PETITIONER: UNION OF INDIA Vs. RESPONDENT: JAIN ASSOCIATES DATE OF JUDGMENT19/04/1994 BENCH: RAMASWAMY, K. BENCH: RAMASWAMY, K. VENKATACHALA N. (J) CITATION: 1994 SCC (4) 665 JT 1994 (3) 303 1994 SCALE (2)604 ACT: HEADNOTE: JUDGMENT:
The Judgment of the Court was delivered by
K. RAMASWAMY, J.- Special leave granted.
2. The respondent had entered into a contract on 7-1-1983
to construct
13 units of Type-V Quarters at the estimated cost of Rs
27,34,000. He was to complete the construction and hand
over possession on 13-8-1984. Despite extension of the time
on 7 occasions, finally up to 30-6-1988, the construction
was not completed resulting in termination of the contract.
As up to 34th bill the appellant paid to the respondent a
sum of Rs 24,34,100.91 ps. towards the executed work. The
contractor laid proceedings under Section 20 of the
Arbitration Act, 1940 (for short ‘the Act’) for reference to
arbitrate the disputes. The joint arbitrators appointed
thereon entered upon reference on 10-4-1989 and nominated Mr
A. Biswas, the second respondent as an umpire. Since the
joint arbitrators could not make and publish the award
within the time, the umpire was called upon to enter upon
the reference. Accordingly on 25-4-1990 the umpire had
entered upon the reference and made an interim award on
26-7-1990 for a sum of Rs 6,02,000. The contractor laid his
claim for a sum of Rs 37,37,885. The appellant laid
counter-claim for Rs 9,49,701.50 ps. On 3-9-1990 the
appellant requested the umpire to consider the counter-
claim. On 4-9-1990, the umpire refused to consider the
counter-claim on the ground of belated counter-claim. On
request the time to make and publish the award was extended
up to 31-1-1991. The umpire held finally sitting on 19-12-
1990 (it is disputed across the bar by the contractor) and
he made the award on 24-12-1990 for a sum of Rs 24,18,320 in
favour of the contractor. The umpire also awarded interest
at 18% up to 10-4-1989 and post-award interest. He did not
grant any pendente lite interest. The appellant challenged
the award on diverse grounds under Sections 30 and 33 of the
Act. Ultimately the Division Bench of the Calcutta High
Court in Appeal No. 453 of 1991 dated 16-9-1992
668
confirmed the award for a sum of Rs 20,07,320 and awarded
pendente lite interest. On a review, it was held by an
order dated 4-2-1993 that the Bench committed mistake in
thinking that the umpire granted pendente lite interest and
is a mistake of fact and law but had confirmed the
pendente lite interest on its power. Thus these two
appeals, with a delay of 137 days in filing the appeal against
original judgment. The delay is condoned.
3. The learned Solicitor General contended that the
Division Bench having held that the umpire committed
illegality in awarding damages twice over on claims 11 and
12, though the contractor was entitled to damages only in
respect of one claim, committed manifest error of law in
upholding the entire award. The fact that the umpire had
committed illegality in awarding damages twice over would
indicate his non-application of judicious mind to the claims
in an objective manner. In a non-speaking award it is
difficult to decide how he adjudged the claims. Thereby he
committed misconduct which entails the setting aside of the
award as a whole and the doctrine of severability becomes
inapplicable to the facts of this case. His next contention
was that under clause 62 of the general conditions, certain
matters were to be finally determined by the Railways and
the arbitrator lacked jurisdiction to decide these claims
and thereby the award gets vitiated by manifest illegality
on its face. There was sufficient time for the arbitrator,
even after the extended time to make the award in respect of
the counter-claim. But was not done, which would also prove
the non-application of judicious mind in an objective and
dispassionate manner and thereby the award gets vitiated by
misconduct committed by the umpire. The 3rd contention is
that the court lacked power to award pendente lite interest
by operation of Section 29 of the Act. Shri Soli Sorabjee,
the learned Senior Counsel for the respondent-contractor
contended inter alia that though the award is a non-speaking
award since the umpire granted each claim separately, the
claims on items 11 and 12 are severable from the rest of the
award. The High Court upheld the highest of the two claims
granted by the umpire. The claim for loss of profits on
item 11 and for damages on item 12 are distinct and separate
concepts. The umpire, therefore, was justified to grant
separate amounts on each of the claims which would show
active consideration and application of the mind. Hence it
is Dot a misconduct. Even otherwise they are severable from
the rest of the award, which could be sustained. The grant
of pendente lite interest by arbitrator was not a settled
principle till the Constitution Bench decision of this Court
in Secretary, Irrigation Department v. G. C. Roy’ was
rendered. Earlier Division Bench of this Court in Executive
Engineer (Irrigation) v. Abhaduta Jena2 where it was held
that arbitrator had no power to award interest pendente
lite, was overruled. In this twilight zone of law, the
arbitrator did not award interest pendente lite. In view of
the Constitution Bench judgment in G. C. Roy case, the grant
of pendente lite interest by the court is legal. Even
otherwise if this
1 (1992) 1 SCC 508
2 (1988) 1 SCC 418:(1988) 1 SCR 253
669
Court finds that the High Court committed illegality in
granting interest pendente lite the matter requires
remittance to the umpire, for fresh decision in this behalf.
Similarly on the counter-claim, it was contended, that no
counter-claim in fact was laid, although belatedly a
counter-statement was made, as found by the umpire. This
point was not argued before the Single Judge nor seriously
disputed before the Division Bench. Even otherwise, this
dispute also could be remitted to the umpire for
reconsideration.
4. The first question that arises for consideration is
whether the court could award interest pendente lite.
Section 29 of the Act says that insofar as award is, for the
payment of money, the court may in the decree, order
interest from the date of the decree at such rate as it
deems reasonable, to be paid on the principal sum adjudged
by the award and confirmed by the decree. In Srikantia &
Co. v. Union of India3 it was held that Section 29 carries
with it the negative import that it shall not be permissible
to the court to award interest on the principal sum adjudged
in the award for a period prior to the date of the passing
of the decree. The same principle was reiterated in Ram
Singh v. Ram Singh4. Section 29 of the Act empowers the
court, that where the award is for payment of money, to
grant reasonable rate of interest on the principal amount
adjudged and confirmed in the decree, only from the date of
the decree. Section 34 CPC empowers the court, where there
is a decree for payment of money to grant interest pendente
lite and future, till the date of realisation. Since
Section 29 of the Act enables the court to grant interest on
the principal amount adjudged in the award and confirmed in
the decree only from the date of the decree, it carries a
negative import with it that the court has no power to grant
interest pendente lite. The High Court, therefore, was not
right in granting interest pendente lite, which the
arbitrator himself had not granted.
5. The second question relates to rejection of the counter-
claim. It is seen that the point was taken before the Single
Judge that counter-claims were laid before the arbitrator.
The record also discloses that the appellant laid counter-
claim. On 4-9-1990 the umpire refused to consider the
counter-claim. It is further seen that the parties mutually
agreed to extend time to enable the arbitrator to make and
publish the award by 31-1-1991. Whether or not the final
sitting was held on 19-12-1990, the fact remains that there
was ample time for the umpire to consider the counter-claim
of the appellant and pass appropriate award in that behalf.
But he failed to do so. This would bear upon the finding on
second question raised by the parties and shows that the
rejection of counter-claim was unwarranted.
6. The crucial question is whether the umpire committed
misconduct by non-application of mind to the claims and
counter-claims and of its consequences. Claim 11 is founded
upon the allegations of delay, ]aches, negligence and
default on the part of the appellant, said to have resulted
in loss of profits to the contractor in a sum of Rs 4,93,696
and the umpire
3 AIR 1967 Bom 347
4 AIR 1985 Raj 148 : 1984 WLN 572
670
awarded Rs 4,11,400. Claim 12 again founded upon the self
same alleged laches and negligence of the appellant for the
damages suffered by the contractor in a sum of Rs 12,00,000
and the umpire awarded Rs 6,00,000. The High Court found in
its judgment that “there is much substance in the submission
of the learned counsel for the petitioner that the umpire
has given damages twice over against the same claim though
shown as two claims, namely, claims 11 and 12 and the
claimant is not entitled to both the claims due to damages”.
“There is an error of law as well as fact” but “in the
interest of justice and fair play the lesser amount of Rs
4,11,400 against claim 11 is omitted and Rs 6,00,000 towards
claim 12 is retained”. Section 73 of the Contract Act
provides that when a contract has been broken, the party
which suffers by such breach is entitled to receive from the
party which has broken the contract, compensation for any
loss or damages caused to him thereby which naturally arose
in the usual course of things from such breach. A perusal
of both the claims would show that claim 11 is founded on
loss of profits and claim 12 is founded for damages, based
upon delay, laches and negligence alleged against the
appellant, resulting in breach of the contract. In other
words the contractor claimed compensation for breach of
contract arising under Section 73 of the Contract Act. The
respondent, it is held by the Division Bench, is given same
type of damages twice over and that holding is not
challenged by respondent. Yet the question is whether the
umpire had applied his mind in a judicious manner so as to
bind the parties by his award made on various claims. In
Law of Arbitration, by Justice Bachawat, a former Judge of
this Court at p. 316, it is stated that:
“An arbitrator is not a conciliator. His duty
is to decide the question submitted to him
according to the legal rights of the parties
and not according to what he may consider fair
and reasonable.”
Russell on Arbitration, 20th Edn. at p. 318
also lays the same principle.
7. In K.P. Poulose v. State of Kerala5 this Court held
that misconduct under Section 30(a) does not connote a moral
lapse. It comprises legal misconduct which is complete if
the arbitrator, on the face of the award, arrives at an
inconsistent conclusion even on his own finding, by ignoring
material documents which would throw abundant light on the
controversy and help in arriving at a just and fair
decision. It is in this sense that the arbitrator has
misconducted the proceedings in the case. In that case the
omission to consider the material documents to resolve the
controversy was held to suffer from manifest error apparent
ex facie. The award was accordingly quashed. In Dandasi
Sahu v. State of Orissa6 this Court held that the arbitrator
need not give any reasons. The award could be impeached
only in limited circumstances as provided under Sections 16
and 30 of the Act. If the award is disproportionately high
having regard to the original claim made and the totality of
the circumstances it would certainly be a case of non-
application of mind amounting to legal misconduct and it is
not
5 (1975) 2 SCC 236 : 1975 Supp SCR 214
6 (1990) 1 SCC 214
671
possible to set aside only invalid part while retaining the
valid part. In other words the doctrine of severability was
held inapplicable in such a situation. It is, therefore,
clear that the word ‘misconduct’ in Section 30(a) does not
necessarily comprehend or include misconduct of fraudulent
or improper conduct or moral lapse but does comprehend and
include actions on the part of the arbitrator, which on the
face of the award, are opposed to all rational and
reasonable principles resulting in excessive award or unjust
result or the like circumstances which tend to show non-
application of the mind to the material facts placed before
the arbitrator or umpire. In truth it points to fact that
the arbitrator or umpire had not applied his mind and not
adjudicated upon the matter, although the award professes to
determine them. Such situation would amount to misconduct.
In other words, if the arbitrator or umpire is found to have
not applied his mind to the matters in controversy and yet,
has adjudicated upon those matters in law, there can be no
adjudication made on them. The arbitrator/umpire may not be
guilty of any act which can possibly be construed as
indicative of partiality or unfairness. Misconduct is often
used, in a technical sense denoting irregularity and not
guilt of any moral turpitude, that is, in the sense of non-
application of the mind to the relevant aspects of the
dispute in its adjudication. In K. V. George v. Secretary
to Government, Water & Power Department, Trivandrum7 this
Court held that the arbitrator had committed misconduct in
the proceedings by making an award without adjudicating the
counter-claim made by the respondent. In Indian Oil Corpn.
Ltd. v. Amritsar Gas Service8 the counter-claim was rejected
on the ground of delay and non-consideration of the claim,
it was held, constituted an error on the face of the award.
8. The question therefore is whether the umpire had
committed misconduct in making the award. It is seen that
claims 11 and 12 for damages and loss of profit are founded
on the breach of contract and Section 73 encompasses both
the claims as damages. The umpire, it is held by the High
Court, awarded mechanically, different amounts on each
claim. He also totally failed to consider the counter-claim
on the specious plea that it is belated counter-statement.
These facts would show, not only the state of mind of the
umpire but also non-application of the mind, as is
demonstrable from the above facts. It would also show that
he did not act in a judicious manner objectively and
dispassionately which would go to the root of the competence
of the arbitrator to decide the disputes.
9. It is true that if the bad portion of the award is
severable from the good part the court may set aside the bad
part and uphold the rest of the award. But when it hinges
upon the state of mind of the arbitrator or the umpire, the
award being a non-speaking award, it is not reasonably
certain as to what part of the award is good and vice versa.
And if such a part cannot be separated then the whole award
must be declared as invalid and it would be set aside on the
ground of misconduct under Section 30(a) of the Act.
7 (1989) 4 SCC 595
8 (1991) 1 SCC 533, 544
672
10. In Russell on Arbitration at p. 485, it
is stated thus:
“The bad portion however must be clearly
separable in its nature in order that the
award may be good or the residue. Where it is
divisible is the faulty direction will alone
be set aside or treated as null.”
At p. 486 it is stated that:
“If the objectionable portion in the award is
inseparable from the rest, on not so clearly
separable that it can be seen that the part of
the award attempted to be supported is not at
all affected by faulty portion, the award will
be altogether avoided.”
In Basant Lal Banarsi Lal v. Bansi Lal Dagdulal9 this Court
finding that the contract in question was illegal and
prohibited by law and consequently the award made under the
arbitration clause this Court held that the award was one
and inseparable from the rest of the disputes covered by it
and the disputes might not have legally and validly been
referred, the whole award was rightly set aside. In
Jivarajbhai Ujamshi Sheth v. Chintamanrao Bala ill’ this
Court found that it was impossible to sever the award since
the arbitrator had committed not a mere error of fact or law
in reaching its conclusion, the entire award was set aside.
In Mattapalli Chelamayya v. M. Venkataratnam11 this Court
held that where a severable part of an award cannot be given
effect to for a lawful reason, there is no bar to enforce
the part to which effect could be justly given. The same
principle was reiterated in Upper Ganges Valley Electricity
Supply Co. Ltd. v. U.P. Electricity Board1 2 holding (SCR at
p. 1 15 : SCC pp. 260-6 1) that the mere error which
occurred in the award of the umpire relating to matter which
is distinct and separate from the rest of the award, the
part which is invalid being severable from that which is
valid, there was no justification for setting aside the
entire award.
11.It is clear from the above facts and legal position
that the arbitrator committed misconduct in non-application
of his mind in deciding claims 11 and 12. It being a non-
speaking award, it is difficult to find whether he had
applied his judicious mind in deciding which of the two
claims the respondent would be entitled to, in particular,
on the finding of the High Court in this behalf. Therefore,
the award in respect of claims 11 and 12 is set aside. The
order of the High Court to award Rs 6,00,000 stands set
aside, Since the counter-claim was not considered the matter
requires determination. Accordingly the rejection of the
counter-claim would be treated as a nil award of the
counter-claim and for the above reasons it stands set aside
and the matter is remitted to be adjusted afresh. The
decree of the High Court granting interest pendente is also
set aside.
12.The appeals are accordingly allowed to the above extent
and the judgment of the Division Bench of the High Court
stands modified and tile
9 (1961) 2 SCR 780: AIR 1961 SC 823
10 (1964) 5 SCR 480: AIR 1965 SC 214
11 (1972) 3 SCC 799 : AIR 1972 SC It 21, 1125 (para 12)
12 (1973) 1 SCC 254 :(1973) 3 SCR 107
673
award of the severable part stands confirmed accordingly.
In the circumstances parties are directed to bear their own
costs.
