Research › Search › Judgment

Calcutta High Court · body

2012 DIGILAW 1017 (CAL)

Union of India v. K. M. Construction

2012-12-05

SANJIB BANERJEE

body2012
JUDGMENT Reconstructed papers have been filed by the Union of India and such reconstructed papers are to be treated as original till the originals are traced out. 2. The railways have challenged an arbitral award rendered under the 1940 Act primarily on three grounds. It is said that the agreement between the parties did not provide for any escalation and there was a letter issued prior to the agreement being executed in which the railways indicated to the contractor that no claim on account of escalation would be acceptable. The railways also question the authority of the arbitrator in disregarding a claim for return of material wrongfully retained by the contractor. Finally, the interest awarded by the arbitrator during the pendency of the reference has also been assailed on the ground that the agreement contained a prohibition on interest being paid by the railways to the contractor. 3. There are two parts to the challenge on the ground of escalation. First, the railways say that even if escalation could otherwise have been awarded by the arbitrator, it is evident that the amount awarded is in excess of the claim made. The railways, however, insist on the more fundamental aspect: that in the absence of the contract conferring any authority on the arbitrator to consider a claim of escalation, the arbitrator misconducted himself and the proceedings in taking such claim into account and awarding any money thereunder. 4. The contractor seeks to demonstrate that the amount awarded was as per the amended statement of claim. Though it appears from the award that the statement of claim had been amended, the amendment to the amount claimed on account of escalation is not evident from the records now available. The contractor has also agreed to the amount awarded to be scaled down from Rs. 4,69,388/- to Rs. 4,43,000/- as originally indicated in the statement of claim. The first aspect of the challenge is thus dealt with. 5. As to the more fundamental issue raised by the railways on the authority of the arbitrator to take cognizance of any claim on account of escalation without the contract providing for escalation, it must first be noticed that there was no express or implied term in the agreement prohibiting any claim on account of escalation being made. 5. As to the more fundamental issue raised by the railways on the authority of the arbitrator to take cognizance of any claim on account of escalation without the contract providing for escalation, it must first be noticed that there was no express or implied term in the agreement prohibiting any claim on account of escalation being made. Ordinarily, since an arbitrator is a creature of an agreement between the parties and derives his authority from such agreement, the arbitrator cannot act in derogation of the terms of the agreement. Such principle would, however, apply if there was a prohibition in the agreement and if the arbitrator disregarded the same. The mere fact that the agreement did not expressly contain any clause reserving the contractor's right to claim escalation would not imply that the contract prohibited escalation being claimed or granted. Reference may be made in this regard to a Constitution Bench judgment in the case of Irrigation Department, Government of Orissa v. G. C. Roy, [reported at (1992) 1 SCC 508 ] where the Supreme Court observed that merely by a contractor agreeing to have the disputes resolved through arbitration would not imply that the contractor had "given up any claim which otherwise it could have successfully asserted before Court and obtained relief." The Court went on to opine that upon a contractor agreeing to have the disputes under a contract resolved through arbitration, the contractor "must be understood to have only opted for a different forum of adjudication with less cumbersome procedure, delay and expenses and lot to abandon all or any of its substantive rights under the various laws in force..." 6. In any event, in the railways having written to the contractor by the letter of October 6, 1989 that a claim on account of escalation would not be acceptable and in the agreement executed subsequent thereto not containing an express prohibition as to escalation, there was room for the arbitrator to infer that the parties had agreed to remain silent on the matter without either specifically providing for the same or excluding it. Since there is no express bar in the agreement - at any rate, none has been cited on behalf of the railways - for escalation to be sought by the contractor under the agreement, the first ground of challenge is repelled. Since there is no express bar in the agreement - at any rate, none has been cited on behalf of the railways - for escalation to be sought by the contractor under the agreement, the first ground of challenge is repelled. The amount awarded, however, would stand reduced under such head to Rs. 4,43,000/- as originally claimed. 7. As to the challenge on the ground of the arbitrator having failed to take into account the railways' contention that it was entitled to withhold moneys due to the contractor under several bills for the contractor not having returned certain material, it appears that there was a counter-claim made by the railways for return of the material. However, while dealing with the first and second heads of claim on account of the money due under the bills raised by the contractor, the arbitrator dwelt on the railways' claim that the contractor had not returned material obtained from the railways. The arbitrator recorded that there was no evidence on such aspect that had been carried to the reference by the railways. The arbitrator disbelieved the assertion on account of wrongful withholding of material by the contractor and proceeded to award the amounts due under the bills. The railways have not challenged the amounts awarded under the first and second heads of claim. In view of the finding in the award that no evidence in support of the railways claim for return of material was adduced, the challenge on such score is devoid of merit. 8. The challenge to the grant of interest is, however, on a different footing. The agreement, indeed, prohibited any interest being paid by the railways to the contractor. The arbitrator noticed such prohibition both in the agreement itself and in the genera conditions governing railway contracts. The arbitrator allowed interest at the rate of 18% per annum "from the date of entering into-reference." 9. The railways place a judgment reported at (2009) 12 SCC 26 (Sayeed Ahmed and Company v. State of Uttar Pradesh) and rely on paragraph 23 thereof where the ratio in a previous judgment reported at (1996) 1 SCC 516 (Board of Trustees for the Port of Calcutta v. Engineers-De-Space-Age) was questioned. The railways place a judgment reported at (2009) 12 SCC 26 (Sayeed Ahmed and Company v. State of Uttar Pradesh) and rely on paragraph 23 thereof where the ratio in a previous judgment reported at (1996) 1 SCC 516 (Board of Trustees for the Port of Calcutta v. Engineers-De-Space-Age) was questioned. However, it would be evident from paragraph 24 of the report in Sayeed Ahmed that despite the subsequent Bench doubting the Engineers-De-Space-Age reasoning, the subsequent Bench noticed that the Engineers-De-Space-Age judgment was rendered under the 1940 Act and the Sayeed Ahmed matter was under the Arbitration and Conciliation Act, 1996. The contractor has referred to a decision reported at (2010) 1 SCC 549 (Madnani Construction Corporation Private Limited v. Union of India) and has relied on paragraph 35 thereof where the Engineers-De-Space-Age dictum was followed. The contractor says that the Madnani Construction judgment was rendered several months after the Sayeed Ahmed verdict. 10. It would appear from the reasoning in the Constitution Bench judgments of G. C. Roy and Dhenkanal Minor Irrigation Division v. N. C. Budharaj [reported at (2001) 2 SCC 721 ] that the Supreme Court did not consider the prohibition on account of interest contained in a contract to operate as a complete erosion of the arbitrator's authority to grant interest and reasoned that interest pendente lite and post-award could be awarded notwithstanding a bar in the agreement. Despite the Engineers-De-Space-Age dictum being doubted in Sayeed Ahmeed, since a subsequent Supreme Court decision under the 1940 Act accepted the Engineers-De-Space-Age interpretation of both G. C. Roy and N. C. Budharaj, it is such view which appeals and is found to be the more acceptable. 11. The arbitrator in the present case awarded interest at the rate of 18% per annum for the period covered by the reference in respect of the amounts awarded under the first three heads of claim and also awarded interest at the rate of 18% per annum for the period following 60 days after the award if the amount awarded was not paid. In principle, there does not appear to be any error or misconduct, on the part of the arbitrator in awarding interest. 12. The challenge to the award fails, except to the extent as conceded by the contractor that the amount awarded on account of escalation would stand reduced to 4,43,000/- in place of Rs. 4,69,388/- awarded by the arbitrator. In principle, there does not appear to be any error or misconduct, on the part of the arbitrator in awarding interest. 12. The challenge to the award fails, except to the extent as conceded by the contractor that the amount awarded on account of escalation would stand reduced to 4,43,000/- in place of Rs. 4,69,388/- awarded by the arbitrator. The rest of the award is not interfered with. 13. AP No. 590 of 2009 is disposed of without any order as to costs. 14. As a consequence, there will be a judgment and decree in terms of the award, save that the principal sum under the third head of claim would stand reduced to Rs. 4,43,000/-. The interest as awarded will be payable at 18% per annum till the payment is made. 15. The decree should be drawn up expeditiously. Urgent certified photocopies of this order, if applied for, be supplied to the parties subject to compliance with all requisite formalities.