The Chief Engineer, The Superintending Engineer, The Executive Engineer vs Chandragiri Construction Company, Government Contractor

N. Paul Vasanthakumar and R. Subbiah, JJ.—This appeal is filed u/s 37 of the Arbitration and Conciliation Act, 1996, as against the order

passed by the learned District Judge of Madurai, dated 31.08.2009 made in O.P. No. 5 of 2007, whereby the petition filed by the Appellants

herein to set aside the award dated 14.04.2007 passed by the Arbitrator was dismissed.

Brief facts, which are necessary to decide the issue involved in the appeal, are as follows:

a) The Government of Tamil Nadu invited bids for the formation of reservoir across Sir Umalayur in Rajathanikottai village, Nilakkottai Taluk, in

Din Digul District. The Government had accorded administrative sanction for Rs. 491 lakhs in G.O. Ms. No. 567, P.W.(S2)/Deducted

23.09.1998 for the said work. The estimate for the above work was technically sanctioned for Rs. 535 lakhs by the Chief Engineer. An agreement

was entered into between the Respondent and the Superintending Engineer, the second Respondent herein for Rs. 3.56 crores pursuant to the

tender called on 18.08.1999. As per the agreement the work has to be completed on or before 17.02.2001. But, these items arenon separable

and due to the change in the scope of scheme subsequently it was found that during execution some additional items are to be carried out for

completing the project in addition to the main work. Those additional works are entrusted to the Respondents after obtaining necessary letter from

him. Additional proposal was prepared on the basis of the prevailing rate and a consent letter was obtained to that effect. When the consent letter

was sent to the Government for getting approval, the Government has not accepted the proposal and instructed to get the revised consent letter

from the Respondent contractor. The Respondent was not in a position to reduce the rate up to the month of July 2004. He has also stopped the

work from the month of April 2001. Therefore, the proposal was not sent to the Government for about 2 years. The payments were also not sent

to the Respondent for want of Government approval. According to the Appellant, the delay is not on the part of the Government but only due to

the Respondent''s long silence.

b) The Department took keen interest in completion of the project and 75% of the additional quantities were paid to the Respondent as per the

procedure but the balance 25%was not paid for want of Government approval. In the said situation, the Income Tax Department, Kerala issued a

letter intimating provisional attachment order, dated31.10.2001 for stopping the payment until income tax clearance affected by the Respondent.

The Respondent has not taken any effort to pay the amount due to the Income Tax department or to settle the problems amicably. By this time, on

receipt of grant and LOC from the Government, the Respondent had produced the letter of income tax, dated12.11.2002 to release the pending

payment. The Income tax Department, in their letter, dated 10.01.2003 had stated that the certificate was issued by them only to facilitate the party

to obtain or acquire fresh contract works. Though the Department is ready to pay the pending bill after getting approval from the Government

towards the additional quantity and additional items, the provisional attachment made by the Kerala, Income tax Department, was not cleared. In

the meantime, the amount received from the Government for the project has been surrendered for the year 2002-2003and 2003-2004 for Rs. 100

lakhs and Rs. 213 lakhs respectively. The Respondent produced a letter dated18.03.2005 and requested the part payment for additional items

utilizing the amount received effecting payment for completing balance items of work at the earliest. The Department took a stand that the

payments could be made only after obtaining approval from the Government for additional items. The Chief Engineer, Madurai Region inspected

the site on 20.09.2004. Based on the assurance given by the Respondent for completion of work, the payment has been made to the Respondent

on 21.09.2004 and28.01.2005 for the work done by the Respondent after27.02.2004. Even after getting the payment, the Respondent did not

keep the promise. Finally, the Appellant terminated the contract on 28.07.2006. Thereafter, the Respondent requested for arbitration which

resulted in appointing the Arbitrator. The Department appointed one Mr. Chellaih as sole Arbitrator who passed an award dated 14.04.2007 in

favour of the Respondent except two items. Aggrieved over the said award, the Appellants filed an appeal u/s 34 of the Arbitration and

Conciliation Act, 1996 to set aside the award before the Principal District Judge, Madurai.

c) The said original petition was contested by the Respondent herein contending that they have completed the work to the extent of Rs. 3.30

crores as against the original contract value of Rs. 3.50 crores. Just before completion of the work, the Department came with a large quantity of

additional work. Since the additional work required additional estimate, the Respondent made a request for revised rates. However, on persuasion

of the Appellants department, the Respondent carried out the additional items of work to a great extent during the period 2002-2003 and2003-

2004 for a total value of additional works worthRs.4.25 crores. Consequently, an amount of Rs. 70.79 lakhs fell due for payment and another

amount of Rs. 40.06 lakhs also fell due for payment towards additional work. The Appellants reckoned its value based on the original contract

rates and after paying 75% of its value had retained 25% as unpaid. The said amount comes to Rs. 40.06 lakhs as with held amounts over and

above Rs. 70.79 lakhs that was outstanding to be paid. That apart, a sum ofRS.5.52 lakhs was withheld from the previous bill on account of

shortage of funds. By September 2005, though an amount of Rs. 1,16,40,000/-became due for payment it remained unpaid even after repeated

demands. Hence, the Respondent after causing a notice resorted to arbitration proceedings.

The learned District Judge, on consideration of the submissions made on either side, dismissed the petition filed by the Appellants Department

Hence, the present appeal.

Learned Additional Advocate General appearing for the Appellants submitted that the original agreement was for the value of Rs. 3.50 crores.

The contractor completed the work as additional work for Rs. 4.25 crores which is over and above the original contract value. For the additional

works, no agreement was entered into between the Respondent and the Respondent. Therefore, the Arbitrator has no jurisdiction to deal with the

claim which was made by the Respondent over and above, the original contract value.

Further, the learned Additional Advocate General submitted that as per the provisions of the agreement Arbitrator could be appointed only if the

claim of the contract is less than Rs. 50,000/-. Hence, on that account also arbitration proceedings is vitiated. Further, it is submitted that the

learned District Judge has failed to consider that there was provisional attachment proceedings initiated by the Income tax Department, Kerala

against the Respondent and hence the Appellants Department was not in a position to make the payment. It is further submitted by attacking the

various amounts awarded by the Arbitrator under different claims made by the Respondent as totally unjust and unwarranted and as such, the

same are liable to be set aside. With regard to the award of interest, the learned Additional Advocate General for the Appellants/Department by

relying upon the following judgments,

i) In Rajasthan State Road Transport Corpn. Vs. Indag Rubber Ltd.,

ii) In McDermott International Inc. Vs. Burn Standard Co. Ltd. and Others,

iii) In Krishna Bhagya Jala Nigam Ltd. Vs. G. Harischandra Reddy and Another,

submitted that the interest award by the Arbitrator has to be reduced.

Per contra, the learned Senior Counsel for the Respondent submitted that the scope u/s 34 of the Arbitration and Conciliation Act, 1996, to set

aside the award is very limited and the scope u/s 37(1)(b) of the Act, on the appeal is still narrow. The learned District Judge dealt with all the

aspects elaborately and dismissed the appeal filed by the Appellants Department. Hence, no case is made out warranting this Court to interfere

with the order passed by the learned District Judge. It is further submitted that the additional value of the additional work was 11/2 time more than

the original contract value. Moreover the additional work is not a different work and it is continuation of the contractual work. Moreover, the

arbitrator was appointed by the Department only, and hence u/s 4 of the Arbitration and Conciliation Act, 1996, the Appellant department by their

conduct waived their right to raise the objections on the ground of jurisdiction. Therefore, now, they cannot question the jurisdiction of the

arbitrator. It is further submitted that the arbitrator has awarded only simple interest of 12% for the claim amount of 2 and 3and simple interest of

10% for the claim amount of 4 and 5. Therefore, there is no need to reduce the interest. The learned Senior counsel also relied upon the

unreported judgment of this Court made in C.M.A. No. 1830/2010, dated09.12.2010 and also relied upon the following the judgments:

i) In Eastern Trading Company and Ors. v. Kalpana Lamps & Components reported in 2008(5) RAJ 577(Mad)

ii) In Kunja Behari Banerjee and sons Vs. M/s. New India Assurance Co., Ltd., reported in 2009 (1) R.A.J 328

We have heard the learned Counsel for both sides and perused the materials available on record.

In view of the submission made on either side, the questions that arise for consideration in this appeal areas follows:

i) Whether the Appellants are entitled to argue that the Arbitrator has jurisdiction to deal with the claim?

ii) Whether the award passed by the Arbitrator''s proper and correct?

iii) Whether this Court can go into the findings arrived at by the Arbitrator, confirmed by the learned Principal District Judge to set aside the

award? and

iv) Whether the interest awarded by the Arbitrator is just and proper?

It is the contention of the learned Additional Advocate General that the original contract is for the value of Rs. 3.50 crores and subsequently,

due to the change in the scope of scheme during execution of the work some additional items of work were to be carried out for completing the

project and the said works were also entrusted to the Respondent and for the additional works, no agreement was entered into between

Appellants/Department and Respondent and hence, the Arbitrator has no jurisdiction on the claim raised by the Respondent. That apart, it is the

submission of the learned Additional Advocate General that as per the clause of agreement, the Arbitrator could be appointed only if the claim is

less than Rs. 50,000/-.

We do not find any force in the submission of the learned Additional Advocate General for the following reasons:

Firstly, the additional work is not totally different and separate work and it is only contingent work of the original contract. Secondly, on the

request made by the Respondent, the Appellants/Department has appointed the retired Superintending Engineer as sole Arbitrator and the

Appellants Department also took part in the arbitration proceedings without raising any objection. Hence, the Appellants department by their

conduct waived their rights to object the jurisdiction of the Arbitrator. The Appellants are statutorily barred from raising this objection in this appeal

in terms of Section 4 of the Arbitration and Conciliation Act, 1996 which reads as follows:

Waiver of right to object: A party who knows that-

a) any provision of this Part from which the parties may derogate, or

b) any requirement under the arbitration agreement, has not been complied with and yet proceeds with the arbitration without stating his objection

to such non-compliance without undue delay or, if a time limit is provided for stating that objection, within that period of time, shall be deemed to

have waived his right to so object.

Though yet another submission was made by the learned Additional Advocate General for the Appellants/Department that since the Income

tax Department, Kerala, issued a letter intimating the provisional attachment to the Respondent, they were not in a position to pay the amount due

to Respondent, we find from the letter dated 12.11.2002 that a request was made to release the pending payment. The Income tax Department,

Kerala, again sent a letter dated 10.01.2003, to facilitate the contractor to get fresh contract. Therefore, the submission made by the learned

Additional Advocate General based on the Income Tax Department letter, cannot be appreciated.

As contended by the learned Senior Counsel that the scope of interference in the arbitration proceedings is very limited even u/s 34 of the Act.

Interference could be made in the award only if the arbitration awards in conflict with the public policy of India.

a) In this regard, a reference could be placed on the decision reported in McDermott International Inc. Vs. Burn Standard Co. Ltd. and Others,

,wherein it has been held that ""Interference on the groundof ''patent illegality'' is permissible only if the same goesto the root of the matter and a

public policy violationshould be so unfair and unreasonable as to shock the conscience of the court. What would constitute ''public policy'' is a

matter dependant upon the nature of the transaction and the statute. The relevance of pleadings and particulars on record in this regard, explained"".

b) In BOC India Ltd. Vs. Bhagwati Oxygen Ltd., , it has been held as follows:

In para 20 of the said decision this Court also, held that the proposition that emerges is that in the case of a reasoned award, the court can

interfere if the award is based upon a proposition of law which is unsound in law and that the erroneous proposition of law must be established to

have vitiated the decision. It has also been held in that decision that the error flaw must appear from the award itself or from any document or note

incorporated in it or appended to it. This Court also held that it was not permissible to travel and consider materials not incorporated or appended

to the award. So far as the facts of the present case are concerned, wed not think that the award of the arbitrator cant all be interfered with as the

award was not based upon either a proposition of law which is unsound or an erroneous proposition of law was established to have vitiated the

decision. As noted herein earlier, the arbitrator had considered all aspects of the matter including the terms of the contract and all the material son

record and the statement of claim and has come to a conclusion of fact. Such being the position, we cannot but hold that the award was not based

upon a proposition of law which is unsound or an error of law must have appeared from the award itself or from any document or note

incorporated in the award or appended to it.:

The reading of the above judgments would show that only if there is patent illegality and it shocks the conscience of the court and if the court

comes to the opinion, that the finding arrived at by the Arbitrator in the normal course cannot be reached, then only interference could be made u/s

34 as well as 37(1)(b) of the Act. In the decision reported in Madnani Construction Corporation (P) Ltd. Vs. Union of India (UOI) and Others, ,

the Supreme Court held that the High Court cannot ignore the findings of the Arbitrator unless the same are perverse. In paragraph 20, it is held

thus:

It is well settled that the arbitrator is the master of facts. When the arbitrator on the basis of record and materials which are placed before him

by the Railways came to such specific findings and which have not been stigmatized as perverse by the High Court, the High Court in reaching its

conclusions cannot ignore those findings. But it appears that in the instant case, the High Court has come to the aforesaid finding that the items

mentioned above are excepted matters and non-arbitral by completely ignoring the factual finding by the arbitrator and without holding that those

findings are perverse.

Hence, we are not inclined to accept the submission made by the learned Additional Advocate General on each claims made by the Respondent.

So far as the award of interest is concerned, we find that the Arbitrator has only awarded 12% simple interest for the claim amount of 2 and 3

and simple interest of 10% for the claim amount of 4 and 5 from01.10.2004 to 14.04.2007 i.e., from the date of award and on failure to pay the

interest within two months from the date of award till realization. In this regard, the learned Additional Advocate General for the

Appellants/Department has relied upon number of judgments for reduction of the interest. Useful reference could be made to some of the

judgments.

a) In Rajasthan State Road Transport Corpn. Vs. Indag Rubber Ltd., , wherein it has been held as follows:

Learned Counsel for the Respondent Company next submitted that the arbitrator has awarded interest at the rate of 12% per annum from the date

of the award i.e. 4-4-1997. Learned Counsel for the Respondent submitted that it was excessive as a long spell of time has expired since the date

of the award. Therefore, granting of interest at the rate of 12% per annum will be burdensome for the Company. Therefore, learned Counsel for

the Respondent prayed that some relief in interest be given. After bestowing our best of consideration, we are of the opinion that awarding of

interest at the rate of 12% per annum from the date of award i.e. 4-4-1997 till there alisation of the amount will be too excessive. Therefore,

looking to the peculiar facts and circumstances of this case, we reduce the rate of interest from 12% to 6% per annum. We allow this appeal and

set aside the judgment and order dated22-12-2000 passed by the learned Single Judge of the High Court of Rajasthan at Jaipur in SBCMA No.

618 of 2000 and affirm the decree passed by the District Judge, Jaipur city making the award rule of the court. The Appellant shall be entitled to

interest at the rate of 6% per annum from the date of the award till realization of the amount in question. No order as to costs.

b) In Krishna Bhagya Jala Nigam Ltd. Vs. G. Harischandra Reddy and Another, , it has been held as follows:

On the merits of the claims made by the contractor we find from the impugned award dated25-6-2000 that it contains several heads. The

arbitrator has meticulously examined the claims of the contractor under each separate head. We do not see any reason to interfere except on the

rates of interest and on the quantum awarded for letting machines of the contractor remaining idle for the periods mentioned in the award. Here

also we may add that we do not wish to interfere with the award except to say that after economic reforms in our country the interest regime has

changed and the rates have substantially reduced and, therefore, we are of the view that the interest awarded by the arbitrator at 18% for the pre-

arbitration period, for the pendent lit period and future interest be reduced to 9%

c) In McDermott International Inc. Vs. Burn Standard Co. Ltd. and Others, , it has been held as follows:

The power of the arbitrator to award interest for pre-award period, interest pendent elite and interest post-award period is not in dispute.

Section 31(7)(a) provides that the Arbitral Tribunal may award interest, at such rate as it deems reasonable, on the whole or any part of the

money, for the whole or any part of the period between the date on which the cause of action arose and the date on which award is made i.e. pre-

award period. This, however, is subject to the agreement as regards the rate of interest on unpaid sums between the parties. The question as to

whether interest would be paid on the whole or part of the amount or whether it should be awarded in the pre-award period would depend upon

the facts and circumstances of each case. The Arbitral Tribunal in this behalf will have to exercise its discretion as regards (i) at what rate interest

should be awarded;

(ii) whether interest should be awarded on the whole or part of the award money; and (iii) whether interest should be awarded for the whole or any

part of the pre-award period.

The 1996 Act provides for award of 18%interest. The arbitrator in his wisdom has granted10% interest both for the principal amount as also

for the interim. By reason of the award, interest was awarded on the principal amount. An interest thereon was up to the date of award as also the

future interest at the rate of 18% per annum.

However, in some cases, this Court has resorted to exercise of its jurisdiction under Article 142 in order to do complete justice between the

parties.

In Pure Helium India (P) Ltd. this Court upheld the arbitration award for payment of money with interest at the rate of 18% p.a. by the

Respondent to the Appellant. However, having regard to the long lapse of time, if award is satisfied in entirety, the Respondent would have to pay

a huge amount by way of interest. With a view to do complete justice to the parties, in exercise of jurisdiction under Article 142 of the Constitution

of India, it was directed that the award shall carry interest at the rate of 6% p.a. instead and in place of 18% p.a.

Similarly in Mukand Ltd. v. Hindustan Petroleumm Corpn. Ltd., while this Court confirmed the decision of the Division Bench upholding the

modified award made by the learned Single Judge, the Court reduced the interest awarded by the learned Single Judge subsequent to the decree

from 11% per annum to 71/2 % per annum observing that 71/2 % per annum would be the reasonable rate of interest that could be directed to be

paid by the Appellant to the Respondent for the period subsequent to the decree.

In this case, given the long lapse of time, it will be in furtherance of justice to reduce the rate of interest to 71/2 %.

As regards certain other contentions, in view of the fact that the same relate to pure questions of fact and appreciation of evidence, wed not

think it necessary to advert to the said contentions in the present case.

Per contra, the learned Senior Counsel has placed reliance on the judgment rendered in Eastern Trading Company and Ors. v. Kalpana

Lamps & Components reported in 2008(5) RAJ 577(Mad), and justified the award of 18; interest. In the said decision in paragraphs 15 and 16, it

is held thus:

It is a well established legal principle that so long as the arbitrator has decided the matter in accordance with the terms of the contract and has

acted within his authority, and according to the principle of fair play, the award of the arbitrator is ordinarily final and conclusive and power of the

court to set aside the award is restricted to the instances set out u/s 34 of the Arbitration and Conciliation Act, 1996 and the re-appraisal of the

evidence by the court is not permissible. Useful reference can be had to the judgments of the Supreme Court in M/s. Ispat Engineering and

Foundry Works, B.S. City, Bokaro Vs. M/s. steel Authority of India Ltd., B.S. City, Bokaro, and Oil and Natural Gas Corporation Ltd. Vs.

SAW Pipes Ltd., 705.

Thus, under the provisions of the Act, if anyone of the above contingencies is there in the award passed by the arbitrator, the court exercising

the jurisdiction u/s 34 of the Act can set aside the award. However, it cannot take the role of the arbitrator and pass an award"".15. On

consideration of the above judgments, we are of the view that the award of interest has to be decided based on the facts and circumstance of each

case and interest of justice would be met by reducing the post award interest from 18% p.a. to 9% p.a. from the date of award. Accordingly, the

post award interest is hereby reduced from18% to 9%.

Except the above modification, in all other respects, the award passed by the learned Principal District Judge, Madurai, is confirmed. The Civil

Miscellaneous Appeal is partly allowed. No costs. Consequently, connected miscellaneous petitions are closed.