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J&K&L High Court: Allows Appeal Partially & Sets Aside Extent of Judgement of the Court below

Justice Sanjeev Kumar of the Jammu and Kashmir and Ladakh High Court passed a judgement in the Union Of India vs M/S D.Khosla matter allowing the Arbitral Award partially against the order and judgement of the Principal District Judge, Jammu ["the Court below"] dated 11.01.2014 passed in File No.41/Award titled M/s D Khosla and Company v. Chief Engineer (P) Sampark. The crux of the judgement stemmed on the basis that the arbitrator had clearly exceeded his jurisdiction and had awarded most of the items of claims by either ignoring the terms and conditions of the contract or acting in derogation therefrom.
Case Details

Appellant: Union Of India
Respondent: M/s D.Khosla- The Contractor

The respondent-contractor was found to be the successful bidder pursuant to an NIT issued by the appellant for allotment of work of "Design and Construction of Permanent Bridge over River Tain at km 80.50 on Akhnoor-Poonch Road in J&K State under Project Sampark".

Accordingly, a contract agreement was entered into between the Union of India and the contractor on 21.01.1987. The lumpsum value of the contract to be executed by the contractor was Rs. 1,34,70,000 with a completion period of 36 months. The date of commencement of work was stated as 27.11.1987 and was to be completed and handed over by the contractor by or before 26.11.1990. On account of certain delays and technical problems, the work could not be completed within the stipulated period. At the request of the contractor, the time to complete the work in question was extended from time to time, and as per the last extension granted, the contractor was to complete the work by 31.03.1993. The contractor during the currency of the contract approached the appellant for interim arbitration on the ground that certain disputes between the parties were affecting both, the progress of the work and the payments.

Feeling aggrieved by the termination of the contract agreement by the appellant, the contractor approached the designated authority (Director General of Border Roads) for the appointment of an arbitrator under Clause-70 of the General Conditions of the contract. The designated authority did not act on the request of the contractor, which constrained him to approach the Court of Principal District Judge, Jammu for appointment of an arbitrator in terms of Clause 70 of the General Conditions of Contract to adjudicate upon the disputes between the parties arising out of the contract. The Union of India did not oblige in the beginning but later agreed to interim arbitration, which, however, did not materialise thereafter. But, instead, the contract was terminated on 14.06.1993. While the matter was pending consideration of the Court below, the designated authority appointed Brig. Sudhir Kumar as the sole arbitrator, to arbitrate the dispute between the Union of India and the contractor.

The Civil Court, however, did not accept the appointment of the arbitrator made by the designated authority under the contract agreement and appointed Brig. (Retd.) B.V.Ahuja, as sole arbitrator in the matter. The order of the Court below appointing Brig. B.V.Ahuja as sole arbitrator was called into question by the Union of India before a Single Judge of this court and after having failed before the Single Judge, before the Division Bench of this Court. An order was passed by the District Judge, and appointing Mr. B.V.Ahuja as sole arbitrator was upheld. The Division Bench directed the appointed arbitrator to conclude the proceedings within four months.

The sole arbitrator entered the reference and issued notices to the Union of India and the contractor on 16.08.1996 to put forth their respective claims and counter-claims. Both parties filed their statement of claims/counter-claims and also filed the statement of defence to the statement of claims filed by the opposite party. The proceedings commenced as above, parties were asked to lead evidence, on the conclusion of the evidence of both the parties, the matter was slated for final arguments on 3.10.2007.

The matter was adjourned on a couple of hearings.

On the hearing that took place on 17.12 2007, both the parties appeared before the arbitrator, but on the last and final hearing, which took place on 28.12.2007, it was only the contractor, who was present whereas there was nobody present on behalf of the Union of India. The matter was heard by the arbitrator in the absence of the Union of India, and the award was passed on 4.01.2008.

    The arbitrator awarded a total amount of Rs. 8,65,39,218.70, which was more than eight times the value of the contract, that too along with pre-reference, pendente lite and future interest @ 18% per annum in favour of the contractor.
  1. For the amounts claimed by the Union of India, the arbitrator awarded an amount of Rs. 47,13,182.25 without awarding any interest.
    Feeling aggrieved by the award passed by the sole arbitrator, the Union of India filed an application under Section 30 and 33 of the Act for setting aside the award on several grounds before the Court below, which was contested by the contractor.
  1. On 11.04.2014, the Court below vide its judgement which was impugned in the appeal, dismissed the application of the Union of India filed under Section 30 and 33 of the Act for setting aside the arbitral award dated 04.01.2008 passed by Brig (Retd.) B.V.Ahuja, the sole arbitrator. Aggrieved, the Union of India filed an appeal before the J&K&L High Court under Section 39 of J&K Arbitration Act, 2002, against the order and judgment of the Principal District Judge, Jammu on the following grounds:
  2. The Court below had not appreciated that the award dated 04.01.2008, impugned before it, was a nullity, in that, the arbitrator having been directed by the Division Bench of this Court to conclude the arbitration proceedings by 18.12.2007 could not have proceeded beyond the said period and published the award on 04.01.2008, more so when the Division Bench of this Court had not granted any extension.
  3. The Award was one-sided, passed without taking into account the case projected by the Union of India before the arbitrator.
  4. That the arbitrator had conducted his proceedings was demonstrative of the legal misconduct of the arbitrator.
  5. The exorbitant interest of 18% per annum.
  6. Lack of adequate opportunity for the Union of India to defend its case.
    "Most of the claims awarded by the arbitrator are way beyond the terms and conditions of the contract and, therefore, outside the submission and jurisdiction of the arbitrator. This aspect has not been considered by the Court below.”
  7. The award passed by the arbitrator suffers from error apparent on the face of the record and, therefore, was not sustainable. The Court below has completely ignored this aspect and has put its seal of approval on all the claims awarded by the arbitrator.
  8. That the arbitrator by awarding interest at a rate as high as 18% per annum past, pendente lite on all items excluding item No.13 and 18% per annum future interest on all claims, has misconducted himself as well as the proceedings. This was against the spirit of Section 29 of the Act.
  9. The Court below has not appreciated that the arbitrator, who awarded huge sums in favour of the contractor arbitrarily, rejected the counter-claims of Union of India except claim No.(e), which, too, appears to have been awarded to strike balance and justify the award of almost all the claims except claims for a meagre amount in favour of the contractor.

Judge Kumar ruled, ‘“The Court hearing an application for setting aside award or hearing appeal against the order of the Court below refusing to set aside the award does not sit in appeal over the decision of the arbitrator. The award of the arbitrator can be interfered with only, if it is the result of corruption, fraud or when there is/are errors apparent on the face of award. In case of a speaking award, the Court can look into the reasons for the award.” Furthermore, the ruling covered in case of unreasoned award, it is not open to the Court to probe the mental process of the arbitrator and speculate as to what impelled the arbitrator to arrive at his conclusion.

In this case, the arbitrator had down the claims and then awarded certain amounts without giving any reason in support of his conclusion. Judge Kumar ruled, ‘’’As per the terms and conditions of the contract, the arbitrator was under no obligation to pass a reasoned award. In the absence of any reasons given for making an award, it may not be open to the Court to interfere with the award by re-appreciating the facts and law. As is said that arbitrator is sole judge of the quality as well as quantity of evidence and it will not be for the Court to take upon itself the task of being a judge on the evidence before the arbitrator”.

On the validity of the award, the ruling stated, ”the award will also be bad, if the arbitrator, who himself is a creature of the contract agreement travels beyond the terms and conditions of the contract and awards claims on the excepted items. Such awards would be invalid and can very well be interfered with by the Court.”

Judge Kumar quoted a reference from judgement rendered in the case of Associate Engineering Company v. Govt. of Andhra Pradesh and others, (1991) 4 SCC 93, which, for facility of reference are reproduced hereunder:- “24. The arbitrator cannot act arbitrarily, irrationally, capriciously or independently of the contract. His sole function is to arbitrate in terms of the contract. He has no power apart from what the parties have given him under the contract. If he has travelled outside the bounds of the contract, he has acted without jurisdiction. But if he has remained inside the parameters of the contract and has construed the provisions of the contract; his award cannot be interfered with unless he has given reasons for the award disclosing an error apparent on the face of it.’’ His ruling stemmed from point 25 of the aforesaid reference which read as, ‘’A deliberate departure from contract amounts to not only manifest disregard of his authority or misconduct on his part, but it may tantamount to a mala fide action. A conscious disregard of the law or the provisions of the contract from which he has derived his authority vitiates the award.”

The bench ruled that the arbitrator had ignored Clause 11, Clause-21(c)(ii) of the contract and acted in derogation therefrom; the arbitrator had admittedly travelled beyond his jurisdiction and had acted contrary to the terms and conditions of the contract of which he was a creature. Admittedly, the contractor had been paid strictly with the aforesaid terms and conditions of the contract but the arbitrator set aside all those terms and conditions of the contract and took up the deviation as an extra amount of work to be paid in terms of Annexure-II forming part of the contract.

Rate of interest: The bench stated categorically, ‘’Indisputably, 18% per annum is not contractual rate of interest. As a matter of fact, the contract agreement does not provide for any rate of interest to be awarded to the party being successful before the arbitrator in getting his claim against other party. The Jammu & Kashmir Arbitration Act, 2002 also does not make any provision for grant of interest @ 18%. Even RBI does not permit grant of such exorbitant interest on the deposits received by the banks. Even lending rate of interest is far less than the interest awarded. By awarding interest @ 18% per annum, the arbitrator has acted arbitrarily, irrationally, capriciously and has committed misconduct’’. About the Arbitrator, the court said that the arbitrator had not applied his mind at all and had awarded all the claims in toto except those, which were for meager sum. Similarly, with a view to balance the award and to make it look fair, the arbitrator had even gone to the extent of awarding one of the counter-claims to the Union of India.

    Summing up Judge Kumar’s ruling said:
  • ‘’the arbitrator had awarded a total of Rs. 8,65,39,218.70, which was more than eight times the value of contract, that too along with pre-reference, pendente lite and future interest interest @ 18% per annum, which indicated that the arbitrator had clearly exceeded his jurisdiction and had awarded most of the items of claims by either ignoring the terms and conditions of the contract or acting in derogation therefrom.
  • the appellate Court had not applied its mind and had endorsed the award as it is. The District Court had not even followed Section 34 of the Code of Civil Procedure for the purpose of exercising its discretion to grant pendent lite and future interest.
  • The award passed by the arbitrator was set aside to the extent of claim Nos. (1), (2), (4), (8), (13), (15), (16) &(17) and to the aforesaid extent the judgement of the Court below is also set aside. The contractor-respondent was held entitled to interest @ 6% per annum from the date of termination of contract till the amount is actually paid. The Registry shall draw the decree-sheet accordingly.
  • For determination of claims of the contractor i.e. claim Nos. (1), (2), (4), (8), (13), (15), (16) &(17) , the matter is remitted back to the arbitrator. ‘’