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NON-REPORTABLE

IN THE SUPREME COURT OF INDIA

CIVIL APPELLATE JURISDICTION

CIVIL APPEAL NO. 1059 OF 2017 (ARISING OUT OF SLP (C) NO. 716 OF 2012)

M/S. SHARMA & ASSOCIATES  CONTRACTORS (P) LTD.  

.....APPELLANT(S)

VERSUS

PROGRESSIVE CONSTRUCTIONS LTD. .....RESPONDENT(S)

J U D G M E N T

A.K. SIKRI, J.

The National Hydro-Electric Power Corporation Ltd. (hereinafter referred

to as 'NHPC”) had floated tender for award of work of construction of left

side Afflux Bund from RD-00 M to RD-1700 M of Tanakpur Hydro-Electric

Project,  Tanakpur,  Distt.  Nainital,  U.P. sometime  in  the  1980s,  when

Nainital was part of State of Uttar Pradesh (now Uttarakhand). In that

tender, Hindustan Steel Works Construction Ltd. (HSCL) emerged as the

successful  tenderor to whom the contract  was awarded by NHPC by

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entering into contract dated January 28, 1986.  The contract permitted

sub-contracting  thereof  by  HSCL with  the  consent  of  NHPC.   Thus,

HSCL  sub-contracted  the  said  works  to  respondent  herein,  i.e.

Progressive Construction Ltd. (PCL) vide contract dated  July 16, 1991.

PCL had  further  sub-contracted  the  said  work  or  part  thereof  to  the

appellant  herein,  i.e.  M/s.  Sharma &  Associates  Contractors  (P)  Ltd.

(SAPL).  This appeal relates to disputes between SAPL (the appellant)

and PCL (the respondent).   Though,  work was sub-contracted to the

appellant,  it  is  an  admitted  case  between  the  parties  that  the

sub-contracting of the work was not permissible by the respondent to the

appellant.  Be that as it may, a contract dated February 09,  1990 was

signed between the  appellant  and  the  respondent  (even  prior  to  the

award of work by HSCL to the respondent), though it was sealed on April

15, 1992, i.e., after the respondent was awarded the sub-contract from

HSCL on July 16, 1991.  From the facts recorded upto now, it is clear

that there is a main contract between the employer NHPC and HSCL

which is dated January 28, 1996 and HSCL sub-contracted the work to

PCL and contract between them is dated July 16, 1991, third contract

which is between PCL (the respondent)   and SAPL (the appellant)  is

dated February 09, 1990, sealed on April 15, 1992.

2) Disputes arose between the appellant and the respondent in respect of

execution of the work. According to the appellant, certain payments were

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not made to it by the respondent though it had executed work.  Those,

disputes  were  referred  to  for  adjudication  to  the  arbitration  as  per

arbitration clause in the contract between appellant and respondent by

the High Court in petition filed by the appellant under Section 20 of the

Arbitration Act, 1940.  After adjudication of these disputes, the arbitrator

rendered his award dated February 18, 1999.  Since this was an award

under Arbitration Act, 1940, the same was filed in the Court for making it

rule of the court and was registered as Suit No. 492/99.  Respondent

filed  objections  thereto  which  were  dismissed  by  the  learned  Single

Judge vide its judgment dated November 18, 2004.  In respect of six

claims  raised  by  the  appellant,  award  was  passed  by  the  arbitrator

allowing Claim Nos. 1 to 3 which was upheld by the  learned Single

Judge.  We are not concerned with all those claims except Claim No. 1

inasmuch as in appeal preferred by the respondent against the aforesaid

judgment of the learned Single Judge, Division Bench has allowed the

appeal in respect of six claims and set aside the award holding that no

money is payable under this claim by the respondent to the appellant. As

far  as  Claim No.  1 is  concerned,  it  was on account  of  revised rates

received by the respondent from HSCL towards deviation in quantities.

The appellant contended that since it was a back to back contract, the

manner in which the rates are revised upward and received by PCL from

HSCL, benefit thereof has to be given to the appellant also.  The matter

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with regard to the revision of rates, which formed part of Claim No. 1,

pertains  to  item  nos.  1  and  6  which  were  to  be  executed  by  the

appellant.  Respondent had taken up this matter with HSCL, purportedly

at the instance of the appellant, and HSCL had revised the rates in the

following manner:

“ Item No.

Revised rate at which respondent received payment

Less  profit @4%  for respondent

Revised  rate payable  to petitioner

1 Rs. 33.49/cum Rs. 1.34/cum Rs.32.15/cum 6 Rs.

249.82/cum Rs.11.99/cum Rs.237.83/cu

m

Thus as against original rate of Rs. 13.44/cum for item No. 1, the petitioner was entitled to the revised rate of Rs. 32.15/cum, while for item no. 6 the increase was to be from Rs. 185.28 to Rs. 237.82/cum”

3) This plea of the appellant was accepted by the learned arbitrator who

awarded a sum of Rs. 19,38,357/- against Claim No. 1 and the aforesaid

approach was accepted by the learned Single Judge.

4) We may state here the basis on which this claim was allowed. Taking

into  consideration  certain  correspondence  exchanged  between  the

parties as well as between PCL and HSCL.  In the sub-contract that was

awarded by HSCL to the respondent certain pre-contractual documents

were incorporated specifically, in Clause 2 of the said sub-contract.  That

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correspondence indicates that if NHPC was to agree to execution of Item

No. 1 at a rate of Rs. 30 Cubic Metre (cum) or more against HSCL's

claim of  Rs.  40 cubic  metre  then respondent  would  be agreeable  to

execution of job on HSCL's tendered rate subject to retention of the 5%

of the proceeds by HSCL.  Thus, at the time of entering into the contract

between HSCL and the respondent,  sum negotiations were going on

between HSCL and the employer, i.e., NHPC for revision of the rates

and  respondent  had  indicated  that  once  the  said  rates  are  revised

benefit  thereof shall  be given to the respondent. In one of the letters

dated February, 1990 issued by PCL to HSCL, which was incorporated

in the contract, the aforesaid demand of the respondent was mentioned

in the following manner:

“In the event of M/s. HSCL getting the enhanced rate for earth  work  excavation item no.  1  due to  division in the overall  contracted  quantity  between  M/s.  HCL and  M/s. NHPC,  we  shall  be  paid  at  the  enhanced  rate  for  the quantity on earthwork executed by us.  As and when the rate for item no. 1 is enhanced at least to Rs. 25 (rupees twenty five) per cum and the amount is received by us, the amounts paid to us towards 10% as per para 7 above, may be adjusted from the additional amount so received by us, provided the enhanced rate for item no. 1 is applied at least for a quantity of 4,00,000 cum.”

5) Gone by the aforesaid considerations, the arbitrator  had awarded the

said claim.

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6) Before the Division Bench of the High Court, in the appeal filed by the

respondent herein, main contention raised by the respondent was that

insofar as contract between the appellant and respondent is concerned,

it was an independent contract which had nothing to do with the contract

that was signed between the HSCL and the respondent and, therefore,

in determining as to whether or not the appellant was entitled to sums

claimed, one could look into the terms of the contract signed between

the appellant and the respondent and could not travel beyond and rely

upon  the  agreement  which  was  signed  between  HSCL  and  the

respondent.  According to the respondent, the approach of the learned

arbitrator, therefore, was totally erroneous as it relied upon the terms of

the contract between HSCL and respondent PCL and, thus, committed a

grave  error  bordering  on  perversity  inasmuch  as  principle  of

incorporation was not applicable.  The Division Bench has accepted the

aforesaid argument.

7) It is not in dispute that insofar as contract between NHPC and HSCL is

concerned, which is the main contract, it permits sub-contracting of the

work by HSCL with the consent of NHPC. It is on that basis sub-contract

was signed between HSCL and the respondent.  This contract is back to

back  as  Clauses  1.2  and  9  thereof  clearly  show that  terms of  main

contract to the extent they were 'sensible' stood explicitly incorporated in

the contract that was entered into between HSCL and the respondent.

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However, we are not concerned with the dispute between HSCL and the

respondent.   As  pointed  out  above,  further  sub-contract  is  signed

between  the  respondent  and  the  appellant.   Therefore,  the  moot

question is as to whether the principle of incorporation would enter into

and extend to this sub-contract as well in the absence of any clause of

back to back contract appearing in the contract that was signed between

the appellant and the respondent.  

8) The High Court in the impugned judgment has answered the aforesaid

question  in  the  negative,  and  rightly  so.   As  noted  above,  contract

executed  between  HSCL  and  the  respondent  was  proceeded  by

correspondent exchange between the said parties.  There was a clear

understanding  between them that  in  case  HSCL is  able  to  get  extra

payment in respect of item Nos.1 and 2, HSCL had to pass on the said

benefit to the respondent after retaining 5% of the enhanced amount so

received.  However, there was no such stipulation in the contract entered

into  between  the  appellant  and  the  respondent.   Entire  thrust  in  the

argument of the learned counsel for the appellant before us was that

there  was  back  to  back  contract  as  according  to  him  the  aforesaid

stipulations contained in a contract between HSCL and the respondent

stood incorporated in the contract  entered into between the appellant

and the respondent as well.  However, we do not find it to be so.  Since

that was the basis on which the learned arbitrator awarded the claim, the

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High Court has rightly held that it is a fundamental error committed by

the  arbitrator.   On  the  other  hand,  what  emerges  from  the  contract

between the appellant and the respondent is that  the appellant could

claim revised rates based only on escalation as per the provisions of

Clause  16.   Under  this  head,  appellant  was  entitled  to  a  sum  of

Rs.7,17,560/-.   Following  discussion  in  the  impugned  judgment  is

pertinent:

“12.  Another aspect of the matter which perhaps had a bearing and was lost sight by the learned arbitrator, was that  along  with  statement  of  claim,  SAPL  had  filed  a detailed worksheet by way of  an annexure justifying the quantification of the amount under claim no. 1.  In the said annexure to the statement of claim, SAPL clearly states that  PCL was  liable  to  pay  the  amount  on  account  of revised rates based on “escalation” as per the provisions of clause 16 of the sub contract.  It is not disputed before us  by  the  learned  counsel  for  SAPL  that  towards escalation  what  is  due  to  the  SAPL  is  a  sum  of Rs.7,17,560/-.   This  aspect  has  also  been noted  in  the arbitrator's  award  as  noticed  by  us  hereinabove.   The learned counsel for PCL also did not dispute that PCL was required to pay the said amount to SAPL.  Therefore, the entire  endeavour  of  SAPL  to  seek  payment  of  money under claim no. 1 was premised on the escalation clause (i.e.,  clause  16)  obtaining  in  the  sub  contract  executed between itself and PCL.  The learned arbitrator instead of examining the validity of the claim based on stand taken by  SAPL has  proceeded  to  advert  to  the  principles  of incorporation of the terms of the main contract in the sub contract.  In our view, this was wholly unnecessary.  The reason  being:  that  wherever  parties  intended  to incorporate  the  terms  of  the  main  contract  obtaining between HSCL and PCL into the sub contract a specific reference was made.  One such instance was clause 16. A  perusal  of  clause  16  would  show  that  parties  had articulated  such  an  eventuality.   For  the  sake  of convenience clause 16 is extracted hereinbelow:

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“16.  Escalation: Escalation shall be calculated and paid as per  the formula given in  the agreement  between principal  contractor and  M/s  Hindustan  Steel  Works Construction  Ltd.,  on  the  work  done  by  the work-contractor.”

9) It was submitted by Mr. S.B. Upadhyay, learned senior counsel that after

going  through  the  various  agreements,  the  arbitrator  had  formed  an

opinion and it was not permissible for the High Court to set aside the

said  award  by  substituting  its  own  view  in  place  of  the  view  of  the

arbitrator as the High Court is not a court of appeal.  Thus, it was also

not  permissible  for  the  High  Court  to  reappraise  the  evidence  while

examining  the  objections,  i.e.,  different  contracts  in  coming  to  the

conclusion that the contract between the appellant and the respondent

was not on back to back basis.  In support, the learned counsel referred

to the following judgments of this Court:

(i) B.V. Radha Krishna v. Sponge Iron India Ltd.1  

“11.  The disposal of the matter by the High Court in the manner shown above does not come within the ambit of Section  30  of  the  Arbitration  Act.  This  Court,  time  and again, has pointed out the scope and ambit of Section 30 of the Act. In  State of Rajasthan v. Puri Construction Co. Ltd. [(1994) 6 SCC 485] after referring to decisions of this Court  as  well  as  English cases,  the Court  observed as follows: (SCC p. 492, para 12)

“On  the  scope  and  ambit  of  the  power  of interference by the court with an award made by an  arbitrator  in  a  valid  reference  to  arbitration, various decisions have been made from time to time by Law Courts  of  India including this Court

1 (1997) 4 SCC 693

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and  also  by  the  Privy  Council  and  the  English Courts.  Both  the  parties  have  referred  to  such decisions  in  support  of  their  respective contentions.  The  factual  contentions  of  the respective parties are proposed to be scrutinised and then the facts are proposed to be tested within the conspectus of judicial decisions governing the issues involved.”

This Court again observed in paras 26-28 as follows: (SCC pp. 500-501)

“The arbitrator  is  the  final  arbiter  for  the  dispute between the parties and it is not open to challenge the  award  on  the  ground  that  the  arbitrator  has drawn  his  own  conclusion  or  has  failed  to appreciate  the  facts.  In  Sudarsan Trading  Co.  v. Govt. of Kerala [(1989) 2 SCC 38] it has been held by  this  Court  that  there  is  a  distinction  between disputes as to the jurisdiction of the arbitrator and the  disputes  as  to  in  what  way  that  jurisdiction should be exercised. There may be a conflict as to the  power  of  the  arbitrator  to  grant  a  particular remedy.  One  has  to  determine  the  distinction between  an  error  within  the  jurisdiction  and  an error  in  excess  of  the  jurisdiction.  Court  cannot substitute its own evaluation of the conclusion of law  or  fact  to  come  to  the  conclusion  that  the arbitrator  had  acted  contrary  to  the  bargain between the parties. (emphasis supplied) Whether a  particular  amount  was  liable  to  be  paid  is  a decision within the competency of the arbitrator. By purporting to construe the contract the court cannot take upon itself the burden of saying that this was contrary  to  the  contract  and  as  such  beyond jurisdiction.  If  on a view taken of  a contract,  the decision  of  the  arbitrator  on  certain  amounts awarded is a possible view though perhaps not the only correct view, the award cannot be examined by the court. Where the reasons have been given by  the  arbitrator  in  making  the  award  the  court cannot  examine  the  reasonableness  of  the reasons.  If  the  parties  have  selected  their  own forum, the deciding forum must be conceded the power of appraisement of evidence. The arbitrator is  the  sole  judge  of  the  quality  as  well  as  the quantity of evidence and it will not be for the court to take upon itself the task of being a judge on the

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evidence before the arbitrator.”  

(ii) Ispat Engineering & Foundry Works v. Steel Authority of India Ltd.2

“4.  Needless to record that there exists a long catena of cases  through  which  the  law  seems  to  be  rather  well settled that the reappraisal of evidence by the court is not permissible.  This  Court  in  one  of  its  latest  decisions (Arosan Enterprises Ltd.  v. Union of India  [(1999) 9 SCC 449]) upon consideration of decisions in Champsey Bhara & Co. v. Jivraj Balloo Spg. & Wvg. Co. Ltd. [AIR 1923 PC 66 : 1923 AC 480], Union of India v. Bungo Steel Furniture (P)  Ltd.  [AIR  1967  SC  1032  :  (1967)  1  SCR  324],  N. Chellappan  v.  Secy.,  Kerala  SEB  [(1975)  1  SCC  289], Sudarsan Trading Co.  v.  Govt.  of  Kerala  [(1989) 2 SCC 38],  State  of  Rajasthan  v.  Puri  Construction  Co.  Ltd. [(1994) 6 SCC 485] as also in  Olympus Superstructures (P) Ltd.  v.  Meena Vijay Khetan  [(1999) 5 SCC 651] has stated  that  reappraisal  of  evidence  by  the  court  is  not permissible and as a matter of fact, exercise of power to reappraise the evidence is unknown to a proceeding under Section  30  of  the  Arbitration  Act.  This  Court  in  Arosan Enterprises [(1999) 9 SCC 449] categorically stated that in the event of there being no reason in the award, question of interference of the court would not arise at all.  In the event, however, there are reasons, interference would still be  not  available  unless  of  course,  there  exist  a  total perversity  in  the  award  or  the  judgment  is  based  on  a wrong proposition of law. This Court went on to record that in  the  event,  however,  two  views  are  possible  on  a question  of  law,  the  court  would  not  be  justified  in interfering with the award of the arbitrator if the view taken recourse to is a possible view. The observations of Lord Dunedin in Champsey Bhara [AIR 1923 PC 66 : 1923 AC 480] stand accepted and adopted by this Court in  Bungo Steel Furniture [AIR 1967 SC 1032 : (1967) 1 SCR 324] to the effect that the court had no jurisdiction to investigate into the merits of the case or to examine the documentary and oral evidence in the record for the purposes of finding out whether or not the arbitrator has committed an error of law. The court as a matter of fact, cannot substitute its own evaluation and come to the conclusion that the arbitrator had acted contrary to the bargain between the parties.”  

2 (2001) 6 SCC 347

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(iii) Indu Engineering & Textiles Ltd. v. Delhi Development Authority3

“5.  The scope for interference by the court with an award passed  by  the  arbitrator  is  limited.  Section  30  of  the Arbitration  Act,  1940  (for  short  “the  Act”)  provides  in somewhat mandatory terms that an award shall not be set aside except on one or more of the grounds enumerated in the provision...

xxx xxx xxx

7.  This Court,  while dealing with the power of  courts  to interfere  with  an  award  passed  by  an  arbitrator,  had consistently laid stress on the position that an arbitrator is a Judge appointed by the parties and as such the award passed by him is not to be lightly interfered with...

8.  As  noted  earlier,  the  Division  Bench  in  appeal  filed under Section 39 of the Act, reversed the order passed by the  Single  Judge  and  set  aside  the  award  holding  that there was no material  before the arbitrator for accepting the claim of the appellant. The Division Bench exceeded the limits of its jurisdiction in entering into the facts of the case  and  in  interpreting  the  agreement  between  the parties and correspondence which was a part of the said agreement.  What  was the price of  the commodity  to be paid by the respondent to the appellant was essentially a question  of  fact.  Even  assuming  that  the  arbitrator  had committed an error in coming to the conclusion that the appellant was entitled to the claim of the escalated price of the  commodity  (hard  coke)  under  the  terms  of  the agreement and the Division Bench felt that the conclusion should  have  been  otherwise,  it  was  not  open  to  it  to interfere with the award on that score...”

10) There is no quarrel about the principle of law mentioned in the aforesaid

judgments.  However, when it is found that claim was entertained by the

learned arbitrator on the basis of provisions in the contract entered into

between HSCL and the respondent and said provisions were not made

applicable in the contract which was entered into between the appellant

3 (2001) 5 SCC 691

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and the respondent,  the  approach  of  the learned arbitrator  is  clearly

perverse in justifying the claim on the basis of provisions which were not

even applicable.  Whether contract entered into between the HSCL and

the respondent governed the relationship between the appellant and the

respondent  was  a  fundamental  and  jurisdictional  issue  and  such  an

exercise is permissible by the Court while examining the validity of an

award.   Undertaking  this  exercise  did  not  amount  to  appraising  the

evidence  or  dealing  with  the  matter  as  an  appellate  court.   On  the

contrary, the approach taken by the Division Bench of the High Court is

on  the  principle  that  arbitrator  is  a  creature  of  contract  between the

parties and if he ignores the specific term of the contract, it would be a

question of jurisdictional error which can be corrected by the Court.  A

deliberate  departure  or  conscious  disregard  of  the  contract  not  only

manifests the disregard of his authority or misconduct on his part, but it

may tantamount to legal malafide as well.  It is further settled in law that

arbitrator is not a conciliator and cannot ignore the law or misapply it in

order to do what he thinks just and reasonable.  This is so held in Food

Corporation of India v. Chandu Construction & Anr.4 in the following

manner:

“19.  ...Having accepted the terms of the agreement dated 19-9-1984, they were bound by its terms and so was the arbitrator. It is, thus, clear that the claim awarded by the arbitrator  is  contrary  to  the  unambiguous  terms  of  the contract.  We are of  the view that  the arbitrator  was not justified  in  ignoring  the  express  terms  of  the  contract

4 (2007) 4 SCC 697

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merely on the ground that in another contract for a similar work, extra payment for material was provided for. It was not open to the arbitrator to travel beyond the terms of the contract even if he was convinced that the rate quoted by the claimants was low and another contractor, namely, M/s Gupta  and  Company  had  been  separately  paid  for  the material. The claimants' claim had to be adjudicated by the specific terms of their agreement with FCI and no other.”  

11) To the  same effect  is  the  judgment  in  the  case  of  Rajasthan State

Mines and Minerals Ltd. v. Eastern Engineering Enterprises & Anr.5.

12) We are conscious of the fact that though the respondent has been able

to get the benefit of enhanced rate in respect of Item Nos.1 and 6 and is

able  to  retain  the  same  thereby  depriving  the  appellant  to  get  this

benefit.  However, in a matter of contract where the parties have to stick

to govern by the provisions of the contract entered into between them,

equity has no role to play. Insofar as contract between the appellant and

respondent  is  concerned,  appellant  was  satisfied  with  “escalation”

clause. Respondent, while entering into contract with HSCL ensured that

enhancement of rates by the principal employer i.e. NHPC in favour of

HSCL will  enure to the benefit  of  the respondent  PCL as well.   The

appellant, however, could not successfully negotiate this aspect with the

respondent  in  the  absence  of  any  such  clause/arrangement  in  the

contract entered into between the appellant and the respondent.  As the

contract between appellant and respondent deals only with escalation, 5 (1999) 9 SCC 283

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appellant has to be satisfied with the same.

13) We,  thus,  do  not  find  any  merit  in  this  appeal,  which  is  accordingly

dismissed.

.............................................J. (A.K. SIKRI)

.............................................J. (R.K. AGRAWAL)

NEW DELHI; FEBRUARY 10, 2017.