Karnataka Neeravari Nigam Limited vs M/s. Shetty Construction Co. Pvt. Ltd.

This appeal u/s 37(1) of the Arbitration Act, 1940 (hereinafter referred to as the Act'') is filed by the second respondent in Arbitration Case No. 1/1993 on the file of the Civil Judge (Sr.Dn). Gokak being aggrieved by the judgment and decree dated 11-10-2006 wherein the application filed by the applicant in the said case (first respondent herein) for accepting the award dated 1-3-2000 and to pass a decree by the Court has been accepted by over-ruling the objections raised by the appellant herein u/s 30 & 33 of the Arbitration Act, 1940 and decreeing the award passed by the Arbitrator dated 1-3-2000 without any modification and further with a direction to respondents including the appellant herein to pay interest at the rate of 13% p.a. from the date of decree of the Court till the date of payment. The material facts leading up to this appeal with reference to the rank of the parties before the trial Court are as follows:

The application was filed u/s 8 of the Act by the first respondent herein before the Court of Civil Judge. Gokak for referring the dispute between the petitioner and the respondents to the arbitration under clause 29 of the contract between the parties. The said application was allowed by order dated 8-6-1994 and the same has been confirmed by this Court in C.R.P.No.2309/1994 dated 10-6-1999. Thereafter the Arbitrator, after giving opportunity to the parties, passed an award with reference to the disputes referred to him as follows:

AWARD

SL. N O

CLAIMS

AWARD

1.

To declare the order of rescission of the contract issued by the Executive Engineer in order dated 6-1-1993 as unjust and illegal and award.

i) Release of E.M.D. in the form of Bank Guarantee Rs.54,000/

ii) F.S.D deducted in R.A. bills in the form of cash Rs. 1.49,861,00

iii; Release of Bank Guarantee commission of Rs 15,120/-

iv) Release of penalty recovered Rs.3,390/-

v) Payment of interest at 24% p.a. on the above

I declare that the order of termination dated 6-1-1993 issued by the Executive Engineer as unjust and award payment to the claimants as under release.

i) E.M.D. in the form of Bank Guarantee of Rs.54,000/-

ii) Rs. 1,49,861,00 towards F.S.D. deducted in R.A.Bills.

iii) Bank Guarantee Commissioner of Rs. 15,120,00

iv) Rs. 3,390,00 recovered as penalty.

v) I award payment, of interest charges at 18% p.a. from 1-4-1993 to date of payment or decree by Court which ever is earlier.

sums till date of payment.

2.

Payment towards hard rock excavated including their disposal with a lead upto 1 K.M. at Rs.160/- per Cu.m for a quantity of 11,384,56Cu.ms with interest there on at 24% p.a. from the 18.10.1990 till date of payment.

I award

i) Payment of Rs. 160/-per Cu.m for a quantity of 11.384.56 Cu.ms less payment made it any earlier

ii) Payment of interest charges at 18% p.a. from 1-4-1992 to date of payment or decree by the Court which ever happens earlier.

3.

(a) Payment of compensation of Rs.22,99,870.00 towards idling of men and machinery.

(b) Payment of interest charges at 24% p.a. from the date of claim till date of payment.

(a) I award payment of compensation of Rs.20.00 lakhs towards this claim.

(b) I award payment of interest charges at 18% p.a. from 1-4-1992 till date of payment or decree by the Court which ever is earlier.

4.

(a) Payment of compensation of Rs.21,00,000/-towards losses in productivity due to avoidable prolongation of the stay of the contractor on the work.

(b) Payment of interest at 24% p.a. from the date of the claim till date of

(a) I award payment of Rs. 12.00 lakhs towards this claim.

(b) I award payment of interest at 18%

p.a. from 1-4-1993 till date of payment or decree by the Court which ever is earlier.

payment.

5.

(a) Compensation of Rs.7.70 lakhs due to illegal termination of contract.

(b) Payment of interest at 24% p.a. from the date of termination till date of payment.

(a) No Award

(b) No Award

6.

Payment of final bill of Rs.2.00 lakhs with interest at 24% p.a.

I award payment to the claimant as per final bill including release of part rates and withheld amounts. I award payment of interest charges at 18% p.a. from 1-4-1993 till date of payment or decree by Court whichever is earlier.

7

(a) Payment of interest charges at 24% p.a. due to delays in payment of R.A.Bills Rs.81,271.00

(b) Payment of interest charges on the above amounts were due till date of payment.

(a) I award payment of interest charges at 18% p.a. in respect of the delayed payments.

8.

Payment of arbitration cost by the respondents.

The Respondents and Claimants shall bear the arbitration costs equally.

Thereafter, an application was filed before the Civil Court to accept the award and to pass a decree by the Court. The respondents in the said application including the appellant herein objected to the said application u/s 30 and 33 of the Act. The trial Court, after considering the contention of the counsel appearing for the parties, held that the application filed u/s 33 of the Act challenging the appointment of the Arbitrator under clause 29 is not maintainable and that the respondents have not shown that the Arbitrator has mis-conducted himself in the proceedings and passing the award in respect of the claim and accordingly rejected the objections filed by the respondents including the appellant herein and accepted the award passed by the sole Arbitrator dated 1-3-2000 without any modification and further directed the respondents to pay interest at the rate of 13% p.a. from the date of the decree till the date of payment and ordered drawing up of the decree in terms of the order. Being aggrieved by the said order passed by the Court of Civil Judge (Sr.Dn.), Gokak in Arbitration Case No.1/1993 dated 11-10-2006, this appeal is filed by the second respondent in the said application before the trial Court.

We have heard the learned counsel appearing for the appellant and learned counsel appearing for the respondents.

The learned counsel appearing for the appellant submitted that clause 29 of the Standard Contract entered into between the first respondent and the respondents before the trial Court was not an arbitration clause and the said contention can be taken at any stage even in collateral proceedings and since clause 29 is not an arbitration clause, the reference of the dispute to the arbitrator itself was void and the trial Court could not have accepted the award as there was inherent lack of jurisdiction and the same can be challenged in collateral proceedings also. In support of his contentions, he has relied upon the decision of the Hon''ble Supreme Court which would be considered at the time of considering the contentions o[ the learned counsel. He further submitted that the arbitrator has not assigned any reasons for accepting the claim of the first respondent herein and while passing the award, he has only narrated the facts and passed the award. Therefore, the award passed by the arbitrator is clearly illegal and could not have been accepted by the trial Court and ought to have been set aside. He has also submitted that the arbitrator becomes functus officio after he passes the award and therefore the order passed by the trial Court is liable to be set aside.

The learned counsel appearing for the respondent submitted that clause 29 of the Standard contract entered into between the first respondent herein - applicant before the trial Court and the respondents therein is the arbitration clause as held by this Court and the order passed referring the matter to arbitration u/s 8 of the Act has been confirmed by this Court in Civil Revision Petition No.2308/1994 and no contention was taken before the arbitrator as to his inherent lack of jurisdiction and therefore, the contention cannot at all be entertained when the trial Court has rightly held that the said contention cannot be accepted. The learned counsel appearing for the first respondent further submitted that in view of the provisions of the Act, there is no obligation on the part of the arbitrator to assign any reasons unless the parties have agreed that the reasons should be assigned for the finding of the arbitrator and it is clearly covered by the decision of the Hon''ble Supreme Court and the decision relied upon by him would also to be considered at the time of considering the contentions.

Having regard to the contentions of learned counsel appearing for the parties, the points that arise for determination in this appeal are as follows:

(i) Whether the finding of the trial Court that the contention raised by the appellant and second respondent herein before the trial Court u/s 33 of the Arbitration Act challenging the appointment of the Arbitrator was not maintainable is justified or calls for interference in this appeal?

(ii) Whether the order passed by the trial Court rejecting the objections filed by the appellant and second respondent herein and accepting the award and passing decree of the Court as per the terms of the award is justified or calls for interference in this appeal?

(iii) What order?

We answer the above points for determination as follows:

Points Nos. 1 & 2: The finding of the trial Court is justified and does not call for interference in this appeal:

Points No.3: As per the final order for the following

REASONS

Point No.(i)

We have given careful consideration to the contention of the learned counsel appearing for the parties and scrutinised the material on record in the light of the decisions relied upon by the counsel appearing for the parties in that behalf.

The scrutiny of the material on record would clearly show that an application was filed for making an order of Reference under Clause 29 of the Contract and the same was allowed on 8.06.1994. Being aggrieved by the said order C.R.P. Nos.2309/1994 and 2308/1994 were filed and the said Revision Petitions were disposed of on 10.06.1999 by observing that following the judgement of this Court reported in ILR 1988 Karnataka 2385 (H.S. Appaji vs. Bangalore University) CRP stands dismissed. The said order was followed in CRP No. 2309/1994 passed on the same day, i.e., on 10.06.1999. Thereafter, the appellant appeared before the arbitrator and filed his objections, but failed to raise the contention that the arbitrator has no jurisdiction to decide as Clause 29 of Contract did not constitute an Arbitration Clause. However. ''he subject matter was resisted on merits and after affording opportunity to both the parties the Arbitrator has passed the award on 1.3.2000. Thereafter, an application was filed in A.C. No.1/93 for accepting the award and to pass the decree accordingly, to which the appellant herein filed objections under Sec. 30 and 33 of the Act, provisions of which shall be applicable to the facts of the case contending that Clause 29 did not constitute an arbitration clause. The learned trial Court has held that in view of the fact that the contention had been taken while application had been filed under Sec.8 of the Act and the said order rejecting the contention that Clause 29 did not constitute an Arbitration Clause, was passed on 8.6.1994, which was challenged in CRP Nos. 2309 and 2308 of 1994. Wherefore, the order has become final. The said contention is also not raised before the Arbitrator. Wherefore, the appellant is estopped from raising the said ground.

Learned counsel appearing for the appellant has submitted that Clause 29 of the agreement has been held to be not an arbitration clause and the decision of this High Court in C.M.P. No. 16/2000 dt. 24.3.2000 Mysore Construction Company Vs. Karnataka Power Corporation Limited and Others, wherein, it is held that Clause 29 did not constitute an Arbitration clause. The same would be void and the reference would become void. Wherefore, any decision rendered by the Arbitrator would be void and the contention about the absence of the arbitration clause would render arbitration void, can be taken even in the collateral proceedings. He has also relied upon the decision of the Hon''ble Supreme Court in the case of 1. Waverly Jute Mills Co. Ltd., (in C.A. Nos. 389 and 390 of 1960) 2. Kelvin Jute Co. Ltd. (in C.A. Nos.391 and 392 of 1960) vs. Raymon and Co. (India) Pvt. Ltd. (In all appeals) reported in 1863 SC 90 (V 50 C 5) in support of his contention that mere fact that the appellant is acquiesced in arbitrary proceedings would not preclude him or estop him from raising the contention about the acceptance of Arbitration Clause under Sec.33 of the Act. He has also relied upon the decision of the Hon''ble Supreme Court in the case of Sunder Dass Vs. Ram Prakash, in support of his contention that if there is lack of inherent jurisdiction, it can even be challenged in collateral proceedings. Wherefore, the award could not have been accepted and trial Court ought to have rejected the award and directed the parties to approach the Civil Court.

Learned counsel appearing for the respondent submitted that the said contention as to whether Clause 29 was an Arbitration Clause, was raised in the application for Reference under Sec.8 of the Act and the same was negative by order dt. 8.6.1994. Thereafter, the same is confirmed in CRP Nos. 2309/94 and 2308/94, wherein judgment of this Court in the case of Dr. H.S. Appaji Vs. Bangalore University, is followed, in the case of Lachmanna B. Horamani vs. The State of Karnataka & ors. reported in ILK 1998 KAR 2385 it has been held that Clause 29 of the Contract constitutes arbitration clause. Wherefore, not raising of the contention before the arbitrator would constitute resjudicata and the appellant is estopped from raising such contention against the award filed before the Court for passing decree. In support of his contention he has relied upon the decision of the Hon''ble Supreme Court in the case of J. Kodanda Rami Reddy Vs. State of A.P. and Others, He has also relied upon para Nos. 17 and 18 of the said judgment to the effect that when the contention is not raised before the arbitrator, the appellant is estopped from taking such contention and even if the order is bad, the same would be binding between the parties, unless it is set aside by the competent Court. He further submitted that in the case of State of West Bengal Vs. Hemant Kumar Bhattacharjee and Others, it has been held that the decision of the Court having jurisdiction even if it is a wrong decision is binding between the parties till it is set aside. As the said order can be set aside only by appeal to higher tribunals or other procedure like review which the law provides. Wherefore, he submitted that the trial Court has rightly rejected the objection of the appellant.

It is clear on consideration of the contention of the counsel appearing for the parties that admittedly the contention regarding question as to whether Clause 29 constitutes arbitration clause, was raised when an application was filed under Sec.8 of the Act and the same was rejected by order dt. 8.6.1994. Thereafter. CRP Nos. 2309/94 and 2308/94 were filed and in the said CRPs following the Judgment of this Court in the case of Dr. H.S. Appaji Vs. Bangalore University, Revision Petitions were dismissed by holding that Clause 29 constitutes arbitration clause. Thereafter, the appellant has submitted to the jurisdictional Arbitrator and contested the claim of the respondents on merits and has never raised the contention that the Arbitrator had no authority to decide as there was no Arbitration clause. Under such circumstances, in the above said decision in J. Kodanda Rami Reddy''s case the Hon''ble Supreme Court, has laid down as follows :

The observation in Obulu Reddy that when there was no arbitration agreement the award is a nullity, was made as the State Government had not accepted the existence of the arbitration agreement at any stage and had all along challenged the order u/s 8 of the Act appointing the Arbitrator. In this case, though the first Respondent had initially contended that there was no arbitration agreement, when the Civil Court held that there was an arbitration agreement and appointed the Arbitrator, the first Respondent did not challenge the decision, but accepted the said position and participated in the arbitration proceeding without protest. More importantly, when the award was made by the Arbitrator, the first Respondent filed an application for setting aside the award wherein it admitted specifically that the appointment of the Arbitrator was in terms of the agreement between the parties, but challenged the award on other grounds. In the circumstances, when there was an adjudication by a Court of competent jurisdiction that there was an arbitration agreement and when that was not challenged and the Arbitrator was allowed to proceed on the basis that there was an arbitration agreement, and when it was specifically conceded that the appointment of Arbitrator is in terms of the agreement between the parties, the award will not be a nullity.

The order dated 25th March, 1991 appointing an Arbitrator was also not a nullity, even though it may be erroneous. It is well-settled that a decree will be a nullity only if it is passed by a Court usurping a jurisdiction it did not have. But a mere wrong exercise of jurisdiction or an erroneous decision by a Court having jurisdiction, will not result in a nullity. An order by a competent Court, even if erroneous, is binding, unless it is challenged and set aside by a higher forum. Be that as it may.

The above said observations of the Apex Court is based upon the finding that the first respondent in the said proceedings participated in the arbitration proceedings and contested the claim of the appellant on merits without challenging the jurisdiction of the Arbitrator and order of the Arbitrator by refusing the contention of the first respondent that there was no clause for arbitration, has been accepted and wherefore, the contention later taken would be barred by principles of resjudicata as it was arbitrary proceedings under Sec.8 of the Act and the decision had attained finality. It is also laid down that a decree will be a nullity only if it is passed by a Court usurping a jurisdiction it did not have. But a mere wrong exercise of jurisdiction or an erroneous decision by a Court having jurisdiction, will not result in a nullity. Moreover, an order by a competent Court, even if infructuous, is binding on the parties, unless it is challenged and set aside by a higher forum. Wherefore, having regard to the above said reasons, we hold that the finding given by the trial Court rejecting the objection raised by the appellant is justified and does not call for interference in this appeal. Accordingly, we answer the point No.1.

Point No.2:

Learned counsel appearing for the appellant has submitted that the Arbitrator has not at all assigned any reason while the claim of the respondent and he ought to have assigned reason and order has been passed without affording opportunity to appellant to represent the case.

Learned counsel appearing for the respondent submitted that sufficient opportunity was afforded to the appellant before the Arbitrator and there is no need to assign any reason as there is no such indication, either in the agreement or in the order of Reference to ignore the provisions of the Arbitration Act. 1940 as there is no obligation on the part of the Arbitrator to assign reasons. In support of his contention, learned counsel appearing for the respondent has relied upon the decision of the Hon''ble Supreme Court in the case of Raipur Development Authority Vs. M/s. Chokhamal Contractors etc. etc., and in the case of State of Rajasthan Vs. Nav Bharat Construction Company, (Head Note C, paras 11 and 14). He has also submitted that the Arbitrator has power to award interest for pre-reference period. In support of his contention he has relied upon the decision of the Hon''ble Supreme Court in the case of Executive Engineer, Dhenkanal Minor Irrigation Division, Orissa, Vs. N.C. Budharaj (Dead) by Lrs. etc. etc., .

In view of the decisions relied upon by the learned counsel appearing for the respondent, it is clear that the contention of the learned counsel appearing for the appellant that Arbitrator ought to have assigned reasons, cannot be accepted and the decisions relied upon by him is not helpful to the appellant in the present case.

We have given careful consideration to the contention of the learned counsel appearing for the parties and scrutinised the material on record. In the light of the principles laid down by the Hon''ble Supreme Court and the decisions relied upon by the counsel appearing for the parties and having regard to the above said decisions relied upon by the learned counsel appearing for the respondent, it is well settled that under the provisions of the Arbitration Act, 1940, unless the agreement requires that reason should be assigned for passing the award or there is an agreement between the parties that reason should be assigned in the award passed by the Arbitrator, the Arbitrator has rightly proceeded on the basis that he is not required to give reasons and observed in his award that whereas there are no instructions from the Court for giving reasons for the award and where as there is no Clause in the contract to give reasons for the award, he has not given any reasons Wherefore, in the absence of any direction in the order passed by the Court that reasons should be assigned for passing the award, in respect of which claim or agreement of parties to that effect, it is clear that there was no obligation on the part of the Arbitrator for assigning reasons as contended by the learned counsel appearing for the appellant.

Further, the material on record would clearly show that sufficient opportunity has been afforded to the appellant to participate in the proceedings and substantiate his contention and the various stages at which arbitration proceedings were held, has been referred in the order, would clearly show that sufficient opportunity was afforded to the appellant before passing the award. The award would further show that the Arbitrator has received all the documents submitted by both the parties which are enclosed to the award and he has heard both the parties by giving ample opportunity to express themselves freely and the Arbitrator having studied all the documents submitted by both the parties, heard their arguments and in obedience to the Court''s order and after applying his mind to the case in question after taking the burden of the said reference has passed the award dt. 1.3.2000.

Further, it is clear from the award passed that when the learned Arbitrator has stated as to how sufficient opportunity was afforded to the appellant, has given valid reasons while passing the award. The award passed by the Arbitrator would show that the entire claim of the appellant has not been awarded, in respect of all the claims and claims have been allowed in part. It is well settled (hat the scope of interference, when an application is filed for accepting the award and to pass the decree, is limited and no misconduct, whatever was pointed to the trial Court in this behalf and having regard to the above said reasoning that no reasons were required to be assigned by the Arbitrator as held by us, is justified and negativing the contention of the appellant that award passed on merits cannot be sustained. Accordingly, in view of (he above reasons we hold that finding of the trial Court is justified and does not suffer from any error or illegality as to call for interference. In view our answer to points Nos. 1 & 2 we answer Point No.3 as per the final order. We hold that the appeal is liable to be dismissed and pass the following:

ORDER

Appeal is dismissed. Order passed by the learned Civil Judge (Sr.Dn.) Gokak in Arbitration Case No. 1/1993 dt. 11.10.2006 is confirmed. However, there shall be no order as to costs in this appeal.