TMI Blog2009 (4) TMI 997X X X X Extracts X X X X X X X X Extracts X X X X ..... parties. When there is no allegation of moral misconduct against the arbitrator with reference to the award, and where the arbitration has not been superseded, there were only two grounds of attack. First was that there was legal misconduct on the part of the arbitrator in making the award. Second was that there was an error apparent on the face of the award. Keeping the said principles in mind let us examine the various claims. Loss of profitability due to late release of mobilization advance - HELD THAT:- The Arbitrator committed a legal misconduct by ignoring the terms of contract, that is the agreement dated 11.1.1989,which specifically provided that in addition to the CTR, the work order and amendment to work order dated 8.11.1988 would also form part of the contract. The Arbitrator also overlooked the fact that additional provision regarding mobilization advance was introduced in the agreement itself. Therefore the mobilisation advance was governed by the terms in the CTR, the work order, the amendment to the work order dated 8.11.1988 and agreement dated 11.1.1989 read together. If so read, it was clear that there was no breach on the part of the employer and the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... future (vide decisions of Constitution Bench in Secretary, Irrigation Department, Government of Orissa vs. G. C. Roy [ 1991 (12) TMI 268 - SUPREME COURT] , Executive Engineer, Dhenkanal Minor Irrigation Division vs. N. C. Budharaj [ 2001 (1) TMI 916 - SUPREME COURT] and the subsequent decision in Bhagawati Oxygen vs. Hindustan Copper Ltd. [ 2005 (4) TMI 611 - SUPREME COURT] . In this case as there was no express bar in the contract in regard to interest, the Arbitrator could award interest. Rate of interest - We are of the view that the award of interest at 18% per annum, in an award governed by the old Act (Arbitration Act, 1940), was an error apparent on the face of the award. In regard to award of interest governed by the Interest Act, 1978, the rate of interest could not exceed the current rate of interest which means the highest of the maximum rates at which interest may be paid on different classes of deposits by different classes of scheduled banks in accordance with the directions given or issued to banking companies generally by the Reserve Bank of India under the Banking Regulation Act. Therefore, we are of the view that pre-reference interest should be only a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... regard to certain terms. The value of the work as per the work order was Rs. 9,91,94,602.50. Ten percent of the value of work (Rs. 99.19 lakhs) which was agreed to be released as mobilization advance, was released to the contractor between 25.1.1989 and 5.5.1989. The contractor created an equitable mortgage over its plant by depositing its title deeds thereto as security for the mobilization advance. By letter dated 15.12.1990, the contractor confirmed that the original title deeds will remain in deposit with the employer till the entire amount of advance was repaid in full with interest. 4. The contract (clause 23 of General Conditions of Contract) provided for settlement of disputes by arbitration. By letter dated 18.6.1990 respondent invoked the provision for arbitration and sought appointment of an arbitrator to decide its claims aggregating to Rs. 2,01,66,547, arising on account of certain alleged omissions and commissions of the employer. Another dispute was raised in respect of the rate payable for work done subsequent to the due date of completion (22.8.1990). On 22.8.1990 the contractor stopped the work. By that date it had manufactured 15.26 km. of pipes and had laid ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h Engineering Department, State of Rajasthan) to appoint him as the arbitrator. On being appointed, the arbitrator entered upon the reference and the contractor filed a claim statement before the arbitrator on 13.1.1992 making 43 claims aggregating to Rs. 6,21,29,626/-. 7. The employer filed its reply to the claim statement, and also made five counter-claims aggregating for Rs. 863,46,505/- before the arbitrator. In the meanwhile, the employer having concluded the arrangements to get the work completed through an alternative agency, on the contractor's failure to resume the work, awarded the work to M/s. Indian Hume Pipes Co. Ltd. on 10.8.1992. On the basis of the contract value in regard to the balance work, the employer revised its counter claim No. 2 relating to extra cost to Rs. 6,66,62,000/-and consequently the total of the counter claims stood increased to Rs. 11,55,98,388/-. 8. After considering the claims and counter claims, the learned arbitrator made an award dated 21.9.1994. He rejected claim Nos. 4, 7,8,10, 14 21,22,23,26,36,36A, 37,38,39,40,41, 41A,42, 42A and 43 of the contractor. He awarded the following amounts to the contractor in regard to the remain ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sand bedding Payment for excavation 1,47,00,000 7,31,676 2,50,740 23,74,458 16. 37A Idle charges for machinery, staff etc. 12,072 per day from 13.1.92 12,072 per day from date of award, if the factory was not released from mortgage security within 30 days. 17. 12 13 Interest (pre-reference, pendent lite and future) 18% per annum 18% per annum The arbitrator rejected counter claims 1, 2, 4 and 5 of the employer. In regard to counter-claim No. 3 (Rs. 79,87,846/- towards refund of mobilization advance with interest), the arbitrator awarded a sum of Rs. 59,42,275 with interest at 18% per annum from 18.9.1990 up to the date or decree or payment whichever was earlier. 9. The contractor made an application for making the award, a rule of the court. The employer challenged the award by filing objections under Section 30 read with Section 33 of the Act. By order dated 17.2.2003, the District Judge, Ajmer allowed the application of the contractor and made the award a rule of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , the employer could not be permitted to raise a technical plea that the arbitrator had no jurisdiction to proceed with the arbitration, in the absence of a further specific reference by the employer. Realising the unsoundness of the said contention, the appellants did not press it before us. 12. On the contentions urged, the question that arises for consideration is whether there is any legal misconduct or error apparent on the face of the award, in regard to the award of the Arbitrator in respect of (i) claims 1 and 37A; (ii) claims 12 13; (iii) claims 2 16, 3 15, 5 18, 6 17, 9 19, 11 20, 24, 27 28, 29, 30, 31, 32, 33, 35 (with claim Nos. 25, 34); and (iv) counter claims 1, 2, 4 and 5. 13. Section 30 of the Act inter alia provides that an award can be set aside on the ground that an arbitrator had misconducted himself or the proceedings, or that the award had been improperly procured or is otherwise invalid. An error apparent on the face of the award, is a ground for setting aside the award under Section 30 or for remitting the award to the Arbitrator under Section 16(1)(c) of the Act. In Champsey Bhara Co. v. Jivraj Balloo Spinning Weaving Co. Ltd. AIR ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eference to arbitration of disputes in commercial and other transactions involving substantial amount has increased in recent times, the courts were impelled to have fresh look on the ambit of challenge to an award by the arbitrator so that the award does not get undesirable immunity. In recent times, error in law and fact in basing an award has not been given the wide immunity as enjoyed earlier, by expanding the import and implication of legal misconduct of an arbitrator so that award by the arbitrator does not perpetrate gross miscarriage of justice and the same is not reduced to mockery of a fair decision of the lis between the parties to arbitration. Precisely for the aforesaid reasons, the erroneous application of law constituting the very basis of the award and improper and incorrect findings of fact, which without closer and intrinsic scrutiny, are demonstrable on the face of the materials on record, have been held, very rightly, as legal misconduct rendering the award as invalid. It is necessary, however, to put a note of caution that in the anxiety to render justice to the party to arbitration, the court should not reappraise the evidences intrinsically with a close scr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ard 15% was Rs. 83,49,913/- and it was entitled to that amount as compensation for the breach by the employer. The calculation of the said loss of profit and overheads in claim No. (1) was as follows: Amount of Contract (with ZVV) Rs. 9,91,94,602.00 Payment already received from the Department ₹ 2,88,28,516.00 Balance ₹ 7,03,66,086.00 Amount due to contractor against work Done Rs. 1,47,00,000.00 Balance ₹ 5,56,66,086.00 Loss of Profitability overheads @ 15% ₹ 83,49,913.00 (0.15 x 5,56,66,086) 15. The employer resisted the said claim contending that having regard to the relevant conditions in the work order and the contract agreement, the mobilization advance had to be released in three installments against Bank Guarantees; that the second and third installments had to be released only on production of the certificate of a chartered accountant on the utilization of the previously paid amount and on verification of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n advance. By letter of amendment dated 8.11.1988 issued by the employer, several clauses of the work order including Clause 5.1(b) were amended/replaced. Para 5.1(b) as replaced is extracted below: The mobilization advance is being given for establishment of factory at site. The mobilization advance shall be paid in three installments of which the second and third installment shall be paid on production of the certificate of the Chartered Accountant about utilization of the previously paid amount and on verification by the department of the progress towards setting up of the factory. This was followed by an agreement executed by both parties on 11.1.1989 and Clause (7) thereof extracted below dealt with mobilization advance: Mobilisation advance: 10% of the contract value shall be given as mobilization advance @ 18% simple interest subject to production of Bank Guarantee from any of the Nationalised Bank equal to the amount of such advance. The recovery of such advance shall be effected from 1st running bill on prorate basis in such a way that recovery of this advance is made by the time when 75% of the work is completed. Amount of interest is recoverable along with ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The arbitrator has held that the said clause was unilaterally introduced and therefore is not binding by the contractor. On the face of it this is erroneous. After the work order, the parties have executed a bilateral agreement dated 11.1.1989 which specifically states at para 2 and para 6 that the work order dated 23.8.1988 and subsequent amendment to the work order dated 8.11.1988 shall be deemed to be a part of the contract and will bind both the parties. The agreement dated 11.1.1989 itself contains a detailed Clause (clause 7) relating to mobilization advance in addition to what was earlier agreed in regard to mobilization advance. Therefore obviously the clauses relating to mobilization advance in the amendment to work order dated 8.11.1988 and the agreement dated 11.1.1989 had to be read in addition to the earlier provision relating to mobilization advance contained in the CTR. Clause 5(1)(b) of the work order, as amended, specifically provided that the contractor had to provide a Bank guarantee for the mobilization advance. Sub-clause (b) of Clause 7 of the agreement dated 11.1.1989 provided that assets built by the contractor by utilizing the mobilization advance should be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rk order (as amended on 8.11.1988) and Clause 7 of the agreement dated 11.1.1989 was totally overlooked by the arbitrator by proceeding on the basis that mobilization advance was governed by the CTR alone. The Arbitrator committed a legal misconduct by ignoring the terms of contract, that is the agreement dated 11.1.1989, which specifically provided that in addition to the CTR, the work order and amendment to work order dated 8.11.1988 would also form part of the contract. The Arbitrator also overlooked the fact that additional provision regarding mobilization advance was introduced in the agreement itself. Therefore the mobilisation advance was governed by the terms in the CTR, the work order, the amendment to the work order dated 8.11.1988 and agreement dated 11.1.1989 read together. If so read, it was clear that there was no breach on the part of the employer and the contractor was itself responsible for the delay. If so, the question of compensating the contractor on that score does not arise. 20. There is yet another aspect. The contractor claimed compensation on the basis that he could not do work of the value of Rs. 5,56,66,086/- in view of the delay and he was entitled t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in spite of the award; and therefore the question of compensating any `daily loss' on that account did not arise. The employer also contested the correctness of the assumptions made for calculating the loss. 22. The contractor deposited the title deeds relating to the plant by way of mortgage of deposit of title deeds, in terms of the contract and specifically agreed that the original deeds will remain in deposit with the employer till the entire mobilization advance was repaid with interest. It is also not in dispute that though a mortgage security was created on the plant, it continued to be in the possession, enjoyment and control of the contractor, as the employer did not take over physical possession of the plant at any point of time. 23. The arbitrator considered Claim 37A with three other claims - (36, 36A and 37). The particulars of the said claims are: Claim 36 Compensation for idling machinery, labour, staff due to delay and wrong decisions (for the period up to 12.1.1992) Rs. 48.21 lacs Claim 36 A Compensation for idling machinery, staff Labour etc. from 13.1.1992 Rs. 6370 per day Claim 37 Compensation for loss of production in the Factory (for the period ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he employer failed to do so, the employer should pay to the contractor Rs. 12,072 per day from the date of the award till the date of release of the mortgage. Therefore, the said award under claim 37A was made, not on account of any breach committed by the employer, but in respect a breach if made in future after the date of the award. There was no such claim and the award was therefore beyond the reference. Further, the reasoning is very strange and is a classic case of an error apparent on the face of the award and a legal misconduct. The arbitrator rejected the claim No. 37A for payment of Rs. 12,072/- as compensation for loss of production from 13.1.1992 (which was the subject matter of claim) on the ground that the plant had been mortgaged in favour of the employer and therefore there was no justification for the contractor to claim that it should be permitted to remove and take away the plant when the mortgage subsisted. Having rejected the claim, the Arbitrator evolved a strange reasoning that though there was a subsisting valid mortgage in respect of the mobilization advance with interest in favour of the employer, because he had made an award in favour of the employer for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e been 15% or Rs. 18,000/- per day. By taking the working days as 306 in a year and deducting 20% of labour component, the loss of profit per day was calculated to be Rs. 12,072/- per day. There is no evidence to show that the contractor was at any point of time manufacturing 15 pipes a day of the value of Rs. 8000/- each or that he would have made a profit of 15% on the cost thereof. The claim is made on the ground that it is disabled from manufacturing that many number of pipes elsewhere. There is no evidence that it had other contracts where it was required to manufacture that number of pipes or that it could not manufacture the required pipes for want of plant and machinery. Nor is there any evidence as to the value of the plant and machinery that had been mortgaged to the employer and what would be the cost of an alternative plant with a capacity to manufacture 15 pipes per day. If the plant and machinery was of the value of say Rs. 25 lakhs, or if the contractor could install another similar plant at a cost of Rs. 25 lakhs, then the loss at best would be interest on Rs. 25 lakhs and not anything more. In fact even though there is no evidence, while making claim Nos. 36 and 37 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d above at best the arbitrator could have directed return of the documents of title to the contractor and could not have directed payment of damages at the rate of Rs. 12072/- per day. 29. We therefore hold that viewed from any angle, awarding Rs. 12,072/- per day as damages, from the date of award under Claim 37A cannot be sustained and the same is liable to be set aside. Re : Claim Nos. 12 and 13: 30. The contractor claimed pre-reference interest at 18% per annum on all its claims from the date of claim to date of arbitrator entering upon the reference (18.6.1990 to 15.12.1991), as also pendente lite interest from 16.12.1991 to 21.9.1994 and future interest from the date of award till date of payment or decree whichever was earlier. The Arbitrator awarded the following interest : (a) pre-reference interest on all sums awarded except claim No. (1), from 3.9.1990 (date of contractor's application under Section 8 and 20 of the Act) to 15.12.1991 at 18% per annum; (b) pendente lite interest on all sums awarded including claim No. 1, from 16,12.1991 to 21.9.1994 at 18% per annum; and (c) future interest on all sums awarded from 22.9.1994 till date of decree or payment whi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t of the person who has committed the breach. He gets compensation as a result of the fiat of the Court. Therefore, no pecuniary liability arises till the Court has determined that the party complaining of the breach is entitled to damages. Therefore, when damages are assessed, it would not be true to say that what the Court is doing is ascertaining a pecuniary liability which already existed. The Court in the first place must decide that the defendant is liable and then it proceeds to assess what that liability is. But till that determination there is no liability at all upon the defendant. 33. The legal position, however, underwent a change after the enactment of Interest Act, 1978. Sub-section (1) of Section 3 of the said Act provided that a court (as also an arbitrator) can in any proceedings for recovery of any debt or damages, if it thinks fit, allow interest to the person entitled to the debt or damages at a rate not exceeding the current rate of interest, for the whole or part of the following period, that is to say, -- (a) if the proceedings relate to a debt payable by virtue of a written instrument at a certain time, then, from the date when the debt is payable to t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion as the case may be. 35. Therefore, even in regard to claims for damages, interest can be awarded for a prior to the date of ascertainment or quantification thereof if (a) the contract specifically provides for such payment from the date provided in the contract; or (b) a written demand had been made for payment of interest on the amount claimed as damages before initiation of action, from the date mentioned in the notice of demand (that is from the date of demand or any future date mentioned therein). In regard to claims for ascertained sums due, interest will be due from the date when they became due. In this case, interest has been awarded only from 3.9.1990, the date of the petition under Section 20 of the Act for appointment of arbitrator. We find no reason to alter the date of commencement of interest. 36. In regard to the rate of interest, we are of the view that the award of interest at 18% per annum, in an award governed by the old Act (Arbitration Act, 1940), was an error apparent on the face of the award. In regard to award of interest governed by the Interest Act, 1978, the rate of interest could not exceed the current rate of interest which means the highest o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nter-claims 1, 2, 4 and 5 made by the appellant against the contractor have been rejected. They are: Counter Brief description of Amount of claim No. counter claim counter claim 1 Liquidated damages Rs. 99,19,460/- 2 Extra cost in getting work Rs. 6,66,62,000/- completed through another agency 4. Interest on payments made to Rs. 2,17,42,168/- the contractor and not utilized 5. Costs Rs. 2,50,000/- Counter-claims 1, 2, 4 have been considered by the arbitrator and rejected by the arbitrator on the ground that the delays/breaches were on the part of the appellant and therefore, the question of claiming these amounts does not arise. Rejection of counter-claim (5) is consequential. As noticed above, the court does not sit in appeal over the award of the arbitrator and cannot re- appreciate the evidence to arrive at a different conclusion. The award on these items do not attract any of the grounds on which award could be set aside. Therefore, rejection of these claims is also not open to interference. 40. We therefore allow these appeals in part and modify the judgments of the courts below as indicated above. Resultantly: (A) The award of Arbitrator on claim No. (1) (Rs. 33 ..... X X X X Extracts X X X X X X X X Extracts X X X X
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