9911796707
TMI Blog1984 (3) TMI 425X X X X Extracts X X X X X X X X Extracts X X X X ..... n, a Government of India undertaking, the value of the tender of the latter being double that of the appellant. For the construction of the Repair Dock, the only tender was of the appellant. In view of the limited number of tenders received, the appellant was invited to negotiate the terms of tender. The value of the works to be executed was over ₹ 24 crores. In view of the huge investment in the project, the tenders were examined by a committee called the Tender Committee constituted in accordance with the approval of the Ministry of Shipping and Transport for examining and evaluating the tenders received for the Building Dock and the Repair Dock. The Tender Committee taking note of the poor response to the invitation to tender and costly affair decided to accept the tender of the appellant inter alia for the reasons (i) that works of such complexity and magnitude have not been undertaken before by any Indian contractor, (ii) that the plant and equipment required for the work are not available indigenously, (iii) that if the contractor is to procure the specialised equipment required for this work, there is hardly any assurance that after these works are over, he would find ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t and machinery, spares, technical know-how and hiring of experts necessary for both the Dock Works vide Work Order No. 13019/1/71-W-II dated January 24,1973 for Building Dock etc. and Work Order No. 13012/15/71-W-II dated January 24, 1973 for Repair Dock etc, amounting to about ₹ 2.00 crores in all will be made available to the contractor from the 11th Yen Credit subject to his getting indigenous clearance and providing detailed justification. The details of such procurement shall be furnished by the Contractor as soon as they are finalised. In view of the huge investment, it was agreed that the respondent would make an advance payment of 75% of the value of old machinery and 90% of the value of new machinery brought to site by the Contractor and in order to secure this advance payment, equipment would be hypothecated by the Contractor to the respondent and the advance payment were to carry interest at 9.1/2% p.a. on the outstanding balance of advance. The mode of recovery was also specified. The formal contract was signed on January 29,1973 which included an arbitration clause to which we would turn a little later. It so happened that the required pile driving equipm ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the appellant upto May 15,1975 on account of variation in the rate of foreign exchange was ₹ 61,27,317 and requested the respondent to compensate the loss atleast upto the tune of ₹ 45 lakhs which is approximately 75% of the loss suffered by the contractor in this behalf. The respondent responded to this letter as per its letter dated July 2,1975 saying that the letter dated July 14,1972 of the appellant which forms part of the contract documents clearly recites that the total foreign exchange required by the contractor for the equipment, spares, technical know-how and hiring of experts, was expected to be about ₹ 2 crores and that the expenditure incurred by the contractor in this behalf so far has been less than ₹ 2 crores and in the circumstances it was found difficult to accept the position that the tender was based on the assumptions indicated in the letter under reply and that the rates for the pile driving should for the future be revised. There ensued further correspondence between the parties. Ultimately, the appellant by its letter dated March 1,1976 informed the respondent that its claim for compensation for increase in the cost of imported pile d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t of imported pile driving equipment and technical know-how fees referred to in clauses (2) and (3) hereunder fall within the purview of the first paragraph of Clause 40 of the General Conditions of Contract entered into between the two parties? 2. If the answer to (1) above is in the affirmative, in terms of the provisions of the contract are Messrs. Tarapore Co. entitled to compensation for increase in the cost of imported pile driving equipment and technical know-how fees to be paid to them by Cochin Shipyard Ltd.? If so, what is the amount ? 3. The dispute that has arisen between Messrs. Tarapore Co., and Cochin Shipyard Ltd. regarding the claim of M/s. Tarapore Co., for compensation for increase in the cost of the imported pile driving equipment and the technical know-how fees. 4. Costs Parties appeared before the Arbitrator through their respective counsel. The Arbitrator gave its Award on July 6,1977. On Point No. 1, the Arbitrator held as under: The claim of Messrs. Tarapore and Company on Cochin Shipyard Limited for compensation for increase in the cost of imported pile driving equipment and technical know-how fees falls within the purview of the fi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ontention of the respondent. The learned Judge after modifying the award of the Arbitrator in the matter of interest from 9.1/2% as awarded by the Arbitrator to 6% granted the application of the applicant and made the award a rule of the court. The respondent preferred M.F.A. 409 of 1979 in the High Court of Kerala at Ernakulam. A Division Bench of the High Court agreed with the learned Subordinate Judge on the question of insufficiency of stamp. The Division Bench however, after expressing its displeasure about not making a reasoned award by the Arbitrator proceeded to examine the contention whether the arbitration clause covers the dispute. The court held that the question whether the dispute is arbitrable or not cannot be finally decided by the arbitrator because it is a matter relating to his jurisdiction. It was further held that the arbitrator cannot by an erroneous interpretation or construction of the clause confer jurisdiction on himself and the court can go into the question whether the matter in dispute between the parties is covered by the arbitration clause. The specific contention on behalf of the appellant that once a specific question of law is referred to the ar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s given in Annexure II. Over and above the extracted portion, the clause provides for the manner and method of appointing the sole arbitrator, the continuance of the work during progress of arbitration proceedings, the time and place of holding the arbitration. proceedings, the power to enlarge the period for making the award and finality to be attached to the award of the Arbitrator. When the arbitration clause was invoked by the appellant, the respondent did contend that the dispute raised by the appellant was not covered by the arbitration clause. After specifying its demur, the respondent formulated the points in dispute on which the arbitration was invited to give his award. Undoubtedly, the respondent proceeded to formulate the points in dispute between the parties on which the Arbitrator was to be invited to give his award without prejudice to its right to contend that the dispute is not covered by the arbitration clause and that the appellant is not entitled to any compensation in respect of the increase in the cost of imported pile driving equipment and technical know-how fees. What is the effect of referring the specific question of law to arbitration without preju ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... arbitrator which opens with a specific clause that it needs only to be decided if the answer to the first point of reference, namely jurisdiction of the arbitrator under Clause 40 is in the affirmative meaning thereby that the dispute so raised and subsisting between the parties would be covered by the arbitration agreement. In other words, if the dispute is covered by the arbitration agreement, the arbitrator was further required to decide whether there was any substance in the claim made, and if he found some substance in the disputed claim, to ascertain what amount the appellant would be entitled to recover as and by way of compensation from the respondent. The arbitrator was thus required and called upon first to decide whether the dispute is arbitrable as falling within the width and ambit of the arbitration agreement. If the answer is in the affirmative, then alone the second point need be examined. If the answer to the first point of reference is in the negative in that if the arbitrator were of the opinion that the dispute is not arbitrable as it would not fall within the scope, width and ambit of the arbitration agreement, it would not be necessary for him to determine whe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he two parties? 2. If the answer to 1 is in the affirmative in terms of the provisions of the concerned contract are Messrs. Tarapore Co. entitled to compensation for increase in the cost of imported pile driving equipment and technical know-how fees to be paid to them by Cochin Shipyard Ltd.? If so, what is the amount? 3. Costs. The respondent proceeded to notify the panel of names and invited the appellant to choose the arbitrator as agreed to between the parties and set out in clause 40. The appellant by his letter dated April 19,1976 while reasserting that the claim made by it would be covered by Clause 40 further stated that the proper course would be to refer the dispute that has arisen between the parties on the matter of compensation to the decision of the arbitrator and not any particular issue or issues. It was also suggested that framing of the issues will be the function of the arbitrator after he enters upon the reference and after he has the pleadings of both the parties before him. The appellant also suggested what dispute should be referred to the arbitrator and set it out as under: The decision of the dispute that has arisen between M/s Tarapore ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tor. The first issue amongst the agreed draft issues reads as under: Does the claim of the claimant fall within the purview of the purview of the first para of Clause 40 of the General Conditions of Contract entered into between the two parties? This point was not to be incidentally decided while deciding the dispute referred to the arbitrator his jurisdiction to entertain the dispute is questioned. In fact, hereby the reference of the specific point of law touching upon the jurisdiction of the arbitrator the parties invited the arbitrator to decide this specific question. It was he who was asked by the submission or terms of reference to decide his jurisdiction first and then proceed to decide the dispute on merits. We referred to Issue No. 1 in the agreed draft issues only to buttress the conclusion that it was at the instance of the respondent that the arbitrator was called upon to decide the question of the scope, ambit and width of arbitration clause the decision on which would confer jurisdiction upon him to decide the dispute as to compensation. In this context it would be advantageous to refer to paragraphs 11 and 12 of the counter statement filed by the respondent b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... error of law appears on the face of the award, the court can interfere with the award. But there is an altogether an independent and a distinct situation in which a question of law might arise such as where the parties to the dispute may frame the specific question of law and reflect it to the Arbitrator for his decision. In the later situation, it was urged that the decision of the Arbitrator even if erroneous would not permit the court to interfere with the award. Proceeding along it was urged that in this case a specific question of law touching upon the jurisdiction of the arbitrator was specifically referred to the Arbitrator for his decision and therefore, the decision of the Arbitrator is binding on the parties and the court cannot proceed to inquire whether upon a true construction of the arbitration clause. the dispute referred to the Arbitrator for arbitration would be covered by the arbitration clause so as to clothe the arbitrator with the jurisdiction to arbitrate upon the dispute. Mr. Pai, learned counsel for the respondent countered by saying that jurisdiction of the arbitrator cannot be left to the decision of the arbitrator so as to be binding on the parties and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... specific question of law to the arbitrator for his decision. There is no more gainsaying the fact that a pure question of law may and can be referred to an arbitrator for his decision. Russel on the Law of Arbitration Twentieth Edition at page 22 states as under; A pure question of law may be referred to an arbitrator; and where such a question is specifically referred his award will not be set aside merely upon the ground that his decision is wrong. In Halshury's Laws of England Vol. 2 Para 623 4th Edition the statement of law reads as under: If a specific question of law is submitted to the arbitrator for his decision and he decide it, the fact that the decision is erroneous does not make the award bad on its face so as to permit its being set aside; and where the question referred for arbitration is a question of construction, which is, generally speaking, a question of law, the arbitrator's decision cannot be set aside only because the court would itself have come to a different conclusion. With the ever widenings expansion of international trade and commerce, complex question of private International Law, effect of local laws on contracts between partie ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... for his decision, the award cannot be set aside on the ground of an error apparent on the face of the award because the question of law was wrongly decided.' At a later stage, it was observed that if the court, before which it is sought to impeach the award, comes to the conclusion that the alleged error in law even if it can be maintained, arises in the decision of a question of law directly submitted to the arbitrator for his decision, then the principle stated by Channel, J., in Re. King and Duveen applies, is attracted and the parties having chosen their tribunal, and not having applied successfully to the court under either s. 4 or s. 19 of the Arbitration Act, 1889, are not in a position to question the award or to maintain a claim to set it aside.' This decision is an authority of the proposition that where a question of construction is the very point referred for arbitration, then the decision of the arbitrator upon that point cannot be set aside by the court only because the court would itself have come to a different conclusion. In F.R. Absalom Ltd. v. Great Western (London) Garden Village Society Ltd. the contention was that the award was bad by reason of an e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ged family settlement valid or admissible in evidence? (9) Is the plaintiff's claim or any portion thereof barred by limitation?,, After these issues had been settled, the parties agreed to refer to arbitration the outstanding matters in the suit. In a motion for setting aside the award it was urged that there was an error of law apparent on the face of the award both with regard as to the admissibility of the alleged family settlement and about the suit of Anardeyi being barred by limitation. Rejecting the motion, the Privy Council observed as under, However, that may be, their Lordships are satisfied that the two points of law as to which it is said the arbitrators error vitiates the award were specifically referred to him to decide and if this is so, it would be contrary to well-established principles such as are laid down in re King and Duveen and F.R. Absalom Ltd. v. Great West (London) Garden Village Society Ltd., for a Court of law to interfere with the award even if the Court itself would have taken a different view of either of the points of law had they been before it. Turning to the decisions of our Court, reference may first be made to Seth Thawardas Pheru ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d if he does not he can be set right by the Courts provided his error appears on the fact of the award. The single exception to this is when the parties choose specifically to refer a question of law as a separate and distinct matter. The Court further proceeded to examine whether in the facts of that case, the arbitrator was specifically asked to construe clause 6 of the contract or any part of the contract or whether any question of law was specifically referred. The Court emphasised the word 'specifically' by pointing out that, parties who made a reference to arbitration have the right to insist that the Tribunal of their choice shall decide their dispute according to law, so before the right can be denied to them in any particular matter, the court must be very sure that both sides wanted the decision of the arbitrator on a point of law rather than that of the Courts and that they wanted his decision on that point to be final. The Court then proceeded to examine the various clauses of the contract and held that this is not the kind of specific reference on a point of law that the law of arbitration requires. The Court held that when a question of law is the point at ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... appended by the arbitrators, stating the reasons for his decision, there is found some legal proposition which is the basis of the award and which is erroneous. This observation does not help in deciding the point under discussion and just after this statement, there follows the observation about the effect of referring a specific question of law for the decision of the arbitrator and the jurisdiction of the Court to set aside the award on the ground that there is an error of law apparent on the face of it. In Union of India v. A.L. Rallia Ram 1 this Court after referring to the decision in Champsey Bhara and Company reaffirmed that, the rule in that decision does not apply where questions of law are specifically referred to the arbitrator for his decision; the award of the arbitrator on those questions is binding upon the parties, for by referring specific questions the parties desire to have a decision from the arbitrator on those questions rather than from the Court and the Court will not, unless it is satisfied that the arbitrator had proceeded illegally interfere with the decision. After referring to the decision hereinabove examined by us, the Court came to the conclusion ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e arbitration agreement, it becomes a specific question of law even if it involves the jurisdiction of the arbitrator and if it is so, a decision of the arbitrator on specific question referred to him for decision even if it appears to be erroneous to the Court is binding on the parties. The decisions relied upon by Mr. Pai do not derogate from this legal position. We may briefly refer to those decision In Produce Brokers Co. Ltd. v. Olympia Oil and Cake Co. Ltd., it was held that if the question which the arbitrator takes upon himself to decide is not in fact within the submission the award is a nullity. The arbitrator cannot make his award binding by holding contrary to the true facts when the question which he affects to determine is within the submission. Let us emphasise the ratio of the decision that the arbitrator takes upon himself to decide a question not within the submission. This would mean that the question of law was not specifically referred to the arbitrator for his decision but it was incidentally raised. In fact, nowhere it was contended that any specific question of law was referred to the arbitrator and if so what would be its effect on the binding character o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng in his own favour some preliminary point upon which his jurisdiction rests. Mr. Pai also referred to the decisions of the Privy Council in Champsey Bhara Co. and Hirji Mulji v. Cheong Yue Steamship Co. Ltd. Both these decisions are of no assistance on the question about the reference of a specific question of law touching upon the jurisdiction of the arbitrator for his decision and its effect. In fact. the decision in Champsey Bhara's case clearly turns upon as to what constitutes an error of law apparent on the face of the award. The next case referred to was Heyman Anrs. v. Darwins Ltd. It reasserts that as a rule the arbitrator cannot clothe himself with jurisdiction. Turning to the decisions of this Court, reference was first made to Jivarajbhai Ujamshi Sheth Ors. v. Chintamanrao Balaji Anr. Shah, J. speaking for himself and Justice Sarkar at page 499 observed that 'this is not a case in which the arbitrator has committed a mere error of fact or law in reaching his conclusion on the disputed question submitted for his adjudication. It is a case of assumption of jurisdiction not possessed by him, and that renders the award, to the extent to which it i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that in the letter dated March 29, 1976 by which the respondent agreed to refer the dispute to the arbitrator, it was in terms stated that the reference is being made without prejudice to the position of the respondent as adopted in the letter meaning thereby without prejudice to its rights to contend that the claim of the appellant is not covered by the arbitration clause. In the context in which the expression 'without prejudice' is used, it would only mean that the respondent reserved the right to contend before the arbitrator that the dispute is not covered by the arbitration clause. It does not appear that what was reserved was a contention that no specific question of law was specifically referred to the arbitrator. It is difficult to spell out such a contention from the letter. And the respondent did raise the contention before the arbitrator that he had no jurisdiction to entertain the dispute as it would not be covered by the arbitration clause. Apart from the technical meaning which the expression 'without prejudice' carries depending upon the context in which it is used, in the present case on a proper reading of the correspondence and in the setting in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion of law touching upon the jurisdiction of the arbitrator was referred for the decision of the arbitrator by the parties. Even if the view taken by the arbitrator may not accord with the view of the court about the scope, ambit and width of the arbitration clause, the award cannot be set aside on the ground that there is an error of law apparent on the face of the award. The view taken by the High Court is palpably untenable and has to be reversed. On this short point, the appeal can be allowed. However, it was strenuously urged by both the sides that the dispute arising out of the claim for compensation made by the appellant on account of the increase in the cost of the pile driving equipment and technical know-how fees would or would not be covered by the first paragraph of Clause 40, we would briefly examine the same to point out that it would be covered. In order to ascertain whether the claim for compensation for increase in the price of pile driving equipment and technical know-how fees would be covered by the arbitration clause, it is necessary briefly to refer to the negotiations and discussions leading to the formation of the contract for construction of the Repair D ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nge for the equipment, spares, technical know-how and hiring of experts shall be provided to the contractor and that the total foreign exchange on all these accounts will be about ₹ 2 crores. A sort of an assurance was thus extended to the contractor that the same would be made available to him from the 11th Yen credit from Japan. This is not disputed. It is also an admitted position that the necessary equipment, machinery, spares and technical know-how were not available from Japan and the availability of the 11th Yen credit from Japan lost all significance. Further the respondent by its letter dated January 24,1973 to the appellant while accepting the tender of the appellant on behalf of Cochin Shipyard Limited specifically stated as under: You shall provide at your cost all construction plant and machinery (including that requiring import) for all items of work including RCC piling and Steel Sheel Piling Works. Departmental machinery likely to be made available for issue to the Contractor shall be as in Annexure IV of the General Conditions of Tender. You shall furnish an inventory of all plant and machinery proposed to be used on the works including items of imported ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d to the contractor at negotiated rates or (ii) the contractor were to import the same the rates be paid to the contractor. The second alternative was accepted by the parties on the fundamental assumption that the investment in this behalf would be ₹ 2 crores. This is the agreed position on which contract was entered into. To continue the narrative, it may be pointed out that this fundamental foundation of the contract not left to guess work, but is specifically referred to in the notice inviting tender and in the specifications and modifications as addenda to the General Conditions of Contract. It was clearly understood between the parties that the contractor has to invest roughly ₹ 2 crores in foreign exchange for importing pile driving equipment and technical know-how fees without which this work could never have been undertaken and without which it would not have been entrusted to the contractor. The contractor when he quote his terms must obviously have made appropriate calculations, one of which in this case appears to be that it will have to invest ₹ 2 crores in foreign exchange and this fact flies in the face that after the work was over the imported machi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... which may be extracted: In this connection, a kind reference is invited to your letter dated the 14th July, 1972 (which forms a part of the contract documents) wherein you had indicated that the total foreign exchange required by you for the equipment, spares, technical know-how and hiring of experts, was expected to be about ₹ 2 crores. From the data enclosed with your letter under reply, it is seen that the foreign exchange expenditure incurred by you so far in connection with this contract had been less than ₹ 2 crores. In the circumstances, it is difficult to accent the position that your tender was based on assumptions indicated by you and that the rates for pile driving should now be revised. This letter furnishes proof, if one was needed that parties were ad idem that the investment for imported pile driving equipment and foreign exchange know-how would be about ₹ 2 crores. The respondent does not contest the claim for compensation under this head as is now sought to be done on the ground that as the contractor had to provide imported pile driving equipment and technical know-how, the respondent is not entitled to compensation even if the initial e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... #39;. One has merely to call attention to the two letters dated July 2, 1975 and August 29 1975 to reach the conclusion that the respondent has gone back upon its original position and having found that the expenditure under this head has gone up beyond the estimated expenditure made a volte face, the two positions so adopted being entirely inconsistent with each other Thereafter, the matter was referred to arbitration. From the commencement i.e, from the stage of inviting tenders and through the negotiations and the finalisation of the contract, at every stage, the respondent assured that foreign exchange would be made available from 11th Yen Credit. As the equipment was not available from Japan, the availability of Yen Credit become otiose from the contractor's point of view. At the instance of and with the active participation of the respondent the contractor made enquiries in various countries and ultimately procured the necessary equipment and technical know-how which was approved by the respondent and imported the same. In the time lag, the price as well as the foreign exchange rates in relation to rupee underwent an upward change, with the result that the contractor h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ormation of the contract any fresh law is enacted which has the bearing on the price of materials incorporated in the works and/or wages of labour, the terms of contract shall accordingly be varied. Clause 26 provided for supply of materials, plants, tools, appliances etc. by the contractor. Clause 2 provides for the liability of the contractor to supply construction, plant and machinery including the items to be imported and a further obligation is cast on the contractor to furnish inventory of the same. Clause 31 amongst others, provided that the pile driving equipment shall be procured by the contractor, and the selection of equipment shall be done by the contractor, in consultation with the respondent. These clauses were presumably referred to in the context of an argument that the price escalation clause does not cover the claim for compensation for additional expenditure on imported plant and machinery and technical know-how because the contract substantially provides for the same to be supplied by the contractor. In our opinion, this over- simplification of the clauses of the contract involving works of such magnitude is impermissible. The whole gamut of discussions, negotia ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ates or otherwise concerning the works or the execution thereof would be covered by the arbitration clause. The question to be posed is does the claim made by the contractor arise out of or relates to the contract, estimates, or is otherwise concerning works for execution thereof ? Phrases such as 'claim arising out of contract' or relating to the contract' or 'concerning the contract' on proper construction would mean that if while entertaining or rejecting the claim or the dispute in relation to claim may be entertained or rejected after reference to the contract, it is a claim arising out of contract. Again the language of cl. 40 shows that any claim arising out of the contract in relation to estimate made in the contract would be covered by the arbitration clause. If it becomes necessary to have recourse to the contract to settle the dispute one way or the other than certainly it can be said that it is a dispute arising out of the contract. And in this case the arbitration clause so widely worded as disputes arising out of the contract or in relation to the contract or execution of the works would comprehend. Within its compass a claim for compensation rel ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rpose of deciding the matter in dispute, it must be held that the matter is within the scope of the arbitration clause and the arbitrators have jurisdiction to decide the same. In so stating the proportion of law, reliance was placed on Heyman Anr. v. Darwins Ltd. in which it was held that 'where the parties are at one in asserting that they entered into a binding contract, but a difference has arisen between them whether there has been a breach by one side or the other, or whether circumstances have arisen which have discharged one or both parties from further performance, such differences should be regarded as differences which have arisen in respect of or 'with regard to, or 'under' the contract, and an arbitration clause which uses these, or similar expressions should be construed accordingly. The Court affirmed the decision in Ruby General Insurance Co. Ltd. case. In Astro Vencedor Compania Naviera S. A. of Panama v. Mabanaft G. M. B. H. The Diamianos a question arose whether a claim in tort would be covered by the arbitration clause? It was admitted that the claim for wrongful arrest is a claim in tort. And it was contended that a claim in tort cannot com ..... X X X X Extracts X X X X X X X X Extracts X X X X
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