SUPREME COURT OF INDIA
K.N. Sathyapalan (Dead) By Lrs
Vs
State of Kerala and Another
Appeal (Civil) 4806 of 2000
(Altamas Kabir and Altamas Kabir, JJ)
30.11.2006
ALTAMAS KABIR, J.
The appellant entered into an agreement with the State of Kerala on 10th
October, 1985 whereunder he was entrusted with the construction work of the
Chavara Distributory from Ch.7440M to 9440M and 10475M to 14767M. Disputes
having arisen between the parties, the matter was referred to arbitration. The
Superintending Engineer, Siruvani Project, Palghat, .the designated Arbitrator
in terms of the contract, was appointed as the sole Arbitrator. By his award,
which was published on 2nd September, 1989, the Arbitrator awarded a total sum
of Rs. 42, 21, 000/- with 12% interest per annum from the date of the award.
Upon the passing of the award the appellant herein filed O.P. (Arb.) 40/89 in
the court below under Section 17 of the Arbitration Act,
1940 for passing a decree in terms of the award. The State of Kerala
filed a petition under Section 30 of the Act challenging the award and for
setting aside the same.
The application filed by the State was dismissed and aggrieved thereby the
State of Kerala preferred an appeal in the High Court of Kerala at Ernakulam,
being MFA No. 980 of 1990 C.
The appellant herein raised claims under 12 different heads but the Arbitrator
allowed only claims (a), (e), (g), (i) and (k). Although, in the memorandum of
appeal, the entire award in favour of the appellant had been challenged, but
the arguments were addressed only with regard to claims under heads (a), (g),
(i) and (k). A preliminary objection was raised in the appeal that the
Superintending Engineer, who had been appointed as the Arbitrator and had
entered on the reference, had been suspended from service for gross
mal-practice, and the Government had informed all concerned that the Arbitrator
was not to continue with the reference. The Arbitrator retired on
superannuation while he was under suspension and the award was made after his
retirement. According to the State of Kerala, in the circumstances, the award
passed by the Arbitrator was without jurisdiction. The aforesaid objection
being preliminary in nature, the same was taken up first for consideration and
it was held by the High Court that such an objection was without any merit. The
Arbitrator, who was working as Superintending Engineer was placed under
suspension on 31st May, 1989. As per an agreement between the parties on 14th
February, 1989, the time for making and publishing the award was extended upto
14th June, 1989. Even after the Arbitrator was suspended from service, both
sides had agreed on 14th June, 1989 to extend the time further for making and
publishing the award upto 14th October, 1989. The Arbitrator retired from
service while under suspension on 30th June, 1989. In the light of the said
facts, the High Court agreed that the court below could not revoke the
authority of the Arbitrator, which could only be done under Section 5 of the Arbitration Act, 1940, with the leave of the Court.
Accordingly, the preliminary objection raised on behalf of the State of Kerala
that the Arbitrator had no authority to continue with the arbitration after his
suspension or retirement, was rejected by the High Court. Claim (a) of the
appellant herein involved the claimant's entitlement to get compensation for
interruption of work by anti-social elements and failure of the Department in
removing such miscreants from the sites which caused the claimant heavy
financial losses by way of idle men and machinery, plant and equipment. The
claim made under the aforesaid head was for a sum of Rs.11, 40, 000/-. The
Arbitrator was satisfied that there was interruption of work by anti-social
elements and that the State had failed to remove such obstruction from the
site. Accordingly, the Arbitrator awarded a sum of Rs. 7, 30, 000/- under this
claim. Claim (g) was confined to the question as to whether the claimant was
entitled to compensation for the losses suffered by him on account of price
escalation of materials that had taken place during the extended period of
completion when such extension of time was necessitated by departmental
failure, although there was no provision for escalation of costs in the
contract. Under the said clause the appellant claimed an amount of Rs.39, 90,
198/- but was awarded a sum of Rs.11, 70, 000/- over and above the amount as
per the rates in the agreement for the work done after the original period of
contract till 9th February, 1987.
Claim (i) was confined to the question regarding the claimant's entitlement for
compensation for the losses purported to have been suffered by him because the
Department was unable to hand over a suitable quarry which resulted in the
claimant having to bring rubble and metal from far off places involving
additional transportation costs. The Arbitrator came to a positive finding that
the claimant had procured rubble from quarries situated at different places.
According to the initial estimate, the quarry ought to have been within 25 Kms.
from the place of work, but from the evidence it would be clear that the
nearest quarry from which the claimant had to procure rubble would be about 47
Km. away from the site of the work. The other quarries were even further away
from the work site. It was the definite finding of the Arbitrator that the
average extra lead involved would be not less than 22 Kms. and accordingly
while the claimant had claimed a sum of Rs.24, 86, 574/-, the Arbitrator awarded
a sum of Rs.13, 35, 000/- under this head for the work executed up to 9th
February, 1987.
The other claim which was pressed by the appellant was claim (k) relating to
losses suffered by him on account of non-availability of a suitable dumping
yard for dumping excess earth. While a claim for a sum of Rs.13, 72, 554/- was
made in this regard, the Arbitrator awarded a sum of Rs.6, 62, 000/- under this
head.
The agreement relating to the handing over of the site to the claimant was
executed on 10th October, 1985 and on 25th October, 1985, the respondents
instructed the claimant to start the work and to complete the same within the
agreement period of eleven months. However, while the period of completion of
eleven months for the whole work was to expire on 24th September, 1986, the
same could not be completed on the scheduled dates and under clause 50 of the
General Conditions of Contract extension of time was sought by the appellant
for completing the work. Clause 50 of the General Conditions of Contract
provides that if failure to complete the work was the result of delays on the
part of Government in supplying materials or equipment it had undertaken to
supply under the contract or from delays in handing over sites or from increase
in the quantity of the work to be done under the contract or force majeure, an
appropriate extension of time would be given. Finding that the said clause was
operative, the respondents extended the time of completion but while doing so
made it conditional that such extension of time would be subject to execution
of a Supplemental Agreement to the effect that the contractor would not be
eligible for any enhanced rate for the work done during the extended period.
According to the appellant, he had no option but to sign the agreement, though
under protest, since he had undertaken to complete the work.
The appellant appears to have moved to the site and commenced the work on 1st
November, 1985 but he was not allowed to proceed with the work because of
external interference involving law and order problems created by local
miscreants and anti-social elements under cover of union activities. Although,
initially such a claim was denied on behalf of the respondents and the law and
order situation was said to be only a labour dispute between the claimant and
his workers, ultimately from the evidence the Arbitrator came to the finding
that the issue was one of law and order which could only have been controlled
by the Governmental agencies. The Arbitrator also came to a finding that in order
to maintain peace at the work site, the claimant had to keep the entire local
work force in the muster rolls and to pay wages when the actual work was done
with bull dozers. The Arbitrator was satisfied that although the claimant had
aimed to complete the work within the original period, he was faced with
adverse site conditions which are not usually met with at construction sites.
The Arbitrator was also satisfied with the claimant's contention that adequate
space had not been provided for dumping the excess earth which had to be
conveyed to distant places for dumping. On assessment of the evidence and the
ground realities under which the claimant was constrained to execute the
Supplemental Agreement, the Arbitrator was convinced that the claim made by the
claimant under the different heads could not be brushed aside.
Apart from the preliminary objection taken with regard to the competence of the
Arbitrator to complete the arbitration proceedings and to publish his award, it
was also contended before the Arbitrator that the State had no responsibility
in settling the disputes between the claimant and his employees and it was
really due to the non-cooperation of the claimant that a settlement could not
be arrived at with the workers. It was contended that under such circumstances
claim (a) could not be granted.
It was also contended that there was no provision in the Agreement by which the
Department could be made liable to compensate any loss sustained by the
contractor because of intervention of third parties. It was contended that it
is one thing to say that the State is responsible for maintaining law and order
and on the other hand to make the State liable under the terms of the Agreement
to compensate the contractor for losses allegedly suffered during the period of
disturbance.
On consideration of the case made out on behalf of the respective parties, the
Arbitrator made his award in respect of each of the several heads of claims on
the losses actually suffered by the appellant while trying to carry out and
complete the tender work. The Arbitrator filed his award before the Subordinate
Judge, Kottarakkara, on which a decree was passed in terms of the award but
modifying the appellant's claim for interest. The respondents preferred an
appeal to the High Court of Kerala at Ernakulam. The stand taken before the
Arbitrator was reiterated by the parties before the High Court of Kerala at
Ernakulam in the said appeal. In addition, arguments were addressed on the
scope of interference by the High Court in an award passed by the Arbitrator,
which award was a speaking award. On looking into the Agreement, the High Court
was of the view that the Arbitrator had exceeded his jurisdiction in granting
claim (a). The High Court felt that the Arbitrator had travelled outside the
Agreement and had acted without jurisdiction in granting such claim.
Even in respect of claim (g), the High Court took note of the fact that by
virtue of the Supplemental Agreement which had to be executed for extension of
the original period of completion of the work, the appellant herein was not
entitled to enhanced rates during the extended period. In respect of claim (g)
also, the High Court found that the Arbitrator had travelled outside the terms
of the contract and had mis- conducted himself.
Admittedly, the original Agreement did not contain a clause for escalation of
rates. On the other hand, the Supplemental Agreement contained a specific
provision that the contractor would carry out all further works within the
extended period at the rates and in the manner agreed to in the Agreement and
would not claim any enhanced rate for such item of work on account of the
extension of time either due to the increase in the rate of labour or materials
or on any other ground whatsoever. The High Court took the view that although
the Arbitrator had come to a finding that the appellant had to execute the
Supplemental Agreement under the force of circumstances, there was no material
before the Arbitrator in support of such contention. On such finding also, the
High Court held that the Arbitrator had acted beyond his jurisdiction in
allowing claim (g).
The award of the Arbitrator against claim (i) also met the same fate and the
High Court held that the Arbitrator had travelled outside the contract in granting
such claim and thus mis-conducted himself.
The only claim which was allowed by the High Court was claim (k).
The High Court accordingly set aside the judgment and decree of the court below
to the extent it affirmed the award as far as claims (a), (g) and (i) are
concerned. The said order of the High Court is the subject-matter of the
present appeal.
Appearing for the appellant, Mr.Dushyant Dave, learned senior advocate, urged
that the High Court while reversing the award under claims (a), (g) and (i) had
failed to take into consideration the finding of the Arbitrator that the
appellant had suffered heavy losses on account of the law and order problem
which had been created at the work site and that he had been compelled to
complete the work under duress. Reference was made to the letter dated 7th
September, 1985 addressed by the appellant to the Superintending Engineer,
K.I.P.(RB) Circle, Kottarakkara, regarding extension of time to complete the
work under tender with the hope that the Department would reciprocate his
gesture and consider the special circumstances under which he had given his
consent for extension of the period for completion of the work. Reference was
also made to another letter dated 24th September, 1986 written by the appellant
to the said Superintending Engineer informing him of the problems that were
being faced for completion of the work and requesting that his accounts be
settled and that he be freed from the entanglements.
The last letter referred to by Mr. Dave was written by the appellant to the
said Superintending Engineer on 30th September, 1986 indicating that he was
carrying out the work despite all the difficulties although the same was not a
solution to the genuine problems being faced by him as indicated in the earlier
letters. It was urged that having regard to the ground realities, it was within
the powers of the Court to grant relief on account of escalation of costs in
interrupted projects, although there may not be any specific provision for such
escalation in the contract itself.
In support of his submissions, Mr. Dave firstly referred to the decision of
this Court in P.M. Paul vs. Union of India, , wherein a dispute arose
regarding payment of escalated costs. By an order of this Court, the dispute
between the parties was referred to a retired Judge of this Court to ascertain
who was responsible for the delay in completion of the building, what was the
repercussions of the delay and how the consequences were to be apportioned. It
had been contended therein that in the absence of any escalation clause it was
not permissible for the Arbitrator to grant any escalation price sought by the
contractor. The Arbitrator, however, noted that the claim related to the losses
caused due to increase in prices of materials and costs of labour and transport
during the extended period of the contract and accordingly allowed 20 per cent
of the compensation sought. The question before this Court was whether the
Arbitrator had travelled beyond his jurisdiction in awarding escalation costs
and charges. This Court came to a finding that the Arbitrator had not
mis-conducted himself in awarding the amount as he had done. Once it was found
that there was delay in execution of the contract due to the conduct of the
respondent, respondent was liable for the consequences of the delay, namely,
increase in prices. It was held that the claim was not outside the purview of
the contract and arose as an incidence of the contract and the Arbitrator had
jurisdiction to make such award. Reference was then made to the decision of
this Court in T.P. George vs. State of Kerala and Anr., 64, where a similar situation arose and the contractor
was compelled to execute a Supplemental Agreement. Although, a question was
raised as to whether the Supplemental Agreement debarred the contractor from
pursuing his claims, the Arbitrator allowed the claims which were however set
aside by the High Court. This Court in appeal held that the High Court had
erred in setting aside the award regarding those claims notwithstanding the
fact that the Supplemental Agreement had been executed between the appellant
and the State Government. The grant of interest by the Arbitrator, which had
been disallowed by the High Court, was also allowed by this Court.
Mr. Dave contended that even in the absence of any escalation clause, if it is
found that the escalation of costs had been occasioned by circumstances which
were not anticipated at the initial stage and was attributable to the
respondents, there was no reason why the Arbitrator could not take notice of
the ground reality and to award escalation costs. It was urged that had the
respondents provided for the rubble to be obtained for the work from the quarry
at Mannady, the appellant would not have had to bear the extra transportation
charges for bringing such rubble from far away quarries. The same applied to
providing a suitable place for dumping of excess earth and the failure of the
respondents to maintain the law and order problem that had been created at the
site.
The submissions advanced on behalf of the appellant were strongly opposed on
behalf of the State Government with particular reference to the award in
respect of claims (a) and (g) since the Original Agreement did not provide for
such escalation and the Supplemental Agreement which had been executed clearly
stipulated that no extra rates would be allowed. It was contended that the
Department had never failed to perform its contractual obligations, and, in any
event, the delay in completing the work was not on account of any neglect on
the part of the State but on account of labour trouble involving the appellant
and his workmen at the site.
Mr. Jayant Muth Raj, who appeared for the State, contended that as had been
observed by this Court as far back as in 1960 in M/s. Alopi Parshad & Sons
Limited vs. The Union of India, reported in , provision for payment of
charges at rates specified had been made in the contract and the arbitrators
could not ignore the express covenants between the parties and award amounts
not agreed to be paid. It was observed further that a contract is not
frustrated merely because the circumstances in which it is made is altered and
that the Courts have no general power to absolve a party from the performance
of his part of the contract merely because its performance has become onerous
on account of an unforeseen turn of events. According to Mr. Muth Raj the award
made in the instant case could not also be justified on the basis of quantum meruit
since such a concept would be applicable when services are rendered but the
price thereof is not fixed by a contract.
Mr. Muth Raj also referred to various other decisions of this Court, including
the decision in State of U.P. vs. Patel Engg. Co. Ltd. and Ors., reported in
2004 (10) SCC 566, where a question arose as to whether on the basis of a
modified contract which specifically excluded payment of freight charges,
claims for variation in payment of such charges could be awarded by the arbitrator.
It was held that the arbitrators had exceeded their jurisdiction in awarding
freight charges in respect of steel and handling transportation charges and
that the District Judge had rightly held that the same was not sustainable
inasmuch as the claimant was not entitled to such freight charges. It was urged
that when no provision had been made in the contract for escalation of costs
and the Supplemental Agreement entered into between the parties specifically
provided that the contractor would not claim any enhanced rate for the work
performed during the extended period of the contract, the Arbitrator had
wrongly allowed some of the claims made by the appellant on account of
escalation of costs and the High Court had rightly disallowed the same.
The question which we are called upon to answer in the instant appeal is
whether in the absence of any price escalation clause in the Original Agreement
and a specific prohibition to the contrary in the Supplemental Agreement, the
appellant could have made any claim on account of escalation of costs and
whether the Arbitrator exceeded his jurisdiction in allowing such claims as had
been found by the High Court.
Ordinarily, the parties would be bound by the terms agreed upon in the
contract, but in the event one of the parties to the contract is unable to
fulfil its obligations under the contract which has a direct bearing on the
work to be executed by the other party, the Arbitrator is vested with the
authority to compensate the second party for the extra costs incurred by him as
a result of the failure of the first party to live up to its obligations. That
is the distinguishing feature of cases of this nature and M/s. Alopi Parshad's
case (supra) and also Patel Engg.'s case (supra). As was pointed out by Mr.
Dave, the said principle was recognized by this Court in P.M. Paul's (supra) ,
where a reference was made to a retired Judge of this Court to fix
responsibility for the delay in construction of the building and the
repercussions of such delay. Based on the findings of the learned Judge, this
Court gave its approval to the excess amount awarded by the arbitrator on
account of increase in price of materials and costs of labour and transport
during the extended period of the contract, even in the absence of any escalation
clause. The said principle was reiterated by this Court in T.P. George's case
(supra).
We have intentionally set out the background in which the Arbitrator made his
award in order to examine the genuineness and/or validity of the appellant's
claim under those heads which had been allowed by the Arbitrator. It is quite
apparent that the appellant was prevented by unforeseen circumstances from
completing the work within the stipulated period of eleven months and that such
delay could have been prevented had the State Government stepped in to maintain
the law and order problem which had been created at the work site. It is also
clear that the rubble and metal, which should have been available at the
departmental quarry at Mannady, had to be obtained from quarries which were
situated at double the distance, and even more, resulting in doubling of the
transportation charges. Even the space for dumping of excess earth was not
provided by the respondents which compelled the appellant to dump the excess
earth at a place which was far away from the work site entailing extra costs
for the same.
In the aforesaid circumstances, the Arbitrator appears to have acted within his
jurisdiction in allowing some of the claims on account of escalation of costs
which was referable to the execution of the work during the extended
period. In our judgment, the view taken by the High Court was on a rigid
interpretation of the terms of contract and the Supplemental Agreement executed
between the parties, which was not warranted by the turn of events.
We accordingly allow the appeal and set aside the order passed by the High
Court and restore the award made by the Arbitrator.
There will, however, be no order as to costs.