The Union of India (UOI) vs Best Cast Construction (Private) Ltd.

D. Murugesan, J.—O.S.A. No. 463 of 2009 is filed by Southern Railway represented by its Chief Engineer (Construction), Bangalore and

O.S.A. No. 464 of 2009 is filed by South Western Railway represented by its Chief Engineer (CN)/Central, Bangalore Cantonment, Bangalore

questioning the common order dated 8.6.2007 dismissing the original petitions filed by the appellants. The parties are referrred to as arrayed in

these original side appeals.

The controversy arose under the following set of facts. By an agreement dated 4.8.99 entered into between the appellants and the first

respondent, the contract for construction of road under bridge near Lottegollahalli, between Yeshwanthpur and Yellahanka was awarded in favour

of the first respondent. Clause 24.6 of the special conditions of contract relates to vitiation clause and the same reads as under:

24.6. When ever vitiation of contract is likely to occur either due to increase or decrease in the quantities of certain item(s) the tenderer/contractor

shall be paid for such items at a rate which being the one quoted by the other tenderer(s) whose offer would become the lowest due to the

vitiation.

The above clause was subsequently modified as under:

In the event of vitiation occuring due to increase or decrease in quantities amongst the first, second and third lowest tenderers, the total value of the

work as done shall be calculated at the rates offered by the three lowest tenderers and the amount payable shall be limited to the lowest aggregate

value as worked out.

In terms of the above vitiation clause, the appellants started to recover monies from the bills of the first respondent by placing reliance on that

clause. The first respondent approached this Court by filing O.A. No. 535 of 2000 u/s 9 of the Arbitration and Conciliation Act, 1996 and sought

for an order of injunction restraining the railway administration from invoking the vitiation clause and recovering monies from their bills pending

conclusion of arbitration proceedings. That application was dismissed on 12.7.2000. The first respondent filed an appeal in O.S.A. No. 233 of

2000 before a Division Bench of this Court and the Division Bench by order dated 28.9.2000 directed interim payment of a sum of Rs. 10 lakhs

to the first respondent and also directed the arbitral tribunal to enter upon the reference within a period of one week with a further direction that the

tribunal should consider the matter of dispute framed in terms of the reference and in addition to the same, to consider the scope and applicability

of vitiation clause. The tribunal was appointed by order dated 22.9.2000 constituting respondents 2 to 4. The arbitral tribunal made an interim

award dated 27.2.2001 only in regard to the vitiation clause and held that the recoveries made towards the vitiation from the contractor for the

work done so far to be refunded without interest. That interim award was questioned by the railway administration in O.P. No. 469 of 2002.

Subsequently, by reason of poor performance of the contract by the first respondent, the contract was terminated at their risk and cost on

26.6.2001. A risk tender was also signed and the remaining work was entrusted to Modern Engineering Works, Nellore under letter of

acceptance dated 12.9.2001. The unfinished portion of the work, calculated according to the rate quoted by the first respondent, worked out to

Rs. 1,35,50,685.94, whereas the risk tender for the same quantum of work was Rs. 1,02,78,521.51. The arbitral tribunal passed a final award

dated 21.5.2005 for a total sum of Rs. 8,83,085.00 in respect of nine claims raised by the first respondent. In respect of scope and applicability of

the vitiation clause, the tribunal held that the interim award formed part of the final award as well.

The appellants, though had accepted the final award for a sum of Rs. 8,83,085.00, questioned that part of the award of the tribunal relating to

the scope and applicability of vitiation clause before this Court by filing O.P. No. 315 of 2006. Both the petitions were dismissed by the order

under appeals.

We have heard Mr. V.G. Sureshkumar learned Counsel for the appellants and Mr. K.K. Muralitharan, learned Counsel for the first respondent.

According to Mr. V.G. Sureshkumar though the arbitral tribunal would be entitled to consider and give a finding as to a particular clause of the

contract, it cannot give a finding that the particular clause itself is not applicable and in that event, it would amount to variation of the very contract

and in that sense, the arbitral tribunal would be exceeding its jurisdiction. When the arbitral tribunal exceeds its jurisdiction, the power of judiicial

review is available. In this regard, the learned Counsel relied upon a judgment of the Apex Court in Numaligarh Refinery Ltd. Vs. Daelim Industrial

Company Ltd., , particularly paragraphs 17 and 19 of that judgment, and submitted that in a case where it is found that the arbitrator has acted

without jurisdiction and has put an interpretation on the clause of the agreement which is wholly contrary to law, then in that case there is no

prohibition for the Court to set things right.

On the other hand, Mr. K.K. Muralitharan, learned Counsel for the first respondent would submit that when the first respondent approached

this Court on an earlier occasion, by order dated 28.9.2000, the Division Bench, among other directions, directed the tribunal to also consider the

scope and applicability of vitiation clause. That order was passed on due representation to the appellants herein. Only in pursuance to the said

order, the Tribunal had entered upon a reference and ultimately by interim award found that the recoveries made towards vitiation from the first

respondent for the work done be refunded without invoking the vitiation clause. The final award was also passed on the same lines. Therefore, it

cannot be now contended that the arbitral tribunal cannot go into that question. Secondly, all that the arbitral tribunal has found that the vitiation

clause would give an impression that the railways had not made up their mind to indicate their intention in clear and definite terms to the tenderers.

Even the railways were not sure as to what constitutes vitiation in a contract, when does it occur and how to avoid it and if it does occur during the

execution of contract, how to regulate it. Hence, that being a finding on interpretation of a clause, the Court would not interfere in such finding.

Having regard to the above submissions, the question that arises for consideration is whether the arbitral tribunal would be justified in rendering a

finding that the recoveries made from the first respondent towards vitiation should be refunded without invoking the vitiation clause and whether this

Court could entertain any challenge to such an award in exercise of the power of judicial review.

In the judgment in Tarapore and Company Vs. Cochin Shipyard Ltd., Cochin and Another, , while considering elaborately on the question as

to when an award can be set aside, the Apex Court has observed as follows:

The discussion leads to the inescapable conclusion that specific question of law touching the jurisdiction of the arbitrator was specifically

referred to the arbitrator and therefore the arbitrator''s decision is binding on the parties and the award cannot be set aside on the sole ground that

there was an error of law apparent on the face of the award.

In U.P. Hotels and Others Vs. U.P. State Electricity Board, , the Apex Court has observed as follows:

If a specific question of law is submitted to the arbitrator for his decision and he decides it, the fact that the decision is erroneous does not make

the award bad on its face so as to permit it being set aside; and where the question referred for arbitration is a question of construction, which is,

generally speaking, a question of law, the arbitrator''s decision cannot be set aside only because the court would itself have come to a different

conclusion; but if it appears on the face of the award that the arbitrator has proceeded illegally, as, for instance, by deciding on evidence which was

not admissible, or on principles of construction which the law does not countenance there is error in law which may be ground for setting aside the

award.

If a question of law is specifically referred and it becomes evident that the parties desired to have a decision on the specific question from the

arbitrator rather than one from the court, then the court will not interfere with the award of the arbitrator on the ground that there was an error of

law apparent on the face of the award even if the view of law taken by the arbitrator did not accord with the view of the court. A long line of

decisions was relied upon by this Court for that proposition.

In Sudarsan Trading Co. Vs. Government of Kerala and Another, , on a similar question, the Apex Court in paragraph-32 observed as

follows:

32....If an arbitrator, even in a non-speaking award decides contrary to the basic features of the contract, that would vitiate the award, it was held.

It may be mentioned that in so far as the decision given that it was possible for the court to construe the terms of the contract to come to a

conclusion whether an award made by the arbitrator was possible to be made or not, in our opinion, this is not a correct proposition in law and the

several decisions relied by the learned Judge in support of that proposition do not support this proposition. Once there is no dispute as to the

contract, what is the interpretation of that contract is a matter for the arbitrator and on which court cannot substitute its own decision.

In Himachal Pradesh State Electricity Board Vs. R.J. Shah and Company, , the Apex Court has observed as follows:

In this case, the arbitration clause is widely worded. The dispute which was referred to the arbitrators, inter alia, related to the construction of

the contract. The contract did visualise the contractor raising a claim for revision of rates. The dispute was as to when such a claim could be raised.

According to the appellant herein, this being an item rate contract the revision of rates could take place only in accordance with clause 12-A when

there was a deviation of more than 20 per cent with regard to individual items. On the other hand, the terms of the contract, according to the

claimant, permitted a claim being made of revision in rates if there was an increase of 20 per cent of the total value of the contract. The dispute

before the arbitrators, therefore, clearly related to the interpretation of the terms of the contract. The said contract was being ready by the parties

differently. The arbitrators were, therefore, clearly called upon to construe or interpret the terms of the contract. The decision thereon, even if it be

erroneous, cannot be said to be without jurisdiction. It cannot be said that the award showed that there was an error of jurisdiction even though

there may have been an error in the exercise of jurisdiction by the arbitrators.

In P.V. Subba Naidu and Others Vs. Government of A.P. and Others, , the Apex Court, while dealing with a case where the High Court had

set aside a non-speaking award after construing the terms of the contract between the parties, allowed the appeal by holding that the High Court

was not right in examining and interpreting the contract to see whether the claim was sustainable under the terms of the contract.

In fact the judgment in Sudarsan Trading Company case (supra) was quoted with approval by the Apex Court in Continental Construction

Ltd. Vs. State of U.P., . The very same view is also expressed by the Apex Court in Pure Helium India Pvt. Ltd. Vs. Oil and Natural Gas

Commission, .

The above law laid down by the Apex Court would show that while an arbitrator is entitled to interpret a clause in the contract, he has to act

within his jurisdiction. If the construction is within his jurisdiction and with reference to the terms of the contract as such, even if the construction is

made in such a manner where another construction is also possible, the Court should not interfere with such interpretation of the arbitral tribunal, as

it is only an error within the jurisdiction and in such case, the judicial review is not available. However, when an arbitral tribunal makes a

construction which would amount to an act without jurisdiction or an interpretation on the clause of the agreement which is wholly contrary to law,

in that event, the Court would be certainly entitled to set things right, as has been held by the Apex Court in Numaligarh Refinery Limited case

(supra) referred to by Mr. V.G. Sureshkumar.

It is a normal rule that the arbitral proceedings are only to ensure speedy resolution of a dispute. The Court would not interfere with an award

as the scope is very limited to a case where the award was without jurisdiction. arbitrary, illegal and against the proceedings of law or on the

ground of misconduct of the arbitrator.

Keeping the above in mind, the grievance of the appellants in these appeals must be considered. There is no dispute that the agreement in

question is binding on the authority. However, whether a particular clause, namely, 26.4 of the agreement, could be given effect to in case of a

dispute referred to an arbitrator, the arbitrator would be justified in considering that clause and to find out as to whether that particular clause could

be given effect to or not. By interim award, the arbitral tribunal has held that the vitiation clause cannot be made applicable to the first respondent.

The same view has been reiterated in the final award, though not in elaborate terms. While considering the findings of the arbitral tribunal, the

learned Judge has held that the arbitral tribunal, while interpreting the vitiation clause in the interim award, has held that the general reading of these

clauses would give an impression that the railways had not made up their mind to indicate their intention in clear and definite terms to the tenderers.

The learned Judge has also observed that the findings of the arbitral tribunal stating that the railways could not produce any documentary evidence

regarding policy, rules and guidelines as to what constitutes vitiation in a contract, when does it occur, how to avoid it and if it does occur during

the execution of the contract, how to regulate it.

In the Numaligarh Refinery Limited case (supra) cited by Mr. V.G. Sureshkumar, the Apex Court had in fact observed that in the event the

arbitrator has acted without jurisdiction and has put an interpretation on the clause of the agreement which is wholly contrary to law, the award can

be interfered with. In our opinion, that judgment is not applicable to the facts of this case, as the arbitral tribunal has not acted without jurisdiction,

as the tribunal was directed to go into the interpretation of the clause. Secondly, the finding as to the non-applicability of clause 26.4 of the special

conditions of contract was on the above reason and it is not contrary to any law. Further, in our opinion, the Court should be very circumspect to

set aside an award, as the Court generally must approach to upheld the award and not to upset it. In view of the well settled principles that even

the interpretation of the clauses in a contract can be well within the realm of the tribunal and even when two interpretations are possible and the

tribunal had adopted one interpretation, the Court would not interfere in such finding. In view of the above finding, the learned Judge is justified in

not interfering with the award which conclusion, according to us, needs no interference in view of the limited scope of judicial review available for

this Court u/s 34 of the Act.

For all the above reasons, we are not inclined to interfere with the impugned order. Accordingly, the original side appeals fail and they are

dismissed. No costs.