PETITIONER:
TARAPORE & COMPANY
Vs.
RESPONDENT:
COCHIN SHIPYARD LTD. COCHIN & ANR.
DATE OF JUDGMENT06/03/1984
BENCH:
DESAI, D.A.
BENCH:
DESAI, D.A.
REDDY, O. CHINNAPPA (J)
CITATION:
1984 AIR 1072 1984 SCR (3) 118
1984 SCC (2) 680 1984 SCALE (1)411
CITATOR INFO :
RF 1988 SC 325 (5)
R 1988 SC1166 (10)
RF 1989 SC 268 (23)
ACT:
Arbitration Act 1940 (Act X of 1940 ) section 16(1)(c),
30 and 33.
Arbitration- Works Contract-Construction of Building
Dock and Repair Dock-Reference of specific question of law
to arbitrator-Arbitrator framing issue-Parties agreeing to
issue being decided-Award if could be set aside on ground of
error of law on face of award.
Interpretation:
Agreement-Works contract of large magnitude-over-
Simplification of clauses impermissible-Agreement Predicated
upon and agreed fact situation-Situation ceasing to exist-
Agreement to that extent rendered irrelevant and otiose.
Words & Phrases:
`Without prejudice'-Meaning of-`claim arising out of
contract'-`Relating to the contract'-Meaning of-Clause 40
General Conditions of Contract.
HEADNOTE:
The appellant and the respondents entered into a
contract for the construction of Building Dock. Clause 40 of
the General Conditions of Contract entered into between the
parties, provided that "all questions and disputes relating
to the meaning of the Specifications Estimates Instructions,
Designs, Drawing and the quality of the workmanship or
materials used in the work or as to another questions,
claim, right, matter or thing whatsoever in any way arising
out of or relating to the contract or otherwise concerning
the execution whether arising during the progress of the
work or after completion shall be referred to the Sole
Arbitrator etc," During the implementation of the works
contract. disputes arose between the parties in respect of a
claim for compensation on account of the increase in the
cost of imported pile-driving equipment and technical know-
how fees. Correspondence was exchanged between the Appellant
and Respondent No. 1 and the dispute was referred to the
Sole Arbitrator. The point referred were: (1) Whether the
claim of compensation for increase in the cost of imported
pile driving equipment and technical know-how fees would
fall within the purview of the first para of clause 40 of
the General Conditions of Contract; and (2) if it does, the
quantum of compensation, if any, to which the appellant
would be entitled to. The arbitrator entered upon the
reference and after hearing the parties gave his award. The
119
arbitrator held that the appellant was entitled to
compensation for the increase in the cost of imported pile
drawing equipment and technical know-how fees by a sum of
Rs. 99 lakhs which amount shall be payable with interest @
9.1/2% The award was typed on stamp paper of the value of
Rs.150/- The arbitrator forwarded the award to both the
parties.
The appellant moved a petition under sections 14 and 17
of the Arbitration Act, in the Court of the Subordinate
Judge for filing the award and for making it a rule of the
Court, while the respondent moved a petition under sections
30 and 33 for setting aside the award contending that: (1)
the award was insufficiently stamped, and (2) the arbitrator
had exceeded his jurisdiction by misconstruing clause 40.
The Subordinate Judge negatived both the contentions. It was
held that the respondent having submitted the question
whether the dispute raised by the appellant was covered by
the arbitration clause; could not controvert the
jurisdiction of the Arbitrator to decide the dispute; and
the award of the arbitrator was modified in the matter of
interest from 9.1/2 per cent as awarded by the arbitrator to
6 per cent, and the award was made a rule of the Court.
The respondent preferred an appeal to the High Court,
and a Division Bench, agreed with the Subordinate Judge on
the question of insufficiency of stamp. It however held that
the question whether the dispute was arbitrable or not could
not be finally decided by the arbitrator because it was a
matter relating to his jurisdiction, and that the arbitrator
cannot by an erroneous interpretation or construction of the
clause confer jurisdiction on himself and that the court can
go into the question whether the matter in dispute between
the parties was covered by the arbitration clause. It
finally held that even though the arbitration clause was
very wide, the dispute as to compensation for increase in
the cost of imported pile driving equipment and technical
know-how fees could not be covered by the arbitration clause
because under clause 26 every plant, machinery and equipment
had to be provided by the contractor and any rise or
escalation in the price of such equipment or machinery,
cannot be the subject matter of compensation by the
respondent. The appeal was therefore allowed, and the trial
court's order, making the award a rule of the court was set
aside and directed that the award be returned to the
parties.
In the appeal to this Court it was contended on behalf
of the appellant, that though Sec. 16(1)(e) of the
Arbitration Act may permit the court to remit or set aside
the award on the ground that there is an error of law
apparent on the face of it, yet where a specific question of
law has been referred to the arbitrator for decision, the
fact that the decision is erroneous does not make the award
bad on its face so as to permit its being set aside. As a
specific question of law touching upon the jurisdiction of
the arbitrator was speficially referred to the arbitrator
for his decision, the decision of the arbitrator is binding
on the parties and the court cannot proceed to inquire
whether upon a true construction of the arbitration clause,
the dispute referred to the arbitrator for arbitration would
be covered by the arbitration clause so as to clothe the
arbitrator with the jurisdiction to arbitrate upon the
dispute.
On behalf of the respondent, it was contended that the
jurisdiction of the arbitrator cannot be left to the
decision of the arbitrator so as to be binding on
120
the parties and it is always for the court to decide whether
the arbitrator had jurisdiction to decide the dispute, and
that the arbitrator cannot by a misconstruction of the
arbitration agreement clothe himself with or confer upon
himself the jurisdiction to decide the dispute.
Allowing the Appeal;
^
HELD: 1. A specific question of law touching the
jurisdiction of the arbitrator was specifically referred to
the arbitrator and therefore the arbitrator's decision is
binding on the parties and the award cannot be set aside on
the sole ground that there was an error of law apparent on
the face of the award. It is also established that the claim
for compensation made by the contractor which led to the
dispute was covered by the arbitration clause. The quantum
of compensation awarded by the arbitrator was never disputed
nor questioned. [170E-F]
2. A question of law may figure before an arbitrator in
two ways. It may arise as an incidental point while deciding
the main dispute referred to the arbitrator or in a given
case parties may refer a specific question of law to the
arbitrator for his decision. [137G-H]
Russel: Law of Arbitration Twentieth Edition p.22;
Halsbury's Laws of England Vol. 2 Para 623 4th Edition
referred to.
3. Arbitration has been considered a civilised way of
resolving disputes avoiding court proceedings. There is no
reason why the parties should be precluded from referring a
specific question of law to an arbitrator for his decision
and agree to be bound by the same. This approach manifests
faith of parties in the capacity of the tribunal of their
choice to decide even a pure question of law. If they do so,
with eyes wide open, and there is nothing to preclude the
parties from doing so, then there is no reason why the court
should try to impose its view of law superseding the view of
the Tribunal whose decision the parties agreed to abide by.
On Principle it appears distinctly clear that when a
specific question of law is referred to an arbitrator for
his decision including the one touching upon the
jurisdiction of the arbitrator, the decision of the
arbitrator would be binding on both the parties and it would
not be open to any of the two parties to wriggle out of it
by contending that the arbitrator cannot clutch at or confer
jurisdiction upon himself by mis-construing the arbitration
agreement.[138-E-G]
4. If a question of law is specifically referred and it
becomes evident that the parties desired to have a decision
on the specific question from the arbitrator rather than one
from the court, then the court will not interfere with the
award of the arbitrator on the ground that there is an error
or law apparent on the face of the award even if the view of
law taken by the arbitrator does not accord with the view of
the court. [147F]
Kelantan Government v. Duff Development Co. Ltd. 1923
All E.R. 349: Re King and Duveen, [1913] 2 K.B. 32: F.R.
Absalom Ltd. v. Great Western (London) Garden Village
Society Ltd., [1933] All E.R. 616; Durga Prasad Chamria
121
and Anr. v. Sewkishen das Bhattar and Ors: AIR 1949 Privy
Council 334; Seth Thawardas Pherumal v. The Union of India;
[1955] 2 S.C.R. 48; M/s. Alopi Parshad & Sons Ltd. v. The
Union of India, [1960] 2 S.C.R. 783; Champsey Bhara and
Company v. Jivraj Balloo Spinning and Weaving Company Ltd .:
Law Report 50 I.B. 324; Union of India v. A.L. Rallia Ram.,
[1964] 3 S.C.R. 164; M/s.Kapoor Nilokheri., Co-op. Dairy
Farm Society Ltd. v. Union of India and Others., AIR 1973
S.C. 1338; N. Chellappan v. Secretary, Kerala State
Electricity Board & Anr., [1975] 2 S.C.R. 811; Produce
Brokers Co. Ltd. v. Olympia Oil and Cake Co. Ltd., [1914-15]
All E.R. 133; Attorney General For Manitoba v. Kelly and
Others., (1922) H.E.R. 68; Hirji Muulji v. Cheong Yue
Steamship Co. Ltd., [1926] All E.R. 51; Heyman & Anr. v.
Darwins Ltd., [1942] 1 All E.R. 337; Jivarajbhai Ujamshi
Sheth & Ors. v. Chiniamanrao Balaji & Anr., [1954] 5 S.C.R.
480; Dr. S.B. Dutt v. University of Delhi., [1958] S.C.R.
1236; referred to.
5. The expression 'without prejudice' carries a
technical meaning depending upon the context in which it is
used. An action taken without prejudice to one's right
cannot necessarily mean that the entire action can be
ignored by the party taking the same. [148F-G]
In the instant case, in the context in which the
expression 'without prejudice' is used, it would only mean
that the respondent reserved the right to contend before the
arbitrator that the dispute is not covered by the
arbitration clause. It does not appear that what was a
contention that no specific question was specifically
referred to the arbitrator, On a proper reading of the
correspondence, and in the setting in which the term
'without prejudice' is used, it only means that the
respondent reserved to itself the right to contend before
the arbitrator that a dispute raised or the claim made by
the contractor was not covered by the arbitration clause. No
other meaning can be assigned to it. [148D-E]
6. In works contract of such magnitude, and which have
been undertaken by an Indian contractor for the first time
negotiations prior to the finalisation of the contact and
the correspondence leading to the formation of contract
supply the basis on which the contract was finally entered
into. Undoubtedly, if in the final written contract, there
is something contrary to the basic understanding during the
formative stage of the contract, the written contract would
prevail. But if the contract does not indicate to the
contary and the assumptions appeared to be the foundation of
the contract, that aspect cannot be overlooked while
determining what were the obligations undertaken the formal
contract. [151H-152B]
7. Over-simplification of the clauses of the contract
involving works of large magnitude is impermissible. The
whole gamut of discussions, negotiations and correspondence
must be taken into consideration to arrive at a true meaning
of what was agreed to between the parties. [156F]
In the instant case, there is no room for doubt that
the parties agreed that the investment of the contractor
under this head would be Rs. 2 crores and the tendered rates
were predicated upon and co-related to this
understanding.[156G]
122
8. When an agreement is predicated upon an agreed fact
situation, if the latter ceases to exist the agreement to
that extent becomes irrelevant of otiose. [156G]
9. Phrases such as 'claim arising out of contract' or
'relating to the contract' or 'concerning the contract' on
proper construction would mean that if while entertaining or
rejecting the claim or the dispute in relation to claim may
be entertained or rejected after reference to the contract,
it is a claim arising out of contract. The language of
clause 40 shows that any claim arising out of the contract
in relation to estimates made in the contract would be
covered by the arbitration clause. If it becomes necessary
to have recourse to the contract to settle the dispute one
way or the other then certainly it can be said that it is a
dispute arising out of the contract. [157F-G]
In the instant case, the arbitration clause is so
widely worded as disputes arising out of the contract or in
relation to the contract or execution of the works that it
would comprehend, within its compass a claim for
compensation related to estimates and arising out of the
contract. [157H]
10. (i) A dispute, the determination of which turns on
the true construction of the contract, would also seem to be
a dispute under arising out of or concerning the contract.
The test is that if in settling a dispute, a reference to
the contract is necessary, such a dispute would be covered
by the arbitration clause.[158D-E]
A.M. Mair & Co. v. Gordhandas Sagarmull., [1950] S.C.R.
792; Ruby General Insurance Co. Ltd. v. Pearey Lal Kumar And
Another; [1952] S.C.R. 501; referred to.
ii. Where the parties are at one in asserting that they
entered into a binding contract, but a difference has arisen
between them whether there has been a breach by one side or
the other, or whether circumstances have arisen which have
discharged one or both parties from further performance,
such differences should be regarded as differences which
have arisen 'in respect of' or 'with regard to' of 'under'
the contract, and an arbitration clause which uses these, or
similar expressions should be contoured accordingly. [159B-
C]
Union of India v. Salween Timber Construction (India) &
Ors., [1969] 2 S.C.R. 224; Heyman & Anr. v. Darwins Ltd.,
[1942] A.C. 356 at 366; Astro Vencedor Compania Naviora S.A.
of Panama v. Mabanaft G.M.B.H. The Diamianos., [1971] 2 Q.B.
588; Gunter Henck v. Andre & CIE. S.A., [1970] 1 Lloyd's Law
Reports 235; referred to
In the instant case, from the pleadings, it clearly
transpires that both the parties had recourse to the
contract. It is satisfactorily established that the claim
made by the contractor would be covered by the arbitration
clause. [160B]
123
JUDGMENT:
CIVIL APPELLATE JURISDICTION: Civil Appeal No. 3023 of
1980.
Appeal by Special leave from the Judgment and Order
dated the 21st August, 1980 of the Kerala High Court in
M.F.A. No. 409 of 1979.
F.S.Nariman, A.N.Haksar, T.Raghvan, R.F.Nariman,
V.A.Bobde & K.R.Nambiar, for the Appellant.
G.B.Pai, P.K.Kumar, A.K.Sharma, Ashok Mathur and
Parveen Kumar for the Respondent.
The Judgment of the Court was delivered by
DESAI, J. In this appeal by special leave a very
interesting question in the field of law of arbitration
which honest man dread more than the dreaded law suits’
arises for our consideration.
First respondent Cochin Shipyard Limited (‘respondent’
for short) invited tenders for construction of Building Dock
at Cochin. As there was only one tender that of Tarapore &
Company, the appellant, the respondent called fresh tenders
somewhere in July, 1971. In December, 1971, the respondent
invited tenders for construction of a Repair Dock also at
Cochin. There were two tenders for Building Dock, namely,
one of the appellant and one by M/s National Building
Construction Corporation, a Government of India undertaking,
the value of the tender of the latter being double that of
the appellant. For the construction of the Repair Dock, the
only tender was of the appellant. In view of the limited
number of tenders received, the appellant was invited to
negotiate the terms of tender. The value of the works to be
executed was over Rs. 24 crores. In view of the huge
investment in the project, the tenders were examined by a
committee called the Tender Committee constituted in
accordance with the approval of the Ministry of Shipping and
Transport for examining and evaluating the tenders received
for the Building Dock and the Repair Dock. The Tender
Committee taking note of the poor response to the invitation
to tender and costly affair decided to accept the tender of
the appellant inter alia for the reasons (i) that works of
such complexity and magnitude have not been undertaken
before by any Indian contractor, (ii) that the plant and
equipment required for the work are not available
indigenously, (iii) that if the contractor is to procure the
124
specialised equipment required for this work, there is
hardly any assurance that after these works are over, he
would find any substantial use for the same, (iv) that
excavation and subsequent construction involve de-watering
which introduces considerable amount of uncertainty and that
during the discussions, the apprehension of the tenders of
this kind was voiced and noticed by the Committee, (v) that
RCC Piling also requires highly skilled and complex
technical operations and it involves a large element of risk
and uncertainty in the work. Both the tenders of the
appellant were accepted, and contracts were entered into
between the parties. Both the parties while entering into
contracts were aware and conscious of the fact that
equipment and technical know-how would have to be imported
involving a huge outlay of foreign exchange. Appellant
contractor quoted rates on two alternative basis depending-
upon whether it had to import equipment and know-how at its
cost involving Rs. 2 crores in foreign exchange or the
equipment and know how were to be imported by the respondent
at its cost and made available for use of the appellant in
which case the appellant would be liable to pay hire charges
for the pile driving plant at the rate of Rs. 23/- per metre
of 600 mm dia. RCC cast-in-situ pipe and Rs. 16/- per metre
of 500 mm dia. RCC cast-in-situ pipe and at the rate of 300
per tonne of steel sheet piles driven to be recovered from
the running bills payable to the appellant contractor. The
appellant was given to understand by a note in the
invitation to tender that foreign exchange in yen credit to
the tune of Rs. 38 lacs is earmarked for the purchase of
construction equipment, accessories etc. from Japan for
works of Building Dock, Repair Dock, the three Quays etc. On
January 24,1973, work order for Building Dock and Repair
Dock was issued by the respondent in favour of appellant and
in this work order as recommended by the Tender Committee,
the respondent adopted the alternative B as set out in the
tender, namely, that the contractor was to procure the
equipment and know-how at a cost of about Rs. 2 crores in
foreign exchange. In order to make this aspect specific,
additional condition No. 31 was incorporated in the works
order in order to provide for the expense to be incurred and
the amount of foreign exchange needed for importing
equipment and technical know-how, relevant portion of which
reads as under:
“Requisite foreign exchange, for importing piling
plant and machinery, spares, technical know-how and
hiring of experts necessary for both the Dock Works
vide Work Order No. 13019/1/71-W-II dated January
24,1973 for Building
125
Dock etc. and Work Order No. 13012/15/71-W-II dated
January 24, 1973 for Repair Dock etc, amounting to
about Rs. 2.00 crores in all will be made available to
the contractor from the 11th Yen Credit subject to his
getting indigenous clearance and providing detailed
justification. The details of such procurement shall be
furnished by the Contractor as soon as they are
finalised.”
In view of the huge investment, it was agreed that the
respondent would make an advance payment of 75% of the value
of old machinery and 90% of the value of new machinery
brought to site by the Contractor and in order to secure
this advance payment, equipment would be hypothecated by the
Contractor to the respondent and the advance payment were to
carry interest at 9.1/2% p.a. on the outstanding balance of
advance. The mode of recovery was also specified. The formal
contract was signed on January 29,1973 which included an
arbitration clause to which we would turn a little later.
It so happened that the required pile driving equipment
including the technical know-how against 11th Japanese Yen
credit were not available. The respondent also made inquires
in this behalf but without success. Ultimately,
International Foundation Group, Holland agreed to provide
the rate of equipment conforming more or less to the same
specification for which clearance was sought and received
from the Government of India. After the respondent certified
that the equipment and know-how offered by International
Foundation Group. Holland conform to the earlier clearance
and that the same equipment being not indigenously
available or against 11th Japanese Yen Credit, the
respondent requested the Government of India to give
necessary clearance to the appellant to import the
equipment. This approval was received on September 1, 1973
and the foreign exchange to the extent of Rs. 211.80 lakhs
equal to 9,442.700. Dutch Florins was released in favour of
the appellant. The entire imported equipment was received in
four consignments between March/July 1974. During the
intervening period, there were variations in the rate of
exchange and therefore the foreign exchange cost of
equipment alone in terms of rupees worked out at Rs. 177.50
lakhs and of the technical know-how fees payable in 11
instalments worked out at Rs. 105 lakhs. The custom duty
went up by Rs. 21 lakhs as a consequence of the increase in
rupee value of the imported equipment in terms of Dutch
Florin.
126
The appellant made a tentative claim in the amount of
Rs. 61.27 lakhs from the respondent on account of increase
in cost of pile driving equipment and technical know-how
fees on the ground that the contractor was entitled to be
compensated by the respondent for the same. In the letter
dated May 28,1975, the appellant has stated that the
‘tendered rates were based on certain total cost of machines
which has since gone up considerably rendering the rates no
longer workable. The appellant had provided for a cost of
150 lakhs of rupees for the equipment and the life of the
equipment was taken as 12,000 hours and its probable period
of engagement on this job was taken as 8,000 hours. On this
basis two-thirds of the cost of the equipment will be
written off by way of depreciation on this job.’ It was also
stated that there is an increase in the fees for the
technical know-how. The letter concluded by saying that the
loss sustained by the appellant upto May 15,1975 on account
of variation in the rate of foreign exchange was Rs.
61,27,317 and requested the respondent to compensate the
loss atleast upto the tune of Rs. 45 lakhs which is
approximately 75% of the loss suffered by the contractor in
this behalf. The respondent responded to this letter as per
its letter dated July 2,1975 saying that the letter dated
July 14,1972 of the appellant which forms part of the
contract documents clearly recites that the total foreign
exchange required by the contractor for the equipment,
spares, technical know-how and hiring of experts, was
expected to be about Rs. 2 crores and that the expenditure
incurred by the contractor in this behalf so far has been
less than Rs. 2 crores and in the circumstances it was found
difficult to accept the position that the tender was based
on the assumptions indicated in the letter under reply and
that the rates for the pile driving should for the future be
revised. There ensued further correspondence between the
parties. Ultimately, the appellant by its letter dated March
1,1976 informed the respondent that its claim for
compensation for increase in the cost of imported pile
driving equipment and technical know-how fees has not been
entertained for over a year. It was further stated that
inasmuch as the dispute has thus arisen between us regarding
the above claim, we are invoking the provisions for
arbitration in our contracts and referring this dispute to
arbitration.’ On March 17,1976 Chief Engineer of the
respondent replied saying that the matter as set out in the
letter dated March 1, 1976, invoking arbitration clause is
receiving their immediate attention and the appellant will
hear shortly in this behalf. On March 29,1976, the
respondent wrote to the appellant denying the claim for
compensation of the appellant. Simultaneously the respondent
framed three points
127
covering the dispute so raised for reference to and decision
by the arbitrator. The letter also sets out as required by
Clause 40 a panel of three names from which anyone can be
chosen by the appellant as the sole arbitrator. The
appellant by its letter dated April 19,1976 while refuting
the contention of the respondent that the dispute would not
be covered by Clause 40 i.e. arbitration clause in the
contract, stated that the proper course would be to refer
the dispute that has arisen between the parties to the
decision of the arbitrator and not any particular issue or
issues. Ultimately from amongst the three names indicated by
the respondent the appellant selected Shri C. Srinivasa Rao,
Chief Bridge Engineer, Southern Railway, Madras to be the
Sole Arbitrator to decide the dispute. On receipt of this
letter the respondent referred the dispute to Shri C.
Srinivasa Rao as Sole Arbitrator. While referring the
dispute to the sole arbitration of Shri C. Srinivasa Rao,
the respondent retained the three points of reference set
out in the letter dated March 29,1976 but added one more.
The Arbitrator entered upon the reference on June 2,1976. On
being called upon by the Arbitrator, the appellant filed its
statement of claim on June 19,1976. The appellant claimed
Rs. 2,03,47,266 as per the Schedule to the Statement of
Claim on account of increase in the cost of equipment and
technical know-how fees. The respondent filed its reply to
the Statement of Claim on July 19,1976.
The points/disputes referred by the parties to the sole
arbitrator read as under:
“1. Does the claim of Messrs. Tarapore & Co. on
Cochin Shipyard Ltd., for compensation for increase in
the cost of imported pile driving equipment and
technical know-how fees referred to in clauses (2) and
(3) hereunder fall within the purview of the first
paragraph of Clause 40 of the General Conditions of
Contract entered into between the two parties?
2. If the answer to (1) above is in the
affirmative, in terms of the provisions of the contract
are Messrs. Tarapore & Co. entitled to compensation for
increase in the cost of imported pile driving equipment
and technical know-how fees to be paid to them by
Cochin Shipyard Ltd.? If so, what is the amount ?
128
3. The dispute that has arisen between Messrs.
Tarapore & Co., and Cochin Shipyard Ltd. regarding the
claim of M/s. Tarapore & Co., for compensation for
increase in the cost of the imported pile driving
equipment and the technical know-how fees.
4. “Costs”
Parties appeared before the Arbitrator through their
respective counsel. The Arbitrator gave its Award on July
6,1977. On Point No. 1, the Arbitrator held as under:
“The claim of Messrs. Tarapore and Company on
Cochin Shipyard Limited for compensation for increase
in the cost of imported pile driving equipment and
technical know-how fees falls within the purview of the
first paragraph of Clause 40 of the General Conditions
of Contract entered into between the parties.”
On Point No. 2, the Arbitrator held that the appellant
Messrs. Tarapore and Company are entitled to compensation by
the Cochin Shipyard Limited for the increase in the cost of
imported pile driving equipment and the technical know-how
fees by a sum of Rs. 99 lakhs only which amount shall be
payable with interest at 9.1/2% per annum from this date
till date of payment or decree, whichever is earlier’. On
Point No. 3, the decision recorded was ‘that it is covered
by the decision on Points (1) and (2)’. On Point No. 4, on
the question of costs, the Arbitrator having determined his
fees and incidental expenses directed both the parties to
bear the same equally. The Award was typed on a stamp paper
of the value of Rs. 150/- at Madras. By his letter dated Nil
July, 1977, the Sole Arbitrator forwarded the award to both
the parties.
The appellant moved a petition under Secs. 14 and 17 of
the Arbitration Act in the Court of the Subordinate Judge,
Ernakulam for filing the award and for making it a rule of
the court. On October 7,1977 the respondent moved O.P. 81 of
1977 being a combined petition under Secs. 30 and 33 of the
Arbitration Act before the Subordinate Judge, Ernakulam
praying for setting aside the award. The prayer for setting
aside the award was founded on two grounds; (1) that the
award is insufficiently stamped and (2) that the Arbitrator
has exceeded his jurisdiction by misconstruing Clause 40
129
of the General Conditions of Contract (Arbitration clause
for short).
The learned Subordinate Judge noted the fact that the
award was originally engrossed on a stamp paper of Rs. 150/-
but before filing the award in the court on August 4,1977,
the Arbitrator on August 1,1977 affixed additional stamp of
Rs. 14,722.50 p. which would be the requisite stamp under
Art. 12 read with Art. 14 of the Kerala Stamp Act. The
learned Subordinate Judge accordingly negatived the
contention of the respondent that the award was
insufficiently stamped. On the second point, the learned
Judge held that the respondent having submitted the question
whether the dispute raised by the appellant was covered by
the arbitration clause cannot be permitted to controvert the
jurisdiction of the Arbitrator to decide this dispute and
accordingly, negatived the contention of the respondent. The
learned Judge after modifying the award of the Arbitrator in
the matter of interest from 9.1/2% as awarded by the
Arbitrator to 6% granted the application of the applicant
and made the award a rule of the court.
The respondent preferred M.F.A. 409 of 1979 in the High
Court of Kerala at Ernakulam. A Division Bench of the High
Court agreed with the learned Subordinate Judge on the
question of insufficiency of stamp. The Division Bench
however, after expressing its displeasure about not making a
reasoned award by the Arbitrator proceeded to examine the
contention whether the arbitration clause covers the
dispute. The court held that the question whether the
dispute is arbitrable or not cannot be finally decided by
the arbitrator because it is a matter relating to his
jurisdiction. It was further held that the arbitrator cannot
by an erroneous interpretation or construction of the clause
confer jurisdiction on himself and the court can go into the
question whether the matter in dispute between the parties
is covered by the arbitration clause. The specific
contention on behalf of the appellant that once a specific
question of law is referred to the arbitrator, the parties
are bound by the decision of the arbitrator was negatived by
the High Court and it was held that as the respondent has
joined arbitration under protest, it was not estopped from
contesting the question and the award is not binding on it
if it can be shown that the arbitration agreement did not
cover the dispute raised by the appellant. The court finally
held that even though the arbitration clause was very wide,
the dispute as to the compensation for increase in the cost
of imported pile driving equipment and technical know-how
fees would
130
not be covered by the arbitration clause inter alia on the
ground that by C1. 26 of the General Conditions of Contract
every plant, machinery and equipment had to be provided by
the contractor and any rise or escalation in the price of
such equipment or machinery cannot be the subject matter of
compensation by the respondent. Accordingly, the appeal of
the respondent allowed and the judgment and order of the
trial court making the award rule of the court was set
aside. The court directed that the award be returned to the
parties. Hence this appeal by the contractor by special
leave.
Before we advert to the rival contentions, it would be
advantageous to refer to the arbitration clause being Clause
40 of the General Conditions of Tender subject to which the
contract was entered into, the relevant portion of which
reads as under:
“Clause 40. Except where otherwise provided in the
contract, all questions and disputes relating to the
meaning of the Specifications, Instructions, designs
Drawings herein before mentioned and as to the quality
or workmanship or materials used on the work or as to
any other questions, claim, right, matter or thing
whatsoever in any way arising out of or relating to the
Contract, Designs, Drawings, Specifications, Estimates,
Instructions, orders or these conditions or otherwise
concerning the works or the execution or failure to
execute the same, whether arising during the progress
of the work or after completion or abandonment thereof
shall, after written notice by either party to the
contract, to the either of them, be referred to the
Sole Arbitration of a person appointed by the Chief
Project Officer of the Cochin Shipyard Project or the
Administrative Head of the Cochin Chipyard Project at
the time of such appointment by what ever designation
known, from a panel of names given in Annexure II.”
Over and above the extracted portion, the clause
provides for the manner and method of appointing the sole
arbitrator, the continuance of the work during progress of
arbitration proceedings, the time and place of holding the
arbitration. proceedings, the power to enlarge the period
for making the award and finality to be attached to the
award of the Arbitrator.
131
When the arbitration clause was invoked by the
appellant, the respondent did contend that the dispute
raised by the appellant was not covered by the arbitration
clause. After specifying its demur, the respondent
formulated the points in dispute on which the arbitration
was invited to give his award. Undoubtedly, the respondent
proceeded to formulate the points in dispute between the
parties on which the Arbitrator was to be invited to give
his award without prejudice to its right to contend that the
dispute is not covered by the arbitration clause and that
the appellant is not entitled to any compensation in respect
of the increase in the cost of imported pile driving
equipment and technical know-how fees. What is the effect of
referring the specific question of law to arbitration
without prejudice to one’s right to contend to the contrary
will be presently examined. The fact remains that on the
dispute arising out of a claim for compensation on account
of the increase in the cost of imported pile driving
equipment and technical know-how fees, the respondent agreed
to refer the dispute under two specific heads to the
Arbitrator. The dispute so raised have already been
extracted. Briefly stated they are : (1) whether the claim
for compensation would fall within the purview of the first
para of the arbitration clause and (2) if it does the
quantum of compensation, if any, to which the appellant
would be entitled. Analysing the disputes, let it be made
distinctly clear that the appellant asserted that its claim
for compensation, would be governed by the arbitration
clause and the same was specifically denied by the
respondent saying that the claim would be beyond the purview
of the arbitration clause. On these rival positions, the
specific issue was framed whether the claim for compensation
would fall within the purview of the first part of the
arbitration clause. This was the specific dispute referred
to the arbitrator inviting him specifically to decide this
of dispute. If this issue specifically raises a question as
to jurisdiction of the arbitrator to arbitrate upon the
dispute set out in Point No. 2, it appears to have been
specifically referred to the Arbitrator for his decision.
Parties, therefore, agreed to submit the specific question
even with regard to the scope, ambit, width and the
construction of the arbitration clause so as to define its
parameters and contours with a view to ascertaining whether
the claim advanced by the appellant and disputed by the
respondent would be covered by the arbitration clause.
Whether upon its true construction the arbitration clause
would include within its compass the dispute thus raised
between the parties was specifically put in issue because
parties were at variance about it. Appellant asserted that
its claim to compensation would form the subject matter of
arbitration under Clause 40
132
and the respondent contending to the contrary. While
deciding this dispute, as to the scope, width and ambit of
arbitration clause vis-a-vis the dispute raised, it is not
necessary to decide whether the claim was tenable justified
or had any substance in it. That would fall within the
second point of reference to the arbitrator which opens with
a specific clause that it needs only to be decided if the
answer to the first point of reference, namely jurisdiction
of the arbitrator under Clause 40 is in the affirmative
meaning thereby that the dispute so raised and subsisting
between the parties would be covered by the arbitration
agreement. In other words, if the dispute is covered by the
arbitration agreement, the arbitrator was further required
to decide whether there was any substance in the claim made,
and if he found some substance in the disputed claim, to
ascertain what amount the appellant would be entitled to
recover as and by way of compensation from the respondent.
The arbitrator was thus required and called upon first to
decide whether the dispute is arbitrable as falling within
the width and ambit of the arbitration agreement. If the
answer is in the affirmative, then alone the second point
need be examined. If the answer to the first point of
reference is in the negative in that if the arbitrator were
of the opinion that the dispute is not arbitrable as it
would not fall within the scope, width and ambit of the
arbitration agreement, it would not be necessary for him to
determine whether the appellant was entitled to recover
anything by way of compensation. This aspect is being
analysed in depth to point out that the parties specifically
referred the question of construction of arbitration
agreement, its width, ambit and parameters vis-a-vis the
dispute raised so as to decide whether the dispute would
fall within the purview of the arbitration agreement, in
other words the jurisdiction of the arbitrator.
Correspondence placed on record would unmistakably show
that a specific question as to the jurisdiction of the
arbitrator was specifically referred by the parties to the
arbitrator. Appellant contractor by his letter dated March
1,1976 to the Chief Engineer of the respondent invited his
attention to the claim for compensation for increase in cost
of pile driving equipment and technical know-how fees raised
about a year ago and further invited his attention to the
letter dated 6th October, 1975 of the respondent informing
the appellant that the claim cannot be entertained. The
appellant proceeded further to state as under:
“In as much as a dispute has thus arisen between
us regarding the above claim, we are invoking the
provisions for
133
arbitration in our contracts and referring this dispute
to arbitration.”
The respondent by his letter dated March 17, 1976
informed the appellant that the matter raised in the letter
dated March 1,1976 in the matter of compensation is
receiving their immediate attention and the appellant will
shortly hear from them in this connection. Thereafter the
respondent by his letter dated March 29,1976 informed the
appellant as under;
“We have dealt with the merits of your claims in
the previous correspondence on the subject and we
reiterate that no amounts whatever are due to you in
respect of these claims. It is also our view that such
claim does not fall within the purview of Clause 40 of
the General Conditions of Contract and hence does not
qualify for arbitration.
However, in view of your insistence and without
prejudice to our position, we propose that, the
following be the issues to be referred to arbitration:
1. Does the claim of M/s Tarapore & Co., on Cochin
Shipyard Ltd., for compensation for increase in the
cost of imported pile driving equipment and technical
know-how fees fall within the purview of the first para
of Clause 40 of the General Conditions of Contract
entered into between the two parties?
2. If the answer to 1 is in the affirmative in
terms of the provisions of the concerned contract are
Messrs. Tarapore & Co. entitled to compensation for
increase in the cost of imported pile driving equipment
and technical know-how fees to be paid to them by
Cochin Shipyard Ltd.? If so, what is the amount?
3. “Costs.”
The respondent proceeded to notify the panel of names
and invited the appellant to choose the arbitrator as agreed
to between the parties and set out in clause 40. The
appellant by his letter dated April 19,1976 while
reasserting that the claim made by it would be covered by
Clause 40 further stated that the proper course would be to
refer the dispute that has arisen between the parties on
134
the matter of compensation to the decision of the arbitrator
and not any particular issue or issues. It was also
suggested that framing of the issues will be the function of
the arbitrator after he enters upon the reference and after
he has the pleadings of both the parties before him. The
appellant also suggested what dispute should be referred to
the arbitrator and set it out as under:
“The decision of the dispute that has arisen
between M/s Tarapore & Co., and the Cochin Shipyard
Limited, regarding the claim of M/s Tarapore & Co., for
compensation for the increase in the cost of the
imported pile driving equipment and of the technical
know-how fees.”
The appellant proceeded to suggest that Shri C.
Srinivasa Rao from amongst the panel be appointed as the
Sole Arbitrator. The respondent by his letter dated April
27/28, 1976 annexing three earlier letters dated March 1,
1976, March 29, 1976 and April 19, 1976 referred the four
points herein before set out for the decision of the
arbitrator.
This correspondence would unmistakably show that while
the appellant wanted a general reference about its claim, it
was the respondent who now contests that no specific
question of law was specifically referred to the arbitrator
for his decision was specific about the points to be
referred for the decision of the Arbitrator. The first point
extracted hereinabove would clearly show that the specific
question about the jurisdiction of the arbitrator to
arbitrate upon the dispute set out in points Nos. 2, 3 and 4
was specifically referred to the arbitrator. On the first
point, the arbitrator had to decide whether the claim made
by the appellant and disputed by the respondent would be
covered by Clause 40 i.e. the arbitration clause. In other
words, the specific question referred to the Arbitrator was
about his jurisdiction to arbitrate upon the disputes
covered by points Nos. 2, 3 and 4, if and only if, upon a
true construction of the arbitration clause that is first
paragraph of Clause 40, would cover the disputed claim for
compensation he can enter into the merits of the dispute and
decide it. It is upon the decision on point No. 1 that the
arbitrator would have jurisdiction to decide the dispute
involved in points Nos. 2, 3 and 4. The first point of
reference is clearly a specific question of law touching
upon the jurisdiction of the arbitrator and this was framed
and referred to by none other than, despite the initial
objection of the petitioner, the respondent. Therefore, the
respondent invited the arbitrator by the specific point of
135
reference which involves a specific question of law touching
upon the jurisdiction of the arbitrator to decide the same.
This becomes further clear from the fact that both the
learned counsel appearing before the arbitrator submitted
agreed draft issues for the decision of the arbitrator. The
first issue amongst the agreed draft issues reads as under:
“Does the claim of the claimant fall within the
purview of the purview of the first para of Clause 40
of the General Conditions of Contract entered into
between the two parties?
This point was not to be incidentally decided while
deciding the dispute referred to the arbitrator his
jurisdiction to entertain the dispute is questioned. In
fact, hereby the reference of the specific point of law
touching upon the jurisdiction of the arbitrator the parties
invited the arbitrator to decide this specific question. It
was he who was asked by the submission or terms of reference
to decide his jurisdiction first and then proceed to decide
the dispute on merits. We referred to Issue No. 1 in the
agreed draft issues only to buttress the conclusion that it
was at the instance of the respondent that the arbitrator
was called upon to decide the question of the scope, ambit
and width of arbitration clause the decision on which would
confer jurisdiction upon him to decide the dispute as to
compensation. In this context it would be advantageous to
refer to paragraphs 11 and 12 of the counter statement filed
by the respondent before the arbitrator which reads as
under:
“11. It is submitted that the claim in question
relating to the increase in the cost of machinery and
equipment as also technical know-how fees payable by
the contractors/claimants is fully outside the purview
of the contract. There is no liability on the part of
the respondent to procure the machinery and equipment
or technical know-how required by the contractor nor
was there any liability to pay any part of the cost,
whether it be the original assumed cost or the
increased cost. The claim thus is completely outside
the purview of the contract and it is submitted,
therefore, that the same does not fall within the
purview of the first paragraph of Clause 40 of the
General Conditions of Contract and thus not arbitrable.
12. It is submitted that the question of arbitrability
of the dispute should be decided as a preliminary point
before proceeding with the other issues.”
136
The formulation of the specific question of law by the
respondent along with its suggestion to decide it as a
preliminary issue and becoming a party to the agreed draft
issue No. 1 would conclusively establish that the specific
question of law touching upon the jurisdiction of the
arbitrator was referred to the arbitrator for his decision.
Therefore, the conclusion is inescapable that a specific
question of law touching upon the jurisdiction of the
arbitrator which is indisputably a question construction of
Cl. 40 and therefore a question of law was specifically
referred by the parties to the arbitrator for his decision
and by the terms of Clause 40 agreed to abide by his
decision as final and binding.
Mr. F.S. Nariman, learned counsel for the appellant
urged that Sec. 16(1) (c) may permit the court to remit or
set aside the award on the ground that there is an error of
law apparent on the face of it, yet where a specific
question of law has been referred to the arbitrator for
decision, the fact that the decision is erroneous does not
make the award bad on its face so as to permit its being set
aside. Expanding the submission, it was urged that a
decision on a question of law by an arbitrator may be given
in two different and distinct situations; firstly where
while deciding a dispute referred to him incidentally a
question of law may arise which an arbitrator may decide in
order to dispose of the reference and if in such a situation
any error of law appears on the face of the award, the court
can interfere with the award. But there is an altogether an
independent and a distinct situation in which a question of
law might arise such as where the parties to the dispute may
frame the specific question of law and reflect it to the
Arbitrator for his decision. In the later situation, it was
urged that the decision of the Arbitrator even if erroneous
would not permit the court to interfere with the award.
Proceeding along it was urged that in this case a specific
question of law touching upon the jurisdiction of the
arbitrator was specifically referred to the Arbitrator for
his decision and therefore, the decision of the Arbitrator
is binding on the parties and the court cannot proceed to
inquire whether upon a true construction of the arbitration
clause. the dispute referred to the Arbitrator for
arbitration would be covered by the arbitration clause so as
to clothe the arbitrator with the jurisdiction to arbitrate
upon the dispute.
Mr. Pai, learned counsel for the respondent countered
by saying that jurisdiction of the arbitrator cannot be left
to the decision of the arbitrator so as to be binding on the
parties and it is always for the court to decide whether the
arbitrator has jurisdiction to decide
137
the dispute. Alternatively, it was submitted that the
arbitrator cannot by a misconstruction of the arbitration
agreement clothe himself with or confer upon himself the
jurisdiction to decide the dispute. The court it was said
has always retains to itself the jurisdiction to look at the
arbitration agreement to determine its scope and ambit and
if it is found that the dispute referred to the arbitrator
does not fall within the arbitration agreement, the court
must interfere on the ground that the award disclosed an
error of law apparent on the face of it.
The contention may be examined both on principle and on
the precedents.
Complexity of rights and obligations in national and
international trade and commerce would certainly generate
disputes between the parties and treated as a normal
incident of commercial life and till commercial arbitration
came to be recognised as a civilised way of resolving such
disputes, prolix and time-consuming litigation was the only
method of resolving such disputes. As an alternative to
court proceedings, arbitration as a method of resolving
disputes by domestic tribunal constituted by the choice of
parties became acceptable. The basic difference between the
court proceedings and the arbitration is the choice of the
tribunal. Ordinarily, all matters in which relief can be
claimed from the court may become subject matter of
arbitration. Now if in a law court incidental questions of
law arise in the course of proceeding, the court has an
obligation to decide those questions of law. But when it
came to a tribunal not endowed, with the judicial power of
the State but by conferment by the parties to the dispute or
which acquires jurisdiction by a submission of the parties
to the dispute to invite the decision by the forum of their
choice and to be bound by it a question arose whether a pure
question of law if at all can be referred to an arbitrator
for his decision and even if he decides, can the decision be
questioned on the ground that there is an error apparent on
the face of the award in deciding the question. Now as
stated a short-while ago, a question of law may figure
before an arbitrator in two ways. It may arise as an
incidental point while deciding the main dispute referred to
the arbitrator or in a given case parties may refer a
specific question of law to the arbitrator for his decision.
There is no more gainsaying the fact that a pure question of
law may and can be referred to an arbitrator for his
decision. Russel on the Law of Arbitration Twentieth Edition
at page 22 states as under;
138
“A pure question of law may be referred to an
arbitrator; and where such a question is specifically
referred his award will not be set aside merely upon
the ground that his decision is wrong.”
In Halshury’s Laws of England Vol. 2 Para 623 4th
Edition the statement of law reads as under:
“If a specific question of law is submitted to the
arbitrator for his decision and he decide it, the fact
that the decision is erroneous does not make the award
bad on its face so as to permit its being set aside;
and where the question referred for arbitration is a
question of construction, which is, generally speaking,
a question of law, the arbitrator’s decision cannot be
set aside only because the court would itself have come
to a different conclusion.”
With the ever widenings expansion of international
trade and commerce, complex question of private
International Law, effect of local laws on contracts between
parties belonging to different nations are certainly bound
to crop up. Arbitration has been considered a civilised way
of resolving such disputes avoiding court proceedings. There
is no reason why the parties should be precluded from
referring a specific question of law to an arbitrator for
his decision and agree to be bound by the same. This
approach manifests faith of parties in the capacity of the
tribunal of their choice to decide even pure a question of
law. If they do so, with eyes wide open, and there is
nothing to preclude the parties from doing so, then there is
no reason why the court should try to impose its view of law
superseding the view of the Tribunal whose decision the
parties agreed to abide by. Therefore, on principle it
appears distinctly clear that when a specific question of
law is referred to an arbitrator for his decision including
the one touching upon the jurisdiction of the arbitrator,
the decision of the arbitrator would be binding on both the
parties and it would not be open to any of the two parties
to wriggle out of it by contending that the arbitrator
cannot clutch at or confer jurisdiction upon himself by mis-
construing the arbitration agreement.
This conclusion is borne out by a long line of
decisions both Indian and foreign to which we would now
turn.
The earliest case to which we would refer is the
decision of the
139
House of Lords in Kelanten Government v. Duff Development
Co. Ltd. in which Lord Trevethin in his speech said as
under:
“If your Lordships should be of opinion that the
award is bad in law upon its face, it should be set
aside, for this is not in my view, a submission to
arbitration of such a nature that, although the law is
bad upon the face of the award, the decision cannot be
questioned. That happens only when the submission is of
a specific question of law and is such that it can be
fairly construed to show that the parties intended to
give up their rights to resort to the King’s courts and
in lieu thereof to submit that question to the decision
of a tribunal of their own.”
Same distinction was also brought out by Lord Parmoor
when he said that ‘the principle applicable where a specific
question of law has been submitted to the decision of
arbitration is well expressed by Channel, J., in Re King and
Duveen, in which it was said that where a specific question
of law is referred to an arbitrator for his decision, the
award cannot be set aside on the ground of an error apparent
on the face of the award because the question of law was
wrongly decided.’ At a later stage, it was observed that if
the court, before which it is sought to impeach the award,
comes to the conclusion that the alleged error in law even
if it can be maintained, arises in the decision of a
question of law directly submitted to the arbitrator for his
decision, then the principle stated by Channel, J., in Re.
King and Duveen applies, is attracted and the parties having
chosen their tribunal, and not having applied successfully
to the court under either s. 4 or s. 19 of the Arbitration
Act, 1889, are not in a position to question the award or to
maintain a claim to set it aside.’ This decision is an
authority of the proposition that where a question of
construction is the very point referred for arbitration,
then the decision of the arbitrator upon that point cannot
be set aside by the court only because the court would
itself have come to a different conclusion.
In F.R. Absalom Ltd. v. Great Western (London) Garden
Village Society Ltd. the contention was that the award was
bad by reason of an error in law appearing on the face of
it. The submission was
140
not before the court and a reference to the pleadings had to
be made for the purpose of ascertaining whether any specific
question of law was in dispute, and was referred to the
arbitrator for his decision. The pleadings disclosed that
the whole dispute between parties was as to the amount due
to the contractor in respect of the value of the work done
and of the materials on the site upto and including a
certain date. In the background of this fact, Lord
Warrington in his speech said that no specific question of
construction arose. In order to decide whether the award was
bad by reason of an error of law on the face of it, Lord
Russel in his speech pointed out at page 621 that it is
essential to keep the case where disputes are referred to an
arbitrator in the decision of which a question of law
becomes material distinct from the case in which a specific
question of law has been referred to him for decision.’
Thereafter he proceeded to state:
“The authorities make a clear distinction between
these two cases and as they appear to me, they decide
that in the former case the court can interfere if and
when any error of law appears on the face of the award,
but that in the latter case no such interference is
possible upon the ground that it so appears that the
decision upon the question of law is an erroneous one.
In reaching this conclusion, the decision in Kelantan
Government v. Duff Development Co. Ltd. was affirmed. On the
facts, it was found that no specific question of law was
referred to the arbitrator for his decision.
In Durga Prasad Chamria and Anr. v. Sewkishendas
Bhattar and Ors; the award was sought to be set aside inter
alia on the ground that the award was bad on account of an
error of law apparent on the face of it. The errors of law
relied upon were; (a) the arbitrator had admitted as
evidence the family settlement and the partnership
arrangement of 1916, neither of which, though each related
(it was said) to immoveable property, had been registered as
required by the Indian Registration Act, and (b) the
arbitrator ought to have held that Anardeyi’s suit was in
any event barred by limitation. The Privy Council first
noticed the issues settled by Panckridge. J.; amongst them
were the two following:
141
“1(b) Is the agreement dated 16th November, 1916,
relating to the alleged family settlement valid or
admissible in evidence?
(9) Is the plaintiff’s claim or any portion
thereof barred by limitation?,,
After these issues had been settled, the parties agreed
to refer to arbitration “the outstanding matters in the
suit.” In a motion for setting aside the award it was urged
that there was an error of law apparent on the face of the
award both with regard as to the admissibility of the
alleged family settlement and about the suit of Anardeyi
being barred by limitation. Rejecting the motion, the Privy
Council observed as under,
“However, that may be, their Lordships are
satisfied that the two points of law as to which it is
said the arbitrators error vitiates the award were
specifically referred to him to decide and if this is
so, it would be contrary to well-established principles
such as are laid down in re King and Duveen and F.R.
Absalom Ltd. v. Great West (London) Garden Village
Society Ltd., for a Court of law to interfere with the
award even if the Court itself would have taken a
different view of either of the points of law had they
been before it.”
Turning to the decisions of our Court, reference may
first be made to Seth Thawardas Pherumal v. The Union of
India 1. In that case, the question was whether the award
was bad on account of error of law apparent on the face of
it, as provided in Sec. 16(1) (c) of the Arbitration Act.
Examining this contention, this Court observed as under:
“This covers cases in which in error of law
appears on the face of the award. But in determining
what such an error is, a distinction must be drawn
between cases in which a question of law is
specifically referred and those in which a decision on
a question of law is incidentally material (however
necessary) in order to decide the question actually
referred. If a question of law is specifically referred
and it is evident that the parties desire to have a
decision from the arbitrator about that rather then one
from the Courts, then the Courts will not interfere,
though even there, there is authority for the view that
the courts will interfere if it is apparent that the
arbitrator
142
has acted illegally in reaching his decision, that is
to say, if he has decided on inadmissible evidence or
on principles of construction that the law does not
contenance or something of that nature. See the speech
of Viscount Cave in Kelantan Government v. Duff
Development Co. at page 409. But that is not a matter
which arises in this case.
The law about this is, in our opinion the same in
England as here and the principles that govern this
class of case have been reviewed at length and set out
with clarity by the House of Lords in F.R. Absalom Ltd.
v. Great Western (London) Garden Village Society and in
Kelantan Government v. Duff Development Co. In Durga
Prasad v. Sewkishendas the Privy Council applied the
law expounded in Absalom’s case to India; see also
Champsey Bhara & Co. v. Jivraj Balloo Spinning and
Weaving Co. and Saleh Mahomed Umer Dossal v. Nathoomal
Kessamal. The wider language used by Lord Macnaghten in
Ghulam Jilani v. Muhammad Hassan had reference to the
revisional powers of the High Court under the Civil
Procedure Code and must be confined to the facts of
that case where the question of law involved there,
namely, limitation, was specifically referred. An
arbitrator is not a conciliator and cannot ignore the
law or misapply it in order to do what he thinks is
just and reasonable. He is a tribunal selected by the
parties to decide their disputes according to law and
so is bound to follow, and apply the law, and if he
does not he can be set right by the Courts provided his
error appears on the fact of the award. The single
exception to this is when the parties choose
specifically to refer a question of law as a separate
and distinct matter.”
The Court further proceeded to examine whether in the
facts of that case, the arbitrator was specifically asked to
construe clause 6 of the contract or any part of the
contract or whether any question of law was specifically
referred. The Court emphasised the word ‘specifically’ by
pointing out that, parties who made a reference to
arbitration have the right to insist that the Tribunal of
their choice shall decide their dispute according to law, so
before the right can be denied to them in any particular
matter, the court must be very sure that both sides wanted
the decision of the arbitrator on a point of law rather than
that of the Courts and that they wanted his decision on that
point to be final. The Court then proceeded to examine the
various clauses of the contract and held that this is not
the kind of specific reference on a point of law that
143
the law of arbitration requires. The Court held that when a
question of law is the point at issue, unless both sides
specifically agree to refer it and agree to be bound by the
arbitrator’s decision, the jurisdiction of the Courts to set
an arbitration right when the error is apparent on the face
of the award is not ousted. The mere fact that both parties
submit incidental arguments about a point of law in the
course of the proceedings is not enough. This decision is an
authority for the proposition that where the parties
specifically agree to refer a specific question of law for
the decision of the arbitrator, and agree to be bound by it,
the Court cannot set aside the award on the ground of an
error of law apparent on the face of it even though the
decision of the arbitrator may not accord with the law as
understood by the Court. If on the other hand, the question
of law is incidentally decided by the arbitrator, it is not
enough to oust the jurisdiction of the Court to set aside
the award on the ground that there is an error apparent on
the face of the award.
In M/s Alopi Parshad & Sons Ltd. v. The Union of India
1 the Court reiterated the observation in Seth Thawardas’s
case and observed that if a specific question is submitted
to the arbitrator and he answers it, the fact that the
answer involves an erroneous decision in point of law, does
not make the award bad on its face so as to permit of its
being set aside. In the facts of the case, this Court
agreeing with the High Court held that there is no
foundation for the view that a specific reference,
submitting a question of law for the adjudication of the
arbitrators, was made. It may be stated in passing that a
brief reference to the claim put forward before the
arbitrator on behalf of the appellants in that case, set out
at page 798 of the report, would clearly show that no
specific question of law was referred by the parties for the
decision of the arbitrator. Mr. Pai learned counsel for the
respondent pointed out that the Court has also observed
following the decision of the Privy Council in Champsey
Bhara and Company v. Jivraj Balloo Spinning and Weaving
Company Ltd 2., that the extent of the jurisdiction of the
court to set aside an award on the ground of an error in
making the award is well-defined. The award of an arbitrator
may be set aside on the ground of an error on the face
thereof only when in the award or in any document
incorporated with it, as for instance, a note appended by
the arbitrators, stating the reasons for his decision, there
is found some legal proposition which is the basis of the
award and which is erroneous. This observation does not help
144
in deciding the point under discussion and just after this
statement, there follows the observation about the effect of
referring a specific question of law for the decision of the
arbitrator and the jurisdiction of the Court to set aside
the award on the ground that there is an error of law
apparent on the face of it.
In Union of India v. A.L. Rallia Ram 1 this Court after
referring to the decision in Champsey Bhara and Company
reaffirmed that, the rule in that decision does not apply
where questions of law are specifically referred to the
arbitrator for his decision; the award of the arbitrator on
those questions is binding upon the parties, for by
referring specific questions the parties desire to have a
decision from the arbitrator on those questions rather than
from the Court and the Court will not, unless it is
satisfied that the arbitrator had proceeded illegally
interfere with the decision. After referring to the decision
hereinabove examined by us, the Court came to the conclusion
that no specific question of law were referred to the
arbitrator’s the decision whereof is binding upon the
parties.
In M/s Kapoor Nilokheri Co-op. Dairy Farm Society Ltd.
v. Union of India and Others 2 the Court agreed with the
submission on behalf of the respondent Government of India
that the appellants having specifically stated that their
claims are based on the agreement and on nothing else and
all that the arbitrator had to decide was as to the effect
of the agreement, the arbitrator had really to decide a
question of law, i.e. of interpreting the document, the
agreement dated May 6, 1953 and therefore the decision is
not open to challenge. In fact, this decision is hardly of
any assistance and we leave it at that.
In N. Chellappan v. Secretary, Kerala State Electricity
Board & Anr. by a consent order, the umpire was appointed as
the sole arbitrator, and the respondent-Board without a
demur participated in the proceedings before the umpire and
took the chance of an award in its favour, this Court said
that it cannot turn round and say that the umpire had no
inherent jurisdiction and therefore its participation in the
proceedings before the umpire is of no avail. This decision
is not of much assistance on the point under discussion. Mr.
Pai on the other hand urged that the jurisdiction of the
arbitrator could not be determined by him nor can he
arrogate jurisdiction to himself
145
by mis-construction of the contract and thereby clutch at
jurisdiction and in such a situation, the court always
retains to itself to set at naught the award on the ground
of an error of law apparent on the face of the award. In
terms, he stated that the issue about the jurisdiction of
the arbitrator has never been parted with by the Court-
Generally speakings, common law courts were very reluctant
to part with its jurisdiction to set at naught an award on
the ground that the arbitrator had no jurisdiction to
entertain and decide the dispute. The Court went so far as
to say that the arbitrator cannot confer jurisdiction upon
himself by deciding in its own favour some preliminary
points upon which its jurisdiction rests. In fact, that is a
non-issue. It cannot be disputed that even the question of
jurisdiction of an arbitrator can be the subject matter of a
specific reference. If the parties agree to refer the
specific question whether the dispute raised is covered by
the arbitration agreement, it becomes a specific question of
law even if it involves the jurisdiction of the arbitrator
and if it is so, a decision of the arbitrator on specific
question referred to him for decision even if it appears to
be erroneous to the Court is binding on the parties. The
decisions relied upon by Mr. Pai do not derogate from this
legal position. We may briefly refer to those decision
In Produce Brokers Co. Ltd. v. Olympia Oil and Cake Co.
Ltd., it was held that “if the question which the arbitrator
takes upon himself to decide is not in fact within the
submission the award is a nullity. The arbitrator cannot
make his award binding by holding contrary to the true facts
when the question which he affects to determine is within
the submission.” Let us emphasise the ratio of the decision
that the arbitrator takes upon himself to decide a question
not within the submission. This would mean that the question
of law was not specifically referred to the arbitrator for
his decision but it was incidentally raised. In fact,
nowhere it was contended that any specific question of law
was referred to the arbitrator and if so what would be its
effect on the binding character of the decision was ever
raised in that case. In that case after an answer was
returned to the Special Case submitted for the opinion of
the court, the Committee of Appeal unreservedly accepted the
said answers upon the construction of the contract as a
matter of law apart from the custom of the trade, but
proceeded further to hold that there was a long established
and well-recognised custom of the trade in cases of re-sales
that buyers under the form of contract
146
in question impliedly agreed with their sellers that they
would accept the original shipper’s appropriation if passed
on without delay. On a motion by the buyers to have the
award set aside, of which notice was given, the Divisional
Court held that the arbitrators had no jurisdiction to find
conclusively the existence of a trade custom, and the Court
of Appeal on the authority of precedents but against their
own opinion, affirmed the decision. The appellant-seller’s
company appealed to the House of Lords. Lord Loreburn in his
speech observed that ‘these men of business made contracts
and therein agreed to arbitrate upon all disputes arising
out of their contracts. Yet there have already been seven
distinct stages of argument and decision, four of them in
courts of law, upon a dispute arising on those contracts,
and the end is not yet. I do not know how many more stages
there will be. Parties have a right to prefer what some may
consider the imperfect though expeditious wisdom of
arbitrators to the slower and more costly justice of His
Majesty’s courts. It is to be regretted when they have to
encounter the inconveniences of both methods with the
advantage of neither.” Approaching the matter from this
angle, the appeal was allowed and the decision of the
Committee of Appeal, taking note of the custom of the trade,
allowed the award to stand. This decision can in no way help
the respondent.
In Attorney General For Manitoba v. Kelly and Others 1
it was observed that “Whenever there is a difference of
opinion between the parties as to the authority conferred on
an umpire or arbitrator under an agreed submission the
decision rests ultimately with the court and not with the
umpire or arbitrator.” This is predicated upon a proposition
that common law courts were reluctant to part with their
jurisdiction to set at naught an award if the arbitrator
confers jurisdiction upon himself by deciding in his own
favour some preliminary point upon which his jurisdiction
rests.
Mr. Pai also referred to the decisions of the Privy
Council in Champsey Bhara & Co. and Hirji Mulji v. Cheong
Yue Steamship Co. Ltd. Both these decisions are of no
assistance on the question about the reference of a specific
question of law touching upon the jurisdiction of the
arbitrator for his decision and its effect. In fact. the
decision in Champsey Bhara’s case clearly turns upon as to
what constitutes an error of law apparent on the face of the
award.
147
The next case referred to was Heyman & Anrs. v. Darwins
Ltd. It reasserts that as a rule the arbitrator cannot
clothe himself with jurisdiction.
Turning to the decisions of this Court, reference was
first made to Jivarajbhai Ujamshi Sheth & Ors. v.
Chintamanrao Balaji & Anr. Shah, J. speaking for himself and
Justice Sarkar at page 499 observed that ‘this is not a case
in which the arbitrator has committed a mere error of fact
or law in reaching his conclusion on the disputed question
submitted for his adjudication. It is a case of assumption
of jurisdiction not possessed by him, and that renders the
award, to the extent to which it is beyond the arbitrator’s
jurisdiction, invalid”. It may be pointed out that these
observations are in the context of the facts of that case
and there was no contention before the court that any
specific question of law touching upon the jurisdiction of
the arbitrator was referred to for his decision by the
parties.
The last decision in this context referred to was Dr.
S.B. Dutt v. University of Delhi. In that case the
arbitrator gave by his award a direction to enforce the
contract of personal service. This was stated as an error of
law apparent on the face of the award and the award was set
aside. Again it may be pointed out that the reference to the
point set out in the letter of reference extracted at page
1240 clearly spells out that no specific question of law
touching upon the jurisdiction of the arbitrator was
referred to the arbitrator for his decision.
On a conspectus of these decisions, it clearly
transpires that if a question of law is specifically
referred and it becomes evident that the parties desired to
have a decision on the specific question from the arbitrator
about that rather than one from court, then the court will
not interfere with the award of the arbitrator on the ground
that there is an error of law apparent on the face of the
award even if the view of law taken by the arbitrator does
not accord with the view of the court. This view of law
taken in England was stated by this Court to be the same in
this country and since the decision in Seth Thawardas’s case
which follows earlier decisions in England and India, it has
not been departed from. The view canvassed for by Mr. Pai
that common law courts were very reluctant to part with its
jurisdiction has hardly any relevance where a specific
question of
148
law including the one touching the jurisdiction of the
arbitrator is referred to the arbitrator for his decision.
Even if the decision of the arbitrator does not accord with
the view of the court, the award cannot be set aside on the
sole ground that there is an error of law apparent on the
face of it.
Before we conclude on this point we must take note of a
contention of Mr. Pai that the respondent cannot be estopped
from contending that the arbitrator had no jurisdiction to
entertain the dispute as the respondent agreed to the
submission without prejudice to its rights to contend to the
contrary. It is undoubtedly true that in the letter dated
March 29, 1976 by which the respondent agreed to refer the
dispute to the arbitrator, it was in terms stated that the
reference is being made without prejudice to the position of
the respondent as adopted in the letter meaning thereby
without prejudice to its rights to contend that the claim of
the appellant is not covered by the arbitration clause. In
the context in which the expression ‘without prejudice’ is
used, it would only mean that the respondent reserved the
right to contend before the arbitrator that the dispute is
not covered by the arbitration clause. It does not appear
that what was reserved was a contention that no specific
question of law was specifically referred to the arbitrator.
It is difficult to spell out such a contention from the
letter. And the respondent did raise the contention before
the arbitrator that he had no jurisdiction to entertain the
dispute as it would not be covered by the arbitration
clause. Apart from the technical meaning which the
expression ‘without prejudice’ carries depending upon the
context in which it is used, in the present case on a proper
reading of the correspondence and in the setting in which
the term is used, it only means that the respondent reserved
to itself the right to contend before the arbitrator that a
dispute raised or the claim made by the contractor was not
covered by the arbitration clause. No other meaning can be
assigned to it. An action taken without prejudice to one’s
right cannot necessarily mean that the entire action can be
ignored by the party taking the same. In this case, the
respondent referred the specific question of law to the
arbitrator. This was according to the respondent without
prejudice to its right to contend that the claim or the
dispute is not covered by the arbitration clause. The
contention was to be before the arbitrator. If the
respondent wanted to assert that it had reserved to itself
the right to contend that no specific question of law was
referred to the arbitrator, in the first instance, it should
not have made the reference in the terms in which it is made
but should have agreed to the proposal of the appellant
149
to make a general reference. If the appellant insisted on
the reference of a specific question which error High Court
appears to have committed, it could have declined to make
the reference of a specific question of law touching his
jurisdiction and should have taken recourse to the court by
making an application under Sec. 33 of the Arbitration Act
to have the effect of the arbitration agreement determined
by the court. Not only the respondent did not have recourse
to an application under Sec. 33 of the Arbitration Act, but
of its own it referred a specific question of law to the
arbitrator for his decision, participated in the arbitration
proceeding invited the arbitrator to decide the specific
question and took a chance of a decision. It connote
therefore, now be permitted to turn round and contend to the
contrary on the nebulous plea that it had referred the
claim/dispute to the sole arbitrator without prejudice to
its right to contend to the contrary. Therefore, there is no
merit in the contention of Mr. Pai.
In this case, as earlier pointed out a specific
question as to whether the claim of compensation made by the
appellant-contractor and demurred and disputed by the
respondent would be covered within the scope, ambit and
width of the arbitration clause, was specifically referred
by the parties for the decision of the arbitrator.
Therefore, it is a case where a specific question of law
touching upon the jurisdiction of the arbitrator was
referred for the decision of the arbitrator by the parties.
Even if the view taken by the arbitrator may not accord with
the view of the court about the scope, ambit and width of
the arbitration clause, the award cannot be set aside on the
ground that there is an error of law apparent on the face of
the award. The view taken by the High Court is palpably
untenable and has to be reversed. On this short point, the
appeal can be allowed. However, it was strenuously urged by
both the sides that the dispute arising out of the claim for
compensation made by the appellant on account of the
increase in the cost of the pile driving equipment and
technical know-how fees would or would not be covered by the
first paragraph of Clause 40, we would briefly examine the
same to point out that it would be covered.
In order to ascertain whether the claim for
compensation for increase in the price of pile driving
equipment and technical know-how fees would be covered by
the arbitration clause, it is necessary briefly to refer to
the negotiations and discussions leading to the formation of
the contract for construction of the Repair Dock and the
Building Dock. The value of the works to be executed was
150
over Rs 24 crores. In respect of the construction of Repair
Dock, there was only the tender of the appellant and in
respect of the Building Dock, there were two tenders: one of
the appellant and another by M/s National Building
Construction Corporation, the tendered value of the latter
being double that of the former. Indisputably, the
respondent had a very limited or realistically no choice. In
such a situation the Tender Committee took notice of the
fact of the poor response to the invitation to tender. The
Committee took notice of such salient features of the work
being the complexity and magnitude of the works to be
undertaken by any Indian Contractor and the non-availability
of plant and equipment required for the works and more
especially that if the contractor was to procure the
specialised equipment required for the works, there was
hardly any assurance that after the works were over, the
machinery would be so much depreciated to have any
substantial use or utility to the contractor. In the
invitation to tender, it was indicated that requisite
foreign exchange for importing pile driving equipment and
machinery, spares and technical know-how amounting to about
Rs 2 crores in all would be made available to the contractor
from the 11th Yen Credit from Japan, subject to his getting
indigenous clearance and providing detailed justification.
Annexure IV to the General Conditions of Contract clearly
specifies that the tenderers while quoting shall give
separately the full details of the equipment for which they
would be requiring foreign exchange assistance. And they
shall also indicate the financial implication if any, for
providing not providing the foreign exchange assistance
indicated for the various equipments. Two things emerge from
recital of the facts herein enumerated in the course of
formation of the contract: (1) that the pile driving
equipment will have to be imported from outside India and
technical know-how fees will have to be paid both in foreign
currency and (2) this would necessitate investment of about
Rs 2 crores by the contractor. The contractor in his letter
dated July 14,1972 specifically invited the respondent to
confirm the modifications in the terms of contract as set
out therein. In paragraph 31 (E) (1), the contractor states
that all foreign exchange for the equipment, spares,
technical know-how and hiring of experts shall be provided
to the contractor and that the total foreign exchange on all
these accounts will be about Rs 2 crores. A sort of an
assurance was thus extended to the contractor that the same
would be made available to him from the 11th Yen credit from
Japan. This is not disputed. It is also an admitted position
that the necessary equipment, machinery, spares and
technical know-how were not available from Japan and the
availability of the 11th
151
Yen credit from Japan lost all significance. Further the
respondent by its letter dated January 24,1973 to the
appellant while accepting the tender of the appellant on
behalf of Cochin Shipyard Limited specifically stated as
under:
“You shall provide at your cost all construction
plant and machinery (including that requiring import)
for all items of work including RCC piling and Steel
Sheel Piling Works. Departmental machinery likely to be
made available for issue to the Contractor shall be as
in Annexure IV of the General Conditions of Tender.
You shall furnish an inventory of all plant and
machinery proposed to be used on the works including
items of imported machinery with probable date of their
availability at site for use on the work. This should
match with the Detailed Working Programme indicated as
above.”
At this stage a reference to the additional Terms and
Conditions/Modifications to the General Conditions and
Specifications of the Departmental Tender Documents, would
be advantageous. It reads as under:
“All Piling Equipment shall be procured by the
Contractor
………………………………………………
Selection of equipment will be done by the Contractor
in consultation with the Cochin Shipyard authorities.
No hire charges for the equipment procured by the
Contractor is payable to the Shipyard
………………………………………..Requisie
foreign exchange, for importing piling plant and
machinery, spares, technical know-how and hiring of
experts necessary for both the Dock Works, vide Work
order…. for Repair Dock etc., amounting to about Rs
2.00 crores in all will be made available to the
Contractor from the 11th Yen credit subject to his
getting indigenous clearance and providing detailed
justification”
It is thus unquestionably established that the
appellant whose tender was accepted after negotiations and
scrutiny by the Tender Committee was expected to invest Rs 2
crores in importing pile driving equipment and technical
know-how fees. The tender was accepted and a formal contract
was entered into on his basis. In works contract of such
magnitude, the value whereof was over Rs. 24 crores, and
which was being undertaken by an Indian contractor for
152
the first time negotiations prior to the finalisation of the
contract and the correspondence leading to the formation of
contract supply the basis on which contract was finally
entered into. Undoubtedly, if in the final written contract,
there is something contrary to the basic understanding
during the formative stage of the contract, the written
contract would prevail. But if the contract does not
indicate to the contrary and the assumptions appeared to be
the foundation of the contract obviously that aspect cannot
be overlooked while determining what were the obligation
undertaken under the formal contract. It may be recalled
that the two alternative rates were quoted by the
contractor: (i) the respondent were to import the pile
driving equipment and technical know-how for its operation,
the same would be leased to the contractor at negotiated
rates or (ii) the contractor were to import the same the
rates be paid to the contractor. The second alternative was
accepted by the parties on the fundamental assumption that
the investment in this behalf would be Rs 2 crores. This is
the agreed position on which contract was entered into. To
continue the narrative, it may be pointed out that this
fundamental foundation of the contract not left to guess
work, but is specifically referred to in the notice inviting
tender and in the specifications and modifications as
addenda to the General Conditions of Contract. It was
clearly understood between the parties that the contractor
has to invest roughly Rs. 2 crores in foreign exchange for
importing pile driving equipment and technical know-how fees
without which this work could never have been undertaken and
without which it would not have been entrusted to the
contractor. The contractor when he quote his terms must
obviously have made appropriate calculations, one of which
in this case appears to be that it will have to invest Rs. 2
crores in foreign exchange and this fact flies in the face
that after the work was over the imported machinery would
depreciate to this extent that it would have hardly any use
of utility to the contractor as noticed by the Tender
Committee. The rates quoted by the contractor were obviously
interrelated to the basic assumption. The fact that such was
also also the understanding of the respondent may now be
pointed out.
The respondent by its letter dated July 31, 1973 to
Industrial Adviser (HME), Directorate General of Technical
Development requested him to issue necessary clearance to
the appellant for import of the equipment set out in the
Annexure to the letter on the ground that the appellant
tried its level best to get the equipment from the Japanese
sources, but they could not get positive restive
153
response for such equipments. They had also tried their best
to get suitable offers from U. K., U. S. A. USSR, Canada,
West Germany and Holland. It was also pointed out that the
respondent itself also made independent enquiries in Japan
for getting suitable offers for the above equipment without
success. Thus it becomes clear that to the knowledge of the
respondent, the 11th Yen Credit became irrelevant. The
Government of India by its letter dated September 1,1973 to
the respondent conveyed its approval to the release of the
foreign exchange in favour of the appellant to the extent of
Rs 211.80 lakhs (Rupees two crores eleven lakhs and eighty
thousand only) equivalent to DFL 9, 442, 700 at the
specified exchange rate. Thereafter the appellant by its
letter dated May 28,1975 amongst others requested the
respondent to take note of the fact that the tendered rates
were based on certain total cost of machines which has since
gone up considerably rendering the rates no longer workable.
The contractor proceeded to point out the utter irrelevancy
of the rates in view of the higher outlay of imported
machinery and technical know-how. It pointed out the loss
sustained by the contractor and requested for compensation
in this behalf. This was followed by the letter dated July
1, 1975 by the contractor to the respondent, emphasising the
fact that the tendered rates had become unworkable and
unrealistic owing to the increase in the. cost of equipment.
know-how etc. as a result of the increase in the foreign
exchange rate of Dutch Guilders as related to the Rupee. In
response to the last letter the respondent replied by its
letter dated July 2, 1975, relevant portion of which may be
extracted:
“In this connection, a kind reference is invited
to your letter dated the 14th July, 1972 (which forms a
part of the contract documents) wherein you had
indicated that the total foreign exchange required by
you for the equipment, spares, technical know-how and
hiring of experts, was expected to be about Rs 2
crores. From the data enclosed with your letter under
reply, it is seen that the foreign exchange expenditure
incurred by you so far in connection with this contract
had been less than Rs 2 crores. In the circumstances,
it is difficult to accent the position that your tender
was based on assumptions indicated by you and that the
rates for pile driving should now be revised.”
This letter furnishes proof, if one was needed that
parties were ad idem that the investment for imported pile
driving equipment and foreign exchange know-how would be
about Rs 2 crores. The
154
respondent does not contest the claim for compensation under
this head as is now sought to be done on the ground that as
the contractor had to provide imported pile driving
equipment and technical know-how, the respondent is not
entitled to compensation even if the initial estimate has
been found to be unrealistic. On the contrary the claim for
compensation is disputed and controverted on the ground that
the foreign exchange expenditure incurred by the contractor
so far in connection with imported pile driving equipment
and technical know-how has been less than Rs 2 crores. From
this correspondence, it would emerge that both the parties
were agreed that the contractor would have to invest Rs 2
crores in foreign exchange for importing pile driving
equipment and technical know-how which could only be used
after approval of the same by the respondent. The appellant
by its letter August 9, 1975 contended that escalation of
expenditure under this head is taken care of in the contract
and more specifically in clauses 13 and 16 of the works
order. We would have occasion to refer to these clauses a
little later. The respondent by its letter dated August
29,1975 reasserted its position that the foreign exchange
element of the expenditure incurred by the contractor works
out to Rs 1.96 crores, which is less than the figure of Rs.
2 crores that was expected to be invested in foreign
exchange which was to be provided by the contractor, The
respondent also referred to the assessment of expenditure
made by the contractor as per its letter dated July 14,1972.
This has already been referred to by us. The respondent
further asserted that the estimate so made till that date
has not been exceeded and therefore, any argument based on
fluctuation in the exchange rate is not valid or tenable. It
may be repeated that the refusal to entertain the claim for
compensation was predicated upon the estimates having not
exceeded the basic minimum of Rs 2 crores by the contractor
on which rates were worked out and agreed, and not that such
claim cannot be entertained under the contract. By its
letter dated September 18,1975, the contractor reiterated
its position. In its letter dated October 6, 1975, the
respondent when it was faced with the situation that the
expenditure incurred under this head in foreign exchange had
risen to Rs 214.33 lacs i. e. it had exceeded the expected
investment of Rs. 2 crores under this head, took a summer
assault and stated that the respondent had at no stage
stated that the contractor was ‘not entitled to any claim
because the amount of foreign exchange has not yet exceeded
Rs 200 lakhs’. One has merely to call attention to the two
letters dated July 2, 1975 and August 29 1975 to reach the
conclusion that the respondent has gone back upon its
original position and having found that the expenditure
under this head has
155
gone up beyond the estimated expenditure made a volte face,
the two positions so adopted being entirely inconsistent
with each other Thereafter, the matter was referred to
arbitration.
From the commencement i.e, from the stage of inviting
tenders and through the negotiations and the finalisation of
the contract, at every stage, the respondent assured that
foreign exchange would be made available from 11th Yen
Credit. As the equipment was not available from Japan, the
availability of Yen Credit become otiose from the
contractor’s point of view. At the instance of and with the
active participation of the respondent the contractor made
enquiries in various countries and ultimately procured the
necessary equipment and technical know-how which was
approved by the respondent and imported the same. In the
time lag, the price as well as the foreign exchange rates in
relation to rupee underwent an upward change, with the
result that the contractor had to invest, as made out by it
and not seriously controverted before the arbitrator in all
Rs. 275.40 lakhs for imported pile driving equipment and
spares and Rs. 18,64, 337.61 on technical services-cum-know-
how fees and a further sum for higher custom duty. Details
of the claim have been set out in Annexures 1 and 2
respectively to the statement of claim submitted by the
appellant to the arbitrator. The respondent in its counter
statement did not controvert the details of the claim and
the expenditure involved under the two heads. The whole of
the counterclaim was concerned with the denial of its
liability to compensate the contractor coupled with the
contention that the claim would not be covered by the
arbitration agreement and therefore, the arbitrator had no
jurisdiction to entertain and adjudicate the claim. It may
also be mentioned that at no time since the award, the
respondent ever disputed or questioned the amount awarded by
the arbitrator. It is thus satisfactorily established that
the contractor had to invest something far in excess of Rs.
2 crores which it was expected to invest in foreign exchange
for imported pile driving equipment and technical know-how
fees. The whole contract was concluded on this
understanding. Being aware of the fluctuating position in
this behalf, the contractor had tendered two alternative
rates for completion of the work as pointed earlier; one
based on equipment being imported by the respondent and
leased to the appellant and alternatively rates on the basis
that the contractor would import pile driving equipment and
technical know-how. In respect of the second alternative,
which was ultimately agreed to between the parties, it was
clearly and unmistakably understood between the partiest had
156
the contractor would have to invest Rs. 2 crores and the
rates were co-related to this investment with the knowledge
of the fact that when work was completed, the equipment
would depreciate to the tune of 75% of its capability and
would be hardly of any use to the contractor. The estimated
expenditure having far exceeded, a claim for compensation
would certainly be tenable at the instance of the
contractor.
The High Court quoted clauses 16, 26 and 31 in its
judgment but did not dilate upon the provisions of the
clauses so as to correlate them with its decision. Clause 16
envisaged a situation where since the formation of the
contract any fresh law is enacted which has the bearing on
the price of materials incorporated in the works and/or
wages of labour, the terms of contract shall accordingly be
varied. Clause 26 provided for supply of materials, plants,
tools, appliances etc. by the contractor. Clause 2 provides
for the liability of the contractor to supply construction,
plant and machinery including the items to be imported and a
further obligation is cast on the contractor to furnish
inventory of the same. Clause 31 amongst others, provided
that the pile driving equipment shall be procured by the
contractor, and the selection of equipment shall be done by
the contractor, in consultation with the respondent. These
clauses were presumably referred to in the context of an
argument that the price escalation clause does not cover the
claim for compensation for additional expenditure on
imported plant and machinery and technical know-how because
the contract substantially provides for the same to be
supplied by the contractor. In our opinion, this over-
simplification of the clauses of the contract involving
works of such magnitude is impermissible. The whole gamut of
discussions, negotiations and correspondence must be taken
into consideration to arrive at a true meaning of what was
agreed to between the parties. And in this case there is no
room for doubt that the parties agreed that the investment
of the contractor under this head would be Rs. 2 crores and
the tendered rates were predicated upon and co-related to
this understanding. When an agreement is predicated upon an
agreed fact situation, if the latter ceases to exist the
agreement to that extent becomes irrelevant or otiose. The
rates payable to the contractor were related to the
investment of Rs 2 crores under this head by the contractor.
Once the rates became irrelevant on account of circumstances
beyond the control of the contractor, it was open to the
contractor to make a claim for compensation. Therefore, it
appears satisfactorily established that the claim arose
while implementing the contract and in relation to the
contract.
157
The next question is whether this claim made by the
contractor and disputed by the respondent would be covered
by the arbitration clause. The arbitration clause has
already been extracted. Even the High Court admits that
clause 40 is very widely worded. It inter alia provides that
all questions and disputes relating to the meaning of the
Specifications Estimates, Instructions, Designs. Drawings
hereinbefore mentioned and as to the quality of the
Workmanship or materials used on the work or as to the any
other questions claim, right, matter or thing whatsoever in
any way arising out of or relating to the contract———-
—————– or otherwise concerning the works or the
execution————————–whether arising during
the progress of the work or after completion—————-
——–shall be referred to the Sole Arbitrator etc.” The
scope, width and the ambit of the Arbitration clause is of
widest amplitude and any claim arising out of or relating to
the contract or otherwise concerning the works or the
execution thereof would be covered by the arbitration
clause. The material portion of clause 40 which would assist
us in deciding the questions is ‘claim’ right matter or
thing whatsoever in any way arising out of or relating to
the contract—————————–estimates or
otherwise concerning the works or the execution etc.”
Briefly stated any claim arising out of or relating to the
contract, estimates or otherwise concerning the works or the
execution thereof would be covered by the arbitration
clause. The question to be posed is “does the claim made by
the contractor arise out of or relates to the contract,
estimates, or is otherwise concerning works for execution
thereof ? Phrases such as ‘claim arising out of contract’ or
“relating to the contract’ or ‘concerning the contract’ on
proper construction would mean that if while entertaining or
rejecting the claim or the dispute in relation to claim may
be entertained or rejected after reference to the contract,
it is a claim arising out of contract. Again the language of
cl. 40 shows that any claim arising out of the contract in
relation to estimate made in the contract would be covered
by the arbitration clause. If it becomes necessary to have
recourse to the contract to settle the dispute one way or
the other than certainly it can be said that it is a dispute
arising out of the contract. And in this case the
arbitration clause so widely worded as disputes arising out
of the contract or in relation to the contract or execution
of the works would comprehend. Within its compass a claim
for compensation related to estimates and arising out of the
contract. The test is whether it is necessary to have
recourse to the contract to settle the dispute that has
arisen.
158
We may now turn to some decision to which our attention
was drawn. The first case we would like to refer to is A.M.
Mair & Co. v. Gordhandass Sagarmull. The Court was concerned
with the arbitration clause drawn up as; “all matters,
question, disputes, differences and/or claims, arising out
of and/or concerning, and/or in connection and/or in
consequence of, or relating to, the contract etc.” The
question arose whether the due date under the contract was
extended within the time, earlier reserved. The arbitrator
held that the due date of the contract has been extended by
a mutual agreement and the respondents were held liable to
pay a sum of Rs. 4,116 together with interest at the rates
specified in the award. It was contended that the dispute is
not covered by the arbitration clause. This Court while
holding that the dispute is covered by the arbitration
clause observed that looking to the rival contentions, such
a dispute, the determination of which turns on the true
construction of the contract, would also seem to be a
dispute under or arising out of or concerning the contract.
The test formulated was that if in settling a dispute, a
reference to the contract is necessary, such a dispute would
be covered by the arbitration clause.
In Ruby General Insurance Co. Ltd v. Pearey Lal Kumar
And Another this Court was concerned with the clause in a
policy of insurance which provided that differences arising
out of the policy shall be referred to the decision of the
arbitrator. In construing this clause, this Court observed
as under:
“The test is whether recourse to the contract by
which the parties are bound is necessary for the
purpose of determining the matter in dispute between
them. If such recourse to the contract is necessary,
them the matter must come within the scope of the
arbitrator’s jurisdiction.”
In Union of India v. Salween Timber Construction
(India) & Ors. this Court observed that the test for
determining the question is whether recourse to the contract
by which both the parties are bound is necessary for the
purpose of determining whether the claim of the respondent
firm is justified or otherwise. If it is necessary to take
recourse to the terms of the contract for the purpose of
deciding the matter in dispute, it must be held that the
matter is within
159
the scope of the arbitration clause and the arbitrators have
jurisdiction to decide the same. In so stating the
proportion of law, reliance was placed on Heyman & Anr. v.
Darwins Ltd. in which it was held that ‘where the parties
are at one in asserting that they entered into a binding
contract, but a difference has arisen between them whether
there has been a breach by one side or the other, or whether
circumstances have arisen which have discharged one or both
parties from further performance, such differences should be
regarded as differences which have arisen in respect of or
‘with regard to, or ‘under’ the contract, and an arbitration
clause which uses these, or similar expressions should be
construed accordingly. The Court affirmed the decision in
Ruby General Insurance Co. Ltd. case.
In Astro Vencedor Compania Naviera S. A. of Panama v.
Mabanaft G. M. B. H. The Diamianos a question arose whether
a claim in tort would be covered by the arbitration clause?
It was admitted that the claim for wrongful arrest is a
claim in tort. And it was contended that a claim in tort
cannot come within the arbitration clause. The Court of
Appeal speaking through Lord Denning held that the claim in
tort would be covered by the arbitration clause, if the
claim or the issue has a sufficiently close connection with
the claim under the contract.
In Gunter Henck v. Andre & CIE. S. A.3 the Court
(Queen’s Bench Division (Commercial Court) help that the
words ‘arising out of clearly extend the meaning than would
otherwise be applied to the clause were it limited to ‘all
disputes arising under the contract.
In the facts before us, the respondent in para 4 of its
counter-statement filed before the arbitrator specifically
referred to clause 16 of the General Conditions of Contract
and to the Additional Terms and Conditions Modifications
forming part of the contract document. In paragraph 11, it
was stated that the claim of the appellant was completely
outside the purview of the contract and the same does not
fall within the purview of the first paragraph of Clause 40
160
it was further stated in paragraph 13 that contract provides
for escalation in certain respects and that is the only
escalation which is admissible in terms of the contract and
the claim made by the appellant does not come within the
escalation clause nor in the agreed formula relating to such
escalation. The contractor relied upon Clause 13 of the
Additional Terms and Conditions Modifications which form
part of the contract document to sustain its claim. From the
pleadings, it clearly transpires that both the parties had
recourse to the contract which is admittedly entered into in
support of the rival contentions and therefore, the claim
made by the appellant would be covered by the arbitration
clause, which is of the widest amplitude, It is thus
satisfactorily established that the claim made by the
contractor would be covered by the arbitration clause.
Mr. Nariman also wanted us to examine whether the claim
made by the arbitrator would be admissible on the principle
of quantum merit. It is not necessary to examine this aspect
at all in the view which we are taking.
He also wanted us to adopt an approach that the effort
of the court must be to uphold the award and not to reject
it. We consider it unnecessary to dilate upon it.
The discussion leads to the inescapable conclusion that
a specific question of law touching the jurisdiction of the
arbitrator was specifically referred to the arbitrator and
therefore the arbitrator decision is binding on the parties
and the award cannot be set aside on the sole ground that
there was an error of law apparent on the face of the award.
It is also established that the claim for compensation made
by the arbitrator which led to the dispute was covered by
the arbitration clause. The quantum of compensation awarded
by the arbitrator was never disputed nor questioned.
Therefore, the High Court was clearly in error reversing the
decision of the trial court.
161
Accordingly this appeal succeeds and is allowed and the
Judgment of the High Court is set aside and the Judgment and
order of the Subordinate Judge, Ernakulam dated March 30,
1979 is restored with costs throughout-
N.V.K. Appeal allowed.
162