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REPORTABLE

IN THE SUPREME COURT OF INDIA CIVIL APPELLATE JURISDICTION

CIVIL APPEAL NO.2991 OF 2007

STATE OF ORISSA                                                … APPELLANT

         VERSUS

M/S. SAMANTARY CONSTN. PVT. LTD. & ANR.            … RESPONDENTS

J U D G M E N T

ADARSH KUMAR GOEL, J.

1. The question raised in this appeal is whether any interference is  

called  for  with  the  award  dated  29th June,  2003  on  the  basis  of  

objections of the appellant-State of Orissa.

2. The Respondent-Company (“the Contractor”) was awarded the  

work of “Construction of Mahanadi Barrage on the Right Side from  

the  Right  Divide  Wall  including  Right  Head  Regulator”   

vide Agreement dated 11th February, 1986 at approximate cost of  

Rs.5 crore.   The project  was  to  be completed by 11th November,  

1987.   However,  within  the  said  period  only  24.99%  work  was  

executed.  Further extension of time was granted upto 21st March,  

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1988.  Till then, only 36.81% of the work was executed.  In these  

circumstances, vide letter dated 21st April,  1988, the contract was  

terminated under Clause 46 of the General Conditions of Contract.  

The work executed till then was only 47.67%.

3. The Contractor made a claim for Rs.6.99 crore towards its dues.  

The  dispute  was  referred  to  the  Arbitration.   Retired  Justice  B.K.  

Behera (‘the Arbitrator’) vide award dated 29th June, 2003 upheld the  

claim of the Contractor to the extent of Rs.4.45 crore.  The Arbitrator  

also  allowed  counter  claim  of  the  Department  to  the  extent  of  

Rs.1.37 crores.

4. The Contractor had raised 26 items of claim, out of which 21  

were rejected and five were accepted.  The major item of claim was  

Item No.18 against which award of Rs.3 crore was made. The said  

claim was towards hire charges of the machinery and equipment as  

follows :

“The various  machineries  which  were  purchased  by the claimants against sanction of advance from  the respondents along with the own machineries   of the claimants and those brought on hire from  the  private  parties  have  been  seized  by  the   respondents.   The  respondents  are  to  pay  hire   charges  on  each  machinery  as  calculated  in   Annexure-P for the period those machineries are  detained by the respondents.  The hire charges of   the machineries calculated till 31-10-1989 amount   to Rs.68,44,332.00.”

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5. The Annexure referred to above, is as follows :

Sl. No. Description of plants and  machineries

Nos. Period Rate/each  Day Rs.

Amount in  Rs.

1 2 3 4 5             6 1 L&T poclain (Excavator) 1 21.4.88

to  31.10.89  

= 559  days

7,475.00 44,77,525.00

2 Hand Winch 6 -do- 210.00 1,17,390.00 3 Derrick for sheetpiling 1 -do- 70.00 39,130.00 4 Vibrator for concreting 2 -do- 48.00 26,832.00 5 Concrete Mixer  

(Jay Pee) 4 -do- 648.00 3,62,232.00

6 Wee Point Pump with  accessories

5 -do- 2405.00 13,44,395.00

7 Diesel Pump (ship) 6 -do- 517.00 2,89,003.00 8 Electric Pump Pan (ship) 6 -do- 175.00 97,825.00 9 Trucks 4 21.4.88 to  

4.6.88 =  45 days

500.00 90,000.00

68,44,332.00

N.B. This  amount  has  been  calculated  till  the  preparation of this claim statement, i.e. up to  31-10-89  and  the  actual  amount  shall  be   arrived  at  after  taking  into  consideration  the  period from 1-11-1989 till the date of handing   over all the aforesaid plants and machinery by   the respondents to the claimants.

6. It  is  not  necessary  to  refer  to  the other  items of  dispute as  

learned  counsel  for  the  parties  have  raised contentions  mainly  in  

respect of Item No.18.

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7. The Arbitrator held that the seizure of the machinery and other  

equipments was illegal as termination of contract itself was illegal.  

The  Contractor  was  therefore,  entitled  to  hire  charges  as  per  

Government rates which amounted to Rs.5 crores but since no men  

were employed to maintain the machines and no oil was used, the  

fair amount of claim to be upheld was Rs.3 crores.

8. The  appellant  filed  objections  under  Section  34  of  the  

Arbitration  and  Conciliation  Act,  1996  (“the  Act”)  to  the  award  

including the award of Rs.3 crores against the above Item No.18 in  

favour of the Contractor.   

9. The  District  Judge  held  that  the  Arbitrator  committed  gross  

illegality in awarding the amount of Rs.3 crore with interest @ 18%  

p.a.  from  the  date  of  award  till  the  date  of  payment.   The  

termination of the agreement was not justified in absence of lack of  

diligence on the part of the Contractor.  The claim of the Contractor  

was to the extent of Rs. 68,44,332/- against which award of Rs.3  

crore could not be made.  The letter of the Engineer-in-Chief to the  

Government could not be looked into in support of the stand of the  

Contractor.   

10. The  District  Judge accepted  the  objection  and  held  that  the  

claimed amount was Rs. 68,44,332/- which was calculated upto 31st  

October,  1989.   There  was  no  tangible  material  beyond  oral  

submission of the Contractor to substantiate the claim.

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11. The High Court reversed the said view.  It was observed that the  

claim was not limited to Rs. 68,44,332/-  as erroneously assumed.  

The claim was for the entire period for  which the Contractor  was  

deprived of the machinery and the equipment.   Calculation of figure  

of  Rs. 68,44,332/-  was  till  31st October,  1989.   It  was  further  

observed  that  the  scope of  Section  34 of  the  Act  was  limited to  

patent illegality or total perversity on the face of the record.  The  

Court could not substitute its own decision for the decision of the  

Arbitrator on merits.  Reliance was placed on the decisions of this  

Court  in  M/s.  Trading  Co. vs. Government  of  Kerala  1  ,  

Coimbatore  Distt.  Podu  Thozillar  Samgam vs.  

Balasubramania  Foundry  2  ,  State  of  Rajasthan vs. Puri  

Construction  Co.  3  ,  Bhagbati  Oxygen  Ltd. vs. Hindustan  

Copper  Ltd.  4  ,  Hindustan Construction  Co.  Ltd. vs. State  of  

Jammu and  Kashmir  5  ,  Oil  Natural  Gas  Corporation  Ltd. vs.  

Saw Pipes Ltd.  6    and  Olympus Superstructures Pvt. Ltd. vs.  

Meena Vijay Khetan  7  .    

12. As  regards  the  objection  of  the  appellant  against  the  

admissibility of letter of the Engineer-in-Chief dated 21st July, 1991, it  

was  observed  that  authenticity  of  the  said  document  was  not  

1 1989 (2) SCC 38 2 1987 (3) SCC 723 3 1994 (6) SCC 485 4 2005 (6) SCC 462 5 1992 (4) SCC 217 6 2003 (5) SCC 705 7 1999 (5) SCC 651

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disputed.    The said Chief Engineer was in charge of the project and  

he had given his report after thorough verification of the work done.  

The Arbitrator was not debarred from looking into the same.  The  

Arbitrator was not bound by the technical rules of evidence and was  

to follow the principles of natural justice.  Section 19(4) of the Act  

empowered  the  Tribunal  to  determine  admissibility,  relevance,  

materiality and weight of evidence of a document.  The said letter  

showed  that  termination  of  the  contract  was  not  justified  as  the  

Contractor had not neglected or failed to execute the work with due  

diligence  and  had  also  not  violated  any  of  the  provisions  of  the  

contract.   The Contractor had reasonable grounds for the delay and  

the  entire  delay  was  not  attributable  to  the  Contractor.    The  

Contractor had completed most difficult part of the work and there  

was justification for further extension of time.

13. We have heard learned counsel for the parties.

14. Principal  contention  raised  on  behalf  of  the  appellant  is  

that the District Judge rightly upheld the objection against the  

award  in  respect  of  Item  No.18.   The  claim  based  on  hire  

charges could not be for indefinite period and could in no case  

exceed  the  price  of  the  machinery  and  other  equipment.  

Moreover, the contract itself provides for idling charges and the  

Contractor  could  at  best  claim  the  said  charges  for  the  

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machinery  and  the  equipment.   It  was  also  submitted  that  

termination  of  the  contract  itself  was  justified  and  the  

Contractor wrongly relied upon the report of the Chief Engineer  

which  was  inadmissible  in  view  of  Section  81  of  the  Act.  

Reference was made to Explanation to Section 34 to the effect that if  

the award was in violation of Section 81, the same will be in conflict  

with the public policy of India which is a ground for setting aside the  

award under Section 34(2)(b)(ii).

15. Learned counsel for the respondents-Contractor supported the  

view taken by the High Court.  It was pointed out that Section 81 of  

the Act had no relevance as the said section was in part III dealing  

with conciliation.  The conciliation commenced, under Section 62, by  

acceptance  of  a  written  invitation to  conciliate  and if  the parties  

thereafter appoint a Conciliator who proceeds as per the procedure  

laid down under the said Chapter of the Act.   No such procedure  

having been followed,  the letter  of  the Chief  Engineer  cannot  be  

treated to be covered by Section 81 of the Act.  The said letter could  

not be treated to be irrelevant or inadmissible in evidence.  In any  

case, the decision of the Arbitrator with regard to its admissibility  

and reliability had to be accepted as final.

16. Having considered the rival submission and perused the record,  

we are of the view that the appeal deserves to be partly allowed.

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17. Undoubtedly, the award of the Arbitrator may not be interfered  

with on the ground that the same was erroneous or on the ground  

that a different view could be taken on merits of the controversy.  In  

considering  an  objection  to  the  award,  the  Court  does  not  sit  in  

appeal  over  the  decision  on  merits.   However,  patent  error  or  

perversity could certainly provide basis for interference.

18. In  Saw Pipes Ltd. (supra),  it  was held that the expression  

‘public policy of India’ has to be construed as being consistent with :  

(a) fundamental policy of Indian law; or

(b) the interest of India; or

(c) justice or morality; or

(d) if it is patently illegal.

19. In  ONGC vs. Western  Geco  International  Ltd.  8  ,  it  was  

observed  that  the  expression  ‘fundamental  policy  of  Indian  law’  

refers to the principles providing basis for administration of justice  

and  enforcement  of  law  in  this  country  which  included  judicial  

approach, i.e. not acting arbitrarily or whimsically and acting in a fair,  

reasonable and objective manner without taking into account any  

extraneous consideration, following the principles of natural justice,  

i.e. taking a decision by due application of mind and by recording  

8 2014 (9) SCC 263

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reasons and taking rational decision which can be decided on the  

touchstone of Wednesbury  9   .     

20. In  P.R. Shah, Shares & Stock Brokers (P) Ltd. vs. B.H.H.  

Securities  (P)  Ltd.  10  ,  it  was  observed  that  dealing  with  an  

objection to an award, a court does not sit in appeal over the award  

by reassessing or reappreciating the evidence.  

21. The  above  principles  are  well  recognized  and  have  been  

reiterated  recently  in  Navodaya  Mass  Entertainment  Ltd. vs.  

J.M. Combines  11   and Associate Builders vs. Delhi Development  

Authority  12  .

22. Coming to the present case, while we do not find any merit in  

the  contention  that  Section  81  of  the  Act  vitiated  the  award  on  

account of inadmissibility of the letter of the Chief Engineer, we do  

find merit in the contention that there is non application of mind in  

awarding  the  amount  of  Rs.3  crores  towards  the  hire  charges.  

Under the 1996 Act,  the award is required to be a reasoned one  

unless  the parties  agree that  no  reasons  are  to  be given or  the  

award is based on agreement (Section 31(3)).  The Arbitrator ought  

to  have  ascertained  the  total  value  of  the  machinery.   Any  

reasonable person dealing with a claim on account of loss caused by  

the  wrongful  seizure  of  machinery  or  equipment  will  certainly  9 Associated Provincial Picture Houses Ltd. vs. Wednesbury Corpn. (1948) 1 KB 223 : (1947) 2 ALL ER 680  (CA) 10 2012 (1) SCC 594 11 2015 (5) SCC 698 12 2015 (3) SCC 49

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enquire into the total value thereof.  The hire charges may, at times  

furnish  the  basis  for  determining  the  compensation  but  such  

determination cannot  normally exceed the price of the equipment  

as the loss caused cannot normally be more than the price of the  

equipment itself.  In absence of such examination, the award can  

certainly  be  held  to  be  perverse  or  based  on non application  of  

mind.  In this view of the matter, either the parties have to be left  

free to have this issue re-determined which may further delay the  

matter  or  we  may  ourselves  determine  the  claim  based  on  the  

material  on  record.   The  latter  course  has  been  suggested  by  

learned counsel.   

23. Learned counsel for the appellant has pointed out that as per  

invoice of purchase of the excavator, the price was Rs.27,34,134.75.  

In  respect  of  the  said  machinery,  claim  of  the  Contractor  is  

Rs.44,77,525/- only upto 31st October, 1989 out of the total claim of  

Rs.68,44,332/-.   The claim could not  be upheld beyond the price  

even if depreciation was not considered.  On that basis total claim  

under Item No.18, on the date of the seizure could not exceed Rs.50  

lakhs which appears to be the price of the machinery.

24. Taking an overall  view including the interest component upto  

the date of award (as the interest has been awarded only from the  

date  of  award)  claim  of  the  Contractor  could  be  assessed  at   

Rs. 1 crore 25 lakhs.   We are conscious that we are not to substitute  

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our opinion for that of the Arbitrator but since this part of the Award  

is  outrightly  perverse and not  based on application of  minds,  we  

modify the award in respect of Item No.18 to Rs.1 crore 25 lakhs as  

on the date of  the award instead of Rs.3 crores.   Subject to this  

modification,  the  award  is  upheld  in  all  other  respects.   Final  

calculation  and  adjustment  may  be  made  accordingly  before  the  

Executing Court.

24. The appeal is partly allowed to the above extent.

…………..……..…………………………….J.                       [ ANIL R. DAVE ]

…………..….………………………………..J.        [ ADARSH KUMAR GOEL ]

NEW DELHI SEPTEMBER 11, 2015.

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