Supreme Court of India
ASSOCIATE BUILDERSversusDELHI DEVELOPMENT AUTHORITY
- Citation
- 2014 INSC 809
- Decided
- 25 November 2014
- Disposal
- Appeal(s) allowed
- Bench
- RANJAN GOGOI
Holding
An arbitral award may be set aside only on the specific grounds listed in Section 34(2) and (3) of the Arbitration and Conciliation Act, 1996, and the Division Bench exceeded its jurisdiction by interfering with the arbitrator's factual findings, so the award is upheld.
Summary
Associate Builders entered into a construction contract with the Delhi Development Authority (DDA) for a housing project. After completing only part of the work, the contractor filed 15 claims for overheads, damages and price escalations, which were largely awarded by an arbitrator. The Single Judge of the Delhi High Court upheld the award, but a Division Bench set aside several claims and reduced others, alleging errors in the arbitrator's application of Hudson's formula and contract clauses. On appeal, the Supreme Court held that under the Arbitration and Conciliation Act, 1996 an award can be set aside only on the limited grounds in Section 34(2) and (3); the Division Bench had exceeded its jurisdiction by re‑examining factual findings and the award’s reasoning. Consequently, the award was reinstated in full and the Division Bench’s order was set aside.
Issues considered
- Whether the Division Bench could set aside the arbitral award beyond the grounds enumerated in Section 34(2) and (3) of the Arbitration and Conciliation Act, 1996.
- Whether the award was in conflict with the public policy of India.
- Whether the court may interfere with the arbitrator's application of Hudson's formula and other factual determinations.
- Whether clauses 10C, 1OC and 22 of the contract were correctly applied to the claims.
- Whether there was duplication or overlap among the awarded claims.
Legislation cited
- Arbitration and Conciliation Act, 1996s. 18, s. 28(1)(a), s. 28(3), s. 31(3), s. 34(2), s. 34(3), s. 5
- Foreign Exchange Regulation Act
Subjects
ArbitrationSection 34Public policyArbitral awardJudicial interventionConstruction contractHudson formulaPatent illegalityJustice and morality
Judgment
[2014] 13 S.C.R. 895
ASSOCIATE BUILDERS A
v.
DELHI DEVELOPMENT AUTHORITY
(Civil Appeal No.10531of2014)
B
NOVEMBER 25, 2014.
[RANJAN GOGOi AND ROHINTON FALi NARIMAN, JJ.]
Arbitration and Conciliation Act, 1996:
ss. 5 and 34(2) and (3) - Arbitral award - Judicial C
intervention with - Scope of-Award of arbitrator- In favour
of the appellant-contractor- Upheld by Single Judge of High
Court - Division Bench of High Court in exercise of
jurisdiction uls.34 setting aside the order of Single Judge
negating four of the claims of the contractor in toto and scaling D
down three of the claims - On appeal, held: An arbitration
award can be set qside only on the grounds mentioned u/
s.34(2) and (3) - None of the grounds contained in sub-
clause 2(a) of the Act deal with the merits of the decision
rendered by the arbitral award - It is only when the award is in E
conflict with the public policy of India that the merits of an
arbitral award are to be looked into under specified
circumstances - The Division Bench of High Court in
exercise of its jurisdiction u/s. 34 has exceeded its jurisdiction F
by interfering with the possible view of arbitrator on the facts
-Arbitral award is upheld.
'Public policy'- Meaning of, in the context ofArbitration
and Conciliation Act, 1996 - Discussed.
Words and Phrases- 'Justice' and 'morality' - Meaning G
of.
Allowing the appeal, the Court
HELD: 1. Section 34 in conjunction with s.5 of the
Arbitration and Conc.iliation Act, 1996, makes it clear that H
895
896 SUPREME COURT REPORTS [2014] 13 S.C.R.
A an arbitration award that is governed by part I of the Act,
can be set aside only on the grounds mentioned under
Section 34 (2) and (~), and not otherwise. None of the
gnJunds conta'ined in sub-clause 2 (a) deal with the
merits of the decision rendered by an arbitral award. It
B is only when the award is in conflict with the public
policy of India that the merits of an arbitral award are to
be looked into under certain specified circumstances.
[Para 12][915-C-D; G-H; 916-A]
Renusagar Power Co. Ltd. v. General Electronic
c
Co. 1993 (3) Suppl. SCR 22: 1994Supp (1) SCC
644; ONGC v. Saw Pipes 2003 (3) SCR 691 :
2003 (5) SCC 705; Hindustan Zinc Ltd. v. Friends
Coal Carbonisation (2006) 4 SCC 445;
D McDermott International Inc. v. Burn Standard Co.
Ltd. 2006 (2) Suppl. scR 409 : (2006) 11 sec
181; Centro trade Minerals & Metals Inc. v.
Hindustan Copper Ltd. 2006 (2) Suppl. SCR 146
: (2006) 11 SCC 245; ODA v. R.S. Sharma and
E co. 2008 (12) scR 785: (2008} 13 sec 80; J.G.
Engineers (P) Ltd. v. Union of India 2011 (8)
SCR 486 : (2011) 5 SCC 758; Union of India v.
Col. L.S.N. Murthy2011 (13) SCR 295: (2012) 1
sec 718 - relied on.
F 2. Violation of the Foreign Exchange Act and
disregarding orders of superior courts in India would be
regarded as being contrary to the fundamental policy of
Indian law. The binding effect of the judgment of a
G superior court being disregarded would be equally
violative of the fundamental policy of Indian law. The
juristic principle of a "judicial approach" demands that
a decision be fair, reasonable and objective. On the
obverse side, anything arbitrary and whimsical would
H obviously not be a deter_mination which would either be
ASSOCIATE BUILDERS v. DELHI DEVELOPMENT 897
AUTHORITY
fair, reasonable or objective. The Audi Alteram Partem A
principle which undoubtedly is a fundamental juristic
principle in Indian law is also contained in Sections 18
and 34 (2) (a) (iii) of the Arbitration and Conciliation Act.
A decision which is perverse or so irrational that no
reasonable person would have arrived at the same, is B
.important and requires some degree of explanation. It is
settled law that where - a finding is based on no
evidence, or an arbitral tribunal takes into account
something irrelevant to the decision which it arrives at;
or ignores vital evidence in arriving at its decision, such c
decision would necessarHy be perverse. The other
ground on which an award may be set aside is that it is
contrary to the interest of India. [Para 12][925-C-D;
928-A-C; F-H; 931-A]
ONGC Ltd. v. Western Geco International Ltd. D
2014 (9) SCC 263; H.B. Gandhi, Excise and
Taxation Officer-cum-Assessing Authority v. Gopi
Nath & Sons 1992 Supp (2) SCC 312; Ku/deep
Singh v. Commr. of Police 1998 (3) Suppl.
SCR 594: (1999) 2 SCC 10 - relied on. E
3. If an award is against justice or morality, it is
against public policy. An award can be said to be against
justice only when it shocks the conscience of the court.
Morality, in the context of an arbitral award would mean
the enforcement of an award say for specific F
performance of a contract involving prostitution.
"Morality" would, if it is to go beyond sexual morality
necessarily cover such agreements as are not illegal but
would not be enforced given the prevailing mores of the
day. However, interference on this ground would also G
be only if something shocks the court's conscience.
[Para 12][931-C-D; 934-E-G]
Gherulal Parekh v. Mahadeo Dass Maiya 1959
Supp (2) SCR 406 - referred to. H
898 SUPREME COURT REPORTS [2014] 13 S.C.R.
A 4. 'Patent illegality' would also fall under public
policy. Under the explanation to section 34(2)(b), an
award is said to be in conflict with the public policy of
India if the making of the award was induced or affected
by fraud or corruption. This ground is perhaps the earliest
B ground on which courts in England set aside awards
under English law. Added to this. ground (in 1802) is the
ground that an arbitral award would be set aside if there
were an error of law by the arbitrator. The 'patent illegality'
principle contains three sub heads: (a) a contravention
C of the substantive law of India would result in the death
knell of an arbitral award. This must be understood in
the sense that such illegality must go to the root of the
matter and cannot be of a trivial nature. This is a
contravention of Section 28(1 )(a) of the Act; (b) a
0
contravention of the Arbitration Act itself would be
regarded as a patent illegality- for example if an arbitrator
gives no reasons for an award in contravention of
sect.ion 31 (3) of the Act, such award will be liable to be
E set aside; and (c) a contravention of Section 28 (3) of the
Arbitration Act. This last contravention must be
understood with a caveat that if an arbitrator construes
a term of the contract in a reasonable manner, it will not
mean that the award can be set aside on this ground.
F Construction of the terms of a contract is primarily for
an arbitrator to decide unless the arbitrator construes
the contract in such a way that it could be said to be
something that no fair minded or reasonable person
could do. (Para 12)(934-G-H; 935-A, 937-C-H; 938-B·D]
G McDermott International Inc. v. Bum Standard Co.
Ltd. 2006 (2) Suppl. SCR 409: (2006) 11 sec
181; MSK Projects (/) (JV) Ltd. v. State of
Rajasthan 2011 (9) SCR 402 : (2011) 10 SCC
573; Rashtriya /spat Nigam Ltd. v. Dewan Chand
H
ASSOCIATE BUILDERS v. DELHI DEVELOPMENT 899
AUTHORITY
Ram Saran 2012 (4) SCR 1 : (2012) 5 SCC 306 A
-relied on.
R v. Northumberland Compensation Appeal
Tribunal. Ex Parte Shaw 1952 1 All ER 122;
Champsey Bhara Company v. The Jivraj Ba/loo
B
Spinning and Weaving Company Ltd. AIR 1923
PC 66 - referred to.
5. When a court is applying the "public policy" test
to an arbitration award, it does not act as a court of
appeal and consequently errors of fact cannot be C
corrected: A possible view by the arbitrator on facts has
necessarily to pass muster as the arbitrator is the
ultimate master of the quantity and quality of evidence
to be relied upon when he delivers his arbitral award.
Thus an award based on little evidence or on evidence D
which does not measure up in quality to a trained legal
mind would not be held to be invalid on this score. Once
it is found that the arbitrator's approach is not arbitrary
or capricious, then he is the last word on facts.
[Para 12][929-F-H; 930-A] E
P.R. Shah, Shares & Stock Brokers (P) Ltd. v.
B.H.H. ·Securities (P) Ltd. 2011 (16) SCR
87 : (2012) 1 sec 594- relied on.
6. ·In the present case, the Division Bench while F
considering claim Nos. 9, 10, 11 and 15, found fault with
the application of Hudson's formula which was set out
by the Arbitrator in order to arrive at the claim made under
these heads. The Division Bench said that it was not
possible for an Arbitrator to mechanically apply~ certain G
formula, however well understood in the trade. This itself
is going outside the jurisdiction to set aside an award u/
s.34. The Division Bench has exceeded its jurisdiction
in interfering with a possible view of the Arbitrator on
facts, forgetting that the Arbitrator is the sole Judge of H
900 SUPREME COURT REPORTS [2014] 13 S.C.R.
A the quantity and quality of evidence before him and
unnecessarily bringing in facts which were neither
pleaded nor proved and ignoring the vital completion
certificate granted by the DOA itself. The Division Bench
also went wrong in stating that as the work completed
B was c>nly to the extent of Rs. 62,84,845/-, Hudson's
formula should have been applied taking this figure
into account and not the entire contract value of
Rs.87 ,66,678/- into account. To apply this formula one
has t.o take into account the contract value that is
C awarded and not the work completed. [Paras 15, 16, 18,
20][941-G-H; 942-A; 945-D; 948-C-E; 949-A]
McDermott International Inc. v. Burn Standard Co.
Ltd. 2006 (2) suppl. scR 409: (2006) 11 sec
o 181 - relied on.
7. The Division Bench has interfered wrongly with
the arbitral award on several counts. It had no business
to enter into a pure question of fact to set aside the
Arbitrator for having applied a formula of 20 months
E instead of 25 months. The Division Bench found that an
adjustment would have to be made with claims awarded
under claim Nos.2, 3 and 4 which are entirely separate
and independent claims and have nothing to do with
claim Nos.12 and 13. The formula then applied by the
F Division Bench was that it would itself do "rough and
ready justice". This cannot be done by any court under
the jurisdiction exercised under Section 34 of the
Arbitration Act. The expression "justice" when it comes
G to setting aside an award under the public policy ground,
can only mean that an award shocks the conscience of
the court. It cannot possibly include what the court thinks.
is unjust on the facts of a case for which it then seeks to
substitute its view for the Arbitrator's view and does what
H it considers to be "justice. The Division Bench lost sight
ASSOCIATE BUILDERS v. DELHI DEVELOPMENT 901
AUTHORITY
of the fact that it is not a first appellate court and cannot A
interfere with errors of fact. [Para 22][951-E-H; 952-A·C]
8. The Arbitrator considered clause 1OC of the
agreement in detail and only awarded amounts under
this clause in excess of 10 percent as required by the
8
clause, when it came to awarding amounts under claim
Nos.2, 3 and 4, which fell within the ambit of clause 1OC.
The arbitrator has not applied the said clause to claim
Nos.9, 10, 11 and 15, as no occasion for applying the
same arose. The award cannot be faulted on this c
ground.[Paras 24, 25][954-B-E]
9. Clause 22 of the agreement does not operate
automatically. It only operates if an objection is taken
stating that part of the site is not available for any reason.
Nowhere has the ODA stated which part of the site is not D
available for any reason. The object of this clause is that
no claim for extras should be granted only if there is an
unavoidable delay. The delay was entirely avoidable and
caused solely by the DOA itself. [Para 26][955-B-C]
E
KochharConstruction Works v. DOA &Anr. (1998)
2 Arb. LR 209; Harsha Constructions v. Union of
India & Ors. (2014) 9 SCC 246- referred to.
10. There has not been a duplication of claims
·awarded. None of the claims are overlapping. They are F
all contained under separate heads. [Paras 27, 28]
[955-0; 956-B]
Case Law Reference:
1993 (3) Suppl. SCR 22 relied on Para 12 G
2003 (3) SCR 691 relied on Para 12
(2006) 4 sec 445 relied on Para 12
2006 (2) Suppl. SCR 409 relied on Para 12
H
902 SUPREME COURT REPORTS [2014] 13 S.C.R.
A 2006 (2) Suppl. SCR 146 relied on . Para 12
2.008 (12) SCR 785 relied on Para 12
2011 (8) SCR 486 relied on Para 12
2011 (13) SCR 295 relied on Para 12
B
2014 (9) sec 263 relied on Para 12
·1992 Supp (2) sec 312 relied on Para 12
1998 (3) Suppl. SCR .594 relied on Para 12
c 2011 (16) SCR 87 relied on Para 12
1959 Supp (2) SCR 406 referred to Para 12
1952 1 All ER 122 referred to Para 12
AIR 1923 PC 66 referred to Para 12
D
2006 (2) Suppl. SCR 409 relied on Para 12
2011 (9) SCR 402. relied on Para 12
2012 (4) SCR 1 relied on Para 12
E (1998) 2 Arb. LR 209 referred to Para 26
(2014) 9 sec 246 referred to Para 26
CIVIL APPELLATE JURISDICTION: Civil Appeal No.
10531 of2014.
F From the Judgment and Order dated 08-02-2012 of the
High Court of Delhi at New Delhi in FAO (O.S.) No. 667 of
2006.
.
M.L. Varma, Sr. Adv., Sc:itvik Varma, Abhishek, Ambar
G Qamaruddin, Ad vs. with him for the Appellant.
A. Sharan, Sr. Adv., Ms. Binu Tamta, Pankaj Pandy, Dhruv
Tamta, Advs. with him for the Respondent.
H
ASSOCIATE BUILDERS v. DELHI DEVELOPMENT 903
AUTHORITY
The Judgment of the Court was delivered by A
R. F. NARIMAN, J. 1. Leave granted.
2. The appellant herein was awarded a certain
construction work contract by the DOA vide a letter of award
dated 141h May, 1992. DOA was building a colony consisting B
of 7 ,000 houses in Trilok Puri in the trans-Yamuna area. 168
Middle Income Group houses and 56 Lower Income Group
houses, Grade-A Pocket- !3 (balance work) was awarded for
the tendered amount of Rs.87 ,66,678/-. The contract was to
be completed in 9 months. Admittedly, it was ultimately C
completed only in 34 months, the contractor completing 166
Middle Income Group houses and 36 Lower Income Group
houses. The total value of work that was done amounted to
Rs.62,84,845/-. As many as 15 claims were made by the
contractor and the High Court of Delhi appointed one Shri K.D. D
Bali.to arbitrate the present dispute .
. 3: We are concerned here with claims 9, 10, 11 and 15,
for these claims have been allowed by the Arbitrator and the
DDA's objections have been dismissed by the learned Single E
Judge of the High Court of Delhi. The Division Bench in an
appeal u~der Section 37 of the Arbitration Act, 1996 has
stepped in to set aside the judgment of the Single Judge and
negative these claims. We are also concerned with claims 12
and 13 which have been scaled down by the Division Bench. F
4. Claims 9, 10, 11 and 15 read as follows:
"Claim No.9: Claimants claim Rs. 20,950/- on account
of hire charges of centering shuttering due to delay in
laying of conduiting. G
a) That the respondents had granted certain work of
electrification but the said agency did not lay the conduit
resulting in delay in removing the shuttering and causing
hire charges. This fact was reported to the respondents
H
904 SUPREME COURT REPORTS (2014] 13 S.C.R.
A vide claimant's letter dated 30.10.92 followed by
reminders and also found place in hindrance register.
b) That this is the actual expenditure incurred and thus
the claimant is entitled for its refund.
B c) That the detailed break-up of this claim has been
appended separately.
Claim No.10: Claimants claim Rs.33,450/- being the hire
charges of shuttering due to stoppage of work in block
no.100and 101.
c
a) That the department had virtually stopped the work in
block 100 & 101 on 20.7.93 and it continued up to
26.2.94. During this period no work was allowed to be
executed in these two blocks resulting in blockade or
D centering and shuttering in the said two blocks.
b) That by stoppage of work in these two blocks the
claimants had suffered hire charges of shuttering due to
respondent's lapses and defaults. ·
E c) It is further stated that there was no justification for
stoppage of work ar:id the action was arbitrary and totally
unjust.
d) That the detail of this claim has been outlined and
appended separately and the same shall from part of
F
the statement of facts.
Claim No. 11: Rs.2.00.000/- payable as damages on
account of hire charges of tools &plants and scaffolding.
a) That due to prolongation of the contract on account of
G the respondents the claimants had to maintain tools &
plants, scaffolding etc, during the prolongation of the
contract resulting in expenditure forthe same.
H
ASSOCIATE BUILDERS v. DELHI DEVELOPMENT 905
AUTHORITY [R. F. NARIMAN, J.]
b) That the said articles remained at site beyond the A
stipulated period and the claimants suffered loss due to
the said prolongation.
Claim No. 15: Claimants claim damages Rs.6,25,979/-
on account of establishment due to prolongation of the
8
contract.
a) That the claimants had contemplated maintenance of
establishment during stipulated period of completion but
the work was prolonged due to various delays and
defaults on the part of the respondents. C
b) It is further stated that the claimants had to pay the
establishment payment during prolongation and the said
expenditure was unproductive and un contemplated.
c) It is further stated that the claimants had maintained D
establishment beyond the stipulated completion due to
the respondent's breach and thus entitled for payment.
d) That the respondents were also aware that the claimant
.has maintained regular establishment and thus, incurred E
expenditure and the claimants had also made several
representations."
Claims 12 a.nd 13 read as follows:
"Claim No. 12: Claimants claim Rs. 7. 12.394/- as F
damages @20% for execution of the work.
a) That the work was delayed because of the
Respondents for the reasons as set out in the letter
indicating hindrances encountered during execution of ·
the work resulting delay in execution of the work for a G
period of 25 months.
b) It is further stated that the claimants incurred
unproductive after stipulated date of completion.
H
906 SUPREME COURT REPORTS [2014].13 S.C.R.
A c) It is further stated that during prolongation there had
been steep rise in cost of material and labour.
d) That the claim of 20% is also lent support from the
cost index as issued by the competent authority and only
applicable on the work which was executed during
B
.prolongation.
e) That as per cost index it comes to more than 30%
whereas the claimants had claimed 20 & being highly
rational and just. '
c f) That the claimants had appended the details of this
claim separately based on cost index to show that the
claimant had actually incurred this additional expenditure
due to the respondents. Copy of the hindrances
D encountered during the execution of the work at the hands
of the respondents has been enclosed.
g) That the respondents had committed breach and thus
liable for damages.
h) It is further stated that the cost of material issued by
E
the department has been deducted by assessing the cost.
Claim No. 13: Claimants claim Rs.97.5000/- being the
extra at 35% for the work executed in block 100 & 101
effective from 28.2.94 till actual completion.
F
a) It is further stated that due to delayed execution of the
work of these two blocks the claimants had to incur extra
expenditure as the stoppage of work was utterly arbitrary.
b) That the detailed break-up of this claim is appended
G with the statement of facts."
5. Though the challenge to claims 2, 3 and 4 were given
up before the Division Bench, they are also relevant and read
as follows:
H \..
ASSOCIATE BUILDERS v. DELHI DEVELOPMENT 907
AUTHORITY [R. F. NARIMAN, J.]
"Claim .No.2: Claimants claim Rs.1 ,62,387/- being the A
reimbursement of statutory increase in labour under
clause 10-C
a) That the claimants submitted the tender on 6.2.92
and said 9ffer was accepted on 14.5.92. The date of
8
commencement was to be reckoned from 24.5.92. The
date of stipulated completion was 9 months i.e. 23.2.93
but the work could be completed on 28.3.95.
b) It is further stated that the claimants had submitted the
bill for the value to the extent the work was executed till C
4.10.94 for a sum of Rs.1,12,067/-as per the formula
applicable.
c) That the respon~ents however, did not make a single
payment though, the work was executed after submission D
of the said bill.
d) That however, a consolidated bill was furnished the
respondents for a sum of Rs. 1,62,287/-. Even the said
payment has not been liquidated so far.
E
e) That the claimants advised the statutory increase as
and when enforced and the claimants also submitted the
labour reports indicating the nature of the labour
employed at site.
f) That the respondents had also certified on the bill that F
the labour payment has been made as per the. labour
rate.
g) That it is further stated that since it is a statutory
increase, the same is payable by the respondents. Copy G
of the both the bills attached. And thus the claimants be
awarded a sum of Rs. 1,62,287/-to the claimants.
Claim No.3: Claimants claim Rs.1.49.862/- being the
increase in cost of stone grit on account closure of the
quarrv by the order of the Supreme Court. H
908 SUPREME COURT REPORTS [2014] 13 S.C.R.
A a) That it is stated that the claimants had submitted the
tender on the basis of the rate prevailing but due to the
Hon'ble Court's directions for closure of the stone quarry
resulting in shortage of stone chips in the market and
consequently rates increased.
B
· b) That the claimants informed the quantum of the
increase on 22.6.92 and followed by reminders.
c) That the respondents had agreed in principle to pay
the increase which was prevailing in the market.
c d) That the detailed break-up of this claim has been
appended separately.
e) It is further stated that the claimant was not instrumental
for increase in cost but due to the interference of the
D Hon'ble Supreme Court. And the said increase has been
taken into account till the stipulated completion dated
23.2.93.
f) That the claimant is entitled for recovery of the said
increase.
E
Claim No. 4: Claimants claim Rs.12.922/- payable by
virtue of clause 10-C of the agreement and up to the
stipulated period
a) That there was steep rise in cost of steel and the
F
claimant was exposed and the respondents were liable
to pay the increase in steel.
b) lhat the detailed break-up of this claim has been
prepared and appended.
G 6. The Arbitrator by a reasoned award dated 23'd May,
2005 held that the entire delay of 25 months in the execution
of tho project was thanks to the ODA, none of this delay being
attributable to the contractor. The learned Arbitrator found:
H
ASSOCIATE BUILDERS v. DELHI DEVELOPMENT 909
AUTHORITY[R. F. NARIMAN, J.]
"That all the above four claims are inter linked being A
related to the overhead expenses and therefore dealt
together.
That the date of commencement of work was 24.5.92
and the period for completion was 9 months and B
therefore, the disputed date of completion was 23.2.93
but the work could be actually completed on 28.3.95.
That there was delay of 25 months in completion of the
work beyond the stipulated date of completion.
That the Claimants urged that there had been various C
delays in the execution of work due to the lapses and
defaults of the Respondents from the very
commencement of work. The progress was held up time
and again and the claimants therefore, as back as D
17.2.93 advised the Respondents (C-9page167)that
the Claimants are not interested to execute the work
beyond the stipulated date of completion and therefore,
their contract be finalized on the stipulated date of
completion as the Claimants shall be exposed to incur E
heavy expenditure in overheads for maintaining
establishment watch and ward and tools and plants and
other shuttering material but the Respondents did not
refute. The chief reasons for delay are highlighted below:-
1) Delay in supply of structural and architectural drawings. F
11) That out of 9 Blocks 2 blocks are abnormally delayed
as the site of the said 21 blocks was made available in
piecemeal which stretched till 26.2.94 whereas the
stipulated completion was 23.2.93. G
Ill) Delay in laying the conduit by the electrical agency
resulting in delay in casting of RCC slab and plastering
work besides development work. The said hindrance
was removed lastly on 28.3.95.
H
910 SUPREME COURT REPORTS [2014] 13 S.C.R.
A IV) Abnormal delay in making availability of the alignment
sketch for electrical cables.
V) Inordinate delay in supply of stipulated material such
as cement, steel and pipes.
B VI) Delay in decision of finishing· work in kitchen and
bath rooms.
VII) There was inordinate delay in making availability.of
colour scheme.
c VIII) That the Respondents also abnormally delayed the
supply of door shutters which were to be supplied by the
Respondents. The same were supplied as late as
8.11.94.
IX) Inordinate delay in writing in the electrical conduits
D resulting in delay in completion offinishing work:
X) Suspension of work by the Respondents for the period
17.1.94 to 25.2.94 and from 7.8.94 to 22.3.95 because
of non-removal of hindrances.
E XI) Delayed payment due to non-sanction of
Administrative Approval and Expenditure Sanction.
That all the delays as set out had been duly recorded
733 to 739 and M.A.S. register pages from 747 to 768
F as highlighted by the Claimants. The Claimants also
relied upon certain documents of MAS Register supplied
by the Respondents.
That the Claimants further stated that the Claimants had
also filed reasons for delay and hold up of the work
G various defaults of the Respondents inAnnexure pages
740 to 746. The Claimants also highlighted the
correspondence made by the Claimants with
Respondents.
H
ASSOCIATE BUILDERS v. DELHI DEVELOPMENT 911
AUTHORITY [R. F. NARIMAN, J.]
That the Claimants further stated that the said hindrances A
were avoidable but the Respondents did not take timely
steps.
That the Claimants also referred the contents of the letter
dated 10. 7.95 (page 885) wherein it was observed that
B
the Superintending Engineer appreciated the working
of the Claimants and also observed that there was no
fault of the. contractor and they have successfully
completed the work. The Claimants further stated that,
they had incurred heavy expenditure on overheads of the c
lapses and default of the Respondents.
As against this the Respondents stated that there was
poor planning of the claimants and also contended that
since the compensation has been levied under Clause
2 of the agreement therefore, claim of the claimants D
deserves to be rejected.
That on record it .is conclusively proved that the
Respondents committed breach of contract as they failed
to discharge their obligations in time resulting in E
prolongations did not deny the deployment of the tools
and plants and machinery at site besideswatch and ward
during the prolongation."
7. It is important to note that before the Division Bench,
the learned counsel for the DDA conceded that this being a F
pure finding of fact, he would not be challenging it before the
Division Bench.
8. Of the total claim of Rs.37.28 lakhs, the learned
Arbitrator awarded an amount of Rs.23.39 lakhs. Further, the G
learned Arbitrator has laboriously gone through all the evidence
and answered each claim giving reasons forthe same .
• 9. By a judgment dated 3rd April, 2006, the learned Single
Judge of the High Court of Delhi dismissed the objections of .
H
912 SUPREME COURT REPORTS [2014] 13 S.C.R.
A the ODA and upheld the award. In an appeal filed under Section
37 of the Arbitration Act, vide the impugned judgment dated
8th February, 2012, a Division Bench of the High Court of Delhi
set aside the judgment of the Single Judge on claims 9, 10, 11
and 15, and negatived these claims in toto. Further, claims 12
B and 13 were scaled down doing "rough and ready justice".
Resultantly, the awarded amount of Rs.7,20,000/-was scaled
down to Rs. 5,57, 137.50/-.
10. We have heard learned counsel forthe parties. Shri
c M. L. Verma, learned Senior Advocate appearing on behalf of
the appellant, submitted that the Division Bench has lost sight
of the law laid down by this Hon'ble Court when it comes to
challenges made to arbitral awards under Section 34 of the
Act. He has submitted that the Division Bench has acted as if
o this was a first appeal from the award and has further submitted
that the Division Bench has taken into account facts which were
neither plead~d nor proved before the learned Arbitrator in
order to negative certain claims. He further submitted that it is
not possible for a Bench hearing an objection against an arbitral
E award to do "rough and ready justice" - it is bound by the law
laid down by this Hon'ble Court. In particular, he argued that
the conceded position is that 25 months delay was due to the
DDA alone. The award read as a whole is just, fair and
reasonable as only certain claims have been granted and every
F claim granted has been supported with reasons. The Arbitrator
is the sole judge of the quality and quantity of evidence before
him and he has decided on that evidence. No errors of law
arise from the award and the award has, therefore, been
wrongly set aside.
G
11. Mr. Amarendra Sharan, learned Senior Advocate
appearing on behalf of the DDA has relied strongly on clause
1OC and clause 22 to support the judgment of the Division
bench and has further argued that there has been duplication
H so far as certain claims are concerned. He argued that an
ASSOCIATE BUILDERS v. DELHI DEVELOPMENT 913
AUTHORITY [R. F. NARIMAN, J.]
award in the teeth of clause 1OC and clause 22 would be a A
jurisdictional error which would vitiate the award.
12. In as much as serious objections have been taken to
the Division Bench judgment on the ground that it has ignored
the parameters laid down in a series of judgments by this Court B
as to the limitations which a Judge hearing objections to an
arbitral award under Section 34 is subject to, we deem it
necessary to state the law on the subject.
Section 34 of the Arbitration and Conciliation Act reads
as follows- c
"Application for setting aside arbitral award.-(1)
Recourse to a Court against an arbitral award may be
made only by an application for setting aside such award
in accordance with sub-section (2) and sub-section (3). · D
(2) An arbitral award may be set aside by the Court only
if-
(a) the party making the application furnishes proof that-
(1) a party was under some incapacity; or E
(ii) The arbitration agreement is not valid under the law
to which the parties have subjected it or, failing any
indication thereon, under the law for the time being in
force; or
F
(iii) the party making the application was not given proper
notice of the appointment of an arbitrator or of the arbitral
proceedings or was otherwise unable to present his case;
or
.G
(iv) the arbitral award deals with a dispute not
contemplated by or not falling within the terms of the
submission to arbitration, or it contains decisions on
matters beyond the scope of the submission to
arbitration:
H
914 SUPREME COURT REPORTS [2014] 13 S.C.R.
A Provided that, if the decisions on matters submitted to
arbitration can be separated from those not so submitted,
only that part of the arbitral award which contains
decisions on matters not submitted to arbitration may
be set aside; or
B
(v) the composition of the arbitral tribunal or the arbitral
procedure was not in accordance with the agreement of
the parties, unless such agreement was in conflict with a
provision of this Part from which the parties cannot
c derogate, or, failing such agreement, was not in
accordance with this Part; or
(b) the Court finds that-
(i) the subject-matter of the dispute is not capable of
settlement by arbitration under the law for the time being
D
in force, or
(ii) the arbitral award is in conflict with the public policy of
India.
Explanation.-Without prejudice to the generality of sub-
E
clause (ii), it is hereby declared, for the avoidance of any
doubt, that an award is in conflict with the public policy of
India if the making of the award was induced or affected
by fraud or corruption or was in violation of Section 75 or
F Section 81.
(:~) An application for setting aside may not be made
after three months have elapsed from the date on which
the party making that application had received the arbitral
award or, if a request had been made under Section 33,
G from the date on which that request had been disposed
of by the arbitral tribunal:
Provided that if the Court is satisfied that the applicant
was prevented by sufficient cause from making the
H
ASSOCIATE BUILDERS v. DELHI DEVELOPMENT 915
AUTHORITY[R. F. NARIMAN, J.]
application within the said period of three months it may A
entertain the ap~ication within a further period of thirty
days, but not thereafter.
(4) On receipt of an application under sub-section (1 ),
the Court may, where it is appropriate and it is so
8
requested by a party, adjourn the proceedings for a
period of time determined by it in order to give the arbitral
tribunal an opportunity to resume the arbitral proceedings
or to take such other action as in the opinion of arbitral
tribunal will eliminate the grounds for setting aside the c
arbitral award."
This Section in conjunction with Section 5 makes it clear
that an arbitration award that is governed by part I of the .
Arbitration and Conciliation Act, 1996 can be set aside only
on grounds mentioned under Section 34 (2) and (3), and not D
otherwise. Section 5 reads as follows:
"5. Extent of judicial intervention.-Notwithstanding
anything contained in any other law for the time being in ·
force, in matters governed by this Part, no judicial E
authority shall intervene except where so provided in this
Part."
It is important to note that the 1996 Act was enacted to
replace the 1940 Arbitration Act in order to provide for an
arbitral procedure which is fair, efficient and capable of meeting F
the needs of arbitration; also to provide that the tribunal gives
reasons for an arbitral award; to ensure that the tribunal remains
within the limits of its jurisdiction; and to minimize the
supervisory roles of courts in the arbitral process.
G
It will be seen that none of the grounds contained in sub-
clause 2 (a) deal with the merits of the decision rendered by
an arbitral award. It is only when we come to the award being
in conflict with the public policy of India that the merits of an
H
916 SUPREME COURT REPORTS [2014113 S.C.R.
A arbitral award are to be looked into under certain specified
circumstances.
In Renusagar Power Co. Ltd. v. General Electronic
Co., 1994 Supp (1) SCC 644, the Supreme Court construed
B Section 7 (1 )(b) (ii) of the Foreign Award (Recognition and
Enforcement)Act, 1961.
· "7. Conditions for enforcement of foreign awards.-
(1) A foreign award may not be enforced under this Act-
(b) if the Court dealing with the case is satisfied that-
c
(ii) the enforcement of the award will be contrary to the
public policy"
In construing the expression "public policy" in the context
of a foreign award, the Court held that an award contrary to
D
1. The fundamental policy of Indian law
2. The interest of India
3. Justice or morality,
E would be set aside on the ground that it would be contrary
to the public policy of India. It went on further to hold that a
contravention of the provisions of the Foreign Exchange
Regulation Act would be contrary to the public policy of India in
that the statute is enacted for the national economic interest to
F ensure that the nation does not lose foreign exchange which
is essential for the economic survival of the nation (see para
75). Equally, disregarding orders passed by the superior
courts in India could also be a contravention of the fundamental
policy of Indian law, but the recovery of compound interest on
G interest, being contrary to statute only, would not contravene
any fundamental policy of Indian law (see paras 85,95).
When it came to construing the expression "the public
policy of India" contained in Section 34 (2) (b) (ii) of the
H
ASSOCIATE BUILDERS v. DELHI DEVELOPMENT 917
AUTHORITY [R. F. NARIMAN, J.]
Arbitration Act, 1996, this Court in ONGC v. Saw Pipes, 2003 A
(5) sec 705, held-
"31. Therefore, in our view, the phrase "public policy of
India" used in Section 34 in context is required to be
given a wider meaning. It can be stated that the concept
8
of public policy connotes some matter which concerns
public good and the public interest. What is for public
good or in public interest or what would be injurious or
harmful to the public good or public interest has varied
from time to time. However, the award which is, on the c
face of it, patently in violation of statutory provisions
cannot be said to be in public interest. Such .award/
judgment/decision is likely to adversely affect the
administration ofjustice. Hence, in our view in addition
to narrower meaning given to the term ''public policy" D
in Renusagar case [1994 Supp (1) SCC 644) it is
required to be held that the award could be set aside if
it is patently illegal. The result would be - award could
be set aside if it is contrary to:
E·
(a) Fundamental policy of Indian law; or
(b) The interest of India; or
(c) Justice or morality, or
(d) in addition, if it is patently illegal. F
I/legality must go to the root of the matter and if the
illegality is of trivial nature it cannot be held that award
is against the public policy. Award could also be set
aside if it is so unfair and unreasonable that it shocks
the conscience of the court. Such award is opposed to G
public policy and is required to be adjudged void.
74. In the result, it is held that:
H
918 SUPREME COURT REPORTS [2014] 13 S.C.R.
A (A) (1) The court can set aside the arbitral award under
Section 34(2) of the Act if the party making the
application furnishes proof that:
(i) a party wa~ under some incapacity, or
B (ii) the arbitration agreement is not valid under the law
to which the parties have subjected it or, failing any
indication thereon, under the law for the time being in
force; or
(iii) the party making the application was not given
c proper notice of the appointment of an arbitrator or of
the arbitral proceedings or was otherwise unable to
present his case; or
(iv) the arbitral award deals with a dispute not
D contemplated by or not falling within the terms of the
submission to arbitration, or it contains decisions on
matters beyond the scope of the submission to
arbitration.
(2) The court may set aside the award:
E
(i)(a) if the composition of the Arbitral Tribunal was not
in accordance with the agreement of the parties,
(b) failing such agreement, the composition of the
Arbitral Tribunal was not in accordan~e with Part I of the
F
Act.
(ii) ifthe arbitral procedure was not in accordance with:
(a) the agreement of the parties, or
G (b) failing such agreement, the arbitral procedure was
not in accordance with Part I of the Act.
However, exception for setting aside the award on the
ground of composition of Arbitral Tribunal or illegality
of arbitral procedure is that the agreement should not
H
ASSOCIATE BUILDERS v. DELHI DEVELOPMENT 919 .
AUTHORITY[R. F. NARIMAN,J.]
be in conflict with the provisions of Part I of the Act from A
which parties cannot derogate.
(c) If the award passed by the Arbitral Tribunal is in
contravention of the provisions of the Act or any other
substantive law governing the parties or is against the
8
terms of the contract.
(3) The award could be set aside if it is against the public
policy of India, that is to say, if it is contrary to:
(a) fundamental policy of Indian law; or
c
(b) the interest of India; or
(c) justice or morality; or
(d) if it is patently illegal.
(4) It could be challenged: D
(a) as provided under Section 13(5); and
(b) Section 16(6) of the Act.
(8)(1) The impugned award requires to pe set aside E
· mainly on the groµnds:
(i) there is specific stipulation in the agreement that the
time and date of delivery of the goods was of the
essence of the contract;
(ii) in case offailure to deliver the goods within the period F
fixed for such delivery in the schedule, ONGC was
entitled to recover from the contractor liquidated
damages as agreed;
(iii) it was also explicitly understood that the agreed G
liquidated damages were genuine pre-estimate of
damages;
(iv) on the request of the respondent to extend the time-
limit for supply of goods, ONGC informed specifically
H
920 SUPREME COURT REPORTS [2014] 13 S.C.R.
A that time was extended but stipulated liquidated
damages as agreed would be recovered;
(i,~ liquidated damages for delay in supply of goods
were to be recovered by paying authorities from the bills
for payment of cost of material supplied by the
B
contractor;
(vi) there is nothing on record to suggest that stipulation
for recovering liquidated damages was by way ofpenalty
or that the said sum was in any way unreasonable.
c (vii) In certain contracts, it is impossible to assess the
damages or prove the same. Such situation is taken
care of by Sections 73 and 74 of the Contract Act and
in the present case by specific terms of the contract."
D The judgment in ONGC v. Saw Pipes has been
consistently followed till date.
In Hindustan Zinc Ltd. v. Friends Coal
Carbonisation, (2006) 4 SCC 445, this Court held:
E "14. The High Court did not have the benefit of the
principles laid down in Saw Pipes [(2003) 5 SCC 705],
and had proceeded on the assumption that award
cannot be interfered with even if it was contrary to the
terms of the contract. It went to the extent of holding that
F contract terms cannot even be looked into for examining
the correctness of the award. This Court in Saw
Pipes [(2003) 5 SCC 705] has made it clear that it is
open to the court to consider whether the award is
against the specific terms of contract and if so, interfere
G with it on the ground that it is patently illegal and
opposed to the public policy of India."
In McDermott International Inc. v. Burn Standard Co.
Ltd., (2006) 11 SCC 181, this Court held:
H
ASSOCIATE BUILDERS v. DELHI DEVELOPMENT 921
AUTHORITY[R. F. NARIMAN, J.]
"58. In Renusagar Power Co. Ltd. v. General Electric A
Co. [1994 Supp (1) SCC 644] this Court laid down that
the arbitral award can be set aside if it is contrary to (a)
fundamental policy of Indian law; (b) the interests of
India; or (c) justice or morality. A narrower meaning to
the expression "public policy" was given therein by B
confining judicial review of the arbitral award only on
the aforementioned three grounds. An apparent shift
can, however, be noticed from the decision of this Court
in ONGC Ltd. v. Saw Pipes Ltd. [(2003) 5 SCC 705] (for
short "ONGC'J. This Court therein referred to an earlier C
decision of this Court in Central Inland Water Transport
Corpn. Ltd. v. Brojo Nath Ganguly [(1986) 3 SCC 156:
1986 SCC (L&S) 429: (1986) 1ATC103} wherein the
applicability of the expression "public policy" on the D
touchstone of Section 23 of the Indian Contract Act and
Article 14 of the Constitution of India came to be
considered. This Court therein was dealing with
unequal bargaining power of the workmen and the
employer and came to the conclusion that any term of E
the agreement which is patently arbitrary and/or
otherwise arrived at because of the unequal bargaining
power would hot only be ultra vires Article 14 of the
Constitution of India but also hit by Section 23 of the
Indian Contract Act. In ONGC [(2003) 5 SCC 705] this F
Court, apart from the three grounds stated
in Renusagar [1994 Supp (1) SCC 644], added another
ground thereto for exercise of the court's jurisdiction in
setting aside the award if it is patently arbitrary.
59. Such patent illegality, however, must go to the root G
of the matter. The public policy violation, indisputably,
should be so unfair and unreasonable as to shock the
conscience of the court. Where the arbitrator, however,
has gone contrary to or beyond the expressed law of H
922 SUPREME COURT REPORTS [2014] 13 S.C.R.
A the contract or granted relief in the matter not in dispute
would come within the purview of Section 34 of the Act.
However, we would consider the applicability of the
aforementioned principles while noticing the merits of
the matter.
B
60. What would constitute public policy is a matter
dependent upon the nature of transaction and nature
of statute. For the said purpose, the pleadings of the
parties and the materials brought on record would be
c relevant to enable the court to judge what is in public
good or public interest, and what would otherwise be
injurious to the public good at the relevant point, as
contradistinguished from the policy of a particular
Government. (See State of Rajasthan v. Basant
D Nahata [(2005) 12 sec 77].)"
In Centrotrade Minerals & Metals Inc. v. Hindustan
Copper Ltd., (2006) 11SCC245, Sinha, J., held:
"103. Such patent illegality, however, must go to the root
E of the matter. The public policy, indisputably, should
be unfair and unreasonable so as to shock the
conscience of the court. Where the arbitrator, however,
has gone contrary to or beyond the expressed law of
the contract or granted relief in the matter not in dispute
F would come within the purview of Section 34 of the Act."
"104. What would be .a public policy would be a matter
which would again depend upon the nature of
transaction and the nature of statute. For the said
purpose, the pleadings of the parties and the materials
G
/Jrought on record would be relevant so as to enable
the court to judge the concept of what was a public good
or public interest or what would otherwise be injurious
to the public good at the relevant point as
contradistinguished by the policy of a particular
H
ASSOCIATE BUILDERSv. DELHI DEVELOPMENT 923
AUTHORITY [R. F. NARIMAN, J.]
government. (See State of Rajasthan v. Basant A .
Nahata {(2005) 12 SCC 77].)"
In DOA v. R.S. Sharma and Co., (2008) 13 SCC 80,
the Court summarized the law thus:
"21. From the above decisions, the following principles B
emerge:
(a) An award, which is
(i) contrary to substantive provisions of law; or ·
(ii) the provisions of the Arbitration and Conciliation Act, C
1996; or
(iii) against the terms of the respective contract; or
(iv) patently illegal; or
D
(v) prejudicial to the rights of the parties;
is open to interference by the court under Section 34(2)
of the Act.
({J) The award could be set aside if it is contrary to:
E
(a) fundamental policy of Indian law; or
(b) the interest of India; or
(c) justice or morality.
(c) The award could a/so be set aside if it is so unfair F
and unreasonable that it shocks the conscience of the ·
court.
(d) It is open to the court to consider whether the award
is against the spe"cific terms of contract and if so, G
interfere with it on the ground that it is patently illegal
and opposed to the public policy of India.
With these principles and statutory provisions,
particularly, Section 34(2) of the Act, let us consider
H
924 SUPREME COURT REPORTS [2014] 13 S.C.R.
A whether the arbitrator as well as the Division Bench of
the High Court were justified in granting the award in
respect of Claims 1 to 3 and Additional Claims 1 to 3 of
the claimant or the appellant DOA has made out a case
for setting aside the award in respect of those claims .
B with reference to the terms of the agreement duly
executed by both parties."
,J.G. Engineers (P) Ltd. v. Union of India, (2011) 5 SCC
758, held:
c "27. Interpreting the said provisions, this Court
in ONGC Ltd. v. Saw Pipes Ltd.[(2003) 5 SCC 705] held·
that a court can set aside an award under Section
34(2)(b)(ii) of the Act, as being in conflict with the public
policy of India, if it is (a) contrary to the fundamental
D policy of Indian law; or (b) contrary to the interests of
India; or (c) contrary to justice or morality; or (d) patently
illegal. This Court explained that to hold an award to be
opposed to public policy, the patent illegality should
go to the very root of the matter and not a trivial illegality.
E It is also observed that an award could be set aside if it
is so unfair and unreasonable that it shocks the
conscience of the court, as then it would be opposed to
public policy."
F Union of India v. Col. L.S.N. Murthy, (2012) 1 SCC
718, held:
"22. In ONGC Ltd. v. Saw Pipes Ltd. [(2003) 5 SCC 705]
this Court after examining the grounds on which an
award of the arbitrator can be- set aside under Section
G 34 of the Act has said: (SCC p. 727, para 31)
"31 . ... However, the award which is, on the face of it,
patently in violation of statutory provisions cannot be
said to be in public interest. Such award/judgment!
H
ASSOCIATE BUILDERS v. DELHI DEVELOPMENT 925
AUTHORITY [R. F. NARIMAN, J.]
decision is likely to adversely affect the administration A
of justice. Hence, in our view in addition to narrower
meaning given to the term 'public policy' in Renusagar
case [Renusagar Power Co. Ltd. v. General Electric Co.,
1994 Supp (1) SCC 644] it is required to be held that
the award could be set aside if it is patently illegal". B
Fundamental Policy of Indian Law
Coming to each of the heads contained in the Saw Pipes
judgment, we will first deal with the head "fundamental policy .
of Indian Law". It has already been seen from the Renusagar C
judgment that violation of the Foreign Exchange Act and
disregarding orders of superior courts in India would be
regarded as being contrary to the fundamental policy of Indian
law. To this it could be added that the binding effect of the
judgment of a superior court b~ing disregarded would be D
equally violative of the fundamental policy of Indian law.
In a recent judgment, ONGC Ltd. v. Western Geco
International Ltd., 2014 (9) SCC 263, this Court added three
other distinct and fundamental juristic principles which must E
be understood as a part and parcel of the fundamental policy-
of Indian law. The Court held-
"35. What then would constitute the ''fundamental policy
of Indian law" is the question. The decision
in ONGC [ONGC Ltd. v. Saw Pipes Ltd., (2003) 5 SCC F
705] does not elaborate that aspect. Even so, the
expression must, in our opinion, include all such
fundamental principles as providing a basis for
administration ofjustice and enforcement of law in this
country. Without meaning to exhaustively enumerate G
the purport of the expression "fundamental policy of
Indian law", we may refer to three distinct and
fundamental juristic principles that must necessarily be
understood as a part and parcel of the fundamental H
926 SUPREME COURT REPORTS [2014] 13 S.C.R.
A policy of Indian law. The first and foremost is the
principle that in every determination whether by a court
or other authority that affects the rights of a citizen or
leads to any civil consequences, the court or authority
concerned is bound to adopt what is in legal parlance
B called a 'judicial approach" in the matter. The duty to
adopt a judicial approach arises from the very nature
of the power exercised by the court or the authority dqes
not have to be separately or additionally enjoined upon
the fora concerned. What must be remembered is that
c the importance of a judicial approach in judicial and
quasi-judicial determination lies in the fact that so long
as the court, tribunal or the authority exercising powers
that affect the rights or obligations of the parties before
them shows fidelity to judicial approach, they cannot
D
act in an arbitrary, capricious or whimsical manner.
Judicial approach ensures that the authority acts bona
fide and deals with the subject in a fair, reasonable and
objective manner and that its decision is not actuated
by any extraneous consideration. Judicial approach in
E
that sense acts as a check against flaws and faults that
can render the decision of a court, tribunal or authority
vulnerable to challenge.
38. Equally important and indeed fundamental to the
F policy of Indian law is the principle that a court and so .
a/so a quasi-judicial authority must, while determining
the rights and obligations of parties before it, do so in
· accordance with the principles of natural justice.
Besides the celebrated audi alteram partem rule one
G of the facets of the principles of natural justice is that
the court/authority deciding the matter must apply its
mind to the attendant facts and circumstances while
taking a view one way or the other. Non-application of
mind is a defect that is fatal to any adjudication.
H
ASSOCIATE BUILDERS v. DELHI DEVELOPMENT 927
AUTHORITY[R. F. NARIMAN, J.]
Application of mind is best d~monstrated by disclo~ure A
of the mind and disclosure of mind is best done by
recording reasons in support of the decision which the
court or authority is taking. The requirement that an
adjudicatory authority must apply its mind is, in that
view, so deeply embedded in our jurisprudence that it B
can be described as a fundamental policy of Indian law.
39. No less important is the principle now recognised
as a salutary juristic fundamental in administrative law
that a decision which is perverse or so irrational that no c
reasonable person would have arrived at the same will
not be sustained in a co.urt of law. Perversity or
irrationality of decisions is tested on the touchstone of
Wednesbury principle [Associated Provincial Picture
Houses Ltd. v. Wednesbury Corpn., (1948) 1KB223: D
(1947) 2All ER 680 (CA)] of reasonableness. Decisions
that fall short of th/3 standards of reasonableness are
open to challenge in a court of law often in writ
jurisdiction of the superior courts but no less in statutory
processes wherever the same are available. E
40. It is neither ne.cessary nor proper for us to attempt
an exhaustive enumeration of what would constitute the
fundamental policy of Indian law nor is it possible to
place the expression in the straitjacket'of a definition.
F
What is important in the context of the case at hand is
that if on facts proved before them the arbitrators fail to
draw an inference which ought to have been drawn or if
they have drawn an inference which is on the face of it,
untenable resulting in miscarriage of justice, the G
adjudication even when made by an Arbitral Tribunal
that enjoys considerable latitude and play at the joints
in making awards will be open to challenge and may
be cast away or modified depending upon whether the
offending part is or is not severable from the rest." H
928 SUPREME COURT REPORTS [2014) 13 S.C.R.
A It is clear that the juristic principle of a "judicial approach"
demands that a decision be fair, reasonable and objective.
On the obverse side, anything arbitrary and whimsical would
obviously not be a determination which would either be fair,
reasonable or objective.
B
The Audi Alteram Partem principle which undoubtedly
is a fundamental juristic principle in Indian law is also contained
in Sections 18 and 34 (2) (a) (iii) of the Arbitration and
Conciliation Act. These Sections read as follows:
c "18. Equal treatment of parties.- The parties shall
be treated with equality and each party shall be given a full
opportunity to present his case.
34. Application for setting aside arbitral award.-
D (2) An arbitral award may be set aside by the Court
only if.-
(a) the party making the application furnishes proof
that-
E (iii) the party making the application was not given
proper notice of the appointment of an arbitrator or of
the arbitral proceedings or was otherwise unable to
present his case; "
F The third juristic principle is that a decision which is
perverse or so irrational that no reasonable person would have
arrived at the same is important and requires some degree of
explanation. It is settled law that where-
1. a finding is based on no evidence, or
G 2. an arbitral tribunal takes into account something
irrelevant to the decision which it arrives at; or
~3. ignores vital evidence in arriving at its decision,
such decision would necessarily be perverse. A good
H working test of perversity is contained in two judgments. In H.B.
ASSOCIATE BUILDERS v. DELHI DEVELOPMENT 929
AUTHORITY[R. F. NARIMAN, J.]
Gandhi, Excise and Taxation Officer-cum-Assessing A
Authority v. Gopi Nath & Sons, 1992 Supp (2) SCC 312 at
p. 317, it was held:
"7. .. ................. It is, no doubt, true that if a finding offact
is arrived at by ignoring or excluding relevant material
8
or by taking into consideration irrelevant material or if
the finding so outrageously defies logic as to suffer from
the vice of irrationality incurri~g the blame of being
perverse, then, the finding is rendered infirm in law."
In Kuldeep Singh v. Commr. of Police, (1999) 2 SCC C
10 at para 10, it was held:
"10. A broad distinction has, therefore, to be maintained
between the decisions which are perverse and those
which are not. If a decision is arrived at on no evidence D
or evidence which is thoroughly unreliable and no
reasonable person would act upon it, the order would
be perverse. But if there is some evidence on record
which is acceptable and which could be relied upon,
.howsoever compendious it may be, the conclusions E
would not be treated as perverse and the findings would
not be interfered with."
It must clearly be understood that when a court is applying
the "public policy" test to an arbitration award, it does not act
as a court of appeal and consequently errors of fact cannot be F
corrected. A possible view by the arbitrator on facts has
necessarily to pass muster as the arbitrator is the ultimate
master of the quantity and quality of evidence to be relied upon
when he delivers his arbitral award. Thus an award based on
G
little evidence or on evidence which does not measure up in
quality to a trained legal mind would not be held to be invalid
on this score 1• Once it is found that the arbitrators approach is
1 Very often an arbitrator is a lay person not necessarily trained in law.
Lord Mansfield, a famous English Judge, once advised a high military H
officer in Jamaica who needed to act as a Judge as follows:
930 SUPREME COURT REPORTS [2014] 13 S.C.R.
A not arbitrary or capricious, then he is the last word on facts. In
P.R. Shah, Shares & Stock Brokers (P) Ltd. v. B.H.H.
Securities (P) Ltd., (2012) 1 SCC 594, this Court held:
"21. A court does not sit in appeal over the award of an
· Arbitral Tribunal by reassessing or reappreciating the
B
evidence. An award can be challenged only under the
grounds mentioned in Section 34(2) of the Act. The
Arbitral Tribunal has examined the facts and held that
both the second respondent and the appellant are liable.
c The case as put forward by the first respondent has been
accepted. Even the minority view was that the second
respondent was liable as claimed by the first
respondent, but the appellant was not liable only on the
ground that the arbitrators appointed by the Stock
D Exchange under Bye-law 248, in a claim against a non-
member, had no jurisdiction to decide a claim against
another member. The finding of the majority is that the
appellant did the transaction in the name of the second
respondent and is therefore, liable along with th~
E second respondent. Therefore, in the absence of any
ground under Section 34(2) of the Act, it is not possible
to re-examine the facts to /ind out whether a different
decision can be arrived at."
F It is with this very important caveat that the two
fundamental principles which form part of the fundamental
policy of Indian law (that the arbitrator must have a judicial
approach and that he must not act perversely) are to be
understood.
"General, you have a sound head, and a good heart; take courage
G and you will do very well, in your occupation, in a court of equity.
My advice is, to make your decrees as your head and your heart
<lictate, to hear both sides patiently, to decide with firmness in the
best manner you can; but be careful not to assign your reasons,
since your determination may be substantially right, although your
reasons may be very bad, or essentially wrong".
H It is very important to bear this in mind when awards of lay arbitrators
are challenge~.
ASSOCIATE BUILDERS v. DELHI DEVELOPMENT 931
AUTHORITY [R. F. NARIMAN, J.]
Interest of India A
The next ground on which an award may be set aside is
that it is contrary to the interest of India. Obviously, this concerns
itself with India as a member of the world community in its
relations with foreign powers. As at present advised, we need
8
not dilate on this aspect as this ground may need to evolv~ on
a case by case basis.
Justice
The third ground of public policy is, if an award is against
justice or morality. These are two different concepts in law. An C
award can be said to be against justice only when it shocks
the conscience of the court. An illustration of this can be given.
A claimant is content with restricting his claim, let us say to Rs.
30 lakhs in a statement of claim before the arbitrator and at no D
point does he seek to claim anything more. The arbitral award
ultimately awards him 45 lakhs without any acceptable reason
or justification. Obviously, this would shock the conscience of
the court and the arbitral award would be liable to be set aside
on the ground that it is contrary to "justice". E
Morality
The other ground is of "morality". Just as the expression
"public policy" also occurs in Section 23 of the Indian Contract
Act, so does the expression "morality". Two illustrations to the F
said section are interesting for they explain to us the scope of
the expression "morality".
"(j) A, who is B's Mukhtar, promises to exercise his
influence, as such, with B in favour of C,
and C promises to pay 1, 000 rupees to A. The G
agreement is void, because it is immoral.
(k) A agrees to let her daughter to hire to B for
concubinage. The agreement is void, because it is
H
932 SUPREME COURT REPORTS [2014] 13 S.C.R.
A immoral, though the letting may not be punishable
under the Indian Penal Code (XLV of 1860)."
In Gherulal Parekh v. Mahadeo Dass Maiya, 1959
Supp (2) SCR 406, this Court explained the concept of
"morality" thus-
8
. "Re. Point 3-lmmorality: The argument under this head
is rather broadly stated by-the learned Counsel for the
appellant. The learned counsel attempts to draw an
analogy from the Hindu Law relating to the doctrine of
c pious obligation of sons to discharge their father's debts
and contends that what the Hindu Law considers to be
immoral in that context may appropriately be applied
to a case under s. 23 of the Contract Act. Neither any
authority is cited nor any legal basis is suggested for
D importing the doctrine of Hindu Law into the domain of
contracts. Section 23 of the Contract Act is inspired by
the common law of England and it would be more useful
to refer to the English Law than to the Hindu Law texts
dealing with a different matter. Anson in his Law of
E Contracts states at p. 222 thus:
"The only aspect of immorality with which Courts of
Law have dealt is sexual immorality. .......... . "
Halsbury in his Laws of England, 3rd Edn., Vol. 8,
F makes a similar statement,. at p. 138:
"A contract which is made upon an immoral
consideration or for 0 an immoral purpose is
unenforceable, and there is no distinction in this respect
G between immoral and illegal contracts. The immorality
ht~re alluded to is ·sexual immorality."
In the Law of Contract by Cheshire and Fifoot, 3rd Edn.,
it is stated at p. 279:
H
ASSOCIATE BUILDERS v. DELHI DEVELOPMENT 933
AUTHORITY[R. F. NARIMAN, J.]
''Although Lord Mansfield laid it down that a contract A
contra bonos mores is illegal, the law in this connection
gives no extended meaning to morality, but concerns
itself only with what is sexually reprehensible."
In the book on the Indian Contract Act by Pollock and
8
Mui/a it is stated at p. 157:
"The epithet "immoral" points, in legal usage, to
conduct or purposes which the State, though
disapproving them, is unable, or not advised, to visit
with direct punishment." C
The learned authors confined its operation to acts
which are considered to be immoral according to the
standards of immorality approved by Courts. The case
law both in England and India confines the operation of D
the doctrine to sexual immorality. To cite only some
instances: settlements in consideration of
concubinage, contracts of sale or hire of things to be
used in a brothel or by a prostitute for purposes
incidental to her profession, agreements to pay money E
for future illicit cohabitation, promises in regard to
marriage for consideration, or contracts facilitating
divorce are all held to be void on the grouhd that the
object is immoral.
The word "immoral" is a very comprehensive word. F
Ordinarily it takes in every aspect of personal conduct
deviating from the standard norms of life. It may also
be said that what is repugnant to good conscience is
immoral. Its varying content depends upon time, place
and the stage of civilization of a particular society. In G
short, no universal standard can be laid down and any
law based on such fluid concept defeats its own purpose ..
The provisions of S. 23 of the Contract Act indicate the
legislative intention to give it a restricted meaning. Its H
934 SUPREME COURT REPORTS [2014] 13 S.C.R.
A juxtaposition with an equally illusive concept, public
policy, indicates that it is used in a restricted sense;
otherwise there would be overlapping of the two
concepts. In its wide sense what is immoral may be
against public policy, for public policy covers political,
B social and economic ground of objection. Decided
cases and authoritative text-book writers, therefore,
confined it, with every justification, only to sexual
immorality. The other limitation imposed on the word
by the statute, namely, "the court regards it as immoral';
c brings out the idea that it is also a branch of the
common law like the doctrine of public policy, and,
therefore, should be confined to the principles
recognized and settled by Courts. Precedents confine
the said concept only to sexual immorality and no case
D
has been brought to our notice where it has been applied
to any head other than sexual immorality. In the
circumstances, we cannot evolve a new head so as to
bring in wagers within its fold."
E This Court has confined morality to sexual morality so
far as section 23 of the Contract Act is concerned, which in the
context of an arbitral award would mean the enforcement of
an award say for specific performance of a contract involving
prostitution. "Morality" would, if it is to go beyond sexual morality
F necessarily cover such agreements as are not illegal but would
not be enforced given the prevailing mores of the day. However,
interference on this ground would also be only if something
shocks the court's conscience.
G Patent Illegality
We now come to the fourth.head of public policy namely,
patent illegality. It must be remembered that under the
explanation to section 34 (2) (b ), an award is said to be in
conflict with the public policy of India if the making of the award
H was induced or affected by fraud or corruption. This ground is
ASSOCIATE BUILDERS v. DELHI DEVELOPMENT 935
AUTHORITY[R. F. NARIMAN, J.]
perhaps the earliest ground on which courts in England set A
aside awards under English law. Added to this ground (in 1802)
is the ground that an arbitral award would be set aside if there
were an error of law by the arbitrator. This is explained by Lord
Justice Denning in R v. Northumberland Compensation
Appeal Tribunal. Ex Parte Shaw., 1952 1 All ER 122 at page B
130:
"Leaving now the statutory tribunals, I turn to the awards
of the arbitrators. The Court of King's Bench never
interfered by certiorari with the award of an arbitrator, c
because it was a private tribunal and not subject to the
prerogative writs. If the award was not made a rule of
court, the only course available to an aggrieved party
was to resist an action on the award or to file a bill in
equity. If the award was made a rule of court, a motion D
could be made· to the court to set it aside for misconduct
of the arbitrator on the ground that it was procured by
corruption or other undue means: see the statute 9 and
10 Will. Ill, c. 15. At one time an award could not be
upset on the ground of error of law by the arbitrator E
because that could not be said to be misconduct or
undue means, but ultimately it was held in Kent v.
Elstob, (1802) 3 East 18, that an award could be set
aside for error of law on the face of it. This was regretted
by Williams, J., in Hodgkinson v. Fernie, (1857) 3 F
C. 8. N. S. 189, but is now well established."
This, in turn, led to the famous principle laid down in
Champsey Shara Company v. The Jivraj Balloo Spinning
and Weaving Company Ltd., AIR 1923 PC 66, where the G
Privy Council referred to Hodgkinson and then laid down:
"The Jaw on the subject has never been more clearly
stated than by Williams, J. in the case of Hodgkinson
v. Fernie (1857) 3 C.B.N.S. 189.
H
936 SUPREME COURT REPORTS [2014] 13 S.C.R.
A ''The law has for many years been settled, and remains
so at this day, that, where a cause or matters in
difference are referred to an arbitrator a lawyer or a
layman, he is constituted the sole and final judge of all
questions both of law and of fact ...... The only
B exceptions to that rule are cases where the award is the
result of corruption or fraud, and one other, which though
it is to be regretted, is now, I think firmly established
viz., where the question of law necessarily arises on the
face of the award or upon some paper accompanying
c and forming part of the award. Though the propriety of
this latter may very well be doubted, I think it may be
considered as established."
"Now the regret expressed by Williams, J. in Hodgkinson
D v. Fernie has been repeated by more than one learned
Judge, and it is certainly not to be desired that the
exception should be in any way extended. An error in
law on the face of the award means, in their Lordships'
view, that you can find in the award or a document
E actually incorporated thereto, as for instance, a note
appended by the arbitrator stating the reasons for his
judgment, some legal proposition which is the basis of
the award and which you can then say is erroneous. It
does not mean that if in a narrative a reference is made
F to a contention of one party that opens the door to seeing
first what that contention is, and then going to the
contract on which the parties' rights depend to see if
that contention is sound. Here it is impossible to say,
from what is shown on the face of the award, what
G mistake the arbitrators made. The only way that the
learned judges have arrived at finding what the mistake
was is by saying: "Inasmuch as the Arbitrators awarded
so and so, and inasmuch as the letter shows that then
buyer rejected the cotton, the arbitrators can only have
H
ASSOCIATE BUILDERS v. DELHI DEVELOPMENT 937
AUTHORITY [R. F. NARIMAN, J.] .
arrived at that result by totally misinterpreting Cl.52." A
But they were entitled to give their own interpretation to
Cl. 52 or any other article, and the award will stand
unless, on the face of it they have tied themselves down
to some special legal proposition which then, when
examined, appears to be unsound. Upon this point, B
therefore, their Lordships think that the judgment of
Pratt, J was right and the conclusion of the learned
Judges of the Court of Appeal erroneous."
This judgment has been consistently followed in India to c
test awards under Section 30 of the Arbitration Act, 1940.
In the 1996 Act, this principle is substituted by the 'patent
illegality' principle which, in turn, contains three sub heads -
(a) a contravention of the substantive law of India would D
result in the death knell of an arbitral award. This must be
understood in the sense that s1.,1ch illegality must go to the root
of the matter and cannot be of a trivial nature. This again is a
really a contravention of Section 28(1)(a) of the Act, which reads
as under: E
"28. Rules applicable to substance of dispute.-(1)
Where the place of arbitration is situated in India,-
( a) in an arbitration other than an international
commercial arbitration, the arbitral tribunal shall decide F
the dispute submitted to arbitration in accordance with
the substantive law for the time being in force in India;"
(b) a contravention of the Arbitration Act itself would be
regarded as a patent illegality- for example if an arbitrator gives
no reasons for an award in contravention of section 31 (3) of G
the Act, such award will be liable to be set aside.
(c) Equally, the third sub-head of patent illegality is really
a contravention of Section 28 (3) of the Arbitration Act, which
reads as under: H
938 SUPREME COURT REPORTS [2014] 13 S.C.R.
A "28. Rules applicable to substance of dispute.- (3)
In all cases, the arbitral tribunal shall decide in
accordance with the terms of the contract and shall take
into account the usages of the trade applicable to the
transaction."
B
This last contravention must be understood with a caveat.
An arbitral tribunal must decide in accordance with the terms
of the contract, but if an arbitrator construes a term of the
contract in a reasonable manner, it will not mean that the award
C can be set aside on this ground. Construction of the terms of a
contract is primarily for an arbitrator .to decide unless the
arbitrator construes the contract in such a way that it could be
said to be something that no fair minded or reasonable person
could do.
D In McDermott International Inc. v. Burn Standard Co.
Ltd., (2006) 11 SCC 181, this Court held as under:
"112. It is trite that the terms of the contract can be
express or implied. The conduct of the parties would
E also be a relevant faCtor in the matter of construction of
a contract. The construction of the contract agreement
is within the jurisdiction of the arbitrators having regard
to the wide nature, scope and ambit of the arbitration
agreement and they cannot be said to have misdirected
F themselves in passing the award by taking into
consideration the conduct of the parties. It is also trite
that correspondences exchanged by the parties are
required to be taken into consideration for the purpose
of construction of a contract. Interpretation of a contract
G is a matter for the arbitrator to determine, even if it gives
rise to determination of a question of law. (See Pure
Helium India (P) Ltd. v. ONGe [(2003) 8 sec 593]
and 0.0. Sharma v. Union of India [(2004) 5 sec 325]).
H
ASSOCIATE BUILDERS v. DELHI DEVELOPMENT 939
AUTHORITY[R. F. NARIMAN, J.]
113. Once, thus, it is held that the arbitrator had the A
jurisdiction, no further question shall be raised and the
court will not exercise its jurisdiction unless it is found
that there exists any bar on the face of the award."
In MSK Projects (I) (JV) Ltd. v. State of Rajasthan,
8
(2011) 10 SCC 573, the Court held:
"17. If the arbitrator commits an error in the construction
of the contract, that is an error within his jurisdiction.
But if he wanders outside the contract and deals with
matters not allotted to him, he commits a jurisdictional C
error. Extrinsic evidence is admissible in such cases
because· the dispute is not something which arises
under or in relation to the contract or dependent on the
construction of the contract or to be determined within
the award. The ambiguity of the award can, in such D
cases, be resolved by admitting extrinsic evidence. The
rationale of this rule is that the nature of the dispute is
something which has to be determined outside and
independent of what appears in the award. Such a
jurisdictional error needs to be proved by evidence E
extrinsic to the award. (See Gobardhan Oas v. Lachhmi
Ram [AIR 1954 SC 689], Thawardas
Pherumal v. Union of India [AIR 1955 SC 468], Union
of India v. Kishori/al Gupta & Bros. [AIR 1959 SC 1362], F
Alopi Parshad & Sons Ltd. v. Union of India [AIR 1960
SC 588], Jivarajbhai Ujamshi Sheth v. Chintamanrao
Balaji [AIR 1965 SC 214] and Renusagar Power Co.
Ltd. v. General Electric Co. [(1984) 4 SCC 679 : AIR
1985SC1156])." G
In Rashtriya lspat Nigam Ltd. v. Dewan Chand Ram
Saran, (2012) 5 SCC 306, the Court held:
"43. In any case, assuming that Clause 9.3 was capable
of two interpretations, the view taken by the arbitrator H
940 SUPREME COURT REPORTS [2014] 13 S.C.R.
A was clearly a possible if not a plausible one. It is not
possible to say that the arbitrator had travelled outside
his jurisdiction, or that the view taken by him was against
the terms of contract. That being the position, the High
Court had no reason to interfere with the award and
B substitute its view in place of the interpretation accepted
by the arbitrator.
44. The legal position in this behalf has been
summarised in para 18 of the judgment of this Court
c in SAIL v. Gupta Brother Steel Tubes Ltd. [(2009) 10
SCC 63: (2009) 4 SCC (Civ) 16] and which has been
referred to above. Similar view has been taken later
in Sumitomo Heavy Industries Ltd. v. ONGC
Ltd. u2010) 11 sec 296: (2010) 4 sec (Civ) 459] to
D which one of us (Gokhale, J.) was a party. The
observations in para 43 thereof are instructive in this
behalf.
45. This para 43 reads as follows: (Sumitomo
case [(2010) 11 sec 296: (2010) 4 sec (Civ) 459],
E sec p. 313)
"43 . ... The umpire has considered the fact situation
and placed a construction on the clauses of the
agreement which according to him was the correct
F one. One may at the highest say that one would have
preferred another construction of Clause 17. 3 but that
cannot make the award in any way perverse. Nor can
one substitute one's own view in such a situation, in
place of the one taken by the umpire, which would
G amount to sitting in appeal. As held by this Court
in Kwality Mfg. Corpn. v. Central Warehousing
Corpn. [(2009) 5sec142: (2009) 2 sec (Civ) 406]
the Court while considering challenge to arbitral
award does not sit in appeal over the findings and
H
ASSOCIATE BUILDERS v. DELHI DEVELOPMENT 941
AUTHORITY[R. F. NARIMAN, J.]
decision of the arbitrator, which is what the High Court A
has practically done in this matter. The umpire is .
legitimately entitled to take the view which he holds
to be the correct one after considering the material
before him and after interpreting the provisions of
the agreement. If he does so, the decision of the B
umpire has to be accepted as final and binding."
13. Applying the tests laid down by this Court, we have
to examine whether the Division Bench has exceeded its
jurisdiction in setting aside the arbitral award impugned before c
it.
14. A large part of the judgment is an extract from the
arbitral award. It is important to note that the Division Bench
held:
D
"9. A perusal of the award would reveal, from the portions
extracted herein above, that with reference to evidence
led before him the learned Arbitrator has held delay
attributable to ODA, a finding of fact which is based on
evidence and rightly conceded to by Sh. Bhupesh E
Narula, Advocate who appears for ODA as being
beyond judicial review power of this Court pertaining to
a reasoned award. But, while awarding Rs.8,27,9601-
the reasoning adopted by the learned Arbitrator is
questioned as being the result of ignoring the well- F
recognized legal principles on the subject, Learned
counsel argued that the reasoning is the ipse dixit of
the learned Arbitrator."
15. The Division Bench while considering claims 9, 10,
11 and 15 found fault with the application of Hudson's formula G
which was set out by the learned Arbitrator in order to arrive at
the claim made under these heads. The Division Bench said
that it was not possible for an Arbitrator to mechanically apply
a certain formula however well understood in the trade. This H
942 SUPREME COURT REPORTS [2014] 13 S.C.R.
A itself is going outside the jurisdiction to set aside an award
under Section 34 in as much as in McDermott's case (supra),
· it was held:
"104. It is not in dispute that Mil had examir:ted one Mr
D.J. Parson to prove the said claim. The said witness
B
calculated the increased overheads and loss of profit
on the basis of the formula laid down in a manual
published by the Mechanical Contractors Association
of America entitled "Change Orders, Overtime,
c Productivity" commonly known as the Emden Formula.
The said formula is said to be widely accepted in
construction contracts for computing increased
overheads and loss of profit. Mr D.J. Parson is said to
have brought out the additional project management
D cost at US$ 1, 109,500. We may at this juncture notice
the different formulas applicable in this behalf.
(a) Hudson Formula: In Hudson's Building and
Engineering Contracts, Hudson Formula is stated in
the following terms:
E
"Contract head x Contract x Period
office overhead sum of
and profit Contract delay"
F percentage period
In the Hudson Formula, the head office overhead
percentage is taken from the contract. Although the
Hudson Formula has received judicial support in many
G
cases, it has been criticised principally because it
adopts the head office overhead percentage from the
contract as the factor for calculating the costs, and this
may bear little or no relation to the actual head office
costs of the contractor.
H
ASSOCIATE BUILDERS v. DELHI DEVELOPMENT 943
AUTHORITY [R. F. NARI MAN, J.]
(b) Emden Formula: In Emden's Building Contracts and A
Practice, the Emden Formula is stated in the following
terms:
"Head office x Contract x Period
overhead and sum of
profit delay" B
100 Contract
period
Using the Emden Formula, the head office overhead C
percentage is arrived at by dividing the total overhead
cost and profit of the contractor's organisation as a whole
by the total turnover. This formula has the advantage
of using the contractor's actual head office overhead
and profit percentage rather than those contained in D
the contract. This formula has been widely applied and
has received judicial support in a number of cases
including Norwest Holst Construction Ltd. v. Coop.
Wholesale Society Ltd. [Decided on 17-2-1998, [1998]
EWHC Technology 339], Beechwood Development Co. E
(Scotland) Ltd. v. Mitchell [Decided on 21-2-2001,
(2001) GILL 1727] and Harvey Shopfitters Ltd. v. Adi
Ltd. [Decided on 6-3-2003, (2004) 2 All ER 982: [2003]
EWCA Civ 1757].
(c) Eichleay Formula: The Eich/eay Formula was F
evolved in America and derives its name from a case
heard by the Armed Services Board of Contract
Appeals, Eichleay Corporation. It is applied in the
following manner:
Contract x Total = Overhead G
bH/ings overhead allocable
for to the
contract contract
period
Total
bfllings for
contract H
period
944 SUPREME COURT REPORTS [2014) 13 S.C.R.
A Sep2
= Daily overhead rfie
ADocal:ie ovethead
Total days of cmtract
B Step3
Daily x N.Jmber = Armt.nt d
CCX'ltract d days unciJsorbed
overhead dde/ay overhead'
rate
c This formula is used where it is not possible to prove
loss of opportunity and the claim is based on actual
cost. It can be seen from the formula that the total head
office overhead during the contract period is first
determined by comparing the value of work carried out
D in the contract period for the project with the value of
work carried out by the contractor as a whole for the
contract period. A share of head office overheads for
the contractor is allocated in the same ratio and
expressed as a lump sum to the particular contract. The
E amount of head office overhead allocated to the
particular contract is then expressed as a weekly
amount by dividing it by the contract period. The period
of delay is then multiplied by the weekly amount to give
the total sum claimed. The Eich/eay Formula is
F regarded by the Federal Circuit Courts of America as
the exclusive means for compensating a contractor for
overhead expenses.
105. Before us several American decisions have been
G referred to by Mr. Dipankar Gupta in aid of his
submission that the Emden Formula has since been
widely accepted by the American courts being Nicon
Inc. v. United States [Decided on 10-6-2003 (USCA
Fed Cir), 331 F. 3d 878 (Fed. Cir. 2003)], G/adwynne
H
ASSOCIATE BUILDERS v. DELHI DEVELOPMENT 945
AUTHORITY [R. F. NARI MAN, J.]
Construction Co. v. Mayor and City Council of A
Baltimore [Decided on 25-9-2002, 807 A. 2d 1141
(2002) : 147 Md. App. 149] and Charles G. William
Construction Inc. v. White [271 F 3d 1055 (Fed. Cir.
2001)].
B
106. We do not intend to delve deep into the matter as
it is an accepted position that different formulae can be
applied in different circumstances and the question as
to whether damages should be computed by taking
recourse to one or the other formula, having regard to c
the facts and circumstances of a particular case, would
eminently fall within the domain of the arbitrator."
16. Obviously, the ~ivision Bench has exceeded its
jurisdiction in interfering with a possible view of the Arbitrator
on facts. D
17. The Division Bench then went on to hold:
"17. There is admitted/¥ no evidence that the contractor
i.e. the respondent had a central establishment. It
appears to be a case where the contractor is petty E
contractor and the only expenses incurred are at the
site. The claim is towards hire charges paid for
centering and shuttering, hiring tools, plants and
scaffoldings i.e. the claim is not for the contractor's own
equipment lying idle. There is just no evidence that the F
contractor paid charges as claimed by him. Not a single
bill raised by the alleged person who let on hire the
equipment to the contractor has been filed nor any
evidence adduced for the payment made. Except for G
listing a 10 HP Water Pump, 4 number 1 HP water
pump, 3 mixers, 250 scaffolding bamboos, 150 bal/is
and 2 vibrators in Annexure-J to the Statement of Claim,
no document proving hiring the same ' and brought at
the site has been led. We highlight that the claim is on H
946 SUPREME COURT REPORTS [2014] 13 S.C.R.
A account of hire Charges paid and there is no evidence
of said payment. It does happen that where a work is
stopped, the person who taken an equipment on hire
returns the same and re-hires the same when work
recommences. Thus, Claim No. 9, 10 and 11 cannot
B be allowed because there is no evidence to support the
claims. Damages on account of establishment
expenses incurred during period contract got prolonged
have certainly to be recompensed, but we find no
evidence in the form of books of accounts, vouchers
c etc. to show payments to the staff or expenses incurred
in maintaining an establishment at site in the form of a
site office. The wages register, photocopy whereof was
filed before the ArbitratOr, pertains to wages paid to the
unskilled, semi-skilled and skilled labour deployed to
D
execute the works. yp The pleadings pertaining to the
claim would show that as per the contractor he had
deployed one Executive Officer, one Graduate
Engineer, one Junior Engineer, one Accountant, one
Storekeeper and Supervisor and one Mechanic at the
E
site and had also deployed watch and ward. Details of
the persons employed have been listed in Annexure-
N to the Statement of Claim and the documents filed to
establish the same would evidence that the contractor
F has filed photocopies of the salary register, which are
available from pages No. 1255 to 1322, but
unfortunately for the contractor, the cat is out of the bag
when we look at the documents. They pertain to
payments made for a site at Mayur Vihar. We highlight
G that the contract in question pertains to flats and houses
at Tri/okpuri and not Mayur Vihar. It is apparent that the
contractor has tried to pull the wool on the eyes of the
primary adjudicator of the claim. It is not the case of the
contractor that these persons were simultaneously
H
ASSOCIATE BUILDERS v. DELHI DEVELOPMENT 947
AUTHORITY [R. F. NARIMAN, J.]
supervising the work at two sites. Assuming this was the A
case, the matter would then have been adjudicated with
reference to same number of persons supervising two
sites and the time spent at each site by them.
18. . Thus, the award pertaining to Claim Nos. 9, 10, 11 B
and 15 is liable to be sent aside and it is so set aside.
We need not therefore take corrective action on the
apparent error i.e. the learned Arbitrator has worked out
the claim on the original contract value of
Rs. 87,66,6781-, of course by reducing it by 15%, but c
ignoring that final work executed was only in sum of
Rs. 62, 84, 845/-."
18. Mr. Verma argued correctly that there is nothing on
record to show that the contractor is a petty contrador and
that the only expenses incurred are at the site. He has shown D
us that the contract itself required execution of the work by a
Class-I contractor and has further shown us that Class-I
contractors require to have certain stipulated numbers of works
worth large amounts before they can apply for the tender and
that their financial soundness has to be attested too by banker's E
certificate showing that their worth is over 10 crores of rupees.
Further, he has pointed out from the statement of claims before
the Arbitrator that there was evidence for claims 9, 10 and 11
laid before the Arbitrator which the Arbitrator has in fact F
accepted. Also establishment expenses were set out in great
detail before the Arbitrator and it is only on this evidence that
the Arbitrator ultimately has awarded these claims. Mr. Verma
is also right in saying that the Division Bench was completely
wrong in stating that the establishment expenses pertained to G
payments for a site at Mayur Vihar as opposed to Trilok Puri
which were where the aforesaid houses were to be
constructed. He pointed out that in. the completion certificate
dated· 301h May, 1997 given by the ODA to the appellant, it is
H
948 SUPREME COURT REPORTS [2014] 13 S.C.R.
A clear that the houses that were, in fact, to be constructed were
in Mayur Vihar, Phase-II, which is part of the Trilok Puri trans-
Yamuna area.
It is most unfortunate that the Division Bench did not
advert to this crucial document at all. This document shows
8
not only that the Division Bench was wholly incorrect in its
conclusion that the contractor has tried to pull the wool over
the eyes over the DDA but it should also have realized that the
DDA itself has stated that the work has been carried out
C generally to its satisfaction barring some extremely minor
defects which are capable of rectification. It is clear, therefore,
that the Division Bench obviously exceeded its jurisdiction in
interfering with a pure finding of fact forgetting that the Arbitrator
is the sole Judge of the quantity and quality of evidence before
D him and unnecessarily bringing in facts which were neither
pleaded nor proved and ignoring the vital completion certificate
granted by the DDA itself. The Divisio,n Bench also went wrong
in stating that as the work completed was only to the extent of
Rs. 62,84,845/-, Hudson's formula should have been applied
E taking this figure into account and not the entire contract value
of Rs.87,66,678/- into account.
"Contract head x Contract x Period
G office overhead §.Yl!l of
and profit delay"
, percentage Contract
period
In the Hudson Formula, the head office overhead
H percentage is taken from the contract. Although the
ASSOCIATE BUILDERS v. DELHI DEVELOPMENT 949
AUTHORITY [R. F. NARI MAN, J.]
Hudson Formula has received judicial support in many A
cases, it has been criticised principally because it
adopts the head office overhead percentage from the
contract as the factor for calculating the costs, and this
may bear little or no relation to the actual head office
costs of the contractor." B
20. It is clear that to apply this formula one has to take
into account the contract value that is awarded and not the
work completed. On this score again, the Division Bench is to
be faulted. c
21. In dealing with claims 12 and 13, the Division Bench
stated: ·
"19. Pertaining to Claim No.12 and 13, the learned
Arbitrator has recompensed the contractor 20% price D
hike in the cost of material and labour noting, that there
was a steep hike in the period in question when the
contract got prolonged by 25 months. We highlight that
though the Arbitrator has found the delay to be 25
months, recompense has been restricted to only 20 E
months.
20. As noted herein above, partial recompense under
Clause 1OC, has been granted to the contractor, but
the same i.e. the Clause in question requiring
applicability during contract stipulated period, it is F
. apparent that the contractor would be entitled to full
recompense for price hike during the extended 25
months period and not the 20 months to which the
learned Arbitrator has restricted the recompense to.
G
21. But, for the benefit granted under Clause. 10C
wherein Rs. 1,62,3871-, Rs.46, 1841- and Rs.12,9221-
have been awarded under Claim Nos. 2, 3 and 4, said
amounts have to be adjusted, but not in full, for the
H
950 SUPREME COURT REPORTS (2014] 13 S.C.R.
A reason these include the amounts payable during the
contract stipulated period.
22. The total of the three sums comes to Rs, 2, 21, 4931-.
We have another problem. Neither counsel could help
us identify the components thereof i.e. the component
B
relatable to the 9 months during which the work had to
be completed and the 25 months during which the
contract got prolonged. Thus, we apply the Rule of
'Rough and Ready Justice'. We divide the sum by 34
c to work out the proportionate increase per month. Rs.
=
2,21,4931-divided by 34 Rs.6,514.50and multiplying
the same by 25, the figure comes to Rs.1,62,862.50.
23. Adopting, for the reasons given by the Arbitrator,
that 20% hike in the balance work done after the contract
D stipulated period i.e. benefit to be granted under this
head for work done in sum of Rs.37,02,0661- and
accepting the sum of Rs. 7, 20, 0001- being the resultant
figure, subtracting Rs.1,62,862.50, the figure arrived at
is Rs. 5, 57, 137. 50."
E
22. Here again, the Division Bench has interfered wrongly
with the arbitral award on several counts. It had no business
to enter into a pure question of fact to set aside the Arbitrator
for having applied a formula of 20 months instead of 25 months.
F Though this would inure in favour of the appellant, it is clear
that the appellant did not file any cross objection on this score.
Also, it is extremely curious that the Divisior;i Bench found that
an adjustment would have to be made with claims awarded
under claims 2, 3 and 4 which are entirely separate and
G independent claims and have nothing to do with claims 12 and
13. The formula then applied by the Division Bench was that it
would itself do "rough and ready justice". We are at a complete
loss to understand how this can be done by any court under
the jurisdiction exercised under Section 34 of the Arbitration
H
ASSOCIATE BUILDERS v. DELHI DEVELOPMENT 951
AUTHORITY [R. F. NARIMAN, J.]
Act. As has been held above, the expression "justice" when it A
comes to setting aside an award under the public policy ground
can only mean that an award shocks the conscience of the
court. It cannot possibly include what the court thinks is unjust
on the facts of a case for which it then seeks to substitute its
view for the Arbitrator's view and does what it considers to be B
"justice". With great respect to the Division Bench, the whole
approach to setting aside arbitral awards is incorrect.' The
Division Bench has lost sight of the fact that it is not a first
appellate court and cannot interfere with errors of fact.
c
23. We come now to the arguments of Mr. Sharan in
support of the Division Bench judgment. The learned counsel
strongly relied on clause 1OC and clause 22. These two clauses
are set out as below:
Clause 1OC of the agreement reads as follows: D
"If during the progress of the works, the price of any
material incorporated in the works,· yp(not being a
material supplied from the Engineer-in-Charge 's stores
in accordance with Clause 10 hereof and/or wages of E
labour increases as direct result of the coming into force
of arw fresh law, or statutory rule or order (but not due to
any changes in sales tax) and such increase exceed
ten per cent of the price and/or wages prevailing at the
time of receipt of the tender for the work, and contractor F
thereupon necessarily and properly pays in respect of
the material (incorporated in the work) such increased
price and/or in respect of labour engaged on the
execution of the work such increased wages, then the
amount of the contract shall accordingly be varied G
provided always that any increase so payable is not, in
the opinion of the Superintending Engineer (whose
decision shall be final and binding) attributable to delay
in execution of the contract within the control of the
H
952 SUPREME COURT REPORTS [2014) 13 S.C.R.
A contractor. Provided, however, no reimbursements shall
be made if the increase is not more than 10% of the
said prices/wages and if so the reimbursements shall
be made only on the excess over 10% and provided
further that any such increase shall not be payable if
B such increase has become operative after the contract
.or extended date of completion of the work in question.
If during the progress of the works, the price of any
material incorporated in the works (not being a material
c supplied from the Engineer-in-Charge's stores in
accordance with Clause 10 hereof) and/or wages of
lal>aur is decreased as a direct result of the coming
into force of any fresh law or statutory rule or order (but
not due to any changes in sales tax) and such decrease
D exceeds ten per cent of the prices and/or wages
prevailing at the time of receipt of the tender for the work,
Delhi Development Authority shall in respect of
materials incorporated in the work (not being materials
supplied from the Engineer-in-Charge's stores in
E accordance with Clause 10 hereof) and/or labour
engaged on the execution of the work after the date of
coming into force of such law, statutory rule ororder be
entitled to deduct from the dues of the contractor such
amount as shall be equivalent of difference between
F the prices of materials and/ or wages as they prevailed
at the time of receipt of tender for the work minus ten
per cent thereof and the prices of materials and/ or
wages of labour on the coming into force of such law,
statutory rule or order.
G
The contractor shall for the purpose of this condition
keep such books of account and other documents as
are necessary to show the amount of any increase
claimed or reduction available and shall allow
H
ASSOCIATE BUILDERS v. DELHI DEVELOPMENT 953
AUTHORITY [R. F. NARI MAN, J.]
inspection of the same by a duly authorised A
representative of Delhi Development Authority and
further shall, at the request of the Engineer-in-Charge
furnish, verified in such a manner as the Engineer-in-
Charge may require. Any document, so kept and such
other information as the Engineer-in-Charge may B
require.
The contractor shall, within a reasonable time of his
becoming aware of any alteration in the prices of any
such materials and/ or wages of labour give notice c
thereof to the Engineer-in- Charge stating that the same
is given in pursuance to the condition together with all
information relating thereto which he may be in a
position to supply."
Clause 22 reads as follows: D
"All sums payable by way of compensations under any
of these conditions shall be, considered as reasonable
compensation to be applied to this use of Delhi
Development Authority without reference to the actual E
loss or damage sustained, and whether or not any
damage shall have been sustained.
Specifications and Conditions:
1. The contractor must get acquainted with the F
proposed site for the works and study specifications and
conditions carefully before tendering. The work shall
be executed as per programme approved by the
Engineer-in-Charge. If part of site is not available for
any reasons or there is some unavoidable delay in G
supply of materials stipulated by the Departments, the
programme of construction shall be modified
accordingly and the contractor shall have no claim for
any extras or compensation on this account."
H
954 SUPREME COURT REPORTS [2014] 13 S.C.R.
A 24. Clause 1OC concerns itself with the price of material
incorporated in the works or wage or labour increases. It has
been seen that claims 9, 10 and 11 have nothing to do with
either of the aforesaid subjects. In seeking to apply this clause
to claim 15, the simple answer is that this clause will not apply
B when a claim for damages is made. Further, the Arbitrator
considered this clause in d.etail and only awarded amounts
under this clause in excess of 10 percent as required by the
clause when it came to awarding amounts under claims 2, 3
and 4, which fell within the ambit of clause 1OC. The DDA in
C the appeal before the Division Bench correctly gave up any
challenge to these claims as has been recorded in paragraph
4 of the order under appeal.
25. The Arbitrator has dealt with this clause in detail and
D has construed and applied the same correctly while dealing
with claims 2, 3 and 4 and has obviously not applied the said
clause to claims 9, 10, 11 and 15 as no occasion for applying
the same arose. The award cannot be faulted on this ground.
26.Also, so far as clause 22 is concerned, the DDAdid
E not raise any argument based on this clause before the learned
Arbitrator. However, it must in fairness be stated that it was
argued before the learned Single Judge. In para 15 of his
judgment, the learned Judge sets the clause out and then
F follows a judgment of the High Court of Delhi in Kochhar
Construction Works v. DOA & Anr., (1998) 2 Arb. LR 209.
Apart from the fact that a learned Single Judge of the same
court is bound by a previous judgment of a Single Judge, the
conclusion of the learned Single Judge that if the appellant is
G at fault and the contract is prolonged for an inordinate period
of time, it cannot be said that the respondents cannot be
compensated for the same is correct. Besides, this point was
not urged before the Division Bench and must be taken to be
given up. Mr. Sharan cited Harsha Constructions v. Union
H of India & Ors., (2014) 9 sec 246 to say that in respect of
ASSOCIATE BUILDERS v. DELHI DEVELOPMENT 955
AUTHORITY [R. F. NARIMAN, J.]
excepted matters, no arbitration is possible, and that this being A
a jurisdictional point, he should be allowed to raise it before
us. Unfortunately for Mr. Sharan, the clause does not operate
automatically. It only operates if an objection is taken stating
that part of the site is not available for any reason. Nowhere
has the DDA stated which part-of the site is not available for B
any reason. Further, the learned Single Judge's reason for
rejecting an argument based on this clause also commends
itself to us as the object of this clause is that no claim for extras
should be granted only if there is an unavoidable delay. We
have seen that the delay was entirely avoidable and caused C ·
solely by the DDA itself.
27. One more point needs to be noted. An argument was
made before the learned Single Judge that there has been a
duplication of claims awarded. The learned Judge dealt with D
this argument as follows:
"18. Learned counsel for the petitioner in respect of
ground P, once again makes a reference to the issue
that there is overlapping of the claim. I am unable to
accept the submission made by the learned counsel. E
The consequence of delay may have more than one
ramifications including the cost of material the
supervision required at the site, the inability of the
contractor to utilise the manpower at some other place, F
the inability of the contractor to make, profits from some
other contract by utilisation of the same resources. All
these aspects are liable to be considered. The Arbitrator
has considered the claims separately and has dealt
with, claims 9, 10, 11 & 15 together. Claims 12 & 13 G
have been thereafter dealt with on the same principles
since it was found that it was not the respondent, who
was responsible for the delay for a period of 25 months
beyond the stipulated condition of 9 months.
H
956 SUPREME COURT REPORTS [2014] 13 S.C.R.
A 19. There is thus no question of overlapping in different
l1eads and the grievance of the petitioner is rejected."
28. The Single Judge is clearly right. We have gone
through all the 15 claims supplied to us and we find that none
B of these claims are in fact overlapping. They are all contained
under separate heads. This argument, therefore, must also
fail.
29. The appeal is, therefore, allowed and the judgment
of the Division Bench is set aside. The judgment of the Single
C Judge is upheld and consequently, the Arbitral award dated
23'd May, 2005 is as a whole upheld. There will be no order as
to costs.
Kalpana K. Tripathy Appeal allowed.
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