Union of India vs R. and P. Construction

Indira Banerjee, J.—1. This appeal filed by Union of India under Section 37 of the Arbitration and Conciliation Act, 1996 is against a judgment and order dated 11th December, 2014 rejecting the application of the appellant being Misc. Case No. 58 of 2014 under Section 34 of the said Act for setting aside of an arbitral award dated 24th October 2013, published on 29th October, 2013, by an arbitral Tribunal comprising Sri Dipankar Lahiri, Financial Adviser and Chief Accounts Officer of South Eastern Railway as Presiding Arbitrator, and Sri Rajnish Arora and Sri Mukul Jain, both senior Officers of South Eastern Railway as Co arbitrators.

The South Eastern Railway issued a tender notice bearing the number CE/CON/GRC/78/2010 inviting offers for "Construction of new RCC OH water tank for improvement of water supply works in replacement of old leaky PS tanks 2 Nos. 225000 litres capacity at Bhaga, Mahuda & Bhojudih (as per Drg. No. RDSO/B-511) and 2 Nos. 450000 litres capacity at Bokaro Steel City (as per Drg. No. RDSO/B-510) in the section of Sr. DEN/N/Adra under the jurisdiction of Dy. Chief Engineer (Con) Adra of S.E. Railway".

The notice tender inter alia provided:

"2. (a) Approximate value of the work is Rs. 4.276 crore, Earnest Money Receipt Deposit is Rs. 3,63,800/-(PEMD is not valid for this tender).

(b) Period of completion is 24 (twenty four) months from the date of issue of acceptance letter. PVC is applicable."

According to the respondent, the respondent submitted its tender on or about 14th September 2010, on the basis of the prevailing cost of labour and materials, keeping in view, the completion period of 24 months. The tender of the respondent was accepted and the South Eastern Railway awarded the contract to the respondent.

A formal contract being contract No. CE/CON/GRC/68/2010 dated 14th February, 2011 was executed for construction of new RCC overhead water tank for improvement of water supply works by replacement of two old leaky tanks of 2,25,000 liters capacity at Bhaga, Mahuda and Bhojudih and two tanks of 4,50,000 liters capacity at Bokaro Steel City.

According to the respondent, immediately on receipt of the work order, the respondent duly commenced work, but the work could not progress satisfactorily due to various reasons attributable to the South Eastern Railway.

It is the case of the respondent that the scope of the tender work included construction of new RCC overhead water tanks in place of two old water tanks at Mahuda and Bhojudih and two in Bokaro Steel City.

The respondent claims to have started work at Mahuda and Bokaro simultaneously for which the respondent had procured the entire quantum of steel materials (TMT Bars) required for the two water tanks.

However, even after commencement of work drawings given by the appellant were not complete and had to be changed by the respondent, as a result of which the respondent was put to extra and/or additional expenditure on account of idle wages.

By a letter dated 13.4.2011 (C/12), the respondent intimated the Assistant Engineer concerned that progress of the work had been badly hampered due to failure of the Railways in providing the revised drawings as well as details of reinforcement work.

The attention of the Railways was drawn to impediments such as encroachments, loss of materials due to natural calamities etc. and also to the progress of work already made.

By a letter dated 21st March, 2012 the Deputy Chief Engineer (CON) of South Eastern Railway asked the respondent not to execute GI pipe line work. In reply, the respondent wrote a letter dated 27th March, 2012 drawing the attention of the Deputy Chief Engineer concerned to the fact that the work had already been completed.

The respondent informed the appellant that the work of RCC overhead tanks at Bokaro Steel City and Mahuda had been completed. The tanks at Bhaga and Bhojudih had been completed to the extent of 90 percent. However, the said two tanks could not be completed as decisions at the end of South Eastern Railway were pending and orders from South Eastern Railway were awaited.

The respondent requested the Deputy Chief Engineer (CON) to make payment for GI Pipe works executed at Bokara Steel City and Mahuda. The refusal to make payment for the said GI pipes gave rise to disputes and difference between the appellant and the respondent.

By a letter dated 8th June, 2012 addressed to the General Manager, South Eastern Railway, Garden Reach, the respondent invoked the arbitration clause and sought appointment of arbitrators to adjudicate the disputes between the appellant and the respondent with regard to the claims of the respondent against the appellant.

In terms of the arbitration clause the General Manager, South Eastern Railway, appointed three arbitrators of whom Dipankar Lahiri, Finance Advisor and Chief Accounts Officer (CON), South Eastern Railway, was the Presiding Arbitrator, and two other Senior Officers of the South Eastern Railway, Sri Rajnish Arora and Sri Mukul Jain, Co-arbitrators.

The respondent filed its statement of claim and the appellant filed its written statement inter alia contending that the appellant had verbally instructed the claimant contractor not to lay any pipe line unless materials were approved by the Railways.

In course of the second hearing, the Deputy Chief Engineer (CON), Adra stated that one portion of the overhead tank and installed pipe line at Bokaro had already been handed over to Open Line for further use and the work of overhead tank and installed pipe line at Mahuda was likely to be handed over to Open Line shortly, for further use, which means that work in question was executed properly by the respondent. The respondent claimed that pipe line installed by them were already in use at Bokaro. Furthermore, on being asked to satisfactorily state if any instructions in writing had been given to the respondent not to execute the work relating to laying of pipes, the respondent could not produce any such letter except for the letter of 21st March, 2012.

The Arbitral Tribunal presided over by Dipankar Lahiri, FA & CAO (CON), South Eastern Railway, and comprising of two other members, Rajnish Arora, CMPE, South Eastern Railway and Mukul Jain, CTPM, South Eastern Railway, made and published an award dated 24th October, 2013, awarding an amount of Rs. 94,85,675/- to the respondent. The awarded amount was directed to be paid to the claimant within sixty days of the date of publication of the award, failing which simple interest at the rate of 10% would be payable for the period beyond sixty days.

The learned Arbitral Tribunal held four hearings before passing the impugned award. Both the parties, i.e. the appellant and the respondent were given full opportunity to present their case before the learned Arbitral Tribunal. In fact, the appellant and the respondent jointly stated in writing, that they had made submissions to their complete satisfaction and had no further submissions to make.

The impugned award is a reasoned award. The learned Arbitral Tribunal has clearly stated the facts referred to in the documents and given a reasoned finding.

It appears that during the second hearing, the Dy. CE (Con)/ADA who had been representing the appellant submitted that a portion of the work i.e. the overhead tank and installed pipeline at Bokaro had already been handed over to Open Line for further use. It was also submitted that the work of overhead tank and installed pipeline at Mahuda was also likely to be handed over to Open Line shortly for further use. From the aforesaid submissions, the learned Arbitrator deduced, and rightly, that the work in question had properly been executed by the respondent.

It appears that the appellant was asked to inform the learned Tribunal of the date of handing over of the work. The respondent submitted that the pipeline installed by them at Bokaro was already in use.

The entire case of the appellant hinges around the alleged instructions given by the appellant to the respondent not to execute the work relating to the laying of pipeline. The appellant was asked to specify whether any written instructions were issued to the respondent instructing them not to execute the work and if so, to produce a copy of such letter. It transpired that no such written instructions were issued. The appellant could not produce any written instructions. On the other hand, the respondent produced a letter dated 12th July, 2013 to support their contention that the work of laying pipeline had been going on with the knowledge of the Dy. CE (Con)/ADA.

The learned Arbitral Tribunal thus concluded that the laying of pipeline was being executed with the knowledge of the respondents and the instructions to claimant/contractor to stop execution of the work was an afterthought, possibly in view of vigilant investigations into the work. The learned Tribunal therefore found the claims of the claimants to be admissible.

The Arbitral Tribunal held that:

"Since Claim No. 1 of Claimant was for payment of executed work of Schedule item 13(a) & 13(b) of Schedule ''B'', work actually executed by him in these two Schedule items is to be assessed, while deciding about amount of claim admissible. Second variation statement signed by the Contractor and Dy. CE (Con)/ADA on 06-03-1013 is the final document indicating work actually executed. As per this statement, work executed in Schedule ''B'' of Item No. 13(a) & 13(b) is Rs. 76,93,641/- and Rs. 8,52,012/- respectively. Considering that contract was awarded at 11% above the scheduled rates, payment admissible to Claimant works out to Rs. 76,93,641/- + Rs. 8,52,012/- + 11% of (Rs. 76,93,641/- + Rs. 8,52,012/-) = Rs. 94,85,675/- (Rupees Ninety four lakhs eighty five thousand six hundred seventy five only)."

The appellant was directed to arrange the payment of the award amount of Rs. 94,85,675/- to the respondent within 60 days of publication of the award failing which simple interest @ 10% per annum would be payable for delay in payment beyond 60 days from the date of the award.

The impugned award was challenged mainly on the ground that the learned Arbitral Tribunal had failed to consider Clause 3.35.1 of the agreement and Clause 27(1) and Clause 41 of the General Conditions of Contract, 2001.

Clause 3.35.1 of the agreement is set out hereinbelow:

"All materials to be used in the work by the Contractor shall be subject to the prior approval of the Engineer-in-charge of the work. Contractor shall submit samples of materials to be used for work and arrange for the supplies, only after the samples has been approved by Engineer."

Even though the learned Tribunal may not have expressly referred to the particular provision on consideration of the submissions and the materials on record, the learned Tribunal arrived at the finding that the work had been going on with the approval of the appellant. By necessary implication, the materials had obviously been approved by the Engineer.

The assertion of contravention of Clause 27(1) and Clause 41 of the General Conditions of Contract, 2001 is devoid of any particulars. It also does not appear that any objection was taken to the claims on the ground of contravention of Clause 27(1) or Clause 41 of the General Conditions of Contract, 2001. The learned arbitrator in effect and substance found that the claims awarded by the learned arbitrator were not hit by the aforesaid clauses.

Arbitrators are Judges appointed by the parties and, therefore, an award passed by an Arbitrator/Arbitral Tribunal is not to be interfered with lightly. It is well-settled that in proceedings under Section 34 of the 1996 Act, the Court does not sit in appeal over the award.

Section 34 of the 1996 Act, provides as follows:--

"34. Application for setting aside arbitral award.--(1) Recourse to a Court against an arbitral award may be made only by an application for setting aside such award in accordance with sub-section (2) and sub-section (3).

(2) An arbitral award may be set aside by the Court only if-

(a) the party making the application furnishes proof that-

(i) a party was under some incapacity; or

(ii) The arbitration agreement is not valid under the law to which the parties have subjected it or, failing any indication thereon, under the law for the time being in force; or

(iii) the party making the application was not given proper notice of the appointment of an arbitrator or of the arbitral proceedings or was otherwise unable to present his case; or

(iv) the arbitral award deals with a dispute not contemplated by or not falling within the terms of the submission to arbitration, or it contains decisions on matters beyond the scope of the submission to arbitration:

Provided that, if the decisions on matters submitted to arbitration can be separated from those not so submitted, only that part of the arbitral award which contains decisions on matters not submitted to arbitration may be set aside; or

(v) the composition of the arbitral tribunal or the arbitral procedure was not in accordance with the agreement of the parties, unless such agreement was in conflict with a provision of this Part from which the parties cannot derogate, or, failing such agreement, was not in accordance with this Part; or

(b) the Court finds that-

(i) the subject-matter of the dispute is not capable of settlement by arbitration under the law for the time being in force, or

(ii) the arbitral award is in conflict with the public policy of India.

Explanation.--Without prejudice to the generality of sub-clause (ii), it is hereby declared, for the avoidance of any doubt, that an award is in conflict with the public policy of India if the making of the award was induced or affected by fraud or corruption or was in violation of Section 75 or Section 81.

(3) An application for setting aside may not be made after three months have elapsed from the date on which the party making that application had received the arbitral award or, if a request had been made under Section 33, from the date on which that request had been disposed of by the arbitral tribunal:

Provided that if the Court is satisfied that the applicant was prevented by sufficient cause from making the application within the said period of three months it may entertain the application within a further period of thirty days, but not thereafter.

(4) On receipt of an application under subsection (1), the Court may, where it is appropriate and it is so requested by a party, adjourn the proceedings for a period of time determined by it in order to give the arbitral tribunal an opportunity to resume the arbitral proceedings or to take such other action as in the opinion of arbitral tribunal will eliminate the grounds for setting aside the arbitral award."

As observed by the Supreme Court in Associate Builders v. Delhi Development Authority reported in , (2015) 3 SCC 49 the 1996 Act was enacted to provide for an arbitral procedure, which is fair, efficient and capable of meeting the needs of arbitration, to provide that the Arbitral Tribunal gives reasons for an arbitral award, to ensure that the arbitral tribunal remains within the limits of its jurisdiction and to minimize the supervisory role of Courts.

Section 5 of the 1996 Act provides that notwithstanding anything contained in any other law for the time being enforce, in matters governed by Part 1, no judicial authority is to intervene, except where so provided in the said part.

Section 34, read in conjunction with Section 5 makes it clear that an arbitral award that is governed by Part 1 of the 1996 Act, can only be set aside on grounds mentioned under Section 34(2) and (3) and not otherwise.

None of the grounds contained in Sub-section 2(a) of Section 34 deal with the merits of the decision rendered by an arbitral award. It is only when an award is found to be in conflict with the public policy of India that the merits of an award are to be looked into under certain specified circumstances, as held by the Supreme Court in Associate Builders (supra).

In Renusagar Power Co. Ltd. v. General Electric Co. reported in , 1994 Supp (1) SCC 644 the Supreme Court held that the expression ''Public Policy'' in the context of a foreign award would have to be construed to mean an award contrary to (i) the fundamental policy of the Indian law; or (ii) the interest of India; or (iii) justice or morality. Such an award would have to be set aside as contrary to the public policy of India.

In ONGC Ltd. v. Saw Pipes Ltd. reported in , (2003) 5 SCC 705 the Supreme Court was of the view that the phrase ''public policy of India'' used in Section 34 was required to be given a wider meaning to connote some matter which concerns public good and the public interest. What is for public good or for public interest or what would be injurious or harmful to the public good or public interest has varied from time to time. However, an award which is on the face of it patently in violation of statutory provisions, cannot be said to be in public interest. Such award is likely to adversely affect the administration of justice. The Supreme Court held that an award would be set aside as if it was contrary to (a) fundamental policy of Indian law; (b) the interest of India or (c) justice or morality or (d) if it was patently illegal.

An award might be set aside as patently illegal, provided the illegality goes to the root of the award. If the illegality is of a trivial nature it cannot be said that the award is against public policy.

In ONGC v. Saw Pipes Ltd. (supra) the Supreme Court held that an award could also be set aside, if it was so unfair and unreasonable, that it shocked the conscience of the Court.

In this case, it cannot be said that the award is liable to be set aside on any of the grounds stipulated in Sub-section 34(2) of the 1996 Act. The award cannot also be said to be against the public policy of India. It is not contrary to the fundamental policy of Indian law or the interest of India or against justice or morality. Nor is the award patently illegal.

In ONGC Ltd. v. Saw Pipes Ltd. (supra) the Supreme Court made it clear that it was open to the Court to consider whether an award was against the specific terms of contract and if so to interfere with it on the ground that it was patently illegal and therefore, opposed to the public policy of India. It is reiterated that patent illegality must go to the root of the award. This proposition was reaffirmed by the Supreme Court in Hindustan Zinc Ltd. v. Friends Coal Carbonization reported in , (2006) 4 SCC 445.

In view of the judgment in ONGC Ltd. v. Saw Pipes Ltd. (supra) it has to be held that the award could be set aside if it was in contravention of the provisions of 1996 Act or any other substantive law governing the parties or was against the terms of the contract. The award would be set aside if it was patently illegal, subject to the condition that the illegality went to the root of the award. It is now also settled law that a decision which is perverse or so irrational that no reasonable person would have arrived at the same would be liable to interference under Section 34 of the 1996 Act.

In Associate Builders v. Delhi Development Authority (supra) the Supreme Court held that it must be clearly understood that when a Court is applying ''public policy'' test to an arbitral award, it does not act as a Court of appeal and consequently the errors of fact cannot be corrected. A possible view by the arbitrator on facts has necessarily to pass muster as the arbitrator is the ultimate master of the quantity and quality of evidence to be relied upon when he delivers his arbitral award. Thus, an award based on little evidence or no evidence, which does not measure up in quality to a trained legal mind would not be held to be invalid on this score. Once it is found that the arbitrators'' approach is not arbitrary or capricious then he is the last word on facts.

In P.R. Shah, Shares & Stock Brokers (P) Ltd. v. B.H.H. Securities (P) Ltd. reported in , (2012) 1 SCC 594 the Supreme Court held:--

"21. A court does not sit in appeal over the award of an Arbitral Tribunal by reassessing or reappreciating the evidence. An award can be challenged only under the grounds mentioned in Section 34(2) of the Act. The Arbitral Tribunal has examined the facts and held that both the second respondent and the appellant are liable. The case as put forward by the first respondent has been accepted. Even the minority view was that the second respondent was liable as claimed by the first respondent, but the appellant was not liable only on the ground that the arbitrators appointed by the Stock Exchange under Bye-law 248, in a claim against a non-member, had no jurisdiction to decide a claim against another member. The finding of the majority is that the appellant did the transaction in the name of the second respondent and is therefore, liable along with the second respondent. Therefore, in the absence of any ground under Section 34(2) of the Act, it is not possible to re-examine the facts to find out whether a different decision can be arrived at."

Patent illegality may render an award to be in conflict with the public policy of India. Under the explanation to Section 34(2)(b) an award is suitable in conflict with the public policy of India if the making of the award was induced or affected by fraud or corruption.

In McDermott International Inc. v. Burn Standard Co. Ltd. reported in , (2006) 11 SCC 181, the Supreme Court held:--

"112. It is trite that the terms of the contract can be express or implied. The conduct of the parties would also be a relevant factor in the matter of construction of a contract. The construction of the contract agreement is within the jurisdiction of the arbitrators having regard to the wide nature, scope and ambit of the arbitration agreement and they cannot be said to have misdirected themselves in passing the award by taking into consideration the conduct of the parties. It is also trite that correspondences exchanged by the parties are required to be taken into consideration for the purpose of construction of a contract. Interpretation of a contract is a matter for the arbitrator to determine, even if it gives rise to determination of a question of law. [See Pure Helium India (P) Ltd. v. ONGC and D.D. Sharma v. Union of India]."

In MSK Projects (I) (JV) Ltd. v. State of Rajasthan reported in , (2011) 10 SCC 573 the Supreme Court held that if the arbitrator commits an error in the construction of the contract, that is an error within his jurisdiction. But if he wanders outside the contract and deals with matters not allotted to him, he commits a jurisdictional error. Extrinsic evidence is admissible in such cases because the dispute is not something which arises under or in relation to the contract or dependent on the construction of the contract or to be determined within the award. The ambiguity of the award can, in such cases, be resolved by admitting extrinsic evidence. The rationale of this rule is that the nature of the dispute is something which has to be determined outside and independent of what appears in the award. Such a jurisdictional error needs to be proved by evidence extrinsic to the award. Reference may in this context, also be made to the judgment of the Supreme Court in Gobardhan Das v. Lachhmi Ram [, AIR 1954 SC 689], Thawardas Pherumal v. Union of India [, AIR 1955 SC 468], Union of India v. Kishorilal Gupta & Bros. [, AIR 1959 SC 1362], Alopi Parshad & Sons Ltd. v. Union of India [, AIR 1960 SC 588], Jivarajbhai Ujamshi Sheth v. Chintamanrao Balaji [, AIR 1965 SC 214] and Renusagar Power Co. Ltd. v. General Electric Co. , (1984) 4 SCC 679 : AIR 1985 SC 1156].

In Rashtriya Ispat Nigam Ltd. v. Dewan Chand Ram Saran, reported in , (2012) 5 SCC 306, the Supreme Court held:

"43. In any case, assuming that Clause 9.3 was capable of two interpretations, the view taken by the arbitrator was clearly a possible if not a plausible one. It is not possible to say that the arbitrator had travelled outside his jurisdiction, or that the view taken by him was against the terms of contract. That being the position, the High Court had no reason to interfere with the award and substitute its view in place of the interpretation accepted by the arbitrator.

The legal position in this behalf has been summarised in para 18 of the judgment of this Court in SAIL v. Gupta Brother Steel Tubes Ltd. and which has been referred to above. Similar view has been taken later in Sumitomo Heavy Industries Ltd. v. ONGC Ltd. to which one of us (Gokhale, J.) was a party. The observations in para 43 thereof are instructive in this behalf.

This para 43 reads as follows: (Sumitomo case, SCC p. 313)

"43.... The umpire has considered the fact situation and placed a construction on the clauses of the agreement which according to him was the correct one. One may at the highest say that one would have preferred another construction of Clause 17.3 but that cannot make the award in any way perverse. Nor can one substitute one''s own view in such a situation, in place of the one taken by the umpire, which would amount to sitting in appeal. As held by this Court in Kwality Mfg. Corpn. v. Central Warehousing Corpn. the Court while considering challenge to arbitral award does not sit in appeal over the findings and decision of the arbitrator, which is what the High Court has practically done in this matter. The umpire is legitimately entitled to take the view which he holds to be the correct one after considering the material before him and after interpreting the provisions of the agreement. If he does so, the decision of the umpire has to be accepted as final and binding."

In Indu Engineering & Textiles Ltd. v. Delhi Development Authority reported in , (2001) 5 SCC 691 the Supreme Court held that the Arbitrator being a Judge appointed by the parties, the award passed by him is not to be interfered with lightly. When the view taken by the arbitrator was a possible or a plausible one on his analysis of evidence and interpretation of contractual and/or statutory provisions and did not suffer from any manifest error, it was not open to the Court to interfere with the award.

Even though the judgment in Indu Engineering & Textiles Ltd. (supra) was rendered in the context of an application under Section 30 of the Arbitration Act 1940, for setting aside of an award, the same principle applies to an application for setting aside an award, under Section 34 of the 1996 Act.

As observed above, an award can only be interfered with grounds stipulated in Section 34(2) of the 1996 Act. In this case no grounds have been made out for interference with the impugned award.

It is well settled that the arbitral tribunal is competent to interpret the terms and conditions of a contract and the interpretation cannot be interfered with by Court in an application for setting aside only because some other interpretation might have been possible.

It was for the learned arbitrator to interpret the contract and decide whether the requirements of clause 3.35 were mandatory or directory and whether non-compliance of any provision would vitiate the contract. It was also for the learned arbitrator to decide whether there had been compliance of the provisions of the contract or not.

It was also for the learned arbitrator to arrive at the finding as to whether the prior permissions contemplated under the relevant clause of the contract had to be in writing or whether approval could be inferred from the conduct of the parties.

In effect and substance the learned arbitrators found that the appellant had approved all the materials utilized by the respondent. Having done so they were obliged to release payments.

The learned arbitrators selected by the General Manager of the South Eastern Railway were highly placed railway officials. However, they do not appear to the legally trained persons with experience of writing detailed judgments. There is no infirmity at all in the impugned award. In our view the omission of the learned arbitrators to expressly refer to paragraph 3.35 of the special conditions or to any provision of the general conditions does not vitiate the award.

The learned Court below rightly rejected the application for setting aside of the award. We find no grounds to interfere with the judgement and order under appeal. The appeal is dismissed.

Urgent Photostat certified copy, if applied for, be delivered to the learned counsel for the parties, upon compliance of all usual formalities.

Sahidullah Munshi, J.—I Agree.