2017 (2) TMI 1322 - SC - Indian Laws

Arbitration agreement - works contract - Disputes arose between the appellant and the respondent in respect of execution of the work. According to the appellant, certain payments were not made to it by the respondent though it had executed work - The appellant contended that since it was a back to back contract, the manner in which the rates are revised upward and received by PCL from HSCL, benefit thereof has to be given to the appellant also. The matter with regard to the revision of rates, which formed part of Claim No. 1, pertains to item nos. 1 and 6 which were to be executed by the appellant. Whether the principle of incorporation would enter into and extend to this sub-contract as well in the absence of any clause of back to back contract appearing in the contract that was signed between the appellant and the respondent? Held that - There was a clear understanding between them that in case HSCL is able to get extra payment in respect of item Nos.1 and 2, HSCL had to pass on the said benefit to the respondent after retaining 5% of the enhanced amount so received. However, there was no such stipulation in the contract entered into between the appellant and the respondent. Entire thrust in the argument of the learned counsel for the appellant before us was that there was back to back contract as according to him the aforesaid stipulations contained in a contract between HSCL and the respondent stood incorporated in the contract entered into between the appellant and the respondent as well. However, we do not find it to be so. Since that was the basis on which the learned arbitrator awarded the claim, the High Court has rightly held that it is a fundamental error committed by the arbitrator. Though the respondent has been able to get the benefit of enhanced rate in respect of Item Nos.1 and 6 and is able to retain the same thereby depriving the appellant to get this benefit. However, in a matter of contract where the parties have to stick to govern by the provisions of the contract entered into between them, equity has no role to play. Insofar as contract between the appellant and respondent is concerned, appellant was satisfied with escalation clause. Respondent, while entering into contract with HSCL ensured that enhancement of rates by the principal employer i.e. NHPC in favour of HSCL will enure to the benefit of the respondent PCL as well. The appellant, however, could not successfully negotiate this aspect with the respondent in the absence of any such clause/arrangement in the contract entered into between the appellant and the respondent. As the contract between appellant and respondent deals only with escalation, appellant has to be satisfied with the same. Appeal dismissed.

Summary

Issues involved:
1. Legality of sub-contracting between the parties.
2. Disputes regarding payments for executed work.
3. Applicability of revised rates in the sub-contract.
4. Jurisdiction and authority of the arbitrator.
5. High Court's authority to interfere with the arbitrator's award.

Issue-wise detailed analysis:

1. Legality of sub-contracting between the parties:
The National Hydro-Electric Power Corporation Ltd. (NHPC) awarded a contract to Hindustan Steel Works Construction Ltd. (HSCL) for construction work. HSCL sub-contracted the work to Progressive Construction Ltd. (PCL), which further sub-contracted it to M/s. Sharma & Associates Contractors (P) Ltd. (SAPL). It was admitted that sub-contracting by PCL to SAPL was not permissible.

2. Disputes regarding payments for executed work:
Disputes arose between SAPL and PCL over unpaid amounts for executed work. These disputes were referred to arbitration as per the arbitration clause in the contract between SAPL and PCL. The arbitrator awarded a sum of ?19,38,357/- to SAPL for Claim No. 1, which was upheld by the learned Single Judge.

3. Applicability of revised rates in the sub-contract:
The core of Claim No. 1 was whether SAPL was entitled to revised rates received by PCL from HSCL for deviations in quantities. SAPL argued that it was a back-to-back contract, and thus, the revised rates should apply. The arbitrator accepted this plea, but the Division Bench of the High Court disagreed, holding that the contract between SAPL and PCL was independent and did not incorporate terms from the HSCL-PCL contract.

4. Jurisdiction and authority of the arbitrator:
The Division Bench found that the arbitrator erred by relying on terms from the HSCL-PCL contract, which were not applicable to the SAPL-PCL contract. The High Court noted that the arbitrator's approach was fundamentally flawed, as it was based on provisions not incorporated into the SAPL-PCL contract. The High Court emphasized that the arbitrator must adhere to the specific terms of the contract between the parties.

5. High Court's authority to interfere with the arbitrator's award:
The High Court held that it was within its jurisdiction to correct the arbitrator's fundamental error. The court cited precedents stating that an arbitrator is bound by the contract terms and cannot ignore them to achieve what he thinks is just and reasonable. The High Court concluded that the arbitrator's award was based on a jurisdictional error, as it relied on terms not applicable to the SAPL-PCL contract.

Conclusion:
The appeal was dismissed, affirming the High Court's decision that the arbitrator's award was based on an incorrect application of contract terms. The High Court's interference was justified as it addressed a fundamental jurisdictional issue, ensuring that the arbitrator adhered strictly to the contract between SAPL and PCL.