State of Kerala v. Antony — 1989 DIGILAW 175 (KER)

Judgment :- 1. This appeal under S.39 of the Arbitration Act arises from the judgment of the Sub Court, Parur in O.P.(ARB.)NO.20 of 1982 and I. A.No.1747 of 1982. The former was an application filed by the present respondent, hereinafter referred to as the 'contractor', under S.17 of the Arbitration Act. I.A.No.1747 of 1982 was filed by the present appellants under S.30 of the Arbitration Act to set aside the award of the Arbitrator. 2. The contractor entered into an agreement with the 2nd appellant on 12-3-1976 for construction of a bridge at Pathalam Kadavu. The total cost of the work was Rs.25,67,646/-. The period of the work was 24 months from the date of handing over the site. The site was handed over on 19-3-1976. The contractor did not complete the work within the stipulated period. He sought revised rates since there was stoppage of work and alteration of alignment etc. The appellants, however, extended the term of the work till 31-5-1979 on the original terms. The contractor proceeded with the work for some time but stopped later. The appellants again offered to extend the period of the contract till 31-12-1979 on the original terms, but the contractor did not accept the offer. He maintained that the contract had come to an end due to the breach committed by the appellants. The appellants thereupon terminated the contract with effect from 15-10-1979 at the risk of the contractor for costs for re-arrangement of the balance work. They also proceeded to realise the security deposits in terms of the contract. 3. The contractor thereupon instituted arbitration suit No.201 of 1979 before the Sub Court, Parur seeking a reference of the dispute for adjudication to the Government Arbitrator. The Sub Court allowed the application by its order dated 10-11-1980. The court referred specific issues for arbitration and directed the Arbitrator to pass the award within the statutory period. The Arbitrator entered the reference on 21-11-1980. He passed the award on 15-3-1982. He awarded a sum of Rs.5 lakhs to the plaintiff-contractor. 4. The Arbitrator found that the appellants were right in terminating the contract due to breach of its terms committed by the contractor. Apparently for this reason, he also found that the contractor was not entitled to any interest. 5. He passed the award on 15-3-1982. He awarded a sum of Rs.5 lakhs to the plaintiff-contractor. 4. The Arbitrator found that the appellants were right in terminating the contract due to breach of its terms committed by the contractor. Apparently for this reason, he also found that the contractor was not entitled to any interest. 5. The contractor filed an application under S.17 of the Arbitration Act before the Sub Court, Parur for a decree in terms of the Award. The appellants thereupon filed an application to set aside the award. The Sub Court disposed of these two applications together by a common order. It is that common judgment which is impugned in this appeal. 6. The appellants had raised a preliminary point before the lower court that the Arbitrator had no jurisdiction to pass any award after the expiry of the period fixed by the court and therefore the award was a nullity. They contended that in cases where the time for passing an award is set by an order of court, even consent of parties cannot confer jurisdiction, and the court alone can extend the period of time for passing the award in exercise of its power under S.28(1) of the Act. Another point which was urged by the appellants was that there was misconduct on the part of the arbitrator and error apparent on the face of the award, since the Arbitrator could not have passed an award in favour of the contractor after having found that the appellants were right in terminating the contract due to the breach committed by the contractor. According to the appellants no award could have been made, if the contractor committed breach of contract and the appellants validly terminated the same. Penal consequences which follow from termination of contract due to breaches committed by the contractor could not be avoided by an arbitral determination. In any case, the breach committed by the contractor should not result in an award in his favour. These submissions did not find favour with the lower court. 7. On the first point, the lower court found on the basis of the decision in Hari Krishna Wattal v. Vaikunth Nath Pandya etc. (AIR 1973 SC 2479) that the consent of parties enables the Arbitrator to enlarge the period of time within which the award had to be passed. These submissions did not find favour with the lower court. 7. On the first point, the lower court found on the basis of the decision in Hari Krishna Wattal v. Vaikunth Nath Pandya etc. (AIR 1973 SC 2479) that the consent of parties enables the Arbitrator to enlarge the period of time within which the award had to be passed. The appellants urged that Hari Krishana Wattal's case would not apply, since that dealt with a term fixed by the parties for making the award and not to a term fixed by a court, and hence there could be extension of the period by consent of parties in that case but not in cases where the term was fixed by the court. The trial court did not accept this contention. The Court also did not accept the argument that there was inconsistency in the findings in the award of the Arbitrator, that the termination of the contract by order dated 15-10-1979 on account of breach committed by the contractor was justified and that the appellants were not entitled to enforce the penal provisions regarding forfeiture of earnest money and security deposit and re-arrangement of work at the risk and cost of the contractor. The court did not accept the case that inconsistency in findings evidenced either error apparent on the face of the award or misconduct of the arbitrator. The Court referred to the decision in Fertilisers & Chemicals, Travancore Ltd. v. Vellappally Brothers, Kalamassery (I.L.R.1983(1) Ker.48) to hold that if the Arbitrator did not tie himself down to any unsound legal principle in the award, the Court cannot interfere with it. It also held that the award did not disclose any wrong application of law or misconstruction of any document. It also found that recitals contained in the award did not disclose any inconsistent finding which rendered the award bad for error apparent on its face. The Court affirmed the award of Rs.5 lakhs along with future interest at 18%. 8. The Government Pleader appearing for the appellants reiterates the main objections. He formulates the following points for consideration: (a) The award is a nullity since it was passed beyond the time fixed by the court in the judgment in Arbitration Suit No.201 of 1979. The Arbitrator had no jurisdiction to pass an award beyond the time limit fixed by the court even with consent of parties. He formulates the following points for consideration: (a) The award is a nullity since it was passed beyond the time fixed by the court in the judgment in Arbitration Suit No.201 of 1979. The Arbitrator had no jurisdiction to pass an award beyond the time limit fixed by the court even with consent of parties. (b) On the question of breach of contract and the right of the contractor to claim compensation, the Arbitrator had entered inconsistent findings which disclosed misconduct of the arbitrator and error apparent on the face of the award. (c) Having found that the contractor had committed breach and the consequent termination of contract was valid the Arbitrator could not have made the award in favour of the contractor. (d) The Arbitrator had not awarded interest in the award. The lower court erred in law in granting interest at 18%. 9. Sri M.A. George appearing for the contractor submitted that it should be the anxiety of the court to support the award of the Arbitrator rather than destroy it on technical considerations. He submits that it should be more so in a case where the award is a non-speaking one. The court is not entitled to speculate as to what grounds the arbitrator would have had and then find fault with the award. The court is not entitled to assume that the Arbitrator also ought to have proceeded in the same manner as the court would have and discover deficiencies on the basis of such assumption. Another proposition he urged emphatically was that the court may not enter into the merits of the findings on the disputes before the Arbitrator in proceedings under S.16, 30, 33 and 39 of the Arbitration Act since such discussion would seriously affect the right of the contractor under S.8 of the Arbitration Act to have the dispute submitted afresh for arbitration. He submits that the dictum that "if the parties set limits to action by the Arbitrator, then the Arbitrator has to follow the limits set for him, and the Court can find that he has exceeded his jurisdiction on proof of such action" extends only to the arbitration agreements between the parties and not to the merits of the dispute. He submits that the dictum that "if the parties set limits to action by the Arbitrator, then the Arbitrator has to follow the limits set for him, and the Court can find that he has exceeded his jurisdiction on proof of such action" extends only to the arbitration agreements between the parties and not to the merits of the dispute. A further proposition which he urges is that the exclusionary clause in the contract against enhancement of rates can apply only in cases where the work was completed according to the specifications and within the time fixed in the original contract. He submits that the court cannot find fault with the award for the only reason that the arbitrator gave a composite award. He submits finally that the award does not contain any proposition of law which is erroneous and therefore the Court has no jurisdiction to interfere with the same. On the question of limitation, counsel refers to condition No.73 of the Preliminary Specifications to Madras Detailed Standard Specifications forming part of the agreement, by which power was conferred on the Arbitrator to enlarge time for making and publishing the award with consent of parties. 10. A large number of authorities were cited before us to establish that courts should be wary in dealing with arbitration awards. There is only limited scope for interference. It is far more limited in cases where the award does not disclose reasons. We have to decide this appeal with the awareness of these limitations. The proposition is far too elementary to require us to refer to all the decisions cited at the bar. The courts interfere in arbitrary processes only in exceptional circumstances. We agree that absence of reasons by itself will not vitiate the award. Award of composite amount for all items in dispute also does not vitiate the award. We therefore refrain from a detailed reference to various decisions which counsel on either side cited to elucidate these points. 11. It is however necessary for us to deal with the questions (1) whether the award of the Arbitrator was a nullity since it was made beyond the time fixed by the court in its order disposing of Arbitration Suit No.201 of 1979 and (2) whether the award was vitiated by error of law on its face or by misconduct due to conflicting and inconsistent findings. 12. 12. Clause.73 of the Preliminary Specifications to Madras Detailed Standard Specifications provides that: "The Arbitrator shall see that the award is passed, if reasonably possible, within a period of four months from the date of his entering upon the reference, but if any extension of that period is considered by him to be necessary, either suo motu or on the application of either party to the reference, the parties hereby agree and consent to such extension as the arbitrator may from time to time consider reasonably necessary, and any such extension shall forthwith be communicated by him in writing to each of the parties hereto." The contract therefore, contained a condition to extend the time of the contract with the consent of parties. The question is whether the super-imposition of an order of court will disable the Arbitrator from exercising this enabling power. Counsel for the contractor referred us to application filed by the parties for extension of time on 10th July, 1981 to extend the period by four months from 21-7-1981 (Page 329 of the records) and a joint application dated 11-11-1981 to extend the period by four more months from 21-11-1981 (page 407 of the records). If the Arbitrator extended the period of time on the basis of the joint applications, such extension would have been valid in terms of Clause.73 of the Preliminary Specifications to Madras Detailed Standard Specifications which we have extracted above. The point remains as to whether the Arbitrator can without an order of court under S.28(1) of the Act extend the period of time in terms of the agreement in a case where the time limit is fixed by the court. 13. The decisions of the Supreme Court deal with this question. In Hari Krishna Wattal v. Vaikunth Nath Pandya etc. (AIR 1973 SC 2479) the question which arose for consideration was whether parties are entitled to enter into an agreement subsequent to the submission for the purpose of enlarging the time within which the arbitrator should pass his award. The Court held that the very terms of S.28(2) of the Act indicated that it could be. (AIR 1973 SC 2479) the question which arose for consideration was whether parties are entitled to enter into an agreement subsequent to the submission for the purpose of enlarging the time within which the arbitrator should pass his award. The Court held that the very terms of S.28(2) of the Act indicated that it could be. In State of Punjab v. Hardayal (AIR 1985 SC 920), the question which had to be considered was whether the parties to an arbitration agreement could have stipulated a period other than four months as specified in Clause.3 of schedule I read with S.3 and 28 of the Arbitration Act. The Court held in the affirmative. The next question was whether in a case where the contract did not contain any such stipulation, and therefore the statutory period of four months applied, it may be possible to uphold the award passed beyond time with parties taking willing part in the proceedings even after expiry of the statutory period. The Court held that the discretion of the Court under S.28(1) of the Act being very wide, even the appellate Court can grant extension of time in a case where the court had set a time limit for making the award. 14. S.28(1) of the Arbitration Act is relevant in this regard. That provides: "(1) The Court may, if it thinks fit, whether the time for making the award has expired or not and whether the award has been made or not, enlarge from time to time, the time for making the award. (2) Any provision in Arbitration agreement whereby the arbitrators or umpire may, except with the consent of all the parties to the agreement, enlarge the time for making the award, shall be void and of no effect." 15. We are of the opinion that in a case where the court has set the time limit within which the award has to be passed, the court alone shall be competent to extend the period. This shall be so notwithstanding a clause in the arbitration agreement that the arbitrator may extent the time with the consent of parties. Any provision in a contract enabling the parties or the arbitrator to arrogate the power conferred to the court under S.28(1) of the Act will be invalid and any extension of time which the arbitrator grants himself by consent of parties will be ineffective. Any provision in a contract enabling the parties or the arbitrator to arrogate the power conferred to the court under S.28(1) of the Act will be invalid and any extension of time which the arbitrator grants himself by consent of parties will be ineffective. It is true that S.28(1) of the Act is only an enabling provision. But we have to read it as obligatory. In such cases the court alone shall grant extension of time. This is the view expressed in AIR 1973 S.C. 2479 and AIR 1985 S.C.920. May be, Clause.73 which we have extracted is not void and ineffective because it authorised the Arbitrator to grant extension of time subject to consent of parties in an ordinary submission of the reference by parties without the intervention of court. But in a case where the court has made a reference under S.20(1) of the Act, the court alone shall be competent to grant extension of time where it had initially set the time limit. The consent of parties does not give the Arbitrator jurisdiction to extend the period of time which can be sanctioned only by the court. 16. It is, however, evident from S.28(1) of the Arbitration Act that the court has a very wide discretion in the matter of granting extension of time. It is evident that the original Court as well as the appellate court functioning under S.39 may exercise that power. The discretion has to be exercised with reference to the facts of the case and the relevant circumstances. One such is the fact whether the disputants had participated in the proceedings without demur even after the expiry of the period of four months which the court had fixed. The present appellants were joint applicants before the arbitrator more than once for extension of time. Not that this conduct conferred jurisdiction which the arbitrator would have had only with orders of court under S.28(1) of the Act, but that conduct disables them to raise the question of jurisdiction. 17. It follows therefore that the award of the arbitrator which was made beyond the period fixed by the court and without obtaining orders of the court extending the period is ineffective and unenforceable. 18. It is however relevant to note that the appellate court is also competent in extra ordinary cases, to exercise the discretion vested in the court under S.28(1) of the Act. 18. It is however relevant to note that the appellate court is also competent in extra ordinary cases, to exercise the discretion vested in the court under S.28(1) of the Act. In State of Punjab v. Hardayal (supra) the Supreme Court held that in view of the policy of law that arbitration proceedings should not be unduly prolonged and the fact that the parties had been taking willing part in the proceedings before the Arbitrator without demur, it should be a fit case for the appellate court to extend the period of time for passing the award. The present case is exactly similar. We have already noticed that the parties applied for and consented to extension of time twice and that was apparently the reason why the arbitrator who was not a law-person, did not apply to the court under S.28(1) of the Act. The appellants had willingly participated in the arbitration proceedings. Taking note of these facts, we feel that this is a case in which we shall extend the period of time for passing the award upto and inclusive of the date on which the arbitrator passed the award. We therefore hold that the award was passed validly. 20. The objection that there was inconsistency in the finding of the Arbitrator in favour of the State terminating the contract because the contractor had broken the terms thereof and the award of enhanced rates to the contractor, deserves serious consideration. The lower court got over this difficulty by stating that the arbitrator did not enter a finding that the termination of the contract was legal and proper and that it was justified by reason of the breaches committed by the contractor. We have to examine whether this reasoning of the lower court is justified. It is necessary for us to look into the award itself. This is what the Arbitrator stated with reference to issues A and B. "Here the work was to be completed within a period of 24 months ending on 18-3-1978. In so far as it was not completed accordingly, there was a breach of contract on the part of the plaintiff. But the circumstances that led to the breach and the reasons therefore are matters on which the parties to the contract could not agree. In so far as it was not completed accordingly, there was a breach of contract on the part of the plaintiff. But the circumstances that led to the breach and the reasons therefore are matters on which the parties to the contract could not agree. The proper course for the parties would have been for them to approach, the Arbitrator for resolving the disputes as provided for in the agreement. Here the plaintiff on the one hand treated the contract as having come to an end and the defendants by their order dated 15-10-1979 purported to terminate it. The contract agreement had run its period by 18-3-1978 by efflux of time and there was no further valid extension of time by agreement between the parties. The order of the respondents terminating the contract though it cannot be said to be wrong on administrative considerations to resolve the stalemate arising out of the stoppage of work, the fastening of the attendant penal provisions regarding forfeiture of security and rearrangement of the work at the risk and cost of the Plaintiff without an adjudication of the disputes cannot be considered to be lawful, justified or proper." If the termination was not wrong, the penal consequences provided for in the contract have necessarily to be fastened to the contractor. The contract provides for forfeiture of the earnest money deposit and security and authorises the appellants to re-arrange the work at the risk and loss of the contractor. These provisions cannot be ignored. Much less could the arbitrator have awarded compensation to the contractor who was rightly held to be liable for the termination of the contract. The fact that the arbitrator awarded only a consolidated amount less than the claim of the contractor is no reason to uphold the award as the lower court did. 21. Inconsistent findings contained in the award of the arbitrator disclose misconduct on his part under S.30(a) of the Act. We are of the opinion that this misconduct vitiates and invalidates the award. We, therefore, hold that the lower court erred in law in upholding the award of the arbitrator. We have the authority of the Supreme Court in doing so. In K.P. Poulose v. State of Kerala (AIR 1975 SC 1259) the Supreme Court held as follows: "We now come to the award. We, therefore, hold that the lower court erred in law in upholding the award of the arbitrator. We have the authority of the Supreme Court in doing so. In K.P. Poulose v. State of Kerala (AIR 1975 SC 1259) the Supreme Court held as follows: "We now come to the award. Although the Arbitrator has held that "jetting, however, is not an authorised extra covered by the agreement", he has made the following significant observation which is inconsistent with his conclusion that the contractor has no right for extra payment for the jetting: "The Chief Engineer has rejected the claims of the contractor on grounds of non-inclusion of this (jetting) in the agreement which was executed subsequent to the direction issued by the department to adopt jetting. The Chief Engineer's decision totally ignores the next sentence in that letter 'Meanwhile you may execute the agreement'. By this sentence the issue of extra payment for jetting is left open even after the execution of the agreement." If the above is the conclusion of the Arbitrator, rejection of the claim on the ground that "jetting, however, is not an authorised extra covered by the agreement" cannot be anything but rationally inconsistent. The award, therefore, suffers from manifest error apparent ex facie. Under S.30(a) of the Arbitration Act an award can be set aside when an Arbitrator has misconducted himself or the proceedings. Misconduct under S.30(a) has got a connotation of moral lapse. It comprises legal misconduct which is complete if the Arbitrator on the face of the award arrives at an inconsistent conclusion even on his own finding or arrives at a decision by ignoring very material documents which throw abundant light on the controversy to help a just and fair decision. It, is in this sense that the Arbitrator has misconducted the proceedings in this case. 22. In this view, it may not be necessary for us to consider the merits of the disputes in respect of other points. We should also bear in mind a specific contention raised on behalf of the contractor to the effect that the right of the contractor to get the matter referred to another arbitrator shall not be prejudiced by any observation that we may make on the merits of the issues involved. We should also bear in mind a specific contention raised on behalf of the contractor to the effect that the right of the contractor to get the matter referred to another arbitrator shall not be prejudiced by any observation that we may make on the merits of the issues involved. We, therefore, allow this appeal with costs and set aside the common order of the Sub Court, Parur in O.P.(Arb.) No.20 of 1982 and I.A.No.1747of 1982. We also set aside the award of the Arbitrator in Arbitration Case No.246 of 1980.