M-S. RASHTRIYA CHEMICALS & FERTILIZERS LTD. v. M-S. CHOWGULE BROTHERS & ORS

Citation: [2010] 7 S.C.R. 962

Court: Supreme Court of India

Bench: AFTAB ALAM, T.S. THAKUR

Case summary

M-S. RASHTRIYA CHEMICALS & FERTILIZERS LTD. v. M-S. CHOWGULE BROTHERS & ORS.pdf

Judgment text

[2010] 7 S. C. R. 962 M/S. RASHTRIYA CHEMICALS & FERTILIZERS LTD. v. M/S. CHOWGULE BROTHERS & ORS. (Civil Appeal No. 5286 of 2006) JULY 7, 2010 [AFTAB ALAM AND T. S. THAKUR, JJ. ] Contract -Work contract - Initially granted for one year - Extendable on the same terms and conditions except the statutory increase in the wages of dock labourers - Extension of contract - Contractor claiming enhanced amount on account of escalation by statutory increase in the wages of labourers during the extended period of contract - It also claimed an amount towards final payment due and payable - Arbitrators by majority decision allowed the claim of contractor - Single Judge of High Court setting aside the award.

- Division Bench upholding the award - Held: Contractor was not entitled to the claim on account of escalation due to statutory increase in wages of laboureres - The relevant clause of the contract did not envisage escalation on the basis of the revision post commencement of the extended period - Arbitrators have no jurisdiction to make an award against the specific terms of the contract - However, contractor is entitled to the claim towards final payment - Arbitration. Appellant-Company invited tenders initially for a period of one year (from 15. 1. 1983 to 14. 1. 1984). As per Clause 2. 03 of the Tender Notice, the contract was extendable at the option of the appellant for a further period of one year on the same terms and conditions except statutory increases in the wages of Dock Labourers. Respondent's tender was accepted by appellant and CHOWGULE BROTHERS & ORS. work was granted for the period ending on 14. 1. 1984. In October, 1983, the appellant in' terms of Clause 2.

03 extended the contract for a further period of one year ending on 14. 1. 1985. The extension was accepted by the respondent-company asking the appellant to consider the revised wages of the Dock Labourers, which came about during the period of one year. Appellant replied that Clause 2. 03 provided for considering increases on account of statutory revisions made upto 15. 1. 1984 and not the increase under negotiations or those granted at a later date with retrospective effect. It called upon the respondent-company on such basis to furnish documentary evidence regarding i~crease in wages upto 15. 1. 1984. The dispute was referred to a panel of three arbitrators. Two awards were passed by the arbitrators. Majority award decided in favour of the respondentcompany. Appellant filed arbitration petition. Single Judge of High Court allowed the petition, setting aside the award holding the same contrary to clause 2. 03 of tender notice. The Court also held the claim barred by time.

Division Bench of High Court set aside the order of Single Judge restoring the majority award passed by the two arbitrators. Hence the present appeal. Partly allowing the appeal, the Court HELD: 1. 1 Single Judge of the High Court was correct in holding that the award made by the Arbitrators to the extent it directed payment of the additional amount was unsustainable. The Division Bench, however, fell in error in taking a contrary view and holding that the interpretation placed by the Arbitrators was a plausible interpretation. [Para 15] [974-F-G] 1. 2 The Note to clause 2. 03 of NIT envisages that on the completion of the first year and at the beginning of the extended contract period, the rates applicable shall have to be determined by reference to the revisions that have already come into effect as on the date of the commencement of the extended period.

It is manifest from a reading of the Note that once an option is exercised, the rate applicable to the extended period shall stand revised taking into consideration the revision of wages if any. Any such revision must of necessity be made as on the date of the commencement of the extended period. Once that is done, the said rate would remain firm till the end of the second year. The contract does not, envisage settlement or revision of the rate by reference to any stage post commencement of the extended period. Even otherwise a contract for the extended period could become effective only if rates 0 applicable to that period are settled or are capable of being ascertained. Rates actually determined or determinable by reference to 15th January, 1984 i. e. the date when the extended period commenced, could include revision in wages made upto that date. Any revision in the wages of the dock labourers which the M. O. L. B.

may have ordered subsequent to 15th January, 1984 would have no relevance even if such revision was made retrospectively from the date of the commencement of the extended period. The Note makes it abundantly clear that revision granted retrospectively would be of no consequence whatsoever. [Para 12] [973- A-F] 1. 3 While accepting the extension of the contract, the respondent-contractor had simply referred to the statutory revision in the wages by M. D. L. B. during the 'last year'. Since the letter of acceptance is of 7th December, 1983 the statutory revision which the contractor wanted tq be taken into consideration were revisions before 1983 and not those made at any time after the extended period RASHTRIYA. CHEMICALS &'~FERTltlZE. Ffs t Ttf'v. 965 CHOWGULE BROTHERS & ORS. 1 of contract. The appellant's letter'dated 27th ~ualluarY, 1984 sent 'in reply t(fthe letter dated 7tti. DE! cember, 1983 made it clear to the respoilderit that'Clause•2!

o3~of 'the NIT did' not envisage escalation on the basis·•ofithe revision subsequent to 15th·:January,· 1984 everHf•such revisions Were already being discus·sed:or 'i1egotiated'by the Dock Workers With the· M~D. LB. -- [Paras"131atia 'f4] [973·G-H; 974-A, C-D] · ':' ; ' " ••-. :' · '' '' ~ ~ t { • ~ '' t:'>:/ t' '' ('. _,.. \ -' . :· 2. An Arbitrator cannot make. an award· contraryJto the terms· of the-contract executed between the parties: While it is true that the courts-show)deference :to :the findings of fact recorded by the Arbitrators: and :even opinions, if any, expressed on questions of1Jaw. referred to them for determination, yetit is,equaUyitrue:that the Arbitrators have no jurisdiction to make an award against the specific terms of the contract executed betweemthe parties. r[Para 16] [974-H; 975-A~B] ·1 · • •:,, ':':'. ~·' • . :-: ",·'. lt~. · .... ~1-. f·l '·'. #-"i·-· : $/f! el Authority of ,[ndia . Lt9. ; v.. J. p. _J~u9. ,haraja, Governr:nent andfv!

ining 4r:;ontractRr ,(199,9) ,8 5~~· 1. 2~; • 1 1 Bharat Coking Coal Ltd. v. Anh. apurna Con$truction (2003) - ' ... -~ --- -! -- ...... 8 SCC 154; MD, Army Welfare Housing Organisation. v. sumangal services 'rPJ Ltd. (2004) 9:sec, 61'9; Asso'Ciated · Engineering Co. v. ' Government . of Aridhr~ Prade$ftan. d Ani. J I ~ • .... , ,~~ ' ·- •. ~ ilo. ~ CHOWGULE BROTHERS & ORS. [T. S. THAKUR, J. ] to any· esca1auon . wh. atsoever. 'J~~·te~ t0f ttie)e>tten8~ci a~? i~8 iA were also similarly' to' rerrlain«'firrri throughhut\'. t~\~t~xtended period subjeet to any ·statutory revision··upto·1stW'Januai)t,'1e84 being taken into consideration. Any subsequent increase if{tfii~ "fiarJes; P'\IY,able. to ~he D~ck: l. ~,~~~f~f~1~r~nt~~: r~t. r,~~pectively . ~ by . the M. D .. L. B. was ~~corq;1ng ,tq . the app~llant,; wholly, i::s •· ~·· · i. • ' 0. ·· i • ·• ! ;__ 'f . fl' - ~· ••' · i' •· ,, t 'HiJ _,·- ;;.. ·· .. ···5.

Denial 'oftli'e'plai°m'·maae:byth~· respon'dent fhus·~aOJ rise'to adispute' whichwas :in 'ief. ms of. the cont~aci.. reterred~tO' a''panel' ofthree Aroit(ator's f~r'adJu,dfoation .. B,efore,the' Arb1trators,. the appellahtdlspute~ the'dahn Ori m~r\fa ~s. also on the ground that tl'le ~ame w~:;'. 'tiarred"~y·:nmWation. "'fhe 1 1 Arbitrators examined 'rival con'ten(! oils urged. ~"oefore them but •. -_ - : • 1· • ' ',.. - .. J ,. J ~' . . '·"' •! ""'' . ,. _ .. ~~failed to arrive at a· unanimous deeision on the·true and c;:otrect intetpretatiori. 6fClause 2. 03. Two kwar,ds, 'the'refor~. ·cafn(flo n be· made', one by Shri-RP. B'~att'wh. o. dism,isse~ the ciaini aria · ttie ·other by' Mis R. C. 'Co6pe~iand' N:A': Modi wt1b 'held 'the' 1 respondents. entitled. to recover from tii'e appella'i1't alurnp ifom atnount of Rs. 61,73,667'. 90. lfis notewoithyfuat whilelhe'awarcf 1 made by Shr'i·R. P. Bhattwas'a reason'ecfAwarcfiflafri1a"de by' 1 the'other'tWo'Arbifrafors'. ~a! n1oC. ,.. ,, .

~ ·:' ''. • . • :,. , r; rming p~rt qf the 1 1 contract executed between th'e ·'parties. Eveh· ttie· plea of limitation succeeded before' the 1earned·sihg1e'jiidge Wtic(liei - _, . • '·· d · H •! -' , viewed. As to how the parties . understood Clause 2. 03. is. ;=tlso i . - •. - f ' ( ~ I :0 ·-\ '"•! • \I • an important factor that needs to be kept)ri min,d){,'t? :\17,,, accepting the e. xtension of the contra~t. , the r~,~~of! _P};nJ , Cf:, 0 1 contractor had simply referred to the statutory rev1s1qt;1 in the.... wages by M. D. L. B. during the 'last year'. ·Since t~~;;1e,t~~& §f,;; 1 acceptance is of 7th December, 1983 the statutory revision which the contractor wanted to be taken into consic:ter~tjon,_were revisions before 1983 <? nd not those made at any tir:ne·after the-:· Ii; extended period of contract.

This position is clear from the following lines appearing in the letter of acceptance dated 7th December, 1983 : "However, we would like to inform you that there are lot of statutory revisions in the wages of Mormugao Dock Labour Board during last 1 year which you will have to consider while extending our contractual period. In this connection, the undersigned will call on your office to discuss the same personally in near future and we expect your cooperation in this regard. " 14. The appellant's letter dated 27th January, 1984 sent in reply to the above made it clear to the respondent that Clause 2. 03 of the NIT did not envisage escalation on the basis of the revision subsequent to 15th January, 1984 even if such revisions were already being discussed or negotiated by the Dock Workers with the M. D. l. B. The following passage from the said communication makes the position abundantly clear: "A copy of clause 2. 03 of Schedule II of N. 1. T. is enclosed.

From this, it will be very clear that whatever increases that have been allowed by M. D. l. B. upto 15. 1. 84, can only be considered for the escalation purposes, and not those increases in wages which are under negotiations, for which M. D. l. B. circulars will be issued subsequently after 15. 1. 84, with retrospective effect. " 15. The learned Single Judge of the High Court was, in the light of the above, correct in holding that the award made by the Arbitrators to the extent it directed payment of the additional amount was unsustainable. The Division Bench, however, fell in error in taking a contrary view and holding that the interpretation placed by the Arbitrators was a plausible interpretation. 16. That brings us to the question whether an Arbitrator can make an award contrary to the terms of the contract executed between the parties. That question is no longer res integra having been settled by a long line of decisions of this Court.

While it is true that the Courts show deference to the findings of fact recorded by the ~rbitrators and even opinions, if any, expressed on questions of law referred to them for determination, yet it is equally true that the Arbitrators have no jurisdiction to make an award against the specific terms of the contract executed between the parties. Reference may be made, in this regard, to the decision of this Court in Steel Authority of India Ltd. v. J. C. Budharaja, Government and Mining Contractor, (1999) 8 SCC 122 where this Court observed : " ........ that it is settled law that the arbitrator derives authority from the cpntract and if he acts in manifest disregard of the contract, the award given by him would be an arbitrary one; that this deliberate departure from the contract amounts not only to manifest disregard of the authority or misconduct on his part, but it may tantamount to mala fide action ...... " ......

It is true that interpretation of a particular condition in the agreement would be within the jurisdiction of the arbitrator. However, in cases where there is no question of interpretation of any term of the contract, but of solely reading the same as it is and still the arbitrator ignores it and awards the amount despite the prohibition in the agreement, the award would be arbitrary, capricious and without jurisdiction. Whether the arbitrator has acted beyond the terms of the contract or has travelled beyond his jurisdiction would depend upon facts, which however would be jurisdictional facts, and are required to be gone into by the court. The arbitrator may have jurisdiction to entertain claim and yet he may not have jurisdiction to pass award for particular items in view of the prohibition contained in the contract and, in such cases, it would be a jurisdictional error. ... " ' 17. It was further observed: ''.....

Further, the Arbitration Act does not give any power to the arbitrator to act arbitrarily or capriciously. His exisience depends upon the agreement and his function is to act within the limits of the said agreement..... " . 18. In W:B. State Warehousing Corporation & Anr. v. Sushi/ Kumar Kayan & Ors. (2002) 5 SCC 679, again this Court observed: : " ...... , If there is a specific term in the contract or the law which does not permit the parties to raise a point before the arbitrator and if there is a specific bar in the contract to the raising of the point, then the award passed by the arbitrcitor in respect thereof would be in excess of his jurisdiction.... " · ·19. In Bharat Coking Coal Ltd. v. Annapurna Construction (2003) 8 SCC 154, this Court reiterated the legal position in the . following words: 'lThere lies a clear distinction between an error within the jurisdiction and error in excess of jurisdiction.

Thus, the role of the arbitrator is to arbitrate within the terms of the , contract. He has no power apart from what the parties have given him under the contract:lf he has travelled beyond the contract, he would be acting without jurisdiction, whereas ·t, if he has remained inside the parameters of the contract, ·· his award cannot be questioned on the ground that it contains an error apparent on the face of the record. " , 20.. In MD, Army Welfare Housing Organisation v. Sumanga/ Services (P) Ltd. (2004) 9 SCC 619 also this . , Court took the similar view and observed: "An Arbifral Tribunal is not a court of law. Its orders are ' not judiciar orders. Its functions are not judicial functions. It cannot exercise its power ex debito justitiae. The jurisdiction of the'arbitrator being confined to the four corners of the agreement, he can only pass such an order which may be the subject-matter of reference. 21.

Reference may also be made to the decisions of this Court in Associated Engineering Co. v. Government of Andhra 8 Pradesh & Anr. (AIR 1992 SC 232), Jivarajbhai Ujamshi Sheth & Ors. v. Chintamanrao Balaji & Ors. (AIR 1965 SC 214), State of Rajasthan v. Nav Bharat Construction Co. (AIR 2005 SC 4430), Food Corporation of India v. Surendra, Devendra & Mahendra Transport Co. (2003) 4 SCC 80, which sufficiently settle the law on the subject. 22. That leaves us with the question whether the valid part of the award can be saved by severance from the invalid part. Before the Arbitrators the respondent-Chairman had quantified the claim at Rs. 27,91,984. 29 on account of escalation of the rates consequent upon statutory increases in the wages of M. D. L. B. during the extended period of contract. A further slim of Rs. 9,88,713. 20 on account of escalation in the wages of other categories of workers such as Tally Clerks, Stichers, Foreman, Asst. Foremen, Supervisors etc.

was also made on the same basis. In addition, a claim for the recovery of Rs. 8,63,953/- towards the final payment due and payable to the claimant with interest@ 18% p. a. on the same was also made. 23. In the light of the discussions in the ear:Jier part of this order the entitlement of the respondent to claim,,any amount on account of escalation consequent upon the increase in the wages of M. D. L. B. workers is not established. The first two claims mentioned above on account of escalation could not, therefore, have been allowed by the Arbitrators nor could the incidental claim for payment of interest on that claim be granted. The question then is whether there is any lawful justification for disallowing the only other claim made by the respondents representing the balance amount due to the claimant towards its final bill. The only defence which the appellant had offered to that claim was based on the law of limitation. That defence A having been withdrawn by Mr.

Divan, we see no real justification for disallowing the said claim especially when the counter-claim made by the appellant has been rejected and the said rejection was not questioned before the High Court. In fairness to Mr. Divan we must record that he did not seriously oppose the B severance of the award made by the Arbitrators so as to separate the inadmissible part of the claim based on an interpretation of Clause 2. 03 from the admissible part. 24. In the result we allow this appeal but only in part and to the extent that the award made by the Arbitrators shall stand C set aside except to the extent of a sum of Rs. 8,63,953/- which amount shall be payable to the respondent-contractor with the interest@ 9% p. a. from 1st April, 1985 till the date of actual payment thereof. O 25. The parties to bear their own costs through out the proceedings. K. K. T. Appeal partly allowed.