IMPORTANT POINT
Ordinarily, the parties would be bound by the terms agreed upon in the contract, but in the event one of the parties to the contract is unable to fulfil its obligations under the contract which has a direct bearing on the work to be executed by the other party the Arbitrator is vested with the authority to compensate the second party for the extra costs incurred by him as a result of the failure of the first party to live up to its obligations.

Headnote:Arbitration Act, 1940—Sections 17 and 30—Arbitration Award—Validity—Absence of any price escalation clause in the Original Agreement—Specific prohibition to the contrary in the Supplemental Agreement—Whether Arbitrator exceeded the jurisdiction in allowing such claims as has been found by the High Court—(No)—Arbitrator acted within his jurisdiction in allowing some of the claims on account of escalation of costs which was referable to the execution of the work during the extended period—Appellant entered into an agreement with State of Kerala for construction work of Chavara Distributory—Disputes having arisen between the parties, matter was referred to arbitration—Superintending Engineer, the designated Arbitrator in terms of the contract, was appointed as the sole Arbitrator—By his award, the Arbitrator awarded a total sum of Rs. 42,21,000/- with interest—Application filed by State challenging validity of the award dismissed—Supplemental Agreement contained a specific provision that the contractor would carry out all further works within the extended period at the rates and in the manner agreed to in the Agreement and would not claim any enhanced rate—However, appellant had suffered heavy losses on account of law and order problem which had been created at work site—He had been compelled to complete the work under duress—High Court was not justified in disallowing the claim.
       Held : Ordinarily, the parties would be bound by the terms agreed upon in the contract, but in the event one of the parties to the contract is unable to fulfil its obligations under the contract which has a direct bearing on the work to be executed by the other party, the Arbitrator is vested with the authority to compensate the second party for the extra costs incurred by him as a result of the failure of the first party to live up to its obligations. That is the distinguishing feature of cases of this nature and M/s. Alopi Parshad’s case (supra) and also Patel Engg.’s case (supra). As was pointed out by Mr. Dave, the said principle was recognized by this Court in P.M. Paul’s (supra), where a reference was made to a retired Judge of this Court to fix responsibility for the delay in construction of the building and the repercussions of such delay. Based on the findings of the learned Judge, this Court gave its approval to the excess amount awarded by the arbitrator on account of increase in price of materials and costs of labour and transport during the extended period of the contract, even in the absence of any escalation clause.(Para 34)
       We have intentionally set out the background in which the Arbitrator made his award in order to examine the genuineness and/or validity of the appellant’s claim under those heads which had been allowed by the Arbitrator. It is quite apparent that the appellant was prevented by unforeseen circumstances from completing the work within the stipulated period of eleven months and that such delay could have been prevented had the State Government stepped in to maintain the law and order problem which had been created at the work site. It is also clear that the rubble and metal, which should have been available at the departmental quarry at Mannady, had to be obtained from quarries which were situated at double the distance, and even more, resulting in doubling of the transportation charges. Even the space for dumping of excess earth was not provided by the respondents which compelled the appellant to dump the excess earth at a place which was far away from the work site entailing extra costs for the same.(Para 35)
       In the aforesaid circumstances, the Arbitrator appears to have acted within his jurisdiction in allowing some of the claims on account of escalation of costs which was referable to the execution of the work during the extended period. In our judgment, the view taken by the High Court was on a rigid interpretation of the terms of contract and the Supplemental Agreement executed between the parties, which was not warranted by the turn of events.(Para 36)

JUDGMENT

Altamas Kabir, J.—The appellant entered into an agreement with the State of Kerala on 10th October, 1985 whereunder he was entrusted with the construction work of the Chavara Distributory from Ch.7440M to 9440M and 10475M to 14767M. Disputes having arisen between the parties, the matter was referred to arbitration. The Superintending Engineer, Siruvani Project, Palghat, the designated Arbitrator in terms of the contract, was appointed as the sole Arbitrator. By his award, which was published on 2nd September, 1989, the Arbitrator awarded a total sum of Rs. 42,21,000/- with 12% interest per annum from the date of the award. Upon the passing of the award the appellant herein filed O.P. (Arb.) 40/89 in the court below under Section 17 of the Arbitration Act for passing a decree in terms of the award. The State of Kerala filed a petition under Section 30 of the Act challenging the award and for setting aside the same.

2. The application filed by the State was dismissed and aggrieved thereby the State of Kerala preferred an appeal in the High Court of Kerala at Ernakulam, being MFA No. 980 of 1990 C.

3. The appellant herein raised claims under 12 different heads but the Arbitrator allowed only claims (a), (e), (g), (i) and (k). Although, in the memorandum of appeal, the entire award in favour of the appellant had been challenged, but the arguments were addressed only with regard to claims under heads (a), (g), (i) and (k). A preliminary objection was raised in the appeal that the Superintending Engineer, who had been appointed as the Arbitrator and had entered on the reference, had been suspended from service for gross mal-practice, and the Government had informed all concerned that the Arbitrator was not to continue with the reference. The Arbitrator retired on superannuation while he was under suspension and the award was made after his retirement. According to the State of Kerala, in the circumstances, the award passed by the Arbitrator was without jurisdiction.

4. The aforesaid objection being preliminary in nature, the same was taken up first for consideration and it was held by the High Court that such an objection was without any merit. The Arbitrator, who was working as Superintending Engineer was placed under suspension on 31st May, 1989. As per an agreement between the parties on 14th February, 1989, the time for making and publishing the award was extended upto 14th June, 1989. Even after the Arbitrator was suspended from service, both sides had agreed on 14th June, 1989 to extend the time further for making and publishing the award upto 14th October, 1989. The Arbitrator retired from service while under suspension on 30th June, 1989. In the light of the said facts, the High Court agreed that the court below could not revoke the authority of the Arbitrator, which could only be done under Section 5 of the Arbitration Act, with the leave of the Court. Accordingly, the preliminary objection raised on behalf of the State of Kerala that the Arbitrator had no authority to continue with the arbitration after his suspension or retirement, was rejected by the High Court.

5. Claim (a) of the appellant herein involved the claimant’s entitlement to get compensation for interruption of work by anti-social elements and failure of the Department in removing such miscreants from the sites which caused the claimant heavy financial losses by way of idle men and machinery, plant and equipment. The claim made under the aforesaid head was for a sum of Rs.11,40,000/-. The Arbitrator was satisfied that there was interruption of work by anti-social elements and that the State had failed to remove such obstruction from the site. Accordingly, the Arbitrator awarded a sum of Rs. 7,30,000/- under this claim.

6. Claim (g) was confined to the question as to whether the claimant was entitled to compensation for the losses suffered by him on account of price escalation of materials that had taken place during the extended period of completion w

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2006 Supreme(SC) 1219

Cases Referred (2)