# STATE OF RAJASTHAN & ANR v. MIS. FERRO CONCRETE CONSTRUCTION PVT. LTD

- **Citation:** [2009] 10 S.C.R. 31
- **Court:** Supreme Court of India
- **Decided:** 2009-04-22
- **Case number:** Civil Appeal No.· 2764 of 2009
- **Bench:** R.V. Raveendran, Lokeshwar Singh Panta
- **Source:** https://unisonlegal.in/judgment/supreme-court-of-india/state-of-rajasthan-anr-v-mis-ferro-concrete-construction-pvt-ltd-24833
- **Pages:** 39

## Headnote

ARBITRATION ACT, 1940
s.30- Setting aside of award- Held: When there is no c
allegation of moral misconduct against arbitrator, award can
be attacked if there was legal misconduct on the part of the
~
arbitrator in making the award and/or if there was an error
apparent on the face of the award - In the instant case, the D
arbitrator, in respect of claims 1 and 37-A of the contractor
and rate of interest payable to contractor (claims 12 and 13)
committed a legal misconduct by ignoring terms of contract
and it was also a case of error apparent on the face of award
- In a reasoned award if claim of contractor is equated to proof E
of the claim, then it is obviously a legal misconduct and an
.-4
error apparent on the face of award - Allowing of interest at
18% in an award governed by 1978 Act was an error on the
face of award -
The rate of interest could not exceed the
current rate of interest - As regards the award in respect of
F
other claims and counter claims, neither want of jurisdiction
nor legal misconduct nor any error apparent on the face of
award was made out, therefore, the award in respect of those
claims and counter-claims is upheld - Award modified
~ accordingly - Interest Act, 1978.
G
INTEREST ACT, 1978 :
S.3- Interest on claims allowed in an award made under
..
Arbitration Act, 1940 - Held: In the absence of an express bar,
31
H
-
32
SUPREME COURT REPORTS
[2009] 10 S.C.R.
~
arbitrator had jurisdiction to award interest for pre-reference,
•
A
pendente lite and future periods - However, award of interest
~
at a rate higher than the current rate is an error on the face of
award - Award modified accordingly - Arbitration Act, 1940.
B
The appellant (employer) entered into a contract with
the respondent-contractor for manufacture, laying,
•
testing and commissioning of water pipeline at a length
~
of 37.41 kilometers. The value of the work as per the work
order was Rs. 9,91,94,602.50. Since the contractor could
c not complete the work within the stipulated time, the
employer got the work completed through alternate
agency by treating the contract as having been
abandoned. As regards the settlement of disputes
between the parties through arbitration, the matter
D
reached the Supreme Court and ultimately a sole
..
arbitrator was appointed. Before the arbitrator the
contractor filed its claim in 43 heads aggregating to
Rs.6,21,29,626/-. The employer, besides filing its reply to
the claim statement, made five counter claims to the tune
of Rs.11,55,98,388/-. The arbitrator allowed certain claims
E
of the contractor amounting to about Rs.1,&7,00,000 and
one counter claim of the employer (amounting to
Rs.59,42,275/-. The contractor filed an application to make
j.
the award a rule of the court. The civil court allowed the
application subject to modification of the award made on
F
claim 37-A of the contractor (direction to employer to pay
Rs.12,072/- per day towards idle charges for machinery
and staff etc. from the date of award) holding that the said
charges would be payable per day from the date of
decree. Both, the employer as also the contractor filed
G
appeals. The High Court dismissed the appeal of the
employer and allowed that of the contractor restoring the
idirection of the arbitrator to pay the compensation of
Rs.12,072/- per day from the date of the award.
H
In the appeals filed by the employer, the question for
STATE OF RAJASTHAN v. FERRO CONCRETE
33
CONSTRUCTION PVT. LTD.
_,
consideration before the Court was : whether there was
A
any legal misconduct or error apparent on the face of the
award, in regard to the award of the arbitrator in respect
of the claims and counter-claims.
Allowing the appeals in part, the Court
B
HELD: 1.1. Section 30 of the Arbitration Act, 1940 inter
alia provides that the award can be set aside on the
ground that the arbitrator had misconducted himself or
the proceedings, or that the award had been improperly c
procured or is otherwise invalid. An error apparent on the
face of the award,

## Text

_Characters 0–39,853 of 75,120. This is a partial read: ask again with offset=39853 for what follows._

-I
[2009) 10 S.C.R. 31
"<
1
STATE OF RAJASTHAN & ANR.
A
v.
MIS. FERRO CONCRETE CONSTRUCTION PVT. LTD.
(Civil Appeal No.· 2764 of 2009)
APRIL 22, 2009
B
[R.V. RAVEENDRAN AND LOKESHWAR SINGH
PANTA, JJ.]
ARBITRATION ACT, 1940
s.30- Setting aside of award- Held: When there is no c
allegation of moral misconduct against arbitrator, award can
be attacked if there was legal misconduct on the part of the
~
arbitrator in making the award and/or if there was an error
apparent on the face of the award - In the instant case, the D
arbitrator, in respect of claims 1 and 37-A of the contractor
and rate of interest payable to contractor (claims 12 and 13)
committed a legal misconduct by ignoring terms of contract
and it was also a case of error apparent on the face of award
- In a reasoned award if claim of contractor is equated to proof E
of the claim, then it is obviously a legal misconduct and an
.-4
error apparent on the face of award - Allowing of interest at
18% in an award governed by 1978 Act was an error on the
face of award -
The rate of interest could not exceed the
current rate of interest - As regards the award in respect of
F
other claims and counter claims, neither want of jurisdiction
nor legal misconduct nor any error apparent on the face of
award was made out, therefore, the award in respect of those
claims and counter-claims is upheld - Award modified
~ accordingly - Interest Act, 1978.
G
INTEREST ACT, 1978 :
S.3- Interest on claims allowed in an award made under
..
Arbitration Act, 1940 - Held: In the absence of an express bar,
31
H
-
32
SUPREME COURT REPORTS
[2009] 10 S.C.R.
~
arbitrator had jurisdiction to award interest for pre-reference,
•
A
pendente lite and future periods - However, award of interest
~
at a rate higher than the current rate is an error on the face of
award - Award modified accordingly - Arbitration Act, 1940.
B
The appellant (employer) entered into a contract with
the respondent-contractor for manufacture, laying,
•
testing and commissioning of water pipeline at a length
~
of 37.41 kilometers. The value of the work as per the work
order was Rs. 9,91,94,602.50. Since the contractor could
c not complete the work within the stipulated time, the
employer got the work completed through alternate
agency by treating the contract as having been
abandoned. As regards the settlement of disputes
between the parties through arbitration, the matter
D
reached the Supreme Court and ultimately a sole
..
arbitrator was appointed. Before the arbitrator the
contractor filed its claim in 43 heads aggregating to
Rs.6,21,29,626/-. The employer, besides filing its reply to
the claim statement, made five counter claims to the tune
of Rs.11,55,98,388/-. The arbitrator allowed certain claims
E
of the contractor amounting to about Rs.1,&7,00,000 and
one counter claim of the employer (amounting to
Rs.59,42,275/-. The contractor filed an application to make
j.
the award a rule of the court. The civil court allowed the
application subject to modification of the award made on
F
claim 37-A of the contractor (direction to employer to pay
Rs.12,072/- per day towards idle charges for machinery
and staff etc. from the date of award) holding that the said
charges would be payable per day from the date of
decree. Both, the employer as also the contractor filed
G
appeals. The High Court dismissed the appeal of the
employer and allowed that of the contractor restoring the
idirection of the arbitrator to pay the compensation of
Rs.12,072/- per day from the date of the award.
H
In the appeals filed by the employer, the question for
STATE OF RAJASTHAN v. FERRO CONCRETE
33
CONSTRUCTION PVT. LTD.
_,
consideration before the Court was : whether there was
A
any legal misconduct or error apparent on the face of the
award, in regard to the award of the arbitrator in respect
of the claims and counter-claims.
Allowing the appeals in part, the Court
B
HELD: 1.1. Section 30 of the Arbitration Act, 1940 inter
alia provides that the award can be set aside on the
ground that the arbitrator had misconducted himself or
the proceedings, or that the award had been improperly c
procured or is otherwise invalid. An error apparent on the
face of the award, is a ground for setting aside the award
u/s 30 or for remitting the award to the arbitrator u/s 16(1)
(c) of the Act. [Para 13] [46-8-C]
.
~
Champsey Bhara & Co. vs. Jivraj Ba/loo Spinning & D
Weaving Co. Ltd. AIR 1923 PC 66, referred to.
1.2. Under the Arbitration Act, 1940, an award was not
open to challenge on the ground that the arbitrator
reached a wrong conclusion or failed to appreciate facts,
E
as under the law the arbitrator is made the final arbiter of
the dispute between the parties. While considering the
.J
challenge to an award, the court will not sit in appeal over
the award nor re-appreciate the evidence for the purpose
of finding whether on the facts and circumstances, the
F
award in question could have been made. When there is
no allegation of moral misconduct ~gainst the arbitrator
with regard to the award, and where the arbitration has
not been superseded there were only two grounds of
attack (i) that there was legal misconduct on the part of
G
the arbitrator in making the award and (ii) that there was
an error apparent on the face of the award. [Para 13] [46E-H; 47-A]
State of Rajasthan vs. Puri Construction Co. Ltd. 1994
(6) sec 485, referred to.
H
34
SUPREME COURT REPORTS
[2009] 10 S.C.R.
A
2.1. In the instant case, as regards claim-1 of the
contractor towards loss of profits and overheads on
account of alleged inordinate delay in releasing the
mobilization advance, it is true that clause 3 of Common
Terms Reference did not contemplate the mobilization
B advance being released in 3 installments. But the CTR
was followed by work order dated 23.8.1988 and by
amendment dated 8.11.1988 which specifically stated that
the mobilization advance would be paid in 3 installments
of which the second and the third installments would be
c paid on production of a certificate of the Chartered
Accountant about utilization of the previously paid
amount on verification by the department towards
progress of the factory. The arbitrator has held that the
said clause was unilaterally introduced and,. therefore,
0 was not binding on the contractor. On the face of it, this
is erroneous. [Para 18] [53-B-E]
2.2. It is evident that the mobilization advance had to
be released only against bank guarantee to be furnished
liy
the
contractor.
The
mobilization
amount
E corresponding to the first bank guarantee was released
within two days. The amount corresponding to the
second and third bank guarantees was to be released
only after the contractor had produced a certificate in
regard to the utilization of the earlier advance. Therefore,
J!
it cannot be said that there was delay or breach on the
part of the employer in releasing mobilization advance. If
at all there was any delay, it was on the part of the
contractor. (Paras 18 and 19] (54-C, E-G; 55-A-B]
G
2.3. The fact that release of mobilization advance was
governed by clause 5(1 )(b) of the work 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
H governed by the CTR alone. The arbitrator committed a
STATE OF RAJASTHAN v. FERRO CONCRETE
35
CONSTRUCTION PVT. LTD.
legal misconduct by ignoring the terms of contract, i.e., A
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 the additional provision regarding 8
mobilization advance was introduced in the agreement
itself. Therefore, the mobilization advance was governed
by the terms in the CTR, the work order, the amendment
to the work order dated 8.11.1988 and the agreement
dated 11.1.1989 read together. If so read, it was clear that C
there was no breach on the part of the employer but the
contractor itself was responsible for the delay and,
therefore, the question of compensating the contractor on
that score does not arise. [Para 19) [55-A-E]
3.1. Claim No. 37-A i.e. compensation at the rate of D
Rs. 12,072/- per day towards idle charges for machinery,
staff etc. was linked to mobilization advance. The
arbitrator considered claim 37-A with three other claims
(36, 36-A and 37) and held that none of the 4 claims was
maintainable as the factory built out of mobilization E
advance had been mortgaged in favour of the employer.
As a consequence, he did not award any amount in.
res.pect of these 4 claims, still he directed payment of
Rs.12,072/- per day from the date of award not because
he held that there was any loss of production as a
F
consequence of any breach by the employer, but
because he had made an award against the contractor
in favour of the employer for Rs. 59,42,275/- with interest.
The arbitrator was of the view that if that sum was
adjusted against the amount due by the employer, there G
was no need for the mortgage of the plant to continue and,
therefore, the employer should release the document of
title deposited by way of equitable mortgage, within 30
days from the date of award; and if the employer failed .
ito do so, the employer should pay the contractor Rs.
H
36
SUPREME COURT REPORTS
(2009] 10 S.C.R.
A 12,072/- per day from the date of the award till the date
of release of the mortgage. Thus, the award under claim
37-A 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
B the award was, therefore, beyond the refere:ice. It is a
clear case of an error apparent on the face of the award
and a legal misconduct. [Paras 21, 23 and 24] [56-B; 57B-C-F-H; 58-A-F-H; 59-A-B]
c
3.2. It is significant to note that as per the award of
the arbitrator, made under claim 37-A , on a claim that
was never made, the amount that would become due at
Rs.12,072/- per day from 21.9.1994 to date will be
approximately Rs.6,42,70,000/-. This is a strange situation
where the arbitrator makes an award in favour of the
D employer directing the contractor to refund the employer
Rs.59,42,275/- with interest at 18% per annum from
18.9.1990 upto date of decree/payment and then even
though the said payment was not made, awards
damages to the contractor which works out to
E Rs.6,42,70,000/-. This again is a legal misconduct and an
error apparent on the face of the award. [Para 26] [60-8D]
3.3. In a reasoned award if the claim of a contractor
F is equated to proof of the claim, then it is a legal
misconduct and an error apparent on the face of the
award. While the quantum of evidence required to accept
a claim may be a mater within the exclusive jurisdiction
of the arbitrator to decide, if there was no evidence at all
G and if the arbitrator makes an award of the amount
claimed merely on the basis of the claim statement
without anything more, it has to be held that the award
on that count would be invalid. In the instant case, the
sum of Rs. 12,072/- per day under claim 37-A was claimed
H as damages by the contractor in a two line calculation
,
-·
STATE OF RAJASTHAN v. FERRO CONCRETE
37
CONSTRUCTION PVT. LTD.
without any supporting evidence document. The claim is A
made on the ground that the contractor was disabled
from manufacturing the stated 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 B
required pipes for want of plant and machinery. However,
in the award the arbitrator neither considered the validity
of the claim of Rs.12,072/- per day-nor did he accept the
said claim as valid or correct. Therefore, the entire award
under this head being wholly illegal and beyond the C
jurisdiction of the arbitrator, cannot be sustained and is
set aside. [Paras 27 and 29] [61-D, E; 60-G, H; 61-C]
4.1. So far as claims 12 and 13 of the contractor are
concerned, it is no doubt true that the position of law 0
earlier was that in regard to award of damages, interest
was not payable before quantification by a court. But, the
position regarding award of interest after the Interest Act,
1978 came into force, can be stated thus : (a) where a
provision has been made in any contract, for interest on
E
any debt or damages, interest shall be paid in accordance
with such contract; (b) where payment of interest on any
debt or damages is expressly barred by the contract, no
interest shall be awarded; (c) where there is no express
bar in the contract and where there is also no provision
for payment of interest then the principles of s.3 of Interest F
Act will apply in regard to the pre-suit or pre-reference
period and consequently interest will be payable: (i)
where the proceedings relate to a debt (ascertained sum)
payable by virtue of a written instrument at a certain time,
then from the date when the debt is payable to the date G
of institution of the proceedings, (ii) where the
proceedings is for recovery of damages or for recovery
of a debt which is not payable at a certain time, then
interest will be payable from the date mentioned in the
H
38
SUPREME COURT REPORTS
[2009] 10 S.C.R.
A written notice (given by the person making a claim to the
person liable for the claim), to date of institution of
proceedings; (d) payment of interest pendente lite (date
of institution of proceedings to date of decree) and future
interest (from the date of decree to date of payment) shall
8
not be governed by the provisions of Interest Act, 1978
but by the provisions of s.34 of Code of Civil Procedure,
1908 or the provisions of the law governing Arbitration
as the case may be. In the instant case, there was no
..
express bar in the contract in regard to interest and,
c therefore, the arbitrator had the jurisdiction and authority
to award interest for all the three periods- pre reference,
pendente lite and future. Since interest has been awarded
only from 3.9.1990, i.e. the date of the petition u/s 20 of
the Act for appointment of arbitrator, there is no reason
0
to alter the date of commencement of interst. [Paras 31,
32 and 34-35] [63-E; 65-C-H; 66-A-B-E]
Bhagwati Oxygen vs. Hindustan Copper Ltd. 2005(6)
SCC 462; Secretary, Irrigation Department, Government of
E
Orissa vs. G.C. Roy 1992(1) SCC 508 and Executive
Engineer, Dhenkana/ Minor Irrigation Division vs. N. C.
Budharaj 2001(2) SCC 721, relied on.
Iron & Hardware {India) Co. vs. Firm Sham/al & Bros. AIR
1954 Bombay 423, referred to.
F
4.2. However, the awarding of interest at 18% per
annum, in an award governed by the 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,
G 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
H
banking companies generally by the Reserve Bank of
-+
"'
-
J
STATE OF RAJASTHAN v. FERRO CONCRETE
39
CONSTRUCTION PVT. LTD.
India under the Banking Regulation Act. Therefore, preA
reference interest_ should be only at the rate of 9% per
annum. It is appropriate to award the same rate of
interest even by way of pendente lite interest and future
interest upto date of payment. [Para 36] [66-F-H; 67-At
5. As regards allowing or rejecting of other claims or ·B
counter claims, by the arbitrator, the awards on these
counts do not suffer from any infirmity which can be the
basis for interference either u/s 30 or u/s 16 of the
Arbitration Act, 1940. Neither want of jurisdiction, nor C
legal misconduct, nor any error apparent on the face of
the award, are made out in regard to these claims. No
ground is made out to interfere with the same. Judgments
of courts below modified accordingly.
[Paras 37, 38 and 40) (67-E, G; 68-G]
Case Law Reference:
AIR 1923 PC 66
referred to
Para 13 ..
1994(6) sec 485
referred to
Para 13
2005(6) sec 462
relied on .
Para 31
1992(1) sec 508
relied on
Para 31
2001(2) sec 121
relied on
Para 31
AIR 1954 Bombay 423 referred to
Para 32
CIVIL APPELLATE JURISDICTION : Civil Appeal No.
2764 of 2009.
D
E
F
From the Judgment & Order dated 5.2.2007 of the High
G
Court of Rajasthan Jaipur Bench, Jaipur in S.8. Civil Misc.
Appeal No. 872 of 2003.
WITH
H
40
SUPREME COURT REPORTS
[2009] 10 <;;'>('.} R
A
C.A. No. 2767 of 2009.
Vijay Hansaria, Jatinder Kumar Bhatia, B.N. Jha and Sneh
Kalita for the Appellants.
Dushyant Dave, Ravindra Shrivastava, Kishore
8 Shrivastava, Kunal Verma, Rajul, Shrivastava, Aniruddh Rajput,
Manish Chaudhary, C. G. Solshe for the Respondents.
The Judgment of the Court was delivered by
c
R.V. RAVEENDRAN, J. 1. Leave granted. Heard learned
counsel.
2. The appellants (also referred to as 'employer') invited
tenders for the manufacture, laying, testing and commissioning
0 of water pipeline of a length of 37.41 km. under a water supply
scheme in Ajmer District. Tenders were received from various
tenderers including respondvnt (hereinafter referred to as the
'contractor'). As different tenderers had stipulated different
terms and conditions, the tenderers were invited for
discussions, and common terms of reference (for short 'CTR')
E were formulated on 22.2.1988 and the original tender
conditions stood modified to the extent of the alterations in the
CTR.
3. Thereafter the offer of the respondent was accepted and
F a work order dated 23.8.1988 was issued to him stipulating the
period for completing the contract as two years from that date.
There was an amendment to the work order on 8.11.1988. The
employer and the contractor entered into an agreement dated
11.1.1989 enumerating and stipulating the documents which
G will form part of the contract and the modifications agreed in
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 betweenJ
H
' .
STATE OF RAJASTHAN v. FERRO CONCRETE
41
CONSTRUCTION PVT. LTD. [R.V. RAVEENDRAN, J.]
25.1.1989 and 5.5.1989. The contractor created an equitable A
-Imortgage 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.
B
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 c
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
D
that date it had manufactured 15.26 km. of pipes and had laid
11.6 km. out of them anc. tested only 1.4 km. of pipeline as
against the total contracted quantity of 37.41 km. On 13.9.1990
the··employer notified the contractor that if he did not resume
the Work, the balance of the work would be got executed through
. an alternative agency in terms of the contract, by treating the
E
contract as having been abandoned on 22.8.1990, and recover
the excess cost from the contractor.
,,
5. The respondent-contractor sent a reply dated 3.11.1990
stating its efforts to complete the work were rendered futile on
F
account of the delays and breaches on the part of the employer;
and it was necessary to enter into a fresh agreement as the
tender was not accepted in the manner in which it ought to have
been accepted. The contractor did not resume the work. The
contractor's stand was that in the absence of an extension of G
time for completion by mutual consent before the stipulated date
-
,\
for completion, it was not liable to continue the work on the
tendered rates. The employer on 30.3.1991 made a final
. demand calling upon the contractor to state whether it was ready
i to re-start and complete the remaining work and if so to submit H
42
SUPREME COURT REPORTS
[2009] 10 S.C.R.
A a revised time schedule for such completion. As the contractor
+
did not resume the work, the employer initiated steps to get the
balance work executed through an alternative agency. In the
.;
meanwhile the contractor filed a suit against the appellant in the
District Court, Ajmer and obtained a temporary injunction
B restraining the employer from imposing liquidated damages.
6. The contractor made an application to the District Court,
Aimer, under section 20 read with section 8 of the Arbitration
...
Act, 1940 (Act for short) for filing the arbitration agreement into
c cpurt and seeking appointment of an arbitrator. The District
Court. Ajmer by order dated 27.4.1991 held that it had
jurisdiction to appoint an arbitrator but deferred the actual
appointment to a future date. The contractor revised its claim
to Rs.5,51,90,306/- in the notice of appointment of arbitrator.
D
The employer challenged the order of the District Judge and
the High Court allowed the appeal on 9.8.1991 and set aside
the order of the District Judge. The contractor in turn
· approached this Court. On 12.11.1991, this Court recorded the
consent of parties for appointment of Mr. B L Mathur as sole
E
arbitrator and directed the employer (Chief Engineer, Public
Health 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/-.
F
7. The employer filed its reply to the claim statement, and
al~o 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
G 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
+ -
ba'lance work, the employer revised its counter claim No. 2
relating to extra cost to Rs.6,66,62,000/-and consequently the
H total of the counter claims stood increased to Rs.11,55,98,388.
STATE OF RAJASTHAN v. FERRO CONCRETE·
43
CONSTRUCTION PVT. LTD. [RV. RAVEENDRAN, J.]
~-
8. After considering the claims and counter claims, the A
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,
& 41 A,42, & 42A and 43 of ·the contractor. He awarded the
following amounts to the contractor in regard to the remaining
claims:
B
S. Claim
Description of
Amount
Amount
No No.
claim
claimed
awarded
Rs.
Rs.
1.
1
Loss of profitability due to late
83,49,913
33,06,500
release of mobilization advance
c
2.
2 & 16 Refund of excess sales tax
2,94, 142
2,94,142
deducted
3.
3 & 15 5% amount withheld for testing
14,70,956
14,70,956
of pipeline
4.
5 & 18 Excess recovery of security
13,28,457
13,28,457
deposit
D
5.
6 & 17 Price escalation
58,83,854
43,47,520
6.
9 & 19 Refusal of employer for re10, 11,354
6,95,910
designing pressure pipes from
higher into lower.
7.
11 & 20 Slow progress due to reduction
21,32,496
21,07, 195
E
of width of trench
8.
24
Refund of deduction for want of
4,31,926
4,31,926
BG renewal
9.
27 & 28 Gap pipes fitted
2,60,200
67,098
10. 29
Payment for 8 kg pipes but paid
F
for 6 kg pipes
11. 30
Refunds for paint of specials
9,759
9,759
12. 31
Deduction from running bill for
22,385
22,385
pipes
13. 32
Refund for deduction for
46,569
46,569
G
insufficient refilling
14. 33
Less measurement of pipe
1, 15,738
1, 15,738
15. 35 with Difference in final bill bedding
1,47,00,000
23,74,458
25
Less payment re: sand
7,31,676
H
44
SUPREME COURT REPORTS
[2009] 10 S.C.R.
A
34
Payment for excavation
2,50,740
..
16. 37A
Idle charges for machinery.
12.072
12,072 per
staff etc.
per day from
day from
13.1.92
date of
award, if
B
the factory
was not
leased from
mortgage
security
within 30
c
days.
17. 12 & 13 Interest (pre-reference,
18% per
18% per
pendente lite and future)
annum
annum
The arbitrator rejected counter claims 1, 2, 4 and 5 of the
D 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.
E
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 orde.r dated 17 .2.2003, the District Judge, Ajmer
..
allowed the application of the contractor and made the award
F
a rule of the court subject to a modification in regard to the
award made on claim No.37 A. In place of the award made by
the Arbitrator (direction to employer to pay Rs.12072/- per day
from the date of award), the District Judge directed that the
employer shall return the original title deeds to the contractor
G and pay the amounts awarded to the contractor after deducting
the amount awarded by way of counter-claim (that is
..
...
Rs.59,42,275/- towards refund of mobilization advance due
with 18% interest) within 30 days from the date of decree, failing
which, the employer shall pay Rs.12072 per day from the date
H of decree.
STATE OF RAJASTHAN v. FERRO CONCRETE
45
CO~'STRUCTION PVT. LTD. [R.V. RAVEENDRAN, J.]
•·
A
10. The employer filed an appeal (Civil Misc. Appeal
No.872/2003) against the said judgment and decree
contending that the award ought to have been set aside. The
contractor also filed an appeal (Civil Misc. Appeal No. 910/
2003) aggrieved by the modification by the Learned District
Judge directing compensation of Rs.12,072/- per day only from
B
the date of decree (instead of the date of award). The High court
I
dismissed the appeal filed by the employer by judgment dated
5.2.2007. The High Court allowed the appeal filed by the
contractor by judgment dated 30.5.2007 and restored the
direction of the arbitrator that the payment of compensation at c
Rs.12,072/- per day should be from the date of the award itself
(21.9.1994). The High Court also granted interest at 18% per
annum from the date of the award. Thus the High Court upheld
the award .
...
D
11. Feeling aggrieved the employer has filed these two
appeals by special leave. The first of the appeals (arising out .
of SLP [CJ No.10818/2007) is against the dismissal of its
appeal on 5.2.2007. The second of the appeals (arising out of
SLP(C)No.22565/2007) is against the judgment dated
30.5.2007 allowing the contractor's appeal. One of the
E
contentions urged by the appellants before the court below was
that the Arbitrator did not have jurisdiction to enter upon the
..
reference and make an award, as the appointing authority under
"-
the arbitration clause had merely appointed the arbitrator, but
had not referred any dispute to him for arbitration. The said
F
contention was rejected by both courts on the ground that when
the authority competent to appoint the arbitrator appointed the
arbitrator, in pursuance of the agreement reached before this
Court to have the pending disputes of both parties settled by
arbitration, the employer could not be permitted to raise a
G
.~
1
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.
H
46
SUPREME COURT REPORTS
(2009] 10 S.C.R.
A
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 37 A; (ii) claims 12
& 13; (iii) claims 2 & 16, 3 & 15, 5 & 18, 6 & 17, 9 & 19, 11 &
B 20, 24, 27 & 28, 29, 30, 31, 32, 3:., 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
c 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
D
& Co. vs. Jivraj Ba/loo Spinning & Weaving Co. Ltd. [AIR
1923 PC 66] the Privy Council explained the term ·an error of
law on the face of the award' thus :
"An error of law on the face of the award means that you
can find in the award or a document actually incorporated
E
thereto as for instance, a note appended by the arbitrator
stating the reasons for his judgment, some legal
proposition which is the basis of the award and which you
can then say is erroneous."
..
F
It was well settled that under the Arbitration Act, 1940, an award
was not open to challenge on the ground that the arbitrator has
reached a wrong conclusion or failed to appreciate facts, as
under the law, the arbitrator is made the final arbiter of the
dispute between the parties. While considering the challenge
G
to an award, the court will not sit in appeal over the award nor
re-appreciate the evidence for the purpose of finding whether
·I.
on the facts and circumstances, the award in question could
have been made. 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
H only two grounds of attack. First was that there was legal
STATE OF RAJASTHAN v. FERRO CONCRETE
'
47
CONSTRUCTION PVT. LTD. [R.V, RAVEENDRAN, J.]
•
misconduct on the part of the arbitrator in making the award.
A
Second was that there was an error apparent on the face of
the award. This Court explained the principles relating to
interference with awards under the 1940 Act in State of
Rajasthan v. Puri Construction Co. Ltd. (1994 (6) SCC 485]
thus:
B
"Similarly, an award rendered by an arbitrator is open to
.,.
challenge within the parameters of several provisions of
the Arbitration Act. Since the arbitrator is a judge by choice
of the parties, and more often than not, a person with little c
or no legal background, the adjudication of disputes by an
arbitration by way of an award can be challenged only
within the limited scope of several provisions of the
Arbitration Act and the legislature in its wisdom has limited
the scope and ambit of challenge to an award in the
D
'
Arbitration Act. Over the decades, judicial decisions have
'
indicated the parameters of such challenge consistent with
the provisions of the Arbitration Act. By and large the courts
have disfavoured interference with arbitration award on
account of error of law and fact on the score of misappreciation and misreading of the materials on record
E
and have shown definite inclination to preserve the award
as far as possible. As reference 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
F
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 G
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 applicatibn of law constituting the very basis of H
48
SUPREME COURT REPORTS
(2009) 10 S.C.R.
A
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
B
caution that in the anxiety to render justice to the party to
arbitration, the court should not reappraise the evidences
intrinsically with a close scrutiny for finding out that the
conclusion drawn from some facts, by the arbitrator is,
according to the understanding of the court, erroneous.
c
Such exercise of power which can be exercised by an
appellate court with power to reverse the finding of fact, is
alien to the scope and ambit of challenge of an award
under the Arbitration Act. Where the error of finding of facts
having a bearing on the award is patent and is easily
0
demonstrable without the necessity of carefully weighing
_;,
the various possible viewpoints, the interference with
award based on erroneous finding of fact is permissible.
Similarly, if an award is based by applying a principle of
law which is patently erroneous, and but for such erroneous
E
application of legal principle, the award could not have
been made, such award is liable to be set aside by
holding that there has been a legal misconduct on the part
of the arbitrator. In ultimate analysis, it is a question of
delicate balancing between the permissible limit of error
..
F
of law and fact and patently erroneous finding easily
demonstrable from the materials on record and application
of principle of law forming the basis of the award which is
patently erroneous."
Keeping the said principles in mind let us examine the
G various claims.
Re: Claim 1 :
14. The contractor claimed that the mobilization advance
had to be released to it immediately on entrustment of work,
H to enable it to set up the factory for manufacturing the pipes. It
STATE OF RAJASTHAN v. FERRO CONCRETE
49
CONSTRUCTION PVT. LTD. [R.V. RAVEENDRAN, J.]
·-"
was contended that prompt release of mobilization advance A
was crucial and fundamental to the contract as manufacture of
pipes depended upon setting up a factory for that purpose.
Even assuming that the mobilization advance could be released
in three instalments, as per modified terms and conditions, the
contractor contended that there was inordinate delay on the part B
of the employer in releasing the instalments, that too, in five
instalments. It was further contended that if the mobilization
advance had been released immediately on award of the work,
it would have set up a factory and commenced production
within three months; that in view of the delay, it lost production c
for a period of eight months that is nearly one third of the
contract period, and that as a consequence they were not able
to execute the work of the value of Rs.5,56,66,086/- and the
loss of profits and overheads on the said amount at a standard
'-
15% was Rs.83,49,913/- and it was entitled to that amount as D
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 "DIV)
Rs.9,91,94,602.00
Payment already received from the
E
Department
Rs. 2,88,28,516.00
-----
Balance
Rs. 7,03,66,086.00
Amount due to contractor against
F
work Done
Rs.1,47,00,000.00
-------------
Balance
Rs. 5,56,66,086.00
----------
G
j.
Loss of Profitability & overheads
Rs. 83,49,913.00
@ 15% (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
H
A
8
c
D
E
F
G
H
50
SUPREME COURT REPORTS
[2009] 10 S.C.R.
the contract agreement, the mobilization advance had to be
released in three instalments against Bank Guarantees; that the
second and third instalments 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
the department of the progress; and that the mobilization
advance was released in instalments in terms of contract and
there was no delay no breach on their part.
16. We may refer to the relevant provisions of the contract
in this behalf. Clause 8 of the Special Conditions relating to
establishment of factory at site provided thus :
"Establishment of factory at site :
The contractor, if he so desires, may establish the pipe
factory at site to avoid transportation of pipes. All material
and equipment and land required for the purpose shall be
arranged by the contractor at his own cost. The department
may assist him in acquisition of land. However, the work
should not be delayed on this account. The firm should
commence and continue to supply the pipes etc. from their
existing set up till the factory at site is established. As
already stated, the supply of pipes etc. should commence
within 30 days, from the award of contract."
The above clause was superseded by clause 3 of the Common
Terms of Reference which is extracted below :
"Mobilisation advance (for PSC Pipes only)
10% of the contract value shall be given against Bank
Guarantee as mobilization advance at a simple interest
rate of 18%. Recovery of mobilization advance shall be
effecied from 1st Running Bill on pro-rata basis in a way
that complete mobilization advance is recovered by the
time 75% work is complete. Interest shall also be
recovered alongwith recovery of capital mobilization
;.
.;,
'"('
~
j
...... •
STATE OF RAJASTHAN v. FERRO CONCRETE
51
CONSTRUCTION PVT. LTD. [R.V. RAVEENDRAN, J.]
advance. The assets built by the contractor out of A
mobilization advance so made will be mc,rtgaged to the
department. In case work is left in-complete, liquidated
damages will be imposed as per terms of the document
and the assets built by the contractor for manufacturing
pipe will become the property of the department. Such
B
assets can be used by the department for the purpose of
completing the remaining work."
In the subsequent work order issued on 23.8.1988, clause 5.1
relates to mobilization advance. While para (a) of clause 5.1
was a reproduction of clause (3) of the Common Terms of C
Reference, the following was added as para (b) in clause 5.1
of the work order :
'The mobilization advance is being given for establishment
of factory at site. In case the factory is not established in
D
3 months period the mobilization advance shall be
recovered by way of the Bank Guarantee given in lieu of
the mobilization advance."
By letter of amendment dated 8.11.1988 issued by the
E
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
0J
of factory at site. The mobilization advance shall be paid
F
in three instalments of which the second and third ·
(J" instalment shall be paid on production of the certificate of
c'l
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."
G
This was followed by an agreement executed by both parties
on 11.1.1989 and clause (7) thereof extracted below dealt with
mobilization advance :
H
52
A
B
c
D
E
SUPREME COURT REPORTS
[2009] 10 S.C.R.
"Mobilisation advance:
10% of the contract value shall be given as mobilization
advance@ 18% simple ir.'erest subject to production of
Bank Guarantee from any of the Nationalised Bank equal
to the amount of such advance.