Grant of any relief which has not been specifically referred for arbitration will clearly fall within the ambit of the phrase 'misconduct'. Phrase misconduct employed in section 30(a) of Arbitration Act encompasses "Legal Misconduct" as well.
Government Of Mahrashtra Irrigatio Department, Pune Vs. Atur India Pvt. Ltd., Pune
FIRST APPEAL NO.854 OF 1992
Citation : 2012 (4) MHLJ 319
CORAM : A.M.KHANWILKAR &
N.M.JAMDAR, JJ
Dated: 21/3/2012
JUDGMENT:
1. This First Appeal filed by the Government of Maharashtra under
Section 39 of Arbitration Act,1940 challenges the Judgment and
Order dated 24.4.1992 passed by the Civil Judge, Senior Division,
Pune passing a decree in respect of the Award of the Arbitrators
appointed to resolve the disputes between the Appellants and the
Respondent. The Award directed the Appellants to pay an amount of
Rs.210.68 lakhs which included interest for the pre-reference period.
Before the Civil Judge, the Appellants did not challenge this liability
to pay the principal amount and restricted their challenge mainly to
the grant of interest for the pre-reference period and other charges and
interest thereupon.
2. The main question that needs to be considered in this Appeal is
whether the Arbitrators as well as the learned Civil Judge were right
in granting interest for the pre-reference period. Thus, only those
facts which are relevant for the purpose of deciding the above
question are encapsulated as under :
3. The Respondents-Plaintiffs were engaged in construction work of
civil nature.
Irrigation Department of the Appellants for construction of Veer Baji
Pasalkar Dam at village Varasgaon Taluka Velhe, District Pune. A
work order in favour of the Respondents was issued on 6.10.1976.
Dispute arose regarding payment to the Respondents and said dispute
was referred for Arbitration to a panel of Arbitrators constituted by
Government Resolution dated 10.4.1989.
The Respondents entered into a contract with the
4. The Arbitrators pronounced the Award on 11.9.1990 and as per the
Award, the Appellants were directed to pay an amount of Rs.210.68
3
FA 854/1992
lacs towards final settlement of all the claims of the Respondents.
This sum included an amount of Rs.58.18 lakhs towards interest for
the pre-reference period. Award also contained a direction to pay an
amount of Rs.2.03 lakhs towards bank guarantee commission The
Award further directed the Appellants to pay the said amount to the
Respondent within one month of the declaration of the Award failing
which the Appellants were liable to pay interest at 18% interest p.a.
from 16.10.1990 till the date of actual payment.
5. The Respondents filed a Special Civil Suit No.1109 of 1990 in the
Court of Civil Judge, Senior Division, Pune with a prayer to file the
Award and pass a decree in terms of the same. The Appellants filed a
Misc.Application No.672 of 1990 for setting aside the Award
contending that the Arbitrators were not right in granting an amount
of Rs.2.03 lacs towards bank guarantee commission and licence fees
and that the Arbitrators were not right in granting an amount of Rs.
58.18 lacs towards the interest for the pre-reference period. The
Appellants also prayed for setting aside the direction in the Award to
pay further interest at 18% per annum. Appellants however, did not
dispute the liability to pay the principal amount of Rs.150.47 lacs.
6. The Civil Judge, Senior Division, Pune heard both the Special Civil
4
FA 854/1992
Suit as well as Misc.Application together and came to the conclusion
that the Award of interest granted by the Arbitrators cannot be faulted
with and further went on to hold that since the jurisdiction of the
Court is limited while deciding objections to Arbitration Award, the
findings of the Arbitrators cannot be interfered with. The learned
Civil Judge accordingly, dismissed the Misc.Application No.672 of
1990 filed by the Appellants and decreed Special Civil Suit No. 1109
of 1990 directing the appellants to pay an amount of Rs.60.21 lacs in
terms of the award along with interest. Being aggrieved, the
Appellant-State has brought this First Appeal before us under section
39 of the Arbitration Act, 1940.
7. We have heard Mrs Geeta Mulekar, learned Assistant Government
Pleader for the State and Mr.A.V.Anturkar learned counsel for the
Respondents.
8. The primary contention raised by the learned Assistant Government
Pleader is that the interest for pre-reference period ought not to have
been granted by the Arbitrators as that issue was not specifically
referred for arbitration and the Arbitrators did not have the power to
grant interest for the pre-reference period. It was further contended
that in view of the law laid down by the Apex Court in the case of
5
FA 854/1992
DURGA RAM PRASAD VS.GOVERNMENT OF A.P.reported in
(1995) 1 SUPREME COURT CASES 418 there was clear legal error
on the part of the Arbitrators to grant interest for the pre-reference
period which amounted to 'misconduct' and thus the Award to that
effect ought to have been set aside by the learned Civil Judge.
9. Mr.Anturkar, learned counsel for the Respondent on the other hand
submitted that the Arbitrators were well within their powers to grant
interest for the pre-reference period as according to him as per the
terms of the Agreement as well as the Reference, the Arbitrators were
empowered to do so. He further contended that the Respondents had
not given up their claim towards grant of interest for pre-reference
period which was implicit in their demand. He also contended that
the scope of the Civil Court and this Court to interfere with the award
of the arbitrators mutually agreed by the parties, is limited and no
case is made out by the Appellants for invoking this limited
jurisdiction.
10.The first question that needs to be addressed is whether the issue of
grant of interest for the pre-reference period was referred to
Arbitrators. If the said issue was not referred to Arbitrators then the
Arbitrators could not have traveled beyond the scope of the
6
FA 854/1992
Reference. For that purpose, it is necessary to first advert to the claim
of the Respondent as noticed from the Arbitration Award.
Claim No.1: Claim amounting to Rs.566.69 lakhs on account of
under utilization of machinery and infra-structure owing to
extended construction period together with interest at 18 percent
per annum compounded quarterly amounting to Rs.441.26 lakhs
adding up to a total amount of claim of Rs.1007.95 lakhs.
Claim No.2: Claim amounting to Rs.32.59 lakhs on account of
incorrect deduction of 2 ½ percent of the value of bills made for
discount for timely payments together with interest thereon at 18
percent per annum compounded quarterly amounting to Rs.95.66
adding up to Rs.128.25 lakhs.
Claim no.3: The claimants also have requested the Arbitrators to
award the incidental claim of the cost of this arbitration to them.
11.The Arbitrators framed questions which they were called upon to
decide in the Arbitration proceedings. The questions so framed are
reproduced as under :
(i) Is it correct that the Claimants did not prove that they had all
requirements of adequate progress and in fact according to the
Respondents, did not possess it during the initial period of
contract up to 5-10-82 ?
(ii)Is it correct that the performance of the contract by
Claimants not being adequate in the original period of contract
the performance spilled over period of financial stringency and
cement shortage and other difficulties thereafter ?
(iii) Is it correct that Claimants were prevented from expected
performance under this contract because of lack of engineering
decisions in the initial period, cement shortages over years,
non-payment of bills because of financial stringency of the
Government, non payment of large amounts of claims etc ?
(iv) In the light of the above questions whether the Claimants
7
FA 854/1992
should shoulder the burden of responsibility for the delayed
performance and in what proportion ?
It is clear from the above mentioned claims as well as questions
framed that there is no specific issue regarding grant of interest for
the pre-reference period for adjudication. Furthermore, in the claim
statement,
mentioned. The Appellant in para 23 of its Written Statement before
the Arbitrators categorically stated that the claim for interest for the
pre-reference period was not referred to the arbitration.
no period for the claim of interest has been specifically
12.Interest for the pre-reference period has to be specifically prayed for
and claimed. Furthermore, the claim for interest for the pre-reference
period has to be specifically referred for Arbitration. If the said issue
is not referred to the Arbitrators for consideration then the Arbitrators
will have no jurisdiction to grant the same. If the Arbitrators have
granted relief to any party,which they had no jurisdiction to grant,
then they would commit a legal error that will go to the root of the
matter.
13. It will be relevant to note section 30 of the Arbitration Act, 1940.
30.Grounds for setting aside award: An award shall not be set
aside except on one or more of the following grounds namely:
8
FA 854/1992
(a) that an arbitrator or umpire has misconducted himself or the
proceedings.
(b) that an award has been made after the issue of an order by
the court superseding the arbitration or after arbitration
proceedings have become invalid under Sec.35;
(c) that an award has been improperly procured or is otherwise
invalid.
14.One of the grounds for setting aside the Arbitration Award is that the
Arbitrators have 'misconducted' themselves. It is now settled that the
phrase 'misconduct' employed in section 30 (a) encompasses 'legal
misconduct' as well. Grant of any relief which has not been
specifically referred for Arbitration will clearly fall within the ambit
of the phrase 'misconduct' as envisaged under section 30 (a) of the
Arbitration Act of 1940. Thus, the learned Civil Judge was in error in
not setting aside the Award in respect of the interest for pre-reference
period and the further interest thereupon. Thus the Appellant has
made out a clear case for exercising powers under section 39 of the
Arbitration Act, 1940.
15.There is one more point on which this ground must be held in favour
of the Appellant. The learned Assistant Government Pleader has
drawn our attention to the term in the Agreement between the parties
in respect of claim of interest. The said term is as under :
9
FA 854/1992
NO INTEREST ON MONEY DUE TO THE CONTRACTOR:
No omission by the Engineer to pay the amount due upon
measurements or otherwise shall vitiate or make void the contract,
nor shall the contractor be entitled to
interest on any guarantee
bond or payment in arrears not on any balance which may on the
final settlement of his account be found due to him.
16.In the context of this term, the learned Assistant Government Pleader
relied on the judgment of the Apex Court in DURGA RAMPRASAD
VS GOVERNMENT OF A.P. REPORTED in (1995) 1 SCC 418.
In that case the term regarding interest in the Agreement between the
parties was as under :
69.” Interest on money due to the Contractor. (a) No omission
by the Executive Engineer or the Sub-Divisional Officer to pay
the amount due upon certificates shall vitiate or make void the
contract nor shall the contractor be entitled to interest upon any
guarantee found or payments in arrears nor upon any balance
which may on the final settlement of his accounts be found to
be due to him.”
17.The terms regarding interest in the case before the Apex court and
case at hand are identical. The Apex court in the case of DURGA
RAM PRASAD supra considered the implications of the above term
as to whether the contractor was entitled to grant of pre-reference
period on the basis of such term. The Apex court observed as under :
10
FA 854/1992
4. It is true that the learned Single Judge of the A.P.High Court
appears to have considered the question and the construction of
clause 69 was put up is in favour of the contractor as contended
for. It is not a correct approach. The construction put up on clause
69 of MDSS is not correct. However on the facts int hat case there
does not appear to any dispute as to the amount due. Therefore the
learned Judge had proceeded that since the contract provides for
withholding the payment for a suspended period of six months, if
the amount is withheld beyond that period, the contractor would
be entitled to payment of interest. That is not the factual scenario
in this case. The very dispute is whether the appellant is entitled to
the payment of the amount pursuant to the contract. The claim of
the State appears to be that the appellant had not constructed the
godown in accordance with the specification is and that therefore
they withheld the payment. Unless the dispute is resolved and that
the amount is found due, the contractor is not entitled to the
payment of it. Thereon interest in terms of clause 69 of the MDSS
is contracted out. When such be the position, then mere reference
does give jurisdiction to the arbitrator to award interest to the
period prior to the reference.
5. This Court in Executive Engineer (Irrigation) vs Abhaduta Jena
(in SCC pg 435 para 20) held that :
“In the remaining cases which arose before the commencement
of the Interest Act, 1978 the respondents are not entitled to
claim interest either before the commencement of the
proceedings. They are not entitled to claim interest for the
period prior to the commencement of the arbitration
proceedings for the reason that the Interest Act 1939 does not
apply to their cases and there is no agreement to pay interest or
any usage of trade having the force of law or any other
provisions of law under which the claimants were entitled to
recover interest”.
This ratio was followed by another Bench of this court in State
of Orissa vs Niranjan Swain. In Secy.Irrigation Dept vs
G.C.Roy the constitution bench was concerned with the case
whether the contractor is entitled to interest pendente lite. The
controversy therefore centres around the question whether the
contractor is entitled to the interest pendente lite. The ratio
therein therefore has no relevance for the purpose of this case.
The ratio in Jena case on the above quoted ratio is still good
11
FA 854/1992
law. Accordingly,we are of the view that the contractor is not
entitled to payment of interest in terms of clause 69 of MDSS
for the period anterior to the reference for arbitration until the
final settlement of the amount due to the contractor of his
account is determined. In this case that dispute was determined
by the arbitrator in his award. Therefore, from the date of
withholding till the date of award the appellant is not entitled to
the payment of interest. The arbitrator has no jurisdiction to
arbitrate that dispute. The Division Bench therefore, rightly
negatived the claim of interest. “
18.The ratio of the above mentioned case is directly applicable to the
case before us. On the interpretation of almost exactly the same term
the Apex court came to the conclusion that such term does not entitle
the contractor for grant of interest for the pre-reference period. A term
with such phraseology is commonly found in the government
contracts. Once the term with very same phraseology and purport has
already been interpreted to mean that the contractor shall not be
entitled to grant of interest for pre-reference period, the Award made
by the Arbitrators in respect of grant of interest for pre-reference
period must be quashed and set aside. Grant of such interest was thus
beyond the jurisdiction of the Arbitrators which has resulted in
'misconduct' and the learned Civil Judge fell in error in not setting
aside the Award to that effect. Thus, we set aside the grant of amount
of Rs.58.18 lacs as interest for the pre-reference period. Further the
relief of grant of interest on the amount of Rs.58.18 lacs (interest for
pre-reference period) has to be set aside being consequence of the
12
FA 854/1992
preceding direction.
19.The learned AGP further submitted that grant of Rs.2.03 lacs in
respect of bank guarantee commission and other charges by both the
Arbitrators as well as the learned Judge was not proper. According to
her, as per the contract it was the responsibility of the respondents to
incur those charges. In this regard, clause 10 of the contract needs to
be noticed. It is reproduced as under :
10.0 Security Deposit:
10.1. A sum as mentioned in 2-2 tender form at para (d) (i) will
have to be deposited by the contractor at the time of completing
the tender documents, if his tender is proposed to be accepted
by government.
10.2 In lieu of cash deposit mentioned above, Government
securities, guarantee bonds in prescribed form of nationalized
Banks or schedule Banks, National saving certificates, Post
office cash certificates, National Plan saving Certificates,
National Defence Saving Certificates etc and as may be
approved by government from time to time, standing to the
name of the tenderer shall be accepted if pledged as security
deposit in the name of the Executive Engineer, Khadakwasla
Canal Division no.1 Poona-1.
10.3. In addition to the sum as in 10.1 and 10.2 above, sums as
security deposit will be deducted from running account bills, at
the rate shown at (e) in B-2 Tender Form to a total up to a sum
mentioned at (d) (ii) in the B-2 Tender form. The cash recovery
of security deposit made from the running account bills, will
remain in the form of cash or government securities, National
saving certificates, Post office cash certificates,National Plan
saving certificates, National Defence saving certificates, or as
may be approved by government from time to time. Standing
in the name of the tenderer and pledged as security deposit in
13
FA 854/1992
the name of Executive Engineer, Khadakwasla Canal Division
No.1 Poona-1.
10.4. As a concession, contractor is allowed to pay security
deposit in the form of Bank guarantee vide col.10.10.2 above
on the express condition that if due to unforeseen
circumstances, government is forced to abandon the execution
of work after the signing of the contract or during the currency
of contract the initial bank commission charges paid by the
contractor for obtaining the guarantees will not be refunded to
the contractor. “
Clause 10.1 makes it clear that as a first priority, the
respondent was required to give security deposit in cash as mentioned
in the tender form at para D (d) (i). As per clause 10.2 the respondent
was permitted tender in lieu of cash deposit; government securities,
guarantee bonds in the prescribed form of Nationalised Banks or
scheduled banks and so on. The option of providing bank guarantee
instead of cash was to be exercised by the Respondents. The
Respondent exercised the option of providing a bank guarantee.
Furthermore,
tendering security deposit by way of bank guarantee was a concession
to be accorded to the respondent under the Contract. The learned AGP
was right in contending that the Appellants cannot be made
responsible for the choice exercised by the Respondents in providing
bank guarantee instead of cash. She would contend that in fact since
the respondent chose to give bank guarantee the Appellant lost
interest on the amount which it would have earned if cash deposit was
the wording of the clause 10.4 would indicate that
14
FA 854/1992
made.
Appellants with an amount of Rs.2.03 lacs towards bank guarantee
commission which was incurred due to the option exercised by the
Respondent for its own convenience. Except referring to this
argument, we find no satisfactory discussion regarding the same in
the impugned judgment. Saddling a party with an amount which is
clearly the responsibility of another party under the contract, is
according to us, a fundamental error on the part of Arbitrators which
would fall within the ambit of section 30 of the Arbitration Act, 1940.
Thus, the award and the decree to this extent also requires to be set
aside.
In our opinion, there was no justification to saddle the
20.Accordingly, the Appeal is allowed. The Judgment and Decree is set
aside and the Misc.Application No.672 of 1990 is allowed.
Appeal is allowed in above terms.
(N.M.JAMDAR, J)
(A.M.KHANWILKAR, J)
Print Page
Government Of Mahrashtra Irrigatio Department, Pune Vs. Atur India Pvt. Ltd., Pune
FIRST APPEAL NO.854 OF 1992
Citation : 2012 (4) MHLJ 319
CORAM : A.M.KHANWILKAR &
N.M.JAMDAR, JJ
Dated: 21/3/2012
JUDGMENT:
1. This First Appeal filed by the Government of Maharashtra under
Section 39 of Arbitration Act,1940 challenges the Judgment and
Order dated 24.4.1992 passed by the Civil Judge, Senior Division,
Pune passing a decree in respect of the Award of the Arbitrators
appointed to resolve the disputes between the Appellants and the
Respondent. The Award directed the Appellants to pay an amount of
Rs.210.68 lakhs which included interest for the pre-reference period.
Before the Civil Judge, the Appellants did not challenge this liability
to pay the principal amount and restricted their challenge mainly to
the grant of interest for the pre-reference period and other charges and
interest thereupon.
2. The main question that needs to be considered in this Appeal is
whether the Arbitrators as well as the learned Civil Judge were right
in granting interest for the pre-reference period. Thus, only those
facts which are relevant for the purpose of deciding the above
question are encapsulated as under :
3. The Respondents-Plaintiffs were engaged in construction work of
civil nature.
Irrigation Department of the Appellants for construction of Veer Baji
Pasalkar Dam at village Varasgaon Taluka Velhe, District Pune. A
work order in favour of the Respondents was issued on 6.10.1976.
Dispute arose regarding payment to the Respondents and said dispute
was referred for Arbitration to a panel of Arbitrators constituted by
Government Resolution dated 10.4.1989.
The Respondents entered into a contract with the
4. The Arbitrators pronounced the Award on 11.9.1990 and as per the
Award, the Appellants were directed to pay an amount of Rs.210.68
3
FA 854/1992
lacs towards final settlement of all the claims of the Respondents.
This sum included an amount of Rs.58.18 lakhs towards interest for
the pre-reference period. Award also contained a direction to pay an
amount of Rs.2.03 lakhs towards bank guarantee commission The
Award further directed the Appellants to pay the said amount to the
Respondent within one month of the declaration of the Award failing
which the Appellants were liable to pay interest at 18% interest p.a.
from 16.10.1990 till the date of actual payment.
5. The Respondents filed a Special Civil Suit No.1109 of 1990 in the
Court of Civil Judge, Senior Division, Pune with a prayer to file the
Award and pass a decree in terms of the same. The Appellants filed a
Misc.Application No.672 of 1990 for setting aside the Award
contending that the Arbitrators were not right in granting an amount
of Rs.2.03 lacs towards bank guarantee commission and licence fees
and that the Arbitrators were not right in granting an amount of Rs.
58.18 lacs towards the interest for the pre-reference period. The
Appellants also prayed for setting aside the direction in the Award to
pay further interest at 18% per annum. Appellants however, did not
dispute the liability to pay the principal amount of Rs.150.47 lacs.
6. The Civil Judge, Senior Division, Pune heard both the Special Civil
4
FA 854/1992
Suit as well as Misc.Application together and came to the conclusion
that the Award of interest granted by the Arbitrators cannot be faulted
with and further went on to hold that since the jurisdiction of the
Court is limited while deciding objections to Arbitration Award, the
findings of the Arbitrators cannot be interfered with. The learned
Civil Judge accordingly, dismissed the Misc.Application No.672 of
1990 filed by the Appellants and decreed Special Civil Suit No. 1109
of 1990 directing the appellants to pay an amount of Rs.60.21 lacs in
terms of the award along with interest. Being aggrieved, the
Appellant-State has brought this First Appeal before us under section
39 of the Arbitration Act, 1940.
7. We have heard Mrs Geeta Mulekar, learned Assistant Government
Pleader for the State and Mr.A.V.Anturkar learned counsel for the
Respondents.
8. The primary contention raised by the learned Assistant Government
Pleader is that the interest for pre-reference period ought not to have
been granted by the Arbitrators as that issue was not specifically
referred for arbitration and the Arbitrators did not have the power to
grant interest for the pre-reference period. It was further contended
that in view of the law laid down by the Apex Court in the case of
5
FA 854/1992
DURGA RAM PRASAD VS.GOVERNMENT OF A.P.reported in
(1995) 1 SUPREME COURT CASES 418 there was clear legal error
on the part of the Arbitrators to grant interest for the pre-reference
period which amounted to 'misconduct' and thus the Award to that
effect ought to have been set aside by the learned Civil Judge.
9. Mr.Anturkar, learned counsel for the Respondent on the other hand
submitted that the Arbitrators were well within their powers to grant
interest for the pre-reference period as according to him as per the
terms of the Agreement as well as the Reference, the Arbitrators were
empowered to do so. He further contended that the Respondents had
not given up their claim towards grant of interest for pre-reference
period which was implicit in their demand. He also contended that
the scope of the Civil Court and this Court to interfere with the award
of the arbitrators mutually agreed by the parties, is limited and no
case is made out by the Appellants for invoking this limited
jurisdiction.
10.The first question that needs to be addressed is whether the issue of
grant of interest for the pre-reference period was referred to
Arbitrators. If the said issue was not referred to Arbitrators then the
Arbitrators could not have traveled beyond the scope of the
6
FA 854/1992
Reference. For that purpose, it is necessary to first advert to the claim
of the Respondent as noticed from the Arbitration Award.
Claim No.1: Claim amounting to Rs.566.69 lakhs on account of
under utilization of machinery and infra-structure owing to
extended construction period together with interest at 18 percent
per annum compounded quarterly amounting to Rs.441.26 lakhs
adding up to a total amount of claim of Rs.1007.95 lakhs.
Claim No.2: Claim amounting to Rs.32.59 lakhs on account of
incorrect deduction of 2 ½ percent of the value of bills made for
discount for timely payments together with interest thereon at 18
percent per annum compounded quarterly amounting to Rs.95.66
adding up to Rs.128.25 lakhs.
Claim no.3: The claimants also have requested the Arbitrators to
award the incidental claim of the cost of this arbitration to them.
11.The Arbitrators framed questions which they were called upon to
decide in the Arbitration proceedings. The questions so framed are
reproduced as under :
(i) Is it correct that the Claimants did not prove that they had all
requirements of adequate progress and in fact according to the
Respondents, did not possess it during the initial period of
contract up to 5-10-82 ?
(ii)Is it correct that the performance of the contract by
Claimants not being adequate in the original period of contract
the performance spilled over period of financial stringency and
cement shortage and other difficulties thereafter ?
(iii) Is it correct that Claimants were prevented from expected
performance under this contract because of lack of engineering
decisions in the initial period, cement shortages over years,
non-payment of bills because of financial stringency of the
Government, non payment of large amounts of claims etc ?
(iv) In the light of the above questions whether the Claimants
7
FA 854/1992
should shoulder the burden of responsibility for the delayed
performance and in what proportion ?
It is clear from the above mentioned claims as well as questions
framed that there is no specific issue regarding grant of interest for
the pre-reference period for adjudication. Furthermore, in the claim
statement,
mentioned. The Appellant in para 23 of its Written Statement before
the Arbitrators categorically stated that the claim for interest for the
pre-reference period was not referred to the arbitration.
no period for the claim of interest has been specifically
12.Interest for the pre-reference period has to be specifically prayed for
and claimed. Furthermore, the claim for interest for the pre-reference
period has to be specifically referred for Arbitration. If the said issue
is not referred to the Arbitrators for consideration then the Arbitrators
will have no jurisdiction to grant the same. If the Arbitrators have
granted relief to any party,which they had no jurisdiction to grant,
then they would commit a legal error that will go to the root of the
matter.
13. It will be relevant to note section 30 of the Arbitration Act, 1940.
30.Grounds for setting aside award: An award shall not be set
aside except on one or more of the following grounds namely:
8
FA 854/1992
(a) that an arbitrator or umpire has misconducted himself or the
proceedings.
(b) that an award has been made after the issue of an order by
the court superseding the arbitration or after arbitration
proceedings have become invalid under Sec.35;
(c) that an award has been improperly procured or is otherwise
invalid.
14.One of the grounds for setting aside the Arbitration Award is that the
Arbitrators have 'misconducted' themselves. It is now settled that the
phrase 'misconduct' employed in section 30 (a) encompasses 'legal
misconduct' as well. Grant of any relief which has not been
specifically referred for Arbitration will clearly fall within the ambit
of the phrase 'misconduct' as envisaged under section 30 (a) of the
Arbitration Act of 1940. Thus, the learned Civil Judge was in error in
not setting aside the Award in respect of the interest for pre-reference
period and the further interest thereupon. Thus the Appellant has
made out a clear case for exercising powers under section 39 of the
Arbitration Act, 1940.
15.There is one more point on which this ground must be held in favour
of the Appellant. The learned Assistant Government Pleader has
drawn our attention to the term in the Agreement between the parties
in respect of claim of interest. The said term is as under :
9
FA 854/1992
NO INTEREST ON MONEY DUE TO THE CONTRACTOR:
No omission by the Engineer to pay the amount due upon
measurements or otherwise shall vitiate or make void the contract,
nor shall the contractor be entitled to
interest on any guarantee
bond or payment in arrears not on any balance which may on the
final settlement of his account be found due to him.
16.In the context of this term, the learned Assistant Government Pleader
relied on the judgment of the Apex Court in DURGA RAMPRASAD
VS GOVERNMENT OF A.P. REPORTED in (1995) 1 SCC 418.
In that case the term regarding interest in the Agreement between the
parties was as under :
69.” Interest on money due to the Contractor. (a) No omission
by the Executive Engineer or the Sub-Divisional Officer to pay
the amount due upon certificates shall vitiate or make void the
contract nor shall the contractor be entitled to interest upon any
guarantee found or payments in arrears nor upon any balance
which may on the final settlement of his accounts be found to
be due to him.”
17.The terms regarding interest in the case before the Apex court and
case at hand are identical. The Apex court in the case of DURGA
RAM PRASAD supra considered the implications of the above term
as to whether the contractor was entitled to grant of pre-reference
period on the basis of such term. The Apex court observed as under :
10
FA 854/1992
4. It is true that the learned Single Judge of the A.P.High Court
appears to have considered the question and the construction of
clause 69 was put up is in favour of the contractor as contended
for. It is not a correct approach. The construction put up on clause
69 of MDSS is not correct. However on the facts int hat case there
does not appear to any dispute as to the amount due. Therefore the
learned Judge had proceeded that since the contract provides for
withholding the payment for a suspended period of six months, if
the amount is withheld beyond that period, the contractor would
be entitled to payment of interest. That is not the factual scenario
in this case. The very dispute is whether the appellant is entitled to
the payment of the amount pursuant to the contract. The claim of
the State appears to be that the appellant had not constructed the
godown in accordance with the specification is and that therefore
they withheld the payment. Unless the dispute is resolved and that
the amount is found due, the contractor is not entitled to the
payment of it. Thereon interest in terms of clause 69 of the MDSS
is contracted out. When such be the position, then mere reference
does give jurisdiction to the arbitrator to award interest to the
period prior to the reference.
5. This Court in Executive Engineer (Irrigation) vs Abhaduta Jena
(in SCC pg 435 para 20) held that :
“In the remaining cases which arose before the commencement
of the Interest Act, 1978 the respondents are not entitled to
claim interest either before the commencement of the
proceedings. They are not entitled to claim interest for the
period prior to the commencement of the arbitration
proceedings for the reason that the Interest Act 1939 does not
apply to their cases and there is no agreement to pay interest or
any usage of trade having the force of law or any other
provisions of law under which the claimants were entitled to
recover interest”.
This ratio was followed by another Bench of this court in State
of Orissa vs Niranjan Swain. In Secy.Irrigation Dept vs
G.C.Roy the constitution bench was concerned with the case
whether the contractor is entitled to interest pendente lite. The
controversy therefore centres around the question whether the
contractor is entitled to the interest pendente lite. The ratio
therein therefore has no relevance for the purpose of this case.
The ratio in Jena case on the above quoted ratio is still good
11
FA 854/1992
law. Accordingly,we are of the view that the contractor is not
entitled to payment of interest in terms of clause 69 of MDSS
for the period anterior to the reference for arbitration until the
final settlement of the amount due to the contractor of his
account is determined. In this case that dispute was determined
by the arbitrator in his award. Therefore, from the date of
withholding till the date of award the appellant is not entitled to
the payment of interest. The arbitrator has no jurisdiction to
arbitrate that dispute. The Division Bench therefore, rightly
negatived the claim of interest. “
18.The ratio of the above mentioned case is directly applicable to the
case before us. On the interpretation of almost exactly the same term
the Apex court came to the conclusion that such term does not entitle
the contractor for grant of interest for the pre-reference period. A term
with such phraseology is commonly found in the government
contracts. Once the term with very same phraseology and purport has
already been interpreted to mean that the contractor shall not be
entitled to grant of interest for pre-reference period, the Award made
by the Arbitrators in respect of grant of interest for pre-reference
period must be quashed and set aside. Grant of such interest was thus
beyond the jurisdiction of the Arbitrators which has resulted in
'misconduct' and the learned Civil Judge fell in error in not setting
aside the Award to that effect. Thus, we set aside the grant of amount
of Rs.58.18 lacs as interest for the pre-reference period. Further the
relief of grant of interest on the amount of Rs.58.18 lacs (interest for
pre-reference period) has to be set aside being consequence of the
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FA 854/1992
preceding direction.
19.The learned AGP further submitted that grant of Rs.2.03 lacs in
respect of bank guarantee commission and other charges by both the
Arbitrators as well as the learned Judge was not proper. According to
her, as per the contract it was the responsibility of the respondents to
incur those charges. In this regard, clause 10 of the contract needs to
be noticed. It is reproduced as under :
10.0 Security Deposit:
10.1. A sum as mentioned in 2-2 tender form at para (d) (i) will
have to be deposited by the contractor at the time of completing
the tender documents, if his tender is proposed to be accepted
by government.
10.2 In lieu of cash deposit mentioned above, Government
securities, guarantee bonds in prescribed form of nationalized
Banks or schedule Banks, National saving certificates, Post
office cash certificates, National Plan saving Certificates,
National Defence Saving Certificates etc and as may be
approved by government from time to time, standing to the
name of the tenderer shall be accepted if pledged as security
deposit in the name of the Executive Engineer, Khadakwasla
Canal Division no.1 Poona-1.
10.3. In addition to the sum as in 10.1 and 10.2 above, sums as
security deposit will be deducted from running account bills, at
the rate shown at (e) in B-2 Tender Form to a total up to a sum
mentioned at (d) (ii) in the B-2 Tender form. The cash recovery
of security deposit made from the running account bills, will
remain in the form of cash or government securities, National
saving certificates, Post office cash certificates,National Plan
saving certificates, National Defence saving certificates, or as
may be approved by government from time to time. Standing
in the name of the tenderer and pledged as security deposit in
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FA 854/1992
the name of Executive Engineer, Khadakwasla Canal Division
No.1 Poona-1.
10.4. As a concession, contractor is allowed to pay security
deposit in the form of Bank guarantee vide col.10.10.2 above
on the express condition that if due to unforeseen
circumstances, government is forced to abandon the execution
of work after the signing of the contract or during the currency
of contract the initial bank commission charges paid by the
contractor for obtaining the guarantees will not be refunded to
the contractor. “
Clause 10.1 makes it clear that as a first priority, the
respondent was required to give security deposit in cash as mentioned
in the tender form at para D (d) (i). As per clause 10.2 the respondent
was permitted tender in lieu of cash deposit; government securities,
guarantee bonds in the prescribed form of Nationalised Banks or
scheduled banks and so on. The option of providing bank guarantee
instead of cash was to be exercised by the Respondents. The
Respondent exercised the option of providing a bank guarantee.
Furthermore,
tendering security deposit by way of bank guarantee was a concession
to be accorded to the respondent under the Contract. The learned AGP
was right in contending that the Appellants cannot be made
responsible for the choice exercised by the Respondents in providing
bank guarantee instead of cash. She would contend that in fact since
the respondent chose to give bank guarantee the Appellant lost
interest on the amount which it would have earned if cash deposit was
the wording of the clause 10.4 would indicate that
14
FA 854/1992
made.
Appellants with an amount of Rs.2.03 lacs towards bank guarantee
commission which was incurred due to the option exercised by the
Respondent for its own convenience. Except referring to this
argument, we find no satisfactory discussion regarding the same in
the impugned judgment. Saddling a party with an amount which is
clearly the responsibility of another party under the contract, is
according to us, a fundamental error on the part of Arbitrators which
would fall within the ambit of section 30 of the Arbitration Act, 1940.
Thus, the award and the decree to this extent also requires to be set
aside.
In our opinion, there was no justification to saddle the
20.Accordingly, the Appeal is allowed. The Judgment and Decree is set
aside and the Misc.Application No.672 of 1990 is allowed.
Appeal is allowed in above terms.
(N.M.JAMDAR, J)
(A.M.KHANWILKAR, J)
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