JUDGMENT
Shiv Narayan Dhingra, J.
1. This petition has been filed by the petitioner under Section 34 read with Section 13(5) and 16(6) of The Arbitration and Conciliation Act, 1996 for setting aside the award dated 30th March, 2001 passed by the sole Arbitrator (Respondent No. 2) and setting aside the orders of the Arbitrator dated 28th August, 1999 and 11th December, 1999.
2. The brief facts relevant for the purpose of deciding this petition are that petitioner entered into an agreement with respondent no. 1 for providing comprehensive architecture services in connection with planning and construction of College of Veterinary Science and Animal Husbandry at Selesih, Aizwal, Mizoram. As per this agreement, the respondent was to provide services as under:
3. That the services as to be provided by the Architects as mentioned above, out of the services of the owner agree to take the following services:
(a) Preparation of Master Plan after conducting pre-design studies of the project meeting the requirements, as provided by the owner sufficient for providing Master Plan.
(b) Preparation of complete architectural, Structural, Electrical, Plumbing, Air-conditioning, Heating and acoustic design including complete detailed engineering design as needed for the project sufficient for carrying out comprehensive work at site.
(c) Preparing detailed Bills of quantities for individual works as per drawings mentioned A: Clause (b) of the para as referred above. Preparing detailed specification after receiving Soil Investigation report pertaining to the site from the owner and recommending specification as are needed for an to suit the local climate conditions using indigenous material as available.
(d) Preparation of Tenders and Contract documents for invitation of bids from pre-qualified contractors for award of work to be incoming agencies capable of executing the contract as per the requirements of the project in phases as may be convenient to the owner.
(e) Providing site supervision commensurate for implementation of design work as to ensure construction of buildings as per design made by the Architects including implementation of all connected Engineering works at site and ensure correct execution of works.
(f) Checking of Running/Final Bills of Contractors and ensure payment for the work for correctly executed items of work with best workmanship and specifications as recommended for the purpose.
(g) Preparing of all completion drawings of buildings as executed at site including complete connected services drawings for the owners records. The mode of payment was as under:
4.0 SCALE OF PROFESSIONAL FEES / MODE OF PAYMENT AND TIME FRAME:
THE owner shall pay to the Architects a total fee of 2.5% (two and half percent) of the project cost as involved in Site Development work, Architectural, Structural Engineering, Sanitary, Plumbing, Drainage, Water Supply, Sewerage, landscape, Electrical, Air conditioning, Heating, Acoustic Design work as per fraction of total fees as spelt against each listed item of work under Clause 4.1 to 4.5 and 4.7 as per paras given as below, this is apart from Clause 4.6 for which there shall be a separate charge of 1% (One percent) of cost of Bill, for related services as elaborated in Clause 4.8.
The Architects Professional fee is linked with estimated cost of project based upon CPWD schedule of Rates 1995 as per % enhancement in rates carried out on 1993 Published schedule by Central Government. (emphasis added)
The Architects shall be responsible for preparing Master Plan for the University Campus and after its approval by the owner and receiving instructions for each item of work as listed at item 4.1, 4.2, 4.3 and 4.4 the Architects shall prepare complete drawings / documentation as listed at item 4.1 to 4.4 needed for execution of entire project as per Master Plan prepared and approved by the Campus by the owner.
It is further agreed to by the owner that in the 1st phase of work of quantum of at least about Rs. 10.00 crore shall be taken up in hand for execution at site and soon after appointment of Contractors and commencement of work the Architects shall provide supervision on the basis of fee as provided under item 4.5 and carry out the necessary checking of Bills of Contractors as submitted for the work done as listed at item no. 4.6 as read in conjunction with item no. 4.8. (emphasis added)
3. The payment of fee for each job of architect was linked with the percentage of the total fee receivable by the architect and the fee structure of each stage was given in the agreement itself. However, the total fee was to be as per the cost of project as specified in para above. The schedule of the work to be done by the architect was given in paras 4.1 to 4.7 of the agreement which gave date of start of the work and the date of completion of work of the architect. The agreement provided that the date of start of the work would reckon from 15 days after the release of first fee to the architect on receipt of the bill which shall be submitted after owner had given detailed requirements and data. Clause 7.1 of the agreement provided that all the stages of work were to be completed by the architect as per time schedule given in Clause 4.1 to 4.8 and the necessary approval given by the owner according to time schedule mutually agreed upon. The work throughout the stipulated period of contract was to be carried out with diligence, time being the essence of the contract. However, the time taken by the owner in giving approvals was in addition to the time schedule required in Architect’s office.
4. The agreement provided regarding termination of contract as under:
7.3 In the event of the failure on the part of the Architects to complete their work or the owner to give their approval and/or make payments within the time specified in the time schedule or in the event of either of the parties committing a breach of any one or other of the terms and conditions of the agreement, the aggrieved party shall be entitled to rescind this Agreement, without prejudice to its rights to claim damages or remedies under the law. The period of notice to be given to rescind the contract will be 30 (Thirty) days.
5. Clause 8 of the agreement provided for arbitration in following terms:
8.0 ARBITRATION
All differences and disputes arising between the owner and the Architect or any matter connected with this agreement or in regard to the interpretation of the content thereof shall be referred to the Council of Architect, New Delhi for final decision.
6. A dispute arose between petitioner and respondent no. 1. Respondent no. 1 initially suspended the work stating that his payments were not being released in time. The petitioner thereafter rescinded the contract/Agreement on 24.4.1998. The respondent no. 1 invoked arbitration clause and requested Indian Council of Architecture to appoint an Arbitrator vide letter dated 9th June, 1998 and letter dated 2nd November, 1998 and initiated arbitration proceedings.
7. The Indian Council of Architecture instead of acting as an arbitrator in the dispute between the parties, appointed Respondent No. 2 as the Sole Arbitrator. Respondent no. 2 passed the impugned award awarding sum of Rs.1,93,74,150/- plus interest of Rs.68,09,045/- up to 30th March, 2001 and future interest @ 18% on the entire sum. The award has been challenged by the petitioner inter alia following grounds:
1. Respondent no. 2 was not competent to act as an arbitrator. His appointment as the Arbitrator was null and void and not in accordance with the agreement.
2. Because Respondent No.2 wrongly dismissed the application of petitioner vide order dated 28.8.1999 challenging the appointment of arbitrator.
3. The appointment of Respondent No.2 as Arbitrator was made without proper notice to the petitioner.
4. No proper notice was given to the petitioner of arbitral proceedings.
5. That award passed by Respondent No.2 was contrary to substantive law in force in India.
6. The award given by the Sole Arbitrator was against the public policy.
7. The award was in collusion with Respondent No. 1, Respondent No. 2 and Respondent No. 3.
8. The award dated 30th March, 2001 was null and void since the arbitration agreement itself was not valid. Respondent No. 1 obtained the contract by playing fraud upon the petitioner. Respondent No. 1 was a company and was not a firm of architects within the meaning of Architecture Act 1972 and was not under the disciplinary control of Counsel of Architecture. Respondent No.1 falsely made the petitioner to believe that they were architects under control of Respondent No.3.
8. The arbitrator agreement, re-produced in para 05 would show that all differences and disputes arising between the parties connected with the agreement were to be referred to The Council of Architecture for final decision. It is clear that it was The Council of Architecture, who was appointed as Arbitrator in the agreement, Respondent no. 2 was not the agreed Sole Arbitrator between the parties. It was not provided in the Arbitration Clause between the parties that The Council of Architecture may appoint some other arbitrator to decide the dispute between the parties. The petitioner’s contention is that the petitioner had agreed for arbitration by The Council of Architecture because the architects are normally under the disciplinary control of The Council of Architecture in respect of professional matters. There was no authority given to The Council of Architecture for further appointing an arbitrator.
9. The agreement between the parties was categorical, if The Council of Architecture was not in a position to act as an arbitrator, it could have refused to act as an arbitrator. The Council could not have further appointed an arbitrator as this was not agreed between the parties. The petitioner raised this objection about the appointment of the arbitrator and the authority of the arbitrator but this objection was turned down by Respondent No. 2 i.e. the Arbitrator. I consider that the very appointment of arbitrator in this case was contrary to the agreement. The agreement had not authorized The Council of Architecture to appoint an arbitrator to arbitrate the dispute between the parties. The agreement only appointed The Council of Architecture as the Arbitrator and the decision of The Council of Architecture was to be final. The purpose behind appointing The Council of Architecture as arbitrator was because it is a multi-member body and there was no possibility of influencing all the members by any side. Also because The Council of Architecture is the professional disciplinary body of practicing architects and the decision of The Council of Architecture would be fair. However, The Council of Architecture misconstrued the arbitration clause and instead of acting as an arbitrator wrote a letter to Respondent No. 2 dated 17th November, 1998 observing as under:
The COA noted that the parties of their own volition entered into the Agreement which contain an Arbitration clause to refer the differences and disputes arising out of the Agreement for adjudication and abide by the decision of the Arbitrator. After considering the substance of the Arbitration clause. I on behalf of the COA, appoint you as a sole arbitrator and request you to proceed with the arbitration and call for claims from the concerned parties.
10. Since there is no ambiguity in the arbitration clause, the petitioner had agreed only to the arbitration of The Council of Architecture and any other person acting as an Arbitrator was contrary to the agreement. The petitioner objected to it at the very initial stage. The submission of petitioner that the appointment of Respondent No. 2 as an arbitrator was contrary to the arbitration clause has, therefore, force. In terms of the agreement only The Council of Architecture could have acted as the arbitrator of the parties. The parties had not authorized The Council of Architecture to appoint another arbitrator.
11. The other ground taken by the petitioner is that the petitioner was not given proper notice about appointment of Respondent No. 2 as arbitrator as well as regarding arbitral proceedings. The respondent no. 1 / claimant had filed an OMP under Section 9 of the Arbitration and Conciliation Act before this Court pleading that a dispute had arisen between the petitioner and respondent which was likely to be referred to the arbitration, and it was also pleaded that the petitioner was avoiding arbitration proceedings. A direction was sought by the respondent/claimant from the Court that the petitioner should be directed to submit to the arbitration. This Court granted injunction against the petitioner restraining petitioner from alienating, damaging, destroying or mutilating the drawings mentioned in the application. During pendency of this petition, the petitioner had joined the arbitration proceedings and also raised objection about authority of arbitrator therefore, it cannot be said that adequate notice was not given to the petitioner either in respect of arbitral proceedings or in respect of appointment of arbitrator. The entire arbitral proceedings had taken place after the petitioner had joined the arbitration proceedings. Even if, initially, sufficient notice was not given to the petitioner, after filing of a petition under Section 9 by the claimant in this Court, the petitioner had sufficient notice of invoking the arbitration clause and all the arbitrary proceedings and the petitioner did join the arbitral proceedings. I find no force in this objection, raised by the petitioner.
12. The next objection raised by the petitioner is that the arbitrator/respondent No. 2 decided the dispute contrary to substantive law and contrary to contract between the parties. It is argued by the counsel for the petitioner that the arbitrator not only acted contrary to the provisions of the contract act but also gave award contrary to the agreement between the parties.
13. A perusal of contract between parties would show that fee payable to the architecture was linked to the cost of the project and the estimated cost of project was based on CPWD rate schedule of 1995 along with percentage enhancing rate, carried out in 1993. It is also clear from the agreement that the work was to be done in phases and first phase of work to be taken in hand for execution at site was to be at least of 10 crore. The architect was to provide services as agreed in Clause 3 and claime fee on the basis of Clause 4.5 taking into account the estimated cost of the work taken in hand. The architect was to get its fees on percentage basis, phase-wise and architect was not to get fee on the basis of entire cost of project from the very beginning.
14. This is evident from the minutes of meeting between petitioner and respondent no. 1 dated 6th March, 1997 that the building was to be zoned out suitably in following manner:
1. Administration
2. Academic
3. Residential
4. Recreational
5. Other facilities
15. In the same meeting, it was observed that architect agency shall submit detailed structural plan and estimate in respect of buildings/site development which could be executed within Rs.15 crore in the first phase of the work. On 17th October, 1997 architect firm (respondent no. 1) wrote letter to the petitioner which reads as under:
Sub: Payment of professional fee as per revised estimates on plinth areas basis, as stand approved by yourselves.
Dear Sir,
This is to bring to your kind notice that the revised estimates are approved by yourselves after amending and incorporating all the suggestions as made by the ICAR vide its letter F NO. 42-3/95-Edv.-IV dated 16/9/1997, as addressed to yourself. On the basis of estimates as approved by yourselves the average plinth area rates as applicable to Building as proposed to be built at site for Non-Residential Area works out @ Rs. 4652.00 (refer details enclosed) and for Residential Area works out @ Rs. 4,150.00. The cost of Non Residential/Residential Buildings as per approved Master Plan by yourselves as well as ICAR based upon plinth area rates of 1.1.1992 basis, with cost index 32 as applicable in 1995 works out at Rs.24,05,32,702.00 and cost of Site Development Rs. 47,54,400 together with cost index of 32% as prevalent in 1995 works out at Rs.62,75,808.00
The total cost of project as per approved Master Plan works out @ Rs.24,68,08,510.00 for the purpose of payment of our fee on the conditions of agreement as adopted by you.
We have to bring to your knowledge that our fee on the above quoted project cost for Master Plan preparation as per Clause 4.1 comes to Rs.12,34,042.00 against
which stage we have been paid so far a sum of Rs.8,17,608.00 in account, and balance payment of Rs.3,85,056.00 remains to be paid by yourselves.
The fee for preparation of Architectural Drawings as per Clause 4.2. (a.b.c) of the contract comes to Rs.20,82,446.00 against which stages of payment we have been paid Rs.13,79,711.00 and balance of Rs.6,49,784.00 remains to be paid.
The total payment as outstanding against stages as referred to above, becomes Rs. 10,34,840.00. It is requested that the same may please be released since we are under great financial constraint because of payment being held up at your end.
Out of this amount we have already raised bills Nos. 7 and 8 and place before yourselves for payment as enclosure to our letter No. BAPL:97:CAU:2329 dated 09/06/1997, for a sum of Rs. 3,85,056.00, and a further payment of Rs.6,49,784.00 is due for which we enclose herewith Pre-receipted Bill NO. 11 and 12
Awaiting your early release of payment.
We remain,
Yours faithfully,
for BHARGAVA and ASSOCIATES PVT. LTD.
Sd/-
(S.C.BHARGAVA)
CHAIRMAN
16. It is clear from above letter that total fee payable for the Master Plan of the entire project to the respondent was Rs.12,34,042/- and an amount of Rs.8,17,608/- had already been paid so, the balance payable was Rs.3,85,056/-. However, the Arbitrator ignored the contract between the parties and also ignored the admitted letter of the respondent stating the admitted basis of cost on which the fee was payable to the respondent and awarded an additional sum of Rs.42,28,072/- to the respondent no. 1, only for the Master Plan.
17. It is apparent from record that the entire premises of the decision of the Arbitrator and the basis of calculation was contrary to the agreement between the parties. While Respondent No. 1 in his letter dated 17.10.1997 stated that the total cost of project was Rs.24,68,08,510/-, the Arbitrator in a strange fashion held that total cost of the project was Rs.60,07,43,545/-. There was no dispute between the parties over total cost of project being Rs.24,68,08,510/- and this being the basis of claiming professional charges by Respondent No. 1. However, the Arbitrator, in a highly unwarranted manner first imagined this dispute and then enhanced the professional fees of Respondent No. 1 by about two and half times by enhancing the total cost of project in an arbitrary manner. The agreement very specifically provided that the calculation of fees was to be phase-wise and the bills were to be raised in respect of the phase under construction. The agreement also provided that the first phase shall not be of less than Rs.10 crore. In view of this specific agreement, the observation of the Arbitrator that there was shifting from the basis of claimant’s work is contrary to the contract between the parties and the award stands vitiated on this ground alone. The Arbitrator’s observation about total cost of project is contrary to the record. The Arbitrator wrongly assumed that the architect had not calculated or was not aware of the cost of the project. The record of the Arbitrator shows that respondent no. 1 did prepare estimate of the project cost and submitted it to the petitioner. The project cost as per contract is found in the report of Arbitrator at pages 839-867 vol. (iv). This report was the initial report submitted by the architect and this included cost study of the project. A perusal of report would show that per square meter cost was calculated in respect of non-residential, residential areas and cost of phase I of the project which was to be undertaken was calculated by respondent no. 1. This cost was Rs.7,73,76,508/- for non-residential building and Rs.8,21,96,595/- for residential building total cost was arrived at Rs.15,95,73,103/-. There were some changes in the area in respect of non-residential building and these changes seem to have been incorporated later on by pen in the report and total cost was modified taking into account these changes in area of residential and non-residential buildings to 12,08,66,073/-. Thus, the observations of the Arbitrator are contrary to his own record. It is also to be noted that the basis for raising of bills by architect is given in the contract between the parties and on this basis respondent no. 1 had written letter dated 17th October, 1997 reproduced above and the total cost of project for the purpose of bills of the respondent was to be Rs.24,68,08,510/- as mentioned in the letter of the respondent no.1 itself. The learned Arbitrator could not have taken Rs.60,07,43,545/- as the total cost of the project. Thus, the basis on which the arbitrator allowed the claim of Respondent No.1 was contrary to the agreement. Even Respondent No.1 in its bills and in the letters written to the petitioner had not taken the total cost of the project as Rs.60,07,43,545/- while raising bills. Respondent No. 1 was to raise bills on the basis of cost of part of the project in hand in terms of the agreement. The Respondent No. 1 categorically stated that the cost of the project as per approved Master Plan was Rs.24,68,08,510/- for payment of fees in view of the conditions of the agreement. This is strange that arbitrator gave award holding the cost of the project as Rs.60,07,43,545/- for the purpose of calculation of fees of Respondent No.1. No dispute was there in respect of cost of project nor such a dispute was referred to the arbitrator. Arbitrator in a very strange manner first assumed jurisdiction to decide the cost of project and then came to conclusion that cost of project should be Rs.60,07,43,545/- and not Rs.24,68,08,510/- which was the basis of agreement and also basis of claim of respondent.
18. It is settled law that an award can be set aside, if it is contrary to justice or morality and if it is patently illegal. The illegality should go to the root of the matter and should not be of trivial nature. In the present case, the illegality committed by the arbitrator in calculating the damages goes to the root of the matter. The Arbitrator took the cost of the project more than double of the agreed cost between the parties and admitted cost as Respondent No.1’s own letter. The award given the Arbitrator is not only unfair and unreasonable but it shocks the conscious of the Court and is liable to be set aside on this ground alone.
19. It is not disputed that the contract between the parties got terminated when the first phase of construction was in progress. The total cost of first phase was around Rs.12 crore and the architect would have been entitled to raise bills on the basis of cost of first phase and that also if he had completed the work of the first phase including supervision, providing of structural drawings, working drawings, architecture drawings etc. The architect was entitled to 2.5% of the fees based on the cost of the project of the first phase. After completion of first phase, the architect would have been entitled to a total fees of Rs.30,21,652/- less proportionate fees for Master Plan to which the architect was entitled on the basis of total cost of project since fees for Master Plan was payable separately in terms of the total cost of the project. This fees even according to the letter of respondent was Rs.12,34,042/-. However, surprisingly, the arbitrator gave an award in favor of the claimant for a sum of Rs.2,61,83,195/- on the basis of cost of the total project @ 2.5% of the total projected cost of the entire project. This was contrary to the contract between the parties. It is settled law that the Arbitrator cannot travel beyond the contract and is bound by the terms of Contract. Even an Arbitrator cannot be permitted to act irrationally and arbitrarily. Respondent No. 1 in his letter dated 7th October, 1997 stated that fees for Master Plan preparation in terms of Clause 4.1 comes to Rs.12,34,042/-. The arbitrator contrary to this evidence came to the conclusion that fees for the Master Plan would be Rs.30,03,717/- i.e. 2′ times of the admitted amount by Respondent No.1. It is settled law that an agreement is to be construed in the way the parties understood it. Respondent no. 1 was an architect and the entire agreement entered with the petitioner was stereotype agreement which is normally entered by architects with their clients because it contains clauses which are more favorable to the architect. The arbitrator went far beyond the contract as understood by Respondent No.1 itself. Respondent No. 1 in terms of the agreement wrote letter dated 7th October, 1997 but the arbitrator, who himself was an architect seemed to be extremely biased in favor of Respondent No. 1 and seemed to be interested in unjustly enriching Respondent No. 1 and for this reason he awarded the cost of Master Plan 2′ times the admitted amount by Respondent No. 1 and consequent by quantum of fees got raised by about 2′ times of the agreed amount by arbitrarily calculating the total cost of the project @ Rs.60,07,43,545/- against the admitted cost of project by Respondent No. 1 of Rs.24,68,08,510/-. The bias in favor of Respondent No. 1 is writ large on the award itself. I consider that the award is liable to be set aside on this ground as well.
20. The other ground taken by the petitioner is that the agreement with the Respondent No. 1 was null and void since it was procured by fraud. This point was also raised before the arbitrator by the petitioner. The Arbitrator vide its order dated 11th December, 1999 rejected this contention. The plea of the petitioner was that Respondent No. 1 being a company under the Companies Act does not fall within meaning of the term ‘Firm’ as per Section 37 of the Architects Act thus, Respondent No. 1 was not an architect within the meaning of Section 37 of the Architects Act. I consider that the petitioner had entered into the agreement in question, with open eyes and after entering into an agreement with Respondent No. 1 company, the petitioner cannot take the stand that Respondent No. 1 played fraud with petitioner regarding its structure and its competence to be an architect. The arbitration clause cannot be declared null and void on this ground.
21. The award of the arbitrator is founded on the premises that Respondent No. 1 was entitled to recover the total cost of the Master Plan based on the estimated cost of the project as Rs.60,07,43,545/-, the Arbitrator could not have gone further and awarded damages also for use of the Master Plan. The Arbitrator in this case awarded damages to the tune of Rs.27,59,644/-. Damages are awarded to a person where a person suffers loss due to rescinding of the contract. Where the entire cost of the Master Plan in accordance with the projected cost of the project is awarded, the question of suffering further loss does not arise. The decision of the arbitrator in awarding damages simultaneously with the total cost of Master Plan is thus, contrary to the Contract Act. Moreover, the contract between the parties was a service contract and if the services were not found satisfactory at any point of time by the petitioner, the petitioner was at liberty to terminate the contract and the respondent no. 1 was liable to the fees only for the service rendered by the respondent no. 1 till the time of termination of the contact.
22. I, therefore, consider that the Award of the Arbitrator is liable to set aside and is hereby set aside.