R. V. RA VEENDRAN, J. : - This appeal by special leave is against the judgment dated 17 -8 -2001 of the Rajasthan High Court in Civil Misc. Appeal No. 227 of 1999 (SB).

2. In pursuance of a tender invitation dated 14 -10 -1991 issued by the appellant for supply of metallurgical coke (for short "coke"), the respondent

submitted its offer dated 8 -11 -1991. The appellant accepted the said offer and placed a purchase order dated 16/18 -12 -1991 on the respondent for supply of 15,000 MT of coke, to be supplied to its Vizag unit and Tundoo unit. Clause (2) of the purchase order contained the specifications for the supply of coke and clause (3) related to price. The price agreed, exclusive of taxes and duties, was Rs. 2231 per MT of coke. The loading charges were Rs. 32 per MT. The transportation charges were Rs. 950 per MT for delivery at Vizag unit and Rs. 120 per MT for delivery at Tundoo unit. Therefore, the FOR price was Rs. 3213 per MT for Vizag unit and Rs. 2383 per MT for Tundoo unit. Clause 5 provided for price variation. Sub -clause (i) thereof provided for variation in prices of coke and sub -clause (ii) provided for variation in transportation cost. As we are concerned with the variation in price of coke, clause 5(i) is extracted below:

"Price variation

(i) For metallurgical coke. - The metallurgical coke price specified in para 3 above is based on the coal price ruling as on 8 -11 -1991 (the date of submission of the offer). In case there is any increase in the coal price by the coal companies w.e.f. 9 -11 -1991 and during the currency of contract period, you will be paid Rs. 1.65 per MT of metallurgical coke for each Re. 1 per MT increase in coal (coking coal washery) price from the price ruling as on 8 -11 -1991 on production of documentary evidence. "

Clause 13 provided for settlement of disputes by arbitration.

3. Coke is the processed product of coal obtained by carbonisation, that is heating coal without air. When burnt, coke generates a higher temperature than coal and produces very little smoke or ash and is used in blast furnaces. The coking coal used for manufacturing coke is graded as Steel Grade I, Steel Grade II, Washery Grade I, Grade II, Grade III and Grade IV depending upon the ash content/impurities. The lesser the ash content/impurities, the higher the grade of coal. The contract terms (the purchase order) gave only the specifications of coke to be supplied, that is fixed carbon 71% +/ - 2%; ash 27% +/ - 2%; moisture 3% maximum; and VM 1 % maximum. The porosity required was 45% +/ - 2% and size 4" to 6". The contract did not specify the use of any particular quality of coal for producing coke of the required specification.

4. The respondent claimed that it used Washery Grade II coal for the supplies made between the period 18 -11 -1991 and 13 -7 -1992; that it found that Washery Grade II coal was not suitable for producing the metallurgical coke of the specifications required by the appellant; and that therefore it switched over to the use of Washery Grade I coal from 14 -7 -1992 and used the said higher quality coal upto 27 -7 -1994 when the last supply was made.

5. The appellant granted escalations in price of coke from time to time by increasing the basic price of coke (Rs. 2231 per MT) and made payments accordingly. The appellant, however, granted escalations only on the basis of price variation of Washery Grade II coal (that is difference between base price of Washery Grade II coal as on 8 -11 -1991 and the prevalent price of Washery Grade II coal) and not with reference to Washery Grade I coal.

6. The respondent was not satisfied with the price escalation given by the appellant. There was some correspondence in that behalf. The respondent ultimately sent a letter dated 16 -12 -1996 claiming that in regard to 7995.135 MT of metallurgical coke supplied to Vizag unit from 14 -7 -1992 onwards, the amount due on account of escalation was Rs. 19,89,977.37. I