REPORTABLE

IN THE SUPREME COURT OF INDIA

CIVIL APPELLATE JURISDICTION

CIVIL APPEAL NO. 5416 OF 2011                

M/s. MSK Projects (I) (JV) Ltd.                                        ... Appellant  

                                             Versus

State of Rajasthan & Anr.                                    ...Respondents

with

CIVIL APPEAL NO. 5417  OF  2011              

J U D G M E N T

Dr. B.S. CHAUHAN, J.

1. Both  these  appeals  have  been preferred  by the  rival  parties  

against the judgment and order dated 24.4.2007 passed by the High  

Court of Rajasthan (Jaipur Bench) in Civil Misc. Appeal No.1581 of  

2006 under Section 37(1)(A) of the Arbitration and Conciliation Act,  

1996  (hereinafter  called  “Act  1996”)  against  the  order  dated

17.1.2006  passed  by  the  District  Judge,  Jaipur  City,  Jaipur  in  

Arbitration Case  No.89/2004 whereby the application filed by the  

State of Rajasthan under Section 34 of the Act 1996 for setting aside  

the arbitral award dated 1.12.2003 had been allowed.   

2. Facts and circumstances giving rise to these appeals are:

A. The  Public  Works  Department  of  the  State  of  Rajasthan  

(hereinafter called “PWD”) decided in September 1997 to construct  

the  Bharatpur  bye-pass  for  the  road  from  Bharatpur  to  Mathura,  

which passed through a busy market of the city of Bharatpur. For the  

aforesaid work, tenders were invited with a stipulation that the work  

would  be  executed  on  the  basis  of  Build  Operate  and  Transfer  

(BOT).  The total extent of the road had been 10.850 k.ms. out of  

which  9.6  k.ms.  was  new  construction  and  1.25  k.ms.  was  

improvement, i.e. widening and strengthening of the existing portion  

of Bharatpur-Deeg Road.

B. After having pre-bid conference/meeting and completing the  

required formalities it was agreed between the tenderers and PWD  

that compensation would be worked out on the basis of investment  

made  by  the  concerned  entrepreneur.   The  tender  submitted  by  

MSK-appellant  for  Rs.1,325  lacs  was  accepted  vide  letter  dated  

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5.2.1998 and the MSK-appellant was called upon to furnish security  

deposit which was done on 25.7.1998. Concession agreement dated  

19.8.1998 was entered into between the parties authorising collection  

of toll fee by MSK-appellant.  According to this agreement, period of  

concession  had  been  111  months  including  the  period  of  

construction.   The  said  period  would  end  on  6.4.2008.  It  also  

contained the provisions for making  repayment/collection of toll  fee  

and  in  case  of  any  difference/dispute  to  refer  the  matter  to  the  

Arbitrator.   

C. MSK-appellant completed the Bharatpur bye-pass Project on  

10.4.2000 and also started collection of toll fee as provided under the  

agreement  with  effect  from  28.4.2000.   There  had  been  some  

problem  in  collecting  the  toll  fee  because  of  agitation  by  local  

people.   The State  issued Notification  dated  1.9.2000 under  the  

provisions  of  the  Indian  Tolls  Act,  1851  and  Rajasthan  Motor  

Vehicles  Taxation (Amendment)  Act,  1994 (hereinafter  called  the  

`Notification dated 1.9.2000’) preventing the entry of vehicles into  

Bharatpur city stipulating its operation with effect from 1.10.2000.  

MSK-appellant  invoked arbitration  clause  raising  the  dispute  with  

respect to:

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(a) Delay in  issuance  of  Notification  prohibiting entry  of  

commercial  vehicles  into  Bharatpur  town  and  diverting  

traffic through the bye-pass; and  

(b) Collection of toll  from vehicles using Bharatpur-Deeg  

patch of the road.  

D. The State/PWD failed to make appointment of the Arbitrator.  

MSK-appellant preferred SB Civil Arbitration Application  No.31 of  

2002 before the High Court and the High Court vide order 12.4.2002  

appointed  the  Arbitrator.  The  Arbitrators  so  appointed  in  their  

meeting on 8.5.2002 appointed the third Arbitrator.  Claim Petition  

was filed before the Tribunal by MSK-appellant on 23.9.2002. The  

State submitted its reply to the claim petition on 7.12.2002.  

E.       The Arbitral Award was made in favour of  MSK-appellant on  

1.12.2003 according to which there had been delay on the part of the  

State of Rajasthan in issuing the Notification and the State failed to  

implement the same and the contractor was entitled to collect toll fee  

even from the vehicles using Bharatpur-Deeg part of the road .   The  

State of Rajasthan was directed to pay a sum of Rs.990.52 lacs to  

MSK-appellant as loss  due upto 31.12.2003 with 18% interest from  

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31.12.2003  onwards.  The  Tribunal  further  gave  various  other  

directions to the State in this regard.  

F. Being aggrieved, the State of Rajasthan filed objections under  

Section 34 of the Act 1996 and while deciding the same, the District  

Judge vide order dated 17.1.2006 set aside the Arbitral Award on the  

grounds  that  there  was  no  clause  in  the  agreement  to  issue  

notification barring the entry of vehicles in the city of Bharatpur; and  

the Tribunal erred in taking 1997 survey as basis for calculating the  

loss suffered by MSK-appellant.  It held that MSK-appellant was not  

entitled  to  any  monetary  compensation  under  clause  10  of  the  

concession agreement, but only entitled to extension of concession  

period, and the rate of interest was reduced from 18% to 10%.

G. Being aggrieved,  MSK-appellant  preferred an  appeal  before  

the High Court wherein the High Court vide impugned judgment and  

order dated 24.4.2007 held that Bharatpur-Deeg section was part of  

the project and the contractor could collect the toll fee from the users  

of this part of the road also. Clause 10 of the concession agreement  

was not attracted in the facts of the case.  There was no agreement  

for issuance of Notification by the State barring the use of old route  

and directing the vehicles to use the new route alone. Therefore, the  

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question of grant of compensation on that account for the traffic loss  

could not arise.  The District Judge was justified in reducing the rate  

of interest from 18% to 10% in view of the provisions of Section  

31(7)(b) of the Act,1996 and economic realities, whereby the rate of  

interest had been reduced by the Banks in India.

Hence, these two appeals.   

3. Mr. K.K. Venugopal, learned senior counsel appearing for the  

private appellant, has submitted that it was implied in the agreement  

and there has been an understanding between the parties  that  State  

Government  would  issue  notification  barring  the  vehicles  driven  

through the markets of Bharatpur City. This was not even an issue  

before the Tribunal and thus, could not be agitated by the State at all.  

Thus,  the courts  below erred in  setting aside the award of  arbitral  

tribunal  to  that  extent,  and  secondly,  that  the  rate  of  interest  as  

reduced from 18 per cent to 10 per cent by the District Court as well  

as the High Court is in contravention of the terms of contract between  

the parties which fixed the rate of interest at  20 per cent.   Further  

opposing the appeal by the State of Rajasthan,  Shri Venugopal has  

submitted  that  Bharatpur-Deeg  patch  was  an  integral  part  of  the  

project as there was only one composite contract of the entire bye-

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pass and, therefore, the private appellant was entitled to collect the toll  

fee from the users of that part of the road also.

4. Per contra, Dr. Manish Singhvi, learned Additional Advocate  

General  for  the  State  of  Rajasthan,  has  submitted  that  arbitration  

proceedings could not be proceeded in contravention to the terms of  

agreement and statutory provisions.  There was no obligation on the  

part  of the State authorities to issue the notification restraining the  

entry of vehicles to the market side of the city.  The rate of interest has  

rightly  been  reduced  considering  the  prevailing  rate  of  interest  in  

banking transactions during the relevant period of contract. In support  

of the appeal of the State, it has been submitted that there was a clear  

understanding between the parties that the private appellant shall not  

collect any toll fee on the Bharatpur-Deeg patch and to that extent the  

Tribunal and  the courts below committed an error.  It has further been  

submitted that the total contract had been for a sum of Rs.13.25 crores  

including interest.  The project was to be executed in two phases. The  

second phase for a sum  of Rs.3.24 crores had never been executed by  

the private appellant. The contractor could collect the compensation  

only on the basis of investment made by it.  The concept of toll fee is  

of compensatory in nature wherein the State which has spent huge  

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amount on construction of roads/bridges etc. has a right to get the said  

amount reimbursed, and therefore, in such a contract the concept of  

profit which prevails in other forms of contract cannot be the relevant  

component.  

5. We have considered the rival submissions made on behalf of  

the parties and perused the record.  

In the appeal  filed by the private contractor,  MSK Projects,  

two issues are involved; namely,  whether it was mandatory/necessary  

in view of the agreement/contract or on the basis of pre-bid under-

standing  that  the  State  had  to  issue  the  notification  barring  the  

vehicles through the markets of Bharatpur city; and secondly  whether  

the rate of interest could be reduced from 18% to 10% by the courts  

below.  

In the State appeal, the only issue required to be considered is  

whether the private appellant had a right to collect the toll fee on the  

patch between Bharatpur - Deeg.

6. The issue regarding the jurisdiction of the Arbitral Tribunal to  

decide an issue not referred to is no more  res integra. It is a settled  

legal proposition that special Tribunals like Arbitral Tribunals and La-

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bour Courts get jurisdiction to proceed with the case only from the  

reference  made  to  them.   Thus,  it  is  not  permissible  for  such  

Tribunals/authorities to travel beyond the terms of reference.   Powers  

cannot be exercised by the Tribunal so as to enlarge materially the  

scope of reference itself.  

  If the dispute is within the scope of the arbitration clause, it is  

no part of the province of the court to enter into the merits of the dis-

pute on the issue not referred to it. If the award goes beyond the refer-

ence or there is an error apparent on the face of the award it would  

certainly be open to the court to interfere with such an award. (Vide:  

Grid  Corporation  of  Orissa  Ltd.  & Anr. v. Balasore  Technical  

School,  AIR  1999  SC  2262;  and  Delhi  Development  Authority  

v. R.S. Sharma and Company, New Delhi, (2008) 13 SCC 80).  

7. In  Associated  Engg.  Co. v. Govt.  of  Andhra  Pradesh  &  

Anr., AIR 1992 SC 232, this Court held that an umpire or arbitrator  

cannot widen his jurisdiction by deciding a question not referred to  

him by the parties.  If he exceeded his jurisdiction by so doing, his  

award would be liable to be set aside. Thus, an arbitrator cannot be al-

lowed to assume jurisdiction over a question which has not been re-

ferred to him, and similarly, he cannot widen his jurisdiction by hold-

9

ing contrary to the fact that the matter which he wants to decide is  

within the submission of the parties.  

8. If the arbitrator commits  an error in the construction of the  

contract, that is an error within his jurisdiction. But if he wanders out-

side the contract and deals with matters not allotted to him, he com-

mits  a jurisdictional  error.  Extrinsic  evidence is  admissible  in such  

cases because the dispute is not something which arises under or in re-

lation to the contract or dependent on the construction of the contract  

or to be determined within the award. The ambiguity of the award can,  

in such cases,  be resolved by admitting extrinsic evidence.  The ra-

tionale of this rule is that the nature of the dispute is something which  

has to be determined outside and independent of what appears in the  

award. Such a jurisdictional error needs to be proved by evidence ex-

trinsic to the award. (See: Gobardhan Das v. Lachhmi Ram & Ors.,  

AIR 1954 SC 689; Seth Thawardas Pherumal v. The Union of In-

dia, AIR 1955 SC 468; Union of India v. Kishorilal Gupta & Bros.,  

AIR 1959 SC 1362; Alopi Parshad & Sons. Ltd. v.  Union of India,  

AIR  1960  SC  588;  Jivarajbhai  Ujamshi  Sheth  &  Ors.  v.   

Chintamanrao Balaji & Ors.,  AIR 1965 SC 214; and  Renusagar  

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Power Co. Ltd. v. General Electric Company & Anr.,  AIR 1985  

SC 1156).

9. In  Kishore  Kumar  Khaitan  &  Anr.  v.  Praveen  Kumar  

Singh, (2006) 3 SCC 312, this Court held that when a court asks itself  

a wrong question or approaches the question in an improper manner,  

even if it comes to a finding of fact, the said finding of fact cannot be  

said to be one rendered with jurisdiction. The failure to render the  

necessary findings to support its order would also be a jurisdictional  

error liable to correction.

(See also: Williams v. Lourdusamy & Anr., (2008) 5 SCC 647)  

10. In Cellular Operators Association of India & Ors. v. Union  

of India & Ors., (2003) 3 SCC 186, this Court held as under:  

“As regards the issue of jurisdiction, it posed a wrong   question  and  gave  a  wrong  answer…………….The   learned  TDSAT,  therefore,  has  posed  absolutely  a   wrong question and thus its impugned decision suffers   from a misdirection in law.”

11. This Court, in Oil & Natural Gas Corporation Ltd. v.  SAW  

Pipes Ltd., AIR 2003 SC 2629; and Hindustan Zinc Ltd. v. Friends  

Coal  Carbonisation, (2006)  4  SCC  445),  held  that  an  arbitration  

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award contrary to substantive provisions of law, or provisions of the  

Act, 1996 or against terms of the contract, or public policy, would be  

patently illegal, and if it affects the rights of the parties, it would be  

open for the court to interfere under Section 34(2) of the Act 1996.   

12. Thus,  in  view  of  the  above,  the  settled  legal  proposition  

emerges to the effect  that the arbitral tribunal cannot travel beyond  

terms  of  reference;  however,  in  exceptional  circumstances  where a  

party pleads that the demand of another party is beyond the terms of  

contract  and  statutory  provisions,  the  tribunal  may  examine  by  he  

terms of contract as well as the statutory provisions. In the absence of  

proper  pleadings  and  objections,  such  a  course  may  not  be  

permissible.  

13. Be  that  as  it  may,  in  the  instant  case,  a  reference  to  the  

Tribunal had been made on the basis of statement of facts, claims by  

the private appellant, defence taken by the respondent-State and re-

joinder by the claimant. After completing the formalities of admission  

and denial  by each party in respect  of each other’s documents and  

submission of draft proposed issues and respective oral evidence, the  

Tribunal on 4.1.2003 framed the following issues:  

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1. Whether claimant as per agreement is entitled to recover  its amount of claim of Rs.453.69 lacs upto 31.12.2002 and on- wards or not?

2. Whether there was delay on part of State in issuing noti- fication  for  restriction  of  traffic  through the  Bharatpur  Town,  which has effected the toll tax or not? If so, how much delay and  delay in full rate of safe implementation as on date, or not? By  virtue  of  it,  is  the  claimant  entitled  to  recover  its  claim  of  Rs.292.17 lacs upto 31.12.2002 and thereafter onward or not; or  merely by extension of concession period as averred by respond- ent?

3. As a consequence of issue 1 &2, which party breached  the contract?

4. Whether the claimant is entitled to claim interest on its  any due claim amount as per decision of issue 1 & 2? If so, from  what date and at what rate of simple/compound interest?

5. Whether claimant or respondent is entitled for cost of ar- bitration  incurred  and claimed  by,  each  party?  If  so,  what  amount and to which party?

6.     Any other if any demanded by any party during proceed- ings.  

14. The Tribunal considered the relevant agreement provisions as  

well as land lease deed, total package documents, minutes of pre-bid  

meetings  and  deed authorising  collection  of  toll  fee  etc.,  and pro-

ceeded with the arbitration proceedings.  The State of Rajasthan  had  

not taken the defence that it was not agreed between the parties to is-

sue the notification barring the traffic through the markets of Bharat-

pur city. The only issue remained as to whether there was delay in is-

13

suance of notification and implementation thereof.  In such a fact-situ-

ation  and  considering  the  settled  legal  propositions,  we  are  of  the  

view that the District Judge as well as the High Court fell in error con-

sidering  the  issue  which  was  not  taken  by  the  State  before  the  

Tribunal during the arbitration proceedings.  

15. Furthermore, it is a settled legal proposition that the arbitrator  

is competent to award interest for the period commencing with the  

date of award to the date of decree or date of realisation, whichever is  

earlier. This is also quite logical for, while award of interest for the  

period prior to an arbitrator entering upon the reference is a matter of  

substantive law, the grant of interest for the post-award period is a  

matter of procedure.

(Vide: Seth Thawardas Pherumal (Supra); Union of India v. Bungo  

Steel Furniture Pvt. Ltd., AIR 1967 SC 1032; Executive Engineer,  

Irrigation, Galimala & Ors. v. Abnaduta Jena, AIR 1988 SC 1520;  

Gujarat  Water  Supply  &  Sewerage  Board v. Unique  Erectors  

(Gujarat) (P) Ltd. & Anr., AIR 1989 SC 973; Secretary, Irrigation  

Department,  Govt.  of  Orissa & Ors.  v. G.C. Roy, AIR 1992 SC  

732; Hindustan Construction Co. Ltd. v.  State of Jammu & Kash-

mir, AIR 1992 SC 2192; Executive Engineer, Dhenkanal Minor Ir-

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rigation  Division,  Orissa v. N.C.  Budharaj  (Dead)  by  Lrs., AIR  

2001  SC  626;  Bhagawati  Oxygen  Ltd.  v. Hindustan  Copper  

Ltd., AIR 2005 SC 2071; and  Indian Hume Pipe Co. Ltd. v. State  

of Rajasthan, (2009) 10 SCC 187).

16. So far as the rate of interest is concerned, it may be necessary  

to refer to the provisions of Section 3 of the Interest Act 1978, relev-

ant part of which reads as under:  

“(1) In any proceedings for the recovery of any debt or   damages or in any proceedings in which a claim for in- terest in respect of' any debt or damages already paid is   made, the court may, if it thinks fit, allow interest to the   person entitled to the debt or damages or to the person   making such claim, as the case may be, at a rate not ex- ceeding the current rate of interest….”   (Emphasis ad- ded)

       Thus, it is evident that the aforesaid provisions empower the  

Court to award interest at the rate prevailing in the banking  transac-

tions. Thus, impliedly, the court  has a power to vary the rate of in-

terest agreed by the parties.  

17.   This Court in  Krishna Bhagya Jala Nigam Ltd. v. G.  Har-

ischandra Reddy & Anr., AIR 2007 SC 817, while dealing with the  

similar issue held as under:  

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“…after economic reforms in our country the interest re- gime  has changed and the rates have substantially re- duced and, therefore, we are of the view that the interest   awarded by the arbitrator at 18% for the pre-arbitration   period, for the pendente lite period and future interest be   reduced to 9%.”  

18. In  H.U.D.A v.  Raj  Singh Rana,  AIR 2008  SC 3035,  this  

Court  considered various  earlier  judgments  of  this  Court  including  

Ghaziabad Development Authority v. Balbir Singh, AIR 2004 SC  

2141;  Bihar State Housing Board v. Arun Dakshy, (2005) 7 SCC  

103; Haryana Urban Development Authority v. Manoj Kumar &  

Anr.,  (2005)  9  SCC 541;  H.U.D.A v.  Prem Kumar  Agarwal  &  

Anr., JT 2008 (1) SC 590 and came to the conclusion:  

“…….the  rate  of  interest  is  to  be  fixed  in  the   circumstances  of  each  case  and  it  should  not  be   imposed at a uniform rate without looking into the   circumstances  leading  to  a  situation  where   compensation was required to be paid.”

19. Be that as it may, the High Court while dealing with the rate of  

interest  has  relied  upon  the  judgment  of  this  Court  in  Krishna  

Bhagya Jala Nigam Ltd.  (supra) and thus, there is no scope for us to  

interfere with the rate of interest fixed by the courts below.   

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20. The issue raised by the State before this Court in its appeal as  

to whether the Bharatpur-Deeg patch was an integral  or  composite  

part of the project and the private appellant could collect the toll fee  

on that part also stands concluded by the High Court after considering  

the entire evidence on record.  

21. It is evident from the record as well as the judgments of the  

courts below that bid documents contained data collected on the flow  

of traffic on 14th and 15th  April, 1994 to find out the viability and re-

quirement of the establishment of Bharatput bye-pass and it included  

the traffic flow on the Bharatpur-Deeg section also which indicates  

that this particular patch had also been an integral part of the project.  

22. In pre-bid conference the interveners wanted a clarification as  

to whether the persons  using this  particular  patch of  road between  

Bharatpur-Deeg  could be liable to pay toll fee. It was clarified by the  

respondent-State authorities that the users of this patch would be re-

quired to pay the toll fee.  

23. Clause 5 of the Concession agreement also provided that Gov-

ernment would levy and charge the fee from all persons using the pro-

ject facilities. The project was not in parts rather it was a composite  

and  integrated  project  which  included  the  Bharatpur-Deeg  section  

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also.  Hence, it was not permissible for the respondent-State to take  

the plea that persons using such section of the road were not liable to  

pay the toll fee. We do not find any force in the submission made by  

Dr. Manish Singhvi, learned counsel for the State that it was not a  

newly constructed road. However, he is not in a position to deny that  

the said portion of road had been widened and strengthened by the  

private appellant and could not be termed as service road which could  

be used free of charge in view of clause 7 of the concession agreement  

as service road has been defined as any road constructed temporarily  

for use of   traffic for short period during construction of the main  

road. Such a facility had to be provided in order to maintain the free  

flow of traffic during the construction of the road.  

24. Thus, in view of the above, the issue raised by the State that  

Bharatpur-Deeg section of  the road was out  of the project  and the  

private appellant was not entitled to collect the toll fee on that part of  

the road, stands settled in favour of the private appellant.

25. Determination of the aforesaid three issues brings us to the en-

titlement of the private appellant.  

The Court is not oblivious to the fact that the State authorities  

cannot be permitted to use the collection of toll fee as augmenting the  

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State revenues.  In  State of U.P. & Ors. v. Devi Dayal Singh, AIR  

2000 SC 961, this Court defined 'toll' as a sum of money taken in re-

spect of a benefit arising out of the temporary use of land. It implies  

some  consideration  moving  to  the  public  either  in  the  form  of  a  

liberty, privilege or service. In other words, for the valid imposition of  

a toll, there must be a corresponding benefit. The Court further held:  

“Although  the  section  has  empowered  the  State   Government  to  levy rates of  tolls  “as it  thinks  fit”,   having regard to the compensatory nature of the levy,   the rate of toll must bear a reasonable relationship to   the providing of benefit. No doubt, by virtue of Section   8 of the Act, the tolls collected are part of the public   revenue and may be absorbed in the general revenue   of the State, nevertheless by definition a toll cannot be   used for otherwise augmenting the State’s revenue.”

                                                                     (Emphasis added)

26. In  fact,  the  toll  fee  under  the  Tolls  Act,  1851  is  of  

compensatory in nature wherein the Government can reimburse itself  

the amount which it had spent on construction of road/bridge etc.

Clause  IV(a)  of  the  statutory  notification  dated  10.2.1997  

which  entitled  the  government  to  give  present  road  on  toll  is  

reproduced below:  

“IV(a).   The  toll  of  any  of  the  aforesaid  facilities/constructions shall be levied only for so long  as the total cost of its construction and maintenance  including  interest  thereupon,  and  the  total  expenditure  in  realisation  of  toll  has  not  been  

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realised in full or for a period of 30 years.”                                                             (Emphasis added)

          It is evident that Clause IV(a)  of  the  Notification  dated  

10.02.1997 envisages that toll can only be collected as long as total  

cost of construction and maintenance including interest thereupon is  

recovered.  A person is debarred by law and statutory inhibition as  

contained in Clause IV(a) of the notification from collection of toll  

beyond the recovery of cost of construction.

27. Thus,  from the above referred provisions, it is evident that toll  

fee is compensatory in nature and can be collected by the State to  

reimburse  itself  the  amount  it  has  spent  on  construction  of  the  

road/bridge etc. The State is competent to levy/collect the toll fee only  

for the period stipulated under the Statute or till the actual cost of the  

project with interest etc. is recovered. However, it cannot be a source  

of revenue for the State.  

28.        In common parlance, “reimbursement” means and implies  

restoration  of  an  equivalent  for  something  paid  or  expanded.  

Similarly,  “Compensation”  means  anything  given  to  make  the  

equivalent. (See:  State of Gujarat v.  Shantilal Mangaldas & Ors.,  

AIR 1969 SC 634; Tata Iron & Steel Co. Ltd. v. Union of India &  

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Ors., AIR  2000  SC  3706;  Ghaziabad  Development  Authority  

(Supra); and H.U.D.A v. Raj Singh Rana, (Supra).

29. However, in  Dwaraka Das v. State of Madhya Pradesh &  

Anr., AIR 1999 SC 1031, it was held that a claim by a contractor for  

recovery  of  amount  as  damages  as  expected  profit  out  of  contract  

cannot  be  disallowed  on  ground  that  there  was  no  proof  that  he  

suffered actual loss to the extent of amount claimed  on account of  

breach of contract.

30. In  M/s. A.T. Brij Paul Singh & Ors. v. State of Gujarat,  

AIR 1984 SC 1703, while interpreting the provisions of Section 73 of  

the Indian Contract Act, 1972, this Court held that damages can be  

claimed  by  a  contractor  where  the  government  is  proved to  have  

committed breach by improperly rescinding the contract  and for  

estimating  the  amount  of  damages,  court  should  make  a  broad  

evaluation  instead of going into minute details. It was specifically  

held that where in the works contract, the party entrusting the work  

committed  breach of contract, the contractor is entitled to claim  

the  damages  for  loss  of  profit  which  he  expected  to  earn  by  

undertaking the works contract. Claim of expected profits is legally  

admissible on proof of the breach of contract by the erring party. It  

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was further observed that what would be the measure of profit would  

depend upon facts and circumstances of each case. But that there shall  

be a reasonable expectation of profit is implicit in a works contract  

and its loss has to be compensated by way of damages if the other  

party  to  the  contract  is  guilty  of  breach  of  contract cannot  be  

gainsaid.

31.   In  B.S.N.L v.  Reliance Communication Ltd., (2011)  1 SCC  

394, this court held as under:

“53. Lastly,  it  may  be  noted  that  liquidated   damages  serve  the  useful  purpose  of  avoiding   litigation and promoting commercial certainty and,   therefore,  the  court  should  not  be  astute  to   categorise  as  penalties  the  clauses  described  as   liquidated damages.”

32. This Court further stated in Oil & Natural Gas Corporation  

Ltd. v. SAW Pipes Ltd. (Supra):

“64….This section is to be read with Section 74,   which deals with penalty stipulated in the contract,   inter  alia (relevant  for  the  present  case)  provides   that when a contract has been broken, if a sum is   named in the contract as the amount to be paid in   case of such breach, the party complaining of breach  is entitled, whether or not actual loss is proved to   have been caused, thereby to receive from the party   who  has  broken  the  contract  reasonable   compensation not exceeding the amount so named.   Section  74  emphasizes  that  in  case  of  breach  of   contract,  the  party  complaining  of  the  breach  is   

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entitled to receive reasonable compensation whether   or not actual loss is proved to have been caused by   such breach….”

33.    Thus, the case requires consideration in the light of the aforesaid  

settled legal principles.  

         Undoubtedly, the total construction was for Rs. 13.25 crores.  It  

is evident from the Bid-documents filed by the private appellant that  

the  work  was  to  be  executed  in  two phases  and  the  relevant  part  

thereof reads as under:

PHASE – I

Year Const.

Cost

(in lacs)

Supervision  Charges  @  10%

Total

(in lacs)

Interest @  20%

Total  investment  of Strs

Upto  date  investment

(in lacs)

1998-99

6/98 75 7.5 82.50 4.12 86.62 86.62

9/98 80 8.0 88.00 8.52 92.52 183.14

12/98 80 8.0 88.00 12.92 100.92 284.06

3/99 80 8.0 88.00 17.32 105.32 389.32

Total 315 31.5 346.50 42.88 389.38 389.88

1999-2000

6/99 110 11.0 121 23.37 144.37 533.75

9/99 120 12.0 132.0 29.97 161.97 695.72

12/99 120 12.0 132.0 36.57 168.57 864.29

3/2000 125 12.50 137.50 43.44 180.94 1045.23

Total 475 47.50 522.50 133.35 655.85 1045.23

Grand  Total

790 79.0 869.0 176.23 1045.23 1045.23

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PHASE - II

2005-06

6/2005 150 15.0 165 8.25 173.25 173.25

9/2005 150 15.0 165 16.50 181.50 354.75

Total 300 30.0 330 24.75 354.75 354.75

       The documents further reveal that phase II work was of worth  

Rs.354.75  lacs  and  it  included  repairing,  maintenance  and  second  

layer  of  bitumen  on  the  entire  road.   Admittedly,  this  part  of  the  

contract had never been executed by the private appellant. More so,  

the chart filed by the State of Rajasthan shows that the estimated cost  

of  the  work  had  been  recovered  by  the  private  appellant  as  the  

schedule prepared for repayment tally with the amount collected by  

the private appellant as toll fee within the stipulated period.  

34.     In the first phase, the private appellant spent about Rs.10.45  

crores and recovered the said amount with certain profit, though the  

actual figure i.e. the toll fee recovered has not been disclosed. So far  

as the second phase is concerned, admittedly, the amount of Rs.354.75  

lacs has not been spent by the private appellant.  This issue has been  

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agitated by the State  of  Rajasthan before this  Court  in its  Counter  

Affidavit wherein it is stated as under:  

“It is respectfully submitted that as per the terms of   the Agreement, petitioner was required to complete   the  project  in  two  phases.  In  the  first  phase   investment of Rs.1045 lacs and after 5 years in the   second phase Rs. 354.75 lacs was to be made by the   petitioner.  However, the petitioner has not abided   by the terms of the agreement and has not made any   investment for the second phase and, therefore, it   has  breached  the  terms  of  the  contract  and,   therefore,  it  is  respectfully  submitted  that  the   contention  of  the  petitioner  that  he  is  entitled  to   recover its investment, is erroneous and petitioner   is  trying  to  give  wrong  picture  about  investment   made and has not come to this Hon’ble Court with   clean  hands  and,  therefore,  the  present  Special   Leave  Petition  is  liable  to  be  dismissed  by  the   Hon’ble Court. The concession period has come to   an end.”

35. The aforesaid allegations have not been denied by the private  

appellant  while  submitting  its  rejoinder.   Relevant  part  of  the  

rejoinder affidavit reads:  

 “…..the present contention as raised was not part   of  the  arbitration  proceeding,  before  the  arbitral   Tribunal.   It  is  further  submitted  that  this   contention  was  never  raised  before  the  District   Court and as well as before the Hon’ble Court of   Rajasthan.   The  point  as  raised  is  subsequent  to   completion of the project and work to be done after   the period of 5 years….”  

Thus, there is no specific denial of the allegations/averments  

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taken by the State as required by the principle enshrined in Order VIII  

Rule 5 of the Code of Civil Procedure, 1908.

36. It is strange that a person who has not complied with terms of  

contract  and has  acted  in  contravention  of  the terms  of  agreement  

claims that he was entitled to earn more profit.   The private appellant  

cannot be permitted to claim damages/compensation in respect of the  

amount  of  Rs.13.25  crores,  as  he  did  not  spend  the  said  amount  

stipulated in the terms of agreement.  Private appellant cannot claim  

the amount of Rs. 7.13 crores for a period of three years for a small  

patch of  1.25 kilometres  out  of  the total  length of  the road to  the  

extent of 10.85 kilometres.   

37.      In  fact,  the  tribunal  has  dealt  with  the  issue  in  correct  

perspective  only  to  the  extent  the  period  of  delay  by  which  the  

notification barring the heavy vehicles through market of Bharatpur  

had been issued stating as under:  

 “The traffic survey conducted by the claimant   on  17th,  18th &  19th April,  2000  has  not  been   accepted by the respondent. The arbitral tribunal   also feels  that this survey, which has been done   by the claimant alone, cannot be relied upon for   this purpose, because respondent is not a party to   this survey. The claim lodged by claimant on its   own survey as per para 12.3(iii) from 12/4/2000   to 30/9/2000 is for Rs.31.18 lacs. In this regard   tribunal  is  of  the opinion that  traffic  survey  of   

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1997  as  per  agreement  in  which  both  parties   bears consent of each other therefore can safely   be relied upon for purpose of assessment of such   losses to the claimant, because the occurrence of   loss as such to the claimant has not been denied   by respondent, which otherwise is an established   fact as per documentary evidence on record. The   tribunal  has  assessed  this  part  of  loss  on  the   traffic  survey  of  1997  for  commercial  vehicles   only  as  Rs.26.34  lacs  from  12/4/2000  to   30/9/2000.”  

         As the notification had been issued,  and it  was not  the  

responsibility  of  the  State  to  establish  a  police  chowki  etc.  to  

implement the notification, there was no occasion for the tribunal to  

proceed  further.   Therefore,  any  award  in  favour  of  the  private  

appellant in that respect for non-issuance of notification beyond the  

date of the notification, cannot be held to be justified and the same is  

liable to be set aside.  

38. The State authority has decided to establish a toll road as it  

was  not  having  sufficient  funds.   In  case  the  claim of  the  private  

appellant  is  allowed  and as  the  State  is  not  in  a  position  to  grant  

further  facility  to  collect  the  toll  fee  at  such  a  belated  stage,  the  

purpose of establishing the toll road itself stands frustrated.  More so,  

the toll fee cannot be collected to recover the amount never spent by  

the contractor.  It is evident from the discourse in pre-bid meetings of  

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the   parties  that  it  had  been  decided  that  compensation  would  be  

worked out  on the basis of investment made by concerned contractor.  

More  so,  the  statutory  notification  dated  10.2.1997  provided  to  

recover the cost  of construction and maintenance including interest  

thereon. Therefore, the question of non-execution of work of second  

phase of the contract becomes very material and relevant to determine  

the real controversy. The State authorities for the reasons best known  

to them, did not make reference to the arbitration proceedings for non-

execution of the work of the second phase of the contract. However,  

the  relief  claimed  by  the  private  appellant  would  prove  to  be  a  

“windfall  profit” without carrying out the obligation to execute the  

work just on technicalities. We have held in this very case, that the  

arbitrator  cannot  proceed  beyond  the  terms  of  reference  and,  

therefore, the question of considering the non-execution of work of  

second phase of the work was neither permissible nor possible as it  

had  arisen  subsequent  to  the  date  of  award  in  the  arbitration  

proceedings.

Be that as it may, in order to do complete justice between the  

parties  and  protect  the  public  exchequer,  we  feel  that  the  matter  

requires adjudication and reconsideration on the following points by  

the arbitration tribunal:

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i) What amount  could have been recovered by the private  

appellant  for  Bharatpur-Deeg part  of  the  road from the  

vehicles using the road?

ii) What could be the effect on the contract as a whole for  

non-executing the work of the second phase?

            In view of the fact that a long time has elapsed, we request the  

learned tribunal to decide the case as early as possible after giving due  

opportunity to the parties concerned. The private appellant shall  be  

entitled only for a sum of Rs.26.34 lacs awarded by the tribunal for  

delay in issuing the notification with 10% interest, if not paid already  

or  it  could  be  adjusted  in  the  final  accounts  bills.   With  these  

observation, the appeals stand disposed of.  No costs.  

                                                               ………………………..J.           (P. SATHASIVAM)

 ………………………..J. (Dr. B.S. CHAUHAN)

New Delhi, July 21,   2011

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