Tarapore & Company v. Cochin Shipyard Ltd. Cochin & Anr.

_ TARAPORE & COMPANY . Ve COCHIN SHIPYARD LTD, COCHIN-& ANR.

oa, - March 6, 1984

“TD.A. DesAt AND O. CHINNAPPA Rebuy, JJ.J

Arbitration Act 1940 (Act X of 1940) section 16(1\(c), 30 and 33, Arbitration—Works contract-~Construction of Building Dock and Repair

Dock—Reference of specific question of law to arbitrator—Arbitrator framing issue-—Parties agreeing to issue being decided—Award if could be set aside on ground of error of law on face of award.

Interpretation:

Agreement—Works contract ‘of large magnitude—Over—Simplification of clauses impermissible~Agreement predicated upon and agreed fact situation— ;

Situation ceasing to exist—Agreement to that extent rendered irrelevant and otiose. | :

Words & Phrases.

“Without prejudice’—Meaning of —‘claim arising out of contract’—‘Relating to the contract’~Meaning of~Clause 40 General Conditions of Contract.

The appellant and the respondents entered into a contract for the construction of Building Dock. ‘Clause 40 _of the General Conditions of Contract entered into between the parties, provided that “all questions and dispute’ relating to the meaning of the Specifications Estimates Instructions, Designs, Drawing———-——and the quality of the workmenship or materials used in the work or as to any other questions, claim, right, matter or thing whatsoever in any way arising out of or relating to the contract or otherwise concerning the execution whether arising during the progress of the work or ofter completion—

———shall ‘be referred to the Sole Arbitrator ete,” During the. implementation of the works contract, disputes arose between the parties.in respect of a claim for compensation on account of the increase in the cost of imported pile-driving equipment and technical know-how fees. Correspondence was exchanged between the Appellant and Respondent No. 1 and the dispute was teferred to the Sole Arbitrator. The point referred were : (1) Whether the claim of compen- - gation for increase in the cost of imported pile driving equipment and technical know-how fees would fall within the purview of the first para of clause 40 of the General Conditions of Contract ; and (2). ifit does, the quantum of compensation, if any, to which the appellant would be -entitled to. The arbitrator entered upon the reference and after’ hearing the parties. gave his award. The

_* ny

TARAPORE CO, . COCHIN SHIPYARD > a 119° arbitrator held that the appellant was entitled to compensation for the increase in the cost of imported pile drawing equipment and technical know-how fees by asum of Rs. 99 lakhs which amount shall be payable with interest @ 9°1/2% The award was typed on stamp paper of the value of Rs. 150/-. The arbitrator forwarded the award to both the parties.

The appellant moved 4 petition under® sections 14 and 17 of the Arbitration Act, in the Court of the Subordinate Judge for filing the award and for making it a rule of the Court, while the respondent moved a petition under sections 30 and 33 for setting aside the award contending that: (1) the award was insufficiently stamped, and (2) the arbjtrator had exceeded his jurisdiction by misconstruing clause 40. The Subordinate Judge negatived both the contentions. - It. was held that the respondent having submitted the question whether the dispute raised by the appellant was covered by the arbitration clause ; could not controvert the jurisdiction of the Arbitrator to decide the dispute ; and the award of the arbitrator was modified in the matter of interest from 9°1/2 per cent as awar-

“+ ded by the arbitrator to 6 per cent, and the award was made a rule of the

Court. .

The respondent preferred an appeal to the High Court, and a Division . ~

Bench, agreed’ with the Subordinate Judge on the question of insufficiency of stamp. It however held that the question whether the dispute was arbitrable or not could not be finally decided by the arbitrator because it was a matter relating to-his jurisdiction, and that the arbitrator cannot by an erroneous interpretation or construction of the clause confer jurisdiction on himself and that the court

. can go into the question whether the matter in dispute between the parties was covered by the arbitration clause. It finally held that even though the arbitration clause was very wide, the dispute as to compensation for increase in the cost of imported pile driving equipment and technical know-how fees could not be covered by the arbitration clause because under clause 26 every plant, machinery and equipment had to be provided by the contractor and any rise or escalation in the price of such equipment or machinery, cannot be the subject matter of compensation. by the respondent. The appeal wa’ therefore allowed, and the trial court’s order, making the award.a rule of the court was set aside and directed that the award be returned to the parties.

In. the appeal to this Court it was contended on behalf of the appellant, that though Sec. 16(1)(c) of the Arbitration Act may permit the court to remit or set aside the award on the ground that there is an error of law apparent on the face of it, yet where a specific question of law has been referred to the arbitrator for decision, the fact that the-decision is ‘erroneous does not make the award bad on its face so as to permit its being set aside. As a specific question of law touching upon the jurisdiction of the arbitrator was speficially referred to

. the arbitrator for his decision, the decision of the arbitrator is binding on the parties and the court cannot proceed to inquire whether upon a true construction of the arbitration clause, the dispute referred to the arbitrator for arbitration would be covered by the arbitration clause so as to clothe the arbitrator with the | jurisdiction to arbitrate upon the dispute.

On behalf of the respondent, it was contended that the jurisdiction of the

* arbitrator cannot be left to the decision of the arbitrator so as to be binding on oA

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120 SUPREME COURT REPORTS

[1984] 3 S.C.R, the parties and it is always for the court to decide whether the arbitrator had jurisdiction to decide the dispute, and that the arbitrator cannot by a miscon- _ struction of the. arbitration agreement clothe himself with or confer upon himself " the jurisdiction to decide the dispute.

Allowing the Appeal ; ~

HELD: 1. A specific question of jaw touching the jurisidiction of the arbitrator was specifically referred to the arbitrator and therefore the arbitrator’s decision is binding on the parties and the award cannot be set aside on the sole ground that there was an error of law apparent on the face of the award. It is also established that the claim for compensation made by the contractor which led to the dispute vais covered by the arbitration clause. The quantum of compensation awarded by the arbitrator was never disputed nor questioned. [170E-F]

2. A question of law may figure before an ‘arbitrator in two ways. It may arise as an incidental point while deciding the main dispute referred to the arbitrator or in a given case parties may refer a specific question of law to’ the arbitrator for his decision. [1376-8]

. Russel: Law of Arbitration. Twentieth Edition p. 22 ; Halsbury’s Laws of England Vol. 2 Para 623 4th Edition referted to.

3. Arbitration has been considered 4 5 civilised. way of resolving disputes avoiding court proceedings. There is no reason why the parties should be precluded from -referring a specific question of law to an arbitrator for his decision and agree to be bound by the same. This approach manifests faith - of parties in the capacity ofthe tribunal of their choice to decide even a pure. question of law. If they do so, with eyes wide open, and there is nothing ‘to * preclude the parties from doing sq, then there is no reason why the court should

‘try to impose its view of law superseding the view of the Tribunal whose decision the parties agreed to. abide by. On-principle it appears distinctly clear that when a specific question of law is referred to an arbitrator for this decision including the one. touching upon the jurisdiction of the arbitrator, the decision of the arbitrator would be binding on both the parties and it would not be open: to any of the two parties to wriggle out of it by contending that the arbitrator cannot clutch at.or confer jurisdiction upon himself by mis-construing the arbi- tration agreement. [1388-G]

. 4 Ifa question of law is specifically referred and it becomes evident ‘that. the parties desired to have a decision on the Roecific question from the arbitrator rather than one from the court, then the court will not in.erfer# with the award of the arbitrator on the ground that. there is an error or law apparent on the face of the award even if the view of law taken by the arbitrator does not accord with the view of the court. [147F]

Kelantan Government v. Duff Development Co. Ltd. 1923 All E.R. 349: Re King and Duveen, [1913)-2 K.B. 32: F.R. Absalom Ltd. vy. Great Western (London)Garden Village Society Ltd., 1933] All E.R. 616; Durga Prasad Chamria e

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TARAPORE CO. ¥. COCHIN SHIPYARD 121

“and Anr. v. Sewkishendas Bhattar and Ors: AIR 1949 Privy Council 334; Seth

Thawardas Pherumal vy. The Union of Iudia; [1955]2 S.C.R. 48; Mis. Alopi

‘Parshad & Sons Ltd. vy. Tbe Union of India, [1960] 2 S.C.R. 783; Champsey

Bhara and Company v. Jivraj Balloo Spinning and Weaving Company Lid.: Law Report 50 1B. 324; Union of India vy. A.L. Rallia Ram., [1964] 3 S.C.R. 164; Mls. Kapoor Nilokheri., Co-cp. Dairy Farm Society Ltd. v. Union of India and Others., ATR 1973 S.C. 1338; N. Chellappan v. Secretary, Kerala State Electricity Board’ & Anr., [1975]28.C.R. 811; Produce Brokers Co. Ltd. y. Olympia Oil and Cake Co. Ltd., [1914-15] AH E.R. 133; Attorney General For Manitoba v. Kelly and Others.. (1922) HH E.R. 68; Hirji Muljiv. Cheong Yue Steamship Co.Ltd., [1926] AILE.R. 51; Heyman & Anr. v. Darwins Ltd., [1942] 1 Al E. Re 337; Jivarajbhai Ujamshi Sheth & Ors. v. Chiniamanrao Balaji & Anr., [1954] 5 S.C.R. 480; Dr. S.B. Dutt v. University of Delhi., {1958} S.C.R. 1236; referred fa. . ‘

5. The expression ‘without prejudice’ carries a technical meaning depending upon the context in which it is used. An action taken without prejudice to one’s right cannot necessarily mean that the entire action can be ignored by the party taking the same. [148F-G] .

In the instant case, in the context in which the expression ‘without prejudice” is used, it would only mean that the respondent reserved the right to contend before the arbitrator that the dispute is not covered by the arbitration clause. It does not appear that, what was a contention that no specific question was specifically referred to the arbitrator, On a proper reading of the correspondence, and in the setting in which the term ‘without prejudice’ is used, it only means that the respondent reserved to itself the right to contend before the arbitrator that a dispute raised or the claim made by the contractor was not covered by the arbitration clause, No Other meaning “can be assigned to it.‘ [148D-E] .

6. In works contract of such magnitude, and which have been undertaken by an Indian contractor for the first time negotiations prior to the finalisation of the contact and the correspondence leading to the formation of contract supply the basis:on which the contract was finally entered into. . Undoubtedly, if in the final written contract, there is something contrary to the basic understanding

. during the formative stage of the contract, the written contract would prevail.

But if the contract does not indicate to the contary and the assumptions appeared to be the foundation of the contract, that aspect cannot be overlooked while determining what were the obligations undertaken the formal contract. {151H-152B]

7. Over-simplification of the clauses of the contract involving works of large magnitude is impermissible. | The whole gamut of discussions, negotiations and correspondence must be taken into consideratioti to arrive at a true meaning of what was agreed to between the parties. (156F]

_ In the instant case, there is no room for doubt that the parties agreed that the investment of the contractor under this head would be Rs. 2 crores and the tendered rates were predicated upon and co-related to this understanding. [156G]

123 SUPREME COURT REPORTS [1984] 3 s.c.r.

8. When an agreement is predicated upon an agreed fact situation, if the latter ceases to exist the agreement to that extent becomes irrelevant of ofiose. [156G}

9. Phrases such as ‘claim arising out of contract’ or.‘relating to the con-- tract’ or ‘concernifig the cotract’ on proper construction would mean that if while éntertaining or rejecting the claim or the dispute in relation to claim may be entertained or rejected after reference to the contract, it is a claim arising out of contract. The language of clause 40 shows that. any claim arising out of the contract in relation to estimates made in the contract would be covered by the arbitration clause. If it becomes necessary to have recourse to the contract to |

" settle the dispute one way or the other then certainly it can be said that it is a dispute arising out of the contract. [157F-G]

In the instant case, the arbitration clause is so widely worded as disputes arising out of the contract or in relation tg the contract or execution of the works that it would comprehend, within its compassa claim for compen- sation related to estimates and arising out of the contract: [157H]

10 @ A dispute, the determination of which turns on the true construction of the contract, would also seem to, be a dispute under arising out of-“or concerning the contract. The test is that if in setling a dispute, a reference to the contract is necessary, such a dispute would be covered by. the arbitration clause. [158D-E}

A.M. Mair & Co. v. Gordhandas Sagarmull., [1950] $.C.R. 792; Ruby General Insurance Co. Ltd. y. Pearey Lal Kumar And Another; [1952] $.C.R. 501; referred to.

; ii. Where the parties are at one-in asserting that they entered into a binding contract, but a difference has arisen between them whether there has

_ been a breach by one side or the other, or whether circumstances have arisen _ which have discharged ‘one -or both parties from -further performance; such differences should be regarded as differences which have arisen ‘in respect of? or ‘with regard to’ of ‘under’ the contract, and an arbitration clause which uses these, or similar expressions should be contrued accordingly. [159B-C]

Union of India v. Salween Timber Construction (India) & Ors., [1969] 2

S.C.R. 224; Heyman & Anr. y. Darwins Lid., [1942] A.C. 356 at 366; Astro -

Vencedor Compania Naviora S.A. of Panama v. Mabanaft G.M.B.H. The Diamianos., [1971] 2 Q.B. 588; Gunter Henck vy. Andre & CIE. S.A., [1970] i

Llioyd’s Law Reports 235; referred to

In the instant case, from the pleadings, it clearly transpires that both the parties had recoutse to the contract. It is satisfactorily established that the.

claim made by the contractor would be covered by the arbitration clause. [160B]

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TARAPORE CO. y. COCHIN SHIPYARD (Desai J.) «133

Civi APPELLATE JURISDICTION : Civil Appeal No. 3023 of e . Appeal by Special leave from the Judgment and Order dated ‘the 21st August, 1980 of the Kerala High Court in M. F. A. No. 409 of 1979. ;

BS. Nariman, A.N. Haksar,: T, Raghvan, RE. Nariman, V.A. Bobde & K.R. Nambiar, forthe Appellant.

_ GB. Pai, P.K. Kumar, AK. Sharma, Ashok Mathur and Parveen Kumar for the Respondent.

The Judgment of the Court was delivered by

Desat, J. In this appeal by special leave a very interesting question in the field of law of arbitration which ‘honest man dread more,than the dreaded law suits’ arises for our consideration.

First respondent Cochin Shipyard Limited (‘respondent’ for short) invited tenders for construction of Building Dock at Cochin, . As there was only one gtender that of Tarapore & Company, the appellant, the respondent called fresh tenders somewhere in July, 1971. In December, 1971, the respondent invited tenders for construction of a Repair Dock also at Cochin. There were two. tenders for Building Dock, namely, one of the appellant and one by M/s National Building Construction Corporation, a Government

- of India undertaking, the value of the tender of the latter being - double that of the appellant. For the construction of the Repair Dock, the only tender was of the appellant. In view of the limited number of tenders received,: the appellant was invited to negotiate the terms of tender.. The value of the works to be executed was

‘over Rs. 24 crores. In view of the huge investment in the project, the tenders were examined by a committee called the Tender Committee constituted in accordance with the approval of the Ministry

‘ of Shipping and Transport for examining and evaluating -the tenders received for the Building Dock and the Repair Dock. The Tender Committee taking note of the poor response to the invitation to tender and costly affair decided to accept the tender of the appellant inter alia for the'reasons (i) that works of such complexity and magiitude have not been undertaken before by any Indian contractor, (ii) that the plant and equipment required for the work are not available indigenously, (iii) that if the contractor is to procure the

124 _ §UPREME COURT REPORTS . ‘ [1984] 3.s.c.R. A specialised equipment ‘required for this work, there is hardly any.

, assurance that after these works are over, he would find any sub- .” ” stantial, use for the same, (iv) that excavation and subsequent conse truction involve de-watering which introduces considerable amount

+ ~, of uncertainty. and that during the discussions, the apprehension of

- the tenders of this kind was’ voiced: and noticed by the Committee, BL - and (v) that RCC Piling also requires highly skilled and complex ‘. technical operations and it involves..a large element of risk and |

- uncertainty in the- work. Both the tenders of the appellant, were . 7 accepted, and contracts were entered into between the parties. Both » - the parties. while entering into contracts were aware and conscious © ” of the fact that equipment and technical know-how would: have to © _- be imported involving a huge outlay of foreign exchange. Appellant- © contractor quoted rates. on two alternative basis depending-upon whether it had to import equipment and know-how at ‘its cost involving Rs. 2 crores in foreign exchange or the equipment ‘and know- . _ how were ‘to be imported by the respondent at“its cost and made’ DpD- available for use of the appellant in which case the appellant would _ be liable to pay hire charges for the pile. driving plant at the rate of - ‘Rs. 23/- per metre of 600-mm ‘dia, RCC cast-in-situ pipe and Rs. 16/- per metre of 500 mm dig. RCC cast-in-situ pipe and atthe ~~ ; rate of 300 per stonne,of steel sheet’ piles driven to be recovered of * from the running bills’ ‘payable to the appellant- contractor. The ' E- appellant was -given to understand by a: note in the invitation to . . tender that foreign exchange in yen credit to the tune of Rs. 38 Iacs : is earmarked for the purchase of construction equipment, accessories ‘ete, from Japan for works of Building Dock, Repair Dock, the three Quays etc. On January 24, 1973, work: order for Building Dock and Repair Dock was issued . by the respondent in favour of appel- _ lant and in this work order as recommended by the Tender Commit- _ tee, the respondent adopted | thé alternative B as set out in the ten-* der, namely, that the contractor was to procure the equipment and know-how at a cost of about Rs, 2 crores in foreign exchange. In order.to make this aspect specific, additional condition No. 31 was G__ . incorporated in the works order in order to provide for the expense . - to be incurred and the amount of foreign exchange needed for importing equipment and. technical know-how, re levant portion of witch reads as under : . .

“ an . ay ~ “Requisite foreign exchange, for importing piling plant. °.-

4 -and machinery, spares, technical . know-how’-and: hiring of experts necessary for both the Dock Works vide Work Order -

No. 13019/1/71-W-Il § dated January 24, 1973 for Building ;

» a TARAPORE.CO. ¥. COCHIN SHIPYARD (Desai J.) 125

‘Dock etc. and Work Order No. 13012/15/71-W-II dated January 24, 1973 for Repair Dock etc., amounting to about Rs 2.00 crores in all will be made available to the contractor from the lith Yen Credit subject to his getting indigenous clearance and providing detailed justification. The details of such procurement shall be furnished by the Contractor as

. soon as they are finalised.” . €

In view of the huge investment, it was agreed that the respondent would make an advance payment of 75% of the value of old machinery and 90% of the value of new machinery brought fo site by the Contractor and in order to secure this advance payment, equipment would be hypothecated by the Contractor to the respon-| dent and the advanoe payment were to carry interest at 9. 1/2% p.a. on the outstanding balance of advance. The mode of recovery was also specified. The formal contract was signed on January 29, 1973 which included an arbitration clause to which we would turn a little later. ,

~ It so happened that the required pile driving equipment includ-

"ing the technical know-how against 11th Japanese ‘Yen credit were’ _ not available. The respondent also made inquires in this behalf, but without 'success. Ultimately, International Foundation Group, Holland agreed to provide the rate of equipment conforming more or less to the same specification for which clearance.was sought and received from the Government of India. After the respondent certified that the equipment and know-how offered by International Foundation Group. Holland conform to the earlier clearance and that the same equipment being not indigenously available or against 11th Japanese Yen Credit, the respondent requested the Government of India to give necessary clearance to the appellant to import the equipment. This approval was received on September 1, 1973 and the foreign exchange to the extent of Rs 211.80 lakhs equal to 9,442. 700. Dutch Florins was released in favour of the appellant.

. The entire imported equipment was received in four consignments between March/July 1974. During the intervening period, there were variations in the rate-of exchange and therefore the foreign exchange cost of equipment alone in terms of rupees worked out at Rs. 177.50 lakhs and of the technical know-how fees payable in 11 instalments worked out at Rs. 105 lakhs. The custom duty went up by Rs. 21 lakhs as a consequence of the increase in rupee value

‘ of the imported equipment in terms of Dutch Forty.

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12% SUPREME COURT REPORTS "1984 3 S.C,

The appellant made -a tentative claim in the amount of Rs. 61.27 lakhs from the-réspondent on account of increase in cost of pile driving equipment and technical know-how fees on the

‘ground that the contractor was entitled to be compensated by the respondent forvthe same. In. the letter dated May 28,1975, the appellant has stated that the ‘tendered rates were -based on certain .

total cost of machines which has since gone up considerably rendering the rates no longer workable. The appellant’ had provided for a cost of 150 lakhs of rupees for the equipment and the fife of the equipment was. taken as 12,000 hours and its. probable period of engagement on this job was taken as 8,000 hours. “On this basis’

two-thirds of the cost of the equipment will be written off by way of depreciation on this job.’ -It was also stated that there is an increase in the fees for the technical know-how. The letter concluded by saying that the loss sustained by the appellant upto May 15,1975 on account of variation in the rate of foreign exchange was Rs..61,27,317 and requested the respondent to compensate the loss atleast upto the tune of Rs. 45 lakhs which is approximately 75% of the loss suffered by the contractor in this behalf. The respondent

7 responded to this letter as per its letter dated July 2,1975 saying * that the letter dated July 14,1972 of the appellant which forms part of the contract documents clearly recites that the total foreign ex- © change required by the contractor for the equipment, spares, techni-

+ €al know-how and hiring of experts, was expected to be about Rs. 2 crores and that the expenditure incurred by the contractor in this behalf, so far has been less: than Rs. 2 crores and in the cireum-

.Stances. it was found difficult to accept the position that the tender was based on the assumptions indicated in the letter under reply aod that the rates for the pile driving should for the future be revised. There ensued further correspondence between the parties. Ultimately, the appellant by its letter dated March 1, 1976 ‘informed

_ the respondent that its claim-for compensation for increase in the cost of imported pile driving equipment and technical, know-how fees has not been entertained for overa year. It was further stated that ‘inasmuch as the dispute has thus arisen between us regardihg the above claim, we are invoking the provisions for arbitration in our contracts and referring this dispute to arbitration.” On March 17, 1976 Chief Engineer of the respondent replied saying that the matter as set out in the letter dated March 1,1976 invoking arbitration clause is receiving tleir immediate attention and the appellant will hear shortly in this behalf. On March 29,1976, the respondent wrote to the appellant denying the claim for compensation of the appellant. Simultaneously the ‘respondent framed three point,

’

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Y

TARAPORE CO. ¥. COCHIN SHIPYARD ( Desai J.) 127 covering the dispute so raised for reference to and decision by the

' arbitrator, The letter also'sets out as required by Clause 40 a panel of three names from which anyone can be chosen by the appellant as the sole arbitrator.. .The appellant by its letter dated April 19,1976 y while refuting the contention of the respondent that the dis-

. pute would not be covered by Clause 40 i.e. arbitration clause in the contract, stated that the proper course would be to refer the

‘ dispute that has arisen between the parties to the decision of the arbitrator aud not any particular issue or issues. Ultimately from amongst the three names indigated by the respondent the appellant selected Shri C. Srinivasa Rao, Chief Bridge -Engineer, Southern’ Railway, Madras to be the Sole Arbitrator-to decide the dispute. On receipt of this letter the respondent referred the dispute to Shri C. Srinivasa Rao as Sole Arbitrator. While referring the dispute to the sole arbitration of Shri C. Srinivasa Rao, the respondent retained the three points of reference set out in the letter dated March - 29,1976 but added one mote. The’ Arbitrator entered upon the re- « ference on June 2,1976. On being called upon by the Arbitrator, the appellant filed its statement of claim on June 19,1976. The

’ appellant claimed Rs. 2,03,47,.266 as per theSchedule to the State- ment of Claim on account of increase in the cost oftequipment and technical know-how fees. The respondent filed its reply to the Statement of Claim on July 19,1976.

The points/disputes referred by the parties to the sole arbitrator read 2 as under ;

“1. Does the claim of Messrs. Tarapore & Co, on Cochin Shipyard Ltd., for compensation for increase in the. cost of imported pile driving equipment and_ technical knowhow fees reférred to in clauses (2) and (3) hereunder fall within the purview of the first paragraph of Clause 40 of the General Conditions of Contract entered into between the two parties ?

2. If the answer to (1) above is in the affirmative, in. terms of the provisions of the contract are Messrs.. Tarapore & Co. entitled to compensation for increase in the cost of im-

‘ ported pile driving equipment and technical know-how fees to be paid to them by Cochin Shipyard Ltd.? If so, whats the amount 2

128, SUPREME COURT REPORTS ~~ [1984] 8.CR.

3. The dispute that has arisen between Messrs. Tarapore & Co., and Cochin Shipyard Ltd. ‘regarding the claim -of M/s. Tarapore & Co., for compensation for increase in the cost of the imported pile driving equipment and the tech- nical know-how fees.

4. “Costs”? .

‘Parties appeared before the Arbitrator through their respective counsel. The Abitrator gave its Award on July 6,1977. On Point - No. 1, the Arbitrator held as under: ‘, “The claim’ of Messrs, Tarapore- and Company on Cochin Shipyard Limited for compensation for increase in the cost of imported pile driving equipment and technical know-how fees falls within the purview of the first paragraph of Clause 40 of the General Conditions of Contract entered into between the parties.”

On Point No.°2, the Arbitrator held that the appellant

‘Messrs. Tardpore and Company are-entitled to compensation by the Cochin Shipyard Limited for the increase in the cost of imported pile driving equipment and the. technical know-how fees by a sum of Rs. 99'lakhs only which amount shall be payable with interest at 9.1/2% per ‘annum from this date till date of payment or decree, whichever ig earlier’. On Point No. 3, the decision recotded was ‘that it is covered by the decision on Points (1) and (2). On

Point No. 4, on the question of costs, the Arbitrator having determined his fees and incidental expenses directed both the parties to

‘bear the same equally. The Award was typed on a stamp paper of the value of Rs. 150/- at Madras. By his letter-dated Nil July, 1977, the Sole Arbitrator forwarded the award to both the parties.

. The appellant moved a petition under Secs. 14 and 17 of the Arbitration Act in the Court of the Subordinate Judge, Ernakulam for filing the award and for making it a rule of the court. On October 7,]977 the respondent moved O.P. 81 of 1977 being a combined petition under Secs. 30 and 33 of the Arbitratian Act before the Subordinate Judge, Ernakulam praying for setting aside the award. - The prayer for setting aside the award was founded on two grouifds; (1) that the award is insufficiently stamped and (2) that the

_ Arbitrator has exceeded his inrisdiction by misconstruing Clause 40

TARAPORE CO. v, COCHIN SHIPYARD (Desai J.) 129 of the General Conditions of Contract (Arbitration clause for short),

The learned Subordinate Judge noted the fact that the award . was originally engrossed ona stamp paper of Rs. 150/- but before filing the‘award in the court on ‘August 4, 1977,.the Arbitrator on

August 1,1977 affixed additional stamp of Rs. 14,722.50 p. which would be the requisite stamp under Art. 12 read with Art. 14 of the Kerala Stamp Act. The learned Subordinate Judge accordingly negatived the contention of the Tespondent that the award was insufficiently stamped. On the second point, the learned Judge held — that the respondent having submitted the question whether the dis-"

pute raised by the appellant was covered by. the arbitration clause _ cannot be permitted to controvert the jurisdiction of the Arbitrator to decide this dispute and accordingly, negatived the contention of the respondent. The learned Judge after modifying the award of the Arbitrator in the matter of interest from 9.1/2% as awarded by the Arbitrator to 6% granted the application of the applicant and .

made the award a rule of the court.

The respondent preferred M.F.A. 409 of 1979 inthe High”

Court of Kerala at Ernakulam. A Division Bench of the High - Court agreed with the learned Subordinate Judge on the question of insufficiency of stamp. The Division Bench however, after expressing its displeasure about not making a reasoned award by the Arbitrator proceeded to examine the contention whether, the arbitra-

‘tion clauge covers the dispute. The court held that the question ~ whether the dispute is arbitrable or not cannot be finally decided by - the arbitrator because it is a matter relating to his jurisdiction. It was further held that the arbitrator cannot by an erroneous inter- - pretation or construction of the clause confér jurisdiction on himself and the court can go into the question whether the matter in dispute between the parties is covered by the arbitration clause. The specific contention on behalf of the appellant that once a specific question of law is referred to the arbitrator, the parties are bound by the decision of the arbitrator was negatived by the High Court and it was held that as the reSpondent has joined arbitration under protest, it was not estopped from contesting. the question and the award is not binding an it if it can be shown that the arbitration agreement did not cover the dispute raised by the appellant. The - court finally held that even though the arbitration clause was very wide, the dispute as to the compensation for increase in the cost of , imported pile driving equipment and technical know-how fees would:

‘ leave.

130 SUPREME COURT REPORTS - [1984]'3 s.c., not be covered by the arbitration clause inter alia on the ground that by Cl. 26 of the General Conditions of Contract every plant, . . machinery and equipment had to be provided by the contrator and any rise or escalation in the price of such equipment or machinery cannot be the subject matter of: compensation by- the respondent, Accordingly, the appeal of the respondent was allowed and the judgment and order of the trial court making the award rule of the court was setaside. The court directed that the award be returned to the patties. Hence this appeal by the contractor by special

Before we advert to the rival contentions, it would be advantageous to refer to the arbitration clause being Clause 40 ‘of the

- General Conditions of Tender subject to which the contract was entered into, the relevant portion of which reads as under ;

“Clause 40. Except where otherwise provided in the contract, all questions and disputes relating to the meaning of the- Specifications, Instructions, designs Drawings hereinbefore mentioned and as to the quality or workmanship or | materials used on the work or as to any other questions, claim, right, matter or thing whatsoever in any way arising

” out of or relating to the Contract, Designs, Drawings, Speci;

fications, Estimates, Instructions, Orders or these conditions or otherwise concerning the works or the execution or, failure to execute the same,. whether arising during the progress of . the work qr after completion or abandonment thereof shall, after written notice by either party to the contract, to the either of them, be referred to the Sole Arbitration of a person appointed by the Chief Project Officer of the Cochin

\

Shipyard Project or the Administrative Head of the-Cochin ~ -

Shipyard Project at the time of such appointment by what- _ ever designation known, from a panel of names given in Annexure JI.”

Over and above the extfacted portion, ‘the clause provides for the manner and method of appointing the sole arbitrator, the continuance of the work during progress of arbitration proceedings, the time and place of holding the arbitration proceedings, the power to’

enlarge the period for making the award and finality to be attached fo the award of the Arbitrator, og

>- au

TARAPORE CO. v. COCHIN SHIPYARD (Desai J.) 131

When the arbitration clause was invoked by the appellant, the respondent did contend that the dispute raised by the appellant was not covered by the arbitration clause. After. specifying its demur, the respondent - formulated the points in dispute on which the arbitration was invited to give his award. Undoubtedly, the respon-

‘dent proceeded to formulate the points in dispute between the parties on which the Arbitrator was to be invited to give his award without prejudice to its. right to contend that the dispute is not —

- covered by-the arbitration clause and that the appellant is .not enti- tled to any compensation -in respect of the increase in the cost of imported pile driving equipment and technical know-how fees. What is the effect of referring the specific question of law to arbitration without prejudice to one’s rigfit to contehd to the contrary will be presently examined.. The fact remains that on the. dispute arising out of a claim for compensation on account of the increase in the cost of imported pile driving equipment. and technical know-how fees, the respondént agreed to refer the dispute under two specific heads to the Arbitrator. The dispute so raised have already been extracted. Briefly stated they are: (1) whether the claim for compensation would fall within the pyrview of the first para of the arbitration clause and (2) if it does. the quantum of compensation, if any, to which the appellant would be entitled. Analysing the disputes, let it be made distinctly clear that the appellant asserted that its‘claim for compensation would be governed by the arbitration clause and the same was specifically denied by the respondent saying

. that the claim would be beyond the purview of the arbitration

, clausg.. On these rival positions, the specific issue was framed

- whether the claim for compensation would fall within the purview of the first part of the arbitratoin clause. Thisrwas the specific dispute referred to the arbitrator inviting him specifically to decide this dispute. If this issue specifically raises a question as to jurisdiction of the arbitrator to arbitrate upon the disputé set out in Point No. 2, if appears to have been specifically referred to the Arbitfator for his decision. Parties, therefore, agreed to submit the specific question even with regard to the scope, ambit, width and the construction ‘of the arbitration clause so as to define its parameters and contours ‘with a view to ascertaining whether the claim advanced -by the appellant and disputed by the respondent would be covered by the — arbitration clause. Whether upon its true construction.the arbitration clause would include within its compass the dispute thus raised between the parties was specifically put in issue because’ parties were at variance about it. ‘Appellant asserted that its claim to compensation would form the subject matterj of atbiteation under Clause 40 —

132 " SUPREME COURT REPORTS [1984] 3 s.cr.

and the respondent contending to the contrary. While deciding this dispute, as to the scope, width and ambit of arbitration clause vis-a-vis the dispute raised, it is not necessary to decide whether the claim was tenable justified or had any substance in it. That would fall within the second point of reference to the arbitrator which opens with a spevific ‘clause that it needs only to be decided if the answer to the first point of reference, namely jurisdiction’ of the arbitrator under Clause 40 is in the affirmative meaning thereby that the Mispute so zaised and subsisting between the parties-would be covered by the arbitration agreement. In other. words, if the dispute is covered by the arbitration agreement, the arbitrator was further required to decide whether there was any. substance in the claim made, and if he found some substance in the disputed claim, to ascertain what amount the appellant would be entitled to recover as and by way of compensation from the respondent. The arbitrator was thus required and called upon first to decide whether the dispute is arbitrable as falling within the width and ambit “of the arbitration . agreement. If the answer is in the affirmative, then alone the second , point neéd be examined. If the answer to the first point of reference _ is in the negative in that if the arbitrator were of the opinion that the dispute is not arbitrable:as it would not fall within the scope, width ahd ambit, of* the arbitration agreement, it would not be necessary for him to determine whether the appellant was entitled to recover anything by way of compensation. This aspect is beng analysed in depth to point out that the parties specificallye referred . . the question of coristruction of arbitration agreement, its vidth, ambit and parameters vis-d-vis the dispute raised so as to decide whether the dispute would fall within: the purview of the arbitration agreement, in other wards the jurisdiction of the arbitrator..

Correspondence placed on record would unmistakably show that a specific questiom as to the jurisdiction of the arbitrator was. specifically referred by the parties to the arbitrator. Appellant- ‘contractor by his letter dated March 1,1976 to the Chief Engirfeer of the respondent invited his attention to the claim for compensation for. increase in cost of pile driving equipment and technical know-how fees raised about a year ago and further invited his attention to the- letter dated 6th October, 1975 of the respondent informing the appellant that the claim ‘cannot’ be entertained. The appellant proceeded further to state as under: _

“Tnasmuch as a ‘dispute has. thus arisen between us “regarding the above claim, we are invoking tle provisions for dof

. tae

“As

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”

TARAPORE CO, v. COCHIN SHIPYARD (Desai J.) 133 arbitration in our contracts and referring this dispute to arbitration.” The respondent by his letter dated March 17, 1976 informed the appellant that the matter raised in the letter dated March 1,1976 in the matter of compensation is receiving their immediate attention and the appellant will shortly hear fiom them in this connection. Thereafter the respondent by his letter dated March 29, 1976 informed the appellant as under;

“We have dealt with the merits of your claims in the- , previous corresporidence on the subject and we reiterate that no amounts whatever are -dwe to you in respect of these _ Claims. It is also our view that such claim does not fall ‘within the purview.of Clause 40 of the General Conditions of Contract and hence does not qualify for arbitration.

However, in view of your insistence and without prejudice to our position, we propose that, the following be © the issues to be referred to arbitration: °

1. Does the claim of M/s Tarapore & Co., on Cochin Shipyard Ltd., for compensation for increase in the cost of imported pile driving equipment and technical know-how fees fall within the purview of the first para of Clause-40 of the General Conditions of Contract entered into between the two parties?

‘2. if the answer to | is in the affirmative in terms of the provisions of the’ concerned contract, are Messrs. Tarapore & Co. entitled to compensation for increase in the cost of imported pile driving equipment and technical know- _

. how fees to be paid to them by Cochin Shipyard Lid.1 ? Ifso, what is the amount?

3. “Costs.’”

_ The respondent proceeded to notify the panel of names and invited the appellant to choose the arbitrator as agreed to between the parties and set out in clause 40, The appellant by his letter dated April 19,-1976 while reasserting that the claim made by it " would be covered by Clause 40 further stated that the proper course would be to refer the dispute that has arisen between thep arties on

134 SUPREME COURT REPORTS — [1984] 3 s.c.r.

the matter of comperisation to the decision of the arbitrator and not, any particular issue or issues. It was also suggested that, framing

'. of the issues. will be the funttion of the arbitrator after he enters

. upon the reference and after he has the pleadings of both the parties before him. The appellant also suggested what dispute should be referred to the arbitrator and sét it out as under:

“The decision . of the dispute that has arisen between M/s. Tarapore & Co., and the Cochin Shipyard Limited, regarding the claim of M/s Tarapore & Co., for compensation ,for the increase in the cost of the imported pile driving . “ equipment and of the technical know-how fees.”

The appellant proceeded to Suggest that Shri C. Srinivasa Rao .

‘from amongst the panel be appointed: as the Sole Arbitrator. The respondent by his letter dated -April 27/28, 1976 annexing three earlier letters dated March 1, 1976, March 29, 1976 and April 19, 1976 referred the four points herein before set out for the decision of the arbitrator. = 4

This correspondence would unmistakably show that while the appellant wanted-a general reference about its claim, it was the respondent who now contests that no specific question of law was

' .specifically referred to the arbitrator for his decision was specific .

about the points to be ‘referred for the decision of the Arbitrator. ’ The first point extracted hereinabove would clearly show that the specific question about the jurisdiction of the. arbitrator to arbitrate ‘; Aipon the dispute set out in points Nos. 2, 3 and 4 was specifically referred to the arbitrator. On the first point, the arbitrator had to decide whether the claim made by the appellant and disputed by the respondent would be covered by Clause’40 i.e. the.arbitration clause. In other words, the specific question referred to fhe Arbitrator was about his jurisdiction to arbitrate upon the disputes covered by -

- points-Nos. 2, 3and 4, if and only if, upon a true construction of the arbitration clause that is first paragraph of Clause 40, would cover the disputed claim for compensation he can enter into the merits of the dispute and decide it. It is upon the decision on point No. 1 that the arbitrator would have jurisdiction to decide the dispute involved in points Nos. 2,3 and 4. The, first point of referénce is clearly a specific question of law touching upon the jurisdiction of the arbitrator and this was framed and referred to by none other than, despite the initial objection of the petitioner, the respondent... There- fore, the respondent invited the arbitrator by the specific point of)

ad

+

TARAPORE CO. v. COCHIN SHIPYARD (Desai, J) 135 reference which involves a'specific question of.law touching upon the jurisdiction of the arbitrator to decide the same. This becomes further clear from the fact that both the learned-counsel appearing

- before the arbitrator submitted agreed draft issues for the decision of the arbitrator. The first issue amongst the agreed draft issues reads as tinder: .

“Does the claim of the claimant fall within the purview of the purview of the first para of Clause 40 of the General Conditions of Contract entered into between the two parties? |

This point was not to be incidentally decided: while deciding the dispute referred to the arbitrator his jurisdiction to entertain the dispute is questioned. In fact, hereby .the reference of the specific, point of law touching upon the jurisdiction’ of the arbitrator the parties invited the arbitrator to decide this specific question. It was he who was asked by the submission or terms of refcrence to decide his jurisdiction first and then proceed to decide: the dispute on merits. We referred to Issue No. 1 in the agreed draft issues only to buttress the conclusion that it-was at the instancé of the respendent that the arbitrator was called upon to decide the question of © the scope, ambit and width of arbitration clause the decision on which would confer jurisdiction upon him to decide the’ dispute as to compensation, In this context it would be advantageous to refer to paragraphs 11 and 12. of the counter statement filed by the respondent before the arbitrator which reads as under:

“11. It is submitted that the claim in question relating to the increase in the cost of machinery and equipment as also technical know-how fees payble by the contractors/claimants is fully outside the. purview of the. contract. There is no liability on the part of the respondent" to procure the machinery and equipment or technical knowhow required by the contractor nor was there any liability to —

' pay any part of the cost, whether it .be the original assumed

~ cost or the ‘increased cost. The claim thus is completely outside the purview of the ‘contract and it is submitted, “therefore, that the same does not fall within the purview of the first paragraph of Clause 40 of the General Conditions of Contract and thus not arbitrable.

12. It is submitted. that the question of Arbitrability of the ; “dispute should be’ decided as a preliminary’ point ‘before proceeding with the other issues.’ .

136 SUPREMEYCOURT REPORTS [1984] 3 s.c.R.

* The formulation of the specific question of law by the respondent along with its suggestion to decide it as a preliminary issue and becoming a party to the agreed draft issue No.1 would conclusively.

- establish. that the specific question of law toucliing upon the * jurisdiction of the arbitrator. was referred to the arbitrator for his decision. Therefore, the conclusion is inescapable that a specific question of law touching upon the jurisdiction of the arbitrator which is indisputably a question construction of Cl. 40 and therefore a question Of law was specifically referred by the parties to the arbitrator for his decision and by the terms of Clause 40 agreed to ' abide by his decision as final andgbinding.

Mr. F.S. Nariman, learned counsel for the appellant urged that

Sec. 16(1) (c) may permit the court to remit or set aside the award on the ground that there is an error of law apparent on the face of - jt, yet where a specific question of Jaw has been referred to the arbitrator for decision, the fact that the decision is erroneous does not make the award bad on its face so as to permit its being set aside. Expanding the submission, it was urged that a decision on a question of law by an arbitrator may be given in two different and distinct situations; firstly where while deciding a dispute referred to him.

incidentally- a question of law may arise which an arbitrator may decide in order to dispose of the refefence and if in such a situation

_ any error of law appears on the face of the award, the court can interfere with the award. But there is an altogether an independent and a distinct situation in which a question of law might arise such .as where the parties to the dispute may frame the specific question of law and refer it to the Arbitrator for his decision. In the later situation, it was urged that the decision of the Arbitrator even if erroneous would not permit the court to interfere with the award. Proceeding along it was urged that in this case.a specific question of law touching upon the jurisdiction of the arbitrator was specifically referred to the Arbitrator for his decision and therefore, the decision - of the Arbitrator is binding on the parties and the court cannot proceed to inquire whether upon a true construction of the arbitration clause. the dispute referred to the Arbitrator for arbitration would be covered by the: arbitration clause so as to clothe the - arbitrator with the jurisdiction to arbitrate upon the dispute.

Mr. Pai, learned counsel for the respondent'countered by saying that jurisdiction ofthe arbitrator cannot be left to the decision of the ‘arbitrator so 4s to be binding on the parties and it is always for the court to decide whether the atbitrator has jurisdiction to decide

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* f f the dispute. Alternatively, it was submitted that the arbitrator cannot by a misconstruction of the arbitration agreement clothe himself with or .confer upon himself the jurisdiction to decide the dispute. The court it was said has always retains to itself the jurisdiction to-look at the arbitration agreement to determine its scope and ambit-and if it_ is found that the dispute referred to the . arbitrator does not fall within the arbitration agreement,. the court _must interfere on the ground that the award disclosed an error of law apparent on the face of it. '

The contention may be examined both on principle and on the precedents. .

” *

Complexity of rights and obligations in national and international trade and commerce would certainly generate disputes between the parties and treated as a normal incident ‘of commercial life arid till: commercial arbitration came to be’ ‘secognised as a civilised way of resolving such disputes, prolix and time-consuming’

litigation was the only méthod of. resolving such disputes. As an

_ alternative to court proceedings, arbitration as a method of resolving disputes by domestic tribunal constituted by the choice of parties became acceptable. The basic difference between the court proceedings and the arbitration is the choice of the tribunal. Ordinarily, all matters in which relief can be claimed from the court may become subject ‘matter of arbitration. Now if in a law court incidental questions of law arise in the course of proceeding, the court has an

_ obligation to decide those questions of law. But when it came to a tribunal not endowed, with the judicial power of the State but by

' conferment by the parties to the dispute or «which acquires jurisdic- - .

tion by a submission of the parties to the dispute to invite the decision by the forum of their choice and to be bound by it a question arose whether a pure question of law if at all can be referred to an arbitrator for his decision and even if he decides, can the decision

-be questioned on the ground that there is an error . apparent on the face of the award in deciding the question. Now as stated a shortwhile ago, a question of law may figure before an arbitrator in two ways. It may arise as an incidental point while deciding the main dispute referred to the arbitrator or in a given case parties may refer a specific question of law to the arbitrator for his decision. There is no more gainsaying the fact that a pure question of law may and can be referred to an arbitrator for his decision. Russel on the Law of Arbitration Twentieth Edition at page 22 states as under;

"€

. 138 ... SUPREME COURT REPORTS [1984] 3 s.c.r.

“A pure ‘question of law may be - referred to an arbitrator; and where sucha question is specifically referred his award will not be set aside merely upon the ground that his decision is wrong.”

In Halsbury’ s Laws of England Vol. 2 Para 623 4th Edition

' the statement of law reads as under:

“Wf ‘a specific question” of law is submitted to the arbitrator for his decision and he decide it, the fact that the decision is erroneous does not make the award bad on its face so as to permit its being. set aside; and where the question

. referred for arbitration is'a question of construction, which is, geacrally speaking, a question of law, the arbitrator’s decision cannot be set aside only because the court would itself have come to a different conclusion.”

With the ever widenings expansion of international trade and commerce, complex question of private International Law, effect of local laws on contracts between parties belonging to different nations afe certainly bound to crop up. Arbitration has been considered a | civilised way of resolving such disputes avoiding court proceedings.

There is no reason why the parties should be precluded from referring.

a specific question of law to an arbitrator for his decision and agree

-to be bound by the same. This approach manifests faith of parties in the capacity of the tribunal of thtir choice to decide even pure a question of law. If they do so, with eyes wide open, and thére is”

nothing to preclude the parties from doing so, then there is no reason why the court should try to impose its view of law superseding the view of the Tribunal whose decision the parties agreed to abide by. Therefore, on principle it appears distinctly clear that when a specific,

: question of law is referred to an arbitrator for his decision including the one touching upon the jurisdiction of the arbitrator, the decision of the atbitrator would be binding on both the -parties and it would. not be open to any of the two parties to, wriggle out of it by contending that the arbitrator cannot clutch at or confer jurisdiction upon. himself by mhis-construing the arbitration agreement.

This conclusion is borne out by along’ line of decisions both

Indian and foreign to which we would now tum.

. . mo ~ ry « . . . . - ot The earliest case to which we would refer is the decision of the

“%

V2 m

TARAPORE CO. v, COCHIN SHIPYARD (Desai, J.) 139 House of Lords in Kelanten Government v. Duff Development Co. Ltd. in which Lord Trevethin in his speech said as under:

“4 your Lordships should be of opinion that the award is bad in law upon its face, it should be set aside, for this is not in my view, a submission to arbitration of such a nature that, although the law is bad upon the face ofthe award, the © decision cannot be questioned. That happers only wheni the

. submission is of a spgcific question of law and is such that it can be fairly construed to show that the parties intended to give up their rights to resort to the King’s courts and in ‘lieu thereof to submit that question to the decision of a tribunal

_of their own.’

Same distinction was also brought outy Lord Parmoor when he said that ‘the principle applicable where a specific question of Jaw has been-submitted to the decision of arbitration is well expressed by Channell, J., in Re King and Duveen2 in which it was said that where a specific question of ‘law is referred to an arbitrator for his decision, t the award cannot be set aside on the ground of an error apparent on the face of the award because the question of law was wrongly decided.’ At a later stage, it was observed that if the court, before which it-is sought to impeach the award, comes to the concly-

_ sion that the alleged error in law even if it can be maintained, arises in the decision of a question of law directly. submitted to the,

* arbitrator for his decision, then the principle stated by- Channel, J., in Re. King and Duveen applies, is attracted and the - parties having

* chosen their tribunal, and not having applied successfully to the. , court under;either s. 4 or s. 19 of the Arbitration Act, 1889, are not in a position to question the award or to’ maintain a claim to set it aside.’ This decision is an authority of the proposition that where!

a question of construction is the very point referred for arbitration, then the decision of the arbitrator upon that point cannot be set

' aside by the court only because the court would itself have come-to a different conclusion. ,

¥ f

In F.R. Absalom Led v. Great Western (London) Garden Village Society Ltd the contention was that the ‘award was bad by reason of an error in law appearing on the face of it. “The submission was

(1) [1923] All E.R. 349 -() [1913] 2K.B. 32 (3) [1933] All E.R. 616

Cc

.-

: Dp

140 - _ SUPREME COURT REPORTS [1984] 3 s.c.R. .

not before the court and a reference to the pleadings had to be made for the purpose of ascertaining whether any specific question of law was in dispute, and was referred to the arbitrator for his decision. The pleadings disclosed that the whole dispute between parties was as to the amount due to the contractor in respect of the value of the work done ahd of the materials ‘on the site upto and including a certain date. In the background of this fact, Lord Warrington in his speech said that no ‘specific question of construction arose. In order to decide whether the award was bad ly reason of an error.of - © law on the face of it, Lord Russel in his speech pointed out at page 621 that it is essential to keep the case. where disputes are referred .to an arbitrator in the decision of which a question of law. becomes

- Material distinct from the case in which a specific question of law has. been referred to him (or decision.” Thereafter he proceeded to

State:

“The authorities make a clear distinction between

«these two cases and as they appear to me,. they decide that in the former case the court can interfere. if and when any error of law appears on the’ face of the award, but that in the latter case no such interference is possible upon the’ ground that it so appears that the decision upon the question of law is an erroneous one. ‘ ,

In reaching this conclusion,‘ the decision in “Kelantan Govern- ment v. Duff Development Co. Ltd. was affirmed. On. the facts, '.. it was found that no specific question of law .was referred to the.

arbitrator for his decision.

In Durga Prasad Chamria _and Ant. Vv. Sewkishendas Bhattar and Orst; the awatd was sought to be: set aside infer alia on the ground that the award was bad on account of an error of law:

" apparent on the face of it. The errors ‘of law relied upon were; (a)

the arbitrator had , admitted as evidence the ‘family settlement and. the partnership arrangement of 1916, neither of which, though each’ related (it was said) to immoveable property, had been registered as required by the Indian Registration Act, and (b) the arbitrator, ought to havé held that Anardeyi’s suit was in any event barred by

. limitation. The Privy Council first noticed. the issues settled by

Panckridge. J.; amongst them were the two following:

" Q) ASLR, 1949 (P.C) 334

4s

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TARAPORE CO... COCHIN SHIPYARD (Desai, J.) 141

“1(b) Is the agreement dated 16th November, 1916, : relating to the alleged family settlement valid or admissible in evidence? .

(9) Is the plaintiff's © claim or any portion thereof barred by limitation?,, \

After tmese issues had been settled, the parties agteed to refer to arbitration “the outstanding matters in the suit.” In a motion for setting aside the award it was urged that there was an error of law apparent on the face of the award both with regard as to the admissibility of the aiféged family settlement and about the suit of

Anardeyi being barred by limitation. Rejecting the motion, the Privy

‘Council observed as under, '

“However, that may be, their Lordships are satisfied that the two points of-law as to which it is said the arbitrators

- error vitiates the award were specfically referred to him to — decide and if this is so, it would be contrary to well-establis- hed principles such as are laid down in re King and Duveen and F.R. Absalom Ltd. v. Great West (London) Garden Village

Society Lid., for a Court of law to interfere with the award even if the Court itself would have taken a different view of either: of the points of law had they been before it.’’

- Turning to the decisions of our Court, reference may first be made to Seth Thawarda3 Pherumal vy. The Union of India’. Jn that

_ case, the question was whether the award was-bad on account of error of law apparent on the face of it, as provided in Sec. 16(1) (c) of the Arbitration Act. Examining this contention, this Court observed as under: mo, se

“This covers cases in which in erros of law appears on . sthe face of the award. But in determiningywhat such an error is, a distinction must’be drawn between cases in which a question of law is specifically referred and those in which a decision on a question of law is incidentally material (however necessary) in order to decide the question actually referred. If a question of law is’specifcally referred and it’ is evident that* the parties desire to have a decision from the arbitrator about © that rather*then one from the Courts, then the Courts will not.

_ interfere, though even there, there is authority for the view that the courts will interfere if it is apparent that the arbitrator

(1) [1955] 2 S.C.R. 48

. 142 SUPREME COURT REPORTS . [1984] 3 s.c.r.

-has. acted illegally in reaching his decision, that is to say, if he has decided on inadmissible evidence or on Principles of “construction that the law does not contenance or” something of that nature. See the Speech of Viscount Cave in Kelantan Government v.. Duff Development Co. at page 409. But that is not a matter which arises in this case. -

The law about this is, in our opinion the same in -England as here and the principles that govern this class of case have been reviewed at length and set-out with clarity by the House of Lords in F.R. Absalom Ltd. v. Great Western (London) Garden Village Society and in Kelantan Government v. Duff Development Co. In Durga Prasad vy. Sewkisg _ hendas’ the Privy Council applied the, law expounded in’. ‘Absalom’s case to India ; see also Champsey Bhara & Co. v. Jivraj Balloo Spinning and Weaving Co. and Saleh Mahomed Umer Dossal v. Nathoomal Kessamal. The wider language “used by Lord Macnaghten in Ghulam Jilani v. Muhammad Hassan ‘had reference to the revisional ‘powers of the High Court under the Civil Procedure Code and must be’ confined to the facts of that case where the question of. law” involved there, namely, limitation; was specifically referred. An arbitrator i is not a conciliator and cannot ignore the law or . misapply it in order to do what he thinks i is just and reasonable. He is a tribunal selected by the parties to decide their disputes according to law and so is bound to follow, and apply the law, ‘and ifhe does not he can be set right by the Courts provided his error appears on.the fact of* the. award. The single exception to this is when the parties choose specifically to refer a question of law as a seperate and distinct matter.”

The Court further proceeded to examine whether in the facts - of that -case, the arbitrator was specifically asked: to construe clause 6 of the contract or any part of the ‘contract or whether any

_ question of law was specifically referred. The Court emphasised - the word ‘specifically’ by pointing out that, parties who made a reference to arbitration have the right to insist that the Tribunal of their choice shall .decide their dispute according to law, so before the right can be denied to them in any particular matter, the | court must be very: sure that both. sides wanted the decision of the arbitrator on 4 point of law rather than that of the Courts and that they wanted his decision on that point to be final. The Court then proceeded to examine the various clauses of the contract and held that this is not the Kind of specific reference on a point of law that

7 Y

*.

TARAPORE.CO. V. COCHIN SHIPYARD (Desai, J.) " - 143 the law of arbitration requires. The Court held that when a -ques-

"tion of law is the point at issue, unless both sides specifically agree _ to refer it and agree to be bound by the arbitrator's decision, the jurisdiction of the Courts to set an arbitration right when the’ error is apparent on the face of the award is not ousted. The mere fact

. that both parties submit incidental arguments about a point of law ‘in the course of the proceedings is not enough. This decision is an authority for the proposition that where the parties specifically agree .

- to refer a specific question of law for the decision of the arbitrato?, and agree to be bound by it, the Court cannot set aside the award on the ground of an error of law apparent on the face of it even though the decision of the arbitrator may not aceord with the law as under- stood by the Court. If on the other hand, the question of law is incidentally decided by the arbitrator, it is not enough to oust the jurisdiction of the Court to set aside the award on the ground that

‘there is an error apparent on the face of the award.

In M}s Alopi Parshad & Sons .Ltd.. v. | The Union of India’ the Court reiterated the observation in Seth Thawardas’s case and observed that if a specific question is submitted to the arbitrator, and he answers it, the fact that the answer involves an erroneous decision in point of law, does not make the award bad on its face so as to permit ofits being set aside. [In the facts of the case, this

Court agreeing with the High Court held that there is no founda- tion-for the view that a specific reference, submitting a question of law for the adjudication of the arbitrators, was made. It may be stated in passing that a brief reference to the claim put forward

‘before the arbitator on behalf of the appellants in that case, set out at page 798 of the report, would clearly. show that no specific - question-of law was referred by the parties for the decision of the arbitrator.. Mr. Pai learned counsel for the respondent pointed out . that the Court has also observed following the decision, of the Privy . Council in Champsey Bhara and Company v. Jiveaj Balléo Spinning and Weaving Company Ltd®., that ‘the-extent of the jurisdiction of the court to set aside an award on the ground of an error in making the award is well-defined. The award of an arbitrator may be set- _aside on the ground of an efror on the face thereof only when in the.award omin any. document incorporated with it, as for instance, anote appended by the -arbitrators, stating the reasons for his’

decision, there is found some legal proposition which is the basis of

‘the award and which is erroneous. This observation . does not help

(1) §[1960F2 S.C.R. 793 (2) Law Report $0 T-A. 324

‘p

=

14 ‘SUPREME COURT REPORTS | — [1984] 3 s.cr.

in deciding the point under discussion and just after this statement, ° there follows the obsevation about the effect of referring a specific: question of law for the decision of the airbitrator and the jurisdic- tion of the Court to set aside the award on the ground that there is an error of law apparent on the face of it.

In Union of India. v. ALL. Rallia Ram this Court after referring to the decision in Champsey Bhara and Company reaffirmed that, the tule in that decision’ does not apply where questions of law are Specifically referred to the arbitrator for his decision; the award of the arbitrator on those questions is binding upon the parties, for by referring specific questions the parties desire to -have a decision from the arbitrator on thoge questions rather than frqm the Court and

~ the Court will not, unless it is satisfied that the arbitrator had procee- ded illegally interfere with the decision. After referring to the deci-

- sion hereinabove examined by us, the Court camé to the conclusion that no specific question of law were referred to the arbitrator’ $ the decision whereof is binding upon the parties.

In M/s Kapoor Nilokheri ‘Co-op. Dairy Farm Society Ltd. v. ® Union of India and Others? the Court agreed with the submission on behalf of the respondent Government of India that the appellants —

‘having specifically stated that their claims are based on the agreement and on nothing else and all that the arbitrator had to decide _was as to the effect of the agreement, the arbitrator had really to decide a question of law, ie. of interpreting the document, the agreement dated May 6, 1953 and therefore the decision is not open-to ¢hallenge.. In fact, this decision is hardly of any assistance and we leave it at that. . In N’ Chellappan v. Secretary, Kerala State Electricity Board & Anr*. by a consent order, the umpire was appointed as the sole arbitrator, and the respondent-Board without a demur participated in the proceedings before the umpire and took the chance of an award in its favour, this Court said that it cannot turn round and say that the umpire. had no inherent jurisdiction and therefore its participation in the proceedings before the,umipire is of no avail. This decision is not of much assistance on the pointjunder discussion. Mr. Pai on the other hand urged that the jurisdiction of the afbitator could not be determined by him nor can he arrogate jurisdiction to himself

(1) [1964] 3 S.C.R. 164 (2) ALR. 1973 S.C. 1338 (3) (1975) 2S.C.R:Ti} vik

-

+ TARAPORE CO. ¥. COCHIN SHIPYARD (Desai, J.) ‘145.

by mis-construction of the contract and thereby clutch at jurisdiction and in such a situation, the court always retains to itself to set at

-naught.the award on the ground of an error of law apparent on the face of the award. I terms, he stated that the issue about the jurisdiction of the arbitrator has never been parted with bythe

Court-Generally: speakings, common law courts were very reluctant

- to part with its jurisdiction to set at naught an award on the ground - that-the arbitrator had no jurisdiction to entertain ‘and, decide the dispute. The Court went so far as to say that the arbitrator cannot confer jurisdiction upon himself by deciding in its own favour some preliminary points upon which its jurisdiction rests. In fact, that is a non-issuse. It cannot be disputed that even the question of jurisdiction of an arbitrator can be the gubject matter of a specific reference. If the parties agree to refer the specific question whether the dispute

~ raised is covered by the arbitration agreement, it becomes a specific question of law even if it involves the jurisdiction of the arbitraor and if it isso, a decision of-the arbitrator on specific question referred to him for decision even if it appears to be erroneous

_to the Court is binding on theeparties.. The decisions relied upon by

Mr. Pai do not derogate from this legal position., We may briefly rgfer to those decision in Produce Brokers Co. Ltd.v. Olympia Oil anq Cake Co. Lid. it was held that “if the question which the arbitrator takes upon

. himself to decide is not in fact within the’ submission the award is a nullity. The arbitrator cannot make his award binding by holding contrary to the true facts when the question which he affects to determine is within the submission.” Let us emphasise the ratio of the decision that the arbitrator takes upon. himself to decide a question not within the submission. This would mean that the.

question of law was not specifically referred to the arbitrator for his decision but it was incidentally raised. In fact, nowhere it was contended that arly specific question of law was referred to the arbitrator and if so what would be its effect on the binding character of the decision was ever raised in that case. Jn that case after an'’

answer was returned to the Special Case submitted for the opinion of the court, the Committee of Appeal unreservedly accepted the — said answers upon the construction of the contract as a matter of law‘apart from the custom ofthe trade, but proceeded further to hold that there was a long established and well-recognised custom of the trade in cases of re-sales that buyers under the form of contract ‘ t

(1) [191415] AUER. 133 ‘

146 SUPREME COURT REPORTS - [1984] 3 s. GR, in question impliedly agreed with their sellers that they would accept the original shipper’s appropriation if passed on without delay. Oa

_ a motion by the buyers to have the award set aside, of which notice was given, the. Divisional Court held that the arbitrators had no jurisdiction to find conclusively the existence of a trade custom, and’ the Court of Appeal én the authority of precedents but against their own opinion, affirmed the decision. . The appellant-seller’s company

_ appealed to the House of Lords. .Lofd Loreburn in his speech ~ observed that ‘these men of.business made contracts and therein agreed to arbitrate upon all disputes arising out of their contracts,

- Yet there have already been seven distinct Stages of argument anddecision, four of them in courts of Jaw, upon a dispute arising on ~

_ those contracts, and the end is not yet. Ido not know how many more stages there will be. Parties have a right to prefer what some may consider the imperfect though expeditious wisdom of arbitrators to the slower and more costly justice of His Majesty’s courts. *It is to be regretted when they have to encounter the inconveniences of both methods: with the advantage o. neither.” Approaching the matter from this. angle, the appeal was allowed and the decision of.

‘the Committee of Appeal, taking note of the custom of the trade,

_ allowed the award to stand. _ This decision can in no way help the’

respondent.

In Attorney General For Manitoba v. Kelly and Others! it was observed that ‘Whenever there is.a difference of opinion between the parties as to the authority conferred on an-umpire or arbitrator ‘under an agreed submission the decision. rests ultimately with the court and ‘not with the umpire or arbitrator.” - This is predicated upon a proposition that common law courts were reluctant to part with their jurisdiction. to set_at-naught an award if the arbitrator confers jurisdiction upon himself by deciding in his own favoursome | -

' preliminary point ‘apon which his jurisdiction rests.

Mr. Pai also referred to the decisions of-the Privy Council in:

Champsey Bhara & Co. and Hirji Mulji v. Cheong Yue Steamship Co.

Ltd? Both these decisions. are of no assistance on the question — about the reference of a specific question of law touching upon the jurisdiction of the arbitrator for his deeision and its effect. In fact. the decision in Champsey Bhara’s case clearly turns upon as to what constitutes an error of law apparent on the face of the award,

(4) [1922] All. E.R. 69 (2) [1926] All. BR. 5]

x

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_ TARAPORE CO. y. COCHIN SHIPYARD (Desai, J.) 147

The next case referred to was Heyman & Anrs, v. Darwins Ltd. Ht reasserts that as a rule the arbitrator cannot clothe himself with Jurisdiction.

“Turning to the decisions of this Court, reference was first made to Jivarajbhai Ujamshi Sheth & Ors. v. Chintamanrao Balaji & Anr2 Shah, J. speaking for himself and Justice Sarkar at page 499 observed

_ that ‘this is not a case in which the arbitrator has committed a mere error of fact or law in ‘reaching his conclusion on the disputed

’ question submitted for his adjudication. It is a case of assumption of jurisdiction not possessed by him, and that renders the award, to the extent to which it is beyond the arbitrator’s jurisdiction, invalid’’.

It may be pointed out that these observations are in the context of the facts of that case and there was no contention before the court that any specific question of law touching upon the jurisdiction of the arbitrator was referred to for his. ‘decision by the parties. ‘

The last decision in this context referred to was Dr. S, B. Dutt

‘y. University of Delhi® In that case the arbitrator gave by his © award a direction to enforce the contract-of personal service. ‘This ~

. was stated as an error of law apparent on the face of the award and’ .

the award was set aside. Again it may be pointed out that the reference to the the point set outin the.letter of reference extracted at page 1240 clearly spells out that no specific question oflaw . touching upon the jurisdiction of the arbitrator was referred to the arbitrator for his decision. .

* On a conspectus of these decisions, it clearly transpires that if a question of law is specifically reférred and it becomes evident that the parties desired to have a decision on: the specific question from _ the arbitrator about that rather than one from court, then the court will not interfere with the award of the arbitrator on the ground that there is an error of law apparent on the face of the award even if the view of ‘law taken by the arbitrator does not accord with the view of the court. This view of law-taken in England was stated by | this Court to be the same in this country and since the decision in Seth Thawardas’s case which follows earlier decisions in England

-and India, it has not been departed from. The view canvassed for by Mr. Pai that common law courts were very reluctant to’ part with its jurisdiction has hardly any relevance where a specific question of

(1) [1942] (1) AN B.R. 337, (2) [1964] 5 SCR 480. . (3) [1959] SCR 1236 | .

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148 * .. SUPREME COURT REPORTS. | [1984] 3 s.c.r.

_law including the one touching the jurisdiction of the arbitrator is ~ referred to the arbitrator for his decision. Even if the decision: of

. the arbitrator does not accord with the view of the court, the award

_cannot be set aside on the sole ground that there is an error of law apparent on the face of it.

Before we’ conclude on this ‘pojnt we must take note ofa. contention of Mr. Pai that the respondent cannot be ‘estopped from ‘contending that the arbitrator had ‘no jurisdiction to entertain the dispute as the respondent agreed to the submission without prejudice to its rights to ‘contend to the contrary. It is undoubtedly true that .

+ jn the letter dated March 29, 1976-by which the respondent agreed - to refer the dispute to the arbitrator, it was in terms stated that the reference is ‘being made. without prejudice to the position of the respondent, as adopted in the: letter meaning thereby without prejudice: to its rights to contend that the claim of the appellant is not covered by the arbitration clause, In the context in which the expression ‘without prejudice’ is used, it would only mean that the respondent - reserved the right to contend before the arbitrator that the dispute is not covered by the arbitration clause. It does not’ appear that ° ‘what was reserved was a contention that.no specific question of law

* was specifically reférred to the arbitrator. It is difficult to spell out

‘?

such a contention from the letter. -And the respondent did raise the

- contention before the arbitrator that he had no jurisdiction to - entertain the dispute as it would not be covered ‘by the arbitration.

clause. Apart from the technical meaning which the expression ‘without prejudice’ carries depending upon the context in which it is used, in the present case on a: proper reading of the correspondence ~ and-in the setting in which the term is used, it only means that the respondent reserved "to itself the right to contend before the arhjtartor that a dispute raised or the claim made by the ‘contractor was not . covered by the arbitration clause. No other meaning cin be assigned . to it. An action taken without prejudice to one’s right cannot necessarily mean that the entire action can be ignored by the party ‘taking the same. In this case, the respondent referred the specific question of law to the arbitrator. This was ‘according to the respondent without ptejudice to its right to. contend that the claim or the dispute. is not covered by the arbitration clause. The contention was to be before the arbitrator. Ifthe respondent wanted to assert that it had reserved to itself the right to confend that no specific question of law was referred to the arbitrator, in the first instance, it should not have made the reference in the terms in which

‘it is made but should have agreed to the proposal of the appellant _ a

“4 S

PARAPORE Co. y. COCHIN SHIPYARD (Desai, J,) 149 to make a general reference. If the appellant insisted on the reference of a specific question which error High Court appears to .

have committed, it could have declined to make the reference of a specific question of law touching his jurisdiction and should have taken recourse to the,court by making an application under Sec. 33 of the Arbitration Act to have the effect Of the arbitration agreement determined by the court. Not only the respondent did not

" have recourse to an application under Sec. 33 of the Arbitration Act, but of its own it referred a specific question of law to the arbitrator for his decision, participated. in the arbitration proceeding invited,

‘the arbitrator to decide the specific question and took. a chance of a decision. It connot therefore, now be permitted to turn round and contend to the contrary on the nebulous plea that it had referred

‘the claim/dispute to the sole arbitrator without prejudice to its right to contend to the contrary. Therefore, there is no merit in the contention of Mr. Pai. . *

_ In this case, as earlier pointed out a specific question as to whether the claim of compensation made by thé appellant-contractor = ‘and demurred and disputed by the respondent would be covered within the scope, ambit and width of the arbitration clause, was - specifically referred by the parties for the decision ofthe arbitrator. Therefore, it is a case where a specific question of law touching upon he jurisdiction of the arbitrator was referred for the decision of the

_ arbitartor by the parties. Even if the view taken by the arbitrator may not accord with the view of the.court about the scope, ambit and width of the arbitration clause, the award cannotbe set aside | on the ground that there is an efror of law apparent on the face of the award. The view taken by the High Court is palpably untenable and has to be réversed. On this short point, the appeal can be. allowed. However, it was strenuously urged by both the sides that the dispute arising out of the claim for compensation made by the.

appellant on account of the increase in the cost of the pile driving equipment and technical know-how fees would or would not-be covered by the first paragraph of Clause 40, we would briefly examine. the same to point out that it would be covered.

In order to ascertain whether the claim: for compensation | for increase in the price of pile driving equipment and technical know- how fees would be covered by the arbitration’ clause, it is necessary: . briefly to refer.to the negotiations and discussions leading to the formation of the contract for construction of the Repair Dock and

‘the Building Dock. The value of the works to be executed was

«

150 . SUPREME ‘COURT REPORTS [1984] 3 s.c.k.

A over Rs 24 crores. In respect Of the construction of Repair Dock, there was only the tender of the appellant jand. in respect of the Building Dock,. there were two tenders: one of the appellant and another by M/s National Building Construction Corporation, the

_ tendered value of the latter béing double . that of. the former. -

Indisputably, the respondent had a very limited or realistically no choice. In such a situation the Tender Committee took notice of the fact of the. poor response to. the invitation to tender. The Committee took notice of such salient features of the work being the complexity and magnitude of the works to be undertaken by any ‘Indian Contragtor and the non-availability of plant and equipment

Cc required for the works and, more especially that if the contractor - was to procure the specialised -equipment required for the works, ‘there was hardly any assurance that after the works werc over, the fnachinery would be so much depreciated to have any substantial

' @ use or utility to the contractor. In the ‘invitation to tender, it was .

indicated that requisite foreign exchange for importing pile driving equipment and machinery, spares and technical know-how amounting to about Rs 2 crores in all would be made available to the contractor ' from the 11th Yen Credit from Japan, subject to his getting indigenous clearance and providing détailed justification. Annexure IV to the General Conditions of Contract clearly. specifies that the tenderers while quoting shail give separately the full details of the- ’ E equipment for which they would be- requiting foreign exchange

"assistance. And they shall also indicate the financial implication if any, for providing not providing the foreign exchange assistance indicated for the various equipments. Two things emerge from recital of the facts’ herein enumerated in the course of formation of, the contract: (1) that the pile driving equipment will have to be ‘imported from outside India and technical know-how fees will have to be paid both in foreign currency and (2) this would necessitate investment of about Rs 2 crores by the contractor. The. contractor in his letter dated July 14,1972 specifically invited the respondent to confirm the modifications in the terms of contract as set out therein.

gq In paragraph 31 (E) (1), the contractor states that all foreign exchange - for the equipment, spares, téchnical know-how and hiring of experts shall be provided to the contractor. and that the total foreign exchange on all these accounts will be about Rs 2 crores. A sort of an assurance was thus extended to the contractor that.the same would ‘be made available to him from the 11th Yen credit from -

Japan. This isnot disputed. It is also an admitted position that the neeessary equipment, machinery, spares and technical know-how were not available from Japan and the availability of the 11th hand vat

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TARAPORIE 0. vy. COCHIN SHIPYARD (Desai, J) 151

Yen credit from Japan lost all significance. Further the respondent

. by its letter dated January 24,1973 to the appellant while accepting the tender of the appellant ,on behalf of Cochin Shipyard Limited specifically stated as under:

*“You shall provide at your cost all construction’ " plant and machinery (including that requiring import) for all items of work including RCC piling and Steel Shee! Piling Works, , Departmental machinery likely to be made available for issue to the Contractor shall be asin Annexure IV of the General Conditions of Tender. :

- You shall furnish an inventory. of all plant and machinery proposed to be used. on the works including items of imported machinery with probable date of their availability at. site for use on the work. This. should match with the Detailed Working Programme indicated as above.” . .

At this stage'a reference to the additional Terms and ‘Condi-

. tions/Modifications to the General Conditions and Specifications of the Departmental Tender Documents, would ‘be advantageous. It reads as under: .

“All Piling Equipment shall be: procured by the Contractor sed ee rene enens@eenpetaneeete Es vec cnencsarcccvsatedecssnsersayeenses, eavave ++. 9election of equipment will be done by the Contractor in consultation with the Cochin Shipyard authorities. No hire charges for the equipment procured by the Contractor is payble to the Shipyard.-.....sessssesesseesereiececteneeessetereeen

Saeaees beseweee Requisite foreign exchange, for importing piling: plant and machinery, spares, technical know-how and _ hiring

_ of experts necessary for both the. Dock Works,videWork Order......... for Repair Dock etc., amounting to about Rs 2.00 crores in-all will be made available to the Contractor from the {lth Yen credit subject to his getting indigenous clearance and proyiding detailed-justification”

It is thus unquestionably established that the appellant whose tender was accepted after negotiations and scrutiny by the Tender Commitee was expected to invest Rs 2 crores in importing pile driving equipment and technical know-how fees. The tender was. accepted and a formal contract was entered into on his. basis, In . works contract of such magnitude, the value whereof was over Rs. 24

" crores, and which was being undertaken. by an Indian contractor for

152 | . SUPREME COURT REPORTS ~ (1984) 3 S.C.R.

the first time negotiations prior to the finalisation of the contract and the correspondence leading to the formation of contract supply the basis.on which contract was finally entered into. Undoubtedly, . if in the final written contract, there. is something contrary to the basic understanding during the formative stage of the contract, the written contract would prevail. But if the contract does not indicate to the contray and the assumptions appeared to be the foundation’ of the contract obviously that aspect. cannot be overlooked while determining what were the obligation undertken under the formal contract. It may be recalled that the two alternative rates were _ quoted ‘by the contractor: (i) the respondent were to import the pile: driving equipment and technical know-how for its operation, the same would bé leased to the contractor at negotiated rates or (ii) the contractor were to import the same the rates be paid to the contractor. The second alternative was accepted by the parties on the fundamental assumption that the investment in this behalf would be

Rs 2 crores. This is the agreed position on which contract was entered into. To continue the narrative, it may be pointed out that this fundamental foundation of the contract not left to guess work, but is specifically referred to in the notice inviting tender and in the " specifications and modifcations as addenda to the General Conuitions of Contract. It was clearly understood between the parties that the contractor has to’ invest roughly Rs, 2 ‘crores in foreign* ** exchange for importing pile driving equipment and technical know- how fees without which this work could never have been undertaken .

and without which it would not have been entrusted to the

‘contractor. The contractor when he quote his terms. must obviously ° have made appropriate calculations, one of which in this case appears to be that it will have to invest Rs. 2-crores in foreign exchange and this fact flies in the face that aftrer the wOrk was over the imported machinery would depreciate to this extent that it would have hardly any use of utility to the contractor as noticed by the Tender Committee. The rates quoted by the contractor were - obviously interrelated to the basic assumption. The fact that such ‘was also also the understanding of the respondent 1 may ‘now be pointed out.

The respondent by its letter’ dated. July 31, 1973 to Industrial

Adviser (HME), Directorate General of Technical Development requested him to issue’ necessary clearance to the appellant fot " import of the equipment set out in the Annexure to the letter on the ground that the appellant tried its level best to get. the equipment from the Japaneses sources, but they’ could not get positive resitive .

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TARAPORE CO. y. COCHIN SHIPYARD (Desai, J.) 183 response for such equipments. They had alsa tried their best to get suitable offers from U. K., U. S. A., USSR, Canada, West Ger- many and Holland. It was also-pointed out that the respondent itself also made independent enquiries in-Japan for getting. suitable offers “ for the above equipment without success. Thus it becomes clear‘ that to the knowledge of the respondent, the 11th Yen Credit became irrelevant. The Government of India by its letter dated

September 1,1973 to the respondent conveyed its approval to the release of;the foreign exchange in favour of the appeHant to the extent of Rs 211.80 lakhs (Rupees two crores eleven lakis and eighty thousand only) equivalent to DFL 9, 442, 700 at the specified exchange rate. Therafer. the appellant by its letter dated May 28,1975 amongst others requested the respondent to take note ofthe fact that the tendered tates were based on certain total cost of machines which has since gone up considerably rendering. the rates no longer’ workable. The contractor proceeded to point out the ‘utter irrelevancy of the rates in view of the higher outlay of imported. machinery and technical know-how. It pointed out the loss sustained

“py the contractor and requested for compensation in this behalf. '_ This was followed by the letter dated July 1, 1975 by the contractor to the respondent, emphasising the fact that the tendered rates had become’ unworkable and unrealistic owing to the increase in the cost of equipment. know-how etc. as a result of the increase in the foreign exchange rate of Dutch Guilders as related to the Rupee. In response to the last letter the respondent replied by, its, letter dated July 2,

1975, relevant portion of which may be extracted:

“In this connection, a kind reference is invited to your letter dated the 14th July, 1972 (which forms a part of the contract documents) wherein you had indicated that the reta/ foreign exchange. required by you for the equipment, spares, ‘technical know-how and hiring of experts, was expected to be about Rs 2 crores. From the data enclosed with your letter under reply, it is seen that the foreign exchange expenditure incurred by you so-far in connection with this contract had been less than Rs 2 crores. In the circumstances, it is difficult to accent the position that your tender-was based on assum- _ ptions indicated by you and that the rates for pile ériving should now be revised..” 7

‘This letter furnishes proof, if one was needed that parties were | ad idem that the investment for imported pile driving equipment and foreign exchange know-how would be about Rs 2 crores.. The

?

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154. ; SUPREME COURT REPORTS 7 [1984] 3 s.c.k.

respondent does not contest the claim for compensation under this head as is now sought to be done on the ground that as the contractor had to provide imported pile driving equipment and technical know-how, the respondent is not entitled to compensation even if the initial estimate has been found to-be unrealistic. On the contrary the claim for compensation 1s disputed and controverted on, - the ground that the foreign exchange expenditure incurred by the contractor so far in connection with imported pile driving equipment

‘and technical -know-how has been less than Rs 2 crores, From this correspondence, ‘it. wolud emerge that both the parties were agreed that the-contractor wonld have to invest Rs:2- crores in foreign exchange for importing pile driving equipment and technical know-how. which could only be used after approval of the same by the ‘respondent. The appellant by its letter August 9,. 1975 contended . that escalation of expenditure under this head is taken care of in the contract and more specifically in clauses 13 and 16 of the works order. We would have occasion to refer to these clauses.a little later. The respondent by its letter dated August 29,1975: reasserted its position’ that the foreign exchange element of the expenditure incurred by the contractor works-out to Rs 1.96 crores, which is less than the figure of Rs. 2 crores that was expected to be invested in foreign exchange which was to be provided: by the contractor, . The respondent. also referred to th: assessment of expenditure made

- by the Contractor as per its letter dated July 14,1972. This has already been referred to by us, The respondent further asserted that ‘the estimate so male till that date has not been exceeded and therefore, any argument based on fluctuation in the exchange rate is not valid or tenable. It may be repeated that the refusal to entertain the claim for compensation was predicated upon the- estimates having -

- not exceeded the basic minimum of Rs. 2 crores by the contractor on which rates were worked out and agreed, and not that such claim cannot be entertained under the contract. By its Iétter dated Sep-

’ tember 18,1975, the contractor reiterated its’ position: In its letter dated October 6, 1975, the respondent when it was faced with the situation that the expenditure incurred under this head in- foreign ex: change had risen to Rs 214.33 lacs i. e. it had exceeded the expected inyéstment of Rs, 2 crores-under this head, took a summerasult and stated that the respondent had at no stage stated that the contractor

~ was ‘not entitled to any claim because the amount of foreign exchange "has not'yet exceeded Rs 200 lakhs’. One has merely to call attention to the two letters dated July 2, 1975 and August 29 1975 to reach the conclusion that the respondent has gone back upon its original position and having found that the expenditure under this head has

Myo ft

TARAPORE CO. Y. COCHIN SHIPYARD (Desai, J.) , 155

{gone up beyond the estimated expenditure made a volte face, the two positions so adopted being entirely inconsistent witli‘ each other Thereafter, the matter was referred to arbitration.

From the commencement i.e. from the stage of inviting tenders and through the negotiations and the finalisation of the contract, at every stage, the respondent assured that foreign exchange would be made available from ith Yen Credit. As the equipment was not

: available from Japan, the availabilty of Yea Credit become ofiose from the contractor's point of view. At the instance of and with the active participation of the respondent, the contractor made enquiries in various countries and ultimately procured the necessary equipment + and technical know-how which was approved by the respondent and imported the same. In the time lag, the price as well as the foreign exchange rates in relation to rupee underwent an. upward change, with the result, that the contractor had -to invest, as made out by it and not seriously controverted before the arbitrator in all’ Rs. 275.40 Jakhs. for imported pile driving equipment and spares and Rs. 18,64, 337.61. on technical services-cum-know-how fees and a further sum for higher custom duty. Details of the claim have been set out ~ in Annexures 1 and 2 respectively to the statement of claim submitted by the appellant to the arbitrator. The respondent in its counterstatement did not controvert the details of the claim and the expenditure involved under the’ two heads. The whole of the counterclaim was concerned with the denial of its liability to compensate the contractur coupled with the contention that the claim would not be covered by the arbitration agreement and therefore, the arbitrator had no jurisdiction to entertain and adjudicate the claim. ~ It may also be mentioned that at-no time since the award, the reso adza t:

ever disputed or questioned the amount awarded ‘by the arbitrator. It is thus satisfactorily established that the contractor had ‘to invest — something far in excess of Rs, 2crores which it was expected to invest in foreign exchange for imported pile driving equipment and technical know-how fets. The whole contract was concluded on this understanding. Being aware of the fluctuating position in this behalf, the contractor had tendered two alternative rates for completion of the.work as pointed earlier; one based on equipment being imported by the respondent and leased to the appellagt and alternatively rates on the basis that the contractor would import pile driving equipment and technical know alternative, which was ultinvately agr was clearly and -unmistakably unders

\ '

} . a - 4

-how. In respect of the second © ced to between the parties, it tood between the partiest hal |

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“1560 _ SuPREME COURT REPORTS [1984] 3 s.c. k

-the contractor would have to invest Rs, 2 crores and the tates were © co-related to this investment with the knowledge of the fact that when work was completed, the equipment would depreciate to the ~~ tune of 75% of its capability and would be hardly of any use to the contractor. The estimated expenditure having far exceeded, a claim for compensation would certainly be tenable at the instance of the contactor. .

Tie High Court quoted clauses 16, 26 and 3f in its judgment but did not dilate upon the provisions of the clauses so as to co- relate them with its decision. Clause 16 envisaged a situation where a since the formation of the ‘contract any fresh law is enacted which -has the bearing on the price of materials incorporated in the works and/or wages of labour, the terms of contract shall accordingly be varied. Clause 26 provided for supply of materials, plants, tools, appliances etc. by the contractor. Clause 2 provides for the liability of. the contractor to supply construction, plant ‘and machinery ~including the items to be imported -and a further obligation is cast on the contractor to furnish inventory of the same. Clause 31 amongst others, provided that the pile driving equipment shall be procured by the contractor, and the selection of equipment shall be done by the contractor, in consultation with the respondent. These clauses were presumably referred to in the context of an argument that the price escalation clause does not cover the claim for compensation for additional expenditure on imported plant and machinery and.technical know-how because the contract substantially provides for the same to be supplied by the contractor. In our opinion, this over-simplification of the clauses of the contract involving works of

- such magnitude is impermissible. The whole gamut of discussions, negotiations and ‘correspondence must be taken into consideration to arrive at a true meaning of. what was agreed to between the parties. And in this case there is no room for doubt that the parties

_ agreed that the investment of the contractor under this head would be Rs, 2 crores and the tendered rates. were predicated upon and '- co-related to this unddtstanding. When an agreement is predicated upon ari agreed fact situation, if the latter’ ceases to exist the agree- ment to that extent becomes irrelevant or otiose. The: rates pay-.

able to the contractor were related to the investment of Rs 2 crores under this head by the contractor. Once the rates became irrelevant on account of circumstances beyond the control of the contractor, it was open to the contractor to make a claim for compensation.

Therefore, it appears satisfactorily established thatthe claim arose .

> while ingplementing the contract and i in, relation to the contract, ear,

“4 a a n>

‘The next question is whether This claim made by the contractor and disputed by the respondent would be covered by the arbitration:

clause. The arbitration clause has already been extracted. Even the

‘High Court admits that clause 40 is very widely worded. It inter alia provides that-all questions and disputes relating to the meaning

‘of the Specifications Estimates, Instructions, Designs. Drawings hereinbefore mentioned and as to the quality of the Workmanship © . or materials used on the work or as to the any other questions claim, tight, matter or thing whatsoever.in any. way arising out of or relat- ing to.the contraci--————*-—-—_ or otherwise concerning the works or the execution———-——-whether atising during the progress of the work or after completion—-——+——— —shall be

‘referred to the Sole Arbitrator etc.” The scope, “width and the ambit of the Arbitration clause is of widest amplitude and any claim arising out of or relating to the contract or otherwise concerning the works or the execittion thereof would be covered by the’ arbitration clause. The material portion of clause 40 which would assist us in deciding the questions is ‘claim’ right matter or thing whatsoever in any way:

arising out of or relating to the contract——-—

. estimates or otherwise concerning the works 6rthe execution etc.”

Briefly stated any claim arising out of or relating to the contract,

_ estimates or otherwisé concerning the works or the execution thereof would be covered by the arbitration clause. The question to be.posed © is “does the claim made by the contractor arise out.of or relates to

‘ the contract, estimates, or is otherwise concerning works for execution thereof ? Phrases such as ‘claim arising out of contract’ or “relating to the’ contract’ or ‘concerning the contract’ on proper construction would mean that if while entertaining or rejecting the claim or ‘the dispute in relation to claim may be entertained or tejected after

..Teference to the contract, it is a claim arising out of contract. Again the Janguage of cl. 40 shows that any claim arising out of the contract in relation to estimate made in the contract would be covered by the arbitration clause. If it becomes necessary to have recourse to the ‘contract to settle the dispute one way or the other than certainly it can be said that it is a dispute arising out of the contract. And in this case the arbitration clause so widely worded as disputes arising out of the contract or in relation to the contract or execution ° _ of the.works would comprehend. Within its compass a claim for compensation related to estimates .and ‘arising out of the’contract. The test is whether it is: necessary to have recourse to the contract to settle the dispute that has arisen.?

(1) (See Russe! on Arbitration 20th ed. page 85)

158 | | SUPREME court REPORTS - [1984] 3 sc,

~ We may now turn to some decision to which our attention was drawn. The first case we would like to.réfer to is A.M. Mair & Co. v. . .

Gordhandass Sagarmull The Court was concerned with the arbitration clause drawn up as ; “all matters, question, disputes, differences and/or claims, arising out of and/or concerning, and/or in connection and/or in consequence of, or relating ‘to, the contract etc.”

The’ question arose whether the due date’ under the contract was . _ extended within the time, earlier reserved. The arbitrator held that the die date of the contract has been extended by a mutual agreement and the respondents were held liable to pay a sum of Rs. 4,116

, together with interest at the rates specified in the award. It was contended that the dispute is not covered by the arbitration clause. This Court whit holding that the dispute is covered by the arbitra:

' tion clause observed that looking to the rival contentions, such a dispute, the determination of which turns on the true construction of the contract, would also seemto bea dispute under or arising out

- of or. concerning the contract. The: test formulated .was that if in ~ settling a dispute, a reference to the contract is necessary, sich a dispute would be covered by the arbitration clause:

In Ruby General Insurance Co. Lid y. Pearey Lal “Kumar And _Another* this Court was. concerned with the-clause in a. policy of insurance which provided that differences arising out of the policy

~ shall be referred to the decision of the arbitrator. In construing this clause, this Court observed as under:

“The test is whether recourse to the contract by which the parties are bound jis necessary for the purpose of determining the matter in dispute between’ them. If such recourse to the contract is necessary, then the matter must come within the scope of the arbitrator's jurisdiction.” ’

In Union af India v. Salween Timber “Coustruction (india) & Ors? this Court obsetved that the test for determining the question

- is whether recourse to. the contract by which both the parties are bound is necessary for. the purpose of determining whether the claim of the respondent firm is justified or otherwise. If it is necessary. to. . take recourse to the terms of the contract for thé purpose of deciding the matter in dispute, it must be held that the matter is within ee (1) [1950] $.C.R. 792. . og (2) 11952] S.C.R. 501. . _ | (3) [1969] 2 8.C.R. 224, Loe, ;

. ¢ ' the scope of the arbitration clause and the aritrators have jurisdiction ad< to decide the same. In so stating the proportion of law, reliance was placed on Heyman & Anr. v. Darwins Lid* in which it was held that ‘where the parties are a®one in asserting that they entered into ‘s a binding contract, but a difference has arisen between them whether there has been a breach by one side or the other, or whether circum-

2 stances have arisen which have discharged ‘one or both parties from a _ further performance, such differences should be regarded as differe- + > nees which have arisen in respect of or ‘with regard to, or ‘under’ . 4 the contract, -and an arbitration clause which uses these, or, similar expressions should be construed accordingly. The Court affirmen the decision in Ruby General Insurance Co. Ltd. case,

In Astro Vencedor Compania Naviera S. A. of Panama v.

Mabanaft G. M. B. H. The Diamianos? a question arose whether a ul claim in tort would be covered by the arbitration clause? It was

My admitted that Me claim for wrongful arrest is a claim in tort. And it was contended that a claim in tot cannot come within the arbitra- tion clause. The Court of Appeal speaking through Lord Denning .

held that the claim in tort would be covéred by the arbitration clause, if the claim or the issue has a sufficiently close connection with the claim under the contract.

* * In Gunter Honck v. Andre & CIE. S. A, 8 the Court (Queen’s * Bench Divisio n (Commercial Court) help that the words ‘arising out of clearly extend the meaning than would otherwise be applied to the clause were it limited to ‘all disputes arising under - the contract.

In the facts before us, the respondent in para g of its counterstatement filed before ‘the arbitrator specifically referred to clause.

; 16 of the General Conditions of Contract and to the Additional

1 tng Terms and Conditions Modifications forming part of ‘the contract document. In paragarph 11, it was stated that the claim of the appéllant was completely outside the purview of the contract and the same does not fall within the purview of the first paragraph of Clause 40

(1) [1942] A.C. 356 @ 366. (2) [1971] 2 Q.B, 588, (3) [1970] 1 Lloyd’s Law Reports 235,

‘,

Me

160 SUPREME COURT REPORTS ~ T1984) 3 s.0R

- it was further stated in paragraph . 13 that contract provides for ' escalation in certain respects and that is the only escalation which is - admissible in terms of. the contract #hd the claim made by the appellant does not come within the escalation clause nor in the agreed formula relating to such escalation. The contrateor relied

- upon Clause 13 of the Additional Terms aid Conditions Modfications which form part of the contract document to sustain its claim. From the pleadings, it clearly transpires that both the parties had recourse to the contract which is admittedly entered into in support of. the - rival contentions and therefore, the claim made by the ‘appellant

| _ would be covered by the arbitration clause, which is of the widest amplitude, It is thus satisfactorily established that the claim made by the contractor would be covered by the arbitration clause.

rd

‘Mr. Nariman also wanted us to examine whether the claim made by the arbitrator woulde be admissible on the principle of quantum meriut. It is not necessary to exemine this dspect at all in the view which we are taking.

He also wanted us to adopt an approach ‘that the effort of the court must be to uphold the award and not to reject it. We. consider it unnecessary to dilate upon it .

The discussion leads to the inescapable conclusion that .a specific questioti-6f law touching the jurisdiction of the arbitrator was specifically referred to the arbitrator and therefore the arbitrator decision is binding on the parties and the award cannot be set aside on.the sole ground that there was an error of law apparent on. the face of the award. It is also established that the claim for compensation made by the arbitrator which led to the dispute was covered by

"the arbitration clause. The quantum of compensation awarded by _ the arbitrator was never disputed nor questioned. Therefore, the

High Court was clearly in error reversing the decision of the trial

. gourt. .

_ Accordingly this appeal succeeds and is allowed and the Judgment of the High Court is set aside and the Judgment and order of the Subordinate Judge, Ernakulam dated March 30, 1979 is restored with costs throughout-

=

NV.K. | | Appeal allowed, —