Judgment :

Sanjeev Kumar, J.

1. This is an application by the petitioners filed under Section 34 of the Jammu and Kashmir Arbitration & Conciliation Act, 1997 [for short ‘the Act of 1997’ hereafter] for setting aside the award dated 01.09.2006 passed by Shri A. N. Saraf, retired District & Sessions Judge, sole arbitrator, awarding a sum of Rs. 13.39 lacs on account of escalation costs along with 9% per annum interest from 27.04.2002 till its realization.

2. With a view to appreciating the grounds of challenge taken by the petitioners to assail the impugned award, it is necessary to notice material background facts.

3. In the year 1991, the petitioners awarded the contract of ‘construction work of Tourist Bungalow Sanasar’ in favour of the predecessor-in-interest of the respondents, late Shri J. N. Dhar ( for short ‘the contractor’ hereafter) vide allotment letter dated 09.10.1991. A formal agreement bearing No. 45 dated 31.12.1991 was executed between the petitioners and the contractor, laying down terms and conditions of the contract. As per clause 6 of the terms and conditions of the contract, the time period for completion of the work was stipulated as 9 working months. While the original work in terms of the aforesaid contract agreement was under execution, the work of Phase II was also allotted to the contractor at the cost of Rs. 29,57,695.10 NP. The 2nd phase of the work was to be executed by the contractor on the same terms and conditions on which the original contract had been allotted to him.

4. To put it in black and white, a supplementary agreement between the parties was executed on 07.07.1997 though both the works had been completed by the contractor and handed over to the petitioners on 04.02.1995. As per the Engineer in-charge, there was a delay of one year and three months in completing the works and the delay was on account of reasons beyond the control of the contractor. It is because of these recommendations of the Engineer in-charge of the work that no penalty was imposed on the contractor. There is no dispute that the contractor was paid the amount of the work for both the phases i.e. Rs. 24,57,304.90 for Phase-I and Rs. 29,57,695.10 for Phase-II i.e. total sum of Rs. 54,13,203/-. The contractor, who was supposed to complete each work within nine working months could complete it much thereafter due to stoppage of work on account of paucity of funds. He thus invoked Clause 43 of the original agreement and laid a claim of Rs. 13.39 lacs along with interest on account of escalation costs. The matter was placed before the Board of Directors in its meeting held on 24.09.1998 in the office chambers of Hon’ble the Chief Minister, J&K State, ex-officio Chairman, J&K Tourism Development Corporation, in which the proposal of the Managing Director for entering into negotiations with the contractor for payment of escalation costs of Rs. 13.39 lacs, claimed by the contractor, was approved and the Managing Director was directed to work out the modus operandi of release of payment and inform the Board accordingly.

5. It appears that no further progress was made in the negotiations and, accordingly, the contractor invoked Clause 53 of the contract agreement and sought appointment of Arbitrator to adjudicate the dispute arising out of the contract entered into between the petitioners and the contractor. The application was allowed and the matter was referred to the Arbitration of Shri A. N. Saraf, retired District & Sessions Judge, as sole Arbitrator. The Arbitrator entered the reference immediately on receipt of order dated 24.12.2004 passed by this Court under Section 11(4) of the Act of 1997 and the parties were directed to file their claims. On 02.07.2005, as many as five issues, enumerated at page 2 of the award, were framed and the parties were called upon to lead their evidence on affidavits. The Arbitrator, after evaluating the evidence led before him, oral as well as documentary, held the contractor entitled to rec