IMPORTANT POINT
An arbitrator derives his authority from the contract and if he acts in disregard of the contract, he acts without jurisdiction. A Deliberate departure from contract amounts to not only manifest disregard of his authority or a misconduct on his part, but it may tantamount to a mala fide action.

Headnote:Arbitration Act, 1940 — Section 30 — Objections against award — Jurisdiction of Court to set aside the award — Claim awarded by arbitrator being contrary to unambiguous terms of the contract — Arbitrator misdirected and misconducted himself — Contract between FCI and claimants for construction of godowns — Termination of contract as claimants could not complete the work within stipulated time — Arbitration of disputes — Claim made that rate quoted by claimants for filling the plinth under floors including watering, ramming, consolidation and dressing was only for labour and did not cover ‘providing or supplying’ sand for the said person and yet they were required to supply sand for filling — Claimants made a claim of Rs. 8,23,101/- for providing and supplying sand — Arbitrator allowed the claim — Whether in awarding this claim, arbitrator has disregarded the agreement between the parties and in the process exceeded his jurisdiction and has, thus, committed legal misconduct — (Yes) — Filling up of the plinth with sand under the floors for completion of the project was contemplated under the agreement — By awarding extra payment for supply of sand the arbitrator has out-stepped confines of the contract.
       Held : While considering objections under Section 30 of the Arbitration Act, 1940 (for short ‘the Act”), the jurisdiction of the Court to set aside an award is limited. One of the grounds, stipulated in the Section, on which the Court can interfere with the award is when the arbitrator has ‘misconducted’ himself or the proceedings. The word “misconduct” has neither been defined in the Act nor is it possible for the Court to exhaustively define it or to enumerate the line of cases in which alone interference either could or could not be made. Nevertheless, the word “misconduct” in Section 30 (a) of the Act does not necessarily comprehend or include misconduct or fraudulent or improper conduct or moral lapse but does comprehend and include actions on the part of the arbitrator, which on the face of the award, are opposed to all rational and reasonable principles resulting in excessive award or unjust result. (Para 10)
       It is trite to say that the arbitrator being a creature of the agreement between the parties, he has to operate within the four corners of the agreement and if he ignores the specific terms of the contract, it would be a question of jurisdictional error on the face of the award, falling within the ambit of legal misconduct which could be corrected by the Court. We may, however, hasten to add that if the arbitrator commits an error in the construction of contract, that is an error within his jurisdiction. But, if he wanders outside the contract and deals with matters not allotted to him, he commits a jurisdictional error. (Para 11)
       It needs little emphasis that an arbitrator derives his authority from the contract and if he acts in disregard of the contract, he acts without jurisdiction. A deliberate departure from contract amounts to not only manifest disregard of his authority or a misconduct on his part, but it may tantamount to a mala fide action. (Para 15)
       From the above extracted terms of the agreement between the FCI and the claimants, it is manifest that the contract was to be executed in accordance with the C.P.W.D. specifications. As per para 2.9.4 of the said specifications, the rate quoted by the bidder had to be for both the items required for construction of the godowns, namely, the labour as well as the materials, particularly when it was a turn key project. It is to be borne in mind that filling up of the plinth with sand under the floors for completion of the project was contemplated under the agreement but there was neither any stipulation in the tender document for splitting of the quotation for labour and material nor was it done by the claimants in their bid. The claimants had submitted their tender with eyes wide open and if according to them the cost of sand was not included in the quoted rates, they would have protested at some stage of execution of the contract, which is not the case here. Having accepted the terms of the agreement dated 19th September, 1989, they were bound by its terms and so was the arbitrator. It is, thus, clear that the claim awarded by the arbitrator is contrary to the unambiguous terms of the contract. We are of the view that the arbitrator was not justified in ignoring the express terms of the contract merely on the ground that in another contract for a similar work, extra payment for material was provided for. It was not open to the arbitrator to travel beyond the terms of the contract even if he was convinced that the rate quoted by the claimants was low and another contractor, namely, M/s Gupta and Company had been separately paid for the material. Claimants’ claim had to be adjudicated by the specific terms of their agreement with the FCI and no other. (Para 19)
       Therefore, in our view, by awarding extra payment for supply of sand the arbitrator has out-stepped confines of the contract. This error on his part cannot be said to be on account of misconstruing of the terms of the contract but it was by way of disregarding the contract, manifestly ignoring the clear stipulation in the contract. In our opinion, by doing so, the arbitrator misdirected and misconducted himself. Hence, the award made by the arbitration in respect of claim No.9, on the face of it, is beyond his jurisdiction; is illegal and needs being set aside. (Para 20)

JUDGMENT

D.K. Jain, J. — Leave granted.

2. Challenge in this appeal, by the Food Corporation of India (for short “FCI”), is to the final judgment and order dated 14th October, 2005 passed by the Division Bench of the High Court of Judicature at Bombay, affirming the judgment of the learned Single Judge in Arbitration Petition No.334 of 2004. By the impugned order, the award of an amount of Rs.8,23,101/- by the sole arbitrator against claim No.9 has been upheld.

3. A brief factual background giving rise to the appeal is as follows:

The FCI undertook construction of godowns at Panvel, District Raigad and issued notice inviting tenders for construction of 50000 MT capacity conventional godowns in 10 units alongwith ancillary work and services. Pursuant thereto, the respondents (hereinafter referred to as the claimants) submitted tender, which was accepted by the FCI. A formal contract was executed between the FCI and the claimants on 19th September, 1984. As per the terms of the contract, the work was to be completed within 10 months from 30th day of issue of the orders and the time was deemed to be of the essence of the contract.

4. As the claimants could not complete the work within the stipulated time, which was once extended, the FCI issued a show cause notice to them seeking to terminate the contract. Ultimately the contract was terminated vide order dated 15th November, 1987. The claimants invoked the arbitration agreement and requested the FCI to appoint an arbitrator. Since there was no response from the FCI, the claimants filed a suit in the High Court for appointment of an arbitrator. An arbitrator was appointed, who gave his award on 27th August, 1998. As payment in terms of the award was not made, the claimants again moved the High Court. The FCI, in turn, filed a petition in the High Court for setting aside of the award. With the consent of parties, the award was set aside and the matter was remitted to the Arbitrator for fresh adjudication.

5. In fresh proceedings before the Arbitrator, the stand of the claimants, qua Claim No.9 was that the rate quoted by them for filling the plinth under floors including watering, ramming, consolidation and dressing in terms of item No.1.7 of the Schedule of rates was only for labour and did not cover “providing or supplying” sand for the said purpose and yet they were required to supply sand for filling. As such the claimants were entitled to be paid extra for supply of sand. Accordingly, they made a claim of Rs.8,23,101/- for providing and supplying 5487.34 cubic meters of sand.

6. The claim was resisted by the FCI on the ground that the scope of work, specifications and the item rates was governed by the terms of the contract and as per clause (2) of the agreement dated 19th September, 1984, the claimants were to be paid the “respective amount for the work actually done by him at the ‘Schedule of rates’ as contained in the appended Schedule and such other sums as may become payable to the contractor under the provisions of this contract”. The contract clearly stipulated that the work was to be carried out as per specifications contained in Volume I and II of C.P.W.D. manual, para 2.9.4 whereof provided that the “Rate” includes the cost of materials and labour. Therefore, the claimants were not entitled to any extra amount for supply of sand. The arbitrator gave his award on 31st December, 2003 accepting the said claim. For reference, the relevant portion of the award is extracted below:

“According to defence under the provision of 1967 CPWD specification Vol. I & II, the nature of the item includes sand also and not merely the labour charges, similarly the rate of sand filling is for consolidated thickness or loose thickness or voids to any extent and this claim is denied into to. Now here the dispute between the two parties is over the words supplying and providing and in respect of this item the particular words are missing whereas as observed earlier they were being found i

Click Here to Read the rest of this document

2007 Supreme(SC) 488

Cases Referred (7)