Steel Authority of India Ltd. v. J.C. Budharaja, Government and Mining Contractor, (S.C.) BS26262
SUPREME COURT OF INDIA

Before:- D.P. Wadhwa and M.B. Shah, JJ.

Civil Appeal No. 507 of 1992. D/d. 1.9.1999.

Steel Authority of India Ltd. - Appellant

Versus

J.C. Budharaja, Government and Mining Contractor - Respondent

For the Appellant :- Mr. Dhruv Mehta and Mr. M.P. Vinod, Advocates.

For the Respondent :- Mr. G.L. Sanghi, Senior Advocate with Mr. Raj Kumar Mehta, Advocate.

A. Arbitration Act, 1940, Section 30 - Award of claim for damages on prohibited items - It is not open to the arbitrator to ignore the conditions which are binding on the parties - If the arbitrator ignores such prohibition clauses and awards the claim, he acts in manifest disregard of the contract and beyond his jurisdiction.

[Para 12]

B. Arbitration Act, 1940, Section 30 - Jurisdiction - Arbitration Act does not give any power to the arbitrator to act arbitrarily or capriciously - He gets existence from the agreement and is bound to act within limits of that - Claim on the basis of rise in price of material and labour charges specifically prohibited in the agreement - Arbitrator may have the jurisdiction to interpret the terms of the agreement and entertain claim, yet he may not have jurisdiction to pass award for particular items in view of the prohibition contained in the contract violation of which will be a jurisdictional error.

[Paras 13, 14 and 16 to 18]

C. Arbitration Act, 1940, Section 30 - Delay in allotment of work - Claim for damages on the ground of delay specifically prohibited in the agreement - Delay justified - Award on such claim held without jurisdiction and vitiated.

[Para 15]

D. Arbitration Act, 1940, Section 37 - Limitation Act, 1963, Article 137 - Delay - Application under Section 20 of the Arbitration Act not filed within the period prescribed in the agreement nor as per Article 137 of the Limitation Act within 3 years of the cause of action - Cause of action arises when the claimant issues notice for the claim - Subsequent reminders will not enlarge the period of limitation - Question of limitation specifically referred to the arbitrator in the terms that the reference is subject to the provisions of limitation - Arbitrator awarded the time barred claims without deciding the issue of limitation - Award held illegal and vitiated in law and beyond jurisdiction in ignoring the terms of the reference itself.

[Paras 19 to 25]

Cases Referred :-

Continental Construction Co. Ltd. v. State of Madhya Pradesh, 1988(3) SCC 82.

New India Civil Erectors (P) Ltd. v. Oil and Natural Gas Corporation, 1997(3) RCR (Civil) 205 (SC).

H.P. State Electricity Board v. R.J. Shah and Company, 1999(4) SCC 214.

Associated Engineering Co. v. Government of Andhra Pradesh, 1991(4) SCC 93.

State of Orissa v. Damodar Das, 1996(2) SCC 216.

Panchu Gopal Bose v. Board of Trustees for Port of Calcutta, 1993(3) RRR 1.

Major (Retd.) Inder Singh Rekhi v. Delhi Development Authority, 1988(2) SCC 338.

JUDGMENT

M.B. Shah, J. - This appeal is filed against the judgment and order dated 11th September, 1991 passed by the Patna High Court, Ranchi Bench in Miscellaneous Appeal No. 621 of 1987 under Section 39(1)(vi) of the Arbitration Act, 1940 (hereinafter referred to as "the Act"). The High Court dismissed the appeal filed by the appellant and confirmed the order dated 2nd April, 1990 passed by the Subordinate Judge, Ist Court, Chas in Arbitration Suit No. 28 of 1988 by which award is made rule of Court with 8% per annum interest from the date of the decree.

2. It is undisputed that the National Mineral Development Corporation, predecessor of the Steel Authority of India Limited on 1.8.1977 executed a contract with the respondent for construction of tailing-cum-storage reservoir at Kundi for Megha Taburu Iron Ore Project. As per the terms of the contract, the work was to be completed within a period of two years. During this period, Public Sector Iron and Steel Companies (Restructuring and Miscellaneous Provisions) Act, 1978 was passed and Steel Authority of India Limited became the employer in place of National Mineral Development Corporation. Further, the contractor, N.C. Budharaja also died and was succeeded by the present respondent.

3. After two years of contract period, on 29th August, 1979, respondent raised the claim of about 18 lakhs as damages for delay in handing over work sites and allied reasons. On 20th December, 1980, a supplementary agreement was executed between the appellant and the respondent for the same work at an increased rate. The relevant part of the said agreement is an under :-

Further clauses 3 and 4 of the said agreement read as under :-

4. Thereafter, dispute arose, in the year 1985 for the work with regard to second agreement dated 20th December, 1980 and the matter was referred to arbitration. In that Reference, respondent raised certain claims relating to the work done under the first agreement. On 2nd December, 1985, the appellant raised an objection that the claim could not be decided by the Arbitrators as the same was pertaining to previous agreement. Thereafter respondent gave notice dated 2nd December, 1985 to the appellant to appoint sole arbitrator as provided for under the first agreement. On 10th December, 1985, the appellant appointed sole arbitrator "with reservation regarding the tenability, maintainability and validity of the Reference as also on further grounds that the claim was barred by the period of limitation and that it pertained to excepted matters of general conditions of the contract."

5. On 11th July, 1986, the arbitrators gave an award pertaining to the dispute under the agreement dated 20.12.1980. Against the claim of Item No. 1 of Rs. 17 lakhs and odd pertaining to first agreement, the arbitrators awarded 'Nil'; this award has been made rule of the Court by the High Court of Delhi.

6. Meanwhile, the appellant challenged the jurisdiction of the sole arbitrator by filing Miscellaneous Case No. 22 of 1987. Finally, the High Court dismissed the Revision Application on 22nd August, 1988. Thereafter on 18th November, 1988, the sole arbitrator made an award granting damages to the tune of Rs. 11,26,296/- as principal sum (unliquidated damages) and a further sum of Rs. 12,06,000/- as interest on the above principal amount from 29th August, 1979 till the date of the Reference, i.e. 15th December, 1985. The arbitrator also awarded future interest at the rate of 17 per cent from the date of the award to the date of payment or the date or decree whichever is earlier. By order dated 2nd April, 1990, the learned Sub-Judge made the award rule of the court with a modification for the payment of interest from the date of the decree at the rate of 8 per cent on the principal amount or unpaid part till the date of actual payment. The appeal filed before the High Court against the said judgment and decree was also dismissed. Hence this appeal.

7. At the time of hearing, the learned Counsel for the appellant submitted that the award passed by the arbitrator is

The learned Counsel for the respondent supported the order passed by the High Court. He submitted that:-

8. For deciding the controversy, it would be necessary to refer to the material part of the award dated 18th November, 1988 which is as under :-

Thus the total amount of claims including interest up to the date of "AWARD" works out to Rs. 51,49,365.48 (Rupees fifty one lacs forty nine thousand three hundred sixty five and paise forty eight only).

On perusal of all documents filed by both parties and relied upon by the parties and keeping in view oral and written submissions and chain of arguments of both parties relating to factual and legal. I am convinced that the claimant sustained losses on account of the following reasons :-

9. After recording the aforesaid reasons, the arbitrator, held that in consideration of the documents, submissions and arguments of both the parties, contractor was entitled to be paid by the Steel Authority of India Limited a sum of Rs. 11,26,296/- as principal amount and a sum of Rs. 12,06,000/- as interest from 29th August, 1979 till 15th August, 1985, in all Rs. 23,32,296/-. The Arbitrator also awarded future interest at the rate of 17% on the principal sum of Rs. 11,26,296/- from the date of award till the date of payment or the date of decree whichever is earlier.

10. Learned Counsel for the appellant submitted that the award is a speaking one and the Arbitrator has awarded the damages for the reasons that department failed to obtain various permissions from the forest department. The reasons which are specifically mentioned in the award for granting damages clearly reveal that the arbitrator has passed a speaking award. He pointed out the terms of the contract and submitted that it is apparent that arbitrator has awarded the amount for the items for which there is prohibition in the contract and thereby he has travelled beyond his jurisdiction. For this purpose, learned Counsel for the appellant referred to conditions which are referred to by the learned single Judge and the trial Court. They are as under :-

"Clause 25 : No claim if work is abandoned or postponed. -

Clause 32 : Site for execution of work :

Clause 39 : (Force majeruo) :-

Clause 5 (iv) : General Conditions of Contract (Time for Completion of work covered by the Contract) :-

11. Before the learned Sub-Judge and the High Court, it was submitted that in view of the aforesaid conditions which are laid down in the contract which prohibited award of damages or compensation, it was not open to the arbitrator to award damages for the alleged losses sustained on account of not obtaining or delay in obtaining various permissions required to be taken under the law or rules from the Forest Department.

Re: Lack of Jurisdiction of the Arbitrator

12. From the Award quoted above, it is apparent that damages are granted by the arbitrator for delay in obtaining permission from the Forest Department :

Clause 32 of the agreement specifically stipulates that no claim whatsoever for not giving the entire site on award of work and for giving the site gradually will be tenable and the contractor is required to arrange his working programme accordingly. Clause 39 further stipulates that no failure or omission to carry out the provisions of the contract shall give rise to any claim by the Corporation and the contractor, one against the other, if such failure or omission arises from compliance with any statute or regulation of Government or other reasons beyond the control of either the Corporation or the Contractor. Obtaining permission from Forest Department to carry out the work in wild-life sanctuary depends on statutory regulations. Clause (vi) of General conditions of the contract also provides that failure or delay by the Corporation to hand over to the Contractor possession of the lands necessary for the execution of the work or any other delay by the Corporation which due to any other cause whatsoever would not entitle the contractor to damage or compensation thereof; in such cases, the only duty of the Corporation was to extend the time for completion of the work by such period as it may think necessary and proper. These conditions specifically prohibit granting claim for damages for the breaches mentioned therein. It was not open to the arbitrator to ignore the said conditions which are binding on the contracting parties. By ignoring the same, he has acted beyond the jurisdiction conferred upon him. It is settled law that arbitrator derives the authority from the contract and if he acts in manifest disregard of the contract, the award given by him would be arbitrary one. This deliberate departure from the contract amounts not only to manifest disregard of the authority or misconduct on his part, but it may tantamount to mala fide action. In the present case, it is apparent that awarding of damages of Rs. 11 lacs and more for the alleged lapses or delay in handing over work site is, on the face of it, against the terms of the contract.

13. Further, the Arbitration Act does not give any power to the arbitrator to act arbitrarily or capriciously. His existence depends upon the agreement and his function is to act within the limits of the said agreement. In Continental Construction Co. Ltd. v. State of Madhya Pradesh, 1988(3) SCC 82, this Court considered the clauses of the contract which stipulated that contractor had to complete the work in spite of rise in the prices of materials and also rise in labour charges at the rates stipulated in the contract. Despite this, the arbitrator partly allowed contractor's claim. That was set aside by the court and the appeal filed against that was dismissed by this Court by holding that it was not open to the contractor to claim extra costs towards rise in prices of material and labour and that arbitrator misconducted himself in not deciding the specific objection regarding the legality of extra claim. In that case, the Court referred to the various decisions and succinctly observed :-

14. It is to be reiterated that to find out whether the arbitrator has travelled beyond his jurisdiction and acted beyond the terms of the agreement between the parties, agreement is required to be looked into. It is true that interpretation of a particular condition in the agreement would be within the jurisdiction of the arbitrator. However, in cases where there is no question of interpretation of any term of the contract, but of solely reading the same as it is and still the arbitrator ignores it and awards the amount despite the prohibition in the agreement, the award would be arbitrary, capricious and without jurisdiction. Whether the arbitrator has acted beyond the terms of the contract or has travelled beyond his jurisdiction would depend upon facts, which however would be jurisdictional facts, and are required to be gone into by the court. Arbitrator may have jurisdiction to entertain claim and yet he may not have jurisdiction to pass award for particular items in view of the prohibition contained in the contract and, in such cases, it would be a jurisdictional error. For this limited purpose reference to the terms of the contract is a must. Dealing with similar question this Court in New India Civil Erectors (P) Ltd. v. Oil and Natural Gas Corporation, 1997(11) SCC 75 : 1997(3) RCR (Civil) 205 (SC) held thus :-

15. However, the learned Counsel for the respondent submitted that the award being non-speaking one, the learned Sub-Judge and the High Court have rightly refused to go behind the award or interfere with. In our view, this submission is without any substance. It is apparent that the arbitrator has awarded Rs. 11,26,296/- for the losses sustained for the reasons stated therein which we have incorporated in the previous paragraph. These reasons only pertained to non-obtaining or delay in obtaining permission from the Forest Department as the work site was located in the wild-life sanctuary of Saranda reserve forest. The arbitrator in his award in terms mentioned "I am convinced that the claimant sustained losses on account of following reasons" and thereafter reasons are recorded. Therefore, it cannot be said that the award is a non-speaking one.

16. Further even if such reasons are not recorded, the claim itself for such prohibited items was not entertainable by the arbitrator. In the agreement between the parties, there is specific bar to raising of such claims. Hence the decision of the arbitrator is without jurisdiction. This aspect is also dealt with by this Court in H.P. State Electricity Board v. R.J. Shah and Company, 1999(4) SCC 214. In paragraph 26, the Court held as under :-

The Court further held that in order to find out whether the arbitrator has acted in excess of the jurisdiction, the Court may have to look into some documents including the contract as well as the reference of the dispute made to the arbitrator limited for the purpose of seeing whether the arbitrator has the jurisdiction to decide the claim made in the arbitration proceedings.

17. Further dealing with the similar condition in the contract, such as no claim for price escalation other than those provided therein shall be entertained and "the Contractor will not be entitled for any extra rate due to change in selection of quarries", this Court in Associated Engineering Co. v. Government of Andhra Pradesh and another, 1991(4) SCC 93, observed that four claims mentioned therein were not payable under the contract, in fact, it prohibited such payment and for this purpose. The Court held "this conclusion is reached not by construction of the contract but by merely looking at the contract". The Court further observed that the Arbitrator could not act arbitrarily, irrationally, capriciously or independently of the contract, his sole function is to arbitrate in terms of the contract. The Court further held thus :-

18. In view of the aforesaid settled law, the award passed by the arbitrator is against the conditions agreed by the contracting parties and is in conscious disregard of stipulations of the contract from which the arbitrator derives his authority. His appointment as a sole arbitrator itself was conditional one and he was informed that the same was "with reservation regarding the tenability, maintainability and validity of the Reference as also on further grounds that the claim was barred by the period of limitation and that it pertained to excepted matters of general conditions of the contract". Despite this he has ignored the stipulations and conditions between parties. Hence, the said award is, on the face of it, illegal.

Re: Limitation

19. Our next question is of limitation. The period of limitation is required to be considered on the basis of the arbitration clause between the parties which is as under :-

20. The Appointing Authority will send within thirty days of the receipt of notice a panel of three names of persons not directly connected with the work of the contractor who will select any one of the persons named to be appointed as a sole Arbitrator within thirty days of receipt of the names. If the Contractor fails to select the name from the panel and communicate within 30 days, the appointing authority shall appoint one out of the panel as sole Arbitrator.

21. If the Appointing Authority fails to send to the contractor the panel of three names, as aforesaid, within the period specified, the Contractor shall send to the Appointing Authority a panel of three names of persons who shall all be unconnected with the organisation by which the work is executed. The Appointing Authority shall on receipt of the names as aforesaid select any one of the persons named and appoint him as the Sole Arbitrator, if the appointing authority fails to select the person and appoint him as the Sole Arbitrator within 30 days of receipt of the panel and inform the contractor accordingly, the Contractor shall be entitled to invoke the provisions of the Indian Arbitration Act, 1940 and any statutory modification thereof."

22. In view of the aforesaid arbitration clause, even though the claim made by the contractor was time barred, the dispute was required to be referred to the arbitrator. However, the reference was subject to the contention that it was barred by the period of limitation. In that context, the learned Counsel for the appellant submitted that it is settled law that application under Section 20 or notice for appointment of arbitrator is to be filed within three years from the date when 'cause of action' arises as provided in Article 137 of the Limitation Act, 1963. The application filed by the contractor in December 1985 was, on the face of it, time barred because the cause of action to recover the amount arose, according to the contractor, in August 1979 when he demanded the alleged damages for loss suffered by him because of the delay in handing over the worksites. He further submitted that, in the present case, in year 1980 for the same work, the Contractor had executed a supplementary agreement for the completion of the work within the stipulated time and at a higher rate. This would also show that Contractor waived his alleged right of asking for appointment of Arbitrator as provided in arbitration clause. He referred to the arbitration clause and pointed out that within 30 days of the receipt of the notice, arbitrator is required to be appointed by the Managing Director. If arbitrator is not appointed then Contractor has option to send the panal of three names from which arbitrator is required to be appointed. He contended that after the supplementary agreement, there was no question of adjudicating the so-called demand made by the Contractor in the year 1979. In any case, he submitted that the Contractor ought to have approached the Court under Section 20 or ought to have demanded arbitration within three years from the date of the notice demanding the amount for loss suffered by him. As against this, learned Counsel for the respondent submitted that the cause of action to refer the matter to the arbitrator arose only in 1983 when respondent denied Contractor's claim.

23. For deciding this controversy, we would first refer to the decision of this Court in the State of Orissa and others v. Damodar Das, 1996(2) SCC 216 wherein this Court held that Section 3 of the Limitation Act, 1963, enjoins the Court to consider the question of limitation whether it is pleaded or not. The Court in paragraph 5 held as under :-

Even if the arbitration clause contains a provision that no cause of action shall accrue in respect of any matter agreed to be referred to until an award is made, time still runs from the normal date when the cause of action would have accrued if there had been no arbitration clause."

The Court also referred to the earlier decision in Panchu Gopal Bose v. Board of Trustees for Port of Calcutta, 1993(4) SCC 338 : 1993(3) RRR 1, where the Court observed as under :-

Applying the aforesaid ratio in the present case, right to refer the dispute to the arbitrator arose in 1979 when Contractor gave a notice demanding the amount and there was no response from the appellant and the amount was not paid. The cause of action for recovery of the said amount arose from the date of the notice. Contractor cannot wait indefinitely and is required to take action within the period of limitation. In the present case, there was supplementary agreement between the parties. Supplementary agreement nowhere provides that so-called right of the contractor to recover damages was in any manner saved. On the contrary, it specifically mentions that contractor was yet to execute a considerable portion of the work more particularly described in the schedule to the agreement. And that the contractor has agreed to complete the said balance work on the terms and conditions enumerated in the agreement. Now, in this set of circumstances, contractor cannot wait and approach the authority or the court for referring the dispute to the arbitrator beyond the period of limitation. Section 37 of the Arbitration Act specifically provides that provisions of the Indian Limitation Act shall apply to the arbitrations as they apply to proceedings in the Court.

24. Learned Counsel for the respondent relied upon the decision of this Court in Major (Retd.) Inder Singh Rekhi v. Delhi Development Authority, 1988(2) SCC 338 for contending that cause of action for referring the claim arises only when the appellant disputed the right of the respondent to recover the damages claimed by him. In the said case, the Court has observed that on completion of the work, the right to get payment would clearly arise, but wherein the final bills have not been prepared and when the assertion of the claim was made on 28th February, 1983 and there was non-payment, the cause of action arose from that date. In that case, application under Section 20 was filed in January 1986. The Court also observed that :

25. In the present case, as stated above, on 29th August, 1979, the contractor wrote letter making certain claims. Thereafter, the supplementary, agreement was executed on 20th December, 1980. In that agreement it is nowhere stated that contractor's alleged right of getting damages or losses suffered by him was kept alive. On the contrary, he has agreed to complete the work within the time stipulated in the second agreement by charging some higher rate. Contractor has not sought any reference within three years from the date when cause of action arose, i.e., from 29th August, 1979. Only in 1985 when dispute arose with regard to the second agreement, respondent gave notice on 2nd December, 1985 to appoint sole arbitrator. The sole arbitrator was appointed with a specific reservation regarding the tenability, maintainability and validity of reference as also on the ground that claim was barred by the period of limitation and it pertained to excepted matters in terms of general conditions of the contract. From these facts, it apparent that claim before the arbitrator in November-December 1985 was apparently barred by period of limitation. Letter dated 3rd September, 1983 written by the appellant repudiating the respondent's claim on account of damages or losses sustained by him would not give fresh cause of action. On that date cause of action for recovering the said amount was barred by the period of three years prescribed under Article 137 of the Limitation Act, 1963. Under Section 3 of the Limitation Act, it was the duty of the arbitrator to reject the claim as it was on the face of it, barred by the period of limitation.

26. In the present case, in view of the aforesaid findings, it is not necessary to discuss the contention with regard to the award of interest prior to coming into force of the Interest Act, 1978 or that no interest could be awarded on the unliquidatd damages. It is also not necessary to discuss whether arbitration agreement provided in first agreement executed in 1977 would survive after execution of the second agreement in December, 1980.

In the result, the appeal is allowed with costs. The impugned order passed by the Patna High Court, Ranchi Bench in Miscellaneous Appeal No. 621 of 1987 and the order dated 2nd April, 1990 passed by the Subordinate Judge, Ist Class, Chas in Arbitration Suit No. 28 of 1988 are quashed and set aside.

Appeal allowed.