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    REPORTABLE IN THE SUPREME COURT OF INDIA

CIVIL APPELLATE JURISDICTION

CIVIL APPEAL NO. 4211 OF 2015 [Arising out of SLP (Civil) No. 7205 of 2007]

ZONAL GENERAL MANAGER, M/S IRCON  INTERNATIONAL LTD. ..  APPELLANT

VERSUS

M/S VINAY HEAVY EQUIPMENTS .. RESPONDENT

WITH

Civil Appeal No. 4213 of 2015 [arising out of SLP (C) No. 7216 of 2007] and

Civil Appeal No. 4212 of 2015 [arising out of SLP (C) No. 33491 of 2009]

J U D G M E N T

VIKRAMAJIT SEN, J.

1 Leave granted.  

2 The  Appellant,  IRCON  International,  is  impugning  the  Judgment  of  the

Learned Division  Bench  of  the  Madras  High Court,  which  had  dismissed  two

Original Second Appeals preferred by the Appellant. Recapitulating the facts of

this litigation, the Appellant was the successful tenderer in respect of a contract

awarded to  it  by SIPCOT (not  a  party to  the present  dispute/  Appeal),  for  the

construction  of  an  Internal  Road for  the  Industrial  Complex at  Irungattukottal,

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Sriperumbpudur Taluk, Kanchipuram District, Tamil Nadu.  The contract between

these parties was made on 10.07.1997 and was valued at Rs.13,06,60,587/-.  In

furtherance  of  the  execution  of  this  contract,  the  Appellant  entered  into  two

subcontracts  (hereinafter,  “the  subcontracts”)  with  the  Respondent  herein,  in

respect of two Packages, namely “C1” and “C2”, for the laying of roads valued at

Rs.3,20,64,752/- and Rs.1,67,01,821/- respectively. The cumulative value of both

packages amounted to Rs.4,87,66,573 /-.  

3 The Respondent completed approximately 67 per cent of the work under the

two subcontracts but thereafter ceased work on both.  The Appellant cancelled the

subcontracts, and managed the completion of the work by engaging other agencies.

The cost of 67 per cent of the contractual work completed by the Respondent was

estimated at Rs.3.23 crores, out of which the Appellant admittedly paid a sum of

Rs.2.62  crores.  The  Respondent  claimed  an  unpaid  balance  of  Rs.61  lakhs  as

arrears due to it by the Appellant, and resorted to arbitration.  The Appellant also

took recourse  to  arbitration  against  the  main  contracting  authority, SIPCOT, in

respect of the pending payments pertaining to C1 and C2 packages. The Arbitrator

was thus adjudicating the claims made by the Respondent against the Appellant in

the First Arbitration, and the claims made in turn by the Appellant against SIPCOT

in the Second Arbitration.  The Arbitrator  passed a  common Award in  the First

Arbitration  for  both  packages  in  favour  of  the  Respondent  for  the  sum  of

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Rs.7,87,21,820/- for C1 and Rs.1,38,78,139/- for C2, both sums carrying with them

interest at the rate of twelve per cent from 04.03.2001 until the date of payment.

Interest  apart,  the  Appellant  stood  liable  as  a  result  of  the  Award  to  pay  the

Respondent Rs.9,25,99,959/-, including the aforementioned Rs.61 lakhs.

4 The Appellant filed two petitions (OP Nos. 107 and 108) under Section 34 of

the  Arbitration  and  Conciliation  Act,  1996,  thereby  separately  challenging  the

Award  passed  in  respect  of  the  two  subcontracts.  The  Respondent  filed  two

applications in the two petitions, contending that while the Appellant had rejected

the Respondent’s claims of payment arrears under the two subcontracts, it had, at

the  same  time  and  contradictorily,  claimed  in  the  Second  Arbitration  against

SIPCOT that its dues to Respondent were in turn payable to it by SIPCOT.  By a

common Order, the Single Judge dismissed the Appellant’s petitions and allowed

the Respondent’s applications. The Appellants thereafter filed two Appeals before

the Division Bench of the Madras High Court, which came to be dismissed.  The

Appellant’s conflicting claims and statements in both arbitrations,  seen and put

together, have proved determinative in the dismissal of the Appeals by the Courts

below; they shall prove similarly so here.   

5 Detailing  the  arrears  claim,  it  is  seen  that  the  Respondent  incurred

expenditure  in  the  execution  of  the  subcontracts  on  two  categories  of  items:

scheduled  and  non-scheduled.  The  Respondent  claimed  Rs.61  lakhs  as  its  due

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under both these heads.   The Appellant’s principle rebuttal in resistance to the

Respondent’s claim is that the main contract (between the Appellant and SIPCOT)

and  the  subcontracts  are  wholly  of  a  “back-to-back”  nature  and  therefore  the

liability  of  the  Appellant  would be  restricted  to  and coextensive  of  that  which

SIPCOT acknowledges.   In other words, the acceptability and tenability of any

claim made by the Respondent against the Appellant will depend first upon that

claim’s acceptability and tenability before SIPCOT in its capacity as the employer

in the main contract. The Appellant declined to pay the Respondent for scheduled

expenditures,  claiming  that  the  Respondent  had  unauthorisedly  performed

additional and increased quantities of works, also challenging the rate claimed by

the Respondent for the same; that the Respondent could not claim any amount in

excess of what was agreed to be paid by SIPCOT in respect of each item of work

covered  under  C1  and  C2  subcontracts.  The  Appellant  also  rejected  the

Respondent’s  claimed  dues  under  the  non-scheduled  head  (which  work  the

Appellant itself had requested to be performed by the Respondent), stating that

SIPCOT had refuted its liability towards non-scheduled expenditures.   Indeed, the

Arbitrator  in  his  Award  detected  two  “general  pleas”  as  resonating  from  the

Appellant:   firstly, that the contracts C1 and C2 were on a “back to back” basis

with  IRCON’s  main  contract  with  SIPCOT  and  unless  SIPCOT  paid  for  the

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amounts claimed by the Respondent, the Appellant was not legally liable for the

same; and secondly, that back to back basis applied even to non-scheduled items.

6 The Arbitrator found that the mention of “back-to-back” had been made only

in  the  contract  rider  agreement  for  Package  C2,  and  in  subsequent  epistles

exchanged  between  IRCON  and  the  Respondent  from  whose  analysis  two

significant factors emerge.   Firstly, that “back-to-back” only meant that the terms

and conditions relating to technical specifications, and quality, quantum, manner

and  method of  work  to  be  done by  the  Appellant  in  the  main  contract,  stood

transposed on the subcontracts, C1 and C2; the primary liability of the Appellant to

the Respondent, however, stood untouched, there having been no transference or

transposition  of  this  liability  onto  SIPCOT,  either  explicitly  or  implicitly.

Secondly,  the  Appellant  had  in  its  Written  Statement  before  the  Arbitrator,

reiterated the “back-to-back” nature and thereby agreed that the Respondent would

be entitled to payment of dues as and when the Appellant received the payment for

these from SIPCOT, the Respondent’s claims having been “transmitted” by the

Appellant to SIPCOT for the latter’s consideration.  The Appellant has taken the

stance that it had no objection to the Arbitrator awarding a reasonable amount to

the Respondent, subject to the Appellant being awarded the same amount by the

Arbitrator  in  its  Arbitration  with  SIPCOT.  The  Appellant  was  agreeable  to  a

direction passed against  it  to  make payment  upon realization  of  the sum from

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SIPCOT, after  a 10 per cent  deduction on the sum as the Appellant’s marginal

profit. The Arbitrator, unstirred by the Appellant’s gambit at foisting the primary

liability onto SIPCOT, located primary liability as resting with the Appellant, being

the ‘employer’ in the subcontracts. The Arbitrator also instanced the Appellant’s

reprobative  and approbative  conduct,  observing first  the  Appellants  conditional

willingness  (supra)  for  the passage  of  a  favourable  Award in  the Respondent’s

favour, and thereafter finding a retraction of the Appellant’s position: viz. that -

“Since SIPCOT refused to pay for these claims, IRCON has taken up a new stand

that works were not done fully and payment has been made for whatever work was

done  by  the  claimant”.    Having  so  observed,  the  Arbitrator  awarded  as

aforementioned.  

7 The  Single  Judge  rightly  upheld  the  Arbitrator’s  repudiation  of  the

applicability of the “back-to-back” principle to the issue of liability of payment in

the facts of this case; affirming that the Appellant as Employer was primarily liable

to the Respondent. Beyond this, the Single Judge adverted to the Award obtained

by the Appellant against SIPCOT, wherein claims had been raised against SIPCOT

on the basis of the earlier Award obtained against the Appellant.  The Single Judge

accepted  the  Respondent’s  contention  that  “the  very  same  claim,  which  the

respondent made against the petitioner has been made by the petitioner against the

SIPCOT and on that basis, an award has been passed in favour of the petitioner”.

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It  is  facially  apparent  that,  on  the  one  hand,  the  Appellant  had  obtained  a

favourable Award in the Arbitration with SIPCOT by substantially relying on (and

as  compensation  for)  the  adverse  Award  passed  in  its  arbitration  with  the

Respondent; on the other hand, it  appealed before the Single Judge against the

adverse  Award  which  had  substantially  been  the  premiss  and  reason  for  the

Appellant’s success against SIPCOT.   In addition, the Appellant expostulated that

the Applications before the Single Judge ought to have been heard along with the

Applications filed by SIPCOT for setting aside of the Award in Appellant’s favour

in the Second Arbitration. To not have done so would be to disjoin the Awards,

leaving it open for the High Court to come to two dissonant conclusions in the two

interdependent  arbitrations;  the  Appellant’s expressed  fear  being  that  while  its

obligation to pay, as sealed by the Award in favour of the respondent in the First

Arbitration, would be sustained, the award in its favour against SIPCOT, if heard

separately, would possibly be set aside, leaving it uncompensated and liable to pay

the Respondent the claimed amount.  The Single Judge observed that no material

had been brought on record,  nor a  specific plea raised or  details adduced,  that

SIPCOT had filed  a  Section  34 petition  before  the  same Court  in  a  challenge

against  the  Award  in  the  Respondent’s  favour;  a  mere  statement  from  the

Appellant’s counsel made across the bar was not sufficient materially to justify the

demand for connecting and hearing the petitions together.  

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8 The Learned Division Bench wholly ratified the reasoning of the Arbitrator

and Single Judge below it, finding no reason to disencumber the Appellant from

the obligation to fulfill the Respondent’s claim.  While entirely agreeing with the

reasons given against the Appellant by the Arbitrator and the Courts below, we also

find additional reasons for dismissing this set of Appeals.

9 While the Award in the SIPCOT arbitration is not immediately an appellate

subject  herein,  yet  it  is  still  part  of  the  record  and  therefore  merits  our

consideration. Until  an order to the contrary be adduced before this Court,  this

Award must be assumed to be standing and valid. Its validity and legitimacy in law,

insofar as it has depended on the earlier Award qua the adjudication of claims,

would only be justifiable by the validity of the earlier Award in the Respondent’s

favour. The earlier Award must, therefore, be presupposed to be valid, when the

validity  of  the later  Award has not  been disproved or  rebutted.  Seen from this

dimension,  the  Award  in  favour  of  the  Appellant  is  positively  valid,  and  its

unsettlement an uninviting prospect.       

10 Insofar as the question of primary liability therein is concerned, the law on

subcontracts and employer liability is amply clear.  In the absence of covenant in

the main contract to the contrary, the rules in relation to privity of contract will

mean that the jural relationship between the employer and the main contractor on

the one hand and between the sub-contractor and the main contractor on the other

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will be quite distinct and separate.   No such clause to the contrary, existent in the

main contract between Appellants and SIPCOT, has been highlighted before us by

the Appellants, which would persuade us towards a deviation from the presumption

of distinct and sole liability of the Appellant-Contractor as employer viz. a. viz. the

Respondent-Sub  Contractor.     On  the  contrary,  much  of  the  exercise  in

determining the existence of a “back to back clause” in the contracts C1 and C2

appears to be misplaced.    Such an accommodation or transference of liability

needs  to  be  pinpointed  in  the  main  contract,  for  it  is  SIPCOT’s acceptance  of

liability of subcontractor claims which is of the essence; even a clause indicating

“back to back” liability in agreements C1 and C2 would not serve to novate the

main contract and fasten payment liability on SIPCOT, prevented as it would be by

privity, for it would be a matter of SIPCOT’s acceptance of subcontractor liability

in the main contract, and not a matter of novation by imposition upon SIPCOT by

two parties in a separate bilateral contract. Nothing presented before us suggests

that  SIPCOT’s  contract  with  the  Appellant  provided  for  “back  to  back”

subcontracts  whereby  SIPCOT would  be  directly  answerable  for  the  payment

claims raised by contractors. That subletting was provided for by the main contract,

and indeed occurred, has been found by the Arbitrator (in both Arbitrations) and

affirmed by the Courts below. This however, is quite distinct from concluding that

SIPCOT contractually (in the main agreement) assumed primary liability for the

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Subcontractor-Respondent’s payment claims in respect of agreements made with

the Appellant.  The fact that the Respondent was represented and present in parleys

and meetings between SIPCOT and the Appellant or that it was referred to in the

correspondence exchanged between them does not lead to the conclusion that a

Tripartite contract had come into effect by evolution.

11 The Appellant conceded before the Arbitrator that it would countenance an

Award in favour of the Respondent as long as it was indemnified for the payment

made to the Respondent by an equal offsetting payment by way of an Award in its

favour  in  its  arbitration  with  SIPCOT.  The  record,  as  has  been  hereinbefore

referenced, shows that the Appellant was granted precisely such an Award. The

legal import of the nature of the Appellant’s admission of liability made before the

Arbitrator in the First Arbitration now needs deliberation. The Appellant exercised

care to make this concession by conjoining therewith its demand for adjustment in

the Second Arbitration. To that extent the concession could be called a conditional

one. At the heart of the concession however, the admission itself, taken alone, was

not  conditional.  The  Appellant  thereby  admitted  an  unconditional  contractual

liability on its part to pay the Respondent’s contractual claim, albeit dressing the

same in the shroud of conditionality, by the expedient of making the concession

dependent upon a consequent favourable outcome in the Second Arbitration. This

was then followed by a remarkable transition in the Appellant’s legal posture, from

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one of conditional agreeability, to outright denial of any and all liability on its part

to  pay  the  Respondent,  stating  that  SIPCOT  was  wholly  answerable  for  the

satisfaction of all contractual claims and payments demanded by the Respondent,

due to the “back to back” nature of the main contract with agreements C1 and C2.

The Appellant, we find, stands bound and bonded by the legal consequences of this

initial admission made by it before the Arbitrator. Having concluded thus, we yet

underscore to observe that the Division Bench below proceeded on the merits in

this  matter  in  upholding  the  Award,  and  did  not  simply  hold  the  Appellant  to

account for the consequences of its admission.  

12 We also find that the Appellant’s case is not advanced by its reliance upon

the  three  Judge  Bench  decision  in  Oil  and  Natural  Gas  Corporation  Ltd.  Vs.

Western Geco International Ltd. (2014) 9 SCC 263.   We cannot subscribe to the

argument on behalf of the Appellant that it was merely a Consultant and therefore

could not be fastened with liability or was imperious to claims preferred by the

Respondent for work contractually carried out, or, in respect of claims founded on

the bedrock of quantum meruit.  

13 For  the  foregoing  reasons,  we  decline  to  interfere  with  the  judgment

properly exercised by the Arbitrator and Courts below, and sustain the impugned

order in its entirety.

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14 Interim orders stand recalled. Appeals dismissed. Parties are to bear their

respective costs.

…..…………………………….J. [VIKRAMAJIT SEN]

....................................................J [SHIVA KIRTI SINGH]

New Delhi, May 6, 2015.