Posted On by &filed under Supreme Court of India.

Supreme Court of India
M.D., Army Welfare Housing … vs Sumangal Services Pvt. Ltd on 8 October, 2003
Author: S.B. Sinha
Bench: Cji., Brijesh Kumar, S.B. Sinha.
           CASE NO.:
Appeal (civil)  1725 of 1997

M.D., Army Welfare Housing Organisation		

Sumangal Services Pvt. Ltd.				

DATE OF JUDGMENT: 08/10/2003





Questions of some importance arise for consideration in this
application filed by the respondent-herein under Sections 30 and 33 of
the Arbitration Act, 1940 questioning an award dated 29.4.2002 passed by
three learned arbitrators appointed by this Court.


Army Welfare Housing Organization (for short ‘AWHO’) and Sumangal
Services Pvt. Ltd. (for short ‘Sumangal’) entered into an agreement for
development of land and construction of a composite housing project on a
turn-key basis on approximately 17.9 acres of land situate on the VIP
Road, in the town of Kolkata. For the said purpose a draft agreement
initially drawn up was given finality by Articles of Agreement dated
28.8.1993. Certain terms and conditions, however, had been altered
therein with mutual consent.

The project was envisaged to be completed in three phases.
Considerable progress was made in the matter of construction of work in
Phase I. The plots where the said work was being carried out fell under
the local administration of Gopalpur Arjunpur Gram Panchayat. The
building plan for Phase I was sanctioned by the said Gram Panchayat in
September, 1991 in terms whereof 11 blocks of houses could be
constructed. The said area, however, became a municipality in terms of
the West Bengal Municipal Act, 1932 known as Rajarhat Gopalpur
Municipality. West Bengal Municipality Act, 1932, however, was repealed
and replaced by West Bengal Municipal Act, 1993.

It is not in dispute that pursuant to or in furtherance of the
said agreement Sumangal entered into negotiations with the owners of the
agricultural lands for sale thereof wherefor sale deeds in respect of
2.32 acres of land were executed by the owners in favour of AWHO.
Sumangal received the amount for consideration from AWHO paid to the
owners upon furnishing a Bank guarantee as also subject to the condition
that it will get the said land converted into Bastu.

Lands measuring about 13 acres had already been converted into
Bastu. On or about 8.12.1994, an application was made by AWHO for
modifications or revisions in the Master Plan wherefor a revised Master
Plan was submitted for approval of the Municipality stating:

“Tel: 3010820 Army Welfare Housing Organisation
South Hutments, Kashmir House,
Rajaji Marg, New Delhi-110011

B/03020/CAL-II/AWHO 8 Dec 94
The Chairman,
Rajarhat Gopalpur Municipality


Dear Sir,

1. This is to bring to your kind notice that our
organization has undertaken the construction of
“Own your own House” housing project for the
benefit of our Defence Personnel at no Profit no
Loss basis. We have engaged M/s Dulal Mukherjee
& Associates as consulting Architect for the

2. As per demand/requirements for the housing for
Army personnel, our Architect made a Master Plan
of the project and also plans for 04 types of
Dwelling Units (05 Storyed) which were approved
by the Gram Panchayat vide Sanction No.181/91
dated 18 Sep. 91.

3. In this connection we would like to mention that
due to site constraints and also to meet the
demand for housing among Army personnel, minor
Modifications/Revisions have been made to the
Master Plan and also to the Individual Dwelling
Units which were sanctioned earlier.

4. We are submitting herewith the revised Master
Plan and also individual Plan for Dwelling Units
(Additions and Alterations) for your approval.
We therefore make an appeal to your goodself to
kindly give special consideration to our plan
and approve the same at the earliest.

Yours faithfully,

(Raghu Nandan)
Brig (Retd)
For Managing Director”

Such permission was granted only on 9.3.1995.

According to Sumangal, despite the fact that no building plan was
filed or sanctioned for Phase II and Phase III but as per instruction of
AWHO it proceeded with the construction of Phase II. Such an
application was filed for the first time on 19.5.1995. It stands
admitted that the proposed height of the towers was more than the
permissible one.

The municipal authorities vide its letter dated 23.5.1995 directed
stoppage of work in six/seven blocks where allegedly unauthorized
construction was being carried out stating:

“We came to learn that some 8 blocks of 5
storied buildings were approved by erstwhile
panchayet before the origination of the above
municipality. After the birth on 13.01.94 as
per norms of W.B.M. Act ’93 and Calcutta
Gazette, new plans if any, or construction job
if any, has to be approved of by this Municipal

We learnt some additional 6/7 blocks are being
constructed at your VIP project for which no
plan was submitted to the Engineering Division
of this office for approval. This is a gross
violation of W.B.M. Act ’93 and ’79 T & C
Development Planning Act.

It is further learnt that the 7/8 blocks
constructed by you on the basis of the plan
sanctioned by erstwhile panchayet has also been
severely deviated from actuality – which is also
punishable under the law.

We strongly believe that an esteemed
organization like you, will not indulge in such
illegal activities and refrain from all such
unapproved/unauthorized works.”

Sumangal thereafter sought advice of AWHO by a letter dated 24th
May, 1995 pointing out therein that if any construction activity is
carried out despite objections of Local Authority, persons involved
would be liable for punishment both under criminal as well as civil law.
It reiterated the said stand by a letter dated 25th May, 1995 drawing
AWHO’s attention to the provisions of Sections 204, 214 and 440 of the
West Bengal Municipal Act, 1993 and requesting it for its response also
to its earlier letter dated 24th May, 1995. Sumangal did not receive any
reply thereto and hence by its letter dated 27th May, 1995 stated:

“If clear out instructions are not received from you
by 29th May, we shall be compelled to demobilize.
Please advise urgently. We shall be constrained to
consider your silence as your agreement to our

The engineers of municipality visited the project site a number of
times but the sanctioned plan had allegedly not been produced. In the
aforementioned situation, the Chairman of the Municipality issued a
letter to the Project Manager, AWHO on 21.7.1995 stating:
“Dear Sir,

Our engineers have visited your project site
number of times and discussed with your
engineers about the drawing, design and other
infrastructurals projects placed before them.
The undersigned also took the opportunity to
meet with you and talk to your M/s Dulal
Mukherjee & Associates where we have inter
changed our views and the norms of Municipal
Rules & Regulations.

Our engineer has been asking you for the
erstwhile panchayet recommended plan by which
you have constructed already 8-9 blocks. All
the time he has come back without result.

You would appreciate that without a plan already
approved by erstwhile panchayet, we can not
check/judge the present position or the
viability of your project. Hence the question
of your infrastructural development like
construction of Road, Drains etc. does not arise
at all at the moment.

We would request you fervently to submit the
panchayet recommended plan on the basis of which
we will proceed further.

Thanking you”

(Emphasis supplied)

In the meantime the architect and the project engineer of AWHO met
the Chairman of the Municipality and it was allegedly agreed that the
work need not be stopped in the buildings for which the plans have
already been approved. Sumangal, therefore, was advised not to stop the
work for which plans have already been approved. (See letter of AWHO to
Sumangal dated 27.5.1995).

AWHO by their letters dated 25th July, 1995 and 11th August, 1995
advised Sumangal to reorganize and recommence its work by employing
sufficient strength of labour and bringing the required material to site
by 11th September, 1995 to ensure that the progress of the work is
substantially increased. It was threatened that if suitable action is
not taken in this behalf by Sumangal AWHO may be compelled to take
action under clause 129(e) of the Contract.

It appears that Sumangal replied thereto by its letter dated 14th
August, 1995. In its response to the said letter dated 14th August,
1995, AWHO drew the attention of Sumangal to the fact that there are
certain types of work which would not come within the purview of the
stop work notice by the Municipality and as such the same could have
been carried out. It was stated:

“…You are again advised to reorganise your
work by employing sufficient labour and bringing
in the required material to ensure that the
progress of the work is substantially increased
by 15 Sep 95 failing which AWHO may be compelled
to take action under clause 129 (e) on page 176
of Contract Agreement. This is without
prejudice to any other right or remedy which
shall have accrued or shall accrue to the

Some correspondences thereafter passed between the parties and by
its letter dated 10th October, 1995 AWHO ultimately cancelled the
contract with effect from 17th October, 1995.

A civil suit was filed by Sumangal before the 1st Assistant
District Judge at Barasat being suit No. 867 of 1995 praying for a
declaration that the contract was void. Certain consequential reliefs
were also prayed therein in relation to the said termination of

An application purported to be under Section 20 of the Arbitration
Act, 1940 was filed by the AWHO before the Delhi High Court which was
marked as Suit No. 2442 of 1995 for appointment of an arbitrator in
terms of the arbitration agreement contained in Clause 136 of the
general terms and conditions of the contract.

In the said civil suit Sumangal prayed for an order of injunction
which was refused whereagainst an appeal was preferred in the High Court
of Calcutta and by reason of an interim order dated 28.3.1996 the
parties were directed to maintain status quo. A SLP was filed by AWHO
against the said order.

This Court in the said S.L.P., however, without going into the
correctness or otherwise of the interim order dated 28.3.1996 of the
High Court passed the following order:

“Leave granted.

This appeal calls in question the order of
the High Court of Calcutta dated 28.3.1996.

In view of the developments which have
taken place in this Court, it is not necessary
to refer to the detailed facts of the case.
Admittedly, disputes and differences have arisen
between the parties and those are pending
adjudication in the Court of the First
Assistant District Judge, Barasat (Title Suit
No.867 of 1995) and in the High Court of Delhi
(Suit No.2442 of 1995). It is agreed to by
learned counsel for the parties that those
disputes and differences be referred for
adjudication to an arbitrator. With consent of
the parties, we refer the disputes arising out
of the two suits noticed above to Shri H.R.
Khanna, Former Judge of this Court, who shall
enter upon the reference and make his Award
within the statutory period. The learned
Arbitrator shall fix his own fee and the manner
of its payment. The parties shall be at liberty
to file their claims/counter-claim before the

With the reference of the disputes and
differences between the parties to the learned
Arbitrator, the two suits pending at Barasat and
in the Delhi High Court shall stand withdrawn
from the respective courts where those are
pending. Copy of this order shall be sent to
the concerned courts for due compliance.

The learned Arbitrator shall file the
Award in this Court. It is directed that no
other court shall interdict the arbitration

The appeal is disposed of accordingly. No

Even before filing the statements of claims and counter-claims;
the parties jointly requested the learned arbitrator to pass an interim
award as regard the ownership of the lands as to whether AWHO by reason
of the purported deeds of sale became the absolute owner of the property
comprising 14.17 acres of land wherefor the following issues were raised
by Sumangal:

“a) Whether or not AWHO/Party No.2 is the
absolute owner of the suit property
comprising of 14.17 acres of land vide
registered Sale Deeds, mutation and
conversion certificates issued by the
competent authority, in favour of the
petitioner including the properties built
thereon and that the land so acquired
absolutely and for ever by the Party
No.2/AWHO and the property built thereon
is not a returnable security, which
property pursuant to the cancellation of
contract is neither refundable nor can be
same be reconveyed to Party No.1 and/or
land sellers?

b) Whether Party No.2 and/or Party No.1
and/or the land sellers have a first
and paramount charge on the said land
sold/transferred to the Party No.2
absolutely and forever, particulars
whereof are given the Annexures1
(Colly), annexed hereto, and that
whether after sale of the said plots of
land by the land sellers, to the Party
No.2 vide registered sale deed based
upon an understanding as spelled out in
the developer’s agreement and power of
attorney and affidavits etc. executed
by and between the land seller and
Party No.1, which as is alleged by
Party No.1 have since become void and
inoperative, and therefore, is the
Party No.1 entitled for the payment of
a sum of Rs.38 lakhs 47 thousand as
pleaded in paragrtaph 56 of its Title
Suit No.867 of 1995?

c) Whether the Party No.1 has a first and
paramount charge on the construction,
buildings and all other materials that
are lying at and within the land
transferred/sold by the land sellers
through Party No.1 to the Party No.2
for it’s claim on the basis of item
rate contract as alleged claimed for
the alleged loss and damages suffered
by the Party No.1 as stated in it’s
Title Suit No.876 of 1995?

d) Whether in alternative a decree for
specific performance of the agreement
referred to in paragraph 69 of the
aforesaid title suit above and
reconveyance of the lands mentioned in
Schedule G to the Suit in favour of the
Party No.1 or the land seller can be
decreed either in favour of the Party
No.1 and/the land sellers who had sold
absolutely and for ever their plots of
land vide registered sale deeds which
were subsequently mutated and its land
use changed from agricultural to
residential by the competent authority
under the West Bengal Land Reform Act
in favour of the Party No.2, but are
now claiming that the Deed of Sale was
in reality a document or security?

e) Whether or not the keys of the godown
at contract site which the Party No.1
is illegally holding in it’s custody be
given back to Party No.2 to utilize the
stores contained therein before
commencing the work.

f) Any other relief in the circumstances of
the case may also be passed/awarded.”

The learned arbitrator, however, was not inclined to accede to the
said request. Thereafter, an application was filed by AWHO before the
learned Arbitrator to the effect that it may be allowed to commence and
complete uninterrupted construction work as well as development of the
housing project at the risk of Sumangal. Sumangal filed a reply to the
said application.

An order was passed on the said application of AWHO by the learned
arbitrator on 1.11.1997 subject to the following conditions:

(a) The question as to whether such an order can be passed at the
risk of Sumangal can be raised only at the time of final award.

(b) The development work may be confined to 14.17 acres of land which
was the subject matter of sale and which it was stated had been
demarcated at the site.

(c) All those works could be subject to the ultimate decision of the

(d) AWHO shall not give final possession of any of those flats or part
of the land to any one including the person described as

(e) The said order was without prejudice to any of the contentions
which may be raised by the parties.

(f) Constructions and development work would be of the same kind and
specifications as were provided in the contract at competitive
rates through an established contractor after inviting tenders

It was further stated therein :

“It is agreed by both the parties that the
contract produce for the construction of 16
towers and such 16 towers already exist on the
site. If any new tower is constructed by party
No. 2 or its contractor, party No. 1 would not
be liable for it.”

A review application was filed before the Arbitrator by Sumangal
wherein several questions including the power of arbitrator to pass an
interim order of injunction were raised but the same was rejected

“It has been vehemently argued that the
Arbitrator has no power to make the kind of
interlocutory order made on November 1, 1997. In
this respect learned counsel for party no.1 has
also emphasized that effected the once the
prayer for interim award has not been granted,
the order dated November 1, 1997 which was in
the nature of an interim award was unwarranted.
I find myself unable to accede to this
contention. So far as that order is concerned,
it was made expressly clear that the said order
would be without prejudice to any of the
contentions which might be raised by the
parties. It was also added that all the works
which party no.2 is being allowed to do would be
subject to the ultimate decision of the case,
the order thus makes it clear that there was no
finality attached to that order and that it
would be subjected to the ultimate decision of
the case. As such the order cannot be deemed to
be an interim award.

Coming to the other contention that the
Arbitrator has no power to make an interlocutory
order dated November 1, 1997. I find that the
work of measurements has been smoothly carried
out and the results of measurements have been
accepted by both the parties. As the
proceedings of arbitration would take
considerable time before the final award is
given, to expedite the execution of the
remaining unfinished work, party no.2 was
allowed to commence and complete the unfinished
work which was the subject matter of the
contract between the parties. In my opinion the
order made on November 1, 1997 was in the
interest of justice and not to let the remaining
work reaming unfinished till the time of the
final award. As the order was made ex debito
justitiae it call for no review or modification.
In any case, it has been made clear that this
order would be subject to the final decision of
the case and without prejudice to any of the
rights of the parties.

Another point made in the application of party
no.1 is that it was working as stated in the
order of November 1, 1997 that 16
blocks/buildings existed at site have gone
through the order dated November 1, 1997, and no
where it is stated therein that 16
blocks/buildings exist at the site.

I, therefore, find no ground to review/modify
the order dated November 1, 1997. The
application accordingly stands disposed of”.

The learned Arbitrator, therefore, did not determine the question
as to whether he had jurisdiction to pass an interim order or not.

No Award was not passed by the Arbitrator for a long time although
several extensions had been granted. On or about 26.2.2000 an
application for revocation of the authority of the arbitrator was filed
by Sumangal and by an order dated 11.5.2000 this Court constituted a
board of three arbitrators instead and place of the sole arbitrator.

The award was filed before this Court on 29.4.2002 by the learned
arbitrators whereagainst Sumangal filed an application on or about 8th
July, 2002 under Sections 30 and 33 of the Act.


Before the arbitrators both the parties filed their respective
claims. Claim No. 1 of AWHO related to the title, ownership and
possession of 14.17 acres of land. Claim No. 2 of AWHO related to cost
of completion of balance work at the risk and expense of Sumangal. Both
the claims were allowed by the learned arbitrators.

Claim No. 3 related to compensation for delay in performance of
the contract by Sumangal, whereas claim No. 4 related to damages for
non-completion of work resulting in loss of rentals to allottees of
AWHO. Claim No. 5 related to reimbursement of payments made by AWHO
towards the premium on Sumangal’s all risk insurance policy. Claim No.
6 related to damages for delay in transfer of land. All these claims
were disallowed.

The claim on interest contained in claim No. 7 and claim of costs
of arbitration in claim No. 8 were also allowed.

The claim of Sumangal relating to title of 14.17 acres of land and
claim for an amount of Rs. 11,40,85,000/-, being an alternative claim
was disallowed.

The learned arbitrators in making the award formulated as many as
29 issues which have been answered in the following terms:

“Issue No.1

Since we have found that SSPL had failed
to discharge their obligation in terms of the
Agreement dated August 27, 1993, the issue is
decided against SSPL and in favour of AWHO.

Issue No.2

Since we have found that AWHO were
entitled to terminate the said contract and to
get the balance work executed at the expense and
risk of SSPL, the issue is decided in favour of
AWHO and against SSPL.

Issue No.3

Since we have found that AWHO are the full
owner and in possession of 14.17 acres of land
in dispute and the property built thereon, the
issue is decided in favour of AWHO and against

Issues Nos.4 & 5

Since we are of the view that the sale
deeds executed in favour of AWHO cannot be
regarded as documents by way of security for the
advance taken by SSPL from AWHO and that no
charge was created on the lands in dispute, the
issues are decided in favour of AWHO and against

Issue No.6

Since we have held that the claims made by
AWHO fall within the ambit of the scope of
reference as laid down in the order of the
Hon’ble Supreme Court, the issue is decided in
favour of AWHO and against SSPL.

Issues Nos.7 & 8

No submission was made on behalf of SSPL
with regard to these issues. The issues are
decided against SSPL and in favour of AWHO.

Issues Nos.9 & 10

Since we have found that as per the
agreement between AWHO and DMA, the Architect
was to provide drawings and specifications of
the proposed flats and external services and it
was the duty of SSPL to take follow up action in
the matter of obtaining sanction from the
statutory bodies and it was not the
responsibility of the Architect to obtain
sanction from the statutory bodies including the
Municipality, the issues are decided against
SSPL and in favour of AWHO.

Issues Nos. 11 & 12

Since we have found that the Agreement
dated August 27, 1993 and the preceding Letter
of Intent dated January 4, 1991 and the Draft
Agreement dated December 26, 1991 cannot be said
to have become impossible of performance and
cannot be regarded to have become void on the
ground of frustration, the issues are decided
against SSPL and in favour of AWHO.

Issue No.13

It has been found that the construction in
respect of the units in Phase I was started
after obtaining the sanction for the plans from
the Gram Panchayat and though there were some
deviations and alterations from the sanctioned
plan but the same could be regularized. As
regards the units which were to be constructed
in Phase II it has been found that the said
construction was made without obtaining the
sanction for the plans from the competent
authority but the plans had been submitted for
approval during the course of construction and
the said plans were subsequently approved on
April 23, 1997 and the plans for the whole
project were also revalidated. This issue is
decided accordingly.

Issue No.14

We have found that the deviations and the
alterations in respect of construction in Phase
I were not very material in nature and could be
regularized and were in fact regularized when
the revised plans were sanctioned and
revalidated by the Municipality. This issue is
decided accordingly.

Issue No.15

We have found that payments for the RARs
for the construction work upto August 1992 were
not made since SSPL failed to abide by their
commitment to transfer the balance land by
February 15, 1992 and subsequently on the
transfer of the balance land in august 1993 and
after execution of the Agreement dated August
27, 1993, the payments for the said work were
made. This issue is decided accordingly.

Issue No.16

We have found that SSPL never raised any
objection regarding construction in respect of
works in Phase II on the ground that there were
no sanctioned plans for the same and SSPL
obtained benefit in the matter of release of
payments on the basis of the order placed for
such construction. This issue is decided
against SSPL and in favour of AWHO.

Issue No.17

It has been found that the Municipality
stopped construction work in Phase II but
subsequently the plans for Phase II were
approved by the Municipality on April 23, 1997.
The issue is decided accordingly.

Issue No.18

We have found that AWHO issued the working
drawings for the project to SSPL and the delay
in issuing some of the drawings was not very
material. The issue is decided accordingly.

Issue No.19

No submissions were made by SSPL in
support of this issue. The issue is accordingly
decided against SSPL and in favour of AWHO.

Issues Nos.20 & 22

The alterations in the lay out of the
built up area of Phase I buildings were made by
AWHO in the full knowledge of SSPL and the said
alterations were not material because they were
subsequently revalidated by the Municipality in
sanctioning the revised plans. The issues are
accordingly decided against SSPL and in favour
of AWHO.

Issue No.21

There was no change in the height of the
buildings in respect of Phase I inasmuch as the
height of the blocks in Phase I were not above
the heights as per the sanctioned plans. The
heights of the blocks constructed in Phase II
for which plans had not been approved were in
excess of the height limitations prescribed in
the buildings regulations. No Objection
Certificate has been granted by the Airport
Authorities of India Ltd. and it was open to the
State Government to relax the height limitation.
The issue is accordingly decided against SSPL
and in favour of AWHO.

Issue No.23

We have found that the title to the lands
transferred in favour of AWHO under the various
sale deeds passed in favour of AWHO independent
of the turnkey project and failure of the
turnkey project did not have any bearing on the
transfer of title. The issue is accordingly
decided in favour of AWHO and against SSPL.

Issue No.24

No submissions were made by SSPL with
regard to this issue and the issue is decided
against SSPL.

Issue No.25

We have found that AWHO are entitled to
compensation under claim no.2 towards cost of
completion of the balance work at the risk and
expense of SSPL since SSPL failed to perform
their part of the obligation under the contract.
The issue is decided in favour of AWHO and
against SSPL.

Issue No.26

We have found that the title, ownership
and possession of 14.17 acres of land which was
transferred in favour of AWHO under the various
sale deeds vests exclusively with AWHO and Claim
No.1 made by AWHO has, therefore, been allowed.
The issue is decided in favour of AWHO

Issue No.27

We have found that SSPL are not entitled
to reversion of land. The issue is accordingly
decided against SSPL.

Issue No.28

We have found that SSPL are not entitled
to recover any amount from AWHO. The issue is,
therefore, decided against SSPL.

Issue No.29

Since we have found Issue No.28 against
SSPL and found that SSPL are not entitled to
recover any amount from AWHO, therefore, the
question of their entitlement to recover
interest from AWHO does not arise. The said
issue is decided against SSPL.”

In terms of the aforementioned findings, the learned arbitrators

“We make the Award in the following terms:

1. The claim of SSPL that land admeasuring
14.17 acres and structures thereon
comprising of the 14 Blocks/buildings or
any other construction that maybe done by
AWHO during the pendency of the
arbitration proceedings, vests and is
owned fully, exclusively and absolutely by
SSPL is disallowed.

2. The alternative claim of SSPL for an
amount of Rs.11,40,85,000.00 is

3. Claim No.1 of AWHO in respect of title,
ownership and possession of land
admeasuring 14.17 acres of land located at
Mauza Tighonia and Koikhali, VIP Road, 24
Parganas (North), Calcutta transferred in
their favour by various Vendors/Land
Owners is allowed.

4. Claim No.2 of AWHO for cost of completion
of balance work at the risk and expenses
of SSPL is allowed to the extent of

5. Claim No.3 of AWHO is disallowed.

6. Claim No.4 of AWHO is disallowed.

7. Claim No.5 of AWHO is disallowed.

8. Claim No.6 of AWHO is disallowed.

9. Claim No.7 of AWHO is allowed to the
extent that interest would be payable @ 12
per cent per annum on the amount of
Rs.6,97,00,000.00 awarded under Claim
No.2. Interest shall be payable from the
date of the award till payment is made.

10. Claim No.8 of AWHO regarding costs is
allowed to the extent that SSPL will
reimburse AWHO towards half share of the
arbitrators’ fee, administrative expenses
and the other incidental expenses for the
conduct of the arbitral proceedings. Each
party shall bear the costs and expenses
incurred by it for prosecuting the
arbitral proceedings.”


Mr. K.N. Bhat, the learned senior counsel appearing on behalf of
Sumangal would raise the following contentions:

(i) A bare perusal of the award would show that the learned
arbitrators ignored the terms of the agreement.

(ii) In terms of Clause 130 of the general conditions of
contract, AWHO could maintain a claim as regard excess
amount required for completion of the unfinished work only
if the work was completed before a claim was raised or an
estimate of the cost of completion is certified by the named
architect. Despite the fact that none of the aforementioned
conditions were fulfilled, the award was made allegedly on
the ground that Clause 130 will have no application while
the completion was permitted by an order passed in a
judicial/ arbitral proceedings. Mr. Bhat would contend that
the arbitrators being creature of the agreement were
required to act within the fourcorners thereof and cannot by
reason of an interim order override the basis of the

(iii) Clause 130 of the general conditions of contract would come
into play only when the contract is validly terminated in
terms of clause 129. The termination of contract by AwHO
was on the ground that Sumangal did not resume work in
relation whereto the learned Arbitrators failed to consider
that the question of resumption of work by it did not arise
as the Municipality had banned further construction
activities. Furthermore, the Arbitrators proceeded also on
a wrong premise that Sumangal failed to obtain sanction of
Building Plans from the Municipal Authorities.

(iv) As the plans were not sanctioned at the relevant time by
statutory authorities; Section 56 of the Contract Act was
attracted having regard to the fact that it was commercially
incapable of being performed upon passing of the ban order.

(v) An award ignoring material and relevant documents would be
rendered illegal and bad in law. As in the case the
arbitrators ignored the letter dated 8th December, 1994 of
AWHO for regularization of deviations and thus thereby they
must be deemed to have admitted that deviations were done by
them deliberately to suit their own convenience, and as such
the Arbitrators must be held to have misconducted themselves
and the proceeding.

(vi) Furthermore, being a reasoned award, wrong application of
law would vitiate the award.

(vii) The award of the arbitrators is vitiated in law as an
agreement purported to have been entered into by and between
AWHO and the architect was enforced against Sumangal
although it was not a party thereto.

(viii) The finding of the arbitrator that the frustration was a
self-induced one is not based on any pleadings or materials
on record. In any event collusion between Sumangal and the
municipal authorities was neither pleaded nor proved.

(ix) In any view of the matter the learned arbitrator committed a
legal misconduct insofar as they applied a wrong principle
of law as regard determination of quantum of damages.

In support of the aforementioned contentions, reliance has been
placed by Mr. Bhat on Steel Authority of India Ltd. Vs. J.C. Budharaja,
Government and Mining Contractor [(1999) 8 SCC 122], Shyama Charan
Agarwala & Sons Vs. Union of India [(2002) 6 SCC 201], McGregor on
Damages, 16th edition, pages 1142 and 1143 and Mertens Vs. Home Freeholds
Co. Ltd. and Others [1921] All E.R. Rep. 372.

Mr. Arvind Kumar Tiwari, the learned counsel appearing on behalf
of the appellant, on the other hand, would submit that as the learned
arbitrator passed an interim order with the consent of the parties,
Sumangal at a later stage cannot be permitted to take a different stand.
In view of the interim order passed by one of the learned arbitrators, a
notice inviting tender was issued whereafter contract was awarded to a
third party and, thus, the bid made pursuant thereto could validly be
made the basis of determination of quantum of damages. The plea of
frustration of contract raised by Sumangal has rightly been rejected by
the learned arbitrators as the same was a self-induced one having regard
to the fact that it itself got the ban orders issued by the municipal
authorities. In any event Sumangal in terms of the contract being liable
for obtaining sanction of the building plans, must be held to have
failed to perform its part of contract and consequentially has rightly
been held liable for damages.



A bare perusal of the order of the learned Arbitrator dated 1st
November, 1997 would clearly show that interim award was prayed for by
the parties which would have granted substantial reliefs sought for by
them in relation to the title in respect of 14.17 acres of land. It is
admitted that the parties cooperated with each other in the matter of
measurement of completed and incompleted works in terms of the
Arbitrator’s order dated 12th May, 1997 passed in the arbitration
proceedings, the compliance whereof was recorded in minute of order
dated 19th August, 1997.

The learned arbitrator admittedly was not inclined to pass an
interim award on the requests of the parties; whereafter only on or
about 23rd October, 1997 an application was filed by AWHO stating:

“That the development of the housing project is
carried out by Party No.2 for it’s allottees on
no profit no loss basis which is self financed
by the allottees of Party No.2. Due to breach
of contract committed by the Party No.1,
allottees of Party No.2 have been denied shelter
as well as their life time investments and are
suffering for the want of shelters for
themselves and their families. Substantial time
has already been lost due to non-performance of
Party No.1 and any delay in commencement of the
construction activity will cause immense
financial misery and loss of further time (which
cannot be given back by any one) to the
allottees. In order to obviate the sufferings
of hundreds of allottees who have invested their
hard earned money. Party No.2 therefore prays
to the Hon’ble Arbitrator to grant Party No.2
following relief:”

The prayer therein is as under:

“In the premise, it is most respectfully prayed
that in order to enable Party No.2 to commence
early and unjustified completion of unfinished
work as well as development of the housing
project at the risk of the Party No.1 permission
and liberty may be granted to Party
No.2/applicant to forthwith take such steps to
commence and complete the unfinished works
including all such development work on 14.17
acres of land owned by Party No.2 at VIP Road,
Calcutta as may be fit and appropriate for the
normal functioning of the housing project and
peaceful and safe habitation of the allottees of
the Party No.2/applicant.

Party No.1, it’s Directors, Officers, employees,
agents and/or attorneys be also directed to hand
over the keys of the stores, offices, and
material lying at contract site which keys the
Party No.1 is illegally holding in it’s custody.
The materials lying at site have already been
paid for by Party No.2.

Party No.1, it’s directors, employees, agents
and/or attorneys be directed not to interfere in
any manner in the development and construction
of the unfinished housing project by Party No.2
through such agencies as Party No.2 may deem fit
and proper.”

Sumangal filed a detailed reply thereto.

Sumangal further stated that the AWHO was not the owner of the
property and the real object for such an application was to dispossess

It was further pointed out that such undertaking of the contract
job by a third party would frustrate the present arbitration agreement
as a result whereof further disputes may arise. It was contended:

“10. The adjudication of this application
without a full-fledged examination of the issues
which have been raised by the parties in these
proceedings would render the entire arbitration
proceedings infructuous. It is further stated
that after such directions as prayed for are
given, the Party No.1 will be deprived of the
fruits of any relief which it might obtain on
final resolution of the disputes involved in
this arbitration proceedings.

11. The allegations contained in the petition
are denied (except those which are admitted in
records of proceedings). The purported
cancellation or termination is wrongful. The
question of completing the balance
work/construction at the risk and cost of Party
No.1 does not arise. The basis of the
development of the housing project between Party
No.2 and its allottees are not known and are
neither admitted. It is denied that Party No.1
has committed any breach. The allegation
relating to shelter and/or lifetime investments
or suffering are not admitted and in any event,
cannot override legal rights. It is denied that
time has been lost due to alleged non-

performance of Party No.1. Since the Party No.1
is willing to return all moneys which are due to
the Party No.2, the question of suffering
financial misery of loss cannot arise and the
Party No.2 cannot put the blame on the Party
No.1 in these facts and circumstances.

12. The construction work commenced on 14 blocks
only out of a total ordered 16 blocks over an
area of 6.36 acres approximately. The said
total area of 6.36 acres and the construction
thereon belongs to the Party No.1 and the Party
No.1 is entitled to deal with the same. The
area of 7.81 acres over which no construction
have been made also belongs to the Party No.1
and the Party No.1 is entitled to deal with the

It is, therefore, not correct to contend that the said order was
passed on consent of the parties. For all intent and purport, Sumangal
could not have consented to grant of such a prayer which would virtually
put a final seal over the disputes. We have hereto- before quoted the
purported order dated 1st September, 1997 which ex facie demonstrate that
the arbitrator assumed jurisdiction to pass the said interim order at
the behest of AWHO. Furthermore, as noticed hereinbefore, Sumangal
filed a review application which was also dismissed in the manner
noticed hereinbefore. The said interim order was, thus, not passed with
consent of parties. If the learned arbitrator has no jurisdiction to
pass an interim order, even by consent no such jurisdiction could be
conferred. (See The United Commercial Bank Ltd. vs. Their Workmen, AIR
1951 SC 230 and Hakam Singh vs. M/s Gammon (India) Ltd., AIR 1971 SC


In Hiscox Vs. Outhwaite [1991] 2 Lloyd’s Law Reports 1, it is

“No act of the parties can create in the courts
a jurisdiction which Parliament has said shall
vest, not in the courts, but exclusively in some
other body. Nor again can a party submit to, so
as to make effective, a jurisdiction which does
not exist: which is perhaps another way of
saying the same thing. The argument we are here
rejecting seems to be based on a confusion
between two distinct kinds of jurisdiction: The
Supreme Court may, by statute, lack jurisdiction
to deal with a particular matter – in this case
matters including superannuation claims under
s.8 – but it has jurisdiction to decide whether
or not it has jurisdiction to deal with such
matters. By entering an unconditional
appearance, a litigant submits to the second of
these jurisdictions (which exists), but not to
the first (which does not).”

An arbitrator in a situation of this nature had no jurisdiction to
pass the interim order under the Arbitration Act, 1940 in absence of any
specific agreement in relation thereto. The learned arbitrator by an
interim order could not have placed the parties to a situation which
would travel beyond the subject of disputes and differences referred to
the arbitration. As no claim and counter-claim had been filed before the
arbitrator, the arbitrator was not even aware of the nature of claims of
the parties. He neither found any prima facie case nor balance of
convenience for passing the said interim order. Furthermore, an
arbitrator is bound by the terms of reference.

An arbitral tribunal is not a court of law. Its orders are not
judicial orders. Its functions are not judicial functions. It cannot
exercise its power ex debito justitiae. The jurisdiction of the
arbitrator being confined to the fourcorners of the agreement, he can
only pass such an order which may be subject matter of reference.

In Morgan Stanley Mutual Fund Vs. Kartick Das [(1994) 4 SCC 225]
the jurisdiction of the Consumer Disputes Redressal Forum to pass an
order of injunction came up for consideration. This court having regard
to the fact situation obtaining therein formulated the following

“(1) Whether the prospective investor
could be a ‘consumer’ within the meaning of
Consumer Protection Act, 1986 ?

(2) Whether the appellant company ‘trades’
in shares ?

(3) Does the Consumer Disputes Redressal
Forum have jurisdiction in matters of this kind?

(4) What are the guiding principles in
relating to the grant of an ad interim
injunction in such areas of the functioning of
the capital market and public issues of the
corporate sectors and whether certain ‘venue
restriction clauses’ would require to be evolved
judicially as has been done in cases such as
State of W. B. v. Swapan Kumar Guha and
Sanchaita Investments
((1982) 1 SCC 561 : 1982
SCC (Cri) 283) ?

(5) What is the scope of Section 14 of the

This Court held that a prospective investor like the respondent
therein is not a consumer. The question of the appellant-company
trading in shares does not arise and in that view of the matter the
Consumer Disputes Redressal Forum has no jurisdiction whatsoever to pass
an order of interim injunction.

Having regard to Section 14 of the Consumer Protection Act, it was

“44. A careful reading of the above discloses
that there is no power under the Act to grant
any interim relief of (sic or) even an ad
interim relief. Only a final relief could be
granted. If the jurisdiction of the Forum to
grant relief is confined to the four clauses
mentioned under Section 14, it passes our
comprehension as to how an interim injunction
could ever be granted disregarding even the
balance of convenience.”

In absence of an agreement to the contrary, in terms of the
provisions of Arbitration Act, 1940 an arbitrator can pass only an
interim award or a final award. Such awards are enforceable in law.
The award of an arbitrator whether interim or final are capable of being
made a rule of court, decree prepared and drawn up in terms thereof and
put to execution.

It is well-settled that for the purpose of obtaining an interim
order a party to the arbitration proceeding during pendency of an
arbitral proceeding can only approach a court of law in terms of Section
41(b) of the Arbitration Act,1940 and not otherwise. The said provision
reads thus:

“41. Procedure and powers of Court.- Subject to
the provisions of this Act of rules made
thereunder :

xxx xxx xxx

(b) the Court shall have, for the purpose of,
and in relation to arbitration proceedings, the
same power of making orders in respect of any of
the matters set out in the Second Schedule as it
has for the purpose of, and in relation to any
proceedings before the Court :

Provided that nothing in Cl.(b) shall be taken
to prejudice any power which may be vested in an
arbitrator or umpire for making orders with
respect to any of such matters.”

In the instant case the proviso has no application as the
Arbitrator was not vested with such power.

Jurisdiction of courts in terms of Section 41 of the Act is
enumerated in the Second schedule, rules 1 and 4 whereof are as under:

“1. The preservation, interim custody or sale of
any goods which are the subject-matter of the

4. Interim injunctions or the appointment of a

Even the Court’s jurisdiction under Section 41(b) of the Act is
limited as it is confined to “for the purpose of and in relation to
arbitration proceedings”.

Courts, thus, have also no power to grant injunction ex debito

See Union of India vs. Raman Iron Foundry [(1974) 2 SCC 231] and
M/s H.M. Kamaluddin Ansari and Co. vs. Union of India and Others [(1983)
4 SCC 417].

We may observe that even provision for stay in a suit under
section 10 C.P.C. is not applicable in relation to an arbitration

In Indrajit Sinha vs. B.L. Rathi (AIR 1984 Cal 281), it is stated:

“When Section 32, Arbitration Act, completely
prohibits a Civil Court from deciding the
existence and validity of the arbitration
agreement and Section 41, Arbitration Act lays
down that the Civil Procedure Code will apply
subject to the provisions and rules of the
Arbitration Act, 1940, then Section 10, C.P.C.,
cannot apply on the facts and circumstances of
this case and the question of its applicability
cannot arise.

So far as Court’s inherent jurisdiction under
Section 151, C.P.C. is concerned, I do not think
that on the facts and circumstances of this case
inherent jurisdiction can be exercised to stay
the pending application in view of the fact that
the City Civil Court is incompetent to decide
the issues pending before me in the application
under Sec. 33 of the Act.”

In Debendra Nath Singha and others vs. Dwijendra Nath Singha and
others reported in AIR 1970 Cal 255, the law is stated in the following
terms :

“On a proper construction of Section 41 of the
Arbitration Act and of Section 41(b) in
particular, I am of the opinion, that the Court
has the power and jurisdiction to appoint a
receiver or to make any order of interim
injunction or to make orders in respect of other
matters set out in the Second Schedule in
appropriate cases for the purpose of, and in
relation to arbitration proceedings; but this
power and jurisdiction of the Court cannot be
exercised, if the exercise of any such power
would prejudice any power which might be vested
in an Arbitrator or Umpire for making orders
with respect to any of such matters. I am
further of the opinion that in view of the
provisions contained in Section 41 of the
Arbitration Act, the power and jurisdiction of
the Court to appoint a receiver or to make any
order of interim injunction or any order in
respect of the other matters set out in the
Second Schedule are now governed, controlled and
regulated by the said section, and apart from
the power and jurisdiction conferred by the said
section, the Court has no power and jurisdiction
independently of the provisions contained in the
said Section 41 to appoint a receiver, to make
any order of interim injunction or any order in
respect of the other matters set out in the
Second Schedule.”

It is useful to notice that such a power has been expressly
conferred on the arbitrator in terms of Section 17 of the Arbitration
and Conciliation Act, 1996 which is as under:

“17. Interim measures ordered by arbitral
tribunal.-(1) Unless otherwise agreed by the
parties, the arbitral tribunal may, at the
request of a party, order a party to take any
interim measure of protection as the arbitral
tribunal may consider necessary in respect of
the subject-matter of the dispute.

(2) The arbitral tribunal may require a
party to provide appropriate security in
connection with a measure ordered under sub-
section (1).”

A bare perusal of the aforementioned provisions would clearly show
that even under Section 17 of the 1996 Act the power of the arbitrator
is a limited one. It cannot issue any direction which would go beyond
the reference or the arbitration agreement. Furthermore, an award of
the arbitrator under the 1996 Act is not required to be made a rule of
court; the same is enforceable on its own force. Even under Section 17
of 1996 Act, an interim order must relate to the protection of subject
matter of dispute and the order may be addressed only to a party to the
arbitration. It cannot be addressed to other parties. Even under
Section 17 of the 1996 Act, no power is conferred upon the Arbitral
Tribunal to enforce its order nor does it provide for judicial
enforcement thereof. The said interim order of the learned Arbitrator,
therefore, being coram non judice was wholly without jurisdiction and,
thus, a nullity. (See Kiran Singh and Others Vs. Chaman Paswan and
Others [AIR 1954 SC 340 (6)], Srimathi Kaushalya Devi & Others Vs. Shri
K.L. Bansal [(1969) 1 SCC 59], Union of India Vs. Tarachand Gupta and
Bros. [(1971) 1 SCC 486 at 496], Sushil Kumar Mehta Vs. Gobind Ram Bohra
(Dead) through His Lrs. [(1990) 1 SCC 193] and Smt. Kanak & Anr. Vs.
U.P. Avas Evam Vikas Parishad & Ors. [2003 (7) SCALE 157]).


Before the learned arbitrators a question was raised as regard
applicability of Clauses 129(e) and 130 of the general conditions of
contract which read as follows:


129. The Organization may, without prejudice to
any other right or remedy which shall have
accrued or shall accrue thereafter to the
Organization, cancel the contract in part or
whole in any of the following cases :

If Contractor :-

(a) xxx xxx

(b) xxx xxx

(c) xxx xxx

(d) xxx xxx

(e) In the opinion of the Organisation/Architect
at any time whether before or after the date or
extended date for completion makes defaults in
proceeding with the work with due diligence and
continues in that state after reasonable notice
from the Architect and or Organisation or

(f) xxx xxx

(g) xxx xxx”

“130. Whenever the Organisation exercises his
authority to cancel the contract under clause
129, he may complete the works by any means at
the contractor’s risk and expense provided
always that in event of cost of completion after
alternative arrangements have been finalized by
the Organisation to get the works completed or
estimated cost of completion (as certified by
the Architect) and approved by Organisation
being less than the contract cost, the advantage
shall accrue to the Organisation. If the cost
of completion after the alternative arrangements
have been fianlised by the Organisation to get
the work completed or estimated cost of
completion (as certified by the Architect) and
approved by the Organisation exceeds the money
due to the contractor under this contract, the
contractor shall either pay the excess amount
assessed by the Architect or the same shall be
recovered from the contractor by other means.”

The learned arbitrators refused to enter into the questions as to
whether the AWHO had made out a case for canceling the contract and
invoking the risk and expense clause stating :

“We do not consider it necessary to go into the
question whether clause 130 requires certificate
by the Architect in case completion of the work
is done at the risk and expense as urged by SSPL
or only where the alternative arrangements for
completion of the work have not been fianlised
and estimated cost of completion is to be
considered, as submitted by AWHO. In our
opinion, clause 130 deals with a situation where
AWHO completes or decides to complete the work
on their own and has no application where the
completion of the work is being permitted
under an order passed in a judicial/arbitral
proceeding. The certification by the Architect
is intended as a check against an arbitrary
claim towards cost of completion. Such a check
is not required when the completion of the work
is done in pursuance of an order in a
judicial/arbitral proceeding because the
court/Arbitral Tribunal would examine any such
grievance of the other party. Since in the
present matter AWHO were allowed to complete the
work under the order of the Sole Arbitrator
dated November 1, 1997 which contained
appropriate directions regarding the manner in
which the contract shall be given, the
certification of the Architect contemplated by
clause 130 was not required.”

The approach to the question by the learned arbitrators was wholly

An award made pursuant to an order which has been passed without
jurisdiction necessarily must be held to be a nullity. Refusal on the
part of the learned arbitrator to consider the effect of clause 130 of
the agreement would amount to a legal misconduct. Having regard to the
facts and circumstances of the case, as would be discussed in details
hereinafter, it was incumbent on the part of the Arbitrators to apply
“due diligence” clause contained in clause 129(e), more cautiously.
They were further required to consider as to whether “due diligence”
clause be applied where the alleged violation of contract was only in
relation to a small part thereof. The learned arbitrators were, in law,
bound to consider the relevant provisions of the contract and in
particular those which deal with the rights and liabilities of the

This aspect of the matter has not been taken into consideration by
the learned arbitrators while making the award. Thus, they failed to
take into consideration a relevant fact.

In Steel Authority of India Ltd. (supra), this Court categorically
stated the law thus:

“It was not open to the arbitrator to ignore the
said conditions which are binding on the
contracting parties. By ignoring the same, he
has acted beyond the jurisdiction conferred upon
him. It is settled law that the arbitrator
derives the authority from the contract and if
he acts in manifest disregard of the contract,
the award given by him would be an arbitrary
one. This deliberate departure from the contract
amounts not only to manifest disregard of the
authority or misconduct on his part, but it may
tantamount to mala fide action.”

It was stated”

“Further, the Arbitration Act does not give any
power to the arbitrator to act arbitrarily or
capriciously. His existence depends upon the
agreement and his function is to act within the
limits of the said agreement. In Continental
Construction Co. Ltd. v. State of M.P.
(1988) 3
SCC 82) this Court considered the clauses of the
contract which stipulated that the contractor
had to complete the work in spite of rise in the
prices of materials and also rise in labour
charges at the rates stipulated in the contract.

It is to be reiterated that to find out
whether the arbitrator has travelled
beyond his jurisdiction and acted beyond
the terms of the agreement between the
parties, the agreement is required to be
looked into. It is true that
interpretation of a particular condition
in the agreement would be within the
jurisdiction of the arbitrator. However,
in cases where there is no question of
interpretation of any term of the
contract, but of solely reading the same
as it is and still the arbitrator ignores
it and awards the amount despite the
prohibition in the agreement, the award
would be arbitrary, capricious and without
jurisdiction. Whether the arbitrator has
acted beyond the terms of the contract or
has travelled beyond his jurisdiction
would depend upon facts, which however
would be jurisdictional facts, and are
required to be gone into by the court. The
arbitrator may have jurisdiction to
entertain claim and yet he may not have
jurisdiction to pass award for particular
items in view of the prohibition contained
in the contract and, in such cases, it
would be a jurisdictional error. For this
limited purpose reference to the terms of
the contract is a must.

(Emphasis Supplied)

In Shyama Charan Agarwala (supra) this Court referred to the said

A Bench of this Court recently in Bharat Coking Coal Ltd. Vs. M/s.
Annapurna Construction [2003 (7) SCALE 20] upon referring to a large
number of decisions stated:

“The question is as to whether the claim of the
contractor is d’hors the terms or not was a
matter which fell for consideration before the
arbitrator. He was bound to consider the same.
The jurisdiction of the arbitrator in such a
matter must be held to be confined to the four-
corners of the contract. He could not have
ignored an important clause in the agreement;
although it may be open to the arbitrator to
arrive at a finding on the materials on records
that the claimant’s claim for additional work
was otherwise justified.”

As regard the duty of the arbitrator to take into consideration
the relevant provisions contained in the agreement, it was observed:

“So far as these items are concerned, in
our opinion, the learned sole arbitrator should
have taken into consideration the relevant
provisions contained in the agreement as also
the correspondences passed between the parties.
The question as to whether the work could not be
completed within the period of four months or
the extension was sought for on one condition or
the other was justifiable or not, which are
relevant facts and were required to be taken
into consideration by the arbitrator.

It is now well settled that the Arbitrator
cannot act arbitrarily, irrationally,
capriciously or independent of the contract.”

This Court further opined:

“There lies a clear distinction between an
error within the jurisdiction and error in
excess of jurisdiction. Thus, the role of the
arbitrator is to arbitrate within the terms of
the contract. He has no power apart from what
the parties have given him under the contract.
If he has travelled beyond the contract, he
would be acting without jurisdiction, whereas if
he has remained inside the parameter of the
contract, his award cannot be questioned on the
ground that it contains an error apparent on the
face of the records.”

Referring to paragraph 577 of Halsbury’s Laws of England, 4th
edition, Commercial Arbitration by Mustill and Boyd at page 598, Alopi
Parshad & Sons Ltd. Vs. Union of India [(1960) 2 SCR 793], Heyman Vs.
Darwin [1942 (1) All ER 327], Associated Engineering Vs. Govt. of A.P.
[(1991) 4 SCC 93], State of Orissa Vs. Dandasi Sahu [(1988) 4 SCC 12],
K.P. Poulose Vs. State of Kerala [(1975) 2 SCC 236], K.V. George Vs. The
Secretary to Government, Water and Power Dept, Tri-vendrum [(1989) 4 SCC
595], Satish Kumar v. Surinder Kumar [AIR 1970 SC 833], Union of India
vs. Jain Associates and Another
[(1994) 4 SCC 665], Sikkim Subba
Associates Vs. State of Sikkim [(2001) 5 SCC 629], Maharashtra State
Electricity Board Vs. Sterilite Industries (India) and Another [(2001) 8
SCC 482], W.B. State Warehousing Corporation and Another Vs. Sushil
Kumar Kayan and Others [(2002) 5 SCC 679], Bharat Coking Coal Ltd. Vs.
L.K. Ahuja & Co. [(2001) 4 SCC 86] and Ispat Engineering & Foundry
Works, B.S. City, Bokaro vs. Steel Authority of India Ltd., B.S. City,
[(2001) 6 SCC 347] this Court observed:

“However, as noticed hereinbefore, this
case stands on a different footing, namely, that
the arbitrator while passing the award in
relation to some items failed and/or neglected
to take into consideration the relevant clauses
of the contract, nor did he take into
consideration the relevant materials for the
purpose of arriving at a correct (sic finding
of) fact. Such an order would amount to
misdirection in law.”

Before the learned arbitrators a question arose as to whether
certification of architect as regard estimated cost of completion was a
condition precedent for determination of the quantum of damages.
Construction of clauses 129 and 130 having regard to the fact situation
obtaining herein was mandatorily required to be considered by the
learned arbitrators. They could not have been simply ignored the same
on the premise that an interim order has been passed by the arbitrator.
An arbitrator cannot be equated with a court of law. Whereas court has
an inherent power; an arbitrator does not have. It is a tribunal of
limited jurisdiction. Its jurisdiction is circumscribed by the terms
and reference. An arbitrator can act only within the fourcorners of the
agreement and not beyond thereto.

Yet again this Court in Union of India Vs. M/s. V. Pundarikakshudu
and Sons and Anr.
[2003 (7) SCALE 323] dealt in details about an award
which was found to be inconsistent, observing:

“The question as to whether one party or the
other was responsible for delay in causing
completion of the contract job, thus, squarely
fell for consideration before the arbitrator.
The arbitrator could not have arrived at a
finding that both committed breaches of the
terms of contract which was ex facie
unsustainable being wholly inconsistent. Clause
54 of the contract could be invoked only when
the first respondent committed breach of the
terms of the contract. An action in terms
thereof could be taken recourse to in its
entirety or not at all. If one part of the award
is inconsistent with the other and furthermore
if in determining the disputes between the
parties the arbitrator failed to take into
consideration the relevant facts or based his
decision on irrelevant factors not germane
therefor; the arbitrator must be held to have
committed a legal misconduct.”

This Court made a distinction between an award passed within
jurisdiction and an award without jurisdiction stating:

“In this case the District Judge as also the
High Court of Madras clearly held that the award
cannot be sustained having regard to the
inherent inconsistency contained therein. The
arbitrator, as has been correctly held by the
District Judge and the High Court, committed a
legal misconduct in arriving at an inconsistent
finding as regard breach of the contract on the
part of one party or the other. Once the
arbitrator had granted damages to the first
respondent which could be granted only on a
finding that the appellant had committed breach
of the terms of contract and, thus, was
responsible therefor, any finding contrary
thereto and inconsistent therewith while
awarding any sum in favour of the appellant
would be wholly unsustainable being self

This Court cannot sit in appeal over the award of the Arbitrator
but can certainly interfere when the award suffers from non-application
of mind or when relevant fact is ignored or irrelevant fact not germane
for deciding the dispute is taken into consideration.

Where an order has been passed without jurisdiction, the
principles of estoppel, waiver and acquiescence will have no
application. There is no estoppel against statute.

The award, therefore, suffers from legal misconduct on the part of
the arbitrators.


An architect plays an important role in execution of a building

In Hudson’s Building and Engineering Contracts at page 243, it is

“An architect is a person who professes skill in
the art of designing buildings to meet his
client’s need, in the organization of the
contractual arrangements for their construction,
and in the supervision of work and contractual
administration until final completion. So a
major part of an architect’s activities will be
concerned with the preparation of contracts, the
obtaining and recommending for acceptance of
estimates from builders, the selection of
specialist contractors, the inspection of work
carried out, the solution of difficulties
encountered during the course of erecting the
building, condemning and dealing with defective
work, the issue of certificates under the terms
of the contract and advising or ruling on
disputes between the owner and the contractor.
Thus it will be seen that although it is the
primary and vital function of the architect to
create new ideas of amenity and design and to
set down those ideas on a drawing-board, his
duties extend far into other fields of technical
knowledge and business management. On the other
hand, while he will remain primarily responsible
to the owner for all matters of design, modern
techniques of construction and specialized
building products and processes in fact demand
expertise and skill for which he will inevitably
not always be personally qualified. The
employment of outside consultants or the less
satisfactory (from the legal point of view if
the employer’s interest is to be properly
protected) device of delegating important design
functions to specialist and sub-contractors and
suppliers, are therefore a frequent and
inevitable accompaniment of many major building
projects but, as will be seen, the architect is
the “captain of the ship” and will be the person
to whom the owner will normally look if a design
failure occurs, though in some, but not all,
cases he will adequately discharge his own
overall responsibility if he exercises due
professional care in referring matters outside
his own expertise to a consultant or specialist
supplier or contractor, particularly if these
latter are engaged on behalf of the owner and
not by the architect himself.”

An Architect has, thus, various roles to play including
independently ruling on disputes between the owner and the contractor.
In R. Vs. Architects’ Registration Tribunal, ex. P. Jaggar [1945]
2 All ER 131, it is stated:

“An architect is one who possesses, with due
regard to aesthetic as well as practical
consideration, adequate skill and knowledge to
enable him (i) to originate, (ii) to design and
plan, (iii) to arrange for and supervise the
erection of such buildings or other works
calling for skill in design and planning as he
might in the course of his business reasonably
be asked to carry out or in respect of which he
offers his services as a specialist.”

An architect has a great role to play in making an estimate. He
is expected to neither under-estimate nor can over-estimate value of the
works. He is bound by his conduct to the owner. He can be sued for his
negligence. For his misconduct, fees payable to him may be forfeited.
He may incur other liabilities not only under the contract but also
under statute.

Clause 130 of the contract casts a burden upon an architect to
estimate the damages when a risk and cost clause is invoked against the
contractor. It is possible to hold that the invocation of arbitration
clause would be subject to exercise of the jurisdiction by the architect
as a demand has to be made upon the contractor depending on such
estimate made by the architect.

In a given case having regard to the reasonableness of the
estimated amount a contractor may pay the same or challenge the same
either by an arbitrator or by a court of law. A dispute may fall for
adjudication by an arbitrator or by a court of law only in the event a
contractor refuses to accept such estimate.

In G.T. Gajria’s Law Relating to Building and Engineering
Contracts in India, Fourth Edition at page 563, it is stated:

“In a contract, where there is certificate
clause which is a condition precedent to payment
and an arbitration clause of some third person
other than the architect, the builder cannot
recover without the certificate, and neither the
arbitrator nor the court (apart always from some
misconduct of the architect), has jurisdiction
to consider any matters. In respect of which
the certificate of the architect by the terms of
the contract is made a condition precedent.”

An architect sometimes is appointed as an arbitrator and no
payment can be made except on his certificate and sometimes his position
is that of a person whose certificate is held to be a condition
precedent for invoking the arbitration clause [See Bristol Corporation
v. John Aird & Co. (1911-13) All E.R. Rep. 1076, Hickman and Co. v.
Roberts (1911-13) All E.R. Rep. 1485 and South India Rly. Co. Ltd. v.
S.M. Bhashyam Naidu, AIR 1935 Mad. 356].

These decisions were considered by a Division Bench of the Madhya
Pradesh High Court in Heavy Electricals (India) Ltd. Bhopal vs. Pannalal
Devchand Malviya [AIR 1973 MP 7].

In this view of the matter, we are of the opinion that the
arbitrator could not have ignored the role of the architect in terms of
clause 130 of the agreement only on the ground that AWHO had been
permitted to raise construction, pursuant to or in furtherance of an
interim order. Non-consideration of the said clause in proper
perspective by the Arbitrator would amount to a legal misconduct on
their part.


M/s. Dulal Mukherjee & Associates had been the architect of
Sumangal. By reason of the agreement, however, he became an architect
of the employer. It was in the aforementioned situation, the following
was agreed between the parties and the same was recorded in the contract
agreement as under:

“26. Company informed that they have negotiated
with M/s Dulal Mukherjee & Associates, 28-B,
Shakespeare Sarani, Calcutta as Architects for
providing all Architectural Services for this
turn key project. As per the understanding of
the Company with the Architect, the Company has
to pay to the Architect at the firm rate of
Rs.6/- per sq. ft. of built-up area excluding
stilt area for the turn key project. The stilt
area is not to be taken into account while
calculating the amount of fee payable to the
Architect. Architect fee for all internal
services, development of land, all external
services and stilt area is deemed to be included
in the rates of Rs.6.00 per sq. ft. for built up

27. It is hereby mutually agreed and accepted
that the services of the Architect M/s Dulal
Mukherjee & Associates, with immediate effect
shall be controlled by the Organisation and the
payments due to the Architects will be made by
the Organisation direct. For making this
payment an amount calculated at Rs.6.00 per sq.
ft. of built up area as per para 16(d) above
shall not be released by the Organisation to the
Company. The payments due to the Architect for
his architectural services shall be released by
the Organisation in terms of separate agreement
entered by the Organisation with M/s Dulal
Mukherjee & Associates, the Architects. For the
Architectural Services rendered by the Architect
upto the signing of this agreement, the Company
is fully responsible for any omissions and
commissions. For all architectural services
after the signing of this agreement, the
Organisation will take the responsibility. The
Company has paid a sum of Rs.5.00 lacs as adhoc
advance to the Architect. This amount shall be
reimbursed by the Organisation to the Company
and shall be adjusted against the total amount
payable to the Architects by the Organisation.”

Architectural services have not been defined in the agreement.
However, in a letter dated 12.6.1991 issued by AWHO to M/s. Dulal
Mukherjee & Associates it was mentioned that obtaining and getting
preparation of municipal drawings and obtaining sanctions was the
architect’s responsibility, stating:

“1. Please refer to your letter of 04 Jun 91
following the detailed discussions on the
project held on 03 & 04 Jun 91 at this HQ.

2. As per understanding arrived at between AWHO
and M/s. Sumangal Services Pvt. Ltd. your
employment and payment will be controlled by
AWHO. Please note that the rate of Rs.6/- per
sqft. as agreed between you and M/s. Sumangal
Services Pvt. Ltd. remain operative for
Architectural services including supervision.

3. For the release of payment the amount of Rs.
5 lacs that is already been paid by M/s.
Sumangal Services Pvt. Ltd. to you as on date
will also be taken into account. Recoveries @
Rs. 6/- per sq. ft. will be considered as
overall payment and will be recovered from M/s.
Sumangal Services Pvt. Ltd. during execution of
project and paid to you on time to time through
your bills.

4. It is also understood that prior to issue of
this letter following works towards the project
has already been undertaken by you.

a) Preparation of conceptual plan.

b) Interaction with local sanctioning

c) Preparation of Municipal drawings and
obtaining sanction.

5. Based on the discussions between AWHO, M/s.
Sumangal Services Pvt. Ltd. and you held in
Delhi on 03 & 04 Jun 91 it is decided that till
Project Manager and staff has been posted, you
will monitor the progress on behalf of AWHO.
You will also forward a weekly report on the

6. The contract documents between you and AWHO
is under drafting and would come in effect when

7. Please acknowledge.”

Despite the fact, by reason of the contract agreement the services
of the architect were placed solely at the disposal of AWHO, it
purported to have entered into another agreement wherein Sumangal was
not a party on or about 24th February, 1992 wherein the responsibility of
the architect was defined as under:

“12. Architects Responsibilities. Except to the
extent otherwise stipulated in this agreement,
the responsibility and services of the Architect
shall include the responsibilities and
obligations of Architects as laid down by the
Indian Institute of Architects (except net
liability and net schedule of payments) and will
particularly include the following obligations
of the Architect :-

(e) Preparation of drawings for
submission to civil agencies excluding obtaining
sanctions which will be done by
builder/contractor but should guide the
builder/contractor but should guide the builder/
contractor in obtaining the same.”

Legally the said agreement was not binding on Sumangal as it was
not a party thereto.

Para 17 of the agreement provides for stages for release of
payments which reads thus:

		         "Stage			          Rate per sq.
                                             ft.of plinth 

Sanction of plans by Zila 
Parishad/Gram Panchayat
On registration of converted 
De-watering land and clearance 
of hyaclnth
Survey and soil test
Filling of earth to raise the 
level to VIP Road
Alongwith the progress of 
building construction 


It does not appear to be the case of the AWHO that there is a
contractual obligation on the part of Sumangal to get the plan
sanctioned. In any event, such a contractual obligation for the purpose
of attracting the penal clauses must appear from the contract itself and
not from any other document.

The learned arbitrators in their award did not point out any
specific clause in terms whereof it was for Sumangal to get the plan
sanctioned. It merely relying or on the basis of a letter of Sumangal
made it partially liable therefor.

No document exists to show that Sumangal had any legal liability
to get the Municipal plan sanctioned.

Section 204 of the West Bengal Municipal Act, 1993 prohibits
erection of any building excepting with the previous sanction of the
Board of Councillors. In terms of Section 205 it is for the person who
intends to erect or re-erect a building to submit an application with a
building plan in such form.

The provisions of the West Bengal Municipal Act, 1993 go to show
that it was for AWHO to submit an application for sanction of the
building plan together with requisite documents therefor. Ordinarily,
the duty to pursue sanction of a plan is of the owner or its authorised
representative. Such a job, it is common experience, is done by a
qualified architect or the persons having regard to their duties to
prepare a building plan in terms of the building laws so as to enable
them to make clarifications as and when called upon by the statutory
authorities or in a given case make modifications or alterations
thereof. The building plans prepared by the architects only would be
subject-matter of sanction by the municipal authorities. Furthermore,
from the letter dated 8.12.1994 also it is evident that AWHO prayed for
alterations of the Master Plan and in the said letter it has clearly
been stated that M/s Dulal Mukherjee & Associates had been appointed by
them as consulting architect for the project. From a perusal of the
letter dated 21.7.1995 issued by the Rajarhat Gopalpur Municipality to
Shri Manohar Singh, Project Manager, AWHO, it would appear that the
author thereof had discussed the matter with Shri Manohar Singh as also
with M/s Dulal Mukherjee & Associates and only with them, views were
exchanged as regard the norms of Municipal Rules and Regulations. From
the letter dated 27.5.1995 issued by AWHO to Sumangal, it appears that
Shri Manohar Singh, its Project Manager along with representatives of
M/s Dulal Mukherjee & Associates had a detailed meeting with Chairman,
Rajarhat Gopalpur Municipality wherein it was agreed that the work need
not be stepped for which its plans had already been approved. The
alleged responsibility of Sumangal to get the plan sanctioned has been
raised only in July-August, 1995, i.e. after the dispute between the
parties started.

The municipality made AWHO responsible for coordination and
construction activities. The stop work notice was served upon AWHO.
AWHO in its letter, as noticed hereinbefore, categorically stated that
its representative with the authorised representative of the architect
saw the Chairman in 1995. AWHO and not Sumangal made other
correspondences with the Municipality. If Sumangal was assisting them
in getting the plan passed, it, in law, did not incur any liability
therefor. The findings of the learned arbitrators, therefore, do not
borne out from the records and are perverse.

It will amount to giving of premium to illegality if it be held
that a party can ignore statutory injunction on the specious plea that
the same is minor in nature and maybe validated by the statutory
authorities in future. Neither any party can undertake any construction
activity on the pains of facing criminal charge nor any court of
law/Arbitral Tribunal encourage such violation either directly or

Furthermore, risk and cost clause cannot be invoked on failure of
the party to respond to its self-imposed obligation. Damages are to be
paid for willful breach of the terms or conditions of the contract.
Such a breach must be in relation to an express agreement entered into
by and between the parties. An alleged breach on the part of a builder
cannot be founded on a mere ipse dixit. The learned arbitrators in
their award purported to have held :

“…That SSPL had a role in getting the plans
sanctioned by the competent authority is borne
out by letter of AWHO to SSPL dated October 25.
1995 (Ex.E-45, AWHO, Vol.3, p.356) and the reply
of SSPL dated December 9, 1994 (Ex.E-103, AWHO,
Vol.17, p.54) to the said letter of AWHO . In
the said letter of AWHO dated October 25, 1994,
it was stated :

“7. Sanctioning of building plan and
revised lay out plan. Sanction of
building plan and revised lay out plans
has already been considerably delayed.
This is effecting the progress of the work
also. Though DMA is taking action but the
follow up action as a part of the turnkey
project is to be taken by you. Please
ensure that the sanction is obtained
without further delay.” (AWHO Vol.3,
p.357, para 7)

SSPL in their reply dated December 9, 1994 said

“g) Sanctioning of building plan – You
have been informed during several
discussions in your office in New Delhi
that there had been structural change in
the local authority system affecting the
project area. For some considerable
period vacuum existed in many standard
local govt. functions. However, the new
Municipality authority has recently been
formed. We are following up with the new
authority in respect of the sanctioning
process.” [AWHO, Vol.17, p.56(g)]

The letter dated 25.10.1994 referred to in the award clearly shows
that the architect was asked to take action but allegedly the follow up
action was to be taken by Sumangal only on the ground that the project
was a turnkey one. Sumangal’s letter dated 9.12.1994 merely stated that
there had been structural change in the local authority system affecting
the project area and there had been some vacuum in many standard local
government functions and that they had been following up with the new
authority in respect of the sanctioning process. Presumably in the
aforementioned backdrop, the learned arbitrators observed :

“We are, therefore, unable to hold that the
entire responsibility for obtaining sanction for
the plans from the competent authority had been
transferred from SSPL to AWHO after June 12,
1991 and thereafter AWHO and DMA were
responsible for obtaining the said sanction.”

Thus, merely some role had been attributed to Sumangal in the
matter of getting the plan sanctioned and not a breach of contract
leading to incurring its liability under clause 130 of the agreement.


There cannot be an agreement that somebody would be bound to
obtain a statutory order from the statutory authorities, as thereover,
he would have no control.

In the Law Lexicon, the maxim ‘Ex turpi causa non oritur actio’ is
defined as:

“On a bad (illegal) consideration on action can

As regard the question as to whether such a contract in its
entirety or to some extent would be illegal or not which would give rise
to further question as regard its enforceability, we may notice the
following passage from Immami Appa Rao and Others Vs. Gollapalli
Ramalingamurthi and Ors. [(1962) 3 SCR 739]:

“Reported decisions bearing on this question
show that consideration of this problem often
gives rise to what may be described as a battle
of legal maxims. The appellants emphasised that
the doctrine which is pre-eminently applicable
to the present case is ex dolo malo non oritur
actio or ex turpi cause non oritur actio. In
other words, they contended that the right of
action cannot arise out of fraud or out of
transgression of law; and according to them it
is necessary in such a case that possession
should rest where it lies in pari delicto potior
est conditio possidenties; where each party is
equally in fraud the law favours him who is
actually in possession, or where both parties
are equally guilty the estate will lie where it
falls. On the other hand, respondent 1 argues
that the proper maxim to apply is nemo allegans
suam turpitudinum audiendum est, whoever has
first to plead turpitudinum should fail; that
party fails who first has to allege fraud in
which he participated. In other words, the
principle invoked by respondent 1 is that a man
cannot plead his own fraud. In deciding the
question as to which maxim should govern the
present case it is necessary to recall what Lord
Wright, M. R. observed about these maxims in
Berg v. Sadler and Moore ([1937] 2 K. B. 158,

162). Referring to the maxim ex turpi causa non
oritur actio Lord Wright observed that “this
maxim, though veiled in the dignity of learned
language, is a statement of a principle of great
importance; but like most maxims it is much too
vague and much too general to admit of
application without a careful consideration of
the circumstances and of the various definite
rules which have been laid down by the

In Kuju Collieries Ltd. Vs. Jharkhand Mines Ltd. and Others [AIR
1974 SC 1892: (1974) 2 SCC 533] this Court held that in relation to a
contract which is hit by Section 23 of the Contract Act Section 65 and
Section 70 of the Contract Act shall not apply. Only in a case where a
contract has become void due to subsequent happenings, the advantage
gained by a person should be restored.

The building plans would be sanctioned provided the same are in
accordance with the statutory building rules. If admittedly the plans
as also the constructions were not in terms of rules, question of
getting them sanctioned by a statutory authority would not arise. Such
a contract, it is reiterated, would be illegal. Principle of estoppel
will have not application in relation thereto as that part of the
agreement itself would not be enforceable. In the event, however, the
builder was merely required to take follow-up action in the matter with
the authorities, the contract may be valid but in that event it must not
only be pleaded and proved that there existed an agreement in that
behalf, but also to how and to what extent the builder failed to perform
its part of the contract. The findings of the learned arbitrators are
without any materials and without applying the correct legal principles
and, thus, the same cannot be sustained.

Admittedly, the deviations which were minor ones were regularized
only on 23rd April, 1997. The contract, however, stood terminated on 17th
October, 1995.

Even in the ordinary course, Sumangal could not have carried out
any construction activities in anticipation that such deviations might
be regularized. Whether such deviations would be regularized in respect
of Phase I or whether building plans for Phase II and Phase III would be
sanctioned and if so within what time could only be a matter of
speculation but the same would be irrelevant for determining the
liabilities of the parties which was required to be guided by commercial

The liability to pay damages must arise out of contract and not
otherwise. The award does not specifically say so.


Section 56 of the Indian Contract Act reads thus:

“Agreement to do impossible act:- An agreement
to do an act impossible in itself is void.

Contract to do act afterwards becoming
impossible or unlawful:-A contract to do an act
which, after the contract is made, becomes
impossible, or, by reason of some event which
the promisor could not prevent, unlawful,
becomes void when the act becomes impossible or

Compensation for loss through non-performance of
act known to be impossible or unlawful:-Where
one person has promised to do something which he
knew, or, with reasonable diligence, might have
known, and which the promise did not know, to be
impossible or unlawful, such promisor must make
compensation to such promisee for any loss which
such promisee sustains through the non-
performance of the promise.”

Impossibility to fulfill the contractual obligation may arise in
different fact situations.

Statutory injunction by a statutory authority may be one of such
causes. A building bye-law must be scrupulously followed. Violation of
Section 204 of the West Bengal Municipal Act, 1993 attracts penal
provisions contained in Section 440. It is, therefore, mandatory in
nature. The correspondences between AWHO and the Municipality clearly
show that even infrastructural works were not permitted to be carried
out. Sumangal, therefore, cannot be said to have committed any
illegality in complying with the stop work notice. To what extent it
committed breach of the terms of the contract, assuming that it could
have carried out some job as pointed out by AWHO would depend upon the
commercial viability as a large number of workmen were to be engaged
although it cannot carry out the major construction work, which was a
relevant factor for determining the quantum of damages. Sumangal might
have been partially liable but it cannot be faulted when it refused to
carry out any constructional work in violation of the stop work notice
which would attract the penal provisions of Section 440 of the West
Bengal Municipal Act, 1993.

The learned arbitrators were also bound to take into consideration
this aspect of the matter. They failed to do so and misdirected
themselves in law.

In an interesting article titled “The Principle of Impossibility
in Contract” by H.W.R. Wade published in Law Quarterly Review Volume 56
page 519, it is stated:

“Two points emerge from the argument so far: (I)
There can exist no duty to do an impossible act.
(II) A promise is, normally and primarily, a
promise of performance simply, and not of
damages in the alternative. The effect of
supervening impossibility on an existing duty
can now be determined, and in view of conclusion
(I) the answer is a simple one. It must be that
the impossibility causes the duty to cease to
exist. For a duty either exists or it does not

– that is to say, every duty continues until it
is discharged, and discharge is the only process
known to the law by which a duty once legally
undertaken can be put off the shoulders of the
obligee. Its effect is a complete removal of
the obligation, and discharge by impossibility
of performance is no less perfect than discharge
by the performance of the original promise. In
the words of Professor Corbin already cited,
‘society no longer commands performance’ –
nothing more can be demanded of the promisor.”

In Emden and Gill’s Buildings Contracts and Practice, Seventh
Edition, page 162-163, it is stated that liability to pay damages for
non-performance of an impossibility only arises where the contract is
absolute and unrestricted by any condition expressed or implied. It is
further stated that a difficulty may not in all circumstances amount to
impossibility. But even in that event the terms and conditions relating
to performance of the contract may stand eclipsed.

The transaction was a commercial one. Sumangal could not plead
frustration of contract if it itself had abandoned it. (See Hauman Vs.
Nortje [1914] A.D. 293, at p. 297 and Hoenig Vs. Issacs [1952] 2 All
E.R. 176, at p. 178H).

It is well-settled that a builder renouncing his obligations could
not claim substantial performance.

In Hudson’s Building and Engineering Contracts at page 484, the
law is stated as:

“A further overriding principle to be deduced
from the cases, it is submitted, is that a party
consciously in breach, a fortiori a party
repudiating an obligation or abandoning work,
should not be enabled to abuse the doctrine by
maintaining that position while at the same time
suing for remuneration under the contract. Thus
in South Africa, there is long-standing
authority that substantial performance is not
available where work is abandoned, or the method
of performance is inconsistent with an honest
intention to carry out the work in accordance
with the contract. Sumpter v. Hedges and Ibmac
v. Marshall were clear cases of abandonment.”

Such a case of abandonment was not made out. What was made out
was a case of self-inducement frustration. We repeatedly asked Mr.
Tiwari to show before us any pleading as regard self-induced frustration
on the part of Sumangal. He failed to do so. No material far less any
pleading has also been placed before us to show that there had been
collusion by and between Sumangal and municipal authorities in getting
the work stopped. There exists a presumption as regard the official
transactions having been done in regular course of business. The onus
of proving that plea of frustration was self-induced one is on the party
who alleges that this is the case. (See Joseph Constantine Steamship
Line Ltd. Vs. Imperial Smelting Corporation Ltd. [1942] A.C. 154])

In Treitel’s Law of Contract, Seventh Edition at page 701, it is

“The onus of proving that frustration is self-
induced is on the party who alleges that this is
the case. In Joseph Constantine SS Line v.
Imperial Smelting Corp. Ltd. [(1942) AC 154] a
ship was disabled by an explosion from
performing her obligations under a charter
party. The owners were sued for damages and
pleaded that the explosion frustrated the
charterparty. The charters argued that the
owners must prove that the explosion was not due
to their fault, but the House of Lords rejected
this argument and upheld the defence of
frustration although the cause of the explosion
was never explained. The rule is open to the
objection that the charterer is much less likely
than the owner to be able to show how the
explosion occurred. This reasoning does,
indeed, prevail in one group of cases: a person
to whom goods have been bailed, and who seeks to
rely on their destruction as a ground of
frustration of the contract of bailment, must
show that the destruction was not due to any
breach of his duty as a bailee. But, this
special situation excepted, the rule as to
burden of proof laid down in the Joseph
Constantine case can be defended on the ground
that generally catastrophic events which prevent
performance do occur without the fault of either
party. To impose the burden of disproving fault
on the party relying on frustration is therefore
less likely than the converse rule to lead to
the right result in the majority of cases.”

It is interesting to note that at page 700 of the said treatise,
the learned author states:

“The further question arises whether a contract
can be frustrated by an event brought about by
the negligent act of one of the parties. Lord
Simon has put the case of a prima donna who lost
her voice through carelessly catching cold. He
seemed to incline to the view that she could
plead frustration so long as the incapacity “was
not deliberately induced in order to get out of
the engagement.” This particular result can
perhaps be justified by the difficulty of
foreseeing the effect of conduct on one’s
health. But it is submitted that generally
negligence should exclude frustration: for
example, the plea should have failed in Taylor
vs. Caldwell if the fire had been due to the
negligence of the defendants. In such a case it
would be unjust to make the other party bear the
loss. A negligent omission should likewise
exclude frustration.”

In Cheshire, Fifoot & Furmston’s Law of Contract (14th Edition) at
page 643, the law is stated, thus:

“This rule, that a party cannot claim to be
discharged by a frustrating event for which he
is himself responsible, does not require him to
prove affirmatively that the event occurred
without his fault. The onus of proving that the
frustration was self-induced rests upon the
party raising this allegation. For instance :

On the day before a chartered ship was due
to load her cargo an explosion of such
violence occurred in her auxiliary boiler
that the performance of the charterparty
became impossible. The cause of the
explosion could not be definitely
ascertained, but only one of three
possible reasons would have imputed
negligence to the shipowners.

It was held by the House of Lords that, since
the charterers were unable to prove that the
explosion was caused by the fault of the owners,
the defence of frustration succeeded and the
contract was discharged. It should perhaps be
noted that in many cases a self-induced
frustrating event will be a breach of contract
but this will not necessarily be so. In
Maritime National Fish Ltd. v. Ocean Trawlers
Ltd [(1935) AC 524], the applicants were not
contractually bound to licence the chartered
trawler but could not excuse failure to pay hire
by relying on the absence of a licence.”

Even no case of negligence on the part of Sumangal made out.

The burden of proof in relation to all these pleas, thus, was on
AWHO. It failed to discharge the same.


It is not necessary for us to go into the question of quantum of
damages in details but we may observe that the learned arbitrators
proceeded on a wrong premise even in relation thereto. It took into
consideration the subsequent events. Purported subsequent conduct on
the part of Sumangal became the bed-rock of the findings against it by
the learned arbitrators. The disputes and differences between the
parties were required to be determined as on 10.10.1995. Conduct of the
parties subsequent thereto was wholly irrelevant. Thus, there exists an
error apparent on the face of the award.

Liability to pay damages would indisputably arise only in the
event a breach of contract has taken place. Clause 130 of the general
conditions of the contract could be invoked only in the event of breach
on the part of Sumangal and if AWHO could in law take recourse to Clause
129 of the Contract.

For the purpose of invoking clause 129(d) of the general
conditions of contract, it was incumbent upon the learned arbitrators to
arrive at a specific finding that a breach of the terms of condition has
been committed by Sumangal. Such breach must be in relation to a term
of the contract between the parties.

If a breach has occurred in respect of an agreement, to which
Sumangal is not a party, clause 129 could not have been invoked.

The law relating to damages in this behalf is stated in McGregor
on Damages, 16th edition at paras 1142 and 1143 in the following terms :

“The normal measure of damages is the cost to
the owner of completing the building in a
reasonable manner less the contract price, and
possibly, in addition, the value of the use of
the premises lost by reason of the delay. This
measure of cost of completion less contract
price is laid down by the Court of Appeal in
Mertens v. Home Freeholds Co., (1921) 2 K.B.
526, CA., which must be regarded perforce as the
leading case since it proves to be the only one
dealing with this issue. The defendant
contracted to build a house for the plaintiff
and was to begin work immediately after
possession of the site was given to him. The
defendant worked well for a month, but then
deliberately failed to proceed with due dispatch
in the knowledge that a government embargo on
building without licence was to be imposed. Had
he worked according to contract, the roof could
have been on to the house before the embargo
descended. Two or three years later the
plaintiff completed the work himself, when
building was again permitted but when costs had
risen. It was held that the proper measure of
damages was the cost to the plaintiff of
completion in a reasonable manner at the
earliest moment that he was allowed to proceed
with building, less the amount he would have had
to pay the defendant had the defendant completed
the house as far as the roofing-in at the time
agreed by the terms of the contract. The Court
of Appeal reversed the Divisional Court which
had taken for its basic figure not the cost of
completion but the market value that the
completed building would have had at the
contractual time due for completion. Of this
Lord Sterndale M.R. said :

“They (the Divisional Court) have treated
the contract as if it were one for the
sale of goods and have held that the
measure of damages is the difference
between the market price of the day of
what the plaintiff ought to have had and
what he got. In my humble opinion that is
an entirely wrong way of looking at the
contract. There is no contract to deliver
goods, and there is no market price for a
roofed house.”

Mertens v. Home Freeholds Co.[(1921)2 K.B.
526, C.A.], is also authority for taking the
cost of completion as at the time when it became
once again legal to build, although between
breach and the removal of the government embargo
on building two or three years afterwards costs
had risen substantially. And conversely, as
Younger L.J. pointed out, “if the cost of
building had decreased in that time the damages
would have been correspondingly diminished”.
This rule is however subject to the general
principles of mitigation so that, in the words
of Lord Sterndale,

“the building owner must set to work to
build his house at a reasonable time and
in a reasonable manner, and is not
entitled to delay for several years and
then, if prices have gone up, charge the
defaulting builder with the increased

We may, however, notice that in Clark and Another Vs. Woor [1965]
1 W.L.R. 650 and East Ham Borough Corporation Vs. Bernard Sunley & Sons
Ltd. [1966 AC 406], law almost to the similar effect has been laid down.

In Hudson’s Building and Engineering Contracts at page 1034-35, it
is stated:

“Builders constructed a school with serious
defects in fixing the stone facing. The
contract was in the 1956 RIBA standard form.
Some years after the final certificate, a stone
fell and the owners discovered the defects. The
arbitrator found that the defects could have
been, but in fact were not, discovered or
noticed by the architect during the course of
his normal supervision of the work. At the date
of the breach (which the parties agreed should
for purposes of convenience be treated as the
date of completing the work), the cost of repair
would have been considerably less, due to rising
prices, than it was when the owners finally
discovered the defects. Held, by Melford
Stevenson J., distinguishing Phillips v. Ward
[(1956) 1 W.L.R. 471] that since the owners had
been guilty of no unreasonable delay once they
discovered the defects, they were entitled to
the greater cost of the repairs at the time they
carried them out. Held, by the House of Lords,
affirming the judge, that the parties must have
contemplated that the architect might fail to
notice defective work. The cost of repair at
the date of discovering the breach was “on the
cards” or a “loss liable to result” from the
breach within the test formulated by Asquith
L.J. in the Victoria Laundry case. Per Lord
Upjohn: “where the cost of reinstatement is the
proper measure of damages it necessarily follows
as a matter of common sense that in the ordinary
case the cost must be assessed at the time when
the defect is discovered and put right and it is
not suggested here that the building owner
unreasonably delayed the work of repair after
discovery of the defect…I am at a loss to
understand why the negligent builder should be
able to limit his liability by reason of the
fact that at some earlier stage the architect
failed to notice some defective work…” East
Ham Borough Council v. Bernard Sunley Ltd.

Reference may also be made to illustrations given in Hudson’s
Building and Engineering Contracts at pages 1038-39.

In Emden and Gill’s Buildings Contracts and Practice, Seventh
Edition, at page 267, the law is stated thus :

“The measure of damages for failure by the
contractor to complete a building or engineering
contract will include first, the difference (if
any)between the price of the work as agreed upon
in the contract and the cost the employer is
actually put to in its completion (i), and cost
of completion means cost of the completion of
the contract work itself.


A builder agreed in May, 1916, to
build a house for plaintiff for a lump
sum, complete within a specified time.
After starting the work the builder
intentionally delayed progress for the
purpose of ensuring that the Ministry of
Munitions should refuse a licence for
construction of the house under Defence of
the Realm regulations, and that he would
thereby (as he thought) be released from
the contract. The licence was refused,
and the work had to be entirely suspended
till 1919, when plaintiff completed the
building. – Held: The builder could not
take advantage of a prevention brought
about by his own act, and the proper
measure of damages was what it cost the
plaintiff to complete the house as soon as
the statutory restriction ceased, less any
amount which have been due and payable to
the builder if he had proceeded with due
diligence up to the date when the licence
was refused.

In a leading case, the House of Lords has
held that the proper measure of damages is the
cost of re-instatement, such cost must be
assessed at the time when the defects are
discovered and are put right.”

Sumangal, thus, could have been found liable for drawings if inter
alia it was guilty of one or the other misconducts as referred to


Claim No. 1 related to title of 14.17 acres of land. Sumangal
entered into an agreement on a turn-key basis. The contention of
Sumangal is that the lands were transferred in the name of AWHO by way
of security. This may or may not be so. But, herein we are only
concerned with the question as to whether the award can be set aside or
not. The learned arbitrator took into consideration the respective
contentions of the parties and came to the conclusion that title has, by
reason of the deeds of sale, passed on to AWHO. While arriving at the
said finding, the arbitrator has not applied wrong principle of law.
Sumangal procured land on behalf of AWHO. It for a specific purpose and
with a view to avoid double payment of stamp duty entered into an
arrangement whereby the owners of the agricultural land executed sale
deeds in favour of AWHO. Subject of course to furnishing bank guarantee
Sumangal received consideration. Sumangal stated that by getting the
land transferred in the their name by way of security at a nominal
price, as part of the turn key project, AWHO has gained enormously to
the tune of about 11.40 crores which they are not entitled to retain
lawfully. They, thus, have unjustly enriched themselves. It does not
appear that such a case has been made out before the learned
arbitrators. The plea of unjust enrichment, therefore, cannot be
allowed to be raised at this juncture. Such consideration was passed on
to the owners of the land. Requirements of Section 54 of the Transfer
of Property Act in respect of sale transaction were fully complied with.
Title to the said land, thus, apparently vested in AWHO and has become
absolute its owners. No exception, thus, to that part of the award can
be taken.


However, we would like to clarify that the observations made
hereinbefore were meant for the purpose of demonstrating that the
learned arbitrators failed to apply the correct principles of law but
not for the purpose of determining finally the lis between the parties.
In other words, the questions have been posed and answered for the
limited purpose as to whether the award of the learned arbitrators
suffer from any legal infirmity within the meaning of Sections 30 and 33
of the Arbitration Act and no more.

We, therefore, for the aforementioned reasons, while upholding
Claim No. 1 of the award are of the opinion that the award of the
arbitrations in relation to Claim No. 2 must be set aside.
Consequently, no interest thereupon shall be payable.

The I.A. No. 11 of 2002 is allowed to the aforementioned extent.
No costs.

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