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REPORTABLE

IN THE SUPREME COURT OF INDIA

CIVIL APPELLATE JURISDICTION

CIVIL APPEAL NO.   10531         OF 2014  (ARISING OUT OF SLP (CIVIL) NO.14767 OF 2012)

Associate Builders                                                                    …Appellant

Versus

Delhi Development Authority                                                  …Respondent      

J U D G M E N T

R.F.Nariman,J.

1. Leave granted.  

2. The appellant herein was awarded a certain construction work contract  

by the DDA vide a letter of award dated 14th May, 1992.  DDA was building a  

colony consisting of 7,000 houses in Trilok Puri in the trans-Yamuna area. 168  

Middle Income Group houses and 56 Lower Income Group houses, Grade-A  

Pocket-  B  (balance  work)  was  awarded  for  the  tendered  amount  of  

Rs.87,66,678/-. The contract was to be completed in 9 months. Admittedly, it  

was ultimately completed only in 34 months, the contractor completing 166  

Middle Income Group houses and 36 Lower Income Group houses. The total  

value  of  work that  was  done amounted to  Rs.62,84,845/-.  As  many  as  15  

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claims were made by the contractor and the High Court of Delhi appointed one  

Shri K.D. Bali to arbitrate the present dispute.  

3. We are concerned here with claims 9, 10, 11 and 15, for these claims  

have  been  allowed  by  the  Arbitrator  and  the  DDA’s  objections  have  been  

dismissed  by  the  learned  Single  Judge  of  the  High  Court  of  Delhi.  The  

Division Bench in an appeal under Section 37 of the Arbitration Act, 1996 has  

stepped in to set aside the judgment of the Single Judge and negative these  

claims.  We are also concerned with claims 12 and 13 which have been scaled  

down by the Division Bench.  

4. Claims 9, 10, 11 and 15 read as follows:

“Claim No.9:  Claimants claim Rs. 20,950/- on account of hire  charges  of  centering  shuttering  due  to  delay  in  laying  of  conduiting.  

a)  That  the  respondents  had  granted  certain  work  of  electrification  but  the  said  agency  did  not  lay  the  conduit  resulting in delay in removing the shuttering and causing hire  charges.  This  fact  was  reported  to  the  respondents  vide  claimant's letter dated 30.10.92 followed by reminders and also  found place in hindrance register.  

b)  That  this  is  the  actual  expenditure  incurred  and  thus  the  claimant is entitled for its refund.  

c) That the detailed break-up of this claim has been appended  separately.  

Claim  No.10:  Claimants  claim  Rs.33,450/-  being  the  hire  charges of shuttering due to stoppage of work in block no. 100  and 101.  

a) That the department had virtually stopped the work in block  100 & 101 on 20.7.93 and it continued up to 26.2.94. During  this period no work was allowed to be executed in these two  

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blocks resulting in blockade or centering and shuttering in the  said two blocks.  

b) That by stoppage of work in these two blocks the claimants  had  suffered  hire  charges  of  shuttering  due  to  respondent's  lapses and defaults.  

c)  It is further stated that there was no justification for stoppage  of work and the action was arbitrary and totally unjust.  

d) That the detail of this claim has been outlined and appended  separately  and  the  same shall  from part  of  the  statement  of  facts.  

Claim No. 11: Rs.2,00,000/- payable as damages on account of  hire charges of tools & plants and scaffolding.  

a) That due to prolongation of the contract on account of the  respondents  the  claimants  had  to  maintain  tools  &  plants,  scaffolding etc, during the prolongation of the contract resulting  in expenditure for the same.  

b)  That the said articles remained at site beyond the stipulated  period  and  the  claimants  suffered  loss  due  to  the  said  prolongation.  

Claim  No.  15:  Claimants  claim  damages  Rs.6,25,979/-  on  account of establishment due to prolongation of the contract.  

a)  That  the  claimants  had  contemplated  maintenance  of  establishment  during  stipulated  period of  completion  but  the  work was prolonged due to various delays and defaults on the  part of the respondents.  

b)  It  is  further  stated  that  the  claimants  had  to  pay  the  establishment  payment  during  prolongation  and  the  said  expenditure was unproductive and un contemplated.  

c)  It  is  further  stated  that  the  claimants  had  maintained  establishment  beyond  the  stipulated  completion  due  to  the  respondent's breach and thus entitled for payment.  

d) That the respondents were also aware that the claimant has  maintained regular establishment and thus, incurred expenditure  and the claimants had also made several representations.”

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Claims 12 and 13 read as follows:

“Claim  No.  12:  Claimants  claim  Rs.7,12,394/-  as  damages  @20% for execution of the work.  

a) That the work was delayed because of the Respondents for  the  reasons  as  set  out  in  the  letter  indicating  hindrances  encountered  during execution  of  the work resulting  delay in  execution of the work for a period of 25 months.  

b) It is further stated that the claimants incurred unproductive  after stipulated date of completion.  

c)   It is further stated that during prolongation there had been  steep rise in cost of material and labour.  

d)  That  the claim of 20% is  also lent  support  from the cost  index as issued by the competent authority and only applicable  on the work which was executed during prolongation.  

e) That as per cost index it comes to more than 30% whereas  the claimants had claimed 20 & being highly rational and just.  

f)  That  the claimants  had appended the details  of  this  claim  separately based on cost index to show that the claimant had  actually  incurred  this  additional  expenditure  due  to  the  respondents.  Copy  of  the  hindrances  encountered  during  the  execution of the work at the hands of the respondents has been  enclosed.  

g) That the respondents had committed breach and thus liable  for damages.  

h)  It  is  further  stated that  the cost  of  material  issued by the  department has been deducted by assessing the cost.  

Claim No. 13: Claimants claim Rs.97,5000/- being the extra at  35% for the work executed in block 100 & 101 effective from  28.2.94 till actual completion.  

a) It is further stated that due to delayed execution of the work  of these two blocks the claimants had to incur extra expenditure  as the stoppage of work was utterly arbitrary.  

b) That the detailed break-up of this claim is appended with the  statement of facts.”

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5. Though the challenge to claims 2, 3 and 4 were given up before the  

Division Bench, they are also relevant and read as follows:

“Claim  No.2:  Claimants  claim  Rs.1,62,387/-  being  the  reimbursement of statutory increase in labour under clause 10-C  

a)   That  the claimants submitted the tender on 6.2.92 and said  offer was accepted on 14.5.92. The date of commencement was to  be reckoned from 24.5.92. The date of stipulated completion was  9 months i.e. 23.2.93 but the work could be completed on 28.3.95.  

b) It is further stated that the claimants had submitted the bill for  the value to the extent the work was executed till 4.10.94 for a  sum of Rs. l,12,067/- as per the formula applicable.  

c) That the respondents however, did not make a single payment  though, the work was executed after submission of the said bill.  

d)  That  however,  a  consolidated  bill  was  furnished  the  respondents for a sum of Rs. l,62,287/-. Even the said payment  has not been liquidated so far.  

e) That the claimants advised the statutory increase as and when  enforced  and  the  claimants  also  submitted  the  labour  reports  indicating the nature of the labour employed at site.  

f)  That  the  respondents  had  also  certified  on  the  bill  that  the  labour payment has been made as per the labour rate.  

g) That it is further stated that since it is a statutory increase, the  same is payable by the respondents. Copy of the both the bills  attached.  And  thus  the  claimants  be  awarded  a  sum  of  Rs.  1,62,287/- to the claimants.  

Claim No.3:  Claimants claim Rs.l,49,862/- being the increase in  cost of stone grit on account closure of the quarry by the order of  the Supreme Court.  

a)  That it is stated that the claimants had submitted the tender on  the  basis  of  the  rate  prevailing but  due to  the Hon'ble  Court's  directions for closure of the stone quarry resulting in shortage of  stone chips in the market and consequently rates increased.  

b) That the claimants informed the quantum of the increase on  22.6.92 and followed by reminders.  

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c) That the respondents had agreed in principle to pay the increase  which was prevailing in the market.  

d)  That  the detailed break-up of  this  claim has been appended  separately.  

e) It is further stated that the claimant was not instrumental for  increase  in  cost  but  due  to  the  interference  of  the  Hon'ble  Supreme Court. And the said increase has been taken into account  till the stipulated completion dated 23.2.93.  

f)  That the claimant is entitled for recovery of the said increase.

Claim No. 4:  Claimants claim Rs.12,922/- payable by virtue of  clause 10-C of the agreement and up to the stipulated period

a) That there was steep rise in cost of steel and the claimant  was exposed and the respondents were liable to pay the increase  in steel.  

b) That the detailed break-up of this claim has been prepared  and appended.  

6. The Arbitrator by a reasoned award dated 23rd May, 2005 held that the  

entire delay of 25 months in the execution of the project was thanks to the  

DDA,  none  of  this  delay  being  attributable  to  the  contractor.  The  learned  

Arbitrator found:

“That all the above four claims are inter linked being related to  the overhead expenses and therefore dealt together.  

That  the date  of  commencement  of  work was 24.5.92 and the  period for completion was 9 months and therefore, the disputed  date of completion was 23.2.93 but the work could be actually  completed on 28.3.95.  

That  there was delay of  25 months in completion of  the work  beyond the stipulated date of completion.  

That the Claimants urged that there had been various delays in the  execution  of  work  due  to  the  lapses  and  defaults  of  the  Respondents from the very commencement of work. The progress  was held up time and again and the claimants therefore, as back as  

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17.2.93  advised  the  Respondents  (C-9  page  167)  that  the  Claimants  are  not  interested  to  execute  the  work  beyond  the  stipulated  date  of  completion  and  therefore,  their  contract  be  finalized on the stipulated date of completion as the Claimants  shall  be  exposed  to  incur  heavy  expenditure  in  overheads  for  maintaining establishment watch and ward and tools and plants  and other shuttering material but the Respondents did not refute.  The chief reasons for delay are highlighted below:-  

I)  Delay in supply of structural and architectural drawings.  

II) That out of 9 Blocks 2 blocks are abnormally delayed as the  site of the said 21 blocks was made available in piecemeal which  stretched  till  26.2.94  whereas  the  stipulated  completion  was  23.2.93.  

III) Delay in laying the conduit by the electrical agency resulting  in  delay  in  casting  of  RCC  slab  and  plastering  work  besides  development  work.  The  said  hindrance  was  removed  lastly  on  28.3.95.  

IV)  Abnormal  delay  in  making  availability  of  the  alignment  sketch for electrical cables.  

V)  Inordinate  delay  in  supply  of  stipulated  material  such  as  cement, steel and pipes.  

VI)  Delay  in  decision  of  finishing·  work  in  kitchen  and  bath  rooms.  

VII) There was inordinate delay in making availability of colour  scheme.

VIII) That the Respondents also abnormally delayed the supply of  door shutters which were to be supplied by the Respondents. The  same were supplied as late as 8.11.94.  

IX) Inordinate delay in writing in the electrical conduits resulting  in delay in completion of finishing work.

X) Suspension of work by the Respondents for the period 17.1.94  to 25.2.94 and from 7.8.94 to 22.3.95 because of non-removal of  hindrances.  

XI)  Delayed  payment  due  to  non-sanction  of  Administrative  Approval and Expenditure Sanction.  

That all the delays as set out had been duly recorded 733 to 739  and M.A.S. register pages from 747 to 768 as highlighted by the  

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Claimants. The Claimants also relied upon certain documents of  MAS Register supplied by the Respondents.  

That the Claimants further stated that the Claimants had also filed  reasons for delay and hold up of the work various defaults of the  Respondents in Annexure pages 740 to 746. The Claimants also  highlighted  the  correspondence  made  by  the  Claimants  with  Respondents.  

That the Claimants further stated that the said hindrances were  avoidable but the Respondents did not take timely steps.

That the Claimants also referred the contents of the letter dated  10.7.95  (page  885)  wherein  it  was  observed  that  the  Superintending  Engineer  appreciated  the  working  of  the  Claimants  and  also  observed  that  there  was  no  fault  of  the  contractor and they have successfully completed the work. The  Claimants further stated that, they had incurred heavy expenditure  on overheads of the lapses and default of the Respondents.  

As  against  this  the  Respondents  stated  that  there  was  poor  planning  of  the  claimants  and  also  contended  that  since  the  compensation has been levied under Clause 2 of the agreement  therefore, claim of the claimants deserves to be rejected.  

That  on  record  it  is  conclusively  proved  that  the  Respondents  committed  breach  of  contract  as  they  failed  to  discharge  their  obligations  in  time resulting in  prolongations  did not  deny the  deployment of the tools and plants and machinery at site besides  watch and ward during the prolongation.”

7. It  is  important  to  note  that  before  the  Division  Bench,  the  learned  

counsel for the DDA conceded that this being a pure finding of fact, he would  

not be challenging it before the Division Bench.

8. Of the total claim of Rs.37.28 lakhs, the learned Arbitrator awarded an  

amount of Rs.23.39 lakhs.  Further, the learned Arbitrator has laboriously gone  

through all the evidence and answered each claim giving reasons for the same.  

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9. By a judgment dated 3rd April,  2006, the learned Single Judge of the  

High  Court  of  Delhi  dismissed  the  objections  of  the  DDA and  upheld  the  

award.  In an appeal filed under Section 37 of  the Arbitration Act,  vide the  

impugned judgment dated 8th February, 2012, a Division Bench of the High  

Court of Delhi set aside the judgment of the Single Judge on claims 9, 10, 11  

and 15, and negatived these claims in toto.  Further, claims 12 and 13 were  

scaled down doing “rough and ready justice”.  Resultantly, the awarded amount  

of Rs.7,20,000/- was scaled down to Rs. 5,57,137.50/-.  

10. We have heard learned counsel for the parties. Shri M. L. Verma, learned  

Senior  Advocate  appearing  on  behalf  of  the  appellant,  submitted  that  the  

Division Bench has lost sight of the law laid down by this Hon’ble Court when  

it comes to challenges made to arbitral awards under Section 34 of the Act. He  

has submitted that the Division Bench has acted as if this was a first appeal  

from the award and has further submitted that the Division Bench has taken  

into account facts which were neither pleaded nor proved before the learned  

Arbitrator in order to negative certain claims. He further submitted that it is not  

possible  for  a  Bench  hearing  an  objection  against  an  arbitral  award  to  do  

“rough and ready justice” – it is bound by the law laid down by this Hon’ble  

Court.  In particular,  he argued that the conceded position is that 25 months  

delay was due to the DDA alone.  The award read as a whole is just, fair and  

reasonable as only certain claims have been granted and every claim granted  

has been supported with reasons. The Arbitrator is the sole judge of the quality  

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and quantity of evidence before him and he has decided on that evidence.  No  

errors of law arise from the award and the award has, therefore, been wrongly  

set aside.  

11. Mr. Amarendra Sharan, learned Senior Advocate appearing on behalf of  

the  DDA has  relied  strongly  on  clause  10C  and  clause  22  to  support  the  

judgment of  the Division bench and has further  argued that  there has been  

duplication so far as certain claims are concerned. He argued that an award in  

the teeth of clause 10C and clause 22 would be a jurisdictional error which  

would vitiate the award.  

12. In as much as serious objections have been taken to the Division Bench  

judgment on the ground that it has ignored the parameters laid down in a series  

of  judgments  by  this  Court  as  to  the  limitations  which  a  Judge  hearing  

objections  to  an arbitral  award  under  Section 34 is  subject  to,  we deem it  

necessary to state the law on the subject.  

Section 34 of the Arbitration and Conciliation Act reads as follows-

“Application for setting aside arbitral award.—(1) Recourse  to a Court against an arbitral award may be made only by an  application for setting aside such award in accordance with sub- section (2) and sub-section (3).

(2) An arbitral award may be set aside by the Court only if—

(a) the party making the application furnishes proof that—

(i) a party was under some incapacity; or

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(ii)  The  arbitration  agreement  is  not  valid  under  the  law  to  which the  parties  have subjected  it  or,  failing any indication  thereon, under the law for the time being in force; or

(iii)  the  party  making  the  application  was  not  given  proper  notice  of  the  appointment  of  an  arbitrator  or  of  the  arbitral  proceedings or was otherwise unable to present his case; or

(iv) the arbitral award deals with a dispute not contemplated by  or not falling within the terms of the submission to arbitration,  or  it  contains  decisions  on  matters  beyond  the  scope  of  the  submission to arbitration:

Provided  that,  if  the  decisions  on  matters  submitted  to  arbitration can be separated from those not so submitted, only  that  part  of  the  arbitral  award  which  contains  decisions  on  matters not submitted to arbitration may be set aside; or

(v)  the  composition  of  the  arbitral  tribunal  or  the  arbitral  procedure  was  not  in  accordance  with  the  agreement  of  the  parties, unless such agreement was in conflict with a provision  of this Part from which the parties cannot derogate, or, failing  such agreement, was not in accordance with this Part; or

(b) the Court finds that—

(i) the subject-matter of the dispute is not capable of settlement  by arbitration under the law for the time being in force, or

(ii) the arbitral award is in conflict with the public policy of  India.

Explanation.—Without prejudice to the generality of sub-clause  (ii), it is hereby declared, for the avoidance of any doubt, that  an award is in conflict with the public policy of India if  the  making  of  the  award  was  induced  or  affected  by  fraud  or  corruption or was in violation of Section 75 or Section 81.

(3) An application for setting aside may not be made after three  months have elapsed from the date on which the party making  that application had received the arbitral award or, if a request  had been made under Section 33, from the date on which that  request had been disposed of by the arbitral tribunal:

Provided that  if  the Court  is  satisfied that  the applicant  was  prevented  by  sufficient  cause  from  making  the  application  within  the  said  period  of  three  months  it  may  entertain  the  

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application  within  a  further  period  of  thirty  days,  but  not  thereafter.

(4) On receipt of an application under sub-section (1), the Court  may, where it is appropriate and it is so requested by a party,  adjourn the proceedings for a period of time determined by it in  order to give the arbitral tribunal an opportunity to resume the  arbitral  proceedings  or  to  take  such  other  action  as  in  the  opinion of arbitral tribunal will eliminate the grounds for setting  aside the arbitral award.”

          This Section in conjunction with Section 5 makes it clear that an arbitration  

award that is governed by part I of the Arbitration and Conciliation Act, 1996  

can be set aside only on grounds mentioned under Section 34 (2) and (3), and  

not otherwise. Section 5 reads as follows:

“5. Extent of judicial intervention.—Notwithstanding anything  contained in any other law for the time being in force, in matters  governed by this Part, no judicial authority shall intervene except  where so provided in this Part.”

It is important to note that the 1996 Act was enacted to replace the 1940  

Arbitration  Act  in  order  to  provide  for  an  arbitral  procedure  which is  fair,  

efficient and capable of meeting the needs of arbitration; also to provide that  

the tribunal  gives reasons  for  an arbitral  award;  to  ensure  that  the tribunal  

remains within the limits of its jurisdiction; and to minimize the supervisory  

roles of courts in the arbitral process.  

It will be seen that none of the grounds contained in sub-clause 2 (a) deal  

with the merits of the decision rendered by an arbitral award.  It is only when  

we come to the award being in conflict with the public policy of India that the  

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merits  of  an  arbitral  award  are  to  be  looked  into  under  certain  specified  

circumstances.  

In  Renusagar Power Co. Ltd. v. General Electronic Co.,  1994 Supp  

(1) SCC 644, the Supreme Court construed Section 7 (1)(b) (ii) of the Foreign  

Award (Recognition and Enforcement) Act, 1961.

“7.  Conditions  for  enforcement  of  foreign  awards.—(1)  A  foreign award may not be enforced under this Act—

(b) if the Court dealing with the case is satisfied that—

(ii) the enforcement of the award will be contrary to the public   policy.”

In construing the expression “public policy” in the context of a foreign  

award, the Court held that an award contrary to  

1. The fundamental policy of Indian law

2. The interest of India

3. Justice or morality,

would be set aside on the ground that it would be contrary to the public policy  

of India. It went on further to hold that a contravention of the provisions of the  

Foreign Exchange Regulation Act would be contrary to the public policy of  

India in that the statute is enacted for the national economic interest to ensure  

that  the  nation  does  not  lose  foreign  exchange  which  is  essential  for  the  

economic survival of the nation (see para 75).  Equally, disregarding orders  

passed by the superior courts in India could also be a contravention of the  

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fundamental policy of Indian law, but the recovery of compound interest on  

interest, being contrary to statute only, would not contravene any fundamental  

policy of Indian law (see paras 85,95).  

When it came to construing the expression “the public policy of India”  

contained in Section 34 (2) (b) (ii) of the Arbitration Act, 1996, this Court in  

ONGC v. Saw Pipes, 2003 (5) SCC 705, held-

“31. Therefore, in our view, the phrase “public policy of India”   used in  Section  34 in  context  is  required  to  be  given a  wider   meaning.  It  can  be  stated  that  the  concept  of  public  policy   connotes some matter which concerns public good and the public   interest.  What is for public  good or in public interest  or what   would  be  injurious  or  harmful  to  the  public  good  or  public   interest has varied from time to time. However, the award which   is, on the face of it, patently in violation of statutory provisions   cannot  be  said  to  be  in  public  interest.  Such   award/judgment/decision  is  likely  to  adversely  affect  the   administration  of  justice.  Hence,  in  our  view  in  addition  to   narrower  meaning  given  to  the  term  “public  policy”   in Renusagar case [1994 Supp (1) SCC 644] it is required to be   held that the award could be set aside if it is patently illegal. The   result would be — award could be set aside if it is contrary to:

(a) Fundamental policy of Indian law; or

(b) The interest of India; or

(c) Justice or morality, or

(d) in addition, if it is patently illegal.

Illegality must go to the root of the matter and if the illegality is   of trivial nature it cannot be held that award is against the public   policy.  Award  could  also  be  set  aside  if  it  is  so  unfair  and   unreasonable  that  it  shocks  the  conscience  of  the  court.  Such   award is opposed to public policy and is required to be adjudged   void.

74. In the result, it is held that:

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(A) (1) The court can set aside the arbitral award under Section   34(2)  of  the  Act  if  the  party  making  the  application  furnishes   proof that:

(i) a party was under some incapacity, or

(ii) the arbitration agreement is not valid under the law to which   the parties have subjected it  or,  failing any indication thereon,   under the law for the time being in force; or

(iii) the party making the application was not given proper notice   of the appointment of an arbitrator or of the arbitral proceedings   or was otherwise unable to present his case; or

(iv) the arbitral award deals with a dispute not contemplated by   or not falling within the terms of the submission to arbitration, or   it  contains  decisions  on  matters  beyond  the  scope  of  the   submission to arbitration.

(2) The court may set aside the award:

(i)(a)  if  the  composition  of  the  Arbitral  Tribunal  was  not  in   accordance with the agreement of the parties,

(b)  failing  such  agreement,  the  composition  of  the  Arbitral   Tribunal was not in accordance with Part I of the Act.

(ii) if the arbitral procedure was not in accordance with:

(a) the agreement of the parties, or

(b)  failing  such  agreement,  the  arbitral  procedure  was  not  in   accordance with Part I of the Act.

However, exception for setting aside the award on the ground of   composition  of  Arbitral  Tribunal  or  illegality  of  arbitral   procedure is that the agreement should not be in conflict with the   provisions  of  Part  I  of  the  Act  from  which  parties  cannot   derogate.

(c)  If  the  award  passed  by  the  Arbitral  Tribunal  is  in   contravention of the provisions of the Act or any other substantive   law governing the parties or is against the terms of the contract.

(3) The award could be set aside if it is against the public policy   of India, that is to say, if it is contrary to:

(a) fundamental policy of Indian law; or

(b) the interest of India; or

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(c) justice or morality; or

(d) if it is patently illegal.

(4) It could be challenged:

(a) as provided under Section 13(5); and

(b) Section 16(6) of the Act.

(B)(1) The impugned award requires to be set aside mainly on the   grounds:

(i) there is specific stipulation in the agreement that the time and   date of delivery of the goods was of the essence of the contract;

(ii) in case of failure to deliver the goods within the period fixed   for such delivery in the schedule, ONGC was entitled to recover   from the contractor liquidated damages as agreed;

(iii) it was also explicitly understood that the agreed liquidated   damages were genuine pre-estimate of damages;

(iv) on the request of the respondent to extend the time-limit for   supply  of  goods,  ONGC  informed  specifically  that  time  was   extended but stipulated liquidated damages as agreed would be   recovered;

(v) liquidated damages for delay in supply of goods were to be   recovered by paying authorities from the bills for payment of cost   of material supplied by the contractor;

(vi)  there  is  nothing  on  record  to  suggest  that  stipulation  for   recovering liquidated damages was by way of penalty or that the   said sum was in any way unreasonable.

(vii) In certain contracts, it is impossible to assess the damages   or prove the same. Such situation is taken care of by Sections 73   and 74 of the Contract Act and in the present case by specific   terms of the contract.”

The judgment in  ONGC v. Saw Pipes has been consistently followed  

till date.

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In Hindustan Zinc Ltd. v. Friends Coal Carbonisation, (2006) 4 SCC  

445, this Court held:                               

“14. The High Court did not have the benefit of the principles   laid  down  in Saw  Pipes  [(2003)  5  SCC  705]  ,  and  had   proceeded on the assumption that award cannot be interfered   with even if it was contrary to the terms of the contract. It went   to  the  extent  of  holding  that  contract  terms  cannot  even  be   looked into for examining the correctness of the award. This   Court in Saw Pipes [(2003) 5 SCC 705] has made it clear that   it is open to the court to consider whether the award is against   the specific terms of contract and if so, interfere with it on the   ground  that  it  is  patently  illegal  and  opposed  to  the  public   policy of India.”

In  McDermott  International  Inc.  v. Burn  Standard  Co.  Ltd.,  

(2006) 11 SCC 181, this Court held:          

“58. In Renusagar  Power  Co.  Ltd. v. General  Electric   Co. [1994 Supp (1)  SCC 644] this  Court  laid down that  the   arbitral  award  can  be  set  aside  if  it  is  contrary  to  (a)   fundamental policy of Indian law; (b) the interests of India; or   (c) justice or morality. A narrower meaning to the expression   “public policy” was given therein by confining judicial review   of the arbitral award only on the aforementioned three grounds.   An apparent shift can, however, be noticed from the decision of   this Court in ONGC Ltd.v. Saw Pipes Ltd. [(2003) 5 SCC 705]  (for short “ONGC”). This Court therein referred to an earlier   decision  of  this  Court  in Central  Inland  Water  Transport   Corpn. Ltd. v. Brojo Nath Ganguly [(1986) 3 SCC 156 : 1986   SCC (L&S) 429 : (1986) 1 ATC 103] wherein the applicability   of the expression “public policy” on the touchstone of Section   23 of the Indian Contract Act and Article 14 of the Constitution   of India came to be considered. This Court therein was dealing   with  unequal  bargaining  power  of  the  workmen  and  the   employer  and  came  to  the  conclusion  that  any  term  of  the   agreement which is patently arbitrary and/or otherwise arrived   at because of the unequal bargaining power would not only be   ultra vires Article 14 of the Constitution of India but also hit by   Section 23 of the Indian Contract Act. In ONGC [(2003) 5 SCC  

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705]  this  Court,  apart  from  the  three  grounds  stated   in Renusagar [1994 Supp (1) SCC 644] , added another ground   thereto for exercise of the court's jurisdiction in setting aside   the award if it is patently arbitrary.

59. Such patent illegality, however, must go to the root of the   matter. The public policy violation, indisputably, should be so   unfair  and  unreasonable  as  to  shock  the  conscience  of  the   court. Where the arbitrator, however, has gone contrary to or   beyond the expressed law of the contract or granted relief in the   matter not in dispute would come within the purview of Section   34 of the Act. However, we would consider the applicability of   the aforementioned principles while noticing the merits of the   matter.

60. What would constitute public policy is a matter dependent   upon the nature of transaction and nature of statute. For the   said  purpose,  the pleadings  of  the parties  and the  materials   brought  on  record  would  be  relevant  to  enable  the  court  to   judge what is in public good or public interest, and what would   otherwise be injurious to the public good at the relevant point,   as  contradistinguished  from  the  policy  of  a  particular   Government. (See State of Rajasthan v. Basant Nahata [(2005)  12 SCC 77].)”

In Centrotrade Minerals & Metals Inc. v. Hindustan Copper Ltd.,  

(2006) 11 SCC 245, Sinha, J., held:

“103. Such patent illegality, however, must go to the root of the   matter.  The public policy,  indisputably,  should be unfair  and   unreasonable so as to shock the conscience of the court. Where   the  arbitrator,  however,  has  gone contrary  to  or  beyond  the   expressed law of the contract or granted relief in the matter not   in dispute would come within the purview of Section 34 of the   Act.”

104. What would be a public policy would be a matter which   would  again  depend upon the nature  of  transaction  and the   nature of  statute.  For the said purpose,  the pleadings of  the   parties and the materials brought on record would be relevant   so as to enable the court to judge the concept of what was a   public  good  or  public  interest  or  what  would  otherwise  be   injurious  to  the  public  good  at  the  relevant  point  as   

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contradistinguished by the policy of a particular government.   (See   State  of  Rajasthan v.  Basant  Nahata [(2005)  12  SCC  77].)”

In DDA v. R.S.  Sharma and Co.,  (2008)  13  SCC 80,  the  Court  

summarized the law thus:  

    “21. From the above decisions, the following principles emerge:

(a) An award, which is

(i) contrary to substantive provisions of law; or

(ii)  the  provisions  of  the  Arbitration  and  Conciliation  Act,   1996; or

(iii) against the terms of the respective contract; or

(iv) patently illegal; or

(v) prejudicial to the rights of the parties;

is open to interference by the court under Section 34(2) of the   Act.

(b) The award could be set aside if it is contrary to:

(a) fundamental policy of Indian law; or

(b) the interest of India; or

(c) justice or morality.

(c)  The award could also be set  aside if  it  is  so unfair  and   unreasonable that it shocks the conscience of the court.

(d)  It  is  open to the court  to consider whether the award is   against the specific terms of contract and if so, interfere with it   on  the  ground  that  it  is  patently  illegal  and opposed  to  the   public policy of India.

With  these  principles  and  statutory  provisions,  particularly,   Section 34(2) of the Act, let us consider whether the arbitrator   as well as the Division Bench of the High Court were justified   in  granting  the  award  in  respect  of  Claims  1  to  3  and   Additional Claims 1 to 3 of the claimant or the appellant DDA   has made out a case for setting aside the award in respect of   

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those claims with reference to the terms of the agreement duly   executed by both parties.”

J.G. Engineers (P) Ltd. v. Union of India, (2011) 5 SCC 758, held:

“27. Interpreting  the  said  provisions,  this  Court  in ONGC  Ltd. v. Saw Pipes Ltd.[(2003) 5 SCC 705] held that a court can   set  aside  an award under  Section  34(2)(b)(ii)  of  the  Act,  as   being in  conflict  with  the  public  policy  of  India,  if  it  is  (a)   contrary  to  the  fundamental  policy  of  Indian  law;  or  (b)   contrary to the interests of India; or (c) contrary to justice or   morality; or (d) patently illegal. This Court explained that to   hold  an  award  to  be  opposed  to  public  policy,  the  patent   illegality should go to the very root of the matter and not a   trivial illegality. It is also observed that an award could be set   aside  if  it  is  so  unfair  and  unreasonable  that  it  shocks  the   conscience of the court, as then it would be opposed to public   policy.”

Union of India v. Col. L.S.N. Murthy, (2012) 1 SCC 718, held:

“22. In ONGC Ltd. v. Saw Pipes Ltd. [(2003) 5 SCC 705] this   Court after examining the grounds on which an award of the   arbitrator can be set aside under Section 34 of the Act has said:   (SCC p. 727, para 31)

“31. … However, the award which is, on the face of it, patently   in  violation  of  statutory  provisions  cannot  be  said  to  be  in   public  interest.  Such  award/judgment/decision  is  likely  to   adversely  affect  the  administration  of  justice.  Hence,  in  our   view in addition to narrower meaning given to the term ‘public   policy’  in Renusagar  case [Renusagar  Power  Co.   Ltd. v. General  Electric  Co.,  1994  Supp  (1)  SCC  644]  it  is   required to be held that the award could be set aside if it  is   patently illegal”.

Fundamental Policy of Indian Law

Coming to each of the heads contained in the Saw Pipes judgment, we  

will first deal with the head “fundamental policy of Indian Law”. It has already  20

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been seen from the Renusagar judgment that violation of the Foreign Exchange  

Act and disregarding orders of superior courts in India would be regarded as  

being contrary to the fundamental  policy of  Indian law. To this it  could be  

added  that  the  binding  effect  of  the  judgment  of  a  superior  court  being  

disregarded would be equally violative of  the fundamental  policy of  Indian  

law.  

In a recent judgment, ONGC Ltd. v. Western Geco International Ltd.,  

2014  (9)  SCC 263,  this  Court  added  three  other  distinct  and  fundamental  

juristic  principles  which  must  be  understood  as  a  part  and  parcel  of  the  

fundamental policy of Indian law. The Court held-

“35. What  then  would  constitute  the  “fundamental  policy  of   Indian  law”  is  the  question.  The  decision  in ONGC [ONGC  Ltd. v. Saw Pipes Ltd., (2003) 5 SCC 705] does not elaborate that   aspect. Even so, the expression must, in our opinion, include all   such  fundamental  principles  as  providing  a  basis  for   administration of justice and enforcement of law in this country.   Without  meaning  to  exhaustively  enumerate  the  purport  of  the   expression “fundamental policy of Indian law”, we may refer to   three  distinct  and  fundamental  juristic  principles  that  must   necessarily be understood as a part and parcel of the fundamental   policy of Indian law. The first and foremost is the principle that in   every determination whether by a court or other authority that   affects the rights of a citizen or leads to any civil consequences,   the court  or authority  concerned is  bound to adopt  what  is  in   legal parlance called a “judicial approach” in the matter.  The   duty to adopt a judicial approach arises from the very nature of   the power exercised by the court or the authority does not have to   be separately or additionally enjoined upon the fora concerned.   What must  be remembered is that  the importance of  a judicial   approach in judicial and quasi-judicial determination lies in the   fact that so long as the court, tribunal or the authority exercising   powers that affect the rights or obligations of the parties before   them shows fidelity to judicial approach, they cannot act in an   

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arbitrary,  capricious  or  whimsical  manner.  Judicial  approach   ensures  that  the  authority  acts  bona  fide  and  deals  with  the   subject in a fair,  reasonable and objective manner and that  its   decision is not actuated by any extraneous consideration. Judicial   approach in that sense acts as a check against flaws and faults   that  can  render  the  decision  of  a  court,  tribunal  or  authority   vulnerable to challenge.

38. Equally  important  and indeed fundamental  to  the  policy  of   Indian  law  is  the  principle  that  a  court  and  so  also  a  quasi- judicial  authority  must,  while  determining  the  rights  and   obligations  of  parties  before  it,  do  so  in  accordance  with  the   principles of natural justice. Besides the celebrated audi alteram  partem rule one of the facets of the principles of natural justice is   that the court/authority deciding the matter must apply its mind to   the attendant  facts  and circumstances  while  taking a view one   way or the other. Non-application of mind is a defect that is fatal   to any adjudication. Application of mind is best demonstrated by   disclosure  of  the mind and disclosure  of  mind is  best  done by   recording reasons in support of the decision which the court or   authority  is  taking.  The  requirement  that  an  adjudicatory   authority must apply its mind is, in that view, so deeply embedded   in our jurisprudence that it can be described as a fundamental   policy of Indian law.

39. No  less  important  is  the  principle  now  recognised  as  a   salutary juristic fundamental in administrative law that a decision   which  is  perverse  or  so  irrational  that  no  reasonable  person   would have arrived at the same will not be sustained in a court of   law.  Perversity  or  irrationality  of  decisions  is  tested  on  the   touchstone  of  Wednesbury  principle [Associated  Provincial   Picture  Houses  Ltd. v. Wednesbury  Corpn.,  (1948)  1  KB  223:   (1947) 2 All ER 680 (CA)] of reasonableness. Decisions that fall   short of the standards of reasonableness are open to challenge in   a court of law often in writ jurisdiction of the superior courts but   no less in statutory processes wherever the same are available.

40. It  is  neither  necessary  nor  proper  for  us  to  attempt  an   exhaustive enumeration of what would constitute the fundamental   policy of Indian law nor is it possible to place the expression in   the straitjacket of a definition. What is important in the context of   the  case  at  hand  is  that  if  on  facts  proved  before  them  the   arbitrators fail to draw an inference which ought to have been   drawn or if they have drawn an inference which is on the face of   it, untenable resulting in miscarriage of justice, the adjudication   even when made by an Arbitral Tribunal that enjoys considerable   

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latitude and play at the joints in making awards will be open to   challenge  and  may  be  cast  away  or  modified  depending  upon   whether the offending part is or is not severable from the rest.”

It is clear that the juristic principle of a “judicial approach” demands that  

a  decision be fair,  reasonable  and objective.  On the obverse  side,  anything  

arbitrary and whimsical would obviously not be a determination which would  

either be fair, reasonable or objective.  

The Audi Alteram Partem principle which undoubtedly is a fundamental  

juristic principle in Indian law is also contained in Sections 18 and 34 (2) (a)  

(iii) of the Arbitration and Conciliation Act. These Sections read as follows:

“18. Equal treatment of parties.— The parties shall be treated   with equality and each party shall be given a full opportunity to   present his case.

34. Application for setting aside arbitral award.—

(2) An arbitral award may be set aside by the Court only if —

(a) the party making the application furnishes proof that—

(iii) the party making the application was not given proper   notice  of  the  appointment  of  an  arbitrator  or  of  the  arbitral   proceedings or was otherwise unable to present his case; ”

The third juristic  principle is  that  a  decision which is  perverse or  so  

irrational  that  no  reasonable  person  would  have  arrived  at  the  same  is  

important and requires some degree of explanation. It is settled law that where-

1. a finding is based on no evidence, or  

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2. an arbitral tribunal takes into account something irrelevant to the  

decision which it arrives at; or

3. ignores vital evidence in arriving at its decision,   

such decision would necessarily be perverse. A good working test of perversity  

is contained in two judgments. In H.B. Gandhi, Excise and Taxation Officer-

cum-Assessing Authority v. Gopi Nath & Sons, 1992 Supp (2) SCC 312 at p.  

317, it was held:

“7. …................It  is,  no  doubt,  true  that  if  a  finding of  fact  is   arrived at by ignoring or excluding relevant material or by taking   into  consideration  irrelevant  material  or  if  the  finding  so   outrageously defies logic as to suffer from the vice of irrationality   incurring  the  blame  of  being  perverse,  then,  the  finding  is   rendered infirm in law.”

In Kuldeep Singh v. Commr. of Police,  (1999) 2 SCC 10 at  

para 10, it was held:

“10. A broad distinction has, therefore, to be maintained between   the decisions which are perverse and those which are not. If a   decision  is  arrived  at  on  no  evidence  or  evidence  which  is   thoroughly unreliable and no reasonable person would act upon   it, the order would be perverse. But if there is some evidence on   record  which  is  acceptable  and  which  could  be  relied  upon,   howsoever compendious it may be, the conclusions would not be   treated  as  perverse  and  the  findings  would  not  be  interfered   with.”

It must clearly be understood that when a court is applying the “public  

policy” test to an arbitration award, it does not act as a court of appeal and  

consequently  errors  of  fact  cannot  be  corrected.  A possible  view  by  the  

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arbitrator on facts has necessarily to pass muster as the arbitrator is the ultimate  

master  of  the  quantity  and  quality  of  evidence  to  be  relied  upon  when  he  

delivers  his  arbitral  award.  Thus  an  award  based  on  little  evidence  or  on  

evidence which does not measure up in quality to a trained legal mind would  

not be held to be invalid on this score1. Once it is found that the arbitrators  

approach is not arbitrary or capricious, then he is the last word on facts. In P.R.  

Shah,  Shares  &  Stock  Brokers  (P)  Ltd.  v.  B.H.H.  Securities  (P)  Ltd.,  

(2012) 1 SCC 594, this Court held:

“21. A court does not sit in appeal over the award of an Arbitral   Tribunal by reassessing or reappreciating the evidence. An award   can be challenged only under the grounds mentioned in Section   34(2) of the Act. The Arbitral Tribunal has examined the facts and   held that both the second respondent and the appellant are liable.   The  case  as  put  forward  by  the  first  respondent  has  been   accepted. Even the minority view was that the second respondent   was liable as claimed by the first respondent, but the appellant   was not liable only on the ground that the arbitrators appointed   by the Stock Exchange under Bye-law 248, in a claim against a   non-member,  had  no  jurisdiction  to  decide  a  claim  against   another member. The finding of the majority is that the appellant   did the transaction in the name of the second respondent and is   therefore, liable along with the second respondent. Therefore, in   the absence of any ground under Section 34(2) of the Act, it is not   possible to re-examine the facts to find out  whether a different   decision can be arrived at.”

It is with this very important caveat that the two fundamental principles  

which form part of the fundamental policy of Indian law (that the arbitrator  1

Very often an arbitrator is a lay person not necessarily trained in law. Lord Mansfield, a famous  English Judge, once advised a high military officer in Jamaica who needed to act as a Judge as follows:

“General, you have a sound head, and a good heart; take courage and you will do very  well, in your occupation, in a court of equity.  My advice is, to make your decrees as your head and   your heart dictate, to hear both sides patiently, to decide with firmness in the best manner you can;   but  be careful  not to assign your reasons,  since your determination may be substantially  right,  although your reasons may be very bad, or essentially wrong”.  

It is very important to bear this in mind when awards of lay arbitrators are challenged. 25

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must have a judicial approach and that he must not act perversely) are to be  

understood.

Interest of India

The next ground on which an award may be set aside is that it is contrary  

to the interest of India. Obviously, this concerns itself with India as a member  

of  the world community in its  relations with foreign powers.  As at  present  

advised, we need not dilate on this aspect as this ground may need to evolve on  

a case by case basis.  

Justice

The third ground of public policy is, if an award is against justice or  

morality. These are two different concepts in law. An award can be said to be  

against justice only when it shocks the conscience of the court. An illustration  

of this can be given. A claimant is content with restricting his claim, let us say  

to Rs. 30 lakhs in a statement of claim before the arbitrator and at no point   

does he seek to claim anything more. The arbitral award ultimately awards him  

45 lakhs without any acceptable reason or justification. Obviously, this would  

shock the conscience of the court and the arbitral award would be liable to be  

set aside on the ground that it is contrary to “justice”.

Morality

The other ground is of “morality”. Just as the expression “public policy”  

also occurs in Section 23 of the Indian Contract Act, so does the expression  

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“morality”. Two illustrations to the said section are interesting for they explain  

to us the scope of the expression “morality”.

“(j) A, who is B's Mukhtar, promises to exercise his influence, as   such, with B in favour of C, and C promises to pay 1,000 rupees   to A. The agreement is void, because it is immoral.

(k) A agrees to let her daughter to hire to B for concubinage. The  agreement is void, because it is immoral, though the letting may   not be punishable under the Indian Penal Code (XLV of 1860).”

In Gherulal Parekh v. Mahadeo Dass Maiya, 1959 Supp (2) SCR 406,  

this Court explained the concept of “morality” thus-

“Re. Point 3 - Immorality: The argument under this head is rather   broadly  stated  by  the  learned  Counsel  for  the  appellant.  The   learned counsel attempts to draw an analogy from the Hindu Law   relating to the doctrine of pious obligation of sons to discharge   their  father's  debts  and  contends  that  what  the  Hindu  Law   considers  to  be  immoral  in  that  context  may  appropriately  be   applied to  a case under  s. 23 of  the Contract  Act.  Neither  any   authority is cited nor any legal basis is suggested for importing   the  doctrine  of  Hindu  Law  into  the  domain  of  contracts.   Section 23 of the Contract Act is inspired by the common law of   England and it would be more useful to refer to the English Law   than to the Hindu Law texts dealing with a different matter. Anson   in his Law of Contracts states at p. 222 thus:

"The only aspect of immorality with which Courts of Law   have dealt is sexual immorality........... ."

Halsbury in his Laws of England, 3rd Edn., Vol. 8, makes a   similar statement, at p. 138 :

"A contract which is made upon an immoral consideration   or  for  an  immoral  purpose  is  unenforceable,  and  there  is  no   distinction in this respect between immoral and illegal contracts.   The immorality here alluded to is sexual immorality."

In the Law of Contract by Cheshire and Fifoot, 3rd Edn., it   is stated at p. 279:

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"Although  Lord  Mansfield  laid  it  down  that  a  contract   contra bonos mores is illegal, the law in this connection gives no   extended meaning to morality, but concerns itself only with what   is sexually reprehensible."

In  the  book  on  the  Indian  Contract  Act  by  Pollock  and   Mulla it is stated at p. 157:

"The epithet "immoral" points, in legal usage, to conduct or   purposes which the State, though disapproving them, is unable, or   not advised, to visit with direct punishment."

The learned authors confined its operation to acts which   are  considered  to  be  immoral  according  to  the  standards  of   immorality approved by Courts.  The case law both in England   and  India  confines  the  operation  of  the  doctrine  to  sexual   immorality.  To  cite  only  some  instances:  settlements  in   consideration of concubinage, contracts of sale or hire of things   to be used in a brothel or by a prostitute for purposes incidental   to  her  profession,  agreements  to  pay  money  for  future  illicit   cohabitation, promises in regard to marriage for consideration,   or contracts  facilitating divorce are all  held to  be void on the   ground that the object is immoral.

The  word  "immoral"  is  a  very  comprehensive  word.   Ordinarily it takes in every aspect of personal conduct deviating   from the standard norms of life. It may also be said that what is   repugnant  to  good  conscience  is  immoral.  Its  varying  content   depends  upon  time,  place  and  the  stage  of  civilization  of  a   particular  society.  In  short,  no  universal  standard  can be  laid   down and any law based on such fluid concept defeats its own   purpose. The provisions of S. 23 of the Contract Act indicate the   legislative  intention  to  give  it  a  restricted  meaning.  Its   juxtaposition  with  an  equally  illusive  concept,  public  policy,   indicates  that  it  is  used  in  a  restricted  sense;  otherwise  there   would be overlapping of the two concepts. In its wide sense what   is immoral may be against public policy, for public policy covers   political, social and economic ground of objection. Decided cases   and  authoritative  text-book  writers,  therefore,  confined  it,  with   every justification, only to sexual immorality. The other limitation   imposed on the word by the statute, namely, "the court regards it   as immoral", brings out the idea that it is also a branch of the   common law like  the  doctrine  of  public  policy,  and,  therefore,   should  be  confined to  the  principles  recognized and settled by   Courts.  Precedents  confine  the  said  concept  only  to  sexual   immorality and no case has been brought to our notice where it   

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has been applied to any head other than sexual immorality. In the   circumstances,  we cannot evolve a new head so as to bring in   wagers within its fold.”

This Court has confined morality to sexual morality so far as section 23  

of the Contract Act is concerned, which in the context of an arbitral award  

would mean the enforcement of an award say for specific performance of a  

contract involving prostitution. “Morality” would, if it is to go beyond sexual  

morality necessarily cover such agreements as are not illegal but would not be  

enforced given the prevailing mores of the day.  However, interference on this  

ground would also be only if something shocks the court’s conscience.  

Patent Illegality

We  now  come  to  the  fourth  head  of  public  policy  namely,  patent  

illegality. It must be remembered that under the explanation to section 34 (2)  

(b), an award is said to be in conflict with the public policy of India if the  

making of  the award was induced or  affected by fraud or  corruption.  This  

ground is perhaps the earliest ground on which courts in England set  aside  

awards under English law. Added to this ground (in 1802) is the ground that an  

arbitral award would be set aside if there were an error of law by the arbitrator.   

This  is  explained  by  Lord  Justice  Denning  in  R  v.  Northumberland  

Compensation Appeal Tribunal. Ex Parte Shaw., 1952 1 All ER 122 at page  

130:

“Leaving now the statutory tribunals, I turn to the awards of the   arbitrators.  The  Court  of  King's  Bench  never  interfered  by   certiorari  with  the  award  of  an  arbitrator,  because  it  was  a   

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private tribunal and not subject  to the prerogative writs.  If  the   award was not made a rule of court, the only course available to   an aggrieved party was to resist an action on the award or to file   a bill in equity. If the award was made a rule of court, a motion   could be made to the court to set it aside for misconduct of the   arbitrator on the ground that it was procured by corruption or   other undue means: see the statute 9 and 10 Will. III, c. 15. At one   time an award could not be upset on the ground of error of law by   the arbitrator because that could not be said to be misconduct or   undue means, but ultimately it was held in Kent v. Elstob,  (1802)   3 East 18, that an award could be set aside for error of law on the   face of it.  This was regretted by Williams, J., in Hodgkinson v.   Fernie, (1857) 3 C.B.N.S. 189, but is now well established.”

This, in turn, led to the famous principle laid down in Champsey Bhara  

Company v. The Jivraj Balloo Spinning and Weaving Company Ltd., AIR  

1923 PC 66, where the Privy Council referred to  Hodgkinson and then laid  

down:

“The law on the subject has never been more clearly stated than   by  Williams,  J.  in  the  case  of  Hodgkinson  v.  Fernie  (1857)  3   C.B.N.S. 189.  

“The law has for many years been settled, and remains so at this   day, that, where a cause or matters in difference are referred to an   arbitrator a lawyer or a layman, he is constituted the sole and   final judge of all questions both of law and of fact …… The only   exceptions to that rule are cases where the award is the result of   corruption  or  fraud,  and  one  other,  which  though  it  is  to  be   regretted,  is  now,  I  think  firmly  established  viz.,  where  the   question of  law necessarily arises on the face of  the award or   upon some paper accompanying and forming part of the award.   Though the propriety of this latter may very well be doubted, I   think it may be considered as established.”  

“Now  the  regret  expressed  by  Williams,  J.  in  Hodgkinson  v.   Fernie has been repeated by more than one learned Judge, and it   is certainly not to be desired that the exception should be in any   way extended.  An error in law on the face of the award means, in   their  Lordships’ view,  that  you  can  find  in  the  award  or  a   

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document actually incorporated thereto, as for instance,  a note   appended by the arbitrator stating the reasons for his judgment,   some legal proposition which is the basis of the award and which   you can then say  is  erroneous.   It  does  not  mean that  if  in  a   narrative a reference is made to a contention of one party that   opens the door to seeing first what that contention is, and then   going to the contract on which the parties’ rights depend to see if   that contention is sound.  Here it is impossible to say, from what is   shown on  the  face  of  the  award,  what  mistake  the  arbitrators   made.   The  only  way  that  the  learned  judges  have  arrived  at   finding  what  the  mistake  was  is  by  saying:  “Inasmuch  as  the   Arbitrators awarded so and so, and inasmuch as the letter shows   that then buyer rejected the cotton, the arbitrators can only have   arrived at that result by totally misinterpreting Cl.52.” But they   were entitled to  give their  own interpretation to  Cl.  52 or any   other article, and the award will stand unless, on the face of it   they have tied themselves down to some special legal proposition   which then, when examined, appears to be unsound.  Upon this   point, therefore, their Lordships think that the judgment of Pratt, J   was right and the conclusion of the learned Judges of the Court of   Appeal erroneous.”

This judgment has been consistently followed in India to test  awards  

under Section 30 of the Arbitration Act, 1940.   

In the 1996 Act, this principle is substituted by the ‘patent illegality’  

principle which, in turn, contains three sub heads -  

(a) a contravention of the substantive law of India would result in the death  

knell  of  an arbitral  award.  This  must  be understood in the sense that  such  

illegality must go to the root of the matter and cannot be of a trivial nature.  

This again is a really a contravention of Section 28(1)(a) of the Act, which  

reads as under:

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“28.  Rules applicable  to  substance of  dispute.—(1)  Where  the  place of arbitration is situated in India,—

(a)  in  an  arbitration  other  than  an  international  commercial   arbitration,  the  arbitral  tribunal  shall  decide  the  dispute   submitted to arbitration in accordance with the substantive law  for the time being in force in India;”

(b) a contravention of the Arbitration Act itself would be regarded as a patent  

illegality-  for  example  if  an  arbitrator  gives  no  reasons  for  an  award  in  

contravention of section 31(3) of the Act, such award will be liable to be set  

aside.  

(c) Equally, the third sub-head of patent illegality is really a contravention of  

Section 28 (3) of the Arbitration Act, which reads as under:

“28. Rules applicable to substance of dispute.— (3) In all cases,   the arbitral tribunal shall decide in accordance with the terms of   the contract and shall take into account the usages of the trade   applicable to the transaction.”

This last contravention must be understood with a caveat.  An arbitral  

tribunal must decide in accordance with the terms of the contract,  but if an  

arbitrator construes a term of the contract in a reasonable manner, it will not  

mean that the award can be set aside on this ground. Construction of the terms  

of  a  contract  is  primarily  for  an  arbitrator  to  decide  unless  the  arbitrator  

construes the contract in such a way that it could be said to be something that  

no fair minded or reasonable person could do.

In McDermott International Inc. v. Burn Standard Co. Ltd.,  (2006)  

11 SCC 181, this Court held as under:  

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“112. It is trite that the terms of the contract can be express or   implied.  The  conduct  of  the  parties  would  also  be  a  relevant   factor  in  the  matter  of  construction  of  a  contract.  The   construction of the contract agreement is within the jurisdiction of   the arbitrators having regard to the wide nature, scope and ambit   of  the  arbitration  agreement  and  they  cannot  be  said  to  have   misdirected  themselves  in  passing  the  award  by  taking  into   consideration  the  conduct  of  the  parties.  It  is  also  trite  that   correspondences  exchanged  by  the  parties  are  required  to  be   taken  into  consideration  for  the  purpose  of  construction  of  a   contract. Interpretation of a contract is a matter for the arbitrator   to determine, even if it gives rise to determination of a question of   law.  (See Pure  Helium  India  (P)  Ltd. v. ONGC [(2003)  8  SCC  593] and D.D. Sharma v. Union of India [(2004) 5 SCC 325]).

113. Once, thus, it is held that the arbitrator had the jurisdiction,   no further question shall be raised and the court will not exercise   its jurisdiction unless it is found that there exists any bar on the   face of the award.”

In MSK Projects (I) (JV) Ltd. v. State of Rajasthan, (2011) 10 SCC  

573, the Court held:

“17. If the arbitrator commits an error in the construction of the   contract, that is an error within his jurisdiction. But if he wanders   outside the contract and deals with matters not allotted to him, he   commits a jurisdictional error. Extrinsic evidence is admissible in   such  cases  because  the  dispute  is  not  something  which  arises   under  or  in  relation  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 rationale 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 extrinsic to the   award. (See Gobardhan Das v. Lachhmi Ram [AIR 1954 SC 689],   Thawardas  Pherumal v. Union  of  India [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 v. Chintamanrao Balaji [AIR 1965 SC  214]  and Renusagar  Power  Co.  Ltd. v. General  Electric   Co. [(1984) 4 SCC 679 : AIR 1985 SC 1156] ).”

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In Rashtriya Ispat Nigam Ltd. v. Dewan Chand Ram Saran, (2012) 5  

SCC 306, the Court held:

“43. In any case, assuming that Clause 9.3 was capable of two   interpretations,  the  view taken by  the  arbitrator  was clearly  a   possible if not a plausible one. It is not possible to say that the   arbitrator had travelled outside his jurisdiction, or that the view   taken by him was against the terms of contract. That being the   position,  the  High  Court  had  no  reason  to  interfere  with  the   award  and  substitute  its  view  in  place  of  the  interpretation   accepted by the arbitrator.

44. The legal position in this behalf has been summarised in para   18 of the judgment of this Court in SAIL v. Gupta Brother Steel   Tubes Ltd. [(2009) 10 SCC 63: (2009) 4 SCC (Civ) 16] and which   has  been referred to  above.  Similar  view has  been taken later   in Sumitomo Heavy Industries Ltd. v. ONGC Ltd. [(2010) 11 SCC  296: (2010) 4 SCC (Civ) 459] to which one of us (Gokhale, J.)   was a party. The observations in para 43 thereof are instructive in   this behalf.

45. This  para  43  reads  as  follows:  (Sumitomo case [(2010)  11  SCC 296 : (2010) 4 SCC (Civ) 459] , SCC p. 313)

“43. … The umpire has considered the fact situation and   placed a construction on the clauses of the agreement   which according to him was the correct one. One may at   the highest say that one would have preferred another   construction of  Clause 17.3 but  that  cannot  make the   award in any way perverse. Nor can one substitute one's   own view in such a situation, in place of the one taken   by the umpire, which would amount to sitting in appeal.   As held by this Court in Kwality Mfg. Corpn. v. Central   Warehousing Corpn. [(2009) 5 SCC 142 : (2009) 2 SCC   (Civ)  406]  the  Court  while  considering  challenge  to   arbitral award does not sit in appeal over the findings   and decision of the arbitrator, which is what the High   Court has practically done in this matter. The umpire is   legitimately entitled to take the view which he holds to   be the correct one after considering the material before   him  and  after  interpreting  the  provisions  of  the   

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agreement. If he does so, the decision of the umpire has   to be accepted as final and binding.”

13. Applying the tests laid down by this Court, we have to examine whether  

the Division Bench has exceeded its jurisdiction in setting aside the arbitral  

award impugned before it.  

14. A large part of the judgment is an extract from the arbitral award.  It is  

important to note that the Division Bench held:

“9.  A  perusal  of  the  award  would  reveal,  from  the  portions   extracted herein above, that with reference to evidence led before   him the learned Arbitrator has held delay attributable to DDA, a   finding of fact which is based on evidence and rightly conceded to   by Sh. Bhupesh Narula, Advocate who appears for DDA as being   beyond  judicial  review  power  of  this  Court  pertaining  to  a   reasoned award. But, while awarding Rs.8,27,960/- the reasoning   adopted by the learned Arbitrator is questioned as being the result   of  ignoring the well-recognized legal principles on the subject,   Learned counsel argued that the reasoning is the ipse dixit of the   learned Arbitrator.”

15. The Division Bench while considering claims 9, 10, 11 and 15 found  

fault  with  the  application  of  Hudson’s  formula  which  was  set  out  by  the  

learned Arbitrator in order to arrive at the claim made under these heads.  The  

Division Bench said that it was not possible for an Arbitrator to mechanically  

apply a certain formula however well understood in the trade.  This itself is  

going outside the jurisdiction to set  aside an award under Section 34 in as  

much as in McDermott’s case (supra), it was held:

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“104. It  is  not  in  dispute  that  MII  had examined  one  Mr D.J.   Parson to prove the said claim. The said witness calculated the   increased overheads and loss of profit on the basis of the formula   laid down in a manual published by the Mechanical Contractors   Association  of  America  entitled  “Change  Orders,  Overtime,   Productivity” commonly known as the Emden Formula. The said   formula is said to be widely accepted in construction contracts for   computing increased overheads and loss of profit. Mr D.J. Parson   is  said to have brought  out  the additional project  management   cost at US$ 1,109,500. We may at this juncture notice the different   formulas applicable in this behalf.

(a) Hudson  Formula:  In Hudson's  Building  and  Engineering  Contracts, Hudson Formula is stated in the following terms:

“Contract  head  office  overhead  and  profit   percentage

× Contract   sum  

Contract   period

× Period  of   delay”

In the Hudson Formula, the head office overhead percentage is   taken  from  the  contract.  Although  the  Hudson  Formula  has   received judicial  support  in  many cases,  it  has  been criticised   principally because it adopts the head office overhead percentage   from the contract as the factor for calculating the costs, and this   may bear little or no relation to the actual head office costs of the   contractor.

(b) Emden Formula: In Emden's Building Contracts and Practice,   the Emden Formula is stated in the following terms:

“Head  office   overhead  and  profit

× Contract   sum

× Period  of   delay”

100 Contract   period

Using the Emden Formula, the head office overhead percentage is   arrived at by dividing the total overhead cost and profit  of the   contractor's organisation as a whole by the total turnover. This   formula has the advantage of using the contractor's actual head   office overhead and profit percentage rather than those contained   in the contract.  This formula has been widely applied and has   received judicial support in a number of cases including Norwest   

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Holst Construction Ltd. v. Coop. Wholesale Society Ltd. [Decided  on  17-2-1998,  [1998]  EWHC  Technology  339], Beechwood  Development Co. (Scotland) Ltd. v. Mitchell [  Decided on 21-2- 2001, (2001) CILL 1727] and Harvey Shopfitters Ltd. v. Adi Ltd. [   Decided on 6-3-2003, (2004) 2 All ER 982 : [2003] EWCA Civ   1757].

(c) Eichleay  Formula:  The  Eichleay  Formula  was  evolved  in   America and derives its name from a case heard by the Armed   Services Board of Contract Appeals, Eichleay Corporation. It is   applied in the following manner:

Step 1

Contract   billings

× Total   overhead  for  contract   period

= Overhead  allocable  to  the  contract

Total   billings  for   contract   period

    Step 2

Allocable overhead = Daily overhead rate

Total days of contract

     Step 3

Daily  contract   overhead  rate

× Number  of  days  of delay

= Amount  of   unabsorbed  overhead”

This  formula  is  used  where  it  is  not  possible  to  prove  loss  of   opportunity and the claim is based on actual cost. It can be seen   from the formula that the total head office overhead during the   contract  period  is  first  determined  by  comparing  the  value  of   work carried out in the contract period for the project with the   value of work carried out by the contractor as a whole for the   contract  period.  A  share  of  head  office  overheads  for  the   contractor is allocated in the same ratio and expressed as a lump   sum  to  the  particular  contract.  The  amount  of  head  office   overhead allocated to the particular contract is then expressed as   

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a weekly amount by dividing it by the contract period. The period   of delay is then multiplied by the weekly amount to give the total   sum claimed. The Eichleay Formula is regarded by the Federal   Circuit  Courts  of  America  as  the  exclusive  means  for   compensating a contractor for overhead expenses.

105. Before us several American decisions have been referred to   by Mr. Dipankar Gupta in aid of his submission that the Emden   Formula has since been widely accepted by the American courts   being Nicon Inc. v. United States [ Decided on 10-6-2003 (USCA  Fed  Cir),  331  F.  3d  878  (Fed.  Cir.  2003)], Gladwynne  Construction  Co. v. Mayor  and  City  Council  of   Baltimore [Decided on 25-9-2002, 807 A. 2d 1141 (2002) : 147   Md.  App.  149]  and Charles  G.  William  Construction   Inc. v. White [271 F 3d 1055 (Fed. Cir. 2001)].

106. We do not intend to delve deep into the matter as it is an   accepted  position  that  different  formulae  can  be  applied  in   different circumstances and the question as to whether damages   should  be  computed  by  taking  recourse  to  one  or  the  other   formula,  having  regard  to  the  facts  and  circumstances  of  a   particular  case,  would  eminently  fall  within  the domain of  the   arbitrator.”

16. Obviously,  the  Division  Bench  has  exceeded  its  jurisdiction  in  

interfering with a possible view of the Arbitrator on facts.  

17. The Division Bench then went on to hold:

“17. There is admittedly no evidence that the contractor i.e. the   respondent had a central establishment. It appears to be a case   where the contractor is petty contractor and the only  expenses   incurred are at the site.  The claim is towards hire charges paid   for centering and shuttering, hiring tools, plants and scaffoldings   i.e. the claim is not for the contractor’s own equipment lying idle.   There  is  just  no  evidence  that  the  contractor  paid  charges  as   claimed by him. Not a single bill raised by the alleged person who   let on hire the equipment to the contractor has been filed nor any   evidence adduced for the payment made. Except for listing a 10   HP Water  Pump,  4  number  1  HP water  pump,  3  mixers,  250   scaffolding bamboos, 150 ballis and 2 vibrators in Annexure-J to   the Statement of Claim, no document proving hiring the same and   

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brought at the site has been led.  We highlight that the claim is on   account  of  hire  Charges paid and there is  no evidence of  said   payment. It does happen that where a work is stopped, the person   who taken an equipment on hire returns the same and re-hires the   same when work  recommences.  Thus,  Claim No.  9,  10 and 11   cannot be allowed because there is no evidence to support  the   claims.  Damages on account of establishment expenses incurred   during  period  contract  got  prolonged  have  certainly  to  be   recompensed,  but  we find no evidence in the form of  books of   accounts, vouchers etc. to show payments to the staff or expenses   incurred in maintaining an establishment at site in the form of a   site office. The wages register, photocopy whereof was filed before   the  Arbitrator,  pertains  to  wages  paid  to  the  unskilled,  semi- skilled  and  skilled  labour  deployed  to  execute  the  works.  The  pleadings  pertaining  to  the  claim would  show that  as  per  the   contractor he had deployed one Executive Officer, one Graduate   Engineer, one Junior Engineer, one Accountant, one Storekeeper   and  Supervisor  and  one  Mechanic  at  the  site  and  had  also   deployed watch and ward. Details of the persons employed have   been  listed  in  Annexure-N  to  the  Statement  of  Claim  and  the   documents  filed  to  establish  the  same would  evidence  that  the   contractor has filed photocopies of the salary register, which are   available from pages No.1255 to 1322, but unfortunately for the   contractor,  the  cat  is  out  of  the  bag  when  we  look  at  the   documents.  They pertain to payments made for a site at Mayur   Vihar. We highlight that the contract in question pertains to flats   and houses at Trilokpuri and not Mayur Vihar. It is apparent that   the  contractor  has  tried  to  pull  the  wool  on  the  eyes  of  the   primary  adjudicator  of  the  claim.  It  is  not  the  case  of  the   contractor that these persons were simultaneously supervising the   work at two sites. Assuming this was the case, the matter would   then  have  been  adjudicated  with  reference  to  same number  of   persons supervising two sites and the time spent at each site by   them.  

18.  Thus, the award pertaining to Claim Nos. 9, 10, 11 and 15 is   liable to be sent aside and it is so set aside. We need not therefore   take  corrective  action  on  the  apparent  error  i.e.  the  learned   Arbitrator has worked out the claim on the original contract value   of  Rs. 87,66,678/-, of course by reducing it by 15%, but ignoring   that final work executed was only in sum of Rs.62,84,845/-.”  

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18. Mr. Verma argued correctly that there is nothing on record to show that  

the contractor is a petty contractor and that the only expenses incurred are at  

the site.  He has shown us that the contract itself required execution of the  

work by a Class-I contractor and has further shown us that Class-I contractors  

require to have certain stipulated numbers of works worth large amounts before  

they  can  apply  for  the  tender  and  that  their  financial  soundness  has  to  be  

attested too by banker’s certificate showing that their worth is over 10 crores of  

rupees.   Further, he has pointed out from the statement of claims before the  

Arbitrator  that  there  was  evidence  for  claims  9,  10  and 11 laid  before  the  

Arbitrator  which  the  Arbitrator  has  in  fact  accepted.   Also  establishment  

expenses were set out in great detail before the Arbitrator and it is only on this  

evidence that the Arbitrator ultimately has awarded these claims.  Mr. Verma is  

also right in saying that the Division Bench was completely wrong in stating  

that the establishment expenses pertained to payments for a site at Mayur Vihar  

as opposed to Trilok Puri which were where the aforesaid houses were to be  

constructed.  He pointed out that in the completion certificate dated 30th May,  

1997 given by the DDA to the appellant, it is clear that the houses that were, in  

fact,  to be constructed were in Mayur Vihar,  Phase-II,  which is part  of  the  

Trilok Puri trans-Yamuna area.  

It  is  most  unfortunate  that  the Division Bench did not  advert  to  this  

crucial  document  at  all.   This  document  shows  not  only  that  the  Division  

Bench was wholly incorrect in its conclusion that the contractor has tried to  

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pull the wool over the eyes over the DDA but it should also have realized that  

the DDA itself has stated that the work has been carried out generally to its  

satisfaction  barring  some  extremely  minor  defects  which  are  capable  of  

rectification. It is clear, therefore, that the Division Bench obviously exceeded  

its  jurisdiction  in  interfering  with  a  pure  finding of  fact  forgetting  that  the  

Arbitrator is the sole Judge of the quantity and quality of evidence before him  

and unnecessarily bringing in facts which were neither pleaded nor proved and  

ignoring  the  vital  completion  certificate  granted  by  the  DDA itself.  The  

Division Bench also went wrong in stating that as the work completed was  

only  to  the  extent  of  Rs.  62,84,845/-,  Hudson’s  formula  should  have  been  

applied taking this  figure  into account  and not  the entire  contract  value of  

Rs.87,66,678/- into account.  

19. Here again, the Division Bench has committed a grave error. Hudson’s  

formula as is quoted in McDermott’s case is as follows:

“(a) Hudson  Formula:  In Hudson's  Building  and  Engineering   Contracts, Hudson Formula is stated in the following terms:

“Contract  head  office  overhead  and  profit   percentage

× Contract   sum  

Contract   period

× Period  of   delay”

In the Hudson Formula, the head office overhead percentage is   taken  from  the  contract.  Although  the  Hudson  Formula  has   received judicial  support  in  many cases,  it  has  been criticised   principally because it adopts the head office overhead percentage   from the contract as the factor for calculating the costs, and this   may bear little or no relation to the actual head office costs of the   contractor.”

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20. It is clear that to apply this formula one has to take into account the  

contract  value that  is  awarded and not the work completed.   On this  score  

again, the Division Bench is to be faulted.   

21. In dealing with claims 12 and 13, the Division Bench stated:

“19. Pertaining to Claim No.12 and 13, the learned Arbitrator   has  recompensed the  contractor  20% price  hike  in  the  cost  of   material  and labour noting,  that  there was a steep hike in  the   period in question when the contract got prolonged by 25 months.   We highlight that though the Arbitrator has found the delay to be   25 months, recompense has been restricted to only 20 months.  

20. As noted herein above, partial recompense under Clause 10C,   has been granted to the contractor, but the same i.e. the Clause in   question requiring applicability during contract stipulated period,   it  is  apparent  that  the  contractor  would  be  entitled  to  full   recompense for price hike during the extended 25 months period   and  not  the  20  months  to  which  the  learned  Arbitrator  has   restricted the recompense to.  

21. But, for the benefit granted under Clause 10C wherein Rs.   1,62,387/-,  Rs.46,184/-  and  Rs.12,922/-  have   been  awarded   under Claim Nos. 2, 3 and 4, said amounts have to be adjusted,   but not in full, for the reason these include the amounts payable   during the contract stipulated period.  

22.  The total of the three sums comes to Rs, 2, 21,493/-. We have   another  problem.  Neither  counsel  could  help  us  identify  the   components thereof i.e. the component relatable to the 9 months   during which the work had to be completed and the 25 months   during which the contract got prolonged. Thus, we apply the Rule   of ‘Rough and Ready Justice’. We divide the sum by 34 to work   out the proportionate increase per month.  Rs. 2,21,493/- divided   by 34 = Rs.6,514.50 and multiplying the same by 25, the figure   comes to Rs.1,62,862.50.  

23. Adopting, for the reasons given by the Arbitrator, that 20%   hike in the balance work done after the contract stipulated period   i.e. benefit to be granted under this head for work done in sum of   Rs.37,02,066/- and accepting the sum of Rs.7,20,000/- being the   

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resultant figure, subtracting Rs.1,62,862.50, the figure arrived at   is Rs.5,57,137.50.”  

22. Here again, the Division Bench has interfered wrongly with the arbitral  

award on several counts.  It had no business to enter into a pure question of  

fact  to  set  aside  the  Arbitrator  for  having applied a  formula  of  20 months  

instead of 25 months. Though this would inure in favour of the appellant, it is  

clear that the appellant did not file any cross objection on this score.  Also, it is  

extremely curious that  the Division Bench found that  an adjustment  would  

have  to  be  made with  claims  awarded  under  claims  2,  3  and  4  which are  

entirely separate and independent claims and have nothing to do with claims 12  

and 13.  The formula then applied by the Division Bench was that it would  

itself do “rough and ready justice”.  We are at a complete loss to understand  

how this  can  be  done  by  any  court  under  the  jurisdiction  exercised  under  

Section 34 of the Arbitration Act.   As has been held above,  the expression  

“justice”  when  it  comes  to  setting  aside  an  award  under  the  public  policy  

ground can only mean that an award shocks the conscience of the court.  It  

cannot possibly include what the court thinks is unjust on the facts of a case for  

which it then seeks to substitute its view for the Arbitrator’s view and does  

what it considers to be “justice”.  With great respect to the Division Bench, the  

whole  approach  to  setting  aside  arbitral  awards  is  incorrect.  The  Division  

Bench has lost sight of the fact that it is not a first appellate court and cannot  

interfere with errors of fact.   

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23. We come now to the arguments of Mr. Sharan in support of the Division  

Bench judgment. The learned counsel strongly relied on clause 10C and clause  

22.  These two clauses are set out as below:

Clause 10C of the agreement reads as follows:  

“If during the progress of the works, the price of any material   incorporated in the works, (not being a material supplied from the   Engineer-in-Charge's stores in accordance with Clause 10 hereof   and/or wages of labour increases as direct result of the coming   into force of any fresh law, or statutory rule or order (but not due   to any changes in sales tax) and such increase exceed ten per cent   of the price and/or wages prevailing at the time of receipt of the   tender  for  the  work,  and contractor  thereupon necessarily  and   properly  pays  in  respect  of  the  material  (incorporated  in  the   work) such increased price and/or in respect of labour engaged   on  the  execution  of  the  work  such  increased  wages,  then  the   amount  of  the  contract  shall  accordingly  be  varied  provided   always that any increase so payable is not, in the opinion of the   Superintending  Engineer  (whose  decision  shall  be  final  and   binding) attributable to delay in execution of the contract within   the  control  of  the  contractor.  Provided,  however,  no   reimbursements shall  be made if  the increase is not more than   10% of the said prices/wages and if so the reimbursements shall   be made only on the excess over 10% and provided further that   any  such  increase  shall  not  be  payable  if  such  increase  has   become  operative  after  the  contract  or  extended  date  of   completion of the work in question.   

If  during  the  progress  of  the  works,  the  price  of  any  material   incorporated in the works (not being a material supplied from the   Engineer-in-Charge's stores in accordance with Clause 10 hereof)   and/or  wages  of  labour  is  decreased  as  a  direct  result  of  the   coming into force of any fresh law or statutory rule or order (but   not due to any changes in sales tax) and such decrease exceeds   ten per cent of the prices and/or wages prevailing at the time of   receipt of the tender for the work, Delhi Development Authority   shall in respect of materials incorporated in the work (not being   materials  supplied  from  the  Engineer-in-Charge's  stores  in   accordance with Clause 10 hereof) and/or labour engaged on the   execution of the work after the date of coming into force of such   law, statutory rule or order be entitled to deduct from the dues of   

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the contractor such amount as shall be equivalent of difference   between the prices of materials and/ or wages as they prevailed at   the  time  of  receipt  of  tender  for  the  work  minus  ten  per  cent   thereof and the prices of materials and/ or wages of labour on the   coming into force of such law, statutory rule or order.  

The contractor shall for the purpose of this condition keep such   books of account and other documents as are necessary to show   the amount of any increase claimed or reduction available and   shall  allow  inspection  of  the  same  by  a  duly  authorised   representative of Delhi Development Authority and further shall,   at the request of the Engineer-in-Charge furnish, verified in such   a manner as the Engineer-in-Charge may require. Any document,   so  kept  and such  other  information  as  the  Engineer-in-Charge   may require.  

The contractor shall,  within a reasonable time of his becoming   aware of any alteration in the prices of any such materials and/ or   wages of labour give notice thereof to the Engineer-in- Charge   stating  that  the  same  is  given  in  pursuance  to  the  condition   together with all information relating thereto which he may be in   a position to supply.”

Clause 22 reads as follows:

“All sums payable by way of compensations under any of these   conditions shall be, considered as reasonable compensation to be   applied  to  this  use  of  Delhi  Development  Authority  without   reference to the actual loss or damage sustained, and whether or   not any damage shall have been sustained.  

Specifications and Conditions:  

1. The contractor must get acquainted with the proposed site for   the works and study specifications and conditions carefully before   tendering.  The  work  shall  be  executed  as  per  programme   approved  by  the  Engineer-in-Charge.  If  part  of  site  is  not   available for any reasons or there is some unavoidable delay in   supply of materials stipulated by the Departments, the programme   of construction shall be modified accordingly and the contractor   shall  have  no  claim  for  any  extras  or  compensation  on  this   account.”

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24. Clause 10C concerns itself with the price of material incorporated in the  

works or wage or labour increases.  It has been seen that claims 9, 10 and 11  

have nothing to do with either of the aforesaid subjects.  In seeking to apply  

this clause to claim 15, the simple answer is that this clause will not apply  

when a claim for damages is made.   Further,  the Arbitrator  considered this  

clause in detail and only awarded amounts under this clause in excess of 10  

percent as required by the clause when it came to awarding amounts under  

claims 2, 3 and 4, which fell within the ambit of clause 10C.  The DDA in the  

appeal  before the Division Bench correctly  gave up any challenge to these  

claims as has been recorded in paragraph 4 of the order under appeal.   

25. The Arbitrator has dealt with this clause in detail and has construed and  

applied  the  same  correctly  while  dealing  with  claims  2,  3  and  4  and  has  

obviously not applied the said clause to claims 9, 10, 11 and 15 as no occasion  

for applying the same arose. The award cannot be faulted on this ground.   

26. Also,  so  far  as  clause  22  is  concerned,  the  DDA did  not  raise  any  

argument based on this clause before the learned Arbitrator. However, it must  

in fairness be stated that it was argued before the learned Single Judge.  In para  

15 of his judgment, the learned Judge sets the clause out and then follows a  

judgment  of  the High Court  of  Delhi  in  Kochhar Construction Works v.  

DDA & Anr.,  (1998) 2 Arb. LR 209.  Apart from the fact that a learned Single  

Judge of the same court is bound by a previous judgment of a Single Judge, the  

conclusion of the learned Single Judge that if the appellant is at fault and the  

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contract is prolonged for an inordinate period of time, it cannot be said that the  

respondents cannot be compensated for the same is correct. Besides, this point  

was not urged before the Division Bench and must be taken to be given up.  

Mr. Sharan cited Harsha Constructions v. Union of India & Ors., (2014) 9  

SCC 246 to say that in respect of excepted matters, no arbitration is possible,  

and that this being a jurisdictional point, he should be allowed to raise it before  

us.   Unfortunately for Mr. Sharan, the clause does not operate automatically. It  

only operates if an objection is taken stating that part of the site is not available  

for  any reason.  Nowhere has  the DDA stated which part  of  the  site  is  not  

available  for  any  reason.   Further,  the  learned  Single  Judge’s  reason  for  

rejecting an argument based on this clause also commends itself to us as the  

object of this clause is that no claim for extras should be granted only if there is  

an unavoidable delay.  We have seen that the delay was entirely avoidable and  

caused solely by the DDA itself.  

27. One more point needs to be noted. An argument was made before the  

learned Single Judge that there has been a duplication of claims awarded. The  

learned Judge dealt with this argument as follows:

“18. Learned counsel for the petitioner in respect of ground P,   once  again  makes  a  reference  to  the  issue  that  there  is   overlapping of the claim. I am unable to accept the submission   made by the learned counsel.  The consequence of delay may have   more than one ramifications including the cost  of  material  the   supervision required at the site, the inability of the contractor to   utilise  the  manpower  at  some  other  place,  the  inability  of  the   contractor to make, profits from some other contract by utilisation   of  the  same  resources.  All  these  aspects  are  liable  to  be   

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considered. The Arbitrator has considered the claims separately   and has dealt with, claims 9, 10, 11 & 15 together. Claims 12 &   13 have been thereafter dealt with on the same principles since it   was found that it was not the respondent, who was responsible for   the  delay  for  a  period  of  25  months  beyond  the  stipulated   condition of 9 months.  

19. There is thus no question of overlapping in different heads and   the grievance of the petitioner is rejected.”  

28. The Single  Judge is  clearly right.   We have gone through all  the 15  

claims  supplied  to  us  and  we  find  that  none  of  these  claims  are  in  fact  

overlapping.  They  are  all  contained  under  separate  heads.   This  argument,  

therefore, must also fail.  

29.    The appeal is, therefore, allowed and the judgment of the Division Bench  

is set aside.  The judgment of the Single Judge is upheld and consequently, the  

Arbitral award dated 23rd May, 2005 is as a whole upheld.  There will be no  

order as to costs.  

..................................................J. (Ranjan Gogoi)

………………………………..J. (R.F. Nariman)

New Delhi, November 25, 2014       

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