An arbitrator cannot exceed contractual terms; applying external recommendation outside the agreed terms constitutes a jurisdictional error and is subject to judicial review under Sections 34 and 37 of the Arbitration Act.

JUDGMENT :

(PER : HONOURABLE THE CHIEF JUSTICE MRS. JUSTICE SUNITA AGARWAL)

1. The instant appeal under Section 37 of the Arbitration and Conciliation Act, 1996 ( in short as “the Act’ 1996) is directed against the arbitral award dated 21.06.2005 and the judgement and order dated 02.07.2008 passed by the learned Principal District Judge, Surat under Section 34 of the Act’ 1996.

2. The appellant Surat Municipal Corporation (in short as “the SMC”) had entered into a contract with the respondent Patel Engineering Company Limited (claimant) for construction work of Indoor Stadium at Surat commencing from 04.03.1989. The work was completed in December, 1997. It is the claim of the SMC, namely the appellant that the total cost of construction work to the tune of Rs.12.60 crores had been paid to the contractor/claimant in the year 1997 itself. However, the dispute has arisen on account of some additional claims raised by the contractor. By communication dated 08.12.1997, the contractor had requested for revision of Price Escalation formula aligned in clause 35 of the contract, on the premise of the formula provided by the National Institute of Construction Management and Research (in short as “NICMAR”) in its research document pertaining to escalation in civil work projects. The prayer was made to implement the recommendations of NICMAR to revise the formula in the contract arrived at between the parties in the year 1989. Based on the proposed revised formula, certain additional claims were made for alleged price escalation, on the premise that the Price Escalation formula provided in the contract has become unworkable and inadequate, considering the abnormal rises over the abnormally delayed period of work.

3. We may note, at this juncture, that there was delay in completion of the work as the stipulated period of completion of construction work of 30 months commencing from 04.03.1989 had to be extended and the construction work, admittedly, was completed in December, 1997. In response to the same, it seems that after much communications between the parties and deliberations in the meeting, it has been decided and agreed to settle the disputes amicably under the tender Clause GC-47. In the meeting held on 05.02.2001, with the Engineer in-Chief and subsequent discussions on the issues, vide communication dated 19.02.2001 sent by the Additional City Engineer, Surat Municipal Corporation, the decision of the Engineer in-Chief was communicated with respect to the claim for revision of escalation formula.

4. A communication, considering the recommendations made by the NICMAR in its research paper on Sardar Sarovar project for escalation of civil works projects, states that there were three claims comprised in three stages in the claim of the contractor for revision of escalation formula. The first factor was revision of reduction factor (multiplying factor) in formula. The second was for calculating value “R” for labour and fuel components. The value of SMC supplied material and the value of material for which star rate difference is being paid separately, for calculating value of “R” for labour and fuel components, had been rejected stating that the policy for the same is already mentioned in the tender conditions as well as in the addenda and corrigendum. The SMC ha