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Union of India (Uoi) Vs. Budhlani Engineering Pvt. Ltd. - Court Judgment

LegalCrystal Citation
SubjectArbitration
CourtKolkata High Court
Decided On
Case NumberA.P.O. No. 608 of 2005, A.P.O.T. No. 696 of 2005 and A.C. No. 14 of 200
Judge
Reported in2008(3)CHN661
ActsArbitration Act, 1940 - Sections 2, 3, 20, 30, 33, 34 and 37(7); ;Interest Act, 1978; ;Negotiable Instruments Act, 1881; ;Arbitration and Conciliation Act, 1996; ;Code of Civil Procedure (CPC) , 1908 - Order 2, Rule 2
AppellantUnion of India (Uoi)
RespondentBudhlani Engineering Pvt. Ltd.
Appellant AdvocateN.C. Roychowdhury and; N. Mukherjee, Advs.
Respondent AdvocateSurojit Nath Mitra,; Arindam Mukherje and; G.S. Gupta, Advs.
Cases ReferredW.B. State Warehousing Corporation and Anr. v. Sushil Kumar Kayan and Ors.
Excerpt:
- bhaskar bhattacharya, j.1. this letters patent appeal is at the instance of the union of india and is directed against the order dated april 29, 2005 passed by a learned single judge of this court by which his lordship dismissed an application under sections 30 and 33 of the arbitration act, 1940 (hereinafter referred to as the act) for setting aside the award passed by the arbitrator.2. the respondent-contractor agreed to carry out a civil construction work worth rs. 19,47,050/-. the time-limit for completion of the work was fixed as one year from the date of awarding the contract. the work was to be completed by 10th february, 1990 but it was actually completed on 13th june, 1991 and as such, there was c delay of more than 16 months in completing the work. the claimant-contractor, after.....
Judgment:

Bhaskar Bhattacharya, J.

1. This letters patent appeal is at the instance of the Union of India and is directed against the order dated April 29, 2005 passed by a learned Single Judge of this Court by which His Lordship dismissed an application under Sections 30 and 33 of the Arbitration Act, 1940 (hereinafter referred to as the Act) for setting aside the award passed by the Arbitrator.

2. The respondent-contractor agreed to carry out a civil construction work worth Rs. 19,47,050/-. The time-limit for completion of the work was fixed as one year from the date of awarding the contract. The work was to be completed by 10th February, 1990 but it was actually completed on 13th June, 1991 and as such, there was c delay of more than 16 months in completing the work. The claimant-contractor, after completion of the work, submitted bills and there was dispute with regard to the quantum of the final bill. The final bill was not paid for a long time despite repeated requests and representations.

3. According to the respondent, it however, received part of such payment and the same was received under protest and without prejudice to its claim for further sum. The final payment was made when the respondent was forced to strike out the endorsement 'with protest'. The respondent apparently recorded full and final satisfaction and certificate of clearance of all dues. The respondent, however, contended that such endorsement was forced upon it by withholding the amount of the final bill.

4. On the aforesaid background, the dispute arose between the parties and the arbitration was sought for but refused. Ultimately, with the intervention of the Court under Section 20 of the Act, the learned Arbitrator was appointed. Initially Mr Justice Satya Brata Mitra, a retired Judge of this Court was appointed as Arbitrator; however, such appointment was later set aside and as provided in the agreement, a departmental Arbitrator was appointed and thereafter, the said departmental Arbitrator made and published an award. Such award was set aside by a learned Single Judge of this Court on an application under Sections 30 and 33 of the Act and the said learned Judge, while setting aside the award, appointed Mr Justice Sambhu Chandra Ghose, a former Chief Justice of this Court, as the sole Arbitrator in place of the departmental Arbitrator. However, Justice Ghose died before the conclusion of the arbitration and in his place, Mr Partha Bihari Mukherjee, an Advocate of this Court, was appointed as Arbitrator who ultimately published the award and the said award was brought under challenge.

5. Before the learned Single Judge, the following points were raised:

(1) The respondent having accepted the payment in full and final settlement after deleting the word 'under protest', there was no cause of any arbitration, as no dispute existed.

(2) The Arbitrator acted without jurisdiction in granting interest as Clause 16(2) of the General Conditions of Contract prohibited payment of interest of any amount payable by the Railway to the contractor.

(3) No amount of damages incurred due to suspension of work causing undue prolongation of the period of performance and such claim was not admissible under Clause 17(3) of the General Conditions of Contract.

6. The learned Single Judge answered all the questions in favour of the respondent and dismissed the application under Sections 30 and 33 of the Act.

7. Being dissatisfied, the Union of India has come up with the present appeal.

8. Mr. Roychowdhury, the learned Senior Advocate appearing on behalf of the Union of India, at the very outset, submitted before us that the learned Single Judge should have set aside the award simply on the ground that in view of the specific terms of the agreement there was no scope of appointment of any 'third party Arbitrator'. According to Mr. Roychowdhury, only the departmental Arbitrator could be appointed and such being the position, the award passed by the third party Arbitrator was on the face of it without jurisdiction.

9. Secondly, Mr Roychowdhury contends that the terms of the agreement do not provide for payment of interest to the contractor and therefore, there was no scope of grant of any pendente lite interest by the Arbitrator and on that ground, the learned Single Judge should have set aside the portion of the award granting pendente lite interest.

10. Lastly, Mr. Roychowdhury contends that in the agreement itself, there was specific provision that if the delay was condoned and the time was extended, no damages could be claimed and, therefore, the Arbitrator acted without jurisdiction in awarding compensation for such damages alleged to have been caused to the contractor. In support of such contentions, Mr Roychowdhury places strong reliance upon the following decisions:

1) A. Mohammad Yunus v. Food Corporation of India and Anr. reported in 2000(7) Supreme 722;

2) Union of India and Anr. v. M.P. Gupta reported in 2004(10) SCC 504;

3) An unreported decision of a two-Judges-bench of the Supreme Court in the case of Union of India v. Krishna Kumar, in Civil Appeal No. 6324 of 2004;

4) Ramnath International Construction (p) Ltd v. Union of India reported in : AIR2007SC509 ;

5) Secretary, Irrigation Department, Government of Orissa v. G.C. Roy reported in : [1991]3SCR417 ;

6) An unreported Division Bench decision of this Court in the case of Union of India v. Singh Verma and Ors. in APO No. 473 of 1998 disposed of on March 25, 1999.

11. Mr. Mitra, the learned Advocate appearing on behalf of the respondent-contractor, however, has opposed the aforesaid contentions advanced by Mr. Roychowdhury and has contended that none of the aforesaid submissions is tenable in the eye of law and those objections did not come within the purview of Sections 30 and 33 of the Act.

12. As regards the first point regarding the appointment of outside Arbitrator, Mr. Mitra contends that by a judicial order, instead of departmental Arbitrator, a third party Arbitrator having been appointed and such order having been accepted by the Union of India and thereafter, the appellant having participated in the proceedings without any protest, they were precluded from raising the question of competence of the third party Arbitrator in the proceedings under Sections 30 and 33 of the Act.

13. Secondly, Mr Mitra contends that Clause 16 of the General Conditions of Contract does not stand in the way of the Arbitrator in awarding interest pendente lite, as the said restriction is not binding upon the Arbitrator.

14. As regards the third point taken by Mr Roychowdhury, Mr Mitra contends that as the Railway Authority did not clear out the water from the site, which was above five feet from the ground level, his client could not start work, as a result, there was delay and, therefore, the learned Arbitrator rightly awarded compensation for the loss suffered by his client for such delay. Mr. Mitra further contends that in the written objection given by his client, it was pointed out that the site was below more than five feet of water but such assertion was not disputed by the Union of India in their counter-objection and according to Mr Mitra, such disputed question of fact cannot be raised in the proceedings under Sections 30 and 33 of the Act. He, therefore, prays for dismissal of the appeal.

15. Therefore, the first point that arises for determination is whether the award passed by the Arbitrator is liable to be set aside on the ground that the Arbitrator was not an officer of the Railways as provided in the agreement.

16. We agree with Mr. Roychowdhury, the learned Counsel for the appellant, that the terms of the agreement did not provide for appointment of a third party arbitrator and in that sense, the appointment of the Arbitrator in question was illegal. Nevertheless, such fact alone cannot be a ground of setting aside the award if it appears that the parties acquiesced to such appointment and without protest participated in the proceedings. In this case, originally a departmental Arbitrator was appointed who passed an award. Such award was set aside on the application under Sections 30 and 33 of the Act by Amitava Lala, J. and at that point of time. His Lordship appointed Justice Sambhu Chandra Ghose as Arbitrator. The parties did not challenge such appointment and participated before the third party arbitrator. After the demise of Justice Ghose, another Arbitrator was appointed by another learned Judge of this Court but such appointment was not challenged before the Division Bench of this Court and even, no objection was raised before the newly appointed Arbitrator who passed the award questioning his authority. In such circumstances, in our opinion, the appellant is precluded from raising the question of jurisdiction of the Arbitrator to adjudicate the dispute. In this connection, we may pertinently refer to the following observations of the Supreme Court in the case of State of Rajasthan v. Nav Bharat Construction Co. reported in : (2006)IIILLJ356SC :

Clause 23 of the Agreement is undoubtedly not an arbitration clause and the sitting Chief Engineer, to whom earlier reference was made, could not have acted as an arbitrator and made the award. The sitting Chief Engineer to whom initial reference was made did not complete the arbitration proceedings. The substituted arbitrator was a retired Chief Engineer and parties agreed to his appointment and submitted to his jurisdiction. By consent of parties, he was chosen sole arbitrator and disputes were referred to him. The State, without demur or protest, submitted to the jurisdiction of the arbitrator and participated in the proceedings. The State is estopped on the doctrine of acquiescence and waiver from raising objection to the competence of the substituted arbitrator and validity of the arbitration proceedings by taking recourse to Clause 23 of the agreement on the basis of which initial reference was made to sitting Chief Engineer. See following observations in the case of Prasun Roy v. Calcutta Metropolitan Development Authority : [1987]3SCR569 :

The principle is that a party shall not be allowed to blow hot and cold simultaneously. Long participation and acquiescence in the proceedings preclude such a party from contending that the proceedings were without jurisdiction... Basically the principle of waiver and estoppel is not only applicable where the award had been made but also where a party challenges the proceedings in which he participated.

17. By relying upon the abovementioned principle, we, therefore, find that the question of want of authority of the Arbitrator is no longer available to the appellant in the present proceedings.

18. Although Mr. Roychowdhury, in this connection, relied upon the decision of the Supreme Court in the case of A. Mohammad Yunus v. Food Corporation of India and Anr. reported in 2000(7) Supreme 722, we find that in that case, the award passed by an Arbitrator, appointed not in terms of agreement, was challenged as illegal and the Court accepted such contention and held that the award was passed by quorum-non-juris. In the said judgment, there is no indication as to whether the parties actually participated in the proceedings before the Arbitrator without protest or not, nor was any submission made on that point. Therefore, the said decision is not an authority for the proposition of law that there cannot be waiver of objection on question of appointment of the Arbitrator and cannot be relied upon as a precedent in support of such proposition.

19. Mr. Roychowdhury, in this connection, also relied upon the decision of the Supreme Court in the case of Union of India and Anr. v. M.P. Gupta reported in 2004(10) SCC 504. In that case, the High Court while allowing an application under Section 20 of the Act, instead of appointing joint Arbitrators as provided in the agreement between the parties, appointed a retired Judge of that Court as the sole Arbitrator. Such appointment was challenged by preferring an appeal before the Apex Court. In such circumstances, the Supreme Court set aside the appointment and directed appointment of joint Arbitrators in terms of the agreement. In our view, if the appellant challenged the appointment of Justice Ghose by preferring appeal against the order of Justice Lala or even challenged the subsequent appointment of Mr. P.B. Mukherjee, Advocate, by preferring appeal against such appointment without participating in the proceedings before the Arbitrator, it could successfully contend that the appointment of the Arbitrator was illegal as held in the case of M.P. Gupta (supra); but after participation without protest before the Arbitrator they cannot dispute the authority of the Arbitrator at this stage as pointed out in the cases of State of Rajasthan v. Nav Bharat (supra) and Prasun Roy v. C.M.D.A (supra). Mr. Roychowdhury also relied upon an unreported decision of a two-Judges-Bench of the Supreme Court in the case of Union of India v. Krishna Kumar in Civil Appeal No. 6124 of 2004, where the Division Bench applied the principles laid down in the case pf M. P. Gupta (supra), and set aside an award in an appeal arising out of proceedings under Section 34 of the Act. In that case also, no point of waiver or acquiescence was either raised or decided. We, therefore, find that the said decision does not stand in our way to follow the decision of the Supreme Court in the cases of Prasun Roy v. C.M.D.A. (supra) or the subsequent one in the case of Nav Bharat (supra).

20. The next question is whether the Arbitrator was justified in granting damages for the alleged loss suffered by the respondent for the delay in completing the work for non-removal of water from the site.

21. In this connection, the following condition of the work is material and is quoted below:

Up to 3 feet water level around the pier for carrying out work no payment of pumping of water will be made by the Railway; beyond 3 feet, extra charge will be borne by the Railway.

22. The aforesaid condition of work makes it abundantly clear that for accumulation of water in the site, the contractor is not supposed to stop the work and blame the Railway. It is his duty to pump out the water and continue with the work. The condition, however, stipulates that if the water level is above 3 feet, the charge for pumping out the water till it comes down to 3 feet, would be borne by the Railway; but the moment it comes within 3 feet level, the contractor himself is required to bear the charge of clearing the water. Therefore, simply because the water was above 3 feet (in this case 5 feet as alleged by the contractor), there was no just reason for stopping the work or not commencing the work and remaining idle asking the Railway to clear out the water. It was the duty of the contractor to pump out the water and charge the cost of pumping out the water from the Railway so long the water level did not come down to 3 feet and thereafter, to bear the cost of de-watering by itself. Here, no question of giving compensation for keeping the labours idle arose.

23. In this connection, it will be profitable to refer to the Sub-Clauses (2) and (3) of Clause 17 of the conditions of the work, which are quoted below:

2. Delay and extension of time.-If the Contractor be delayed at any time in the progress of the works by any act or neglect of the Railway's employees or by any other contractor employed by the Railway under Sub-clause (4) of Clause 20 of these conditions, or by strikes, lock-outs, fire, unusual delay in transportation, unavoidable casualties or any causes beyond the Contractor's control, or by delay authorised by the Engineer pending arbitration, or by any cause which the Engineer shall decide to justify the delay, then the time of completion of the works may be extended for such reasonable time as the Engineer on behalf of the Railway may decide.

3. Extension of time on Railway Account.-In the event of any failure or delay by the Railway to hand over to the Contractor possession of the lands necessary for the execution of the works or to give the necessary notice to commence the works or to provide the necessary drawings or instructions or any other delay caused by the Railway due to any other cause whatsoever, then such failure or delay shall in no way affect or vitiate the contract or alter the character thereof or entitle the Contractor to damages or compensation therefor but in any such case, the Railway may grant such extension or extensions of the completion date as may be considered reasonable.

24. The aforesaid two sub-clauses point out that in the event of extension of time for completion of work for any reason whatsoever as mentioned therein, there is no scope of claiming damages against the Railway for the loss of idle labour. Therefore, the claim of damages for the delay due to excess water in the site was not entertainable. In this connection, it will not be out of place to refer to the decision of the Supreme Court in the case of Ramnath International Construction (P) Ltd. v. Union of India reported in : AIR2007SC509 , where the contract provided that if there was any delay, attributable either to the contractor or the employer or to both and the contractor sought for and obtained extension of time for execution on that account, he would not be entitled to claim compensation of any nature on the ground of such delay in addition to the extension of time obtained by him. According to the Supreme Court, prayer for extension of time by the contractor amounted to a specific consent by the contractor to accept extension of time alone in satisfaction of his claim for delay and not to claim any compensation in lieu thereof.

25. We, therefore, hold that the Sub-clauses (2) and (3) of Clause 17 did not authorise the contractor to claim any compensation once he had applied for extension and got the extension. The Arbitrator, therefore, clearly misdirected himself in awarding compensation on that account and the learned Single Judge totally overlooked this aspect of the case. We, t accordingly, set aside the award so far as it granted damages to the respondent for the suspended period of work as mentioned in claim No. 12(iv)(a)(b)(c) & (d) as the same is not tenable under the terms of the agreement.

26. The last question is whether the Arbitrator was entitled to grant interest pendente lite in view of Clause 16(2) of the conditions, which is quoted below:

2. Interest on amounts.-No interest will be payable upon the earnest money or the security deposit or amounts payable to the contractor under the contract.

(Emphaais supplied by us)

27. In the case of Secretary, Irrigation Department, Government of Orissa v. G.C. Roy reported in : [1991]3SCR417 , a Constitutional Bench of the Supreme Court had the occasion to consider the circumstances where an Arbitrator can grant pendente lite interest. In that context, the Supreme Court made it clear that where the terms of agreement prohibits grant of interest, the Arbitrator has no authority to grant any pendente lite interest.

28. According to the provision of the Interest Act, 1978, the word 'Court' as defined in Section 2 of the Act includes Arbitrator, which was not there in the old Interest Act. Section 3 of the said Act provides that the power of the Court, which includes an Arbitrator, to grant interest as provided therein will have no application if the agreement between the parties out of which the debt arises prohibits grant of interest. The provision contained in Section 3 of the Act is quoted below:

Power of Court to allow interest.-(1) In any proceedings for the recovery of any debt or damages or in any proceedings in which a claim for interest in respect, of any debt or damages already paid is made, the Court may, if it thinks fit, allow interest to the person entitled to the debt or damages or to the person making such claim, as the case may be, at a rate not exceeding the current rate of interest, for the whole or part of the following period, that is to say,

(a) if the proceedings relate to a debt payable by virtue of a written instrument at a certain time, then, from the date when the debt is payable to the date of institution of the proceedings;

(b) if the proceedings do not relate to any such debt, then, from the date mentioned in this regard in a written notice given by the person entitled or the person making the claim to the person liable that interest will be claimed, to the date of institution of the proceedings:

Provided thai where the amount of the debt or damages has been repaid before the institution of the proceedings, interest shall not be allowed under this section for the period after such repayment.

(2) Where, in any such proceedings as are mentioned in Sub-section (1),

(a) judgment, order or award is given for a sum which, apart from interest on damages, exceeds four thousand rupees, and

(b) the sum represents or includes damages in respect of personal injuries to the plaintiff or any other person, or in respect of a person's death, then, the power conferred by that sub-section shall be exercised so as to include in that sum interest on those damages or on such part of them as the Court considers appropriate for the whole or part of the period from the date mentioned in the notice to the date of institution of the proceedings, unless the Court is satisfied that there are special reasons why no interest should be given in respect of those damages. (3) Nothing in this section,

(a) shall apply in relation to

(i) any debt or damages upon which interest is payable as of right, by virtue of any agreement; or

(ii) any debt or damages upon which payment of interest is barred, by virtue of an express agreement;

(b) shall effect

(i) the compensation recoverable for the dishonour of a bill of exchange, promissory note or cheque, as defined in the Negotiable Instruments Act, 1881 (26 of 1881); or

(ii) the provisions of Rule 2 of Order II of the First Schedule to the Code of Civil Procedure, 1908 (5 of 1908);

(c) shall empower the Court to award interest upon interest.

29. In the case before us, Clause 16(2) of the agreement specifically prohibits grant of interest on the amounts payable to the contractor under the contract and in such a situation, in our view, there was no scope of grant of any pendente lite interest.

30. Mr. Roychowdhury, the learned Senior Advocate appearing on behalf of the appellant, in this connection, relied upon ah unreported Division Bench decision of this Court in the case Of Union of India v. Singh Verma and Ors. in APO No. 473 of 1998, disposed of on March 25, 1999 where the said Division Bench while considering exactly the same clause prohibiting grant of interest on the amounts payable to the contractor held that the Arbitrator was not justified in granting pendente lite interest. The following observations of the Division Bench in the case of Singh Verma are relevant and quoted below:

The other claim which was allowed is claim No. 15. No reasons whatsoever have been given by the arbitrators for awarding interest on the awarded amount. Apart from this, the arbitrators also violated the clause in the contract by awarding interest. In Secretary, Irrigation Department v. G.C. Roy : [1991]3SCR417 , a Five-Judge Bench held that the arbitrator had power to award interest pendente lite only:

Where the agreement between the parties does not prohibit grant of interest and where a party claims interest and that dispute (along with the claim for principal amount or independently) is referred to the arbitrator

This view was affirmed in Board of Trustees for the Port of Calcutta v. Engineers-de-Space-Age : AIR1996SC2853 , although in that case the award of interest was upheld because the clause read that 'no claim for interest will be entertained by the Commissioner'. According to the Supreme Court:

Strictly construed the term of the contract merely prohibits the Commissioner from paying interest to the contractor for delayed payment but once the matter goes to arbitration the discretion of the arbitrator is not, in any manner, stifled by this term of the contract and the arbitrator would be entitled to consider the question of grant of interest pendente lite and award interest if he finds the claim to be justified. We are, therefore, of the opinion that under the clause of the contract the arbitrator was in no manner prohibited from awarding interest pendente lite

In this case the clause in the agreement between the parties specifically forbade the grant of interest on security deposit and earnest money. Clause 83 of the Instruction to tenderers which formed part of contract, said:

No interest will be payable upon earnest money or security deposit or any other amount payable to the contractors under the contract.

The learned Judge has not indicated as what statute provided for payment of interest which overrode the clause in the agreement.

31. We, therefore, find that the view we propose to take is in conformity with the one taken by a Division Bench of this Court while dealing with exactly the same clause in the agreement prohibiting payment of interest on the amount payable to the contractor under the agreement.

32. Mr. Mitra, the learned Counsel appearing on behalf of the respondent, on the other hand, relied upon a Division Bench decision of Andhra Pradesh High Court in the case of N.G. Gumani v. Union of India reported in 1996 (Supp) Arb. L.R 566 where the said Division Bench while interpreting a similar clause as involved herein held that the interest pendente lite was permissible. In arriving at such conclusion, the said Division Bench relied upon the above quoted observations of the Apex Court in the case of Board of Trustee for the Port Trust of Calcutta v. Engineers-de-Space-Age reported in : AIR1996SC2853 , which has been distinguished by the Division Bench of our Court in the case of Singh Verma and Ors. (supra) where the relevant clause provided that 'no claim for interest will be entertained by the Commissioner'.

33. In the case before us, the clause prohibits grant of interest on the amounts payable to the contractor under the contract and not by any particular authority as was the agreement in the case of Board of Trustees (supra), and therefore, the said decision does not apply to the facts of the case in hand. With great respect to the learned Judges of the Andhra Pradesh High Court, we are unable to subscribe to the view taken by Their Lordships.

34. Although, Mr. Mitra relied upon a decision of a Division Bench of this Court in the case of Union of India v. Pam Development Put. Ltd. reported in : AIR2005Cal332 in support of his contention that the said Division Bench having relied upon the decision of the Andhra Pradesh High Court in the case of N.G. Gumani (supra), we should also follow the same, we are of the view that the said decision based on Arbitration and Conciliation Act, 1996 cannot have any application to the facts of the present case as a precedent. The said Division Bench in arriving at the conclusion that the 1996 Act gives special power as provided in Section 31(7) of the Act to the Arbitrator to pass interest in a case like the present one where there was prohibition of grant of interest on the claim of a contractor did not take notice of the earlier Division Bench decision of this Court in the case of Union of India v. Singh Verma (supra), and thus, the said decision is not a valid precedent at least in dealing with the power of Arbitrator under the 1940 Act.

35. In the said case, the Division Bench held that in order to denude an Arbitrator of his power to award interest for the post-reference period, such prohibition must be incorporated in the 'Arbitration contract' itself which is often referred to as arbitration clause in legal parlance. The said Division Bench while laying down such a law relied upon the decision of a Division Bench of this Court in the case of Board of Trustees for the Port of Calcutta v. Mahalakshmi Constructions 2002(1) Arb. LR 656. The following observations of the Division Bench in the case of Pam Development (supra), are quoted below:

In our opinion, in order to decide as to whether an Arbitrator has been divested of his jurisdiction to award interest for the post-reference period by an agreement, we would have to analyse the manner in which the terms have been agreed upon. In the case of Board of Trustees for the Port of Calcutta v. Engineers-De-Space Age : AIR1996SC2853 (supra) interest prohibition clause ran as follows (para 2 of AIR):

No claim for interest will be entertained by the Commissioners with respect to any money or balance which may be in their hands owing to any dispute between themselves and the contractor or with respect to any delay on the part of the Commissioners in making interim or final payment or otherwise.This clause was held to be binding on the Commissioners, but not on the Arbitrator. In the case of N.G. Gumani v. Union of India : 1996(4)ALT1046 (supra), a similar clause was construed by the Hon'ble Court of Andhra Pradesh, and such a clause was held to be a bar on the departmental officers to allow interest, but such a provision, it was held, did not restrict the power of the Arbitrator to award interest.

On this point, we are of the view that in the event the parties to an agreement intend to denude the Arbitrator of his power to award interest for the post-reference period, such prohibition must be incorporated in the 'Arbitration contract' itself, which is often referred to as arbitration clause in legal parlance. The decision of an Hon'ble Division Bench of this Court in the case of Board of Trustees for the Port of Calcutta v. Mahalakshmi Constructions 2002(1) Arb. LR 656 (supra), while considering legality of an award to which ACA 1996 was applicable held that unless the arbitration-agreement itself excepted payments under certain heads, the Arbitrator could not be fettered by an agreement between the parties.

We are in agreement with the ratio of the judgments of this Court in the case of Board of Trustees for the Port of Calcutta v. Mahalakshmi Constructions (supra) and that of the Hon'ble High Court of Andhra Pradesh in the case of N.G. Gumani 1996(4) Andh LT 1046) (supra). In the present case, the interest prohibition clause admittedly was incorporated in the GCC, but not in the Arbitration Clause forming the Arbitration Contract. In our opinion, a plain reading of the contract does not reflect intention of the parties to denude the power of the Arbitrator to award interest. Clause 16(2) of the GCC has not been included in the list of excepted matters in Clause 63 thereof. It has also not been argued before us the issue of award of interest came within excepted matters. Accordingly, we are of the view that the interest exclusion clause should be held in the present case to be an embargo on the power of the appellant or its officers to award interest, but the Arbitrator's power to award interest has not been curbed in the agreement.

We accordingly hold that no illegality was committed by the Arbitrator in awarding interest in the present case.

36. In the case of Mahalakshmi Construction (supra), relied upon by the Division Bench in the case of Pam Development (supra), the contract contained a clause prohibiting payment of escalation of price hike excepting only for the price-rise of steel. According to the Port Trust Authority, the Arbitrator being a creature of the contract and the contract having prohibited payment on account of escalation, the Arbitrator acted without jurisdiction in passing the award.

37. In the aforesaid background, the Division Bench in Mahalakshmi Construction (supra), made the following observations:

If a commercial contract with prohibitory clauses like escalation prohibition were to become subject-matter of a suit, before an ordinary Court of Law, nobody would dream of arguing that a decree passed allowing escalation is a decree without jurisdiction. Such a decree might be wrong and might be upset in appeal. But jurisdiction of Court has, and such possession of jurisdiction also entails the power of the Court to go wrong. The Court will interpret the contract considering all the clauses. The Court will consider the entirety of the surrounding circumstances. The Court will consider the complicated law of contract. The ,Court will consider the evidence given by the different parties and on this basis if the Court thinks that it is just and legal to grant escalation it will grant escalation even if there should be one clause in a big contract appearing to prohibit such grant.

The jurisdiction of the Court is not derived from the commercial contract but is derived from the general law of the land. The jurisdiction of the Arbitrator is not derived from the commercial contract but it is derived from the general law of the land and the separate contract which is the forum choosing contract agreed upon by and between the parties. Exactly like a Court of Law the Arbitrator can also award escalation amounts, even if there should be one clause in the contract prohibiting such grant

Ultimately, the said Division Bench held as follows:

ft might be that the commercial contract has to be looked into to demonstrate that the proposition of law contained in the award is wrong. It can be looked into only when the commercial contract or the required material part of it forms a part of the face of the award, otherwise, even if the error of law might be demonstrable with reference to it, the award is not vitiated.

Thus, one cannot even look at the commercial contractual clause prohibiting grant of escalation, and thus come to the conclusion that the Arbitrator has erred in law, unless that prohibition clause is apparent on the face of the award itself.

38. We, however, find that the aforesaid view of the Division Bench in the case of Mahalakshmi Construction (supra) is totally contrary to the decisions of Apex Court in the case of Associated Engineering Co. v. Government of Andhra Pradesh and Anr. reported in : [1991]2SCR924 , where the Apex Court made the following observations by distinguishing a case of the Arbitrator travelling beyond the jurisdiction from the case of an ordinary award when such award was challenged on the ground of error apparent on the face of record:

A dispute as to the jurisdiction of the arbitrator is not a dispute within the award, but one which has to be decided outside the award. An umpire or arbitrator cannot widen his jurisdiction by deciding a question not referred to him by the parties or by deciding a question otherwise than in accordance with the contract. He cannot say that he does not care what the contract says. He is bound by it. It must bear his decision. He cannot travel outside its bounds. If he exceeded his jurisdiction by so doing, his award would be liable to be set aside. As stated by Lord Parmoor:.It would be impossible to allow an umpire to arrogate to himself jurisdiction over a question which on the true construction of the submission was not referred to him. An umpire cannot widen the area of his jurisdiction by holding, contrary to the fact, that the master which he affects to decide is within the submission of the parties....Attorney-General for Manitoba v. Kelly 1922(1) AC 268 276.

Evidence of matters not appearing on the face of the award would be admissible to decide whether the arbitrator travelled outside the bounds of the contract and thus exceeded his, jurisdiction. In order to see what the jurisdiction of the arbitrator is, it is open to the Court to see what dispute was submitted to him. If that is not clear from the award, it is open to, the Court to have recourse to outside sources. The Court can look at the affidavits and pleadings of parties; the Court can look at the agreement itself. Bunge & Co. v. Dewar and Webb 1921(8) Lloyd's Rep 436 (KB). If the arbitrator commits an error in the construction of the contract, that is an error within his jurisdiction. But if he wanders outside the contract and deals with matters not allotted to him, he commits a jurisdiction error. Such error going to his jurisdiction can be established by looking into material outside the award. Extrinsic evidence is admissible in such cases because the dispute is not something which arises under or in relation to the contract or dependent on the construction of the contract or to be determined within the award. The dispute as to jurisdiction is a matter which is outside the award or outside whatever may be said about it in the award. The ambiguity of the award can, in such cases, be resolved by admitting extrinsic evidence. The rationale of this rule is that the nature of the dispute is something which has to be determined outside and independent of what appears in the award. Such jurisdictional error needs to be proved by evidence extrinsic to the award. [See Alopi Parshad and Sons Ltd. v. Union of India : [1960]2SCR793 ; Bunge & Co. v. Dewar & Webb 1921(8) Lloyd's Rep 436 (KB); Christopher Brown Ltd. v. Genossenschaft Oesterreichischer 1954(1) QB 8; Rex v. Fulham 1951(2) KB 1; Falkingham v. Victorian Railways Commission 1900 AC 452; Rex v All Saints Southampton 1828(7) B and C 785; Laing Sons and Co. Ltd. v. Eastcheap Dried Fruit Co. 1961(1) Lloyd's Rep 142, 145 (QB); Dalmia Dairy Industries Ltd. v. National Bank of Pakistan 1978(2) Lloyd's Rep 223 (CA); Heyman v. Darwins Ltd. 1942 AC 356; Union of India v. Kishorilal : [1960]1SCR493 ; Renusagar Power Co. Ltd. v. General Electric Co. : [1985]1SCR432 ; Jivarajbhai v. Chintamanrao : [1964]5SCR480 ; Gobardhan Das v. Lachhmi Ram : AIR1954SC689 ; Thawardas v. Union of India : [1955]2SCR48 ; Omanhene v. Chief Obeng ; F.R. Absalom Ltd. v. Great Western (London) Garden Village Society Limited 1933 AC 592 (HL) and M. Golodetz v. Schrier 1947(80) Lloyd's Rep 647].

In the instant case, the umpire decided matters strikingly outside his jurisdiction. He outstepped the confines of the contract. He wandered far outside the designated area. He digressed far away from the allotted task. His error arose not by misreading or misconstruing or misunderstanding the contract, but by acting in excess of what was agreed. It was an error going to the root of his jurisdiction because he asked himself the wrong question, disregarded the contract and awarded in excess of his authority. In many respects, the award flew in the face of provisions of the contract to the contrary. See the principles stated in Anisminic Ltd. v. Foreign Compensation Commission 1969(2) AC 147: Pearlman v. Keepers and Governors of Harrow School 1979(1) QB 56; Lee v. Showmen's Guild of Great Britain 1952(2) QB 329; M L. Sethi v. R.P. Kapur : [1973]1SCR697 ; Managing Director, J. and K. Handicrafts v. Good Luck Carpets : AIR1990SC864 ; State of Andhra Pradesh v. R.V. Rayanim : [1990]1SCR54 . See also Mustill and Boyd's Commercial Arbitration, Second Edition; Halsbury's Laws of England, Fourth Edition, Vol. 2].

39. It appears that the Division Bench took note of the aforesaid decision and other decisions of the Supreme Court taking similar view but bypassed those decisions by holding that there are also contrary views of the Apex Court on the aforesaid question by relying upon the following two decisions:

a) N. Challeppan v. Secretary, Kerala State Electricity Board reported in : [1975]2SCR811 ;

b) Sudersan Trading v. Government of Kerala reported in : [1989]1SCR665 .

40. After recording those two decisions, the Division Bench held that in case of conflict of decisions of the Apex Court, it was free to choose any of those decisions and relied upon the decision of the Privy Council in the case of Champsay Bhara reported in AIR 1923 PC 66. The Division Bench totally overlooked that the cases of if. Challappan and of Sudarshan Trading (supra), related to a simple case of award where the allegation was that the same was vitiated with the error apparent on the face of record but those did not involve the question of excess jurisdiction, as is the case here.

41. With great respect to the Hon'ble Judges of the Division Bench in the case of Union of India v. Pam Development (supra), we are unable to subscribe to the view taken by Their Lordships that even if it is specifically provided in the agreement between the parties that no interest would be payable on the amount payable to the contractor under the agreement, the Arbitrator would be vested with the authority to grant pendente lite interest in his award simply because the clause prohibiting payment of interest was not included in the list of exceptions attached to the Arbitration Clause. It appears that in the Arbitration Clause of the agreement, some of the clauses of file agreements have been kept out of the purview of arbitration, meaning thereby, that the Arbitrator would have no authority to take into consideration those clauses. The Clause 16(2) prohibiting payment of interest has not been brought within such list and it necessarily follows that the said clause has been kept alive for the arbitration and therefore, the Arbitrator while adjudicating disputes was bound to take into consideration the said clause.

42. At this stage, we may profitably refer to the following observations of the Supreme Court in the case of W.B. State Warehousing Corporation and Anr. v. Sushil Kumar Kayan and Ors. reported in : AIR2002SC2185 , where the Apex Court reiterated the guidelines to decide whether the Arbitrator acted without jurisdiction:

In order to determine whether the arbitrator has acted in excess of his jurisdiction what has to be seen is whether claimant can raise a particular claim before the arbitrator. If there is a specific term in the contract or the law which does not permit to the parties to raise a point before the arbitrator and if there is a specific bar in the contract to the raising of the point then the award passed by the arbitrator in respect thereof would be in excess of his jurisdiction.

43. We, therefore, find that the aforesaid Division Bench of this Court as also the Division Bench of the Andhra Pradesh High Court did not properly construe the implication of non-mentioning of the Clause like 16(2) in the list of exceptions attached to the Arbitration Clause. Similarly, the Division Bench of this Court in the case of Mahalakshmi Construction (supra), in our view, ought to have followed the well-accepted view taken by the Supreme Court that when an award has been challenged as in excess of jurisdiction, the Court is entitled to take into consideration the documents not mentioned in the award as evidence to find out the terms of the contract between the parties and is not required to restrict its scrutiny to the award itself.

44. Now, the next question is what should be our duty in the facts of the present case where (1) a co-ordinate Bench of equal strength has taken a view contrary to the one taken by the Supreme Court after taking note of those decisions of the Supreme Court and (2) where a Division Bench in ignorance of the earlier decision of a Bench of equal strength taking a contrary view has relied upon the decision of the Andhra Pradesh High Court and another decision of a Division Bench of this Court which is in conflict with the decisions of the Supreme Court.

45. A contrary view taken in ignorance of the decision of the Bench of equal strength makes the judgment per incuriam but a view taken in spite of noticing a binding decision and holding the same as not binding cannot be said to be judgment per incuriam and therefore, if we disagree with such decisions, it is our duty to refer the matter to the Hon'ble Chief Justice to constitute a larger Bench for resolving the dispute.

46. We, therefore, refer the following points to the Hon'ble Chief Justice for decision by constituting a Larger Bench:

a) If the terms of contract prohibits payment of interest on the amount payable to the Contractor under the agreement, whether an Arbitrator can grant pendente lite interest on the amount payable?

b) Whether Clause 16(2) of the agreement between the parties can be construed to be a prohibition applicable only to the department but not the Arbitrator simply because the said clause is not kept within the exceptions mentioned in Arbitration Clause?

c) Whether in order to challenge an award as in excess of jurisdiction, it is necessary that such defect must appear on the face of award and that no evidence, not even the term of the contract which excludes the jurisdiction of the Arbitrator, is admissible to demonstrate such fact?

47. We make it clear that apart from the question of grant of pendente lite interest, which according to us is not permissible within the terms of the agreement, we have set aside the award as regards the claim of damages for the suspended period of work when the site of work was water-logged as mentioned in claim No. 12(iv) (a) (b) (c) & (d).

Our decision on the question of interest pendente lite is, however, subject to the decision of the Larger Bench. In the facts and circumstances, there will be, however, no order as to costs.

Rudrendra Nath Banerjee, J.

I agree.


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