ASSOCIATE BUILDERS Vs. DELHI DEVELOPMENT AUTHORITY
Supreme Court of India (Division Bench (DB)- Two Judge)
Appeal (Civil), 10531 of 2014, Judgment Date: Nov 25, 2014
REPORTABLE
IN THE SUPREME COURT OF INDIA
CIVIL APPELLATE JURISDICTION
CIVIL APPEAL NO. 10531 OF 2014
(ARISING OUT OF SLP (CIVIL) NO.14767 OF 2012)
Associate Builders ...Appellant
Versus
Delhi Development Authority ...Respondent
J U D G M E N T
R.F.Nariman,J.
1. Leave granted.
2. The appellant herein was awarded a certain construction work contract
by the DDA vide a letter of award dated 14th May, 1992. DDA was building a
colony consisting of 7,000 houses in Trilok Puri in the trans-Yamuna area.
168 Middle Income Group houses and 56 Lower Income Group houses, Grade-A
Pocket- B (balance work) was awarded for the tendered amount of
Rs.87,66,678/-. The contract was to be completed in 9 months. Admittedly,
it was ultimately completed only in 34 months, the contractor completing
166 Middle Income Group houses and 36 Lower Income Group houses. The total
value of work that was done amounted to Rs.62,84,845/-. As many as 15
claims were made by the contractor and the High Court of Delhi appointed
one Shri K.D. Bali to arbitrate the present dispute.
3. We are concerned here with claims 9, 10, 11 and 15, for these claims
have been allowed by the Arbitrator and the DDA's objections have been
dismissed by the learned Single Judge of the High Court of Delhi. The
Division Bench in an appeal under Section 37 of the Arbitration Act, 1996
has stepped in to set aside the judgment of the Single Judge and negative
these claims. We are also concerned with claims 12 and 13 which have been
scaled down by the Division Bench.
4. Claims 9, 10, 11 and 15 read as follows:
"Claim No.9: Claimants claim Rs. 20,950/- on account of hire charges of
centering shuttering due to delay in laying of conduiting.
a) That the respondents had granted certain work of electrification but the
said agency did not lay the conduit resulting in delay in removing the
shuttering and causing hire charges. This fact was reported to the
respondents vide claimant's letter dated 30.10.92 followed by reminders and
also found place in hindrance register.
b) That this is the actual expenditure incurred and thus the claimant is
entitled for its refund.
c) That the detailed break-up of this claim has been appended separately.
Claim No.10: Claimants claim Rs.33,450/- being the hire charges of
shuttering due to stoppage of work in block no. 100 and 101.
a) That the department had virtually stopped the work in block 100 & 101 on
20.7.93 and it continued up to 26.2.94. During this period no work was
allowed to be executed in these two blocks resulting in blockade or
centering and shuttering in the said two blocks.
b) That by stoppage of work in these two blocks the claimants had suffered
hire charges of shuttering due to respondent's lapses and defaults.
c) It is further stated that there was no justification for stoppage of
work and the action was arbitrary and totally unjust.
d) That the detail of this claim has been outlined and appended separately
and the same shall from part of the statement of facts.
Claim No. 11: Rs.2,00,000/- payable as damages on account of hire charges
of tools & plants and scaffolding.
a) That due to prolongation of the contract on account of the respondents
the claimants had to maintain tools & plants, scaffolding etc, during the
prolongation of the contract resulting in expenditure for the same.
b) That the said articles remained at site beyond the stipulated period
and the claimants suffered loss due to the said prolongation.
Claim No. 15: Claimants claim damages Rs.6,25,979/- on account of
establishment due to prolongation of the contract.
a) That the claimants had contemplated maintenance of establishment during
stipulated period of completion but the work was prolonged due to various
delays and defaults on the part of the respondents.
b) It is further stated that the claimants had to pay the establishment
payment during prolongation and the said expenditure was unproductive and
un contemplated.
c) It is further stated that the claimants had maintained establishment
beyond the stipulated completion due to the respondent's breach and thus
entitled for payment.
d) That the respondents were also aware that the claimant has maintained
regular establishment and thus, incurred expenditure and the claimants had
also made several representations."
Claims 12 and 13 read as follows:
"Claim No. 12: Claimants claim Rs.7,12,394/- as damages @20% for execution
of the work.
a) That the work was delayed because of the Respondents for the reasons as
set out in the letter indicating hindrances encountered during execution of
the work resulting delay in execution of the work for a period of 25
months.
b) It is further stated that the claimants incurred unproductive after
stipulated date of completion.
c) It is further stated that during prolongation there had been steep
rise in cost of material and labour.
d) That the claim of 20% is also lent support from the cost index as issued
by the competent authority and only applicable on the work which was
executed during prolongation.
e) That as per cost index it comes to more than 30% whereas the claimants
had claimed 20 & being highly rational and just.
f) That the claimants had appended the details of this claim separately
based on cost index to show that the claimant had actually incurred this
additional expenditure due to the respondents. Copy of the hindrances
encountered during the execution of the work at the hands of the
respondents has been enclosed.
g) That the respondents had committed breach and thus liable for damages.
h) It is further stated that the cost of material issued by the department
has been deducted by assessing the cost.
Claim No. 13: Claimants claim Rs.97,5000/- being the extra at 35% for the
work executed in block 100 & 101 effective from 28.2.94 till actual
completion.
a) It is further stated that due to delayed execution of the work of these
two blocks the claimants had to incur extra expenditure as the stoppage of
work was utterly arbitrary.
b) That the detailed break-up of this claim is appended with the statement
of facts."
5. Though the challenge to claims 2, 3 and 4 were given up before the
Division Bench, they are also relevant and read as follows:
"Claim No.2: Claimants claim Rs.1,62,387/- being the reimbursement of
statutory increase in labour under clause 10-C
a) That the claimants submitted the tender on 6.2.92 and said offer was
accepted on 14.5.92. The date of commencement was to be reckoned from
24.5.92. The date of stipulated completion was 9 months i.e. 23.2.93 but
the work could be completed on 28.3.95.
b) It is further stated that the claimants had submitted the bill for the
value to the extent the work was executed till 4.10.94 for a sum of Rs.
l,12,067/- as per the formula applicable.
c) That the respondents however, did not make a single payment though, the
work was executed after submission of the said bill.
d) That however, a consolidated bill was furnished the respondents for a
sum of Rs. l,62,287/-. Even the said payment has not been liquidated so
far.
e) That the claimants advised the statutory increase as and when enforced
and the claimants also submitted the labour reports indicating the nature
of the labour employed at site.
f) That the respondents had also certified on the bill that the labour
payment has been made as per the labour rate.
g) That it is further stated that since it is a statutory increase, the
same is payable by the respondents. Copy of the both the bills attached.
And thus the claimants be awarded a sum of Rs. 1,62,287/- to the claimants.
Claim No.3: Claimants claim Rs.l,49,862/- being the increase in cost of
stone grit on account closure of the quarry by the order of the Supreme
Court.
a) That it is stated that the claimants had submitted the tender on the
basis of the rate prevailing but due to the Hon'ble Court's directions for
closure of the stone quarry resulting in shortage of stone chips in the
market and consequently rates increased.
b) That the claimants informed the quantum of the increase on 22.6.92 and
followed by reminders.
c) That the respondents had agreed in principle to pay the increase which
was prevailing in the market.
d) That the detailed break-up of this claim has been appended separately.
e) It is further stated that the claimant was not instrumental for increase
in cost but due to the interference of the Hon'ble Supreme Court. And the
said increase has been taken into account till the stipulated completion
dated 23.2.93.
f) That the claimant is entitled for recovery of the said increase.
Claim No. 4: Claimants claim Rs.12,922/- payable by virtue of clause 10-C
of the agreement and up to the stipulated period
a) That there was steep rise in cost of steel and the claimant was
exposed and the respondents were liable to pay the increase in steel.
b) That the detailed break-up of this claim has been prepared and
appended.
6. The Arbitrator by a reasoned award dated 23rd May, 2005 held that the
entire delay of 25 months in the execution of the project was thanks to the
DDA, none of this delay being attributable to the contractor. The learned
Arbitrator found:
"That all the above four claims are inter linked being related to the
overhead expenses and therefore dealt together.
That the date of commencement of work was 24.5.92 and the period for
completion was 9 months and therefore, the disputed date of completion was
23.2.93 but the work could be actually completed on 28.3.95.
That there was delay of 25 months in completion of the work beyond the
stipulated date of completion.
That the Claimants urged that there had been various delays in the
execution of work due to the lapses and defaults of the Respondents from
the very commencement of work. The progress was held up time and again and
the claimants therefore, as back as 17.2.93 advised the Respondents (C-9
page 167) that the Claimants are not interested to execute the work beyond
the stipulated date of completion and therefore, their contract be
finalized on the stipulated date of completion as the Claimants shall be
exposed to incur heavy expenditure in overheads for maintaining
establishment watch and ward and tools and plants and other shuttering
material but the Respondents did not refute. The chief reasons for delay
are highlighted below:-
I) Delay in supply of structural and architectural drawings.
II) That out of 9 Blocks 2 blocks are abnormally delayed as the site of the
said 21 blocks was made available in piecemeal which stretched till 26.2.94
whereas the stipulated completion was 23.2.93.
III) Delay in laying the conduit by the electrical agency resulting in
delay in casting of RCC slab and plastering work besides development work.
The said hindrance was removed lastly on 28.3.95.
IV) Abnormal delay in making availability of the alignment sketch for
electrical cables.
V) Inordinate delay in supply of stipulated material such as cement, steel
and pipes.
VI) Delay in decision of finishing work in kitchen and bath rooms.
VII) There was inordinate delay in making availability of colour scheme.
VIII) That the Respondents also abnormally delayed the supply of door
shutters which were to be supplied by the Respondents. The same were
supplied as late as 8.11.94.
IX) Inordinate delay in writing in the electrical conduits resulting in
delay in completion of finishing work.
X) Suspension of work by the Respondents for the period 17.1.94 to 25.2.94
and from 7.8.94 to 22.3.95 because of non-removal of hindrances.
XI) Delayed payment due to non-sanction of Administrative Approval and
Expenditure Sanction.
That all the delays as set out had been duly recorded 733 to 739 and M.A.S.
register pages from 747 to 768 as highlighted by the Claimants. The
Claimants also relied upon certain documents of MAS Register supplied by
the Respondents.
That the Claimants further stated that the Claimants had also filed reasons
for delay and hold up of the work various defaults of the Respondents in
Annexure pages 740 to 746. The Claimants also highlighted the
correspondence made by the Claimants with Respondents.
That the Claimants further stated that the said hindrances were avoidable
but the Respondents did not take timely steps.
That the Claimants also referred the contents of the letter dated 10.7.95
(page 885) wherein it was observed that the Superintending Engineer
appreciated the working of the Claimants and also observed that there was
no fault of the contractor and they have successfully completed the work.
The Claimants further stated that, they had incurred heavy expenditure on
overheads of the lapses and default of the Respondents.
As against this the Respondents stated that there was poor planning of the
claimants and also contended that since the compensation has been levied
under Clause 2 of the agreement therefore, claim of the claimants deserves
to be rejected.
That on record it is conclusively proved that the Respondents committed
breach of contract as they failed to discharge their obligations in time
resulting in prolongations did not deny the deployment of the tools and
plants and machinery at site besides watch and ward during the
prolongation."
7. It is important to note that before the Division Bench, the learned
counsel for the DDA conceded that this being a pure finding of fact, he
would not be challenging it before the Division Bench.
8. Of the total claim of Rs.37.28 lakhs, the learned Arbitrator awarded
an amount of Rs.23.39 lakhs. Further, the learned Arbitrator has
laboriously gone through all the evidence and answered each claim giving
reasons for the same.
9. By a judgment dated 3rd April, 2006, the learned Single Judge of the
High Court of Delhi dismissed the objections of the DDA and upheld the
award. In an appeal filed under Section 37 of the Arbitration Act, vide the
impugned judgment dated 8th February, 2012, a Division Bench of the High
Court of Delhi set aside the judgment of the Single Judge on claims 9, 10,
11 and 15, and negatived these claims in toto. Further, claims 12 and 13
were scaled down doing "rough and ready justice". Resultantly, the awarded
amount of Rs.7,20,000/- was scaled down to Rs. 5,57,137.50/-.
10. We have heard learned counsel for the parties. Shri M. L. Verma,
learned Senior Advocate appearing on behalf of the appellant, submitted
that the Division Bench has lost sight of the law laid down by this Hon'ble
Court when it comes to challenges made to arbitral awards under Section 34
of the Act. He has submitted that the Division Bench has acted as if this
was a first appeal from the award and has further submitted that the
Division Bench has taken into account facts which were neither pleaded nor
proved before the learned Arbitrator in order to negative certain claims.
He further submitted that it is not possible for a Bench hearing an
objection against an arbitral award to do "rough and ready justice" - it is
bound by the law laid down by this Hon'ble Court. In particular, he argued
that the conceded position is that 25 months delay was due to the DDA
alone. The award read as a whole is just, fair and reasonable as only
certain claims have been granted and every claim granted has been supported
with reasons. The Arbitrator is the sole judge of the quality and quantity
of evidence before him and he has decided on that evidence. No errors of
law arise from the award and the award has, therefore, been wrongly set
aside.
11. Mr. Amarendra Sharan, learned Senior Advocate appearing on behalf of
the DDA has relied strongly on clause 10C and clause 22 to support the
judgment of the Division bench and has further argued that there has been
duplication so far as certain claims are concerned. He argued that an award
in the teeth of clause 10C and clause 22 would be a jurisdictional error
which would vitiate the award.
12. In as much as serious objections have been taken to the Division
Bench judgment on the ground that it has ignored the parameters laid down
in a series of judgments by this Court as to the limitations which a Judge
hearing objections to an arbitral award under Section 34 is subject to, we
deem it necessary to state the law on the subject.
Section 34 of the Arbitration and Conciliation Act reads as follows-
"Application for setting aside arbitral award.-(1) Recourse to a Court
against an arbitral award may be made only by an application for setting
aside such award in accordance with sub-section (2) and sub-section (3).
(2) An arbitral award may be set aside by the Court only if-
(a) the party making the application furnishes proof that-
(i) a party was under some incapacity; or
(ii) The arbitration agreement is not valid under the law to which the
parties have subjected it or, failing any indication thereon, under the law
for the time being in force; or
(iii) the party making the application was not given proper notice of the
appointment of an arbitrator or of the arbitral proceedings or was
otherwise unable to present his case; or
(iv) the arbitral award deals with a dispute not contemplated by or not
falling within the terms of the submission to arbitration, or it contains
decisions on matters beyond the scope of the submission to arbitration:
Provided that, if the decisions on matters submitted to arbitration can be
separated from those not so submitted, only that part of the arbitral award
which contains decisions on matters not submitted to arbitration may be set
aside; or
(v) the composition of the arbitral tribunal or the arbitral procedure was
not in accordance with the agreement of the parties, unless such agreement
was in conflict with a provision of this Part from which the parties cannot
derogate, or, failing such agreement, was not in accordance with this Part;
or
(b) the Court finds that-
(i) the subject-matter of the dispute is not capable of settlement by
arbitration under the law for the time being in force, or
(ii) the arbitral award is in conflict with the public policy of India.
Explanation.-Without prejudice to the generality of sub-clause (ii), it is
hereby declared, for the avoidance of any doubt, that an award is in
conflict with the public policy of India if the making of the award was
induced or affected by fraud or corruption or was in violation of Section
75 or Section 81.
(3) An application for setting aside may not be made after three months
have elapsed from the date on which the party making that application had
received the arbitral award or, if a request had been made under Section
33, from the date on which that request had been disposed of by the
arbitral tribunal:
Provided that if the Court is satisfied that the applicant was prevented by
sufficient cause from making the application within the said period of
three months it may entertain the application within a further period of
thirty days, but not thereafter.
(4) On receipt of an application under sub-section (1), the Court may,
where it is appropriate and it is so requested by a party, adjourn the
proceedings for a period of time determined by it in order to give the
arbitral tribunal an opportunity to resume the arbitral proceedings or to
take such other action as in the opinion of arbitral tribunal will
eliminate the grounds for setting aside the arbitral award."
This Section in conjunction with Section 5 makes it clear that
an arbitration award that is governed by part I of the Arbitration and
Conciliation Act, 1996 can be set aside only on grounds mentioned under
Section 34 (2) and (3), and not otherwise. Section 5 reads as follows:
"5. Extent of judicial intervention.-Notwithstanding anything
contained in any other law for the time being in force, in matters governed
by this Part, no judicial authority shall intervene except where so
provided in this Part."
It is important to note that the 1996 Act was enacted to
replace the 1940 Arbitration Act in order to provide for an arbitral
procedure which is fair, efficient and capable of meeting the needs of
arbitration; also to provide that the tribunal gives reasons for an
arbitral award; to ensure that the tribunal remains within the limits of
its jurisdiction; and to minimize the supervisory roles of courts in the
arbitral process.
It will be seen that none of the grounds contained in sub-
clause 2 (a) deal with the merits of the decision rendered by an arbitral
award. It is only when we come to the award being in conflict with the
public policy of India that the merits of an arbitral award are to be
looked into under certain specified circumstances.
In Renusagar Power Co. Ltd. v. General Electronic Co., 1994
Supp (1) SCC 644, the Supreme Court construed Section 7 (1)(b) (ii) of the
Foreign Award (Recognition and Enforcement) Act, 1961.
"7. Conditions for enforcement of foreign awards.-(1) A foreign award
may not be enforced under this Act-
(b) if the Court dealing with the case is satisfied that-
(ii) the enforcement of the award will be contrary to the public
policy."
In construing the expression "public policy" in the context of
a foreign award, the Court held that an award contrary to
1. The fundamental policy of Indian law
2. The interest of India
3. Justice or morality,
would be set aside on the ground that it would be contrary to the
public policy of India. It went on further to hold that a contravention of
the provisions of the Foreign Exchange Regulation Act would be contrary to
the public policy of India in that the statute is enacted for the national
economic interest to ensure that the nation does not lose foreign exchange
which is essential for the economic survival of the nation (see para 75).
Equally, disregarding orders passed by the superior courts in India could
also be a contravention of the fundamental policy of Indian law, but the
recovery of compound interest on interest, being contrary to statute only,
would not contravene any fundamental policy of Indian law (see paras
85,95).
When it came to construing the expression "the public policy of
India" contained in Section 34 (2) (b) (ii) of the Arbitration Act, 1996,
this Court in ONGC v. Saw Pipes, 2003 (5) SCC 705, held-
"31. Therefore, in our view, the phrase "public policy of India" used
in Section 34 in context is required to be given a wider meaning. It can be
stated that the concept of public policy connotes some matter which
concerns public good and the public interest. What is for public good or in
public interest or what would be injurious or harmful to the public good or
public interest has varied from time to time. However, the award which is,
on the face of it, patently in violation of statutory provisions cannot be
said to be in public interest. Such award/judgment/decision is likely to
adversely affect the administration of justice. Hence, in our view in
addition to narrower meaning given to the term "public policy" in Renusagar
case [1994 Supp (1) SCC 644] it is required to be held that the award could
be set aside if it is patently illegal. The result would be - award could
be set aside if it is contrary to:
(a) Fundamental policy of Indian law; or
(b) The interest of India; or
(c) Justice or morality, or
(d) in addition, if it is patently illegal.
Illegality must go to the root of the matter and if the illegality is
of trivial nature it cannot be held that award is against the public
policy. Award could also be set aside if it is so unfair and unreasonable
that it shocks the conscience of the court. Such award is opposed to public
policy and is required to be adjudged void.
74. In the result, it is held that:
(A) (1) The court can set aside the arbitral award under Section
34(2) of the Act if the party making the application furnishes proof that:
(i) a party was under some incapacity, or
(ii) the arbitration agreement is not valid under the law to which
the parties have subjected it or, failing any indication thereon, under the
law for the time being in force; or
(iii) the party making the application was not given proper notice of
the appointment of an arbitrator or of the arbitral proceedings or was
otherwise unable to present his case; or
(iv) the arbitral award deals with a dispute not contemplated by or
not falling within the terms of the submission to arbitration, or it
contains decisions on matters beyond the scope of the submission to
arbitration.
(2) The court may set aside the award:
(i)(a) if the composition of the Arbitral Tribunal was not in
accordance with the agreement of the parties,
(b) failing such agreement, the composition of the Arbitral Tribunal
was not in accordance with Part I of the Act.
(ii) if the arbitral procedure was not in accordance with:
(a) the agreement of the parties, or
(b) failing such agreement, the arbitral procedure was not in
accordance with Part I of the Act.
However, exception for setting aside the award on the ground of
composition of Arbitral Tribunal or illegality of arbitral procedure is
that the agreement should not be in conflict with the provisions of Part I
of the Act from which parties cannot derogate.
(c) If the award passed by the Arbitral Tribunal is in contravention
of the provisions of the Act or any other substantive law governing the
parties or is against the terms of the contract.
(3) The award could be set aside if it is against the public policy
of India, that is to say, if it is contrary to:
(a) fundamental policy of Indian law; or
(b) the interest of India; or
(c) justice or morality; or
(d) if it is patently illegal.
(4) It could be challenged:
(a) as provided under Section 13(5); and
(b) Section 16(6) of the Act.
(B)(1) The impugned award requires to be set aside mainly on the
grounds:
(i) there is specific stipulation in the agreement that the time and
date of delivery of the goods was of the essence of the contract;
(ii) in case of failure to deliver the goods within the period fixed
for such delivery in the schedule, ONGC was entitled to recover from the
contractor liquidated damages as agreed;
(iii) it was also explicitly understood that the agreed liquidated
damages were genuine pre-estimate of damages;
(iv) on the request of the respondent to extend the time-limit for
supply of goods, ONGC informed specifically that time was extended but
stipulated liquidated damages as agreed would be recovered;
(v) liquidated damages for delay in supply of goods were to be
recovered by paying authorities from the bills for payment of cost of
material supplied by the contractor;
(vi) there is nothing on record to suggest that stipulation for
recovering liquidated damages was by way of penalty or that the said sum
was in any way unreasonable.
(vii) In certain contracts, it is impossible to assess the damages or
prove the same. Such situation is taken care of by Sections 73 and 74 of
the Contract Act and in the present case by specific terms of the
contract."
The judgment in ONGC v. Saw Pipes has been consistently
followed till date.
In Hindustan Zinc Ltd. v. Friends Coal Carbonisation, (2006) 4
SCC 445, this Court held:
"14. The High Court did not have the benefit of the principles laid
down in Saw Pipes [(2003) 5 SCC 705] , and had proceeded on the assumption
that award cannot be interfered with even if it was contrary to the terms
of the contract. It went to the extent of holding that contract terms
cannot even be looked into for examining the correctness of the award. This
Court in Saw Pipes [(2003) 5 SCC 705] has made it clear that it is open to
the court to consider whether the award is against the specific terms of
contract and if so, interfere with it on the ground that it is patently
illegal and opposed to the public policy of India."
In McDermott International Inc. v. Burn Standard Co. Ltd.,
(2006) 11 SCC 181, this Court held:
"58. In Renusagar Power Co. Ltd. v. General Electric Co. [1994 Supp (1)
SCC 644] this Court laid down that the arbitral award can be set aside if
it is contrary to (a) fundamental policy of Indian law; (b) the interests
of India; or (c) justice or morality. A narrower meaning to the expression
"public policy" was given therein by confining judicial review of the
arbitral award only on the aforementioned three grounds. An apparent shift
can, however, be noticed from the decision of this Court in ONGC Ltd.v. Saw
Pipes Ltd. [(2003) 5 SCC 705] (for short "ONGC"). This Court therein
referred to an earlier decision of this Court in Central Inland Water
Transport Corpn. Ltd. v. Brojo Nath Ganguly [(1986) 3 SCC 156 : 1986 SCC
(L&S) 429 : (1986) 1 ATC 103] wherein the applicability of the expression
"public policy" on the touchstone of Section 23 of the Indian Contract Act
and Article 14 of the Constitution of India came to be considered. This
Court therein was dealing with unequal bargaining power of the workmen and
the employer and came to the conclusion that any term of the agreement
which is patently arbitrary and/or otherwise arrived at because of the
unequal bargaining power would not only be ultra vires Article 14 of the
Constitution of India but also hit by Section 23 of the Indian Contract
Act. In ONGC [(2003) 5 SCC 705] this Court, apart from the three grounds
stated in Renusagar [1994 Supp (1) SCC 644] , added another ground thereto
for exercise of the court's jurisdiction in setting aside the award if it
is patently arbitrary.
59. Such patent illegality, however, must go to the root of the
matter. The public policy violation, indisputably, should be so unfair and
unreasonable as to shock the conscience of the court. Where the arbitrator,
however, has gone contrary to or beyond the expressed law of the contract
or granted relief in the matter not in dispute would come within the
purview of Section 34 of the Act. However, we would consider the
applicability of the aforementioned principles while noticing the merits of
the matter.
60. What would constitute public policy is a matter dependent upon
the nature of transaction and nature of statute. For the said purpose, the
pleadings of the parties and the materials brought on record would be
relevant to enable the court to judge what is in public good or public
interest, and what would otherwise be injurious to the public good at the
relevant point, as contradistinguished from the policy of a particular
Government. (See State of Rajasthan v. Basant Nahata [(2005) 12 SCC 77].)"
In Centrotrade Minerals & Metals Inc. v. Hindustan Copper Ltd.,
(2006) 11 SCC 245, Sinha, J., held:
"103. Such patent illegality, however, must go to the root of the
matter. The public policy, indisputably, should be unfair and unreasonable
so as to shock the conscience of the court. Where the arbitrator, however,
has gone contrary to or beyond the expressed law of the contract or granted
relief in the matter not in dispute would come within the purview of
Section 34 of the Act."
104. What would be a public policy would be a matter which would
again depend upon the nature of transaction and the nature of statute. For
the said purpose, the pleadings of the parties and the materials brought on
record would be relevant so as to enable the court to judge the concept of
what was a public good or public interest or what would otherwise be
injurious to the public good at the relevant point as contradistinguished
by the policy of a particular government. (See State of Rajasthan v.
Basant Nahata [(2005) 12 SCC 77].)"
In DDA v. R.S. Sharma and Co., (2008) 13 SCC 80, the Court
summarized the law thus:
"21. From the above decisions, the following principles emerge:
(a) An award, which is
(i) contrary to substantive provisions of law; or
(ii) the provisions of the Arbitration and Conciliation Act, 1996; or
(iii) against the terms of the respective contract; or
(iv) patently illegal; or
(v) prejudicial to the rights of the parties;
is open to interference by the court under Section 34(2) of the Act.
(b) The award could be set aside if it is contrary to:
(a) fundamental policy of Indian law; or
(b) the interest of India; or
(c) justice or morality.
(c) The award could also be set aside if it is so unfair and unreasonable
that it shocks the conscience of the court.
(d) It is open to the court to consider whether the award is against the
specific terms of contract and if so, interfere with it on the ground that
it is patently illegal and opposed to the public policy of India.
With these principles and statutory provisions, particularly, Section 34(2)
of the Act, let us consider whether the arbitrator as well as the Division
Bench of the High Court were justified in granting the award in respect of
Claims 1 to 3 and Additional Claims 1 to 3 of the claimant or the appellant
DDA has made out a case for setting aside the award in respect of those
claims with reference to the terms of the agreement duly executed by both
parties."
J.G. Engineers (P) Ltd. v. Union of India, (2011) 5 SCC 758, held:
"27. Interpreting the said provisions, this Court in ONGC Ltd. v. Saw Pipes
Ltd.[(2003) 5 SCC 705] held that a court can set aside an award under
Section 34(2)(b)(ii) of the Act, as being in conflict with the public
policy of India, if it is (a) contrary to the fundamental policy of Indian
law; or (b) contrary to the interests of India; or (c) contrary to justice
or morality; or (d) patently illegal. This Court explained that to hold an
award to be opposed to public policy, the patent illegality should go to
the very root of the matter and not a trivial illegality. It is also
observed that an award could be set aside if it is so unfair and
unreasonable that it shocks the conscience of the court, as then it would
be opposed to public policy."
Union of India v. Col. L.S.N. Murthy, (2012) 1 SCC 718, held:
"22. In ONGC Ltd. v. Saw Pipes Ltd. [(2003) 5 SCC 705] this Court after
examining the grounds on which an award of the arbitrator can be set aside
under Section 34 of the Act has said: (SCC p. 727, para 31)
"31. ... However, the award which is, on the face of it, patently in
violation of statutory provisions cannot be said to be in public interest.
Such award/judgment/decision is likely to adversely affect the
administration of justice. Hence, in our view in addition to narrower
meaning given to the term 'public policy' in Renusagar case [Renusagar
Power Co. Ltd. v. General Electric Co., 1994 Supp (1) SCC 644] it is
required to be held that the award could be set aside if it is patently
illegal".
Fundamental Policy of Indian Law
Coming to each of the heads contained in the Saw Pipes judgment, we
will first deal with the head "fundamental policy of Indian Law". It has
already been seen from the Renusagar judgment that violation of the Foreign
Exchange Act and disregarding orders of superior courts in India would be
regarded as being contrary to the fundamental policy of Indian law. To this
it could be added that the binding effect of the judgment of a superior
court being disregarded would be equally violative of the fundamental
policy of Indian law.
In a recent judgment, ONGC Ltd. v. Western Geco International Ltd.,
2014 (9) SCC 263, this Court added three other distinct and fundamental
juristic principles which must be understood as a part and parcel of the
fundamental policy of Indian law. The Court held-
"35. What then would constitute the "fundamental policy of Indian law" is
the question. The decision in ONGC [ONGC Ltd. v. Saw Pipes Ltd., (2003) 5
SCC 705] does not elaborate that aspect. Even so, the expression must, in
our opinion, include all such fundamental principles as providing a basis
for administration of justice and enforcement of law in this country.
Without meaning to exhaustively enumerate the purport of the expression
"fundamental policy of Indian law", we may refer to three distinct and
fundamental juristic principles that must necessarily be understood as a
part and parcel of the fundamental policy of Indian law. The first and
foremost is the principle that in every determination whether by a court or
other authority that affects the rights of a citizen or leads to any civil
consequences, the court or authority concerned is bound to adopt what is in
legal parlance called a "judicial approach" in the matter. The duty to
adopt a judicial approach arises from the very nature of the power
exercised by the court or the authority does not have to be separately or
additionally enjoined upon the fora concerned. What must be remembered is
that the importance of a judicial approach in judicial and quasi-judicial
determination lies in the fact that so long as the court, tribunal or the
authority exercising powers that affect the rights or obligations of the
parties before them shows fidelity to judicial approach, they cannot act in
an arbitrary, capricious or whimsical manner. Judicial approach ensures
that the authority acts bona fide and deals with the subject in a fair,
reasonable and objective manner and that its decision is not actuated by
any extraneous consideration. Judicial approach in that sense acts as a
check against flaws and faults that can render the decision of a court,
tribunal or authority vulnerable to challenge.
38. Equally important and indeed fundamental to the policy of Indian law is
the principle that a court and so also a quasi-judicial authority must,
while determining the rights and obligations of parties before it, do so in
accordance with the principles of natural justice. Besides the
celebrated audi alteram partem rule one of the facets of the principles of
natural justice is that the court/authority deciding the matter must apply
its mind to the attendant facts and circumstances while taking a view one
way or the other. Non-application of mind is a defect that is fatal to any
adjudication. Application of mind is best demonstrated by disclosure of the
mind and disclosure of mind is best done by recording reasons in support of
the decision which the court or authority is taking. The requirement that
an adjudicatory authority must apply its mind is, in that view, so deeply
embedded in our jurisprudence that it can be described as a fundamental
policy of Indian law.
39. No less important is the principle now recognised as a salutary
juristic fundamental in administrative law that a decision which is
perverse or so irrational that no reasonable person would have arrived at
the same will not be sustained in a court of law. Perversity or
irrationality of decisions is tested on the touchstone of Wednesbury
principle [Associated Provincial Picture Houses Ltd. v. Wednesbury Corpn.,
(1948) 1 KB 223: (1947) 2 All ER 680 (CA)] of reasonableness. Decisions
that fall short of the standards of reasonableness are open to challenge in
a court of law often in writ jurisdiction of the superior courts but no
less in statutory processes wherever the same are available.
40. It is neither necessary nor proper for us to attempt an exhaustive
enumeration of what would constitute the fundamental policy of Indian law
nor is it possible to place the expression in the straitjacket of a
definition. What is important in the context of the case at hand is that if
on facts proved before them the arbitrators fail to draw an inference which
ought to have been drawn or if they have drawn an inference which is on the
face of it, untenable resulting in miscarriage of justice, the adjudication
even when made by an Arbitral Tribunal that enjoys considerable latitude
and play at the joints in making awards will be open to challenge and may
be cast away or modified depending upon whether the offending part is or is
not severable from the rest."
It is clear that the juristic principle of a "judicial approach"
demands that a decision be fair, reasonable and objective. On the obverse
side, anything arbitrary and whimsical would obviously not be a
determination which would either be fair, reasonable or objective.
The Audi Alteram Partem principle which undoubtedly is a
fundamental juristic principle in Indian law is also contained in Sections
18 and 34 (2) (a) (iii) of the Arbitration and Conciliation Act. These
Sections read as follows:
"18. Equal treatment of parties.- The parties shall be treated with
equality and each party shall be given a full opportunity to present his
case.
34. Application for setting aside arbitral award.-
(2) An arbitral award may be set aside by the Court only if-
(a) the party making the application furnishes proof that-
(iii) the party making the application was not given proper notice
of the appointment of an arbitrator or of the arbitral proceedings or was
otherwise unable to present his case; "
The third juristic principle is that a decision which is perverse or
so irrational that no reasonable person would have arrived at the same is
important and requires some degree of explanation. It is settled law that
where-
a finding is based on no evidence, or
an arbitral tribunal takes into account something irrelevant to the
decision which it arrives at; or
ignores vital evidence in arriving at its decision,
such decision would necessarily be perverse. A good working test of
perversity is contained in two judgments. In H.B. Gandhi, Excise and
Taxation Officer-cum-Assessing Authority v. Gopi Nath & Sons, 1992 Supp (2)
SCC 312 at p. 317, it was held:
"7. ...................It is, no doubt, true that if a finding of fact is
arrived at by ignoring or excluding relevant material or by taking into
consideration irrelevant material or if the finding so outrageously defies
logic as to suffer from the vice of irrationality incurring the blame of
being perverse, then, the finding is rendered infirm in law."
In Kuldeep Singh v. Commr. of Police, (1999) 2 SCC 10 at para 10, it was
held:
"10. A broad distinction has, therefore, to be maintained between the
decisions which are perverse and those which are not. If a decision is
arrived at on no evidence or evidence which is thoroughly unreliable and no
reasonable person would act upon it, the order would be perverse. But if
there is some evidence on record which is acceptable and which could be
relied upon, howsoever compendious it may be, the conclusions would not be
treated as perverse and the findings would not be interfered with."
It must clearly be understood that when a court is applying the
"public policy" test to an arbitration award, it does not act as a court of
appeal and consequently errors of fact cannot be corrected. A possible view
by the arbitrator on facts has necessarily to pass muster as the arbitrator
is the ultimate master of the quantity and quality of evidence to be relied
upon when he delivers his arbitral award. Thus an award based on little
evidence or on evidence which does not measure up in quality to a trained
legal mind would not be held to be invalid on this score[1]. Once it is
found that the arbitrators approach is not arbitrary or capricious, then he
is the last word on facts. In P.R. Shah, Shares & Stock Brokers (P) Ltd. v.
B.H.H. Securities (P) Ltd., (2012) 1 SCC 594, this Court held:
"21. A court does not sit in appeal over the award of an Arbitral Tribunal
by reassessing or reappreciating the evidence. An award can be challenged
only under the grounds mentioned in Section 34(2) of the Act. The Arbitral
Tribunal has examined the facts and held that both the second respondent
and the appellant are liable. The case as put forward by the first
respondent has been accepted. Even the minority view was that the second
respondent was liable as claimed by the first respondent, but the appellant
was not liable only on the ground that the arbitrators appointed by the
Stock Exchange under Bye-law 248, in a claim against a non-member, had no
jurisdiction to decide a claim against another member. The finding of the
majority is that the appellant did the transaction in the name of the
second respondent and is therefore, liable along with the second
respondent. Therefore, in the absence of any ground under Section 34(2) of
the Act, it is not possible to re-examine the facts to find out whether a
different decision can be arrived at."
It is with this very important caveat that the two fundamental
principles which form part of the fundamental policy of Indian law (that
the arbitrator must have a judicial approach and that he must not act
perversely) are to be understood.
Interest of India
The next ground on which an award may be set aside is that it
is contrary to the interest of India. Obviously, this concerns itself with
India as a member of the world community in its relations with foreign
powers. As at present advised, we need not dilate on this aspect as this
ground may need to evolve on a case by case basis.
Justice
The third ground of public policy is, if an award is against justice
or morality. These are two different concepts in law. An award can be said
to be against justice only when it shocks the conscience of the court. An
illustration of this can be given. A claimant is content with restricting
his claim, let us say to Rs. 30 lakhs in a statement of claim before the
arbitrator and at no point does he seek to claim anything more. The
arbitral award ultimately awards him 45 lakhs without any acceptable reason
or justification. Obviously, this would shock the conscience of the court
and the arbitral award would be liable to be set aside on the ground that
it is contrary to "justice".
Morality
The other ground is of "morality". Just as the expression "public
policy" also occurs in Section 23 of the Indian Contract Act, so does the
expression "morality". Two illustrations to the said section are
interesting for they explain to us the scope of the expression "morality".
"(j) A, who is B's Mukhtar, promises to exercise his influence, as such,
with B in favour of C, and C promises to pay 1,000 rupees to A. The
agreement is void, because it is immoral.
(k) A agrees to let her daughter to hire to B for concubinage. The
agreement is void, because it is immoral, though the letting may not be
punishable under the Indian Penal Code (XLV of 1860)."
In Gherulal Parekh v. Mahadeo Dass Maiya, 1959 Supp (2) SCR 406, this
Court explained the concept of "morality" thus-
"Re. Point 3 - Immorality: The argument under this head is rather broadly
stated by the learned Counsel for the appellant. The learned counsel
attempts to draw an analogy from the Hindu Law relating to the doctrine of
pious obligation of sons to discharge their father's debts and contends
that what the Hindu Law considers to be immoral in that context may
appropriately be applied to a case under s. 23 of the Contract Act. Neither
any authority is cited nor any legal basis is suggested for importing the
doctrine of Hindu Law into the domain of contracts. Section 23 of the
Contract Act is inspired by the common law of England and it would be more
useful to refer to the English Law than to the Hindu Law texts dealing with
a different matter. Anson in his Law of Contracts states at p. 222 thus:
"The only aspect of immorality with which Courts of Law have dealt is
sexual immorality........... ."
Halsbury in his Laws of England, 3rd Edn., Vol. 8, makes a similar
statement, at p. 138 :
"A contract which is made upon an immoral consideration or for an
immoral purpose is unenforceable, and there is no distinction in this
respect between immoral and illegal contracts. The immorality here alluded
to is sexual immorality."
In the Law of Contract by Cheshire and Fifoot, 3rd Edn., it is stated
at p. 279:
"Although Lord Mansfield laid it down that a contract contra bonos
mores is illegal, the law in this connection gives no extended meaning to
morality, but concerns itself only with what is sexually reprehensible."
In the book on the Indian Contract Act by Pollock and Mulla it is
stated at p. 157:
"The epithet "immoral" points, in legal usage, to conduct or purposes
which the State, though disapproving them, is unable, or not advised, to
visit with direct punishment."
The learned authors confined its operation to acts which are
considered to be immoral according to the standards of immorality approved
by Courts. The case law both in England and India confines the operation of
the doctrine to sexual immorality. To cite only some instances: settlements
in consideration of concubinage, contracts of sale or hire of things to be
used in a brothel or by a prostitute for purposes incidental to her
profession, agreements to pay money for future illicit cohabitation,
promises in regard to marriage for consideration, or contracts facilitating
divorce are all held to be void on the ground that the object is immoral.
The word "immoral" is a very comprehensive word. Ordinarily it takes
in every aspect of personal conduct deviating from the standard norms of
life. It may also be said that what is repugnant to good conscience is
immoral. Its varying content depends upon time, place and the stage of
civilization of a particular society. In short, no universal standard can
be laid down and any law based on such fluid concept defeats its own
purpose. The provisions of S. 23 of the Contract Act indicate the
legislative intention to give it a restricted meaning. Its juxtaposition
with an equally illusive concept, public policy, indicates that it is used
in a restricted sense; otherwise there would be overlapping of the two
concepts. In its wide sense what is immoral may be against public policy,
for public policy covers political, social and economic ground of
objection. Decided cases and authoritative text-book writers, therefore,
confined it, with every justification, only to sexual immorality. The other
limitation imposed on the word by the statute, namely, "the court regards
it as immoral", brings out the idea that it is also a branch of the common
law like the doctrine of public policy, and, therefore, should be confined
to the principles recognized and settled by Courts. Precedents confine the
said concept only to sexual immorality and no case has been brought to our
notice where it has been applied to any head other than sexual immorality.
In the circumstances, we cannot evolve a new head so as to bring in wagers
within its fold."
This Court has confined morality to sexual morality so far as section
23 of the Contract Act is concerned, which in the context of an arbitral
award would mean the enforcement of an award say for specific performance
of a contract involving prostitution. "Morality" would, if it is to go
beyond sexual morality necessarily cover such agreements as are not illegal
but would not be enforced given the prevailing mores of the day. However,
interference on this ground would also be only if something shocks the
court's conscience.
Patent Illegality
We now come to the fourth head of public policy namely, patent
illegality. It must be remembered that under the explanation to section 34
(2) (b), an award is said to be in conflict with the public policy of India
if the making of the award was induced or affected by fraud or corruption.
This ground is perhaps the earliest ground on which courts in England set
aside awards under English law. Added to this ground (in 1802) is the
ground that an arbitral award would be set aside if there were an error of
law by the arbitrator. This is explained by Lord Justice Denning in R v.
Northumberland Compensation Appeal Tribunal. Ex Parte Shaw., 1952 1 All ER
122 at page 130:
"Leaving now the statutory tribunals, I turn to the awards of the
arbitrators. The Court of King's Bench never interfered by certiorari with
the award of an arbitrator, because it was a private tribunal and not
subject to the prerogative writs. If the award was not made a rule of
court, the only course available to an aggrieved party was to resist an
action on the award or to file a bill in equity. If the award was made a
rule of court, a motion could be made to the court to set it aside for
misconduct of the arbitrator on the ground that it was procured by
corruption or other undue means: see the statute 9 and 10 Will. III, c. 15.
At one time an award could not be upset on the ground of error of law by
the arbitrator because that could not be said to be misconduct or undue
means, but ultimately it was held in Kent v. Elstob, (1802) 3 East 18,
that an award could be set aside for error of law on the face of it. This
was regretted by Williams, J., in Hodgkinson v. Fernie, (1857) 3 C.B.N.S.
189, but is now well established."
This, in turn, led to the famous principle laid down in
Champsey Bhara Company v. The Jivraj Balloo Spinning and Weaving Company
Ltd., AIR 1923 PC 66, where the Privy Council referred to Hodgkinson and
then laid down:
"The law on the subject has never been more clearly stated than by
Williams, J. in the case of Hodgkinson v. Fernie (1857) 3 C.B.N.S. 189.
"The law has for many years been settled, and remains so at this day, that,
where a cause or matters in difference are referred to an arbitrator a
lawyer or a layman, he is constituted the sole and final judge of all
questions both of law and of fact ...... The only exceptions to that rule
are cases where the award is the result of corruption or fraud, and one
other, which though it is to be regretted, is now, I think firmly
established viz., where the question of law necessarily arises on the face
of the award or upon some paper accompanying and forming part of the award.
Though the propriety of this latter may very well be doubted, I think it
may be considered as established."
"Now the regret expressed by Williams, J. in Hodgkinson v. Fernie has been
repeated by more than one learned Judge, and it is certainly not to be
desired that the exception should be in any way extended. 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 stating 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. Here it is
impossible to say, from what is shown on the face of the award, what
mistake the arbitrators made. The only way that the learned judges have
arrived at finding what the mistake was is by saying: "Inasmuch as the
Arbitrators awarded so and so, and inasmuch as the letter shows that then
buyer rejected the cotton, the arbitrators can only have arrived at that
result by totally misinterpreting Cl.52." But they were entitled to give
their own interpretation to Cl. 52 or any other article, and the award will
stand unless, on the face of it they have tied themselves down to some
special legal proposition which then, when examined, appears to be unsound.
Upon this point, therefore, their Lordships think that the judgment of
Pratt, J was right and the conclusion of the learned Judges of the Court of
Appeal erroneous."
This judgment has been consistently followed in India to test awards
under Section 30 of the Arbitration Act, 1940.
In the 1996 Act, this principle is substituted by the 'patent
illegality' principle which, in turn, contains three sub heads -
(a) a contravention of the substantive law of India would result in
the death knell of an arbitral award. This must be understood in the sense
that such illegality must go to the root of the matter and cannot be of a
trivial nature. This again is a really a contravention of Section 28(1)(a)
of the Act, which reads as under:
"28. Rules applicable to substance of dispute.-(1) Where the place of
arbitration is situated in India,-
(a) in an arbitration other than an international commercial arbitration,
the arbitral tribunal shall decide the dispute submitted to arbitration in
accordance with the substantive law for the time being in force in India;"
(b) a contravention of the Arbitration Act itself would be regarded as a
patent illegality- for example if an arbitrator gives no reasons for an
award in contravention of section 31(3) of the Act, such award will be
liable to be set aside.
(c) Equally, the third sub-head of patent illegality is really a
contravention of Section 28 (3) of the Arbitration Act, which reads as
under:
"28. Rules applicable to substance of dispute.- (3) In all cases, the
arbitral tribunal shall decide in accordance with the terms of the contract
and shall take into account the usages of the trade applicable to the
transaction."
This last contravention must be understood with a caveat. An arbitral
tribunal must decide in accordance with the terms of the contract, but if
an arbitrator construes a term of the contract in a reasonable manner, it
will not mean that the award can be set aside on this ground. Construction
of the terms of a contract is primarily for an arbitrator to decide unless
the arbitrator construes the contract in such a way that it could be said
to be something that no fair minded or reasonable person could do.
In McDermott International Inc. v. Burn Standard Co. Ltd.,
(2006) 11 SCC 181, this Court held as under:
"112. It is trite that the terms of the contract can be express or implied.
The conduct of the parties would also be a relevant factor in the matter of
construction of a contract. The construction of the contract agreement is
within the jurisdiction of the arbitrators having regard to the wide
nature, scope and ambit of the arbitration agreement and they cannot be
said to have misdirected themselves in passing the award by taking into
consideration the conduct of the parties. It is also trite that
correspondences exchanged by the parties are required to be taken into
consideration for the purpose of construction of a contract. Interpretation
of a contract is a matter for the arbitrator to determine, even if it gives
rise to determination of a question of law. (See Pure Helium India (P)
Ltd. v. ONGC [(2003) 8 SCC 593] and D.D. Sharma v. Union of India [(2004) 5
SCC 325]).
113. Once, thus, it is held that the arbitrator had the jurisdiction, no
further question shall be raised and the court will not exercise its
jurisdiction unless it is found that there exists any bar on the face of
the award."
In MSK Projects (I) (JV) Ltd. v. State of Rajasthan, (2011) 10
SCC 573, the Court held:
"17. 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 jurisdictional error. 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 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 a jurisdictional
error needs to be proved by evidence extrinsic to the award. (See Gobardhan
Das v. Lachhmi Ram [AIR 1954 SC 689], Thawardas Pherumal v. Union of
India [AIR 1955 SC 468], Union of India v. Kishorilal Gupta & Bros. [AIR
1959 SC 1362], Alopi Parshad & Sons Ltd. v. Union of India [AIR 1960 SC
588], Jivarajbhai Ujamshi Sheth v. Chintamanrao Balaji [AIR 1965 SC 214]
and Renusagar Power Co. Ltd. v. General Electric Co. [(1984) 4 SCC 679 :
AIR 1985 SC 1156] )."
In Rashtriya Ispat Nigam Ltd. v. Dewan Chand Ram Saran, (2012)
5 SCC 306, the Court held:
"43. In any case, assuming that Clause 9.3 was capable of two
interpretations, the view taken by the arbitrator was clearly a possible if
not a plausible one. It is not possible to say that the arbitrator had
travelled outside his jurisdiction, or that the view taken by him was
against the terms of contract. That being the position, the High Court had
no reason to interfere with the award and substitute its view in place of
the interpretation accepted by the arbitrator.
44. The legal position in this behalf has been summarised in para 18 of the
judgment of this Court in SAIL v. Gupta Brother Steel Tubes Ltd. [(2009) 10
SCC 63: (2009) 4 SCC (Civ) 16] and which has been referred to above.
Similar view has been taken later in Sumitomo Heavy Industries Ltd. v. ONGC
Ltd. [(2010) 11 SCC 296: (2010) 4 SCC (Civ) 459] to which one of us
(Gokhale, J.) was a party. The observations in para 43 thereof are
instructive in this behalf.
45. This para 43 reads as follows: (Sumitomo case [(2010) 11 SCC 296 :
(2010) 4 SCC (Civ) 459] , SCC p. 313)
"43. ... The umpire has considered the fact situation and placed a
construction on the clauses of the agreement which according to him was the
correct one. One may at the highest say that one would have preferred
another construction of Clause 17.3 but that cannot make the award in any
way perverse. Nor can one substitute one's own view in such a situation, in
place of the one taken by the umpire, which would amount to sitting in
appeal. As held by this Court in Kwality Mfg. Corpn. v. Central Warehousing
Corpn. [(2009) 5 SCC 142 : (2009) 2 SCC (Civ) 406] the Court while
considering challenge to arbitral award does not sit in appeal over the
findings and decision of the arbitrator, which is what the High Court has
practically done in this matter. The umpire is legitimately entitled to
take the view which he holds to be the correct one after considering the
material before him and after interpreting the provisions of the agreement.
If he does so, the decision of the umpire has to be accepted as final and
binding."
13. Applying the tests laid down by this Court, we have to examine
whether the Division Bench has exceeded its jurisdiction in setting aside
the arbitral award impugned before it.
14. A large part of the judgment is an extract from the arbitral award.
It is important to note that the Division Bench held:
"9. A perusal of the award would reveal, from the portions extracted herein
above, that with reference to evidence led before him the learned
Arbitrator has held delay attributable to DDA, a finding of fact which is
based on evidence and rightly conceded to by Sh. Bhupesh Narula, Advocate
who appears for DDA as being beyond judicial review power of this Court
pertaining to a reasoned award. But, while awarding Rs.8,27,960/- the
reasoning adopted by the learned Arbitrator is questioned as being the
result of ignoring the well-recognized legal principles on the subject,
Learned counsel argued that the reasoning is the ipse dixit of the learned
Arbitrator."
15. The Division Bench while considering claims 9, 10, 11 and 15 found
fault with the application of Hudson's formula which was set out by the
learned Arbitrator in order to arrive at the claim made under these heads.
The Division Bench said that it was not possible for an Arbitrator to
mechanically apply a certain formula however well understood in the trade.
This itself is going outside the jurisdiction to set aside an award under
Section 34 in as much as in McDermott's case (supra), it was held:
"104. It is not in dispute that MII had examined one Mr D.J. Parson to
prove the said claim. The said witness calculated the increased overheads
and loss of profit on the basis of the formula laid down in a manual
published by the Mechanical Contractors Association of America entitled
"Change Orders, Overtime, Productivity" commonly known as the Emden
Formula. The said formula is said to be widely accepted in construction
contracts for computing increased overheads and loss of profit. Mr D.J.
Parson is said to have brought out the additional project management cost
at US$ 1,109,500. We may at this juncture notice the different formulas
applicable in this behalf.
(a) Hudson Formula: In Hudson's Building and Engineering Contracts, Hudson
Formula is stated in the following terms:
|"Contract head office | | |Period of |
|overhead and profit | |Contract period| |delay" |
|percentage | | | | |
In the Hudson Formula, the head office overhead percentage is taken from
the contract. Although the Hudson Formula has received judicial support in
many cases, it has been criticised principally because it adopts the head
office overhead percentage from the contract as the factor for calculating
the costs, and this may bear little or no relation to the actual head
office costs of the contractor.
(b) Emden Formula: In Emden's Building Contracts and Practice, the Emden
Formula is stated in the following terms:
|"Head office overhead and | |Contract sum | |Period of |
|profit | | | |delay" |
|100 | |Contract period| | |
Using the Emden Formula, the head office overhead percentage is arrived at
by dividing the total overhead cost and profit of the contractor's
organisation as a whole by the total turnover. This formula has the
advantage of using the contractor's actual head office overhead and profit
percentage rather than those contained in the contract. This formula has
been widely applied and has received judicial support in a number of cases
including Norwest Holst Construction Ltd. v. Coop. Wholesale Society
Ltd. [Decided on 17-2-1998, [1998] EWHC Technology 339], Beechwood
Development Co. (Scotland) Ltd. v. Mitchell [ Decided on 21-2-2001, (2001)
CILL 1727] and Harvey Shopfitters Ltd. v. Adi Ltd. [ Decided on 6-3-2003,
(2004) 2 All ER 982 : [2003] EWCA Civ 1757].
(c) Eichleay Formula: The Eichleay Formula was evolved in America and
derives its name from a case heard by the Armed Services Board of Contract
Appeals, Eichleay Corporation. It is applied in the following manner:
Step 1
|Contract billings | |Total overhead |= |Overhead allocable to|
| | |for contract | |the contract |
| | |period | | |
|Total billings for | | | |
|contract period | | | |
Step 2
|Allocable overhead |= |Daily overhead rate |
|Total days of contract | |
Step 3
|Daily contract | |Number of days|= |Amount of unabsorbed |
|overhead rate | |of delay | |overhead" |
This formula is used where it is not possible to prove loss of opportunity
and the claim is based on actual cost. It can be seen from the formula that
the total head office overhead during the contract period is first
determined by comparing the value of work carried out in the contract
period for the project with the value of work carried out by the contractor
as a whole for the contract period. A share of head office overheads for
the contractor is allocated in the same ratio and expressed as a lump sum
to the particular contract. The amount of head office overhead allocated to
the particular contract is then expressed as a weekly amount by dividing it
by the contract period. The period of delay is then multiplied by the
weekly amount to give the total sum claimed. The Eichleay Formula is
regarded by the Federal Circuit Courts of America as the exclusive means
for compensating a contractor for overhead expenses.
105. Before us several American decisions have been referred to by Mr.
Dipankar Gupta in aid of his submission that the Emden Formula has since
been widely accepted by the American courts being Nicon Inc. v. United
States [ Decided on 10-6-2003 (USCA Fed Cir), 331 F. 3d 878 (Fed. Cir.
2003)], Gladwynne Construction Co. v. Mayor and City Council of
Baltimore [Decided on 25-9-2002, 807 A. 2d 1141 (2002) : 147 Md. App. 149]
and Charles G. William Construction Inc. v. White [271 F 3d 1055 (Fed. Cir.
2001)].
106. We do not intend to delve deep into the matter as it is an accepted
position that different formulae can be applied in different circumstances
and the question as to whether damages should be computed by taking
recourse to one or the other formula, having regard to the facts and
circumstances of a particular case, would eminently fall within the domain
of the arbitrator."
16. Obviously, the Division Bench has exceeded its jurisdiction in
interfering with a possible view of the Arbitrator on facts.
17. The Division Bench then went on to hold:
"17. There is admittedly no evidence that the contractor i.e. the
respondent had a central establishment. It appears to be a case where the
contractor is petty contractor and the only expenses incurred are at the
site. The claim is towards hire charges paid for centering and shuttering,
hiring tools, plants and scaffoldings i.e. the claim is not for the
contractor's own equipment lying idle. There is just no evidence that the
contractor paid charges as claimed by him. Not a single bill raised by the
alleged person who let on hire the equipment to the contractor has been
filed nor any evidence adduced for the payment made. Except for listing a
10 HP Water Pump, 4 number 1 HP water pump, 3 mixers, 250 scaffolding
bamboos, 150 ballis and 2 vibrators in Annexure-J to the Statement of
Claim, no document proving hiring the same and brought at the site has been
led. We highlight that the claim is on account of hire Charges paid and
there is no evidence of said payment. It does happen that where a work is
stopped, the person who taken an equipment on hire returns the same and re-
hires the same when work recommences. Thus, Claim No. 9, 10 and 11 cannot
be allowed because there is no evidence to support the claims. Damages on
account of establishment expenses incurred during period contract got
prolonged have certainly to be recompensed, but we find no evidence in the
form of books of accounts, vouchers etc. to show payments to the staff or
expenses incurred in maintaining an establishment at site in the form of a
site office. The wages register, photocopy whereof was filed before the
Arbitrator, pertains to wages paid to the unskilled, semi-skilled and
skilled labour deployed to execute the works. The pleadings pertaining to
the claim would show that as per the contractor he had deployed one
Executive Officer, one Graduate Engineer, one Junior Engineer, one
Accountant, one Storekeeper and Supervisor and one Mechanic at the site and
had also deployed watch and ward. Details of the persons employed have been
listed in Annexure-N to the Statement of Claim and the documents filed to
establish the same would evidence that the contractor has filed photocopies
of the salary register, which are available from pages No.1255 to 1322, but
unfortunately for the contractor, the cat is out of the bag when we look at
the documents. They pertain to payments made for a site at Mayur Vihar. We
highlight that the contract in question pertains to flats and houses at
Trilokpuri and not Mayur Vihar. It is apparent that the contractor has
tried to pull the wool on the eyes of the primary adjudicator of the claim.
It is not the case of the contractor that these persons were simultaneously
supervising the work at two sites. Assuming this was the case, the matter
would then have been adjudicated with reference to same number of persons
supervising two sites and the time spent at each site by them.
18. Thus, the award pertaining to Claim Nos. 9, 10, 11 and 15 is liable to
be sent aside and it is so set aside. We need not therefore take corrective
action on the apparent error i.e. the learned Arbitrator has worked out the
claim on the original contract value of Rs. 87,66,678/-, of course by
reducing it by 15%, but ignoring that final work executed was only in sum
of Rs.62,84,845/-."
18. Mr. Verma argued correctly that there is nothing on record to show
that the contractor is a petty contractor and that the only expenses
incurred are at the site. He has shown us that the contract itself
required execution of the work by a Class-I contractor and has further
shown us that Class-I contractors require to have certain stipulated
numbers of works worth large amounts before they can apply for the tender
and that their financial soundness has to be attested too by banker's
certificate showing that their worth is over 10 crores of rupees.
Further, he has pointed out from the statement of claims before the
Arbitrator that there was evidence for claims 9, 10 and 11 laid before the
Arbitrator which the Arbitrator has in fact accepted. Also establishment
expenses were set out in great detail before the Arbitrator and it is only
on this evidence that the Arbitrator ultimately has awarded these claims.
Mr. Verma is also right in saying that the Division Bench was completely
wrong in stating that the establishment expenses pertained to payments for
a site at Mayur Vihar as opposed to Trilok Puri which were where the
aforesaid houses were to be constructed. He pointed out that in the
completion certificate dated 30th May, 1997 given by the DDA to the
appellant, it is clear that the houses that were, in fact, to be
constructed were in Mayur Vihar, Phase-II, which is part of the Trilok Puri
trans-Yamuna area.
It is most unfortunate that the Division Bench did not advert to this
crucial document at all. This document shows not only that the Division
Bench was wholly incorrect in its conclusion that the contractor has tried
to pull the wool over the eyes over the DDA but it should also have
realized that the DDA itself has stated that the work has been carried out
generally to its satisfaction barring some extremely minor defects which
are capable of rectification. It is clear, therefore, that the Division
Bench obviously exceeded its jurisdiction in interfering with a pure
finding of fact forgetting that the Arbitrator is the sole Judge of the
quantity and quality of evidence before him and unnecessarily bringing in
facts which were neither pleaded nor proved and ignoring the vital
completion certificate granted by the DDA itself. The Division Bench also
went wrong in stating that as the work completed was only to the extent of
Rs. 62,84,845/-, Hudson's formula should have been applied taking this
figure into account and not the entire contract value of Rs.87,66,678/-
into account.
19. Here again, the Division Bench has committed a grave error. Hudson's
formula as is quoted in McDermott's case is as follows:
"(a) Hudson Formula: In Hudson's Building and Engineering Contracts, Hudson
Formula is stated in the following terms:
|"Contract head office | | |Period of |
|overhead and profit | |Contract period| |delay" |
|percentage | | | | |
In the Hudson Formula, the head office overhead percentage is taken from
the contract. Although the Hudson Formula has received judicial support in
many cases, it has been criticised principally because it adopts the head
office overhead percentage from the contract as the factor for calculating
the costs, and this may bear little or no relation to the actual head
office costs of the contractor."
20. It is clear that to apply this formula one has to take into account
the contract value that is awarded and not the work completed. On this
score again, the Division Bench is to be faulted.
21. In dealing with claims 12 and 13, the Division Bench stated:
"19. Pertaining to Claim No.12 and 13, the learned Arbitrator has
recompensed the contractor 20% price hike in the cost of material and
labour noting, that there was a steep hike in the period in question when
the contract got prolonged by 25 months. We highlight that though the
Arbitrator has found the delay to be 25 months, recompense has been
restricted to only 20 months.
20. As noted herein above, partial recompense under Clause 10C, has been
granted to the contractor, but the same i.e. the Clause in question
requiring applicability during contract stipulated period, it is apparent
that the contractor would be entitled to full recompense for price hike
during the extended 25 months period and not the 20 months to which the
learned Arbitrator has restricted the recompense to.
21. But, for the benefit granted under Clause 10C wherein Rs. 1,62,387/-,
Rs.46,184/- and Rs.12,922/- have been awarded under Claim Nos. 2, 3 and 4,
said amounts have to be adjusted, but not in full, for the reason these
include the amounts payable during the contract stipulated period.
22. The total of the three sums comes to Rs, 2, 21,493/-. We have another
problem. Neither counsel could help us identify the components thereof i.e.
the component relatable to the 9 months during which the work had to be
completed and the 25 months during which the contract got prolonged. Thus,
we apply the Rule of 'Rough and Ready Justice'. We divide the sum by 34 to
work out the proportionate increase per month. Rs. 2,21,493/- divided by
34 = Rs.6,514.50 and multiplying the same by 25, the figure comes to
Rs.1,62,862.50.
23. Adopting, for the reasons given by the Arbitrator, that 20% hike in the
balance work done after the contract stipulated period i.e. benefit to be
granted under this head for work done in sum of Rs.37,02,066/- and
accepting the sum of Rs.7,20,000/- being the resultant figure, subtracting
Rs.1,62,862.50, the figure arrived at is Rs.5,57,137.50."
22. Here again, the Division Bench has interfered wrongly with the
arbitral award on several counts. It had no business to enter into a pure
question of fact to set aside the Arbitrator for having applied a formula
of 20 months instead of 25 months. Though this would inure in favour of the
appellant, it is clear that the appellant did not file any cross objection
on this score. Also, it is extremely curious that the Division Bench found
that an adjustment would have to be made with claims awarded under claims
2, 3 and 4 which are entirely separate and independent claims and have
nothing to do with claims 12 and 13. The formula then applied by the
Division Bench was that it would itself do "rough and ready justice". We
are at a complete loss to understand how this can be done by any court
under the jurisdiction exercised under Section 34 of the Arbitration Act.
As has been held above, the expression "justice" when it comes to setting
aside an award under the public policy ground can only mean that an award
shocks the conscience of the court. It cannot possibly include what the
court thinks is unjust on the facts of a case for which it then seeks to
substitute its view for the Arbitrator's view and does what it considers to
be "justice". With great respect to the Division Bench, the whole approach
to setting aside arbitral awards is incorrect. The Division Bench has lost
sight of the fact that it is not a first appellate court and cannot
interfere with errors of fact.
23. We come now to the arguments of Mr. Sharan in support of the Division
Bench judgment. The learned counsel strongly relied on clause 10C and
clause 22. These two clauses are set out as below:
Clause 10C of the agreement reads as follows:
"If during the progress of the works, the price of any material
incorporated in the works, (not being a material supplied from the Engineer-
in-Charge's stores in accordance with Clause 10 hereof and/or wages of
labour increases as direct result of the coming into force of any fresh
law, or statutory rule or order (but not due to any changes in sales tax)
and such increase exceed ten per cent of the price and/or wages prevailing
at the time of receipt of the tender for the work, and contractor thereupon
necessarily and properly pays in respect of the material (incorporated in
the work) such increased price and/or in respect of labour engaged on the
execution of the work such increased wages, then the amount of the contract
shall accordingly be varied provided always that any increase so payable is
not, in the opinion of the Superintending Engineer (whose decision shall be
final and binding) attributable to delay in execution of the contract
within the control of the contractor. Provided, however, no reimbursements
shall be made if the increase is not more than 10% of the said prices/wages
and if so the reimbursements shall be made only on the excess over 10% and
provided further that any such increase shall not be payable if such
increase has become operative after the contract or extended date of
completion of the work in question.
If during the progress of the works, the price of any material
incorporated in the works (not being a material supplied from the Engineer-
in-Charge's stores in accordance with Clause 10 hereof) and/or wages of
labour is decreased as a direct result of the coming into force of any
fresh law or statutory rule or order (but not due to any changes in sales
tax) and such decrease exceeds ten per cent of the prices and/or wages
prevailing at the time of receipt of the tender for the work, Delhi
Development Authority shall in respect of materials incorporated in the
work (not being materials supplied from the Engineer-in-Charge's stores in
accordance with Clause 10 hereof) and/or labour engaged on the execution of
the work after the date of coming into force of such law, statutory rule or
order be entitled to deduct from the dues of the contractor such amount as
shall be equivalent of difference between the prices of materials and/ or
wages as they prevailed at the time of receipt of tender for the work minus
ten per cent thereof and the prices of materials and/ or wages of labour on
the coming into force of such law, statutory rule or order.
The contractor shall for the purpose of this condition keep such books of
account and other documents as are necessary to show the amount of any
increase claimed or reduction available and shall allow inspection of the
same by a duly authorised representative of Delhi Development Authority and
further shall, at the request of the Engineer-in-Charge furnish, verified
in such a manner as the Engineer-in-Charge may require. Any document, so
kept and such other information as the Engineer-in-Charge may require.
The contractor shall, within a reasonable time of his becoming aware of any
alteration in the prices of any such materials and/ or wages of labour give
notice thereof to the Engineer-in- Charge stating that the same is given in
pursuance to the condition together with all information relating thereto
which he may be in a position to supply."
Clause 22 reads as follows:
"All sums payable by way of compensations under any of these conditions
shall be, considered as reasonable compensation to be applied to this use
of Delhi Development Authority without reference to the actual loss or
damage sustained, and whether or not any damage shall have been sustained.
Specifications and Conditions:
1. The contractor must get acquainted with the proposed site for the works
and study specifications and conditions carefully before tendering. The
work shall be executed as per programme approved by the Engineer-in-Charge.
If part of site is not available for any reasons or there is some
unavoidable delay in supply of materials stipulated by the Departments, the
programme of construction shall be modified accordingly and the contractor
shall have no claim for any extras or compensation on this account."
24. Clause 10C concerns itself with the price of material incorporated in
the works or wage or labour increases. It has been seen that claims 9, 10
and 11 have nothing to do with either of the aforesaid subjects. In
seeking to apply this clause to claim 15, the simple answer is that this
clause will not apply when a claim for damages is made. Further, the
Arbitrator considered this clause in detail and only awarded amounts under
this clause in excess of 10 percent as required by the clause when it came
to awarding amounts under claims 2, 3 and 4, which fell within the ambit of
clause 10C. The DDA in the appeal before the Division Bench correctly gave
up any challenge to these claims as has been recorded in paragraph 4 of the
order under appeal.
25. The Arbitrator has dealt with this clause in detail and has construed
and applied the same correctly while dealing with claims 2, 3 and 4 and has
obviously not applied the said clause to claims 9, 10, 11 and 15 as no
occasion for applying the same arose. The award cannot be faulted on this
ground.
26. Also, so far as clause 22 is concerned, the DDA did not raise any
argument based on this clause before the learned Arbitrator. However, it
must in fairness be stated that it was argued before the learned Single
Judge. In para 15 of his judgment, the learned Judge sets the clause out
and then follows a judgment of the High Court of Delhi in Kochhar
Construction Works v. DDA & Anr., (1998) 2 Arb. LR 209. Apart from the
fact that a learned Single Judge of the same court is bound by a previous
judgment of a Single Judge, the conclusion of the learned Single Judge that
if the appellant is at fault and the contract is prolonged for an
inordinate period of time, it cannot be said that the respondents cannot be
compensated for the same is correct. Besides, this point was not urged
before the Division Bench and must be taken to be given up. Mr. Sharan
cited Harsha Constructions v. Union of India & Ors., (2014) 9 SCC 246 to
say that in respect of excepted matters, no arbitration is possible, and
that this being a jurisdictional point, he should be allowed to raise it
before us. Unfortunately for Mr. Sharan, the clause does not operate
automatically. It only operates if an objection is taken stating that part
of the site is not available for any reason. Nowhere has the DDA stated
which part of the site is not available for any reason. Further, the
learned Single Judge's reason for rejecting an argument based on this
clause also commends itself to us as the object of this clause is that no
claim for extras should be granted only if there is an unavoidable delay.
We have seen that the delay was entirely avoidable and caused solely by the
DDA itself.
27. One more point needs to be noted. An argument was made before the
learned Single Judge that there has been a duplication of claims awarded.
The learned Judge dealt with this argument as follows:
"18. Learned counsel for the petitioner in respect of ground P, once again
makes a reference to the issue that there is overlapping of the claim. I am
unable to accept the submission made by the learned counsel. The
consequence of delay may have more than one ramifications including the
cost of material the supervision required at the site, the inability of the
contractor to utilise the manpower at some other place, the inability of
the contractor to make, profits from some other contract by utilisation of
the same resources. All these aspects are liable to be considered. The
Arbitrator has considered the claims separately and has dealt with, claims
9, 10, 11 & 15 together. Claims 12 & 13 have been thereafter dealt with on
the same principles since it was found that it was not the respondent, who
was responsible for the delay for a period of 25 months beyond the
stipulated condition of 9 months.
19. There is thus no question of overlapping in different heads and the
grievance of the petitioner is rejected."
28. The Single Judge is clearly right. We have gone through all the 15
claims supplied to us and we find that none of these claims are in fact
overlapping. They are all contained under separate heads. This argument,
therefore, must also fail.
29. The appeal is, therefore, allowed and the judgment of the Division
Bench is set aside. The judgment of the Single Judge is upheld and
consequently, the Arbitral award dated 23rd May, 2005 is as a whole upheld.
There will be no order as to costs.
.......................................J.
(Ranjan Gogoi)
......................................J.
(R.F. Nariman)
New Delhi,
November 25, 2014
-----------------------
[1]
[2]Very often an arbitrator is a lay person not necessarily trained
in law. Lord Mansfield, a famous English Judge, once advised a high
military officer in Jamaica who needed to act as a Judge as follows:
"General, you have a sound head, and a good heart; take courage and
you will do very well, in your occupation, in a court of equity. My advice
is, to make your decrees as your head and your heart dictate, to hear both
sides patiently, to decide with firmness in the best manner you can; but be
careful not to assign your reasons, since your determination may be
substantially right, although your reasons may be very bad, or essentially
wrong".
It is very important to bear this in mind when awards of lay
arbitrators are challenged.
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