or after the completion or abandonment thereof shall be referred to the sole arbitration of the person appointed by the Chief Engineer, Central Public Works Department........................'

(9) The Builders wrote to the Chief Engineer that their claim should be referred to arbitration. The Chief Engineer agreed. He referred the following dispute to arbitration: Claim No. I The contractors state that due to various defaults, lapses and breaches on the part of the Department they could not complete the work by the stipulated date of completion and they had to sustain additional cost of execution on this account and that they are entitled to a payment at higher rate for the work executed after the stipulated date of completion. Consequently, they claim a rise of 44.58% on their quoted rates for the work that remained to be completed on 20th July, 1971 and claim this relief duly quantified in terms of money. The arbitrator is to determine whether the claim of the contractor is justified, and if so, to what extent ?

(10) The matter went to the arbitrator. He heard the parties. He made his award on April 5, 1974. He awarded the builders a sum of Rs. 5,20,198.77 with interest at 4 per cent per annum from the date of the award till payment or decree whichever is earlier.

(11) On April 10, 1974, the builders made an application under ss. 14 and 17 of the Arbitration Act (the Act) that the award be made a rule of the court. The Union of India filed objections to the award under ss. 30 and 33 of the Act. The grounds of opposition are reflected in the following issues :

1. Did the arbitrator misconduct the proceedings as alleged in Para 7 of the Objection petition ?

2. Is the award beyond the scope of reference If so, with* what effect ?

3. Is the award liable to be set aside on any other ground pleaded by respondent No. 1

(12) The first ground of attack is that the reference is beyond the scope of the agreement. This argument is untenable. The arbitration clause is as wide as can well be imagined. All questions, claims, rights, matters or things whatsoever, in any way arising out of or relating to the contract, or its conditions or otherwise concerning the works, or the execution or failure to execute the same whether arising during the progress of the work or after the completion can be referred to arbitration. The words 'arising out of or 'relating to' or 'otherwise concerning the works' are extremely wide and they take within their comprehension every conceivable dispute that can arise between the parties in regard to the work in hand. thereforee. the dispute raised by the builders in my opinion was within the scope of the arbitration clause and could thereforee form the subject- matter of reference.

(13) The second ground of objection to the award is that the arbitrator was not empowered to award any escalation in prices as the contract did not provide for the same and that the only thing open to the builders was to prove damages they had suffered by reason of the breach of the contract on the part of the Government. Counsel submitted that the claim of the builders had to be quantified in terms of money itemwise and in perfect details so that the arbitrator could decide whether the builders had suffered any loss and if so to what extent. Counsel argued that as this was not done the arbitrator was guilty of judicial misconduct and his award was bad as there was an error apparent on the face of the award. This is the main ground of attack.

(14) Counsel for the Union of India referred me to clauses 5, 10C and 12 of the conditions of contract. These clauses provide that the builders shall work accarding to the programme and time can be extended by the Government in a proper case, that statutory increase can be allowed if there is an increase in wages or price of the material during the currency of the contract, that for substituted and altered items the rates shall be determined in accordance with the formula laid down in the said clause.

(15) On the strength of these clauses counsel invited me to hold that it was not open to the arbitrator to award a general increase in price and that at best he could award damages if the builders were able to prove them to his satisfaction.

(16) In my opinion this argument is not well-founded. The arbitrator's award gives no reasons. It is a non-speaking award. It is true that in the recitals he said :

'THE claimant claims from the respondents Rs. 8,18,136.89 on the ground that the claimant did the work of the value of Rs. 18,09,637 after 20th July, 1971. The claimant claims at the rate of 45.21% (60.70% minus 15.49%) on the said work of the value of Rs. 18,08,637.'

In the operative portion of the award all that the arbitrator says is:

'THATthe respondent do pay to the claimant Rs. 5,20,198.77 with interest thereon at 4% per annum from this date till payment or decree whichever is earlier.'

(17) An award can be set aside on the ground of an error apparent on the face of the award. What is an error of law Lord Dunedin said in Champsey Bhara & Company v. Jivraj Ballco Spinning and Weaving Company Ltd. Air 1923 P.C. 66 :-

'AN error in law on the face of the award means in their Lordships' view that you can find in the award or a document actually incorporated thereto, as for instance, a note appended by the arbitrator staling the reasons for his judgment, some legal proposition which is the basis of the award and which you can then say is erroneous. It does not mean that if in a narrative a reference is made to a contention of one party that opens the door to seeing first what that contention is, and then going to the contract on which the parties' rights depend to see if that contention is sound.'

(18) The ground of error in law on the face of the award is a ground of limited jurisdiction. This jurisdiction is not lightly to be exercised. [Halsbury Laws of England (4th ed.) Vol. 2 p. 334]. An award is not invalid merely because by a process of inference and argument it may be demonstrated that the arbitrator has committed some mistake in arriving at his conclusion. It is now a well-settled principle that if an arbitrator, in deciding a dispute before him, does not record his reasons and does not indicate the principles of law on which he has proceeded, the award is not on that account vitiated. It is only when the arbitrator proceeds to give his reasons or to .lay down principles on which he has arrived at his decision that the court is competent to examine whether he has proceeded contrary to law and is entitled to interfere if such error in law is apparent on the face of the award itself (Bungo Steel Furniture v. Union of India, : [1967]1SCR633 ).

(19) In the present case the arbitrator has awarded compensation to the builders. But he has not enunciated the principles the validity of which can be tested on the basis of laws applicable to breaches of contract. The arbitrator awarded compensation to the extent that he considered right in his discretion without indicating his reasons. Such a decision by the arbitrator, the Supreme Court has held, cannot be held to be erroneous on the face of the record: See Bungo Steel (supra) (p. 383).

(20) Counsel for the Government referred me to s. 73 of the Indian Contract Act and contended that the arbitrator has awarded damages to the builders on a wrong legal basis and thereforee there is an error apparent on the face of the award. In any event, counsel argued, it is a case of judicial misconduct. I cannot accept this line of reasoning. The reason is plain. There is no error apparent on the face of the award as the arbitrator has not given us the legal basis on which he has proceeded. Nor is it a case of judicial misconduct for the arbitrator is the master of law and facts. Merely because he has reached a conclusion with which a court of law might have disagreed if it were seized of the case is no ground turn setting aside the arbitrator's award or for charging him with judicial misconduct. A court can decide rightly or wrongly. So can an arbitrator. If his award is wrong on facts or in law and no reasons are given can it be said that he is guilty of judicial misconduct ?

(21) The builders' claim for compensation was based on the difference between the rates quoted by them for the second tender and the rates quoted by them for the first tender. 60.70 minus 15.4645.24. This was the formula. This can also be true measure of damages. I find nothing wrong in it. The normal rule for computing damages for breach of contract is the difference between the contract price and the market price of goods at the time when the contract is broken. The builders' claim was that the Government was in breach of the contract. They were entitled to stop the work. Instead they went on with the work and did not treat it as a repudiation of the contract. The measure of damages is the loss of profit arising out of the reduced profitability or added expenses of the work carried out and completed by the builders.

(22) Reduced profitability or partial prevention can arise from many possible breaches of contract by the employer such as failure to give uninterrupted or prompt possession of the site as happened in Lawson v. Wallasey Local Board (1883) 48 L.T 506 a case to which I was referred or by failure to give drawings, details and information or niterference by other contractors and so on (Hudson's Building Contracts 9th ed. p. 451).

(23) Where the. contractor treats the breach as partial and continues the work, the most usual circumstances which give rise to claims are delay in giving the contractor possession of the site or in the supply of drawings, or suspension of the works caused by some act or omission of the employer and a consequent increase of expense in the performance of the works; and the contractor may be able to recover damages for delay caused by the employer notwithstanding that an extension of time for completion has been granted in respect of such delay. (Halsbury's Laws of England 4th ed. Vol. 4, p. 653).

(24) In the present case damages can be ascertained by putting the two contracts side by side and by seeing how prices have risen between the priod of January 6, 1970 and July 20. 1971. The second contract for 5th and 6th floors can be a true measure of damages. It is a good index of the rise in prices. The Supreme Court has held that the arbitrator can award

'COMPENSATION to the extent that he considered right in his discretion without indicating his reasons'

[Sec Bungo Steel (supra)].

(25) It will be noticed that though the claim of the builders was for 45.21 per cent the arbitrator did not award them what they had claimed. The builders had claimed Rs. 8,18,136.89. The arbitrator awarded only Rs. 5,20,198.77. How did he reach this conclusion we do not know. He has not indicated his reasons. Counsel suggested that the working of the arbitrator's mind can be seen from the award. I do not agree. In the recitals the arbitrator has referred to the claim made before him. But recitals are not reasons. In the operative portion the arbitrator has not indicated any reasons. His award thereforee is inscrutable like the face of the sphinx. I, thereforee, reach the conclusion that the arbitrator is neither guilty of judicial misconduct nor his award is vitiated by any error on the face of the award.

(26) Counsel for the Union of India referred me to M/s Alopi Parshad and Sons Ltd. v. Union of India. : [1960]2SCR793 . I do not see how that case helps him. Alopi Parshad were the Agents appointed to supply ghee to the Government. Under the terms of the contract the right of the Agent was to receive remuneration. Agents claimed remuneration at rates substantially different from those stipulated in the contract. The claim was made on the basis of quantum meruit. The arbitrators allowed the claim. The Supreme Court, agreeing with the High Court, held that the award of the arbitrators awarding additional expenses under the head of establishment and contingencies was on the face of it erroneous. The Supreme Court said:

'......THE terms of the contract, stipulating the rate at which the financing and overhead charges were to be paid under clause 13(a) read with clause 12(b). remained binding so long as the contract was not abandoned or altered by mutual agreement, and the arbitrators had no authority to award any amount in excess of the amount expressly stipulated to be paid.'

(p. 539).

(27) The court said compensation quantum meruit cannot be awarded where the contract expressly provides for the consideration payable for work done or services rendered.

(28) The principle of Alopi Parshad's case applies to cases where the terms of the contract remain binding and there is no breach. In the case in hand the claim for higher rates or 'escalation' in prices, as counsel for the Union chose to call it, was made on the footing that the Government was guilty of defaults, delay, acts and omissions and had failed to perform its part of the contract which imposed reciprocal obligations on the parties. If a party is able to show that the other party is in breach, he is not obliged to work at the rates stipulated in the contract. He can ask for compensation. The foundation of the claim for rise in rates is breach. Once that is established the party can be awarded compensation which is a form of restitution. This is exactly what happened in this case.

(29) Counsel said that the contract does not provide for escalation and there is no such clause in the contract as is some times introduced in contracts these days. This argument, I think, is based on a confusion of thought. The case of the builders was founded on a 'partial' breach of contract. They claimed compensation. For awarding compensation the arbitrator does not need to have an escalation clause in the contract. The contract does not provide for a 'partial' breach. As has been often pointed out, parties at the time of contracting contemplate not the breach of the contract, but its performance.

(30) The legal basis for compensation is enunciated in section 73 of the Contract Act. The arbitrator can award that amount of compensation which appears to be right to him. This is what he did. It cannot be said that he has gone wrong in law or that he has stated some legal proposition for the grant of compensation which is the basis of the award and, which you can then say, is erroneous. The arbitrator's award is a 'non-speaking' award. The arbitrator states no reasons for his decision. The Court cannot speculate what these reasons are. Nor can it start on a voyage of discovery to fathom those reasons which, unless expressed, will always remain in the breast of the arbitrator. The court will never know his thought processes and the reasons which impelled him and weighed with him in arriving at the conclusion he did. The arbitrator has slated his conclusion. The deductive and the inductive processes of reasoning, which men as rational creatures generally employ, have not been indicated. The final result is stated. But the steps in the reasoning are not stated. So far as reasoning is concerned it is a 'wordless' award. The arbitrator's reasons are unsearchable.

(31) As Shah J. said in Jivrajbhai v. Chintamanrao, : [1964]5SCR480 :

'IT is not open to the Court to speculate, where no reasons are given by the arbitrator, as to what impelled the arbitrator to arrive at his conclusion, On the assumption that the arbitrator must have arrived at his conclusion by a certain process of reasoning, the Court cannot proceed to determine whether the conclusion is right or wrong. It is not open to the Court to attempt to probe the mental process by which the arbitrator has reached his conclusion where it is not disclosed by the terms of his award.'

(32) What is 'escalation' It means an increase in the price of an article. If as between the price of a product and the cost of material there is unjust discrepancy an escalation clause in the contract tries to bring about the adjustment of prices proportionally e.g. by giving a rise in the price or wages. The claim of the builders is not for escalation but for compensation for the loss caused to them by reason of breach from the party in default. They suffered by such breach, they said. They claimed compensation from the contract- breaker. The claim is within the confines of section 73, Contract Act. It is true, in a way it is a claim for escalation. Whatever the future may have in store for us, nearly for one decade the prices have shown an upward trend. During January 1970 and July 1971, it was no different. In such circumstances the second contract can serve as an index. An index registers the increase in the cost of living. It is a sort of barometer.

(33) The escalator is an index. It can be a convenient measure of damages. The contract does not provide for escalation in case of a breach of contract. The escalator can be adopted by the court as a true measure of damages if it is available at hand. This can furnish good evidence of the loss sustained. It will show the prices prevailing at a particular time. We can then know the difference between the price at which a particular work was to be done at the time of the making of the contract and the price at which it could be done at the time of the breach.

(34) In the instant case this evidence was readily available. On its basis the builders made a claim lor extra payment by 45.21 per cent. The arbitrator did not accept the claim in its entirety. He awarded compensation in a lumpsum.

(35) Counsel said that the builders ought to have proved damages itemwise before the arbitrator. I do not agree. What better evidence can there be than the second contract itself Such evidence as was available of the acceptance of the tender in the second contract came handy to the buiders and furnished an excellent proof of damages.

(36) Now to sum up. Compensation is given for loss suffered owing to a breach of contract. The principle is that the injured party should be put as nearly as possible in the same position, so far as money can do it, as if he had not been injured. The test by which the amount of damages is ascertained is called the measure of damages.

(37) Take this very case. The claim before the arbitrator was for compensation. It was founded on the ground that the builders 'had to bear the burden of additional cost of execution'. This what the reference by the Chief Engineer says. If there is an increase of expense in the performance of works because of the breach of.contract on the part of contract-breaker the measure of damages will be the compensation to cover up the increase of expense or additional cost of execution. There is the loss suffered by the builders. The arbitrator thought that they are entitled to compensation. He awarded a lumpsum which in his judgment and discretion he thought to be right. This, in short, is the whole case.

(38) A subsidiary argument raised by counsel for the Union was that though the reference showed that the dispute was confined to the claim of 44.58 per cent made on account of rise in prices the arbitrator had gone on to consider the claim at the rate of 45.21 per cent. The reference was for 44.58 per cent. The award refers in the recitals to the builders' claim at the rate of 45.21 per cent. It appears that the arbitrator neither awarded 45.21 nor 44.58 per cent. He came to his own decision and directed the Government to pay a lumpsum of Rs. 5,20,198.77. He has not given us the percentage or any other legal basis for arriving at this figure. This amount in fact works out to 28.74 per cent which is much less than what the claim was and the reference was.

(39) Counsel then submitted that the arbitrator had no power to award interest as there was no reference of the claim of interest to the arbitrator. In Firm Madan Lal Roshanlal v. Hukumchand Mills, : [1967]1SCR105 and Union of India v. Bungo Steel Furniture, : [1967]1SCR324 the Supreme Court has settled that arbitrator has power to award pandente lite interest. Although, in terms, s. 34, Code of Civil Procedure does not apply to arbitrations, it is an implied term of the reference that the arbitrator would decide the dispute according to law and would give such relief with regard to pendent We interest as the court give if it decided the dispute. Interest is a matter in dispute in itself whether demanded or not. The power of the arbitrator to award interest is derived from the reference made to him which impliedly gave him the power to decide all matters in difference according to the existing law of contract, exercising every right and discretionary remedy given to a court of law. This is the law in England. The legal position is the same in India. In Bhowanidas v. Harasukhdas : AIR1924Cal524 a division bench of the Calcutta High Court consisting of Mookerjee and Rankin Jj held that the arbitrators had authority to make a decree for interest after the date of the award and expressly approved of the English cases. The arbitrator in this case has awarded interest from the date of the award to the date of the decree or payment whichever is earlier. This power he clearly had. I do not think there is anything wrong in the arbitrator awarding 4 per cent interest to the builders.

(40) For these reasons I would dismiss the objections and make the award a rule of the court. The builders will be entitled to interest at the rate of 6 per cent on the sum of Rs. 5.20,198.77 from the date of the decree till payment as well as costs.


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