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2006 (4) TMI 528 - SC - Indian LawsJurisdiction - power of a court to modify an award - award was contrary to the price escalation clause contained in the contract - supply of Metallurgical coke (for short coke ) - respondent who was earlier using Washery Grade II coal in regard to the supplies upto 13.7.1992 started using washery grade I coal from 14.7.1992, on the ground that it found it difficult to produce the coke of the required specifications, by using washery grade II coal - HELD THAT - Having regard to the escalation clause, price escalation had to be worked out by taking the difference between the price of washery grade I coal on 14.7.1992 (Rs.798.98) and the base price of washery grade I on 8.11.1991 (Rs.654.42) that is ₹ 144.56 and multiply it by a factor of 1.65 which works out to ₹ 238.52. But what the respondent claimed was by calculating the difference between the market price of washery grade I coal on 14.7.1992 (798.98) and the base price of washery grade II coal on 8.11.1991 (540.02) that is ₹ 258.96 multiplied by the factor of 1.65 and arrive at the escalation as ₹ 427.28 per MT. This is in clear violation of the provisions of Clause 5 of the purchase order relating to price variation. The contract only mentioned the specifications of metallurgical coke and did not specify the quality of coal to be used for producing the metallurgical coke. It was open to the respondent to use any grade of coal, provided it supplied the coke of the quality specified. The purchaser was concerned with the specifications of the product it purchased, namely, metallurgical coke. It was not concerned with the quality of the raw material (that is coal) used for producing the metallurgical coal. The price of metallurgical coke was not linked to or based on the basic price of any particular quality of washery coal. Therefore, neither the respondent nor the Arbitral Tribunal could assume that the contract price of ₹ 2231/- was based on the base price of washery grade II as on 8.11.1991. Having regard to the escalation clause, the price increase should be with reference to the coal that is used. It cannot be worked out by taking the difference between the higher cost of superior quality coal and lower base price of inferior quality of coal. In the operative portion, the Arbitrators having correctly stated that the respondent will be entitled to price increase as per the escalation clause and that from 14.7.1992, the price escalation will be with reference to change in the price of washery grade I coal, acted in violation of the specific terms of the contract by stating that - The base price for determining escalation is the price of coking coal washery grade II coal ruling as on 8.11.1991. This sentence should have actually been as follows The base price for determining escalation is the price of washery grade I coal ruling as on 8.11.1991, for determining escalation for supplies from 14.7.1992. A reading of the award shows that what was intended to be given was escalation in terms of an escalation clause in the purchase order. But on account of apparent error in the Award, the calculation of escalation has been done with reference to the prevailing price of superior quality of coal (washery grade I) and the base price of inferior quality of coal (washery grade II) instead of calculating escalation with reference to the prevailing price of the superior quality of coal (washery grade I) and the base price of superior quality of coal (washery grade I). In fact, when queries by us, the learned counsel for respondent could not explain with reference to contrary terms, how the base price of washery grade II coal could be applied to calculate the escalation in coke price produced by using washery grade I coal. The appellant has given calculation fully and correctly which shows that the escalation was only 11,42,203.90. This was what was awarded by the trial court and this amount had been paid with interest of ₹ 12,75,442 in all ₹ 24,17,646 on 6.2.1999. In spite of our directions on 21.3.2006, the respondent has not given the actual calculations but has furnished only the final figure of claim. The respondent s memo makes it clear that the respondent wants the escalation to be calculated for supplies from 14.7.1992 with reference to the base price of washery grade II coal and not with reference to washery grade I coal. This is impermissible. The order of the Division Bench is unsustainable as it failed to interfere with the portion of the award which is opposed to the specific terms of the contract. On the other hand, the trial court had correctly decided the matter. Therefore, we allow this appeal, set aside the judgment of the High Court and restore the judgment of the trial court. Parties to bear their respective costs.
Issues Involved:
1. Price escalation calculation for the supply of metallurgical coke. 2. Interpretation and application of the price variation clause in the contract. 3. Validity and enforcement of the Arbitral Tribunal's award. 4. Scope of judicial interference under Section 34 of the Arbitration and Conciliation Act, 1996. Detailed Analysis: 1. Price Escalation Calculation for the Supply of Metallurgical Coke: The appellant issued a tender for the supply of metallurgical coke, and the respondent submitted an offer which was accepted. The contract specified the price per MT of coke and included a price variation clause based on the price of coal. The respondent initially used Washery Grade II coal but later switched to Washery Grade I coal due to quality issues. The appellant granted price escalations based on Washery Grade II coal prices, which the respondent disputed, claiming escalations should be based on Washery Grade I coal prices. 2. Interpretation and Application of the Price Variation Clause in the Contract: The contract's price variation clause stipulated that the price of coke would vary based on changes in coal prices from the base price as of 8.11.1991. The respondent claimed escalations based on the price of Washery Grade I coal, which they used from 14.7.1992 onwards. The Arbitral Tribunal awarded escalations based on Washery Grade I coal but mistakenly used the base price of Washery Grade II coal for calculations. The trial court corrected this by stating that the base price for escalation should be that of Washery Grade I coal. 3. Validity and Enforcement of the Arbitral Tribunal's Award: The Arbitral Tribunal awarded the respondent escalations for the period after 14.7.1992 based on the price of Washery Grade I coal but used the base price of Washery Grade II coal, leading to incorrect calculations. The trial court partially set aside the award, correcting the base price to that of Washery Grade I coal. The High Court, however, reinstated the Arbitral Tribunal's award in its entirety, which was challenged by the appellant. 4. Scope of Judicial Interference under Section 34 of the Arbitration and Conciliation Act, 1996: The Supreme Court referenced the ONGC v. Saw Pipes Ltd. case, which allows courts to set aside awards that are contrary to the terms of the contract or substantive law. The High Court erred by not considering the contract terms and assuming that awards cannot be interfered with even if they contradict the contract. The Supreme Court emphasized that awards violating the contract terms are patently illegal and can be set aside. Conclusion: The Supreme Court allowed the appeal, setting aside the High Court's judgment and restoring the trial court's decision. The trial court correctly determined the escalation should be calculated based on the base price of Washery Grade I coal for supplies after 14.7.1992. The appellant had paid the correct amount as per the trial court's judgment, and the respondent was ordered to refund the excess amount withdrawn, with interest. The judgment clarified the correct application of the price variation clause and the scope of judicial interference in arbitration awards.
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