State of Rajasthan v. Ferro Concrete Construction Pvt. Ltd.

A contractor laying a water pipeline in Ajmer got an arbitral award against the State of Rajasthan. The Supreme Court set aside two awards. One ignored the written terms on the mobilisation advance. The other gave a daily sum for a breach that had not happened, in a claim never made. It upheld the other awards and cut the interest to 9 per cent.

Quick Revision

Read the full judgment: Indian Kanoon (unofficial copy)

Parties

State of Rajasthan and another — appellants; the employer that invited tenders for the water pipeline. The Chief Engineer, Public Health Engineering Department, was the appointing authority.

M/s. Ferro Concrete Construction Pvt. Ltd. — respondent; the contractor. It manufactured, laid and tested the pipeline.

Procedural History

1. On 18 June 1990 the contractor invoked arbitration under clause 23 of the General Conditions of Contract for claims of Rs 2,01,66,547 (para 4).
2. The contractor applied to the District Court, Ajmer, under Section 20 read with Section 8 of the Arbitration Act, 1940. By order of 27 April 1991 the District Court held it had jurisdiction but deferred appointment. The High Court allowed the employer's appeal on 9 August 1991 (para 6).
3. On 12 November 1991 this Court recorded the parties' consent to appoint Mr. B.L. Mathur as sole arbitrator and directed the employer to appoint him (para 6).
4. On 13 January 1992 the contractor filed a claim statement with 43 claims totalling Rs 6,21,29,626. The employer filed a reply and five counter-claims (paras 6, 7).
5. On 21 September 1994 the arbitrator made his award (para 8).
6. The contractor applied to make the award a rule of court. The employer objected under Section 30 read with Section 33. On 17 February 2003 the District Judge, Ajmer, made the award a rule of court with a change to claim 37A. In place of Rs 12,072 a day from the award date, he directed the employer to return the original title deeds to the contractor. The employer was to pay the awarded amounts, after deducting the Rs 59,42,275 counter-claim award with 18 per cent interest, within 30 days of the decree. Failing that, it would pay Rs 12,072 a day from the date of the decree (para 9).
7. The employer filed Civil Misc. Appeal No. 872/2003, saying the award should have been set aside. The contractor filed Civil Misc. Appeal No. 910/2003, objecting that compensation ran only from the decree date and not from the award date. On 5 February 2007 the High Court dismissed the employer's appeal. On 30 May 2007 it allowed the contractor's appeal, restoring the arbitrator's direction on claim 37A and granting 18 per cent interest from the award date (para 10).
8. The employer appealed to this Court by special leave: CA No. 2764 of 2009 against the dismissal, and CA No. 2767 of 2009 against the order allowing the contractor's appeal (para 11).

Facts

1. The employer invited tenders for manufacture, laying, testing and commissioning of a water pipeline of 37.41 km under a water supply scheme in Ajmer District. Different tenderers gave different terms, so common terms of reference (CTR) were formulated on 22 February 1988. The tender conditions were modified accordingly (para 2).
2. The contractor's offer was accepted. A work order of 23 August 1988 gave two years from that date. It was amended on 8 November 1988. A bilateral agreement of 11 January 1989 listed the documents forming the contract and some modified terms (para 3).
3. The work order value was Rs 9,91,94,602.50. Ten per cent (Rs 99.19 lakhs) was released as mobilisation advance between 25 January 1989 and 5 May 1989 (para 3).
4. The contractor created an equitable mortgage over its plant by depositing the title deeds as security. By letter of 15 December 1990 it confirmed the deeds would stay with the employer until the advance was repaid in full with interest (para 3).
5. Clause 23 of the General Conditions of Contract provided for arbitration. The contractor invoked it by letter of 18 June 1990 for claims of Rs 2,01,66,547. A second dispute was about the rate for work done after the due date of 22 August 1990 (para 4).
6. On 22 August 1990 the contractor stopped work. It had manufactured 15.26 km of pipes, laid 11.6 km and tested only 1.4 km, against 37.41 km (para 4).
7. On 13 September 1990 the employer said it would get the balance work done by another agency, treat the contract as abandoned on 22 August 1990, and recover the excess cost (para 4).
8. On 3 November 1990 the contractor replied that delays and breaches by the employer defeated its efforts and that a fresh agreement was needed. It said that without extension of time by mutual consent it was not liable to continue at the tendered rates (para 5).
9. On 30 March 1991 the employer made a final demand to restart and give a revised schedule. The contractor did not resume. It filed a suit in the District Court, Ajmer, and got a temporary injunction against the employer imposing liquidated damages (para 5).
10. The contractor revised its claim to Rs 5,51,90,306 in its notice of appointment (para 6).
11. The employer made five counter-claims totalling Rs 8,63,46,505. On 10 August 1992 it awarded the balance work to M/s. Indian Hume Pipes Co. Ltd., and revised counter-claim 2 to Rs 6,66,62,000. The counter-claims then totalled Rs 11,55,98,388 (para 7).
12. The arbitrator rejected claims 4, 7, 8, 10, 14, 21, 22, 23, 26, 36, 36A, 37 to 41A, 42, 42A and 43. He awarded the contractor the amounts in the table below (para 8).
13. He rejected counter-claims 1, 2, 4 and 5. On counter-claim 3 (Rs 79,87,846 for refund of mobilisation advance with interest) he awarded Rs 59,42,275 with interest at 18 per cent from 18 September 1990 until decree or payment (para 8).

Issues Raised

The Court framed the question (para 12):

1. Is there legal misconduct or an error apparent on the face of the award in the arbitrator's award on claims 1 and 37A?
2. Is there such a defect in the award on claims 12 and 13 (interest)?
3. Is there such a defect in the award on claims 2 and 16, 3 and 15, 5 and 18, 6 and 17, 9 and 19, 11 and 20, 24, 27 and 28, 29, 30, 31, 32, 33, and 35 (with 25 and 34)?
4. Is there such a defect on counter-claims 1, 2, 4 and 5?

Arguments Contended

For the appellants (the employer):

• The mobilisation advance had to be released in three instalments against bank guarantees, and the second and third instalments only on a chartered accountant's certificate of utilisation and departmental verification. It was released in instalments as the contract provided, so there was no delay or breach (para 15).
• On claim 37A, there was no obligation to release the plant and its title deeds until the mobilisation advance was repaid with interest. The contractor had not repaid it, so no daily loss arose. The employer also disputed the figures used to calculate the loss (para 21).
• There was no provision in the contract for interest on amounts payable to the contractor, so no interest should be awarded (para 31).
• On claims in the nature of damages, interest is payable only on quantification, so interest before the award was illegal (para 32).
• Before the lower courts the appellants argued that the arbitrator had no jurisdiction because the appointing authority only appointed him and did not refer the disputes to him. The appellants did not press this before this Court (para 11).

For the respondent (the contractor):

• Prompt release of the mobilisation advance was crucial and fundamental, since pipe manufacture depended on setting up a factory. Even if it could be released in three instalments, there was inordinate delay, in five instalments. With prompt release it would have set up the factory and begun production in three months. It lost production for eight months, nearly a third of the contract period, and could not execute work worth Rs 5,56,66,086. It claimed loss of profit and overheads at 15 per cent (para 14).
• On claim 37A, the machinery installed in the mortgaged factory was not released, so it could not be moved elsewhere and had to stay idle. The employer should reimburse the loss of production from 13 January 1992 at Rs 12,072 a day. It would have produced 15 pipes a day valued at Rs 1,20,000, with overheads and profit of 15 per cent (Rs 18,000 a day). It worked this out as 18,000 x 306 / 365 = Rs 15,090 a day, less 20 per cent for labour, which gives Rs 12,072 a day (para 21).
• Although the award on counter-claim 3 was Rs 59,42,275 with interest in the employer's favour, there was a larger award in its favour of about Rs 1.67 crores with interest. It was entitled to adjust the one against the other, so the liability for the advance was wiped out on the date of the award (para 28).

Court's Reasoning

The judgment has numbered paragraphs and one opinion, delivered by R.V. Raveendran, J. Both Judges signed it. Steps follow the order of the paragraphs.

R.V. Raveendran, J. (judgment of the Bench)

1. Noted: Leave was granted and counsel were heard (para 1).
2. Noted: The employer invited tenders for the 37.41 km pipeline in Ajmer District. Different terms from tenderers led to common terms of reference (CTR) on 22 February 1988 (para 2).
3. Noted: The work order of 23 August 1988 gave two years. It was amended on 8 November 1988, and the agreement of 11 January 1989 listed the contract documents. Rs 99.19 lakhs was released as mobilisation advance, secured by an equitable mortgage over the plant (para 3).
4. Noted: Clause 23 provided for arbitration. The contractor invoked it on 18 June 1990, stopped work on 22 August 1990, and the employer treated the contract as abandoned (para 4).
5. Noted: The contractor's reply of 3 November 1990, the final demand of 30 March 1991, the suit and the temporary injunction against liquidated damages are recorded (para 5).
6. Noted: The Section 20 application, the High Court order of 9 August 1991, the consent order of this Court of 12 November 1991 appointing Mr. B.L. Mathur, and the claim statement of 13 January 1992 are recorded (para 6).
7. Noted: The employer's reply and five counter-claims, and the award of the balance work to M/s. Indian Hume Pipes Co. Ltd. on 10 August 1992, are recorded (para 7).
8. Noted: The award of 21 September 1994 with its table of claims and the rejected claims is set out (para 8).
9. Noted: The District Judge's order of 17 February 2003 modified claim 37A to a direction to return the title deeds after adjusting the counter-claim, with Rs 12,072 a day from the decree date if the employer did not comply. The employer's appeal said the award should have been set aside. The contractor's appeal said compensation should run from the award date. The High Court dismissed the employer's appeal on 5 February 2007. On 30 May 2007 it allowed the contractor's appeal and upheld the award (paras 9, 10).
10. Noted: The employer argued before the High Court that the arbitrator had no jurisdiction because he was only appointed and no dispute was referred. Both courts rejected this because the appointment followed an agreement before this Court to settle the disputes by arbitration. The appellants did not press it here (para 11).
11. Noted: The question is whether there was legal misconduct or error apparent on the face of the award on the four groups of claims (para 12).
12. Noted: Section 30 of the Arbitration Act, 1940 allows an award to be set aside for misconduct by the arbitrator, or if the award was improperly procured or is otherwise invalid. An error apparent on the face of the award is a ground under Section 30 or for remission under Section 16(1)(c) (para 13).
13. Noted: In Champsey Bhara & Co. v. Jivraj Balloo Spinning & Weaving Co. Ltd. the Privy Council said an error of law on the face of the award means you can find in the award, or a document incorporated in it, a legal proposition that is the basis of the award and is erroneous (para 13).
14. Held: Under the 1940 Act an award could not be challenged because the arbitrator reached a wrong conclusion or failed to appreciate facts, since he is the final arbiter. The court does not sit in appeal over the award or re-appreciate the evidence (para 13).
15. Held: Where there is no allegation of moral misconduct and the arbitration has not been superseded, there are two grounds of attack: legal misconduct in making the award, and an error apparent on its face (para 13).
16. Noted: In State of Rajasthan v. Puri Construction Co. Ltd. this Court said courts disfavour interference for errors of law and fact. But an erroneous application of law forming the very basis of the award, and patent errors of fact easily shown without weighing viewpoints, may be legal misconduct. It cautioned that the court must not re-appraise the evidence as an appellate court would (para 13).
17. Noted (claim 1): The contractor argued that the mobilisation advance had to be released at once to set up the factory. It said that even if three instalments were allowed there was inordinate delay, and it lost eight months, a third of the contract period. It claimed profit and overheads at 15 per cent on Rs 5,56,66,086, that is Rs 83,49,913. The Court sets out the calculation (para 14).
18. Noted: The employer said the contract required three instalments against bank guarantees, with the second and third released only on a chartered accountant's certificate and verification of progress. It said there was no delay or breach (para 15).
19. Noted: The Court sets out the clauses on mobilisation advance (para 16):
    • Clause 8 of the Special Conditions: the contractor may set up a pipe factory at site at its own cost, and the department may help with land. Supply of pipes must start within 30 days of the award. This clause was superseded by clause 3 of the CTR.
    • Clause 3 of the CTR: 10 per cent of the contract value is given against a bank guarantee at 18 per cent simple interest. Recovery starts from the first running bill and must finish by 75 per cent completion, with interest. The assets built are mortgaged to the department. If the work is left incomplete, liquidated damages apply and the assets become the department's property.
    • Clause 5.1 of the work order of 23 August 1988: para (a) repeats clause 3 of the CTR. Para (b) said that if the factory was not set up in three months, the advance would be recovered through the bank guarantee.
    • The amended clause 5.1(b), from the letter of 8 November 1988: the advance is paid in three instalments. The second and third are paid on a chartered accountant's certificate of utilisation and the department's verification of progress.
    • Clause 7 of the agreement of 11 January 1989: 10 per cent advance at 18 per cent simple interest against a nationalised bank's guarantee equal to the advance. Recovery by 75 per cent completion. The assets are mortgaged only to the Government. If the contractor fails to complete, liquidated damages apply and the assets become government property.
20. Noted: The arbitrator held that clause 8 was superseded by clause 3 of the CTR, which required release in one instalment. He held that clause 5(1)(b), inserted by the amendment of 8 November 1988, was a unilateral addition not binding on the contractor. He found the employer delayed release by 8.5 months in total. He held the contractor could have done a third of the work, worth Rs 3,30,64,867.50, and awarded 10 per cent of it, Rs 33,06,500 (para 17).
21. Held: Clause 8 must be read with clause 3 of the CTR. But the CTR was followed by the work order and then the amendment of 8 November 1988, which said the advance would be paid in three instalments, the second and third on a chartered accountant's certificate and verification. The arbitrator's view that this was unilateral is erroneous on its face (para 18).
22. Why: The bilateral agreement of 11 January 1989 says in paras 2 and 6 that the work order and the amendment form part of the contract and bind both parties. Clause 7 of the agreement has a detailed clause on mobilisation advance. So all these clauses must be read together with the CTR (para 18).
23. Held: Clause 5(1)(b) as amended required a bank guarantee for the advance. Clause 7 required the assets built to be mortgaged, and the assets to become the employer's property if the work was not completed. If the factory was not set up within three months, the advance would be recovered by enforcing the bank guarantee. So the advance had to be released only against a bank guarantee (para 18).
24. Held: If the contractor wanted a single release it should have given a single bank guarantee. It gave four guarantees: Rs 40 lacs on 21 May 1989, Rs 25 lacs on 1 February 1989, Rs 15 lacs on 17 February 1989 and Rs 25 lacs on 23 March 1989. So it also proceeded on the basis of clause 5(1)(b) (para 19).
25. Held: The first amount was released within two days, the second in seven days, and the third partly in twelve days and the rest in two months. The second and third releases needed the utilisation certificate. For the first advance the certificate came on 7 February 1989 and the second instalment was released that day. For the third the certificate was received only on 4 April 1989. So there was no delay or breach by the employer. If there was delay, it was the contractor's (para 19).
26. Held: The arbitrator committed legal misconduct by ignoring the agreement of 11 January 1989, which made the work order and the amendment part of the contract. He also overlooked the additional provision on mobilisation advance in the agreement. Read together, there was no breach by the employer, so there is no question of compensation (para 19).
27. Held: There is another flaw. The contractor claimed Rs 83,49,913 on the footing that it could not do work worth Rs 5,56,66,086. The arbitrator instead awarded 10 per cent of work worth Rs 3,30,64,867 that could have been done in the delay period (para 20).
28. Why: First, there was no such plea. Second, the delay was not the employer's. Third, even if there was delay, it was nobody's case that no work was done or that the contractor lost money by not executing work in the contract period. So the award of Rs 33,03,500 on claim 1 is set aside (para 20).
29. Noted (claim 37A): The contractor said its mortgaged factory and machinery were not released, so it could not move them to start manufacturing elsewhere and had to keep them idle. It claimed Rs 12,072 a day from 13 January 1992 and showed its calculation. The employer said there was no duty to release the plant or deeds until the advance was repaid with interest, and the contractor had not repaid it (para 21).
30. Noted: The contractor deposited the title deeds as mortgage and agreed they would remain until the advance was repaid with interest. It is not in dispute that the plant stayed in the contractor's possession and control, as the employer never took physical possession (para 22).
31. Noted: The arbitrator considered claim 37A with claims 36, 36A and 37: idling of machinery, labour and staff, and loss of production in the factory, before and after 13 January 1992. He held none maintainable, as the factory built from the advance was mortgaged to the employer, and awarded nothing on those claims (para 23).
32. Noted: Yet he directed payment of Rs 12,072 a day from the date of award. He said it was a case of real hardship, that but for the mortgage he would have considered an award, and that since he allowed counter-claim 3 in full there was no reason for the assets to remain mortgaged. He directed release of the mortgage documents within 30 days, failing which the contractor would get Rs 12,072 a day from the award date until release. He gave nothing for the period from entering on the reference to the date of the award (para 23).
33. Held: The award on claim 37A was not made on any finding of breach by the employer. It was made because the arbitrator had awarded Rs 59,42,275 with interest to the employer, and thought the mortgage should end if that was adjusted (para 24).
34. Held: So the award was made not for a breach committed, but for a breach that might be made in the future after the award. There was no such claim, so the award was beyond the reference. The Court calls the reasoning strange, and "a classic case of an error apparent on the face of the award and a legal misconduct" (para 24).
35. Held: The arbitrator rejected claim 37A as claimed because the plant was mortgaged. He then reasoned that, because he had awarded Rs 59,42,275 plus interest to the employer, the mortgage ended and the employer must return the documents or pay Rs 12,072 a day (para 24).
36. Held: The arbitrator noticed that the original documents would remain in deposit until the advance was repaid with full interest. He awarded the employer Rs 59,42,275 with 18 per cent interest (from 1 September 1990 to 17 September 1990 and then from 18 September 1990). So until that sum with interest was paid, the mortgage continued, the employer had no duty to return the deeds, and the contractor could not claim loss of production for the withholding (para 25).
37. Held: On the award, the amount due at Rs 12,072 a day from 21 September 1994 works out to about Rs 6,42,70,000. The arbitrator ordered the contractor to refund Rs 59,42,275 with interest and then, though that payment was not made, awarded the contractor damages of Rs 6,42,70,000. This is legal misconduct and an error apparent on the face of the award (para 26).
38. Held: The daily sum was claimed in a two-line calculation without evidence. There is no evidence that the contractor was making 15 pipes a day of Rs 8,000 each, or would have made 15 per cent profit. There is no evidence of other contracts needing that production, of the value of the mortgaged plant, or of the cost of an alternative plant (para 27).
39. Held: If the plant was worth about Rs 25 lakhs, the loss at best would be interest on it. In claims 36 and 37 the contractor gave the plant value as Rs 36,84,161. Even then the loss would be around 1 per cent a month, Rs 36,841 a month (para 27).
40. Held: The arbitrator nowhere considers whether the claim of Rs 12,072 a day is valid. If a claim is equated with proof of the claim in a reasoned award, that is legal misconduct. If there was no evidence at all and the arbitrator awards what was claimed merely on the claim statement, the award is invalid. The award under this head is wholly illegal, beyond jurisdiction and unsustainable (para 27).
41. Noted: The contractor argued it could adjust the Rs 59,42,275 with interest against its larger award of about Rs 1.67 crores with interest, so the liability stood wiped out on the award date (para 28).
42. Held: This is not sound. The advance was an ascertained sum with a specific interest provision and a specific contract for the mortgage to continue until payment. The contractor's awarded amounts were mostly damages and price escalation, whose validity was under challenge, with no contract provision for interest. At best the arbitrator could have directed return of the title documents, not payment of Rs 12,072 a day (para 28).
43. Held: Viewed from any angle, the award of Rs 12,072 a day from the date of award under claim 37A cannot stand and is set aside (para 29).
44. Noted (claims 12 and 13, interest): The contractor claimed 18 per cent interest on all claims. The contractor claimed pre-reference interest from 18 June 1990 to 15 December 1991 and pendente lite interest from 16 December 1991. The arbitrator awarded interest at 18 per cent in three parts (para 30):
    • Pre-reference interest on all sums except claim 1, from 3 September 1990 (the date of the Section 8 and 20 application) to 15 December 1991.
    • Pendente lite interest on all sums including claim 1, from 16 December 1991 to 21 September 1994.
    • Future interest on all sums from 22 September 1994.
    The District Court gave no post-decree interest, but the High Court granted it from the decree date at 18 per cent (para 30).
45. Held: The employer said the contract had no provision for interest. But in the absence of an express bar the arbitrator may award interest for pre-reference, pendente lite and future periods. The Court relies on Secretary, Irrigation Department, Government of Orissa v. G.C. Roy (Constitution Bench), Executive Engineer, Dhenkanal Minor Irrigation Division v. N.C. Budharaj and Bhagawati Oxygen v. Hindustan Copper Ltd. There was no bar here, so the arbitrator could award interest (para 31).
46. Noted: The employer argued that on damages interest is payable only on quantification. Earlier law was that no interest was payable on damages before a court quantified them. The Court quotes Chagla, C.J. in Iron & Hardware (India) Co. v. Firm Shamlal & Bros: a breach gives no pecuniary liability until the court decides the party is entitled to damages (para 32).
47. Noted: The law changed with the Interest Act, 1978. Section 3(1) allows a court or arbitrator to allow interest at a rate not exceeding the current rate. For a debt payable at a certain time under a written instrument it runs from the due date to institution of proceedings. In other cases it runs from the date in a written notice that interest will be claimed. Section 3(3) excludes debts or damages on which interest is payable as of right by agreement, or on which interest is barred by an express agreement, and bars interest upon interest. Section 5 saves Section 34 of the Code of Civil Procedure (para 33).
48. Held: After the 1978 Act, the position is (para 34):
    • Where the contract provides for interest, interest is paid as the contract says.
    • Where the contract expressly bars interest, none is awarded.
    • Where there is no bar and no provision, Section 3 of the 1978 Act governs the pre-suit or pre-reference period.
    • For a debt payable at a certain time, interest runs from the due date to institution of proceedings.
    • For damages, or a debt not payable at a certain time, interest runs from the date in a written notice claiming interest, to institution of proceedings.
    • Interest pendente lite and future interest are governed by Section 34 CPC or the law governing arbitration, not by the 1978 Act.
49. Held: Even for damages, interest can be awarded before quantification if the contract provides for it, or if a written demand for interest was made before action. For ascertained sums, interest is due from the date they became due. Here interest ran only from 3 September 1990, the date of the Section 20 petition, and the Court found no reason to change it (para 35).
50. Held: On the rate, 18 per cent in an award under the 1940 Act "was an error apparent on the face of the award". Under the 1978 Act the rate cannot exceed the current rate of interest, the highest maximum rate for deposits fixed by the Reserve Bank under the Banking Regulation Act. So pre-reference interest should be only 9 per cent a year. The same rate is appropriate for pendente lite and future interest up to payment (para 36).
51. Noted (other claims): Claims 9 and 19, 27 and 28, 29, 33 and 35 (with 25 and 34) are for work done. Claims 2 and 16, 3 and 15, 5 and 18, 24, 30, 31 and 32 are for release or refund of amounts withheld or deducted. Claims 6 and 17 are for price escalation. Claims 11 and 20 are for slow progress due to reduction of trench width (para 37).
52. Held: The arbitrator examined the material and the contract terms and gave reasons. "Courts can not sit in judgment over the award of the arbitrator, nor re-appreciate the evidence." No want of jurisdiction, legal misconduct, inconsistency or error apparent on the face of the award is made out. These awards are upheld (para 37).
53. Held: The rejected claims 4, 7, 8, 10 and 21, 14, 22, 23, 26, 38, 39, 40, 41 and 41A, 42 and 42A, and 43 were examined by the arbitrator and upheld by the courts below. No ground is made out to interfere (para 38).
54. Noted (counter-claims): Of five counter-claims only counter-claim 3 was allowed: Rs 59,42,275 of Rs 79,87,846 for refund of mobilisation advance, with interest at the contract rate of 18 per cent to decree or payment. The rejected counter-claims were liquidated damages (Rs 99,19,460), extra cost of completion through another agency (Rs 6,66,62,000), interest on payments not utilised (Rs 2,17,42,168) and costs (Rs 2,50,000) (para 39).
55. Held: Counter-claims 1, 2 and 4 were rejected because the delays and breaches were the employer's. Rejection of counter-claim 5 is consequential. The court does not sit in appeal over the award or re-appreciate the evidence. None of the grounds to set aside the award applies, so the rejection stands (para 39).
56. Held: The appeals are allowed in part and the judgments of the courts below are modified as set out under Judgement (para 40).

Authorities

• Champsey Bhara & Co. v. Jivraj Balloo Spinning & Weaving Co. Ltd., AIR 1923 PC 66. Followed. The meaning of an error of law on the face of the award (para 13).
• State of Rajasthan v. Puri Construction Co. Ltd., 1994 (6) SCC 485. Followed. The limited scope for challenging an award under the 1940 Act, with a caution against re-appraising evidence (para 13).
• Secretary, Irrigation Department, Government of Orissa v. G.C. Roy, 1992 (1) SCC 508 (Constitution Bench). Relied on. An arbitrator may award interest absent an express bar (para 31).
• Executive Engineer, Dhenkanal Minor Irrigation Division v. N.C. Budharaj, 2001 (2) SCC 721. Relied on for the same rule (para 31).
• Bhagawati Oxygen v. Hindustan Copper Ltd., 2005 (6) SCC 462. Relied on for the same rule (para 31).
• Iron & Hardware (India) Co. v. Firm Shamlal & Bros, AIR 1954 Bombay 423. Quoted as the earlier law that no interest was payable on damages before quantification. The Court said the law changed after the Interest Act, 1978 (paras 32, 33).

Also cited in footnotes: the judgment has no footnotes.

Provisions

• Section 30, Arbitration Act, 1940: an award may be set aside for misconduct, improper procurement or invalidity (para 13).
• Section 16(1)(c), Arbitration Act, 1940: remission of an award to the arbitrator for an error apparent on its face (para 13).
• Sections 8, 20 and 33, Arbitration Act, 1940: the contractor's application to file the arbitration agreement in court and the employer's objections (paras 6, 9).
• Section 3(1), (3) and Section 5, Interest Act, 1978: power to allow interest on debt or damages; no interest on interest; no effect on Section 34 CPC (para 33).
• Section 34, Code of Civil Procedure: pendente lite and future interest (paras 33, 34).
• Banking Regulation Act: its Reserve Bank directions set the maximum deposit rates used to fix the current rate of interest (para 36).
• Clause 23 of the General Conditions of Contract (arbitration), clause 8 of the Special Conditions, clause 3 of the CTR, clause 5.1 of the work order, clause 7 of the agreement of 11 January 1989 (paras 4, 16).

Judgement

1. The award of the arbitrator on claim 1 (Rs 33,06,500) and on claim 37A (Rs 12,072 a day from 21 September 1994 until payment) is set aside (para 40).
2. The award on claims 2 and 16, 3 and 15, 5 and 18, 6 and 17, 9 and 19, 11 and 20, 24, 27 and 28, 29, 30, 31, 32, 33 and 35 (with 25 and 34), totalling Rs 1,34,24,407, is upheld (para 40).
3. Interest is payable at 9 per cent a year on Rs 1,34,24,407 from 3 September 1990 until payment. The award on claims 12 and 13 is modified accordingly (para 40).
4. The award of Rs 59,42,275 on counter-claim 3 with interest at 18 per cent a year from the respective dates of release until payment is upheld (para 40).
5. The adjustment of the counter-claim 3 amount against the amounts due to the contractor, both calculated as on 21 September 1994, is upheld. The appellant must release the title deeds deposited for the contractor's plant and machinery. The contractor may remove the plant, if it has not already done so (para 40).
6. The rejection of claims 4, 7, 8, 10 and 21, 14, 22, 23, 26, 38, 39, 40, 41 and 41A, 42 and 42A and 43 of the contractor, and of counter-claims 1, 2, 4 and 5 of the employer, is upheld (para 40).
7. The parties bear their own costs (para 40).

Legal Principle / Ratio

A court will not re-appreciate evidence or substitute its view for an arbitrator's. Under the 1940 Act it can interfere only for legal misconduct or an error apparent on the face of the award, such as ignoring the written terms of the contract or awarding what was never claimed. Interest follows the contract, or the Interest Act, 1978 for the period before reference, and the rate was cut to 9 per cent. Key holding: "Courts can not sit in judgment over the award of the arbitrator, nor re-appreciate the evidence."

Critical Analysis

Analysis based on the judgment text.

• The Court applies the narrow review under the 1940 Act. It sets aside two awards for ignoring the contract and for awarding an unclaimed sum, and upholds the rest without re-examining the facts.
• On claim 37A the Court also notes there was no evidence of the daily loss. The finding of an unclaimed sum and the lack of evidence are two separate grounds (paras 24, 27).
• The Court cut interest from 18 to 9 per cent on the footing that 18 per cent was an error apparent on the face of the award (para 36). It does not say how it fixed 9 per cent beyond the Interest Act's cap on the current rate.
• The text has small inconsistencies:
  • The guarantee dates in para 19 list one of 21 May 1989 before one of 1 February 1989.
  • The award on claim 1 is given as Rs 33,06,500 and as Rs 33,03,500.
  • Para 37 refers to claim 35 with 25 and 35, and para 40(B) to claim 35 with 25 and 24, where claim 34 appears to be meant.

Significance

• The case restates the limits of court review of arbitral awards under the 1940 Act.
• It shows that an arbitrator who ignores the written terms of the contract commits legal misconduct.
• It sets out the rules on interest under the Interest Act, 1978 and the arbitrator's power to award interest absent an express bar.
• It shows the rule that a claim without evidence cannot be treated as proved because it was claimed.

Exam-Important Points

• Rule first: under the 1940 Act a court does not sit in appeal over an award. It can interfere for legal misconduct or an error apparent on the face of the award.
• Ignoring the express terms of the contract, and awarding what was never claimed, are errors of that kind.
• An arbitrator can award interest for pre-reference, pendente lite and future periods unless the contract expressly bars it.
• Interest on damages before quantification can be awarded if the contract provides for it, or a written demand for interest was made before the action (Interest Act, 1978).
• Trap: the Court cut the rate to 9 per cent a year because 18 per cent in a 1940 Act award was an error apparent on the face of the award.
• A mortgage by deposit of title deeds continues until the secured advance with interest is paid. The award of a daily sum for a future breach was set aside.
• Directions: claims 1 and 37A set aside, other awards upheld with 9 per cent interest, title deeds to be released after adjustment, each side bears its costs.

Prepared from the full text of the judgment. Paragraph numbers follow the official Supreme Court judgment text; law reports may number the same paragraph differently.