Holding

The arbitral award is set aside insofar as it awards cost of completion, as the arbitrator exceeded jurisdiction and committed legal misconduct; the remainder of the award is upheld.

Summary

The Supreme Court examined an arbitration award arising from a turnkey housing contract between Army Welfare Housing Organisation (AWHO) and Sumangal Services Pvt. Ltd. (Sumangal). The Court held that the arbitrator had no jurisdiction to pass an interim injunction under Section 41(b) of the Arbitration Act, 1940, and that the award was tainted by legal misconduct for failing to consider key contractual clauses, notably clauses 129(e) and 130. It further found that the award contained an error apparent on its face by relying on post‑date conduct of the parties, and that damages must arise from the contract, which the award did not specify. The Court set aside the portion of the award relating to cost of completion (Claim No. 2) while upholding the award on title of the land (Claim No. 1). Consequently, the appeal was partially allowed and the award was partially vacated.

Issues considered

The arbitrator's power to pass an interim award under Section 41(b) of the Arbitration Act, 1940.
Whether the arbitrator committed legal misconduct under Section 30 by ignoring contractual provisions.
Whether the award contained an error apparent on its face.
Whether damages can be awarded absent a contractual basis under Section 73 of the Contract Act.
Applicability of Section 17 of the Arbitration and Conciliation Act, 1996 to interim measures.
Whether the contract was frustrated under Section 56 of the Contract Act.
Whether a plea of unjust enrichment could be raised for the first time before the Supreme Court.

Legislation cited

Arbitration Act, 1940s. 30, s. 41(b), s. 4l(b)
Arbitration and Conciliation Act, 1996s. 17
Constitution of Indias. 136
Indian Contract Act, 1872s. 56, s. 73
Transfer of Property Acts. 54

Subjects

ArbitrationInterim awardJurisdictionLegal misconductContract frustrationDamagesArchitect's roleSection 41(b) Arbitration ActSection 30 Arbitration ActSection 17 Arbitration and Conciliation ActSection 56 Contract ActUnjust enrichment

Judgment

M.D., ARMY WELFARE HOUSING ORGANISATION A
v.

- SUMANGAL SERVICES PVT. LTD.

OCTOBER 8, 2003

[V.N. KHARE, CJ., BRIJESH KUMAR AND S.B. SINHA, JJ.]
B

Arbitration :

Arbitration Act, 1940 :
c
Section 4l(b) proviso-Interim order-Passing of-Powers of
Arbitrator-Held: Arbitrator does not have power to pass an interim order
in the absence of any specific agreement in relation thereto.

Section 30-Award-Misconduct by Arbitrator-Setting aside of D
award-Arbitrator refused to consider provisions of contract dealing with
rights and liabilities of parties-Held: Such a conduct amounted to legal
misconduct on the part of the Arbitrator-Hence, award liable to be set
aside.

Section 30-Award-Error apparent on the face of award-Setting E
aside of award-Disputes and differences between the parties were
required to be determined as on a particular date-But the Arbitrator took
into consideration subsequent conduct of the parties-Held : Subsequent
conduct of parties was wholly irrelevant-Hence, there existed an error
apparent on the face ofthe award-Therefore, award liable to be set aside. F

Section 30-Award-Damages-Held : Liability to pay damages
must arise out of contract and not otherwise-Since the award did not
specifically say so parties not entitled to award of damages.

Arbitration and Conciliation Act, 1996 : G
Section 17-Power ofArbitrator-Held: Is a limited one-Arbitrator
could not issue any direction which would go beyond the reference or
arbitration agreement-Interim order could only relate to the parties to the
dispute and not to other parties. H
385
386 SUPREME COURT REPORTS [2003] SUPP. 4 S.C.R.

A Contract Act, 1872 :

Section 73-Damages-Army Welfare Housing Organisation (AWHO)
entered into a contract with a builder for construction ofhousing project-
Builder had no legal liability to get the building plans sanctioned-
....
However, builder merely assisted A WHO in getting the plans sanctioned-
B
Liability of builder-Held: Builder had incurred no liabilities under law.

Section 56-/mpossibility to fulfil contract-Frustration ofcontract-
Damages-Army Welfare Housing Organisation (AWHO) awarded contract
for construction of housing project-Municipality ordered stoppage of
c work in 617 blocks-Contractor complied with such stop.,-work order-
Liability of contractor-Held : Assuming the contractor could carry out
some job and might be partially liable yet he could not be faulted when
he refused to undertake any constructional work in violation of stop-work
order-Moreover, there was no material to prove alleged self-induced
D frustration on the part of the contractor-There was also no collusion
between the Municipal authorities and the contractor in getting the work
stopped-Hence, contractor not liable for any damages.

Constitution of India, 1950 :
E ·Article 136-Plea-New Plea-Award-Appeal against-One of the
parties to arbitration raised a plea before the Supreme Court that the other
party had unjustly enriched. itself-Such a plea not raised before the
arbitrator-Held : A new plea could not be raised for the first time before
the Supreme Court-Practice and procedure.
F
The appellant entered into an agreement with the respondent for
development of land and construction of a composite housing project
on a turnkey basis. Considerable progress was made in the construction
of work in Phase 1. Despite the fact that no building plan was filed or
G sanctioned for Phases II and III, the respondent, on the instruction of
the appellant, proceeded with the construction of Phase II. But the
municipal authorities directed to stop work in 617 blocks. The
respondent, therefore; stopped further construction activity which
resulted in the appellant's termination of its contract with the
,
H respondent "
M.D., ARMY WELFARE HOUSING ORGANISATION'" SUMANGAL SERVICES P. LTD. 387

The respondent filed a civil suit for injunction which was refused. A
In appeal, the High Court ordered the parties to maintain status quo.
In appeal, this Court referred the disputes between the appellant and
the respondent for adjudication by an Arbitrator.

The appellant and the respondent filed an application before the B
Arbitrator for passing of an interim award regarding certain matters.
The Arbitrator passed an interim order of injunction and subsequently
an award was filed before this Court. Hence the appeal.

On behalf of the respondent, it was contended that the Arbitrator. C
had no power to pass an interim award under Section 4l(b) of the
Arbitration Act, 1940; that failure of the Arbitrator to consider
provisions of the contract amounted to misconduct by the Arbitrator
under Section 30 of the Act; that as the building plans were not
sanctioned by the statutory authorities the contract was frustrated
under Section 56 of the Contract Act, 1872; and that the finding of the D
• Arbitrator that the frustration was a self-induced one was not based
on any materials.

Disposing of the appeal, the Court
E
HELD: I.I. An Arbitrator had no jurisdiction to pass the interim
order under the Arbitration Act, 1940 in the absence of any specific
agreement in relation thereto. The Arbitrator by an interim order
could not have placed the parties to a situation which would travel
beyond the subject of disputes and differences referred to the arbitration. F
As no claim and counter-claim had been filed before the arbitrator, the
arbitrator was not even aware of the nature of claims of the parties.
He neither found any prima facie case nor balance of convenience for
passing the said interim order. Furthermore, an arbitrator is bound
by the terms of reference. [416-F, G]
G
1.2. The jurisdiction of the arbitrator being confined to the four
corners of the agreement, he can only pass such an order which may
be the subject-matter of reference. [416-H, 417-A)

I.3. In the instant case, the interim award was not passed with H
388 SUPREME COURT REPORTS (2003] SUPP. 4 S.C.R.
A the consent of the parties. If the arbitrator has no jurisdiction to pass
an interim order, even by consent no such jurisdiction could be
conferred. (416-A, BJ

United Commercial Bank Ltd. v. Their Workmen, AIR (1951) SC 230
B and Hakam Singh v. Mis. Gammon (India) Ltd., AIR (1971) SC 740,
relied on.

Hiscox v. Outhwaite, (1991) 2 Lloyd's Law Reports 1, referred to.

2.1. It is well-settled that for the purpose of obtaining an interim
C order a party to the arbitration proceeding during pendencyofan arbitral
proceeding can only approach a court oflaw in terms of Section 41(b) of
the Arbitration Act, 1940 and not otherwise. (418-C-D]

2.2. In the instant case, Section 41(b) proviso has no application
D as the arbitrator was not vested with such power. [418-G]

Morgan Stanley Mutual Fund v Kartick Das, (1994] 4 SCC 225,
Union ofIndia v. Raman Iron Foundry, (1994] 2 SCC 231 and Mis. H.M·
Kamaluddin Ansar:i v. Union of India, (1983) 4 SCC 417, relied on:

E
..
Indrajit Sinha v. B.L. Rathi, AIR (1984) Cal. 281 and Debendra Nath
Singha v. Dwijendra Nath Singha, AIR (1970) Cal. 256, approved.

3. Even under Section 17 of the Arbitration and Conciliation Act,
1996 the power of the arbitrator is a limited one. It cannot issue any
F direction which would go beyond the reference or the arbitration
agreement. Furthei:more, an award of the arbitrator under the 1996
Act is not required to be made a rule of court; the same is enforceable
on its own force. Even under Section 17 of the 1996 Act, an interim
·order must relate to the protection of the subject-matter of dispute and
G the order may be addressed only to a party to the arbitration. It cannot
be addressed to other parties. Even under Section 17 of the 1996 Act,
no power is conferred upon the Arbitral Tribunal to enforce its order
nor does it provide for judicial enforcement thereof. The said interim
order of the arbitrator, therefore, being coram non judice was wholly
H without jurisdiction and, thus, a nullity. [420-G, H, 421-A, BJ
M.D., ARMY WELFARE HOUSING ORGANISATION 1·. SUMANGAL SERVICES P. LTD. 389
Kiran Singh v. Chaman Paswan, AIR (1954) SC 340(6), Srimathi A
Kaushalya Devi v. Shri K.L. Bansal, [1969] 1 SCC 59, Union of India
v. Tarachand Gupta, (1971) 1 SCC 486, Sushi/ Kumar Mehta v. Gobind
Ram Bohra, (1990) l SCC 193 and Smt. Kanak v. UP. Avas Evam Vikas
Parishad, (2003) 7 SCALE, relied on.
B
4.1. An award made pursuant to an order which has been passed
without jurisdiction necessarily must be held to be a nullity. Refusal
on the part of the arbitrator to consider the effect of clause 130 of the
agreement would amount to a legal misconduct. In the facts and
circumstances of the case, it was incumbent on the part of the
arbitrators to apply "due diligence" clause contained in clause 129(e) C
of the agreement, more cautiously. They were further required to
consider as to whether "due diligence" clause be applied where the
alleged violation of contract was only in relation to a small part thereof.
The arbitrators were, in law, bound to consider the relevant provisions
of the contract and in particular those which deal with the rights and D
liabilities of the parties. (423-D-E)

4.2. The above aspect of the matter has not been taken into
consideration by the arbitrators while making the award. Thus, they
failed to take into consideration a relevant fact. [423-F] . E
Steel Authority of India Ltd. v. J.C. Budharaja, Government and
Mining Contractor, (1999) 8 SCC 122, Shyama Charan Agarwala v.
Union of India, (2002] 6 SCC 201, Mertens v. Home Freeholds ,:;o. Ltd.,
(1921) All ER 372, Bharat Coking Coal Ltd. v. Mis. Annapurna
Constructed, (2003) 7 SCALE 20, Alopi Parshad & Sons Ltd. v. Union F
of India, [1960) 2 SCR 793, Heyman v. Darwin, (1942) 1 All ER 327,
Association Engineeringv. Govt. ofA.P., [1991) 4 SCC 93, State ofOrissa
v. Dandasi Sahu, (1988) 4 SCC 12, K.P. Poulose v. State ofKera/a, [1975)
2 SCC 236, K. V. George v. The Secretary to Government, Water and
Power Dept., (1989) 4 SCC 595, Satish Kumar v. Surinder Kumar, AIR 0
(1970) SC 833, Union of India v. Jain Associates, [1994) 4 SCC 665,
Sikkim Subba Associates v. State ofSikkim, (2001] 6 SCC 629, Maharashtra
State Electricity Board v. Sterilite Industries (India), [2000) 8 sec 482,
W.B. State Warehousing Corporation v. Sushi! Kumar Kayan, (20021 5
sec 679, Bharat Coking Coal Ltd. v. L.K. Ahuja & Co., [2001) 4 secH
390 SUPREME COURT REPORTS [2003] SUPP. 4 S.C.R
A 86 and /spat Engineering & Foundary Works, B.S. City Bokaro, (2001)
6 sec 347, referred to.

Continental Construction Co. Ltd. v. State ofMP., (1988) 3 SCC 82,
cited.
B Halsbury 's Laws of England, 4th Edn., Mustill and Boyd
"Commercial Arbitration" p. 598, referred to.

5.1. Before the arbitrators a question arose as to whether
certification of an architect as regard estimated cost of completion was
C a condition precedent for determination of the quantum of damages.
Construction of clauses 129 and 130 having regard to the fact situation
obtaining herein was mandatorily required to be considered by the
arbitrators. They could not have simply ignored the same on t~e
premise that an interim order has been passed by the arbitrator. An
D arbitrator cannot be equated with a court of law. Whereas a court has
an inherent power, an arbitrator does not have. It is a tribunal of
limited jurisdiction. Its jurisdiction is circumscribed by the terms and
reference. An arbitrator can act only within the fou~ corners of the
agreement and not beyond thereto. [426-G, H, 427-A)

E 5.2. This Co ti rt cannot sit in appeal over the award of the arbitrator
but can certainly interfere when the award suffers from non-application
of mind or when relevant fact is ignored or irrelevant fact not germane
for deciding the dispute is taken into consideration. [428-A, BJ

F 5.3. Where an order has been passed without jurisdiction, the
principles of estoppel have no application. There is no estoppel against
statute. The award, therefore, suffers from legal misconduct on the
part of the arbitrator. [428-B, C]
.. {,' .:···.-,.r
Union of India v. Mis. V. Pundarikashudu and Sons, (2003) ·7
G SCALE 323, referred to.

6.1. Moreover, Clause 130 of the contract casts a burden upon an
architect to estimate· the damages when a risk and cost clause is
invoked against the contractor. It is possible to hold that the invocation
H of arbitration clause would be subject to exercise of the jurisdiction by
M.D., ARMY WELFARE HOUSING ORGANISATION 1•. SUMANGAL SERVICES P. LTD. 39 l
the architect as a demand has to be made upon the contractor A
depending on such estimate made by the architect. (430-A-B)

6.2. Thus, the arbitrator could not have ignored the role of the
architect in terms of clause 130 of the agreement only on the ground
that the appellant had permitted to raise construction, pursuant to or B
in furtherance of an interim order. Non-consideration of the said .
clause in proper perspective by the arbitrator would amount to a legal
misconduct on his part. (430-H, 431-A]

Heavy Electricals (India) Ltd v. Pannalal Devchand Masviya, AIR C
(1973) MP 7, South India Rly. Co. Ltd v. S.M Bhashyam Naidu, AIR
(1935) Mad. 356; Bristol Corporation v. John Aird & Co., (1911-13) All
ER 1076, Hieman & Co. v. Roberts, (1911-13) All ER 1485 and R. v.
Architects' Registration Tribunal ex P. Jaggar, (1945) 2 All ER 131,
referred to.
D
Hudson's Building and Engineering Contracts, p. 243 and G. T.
Gajria 's Law Relating to Building and Engineering Contracts in India, 4th
Edn., p. 563, referred to.

7.1. Merly because of the fact that some role had been attributed E
to the respondent in the matter of getting the building plan sanctioned
it would not lead to the respondent incurring any liability under clause
130 of the agreement. [430-D]

7.2. The building plans would have been sanctioned provided the F
same were in accordance with the statutory building rules. If admittedly
the plans as also the constructions were not in terms of rules, the
question of getting them sanctioned by a statutory authority would not
arise. Such a contract, it is reiterated, would be illegal. Principle of
estoppel will have no application in relation thereto as that part of the
agreement itself would not be enforceable. In the event, however, the G
builder was merely required to take follow-up action in the matter with
the authorities, the contract may be valid but in that event it must not
only be pleaded and proved that there existed an agreement in that
behalf, but also to how and to what extent the builder failed to perform
its part of the contract. [438-G, H 439-A, B] H
392 SUPREME COURT REPORTS [2003] SUPP. 4 S.C.R.

A lmmami Appa Rao v. Gollapallil Ramalilngamurthi, [1962) 3 SCR
739 and Kuju Collieries Ltd. v. Jharkhand Mines Ltd., AIR (1974) SC
1892, referred to.

8. The liability to pay damages must arise out of contract and not
otherwise. The award does not specifically say so. (439-E)
B.
9.1. The respondent cannot be said to have committed any
illegality in complying with the stop-work notice. Assuming the
respondent could have carried out some job it might have been
partially liable; but cannot be faulted when it refused to carry out any
C constructional work in violation of the stop-work notice which would
attract the penal provisions of Section 440 of the West Bengal Municipal
Act, 1993. [440-D, E]

Hauman v. Nortje, (1914) A.D. 293 and Hoenig v. Issacs, (1952) 2
All ER 176, referred to.
D
H. WR. Wade : "The Principle of Im1ossibility in Contract", Law
Quarterly Review Vol. 56 p. 519, Emden and Gill: "Buildings Contracts
and Practice" 7th Edn., pp. 162-163 and Hudson's Building and Engineering
Contracts, p. 484, referred to.
E 9.2. There is no material to show that there had been collusion
by and between the respondent and the municipal authorities in getting
the work stopped. There exists a presumption as regard the official
transactions having been done in regular course of business. The onus
of proving that plea of frustration was a self-induced one is on the party
F who alleges that this is the case. (442-B, CJ

Joseph Constantine Steamship Line Ltd. v. Imperial Smelting
Corporation Ltd., (1942) A.C. 154, referred to.

G Treitel: "Law of Contract" 7th Edn., p. 701 and Cheshire, Fifoot
& Furmston : "Law of Contract" 14th Edn., p. 643, referred to.

10. The disputes and differences between the parties were required
to be determined as on a particular date. The conduct of the parties
' wholly irrelevant. Thus, there exists an err~r
subsequent thereto was
H apparent on the face of the aW&rd. [444-E) ·

.
M.D., ARMY WELFARE HOUSING ORGANISATION'" SUMANGAL SERVICES P. LTD. 393
11.1. Liability to pay damages would indisputably arise only in A
the event a breach of contract has taken place. Clause 130 of the
general conditions of the contract could be invoked only in the event
of breach on the part of the respondent and if the appellant could in
law take recourse to clause 129 of the contract. [444-FJ
B
11.2. For the purpose of invoking clause 129(d) of the general
conditions of contract, it was incumbent upon the arbitrators to arrive
at a specific finding that a breach of the terms of condition has been
committed by the respondent. Such a breach must be in relation to a
term of the contract between the parties. [444-GJ
c
11.3. If a breach has occurred in respect of an agreement, to
which the respondent is not a party, clause 129 could not have been
invoked. [444-H]

Clark v. Woor, (1965) 1 W.L.R. 650 and East Ham Borough D
Corporation v. Bernard Sunley & Sons Ltd., (1966) AC 406, referred to.

McGregor on Damages,' 16th Edn., paras. 1142 and 1143, Hudson's
Building and Engineering Contracts, pp. 1034-35 and Emden and Gill :
"Buildings Contracts and Practice" 7th Edn., p. 267, referred to. E
12. The plea that the appellant had unjustly enriched itself was
not raised before the arbitrators. Such a plea connot, therefore, be
raised for the first time before this Court. [448-H, 449-AJ

CIVIL APPELLATE JURISDICTION : Civil Appeal No. 1725 of f
1997.

From the Judgment and Order dated 28.3.96 of the Calcutta High
Court in F.M.A.T. No. 691 of 1996.

Arvind Kumar Tewari for the Appellant. G

K.N. Bhat, P.R. Agarwal, Pramod Dayal, Piyush Sharma and R.
Anand Padmanabhan for the Respondent.

The Judgment of the Court was delivered by H
394 SUPREME COURT REPORTS [2003) SUPP. 4 S.C.R.
A S.B. SINHA, J : Questions of some importance arise for consideration
in this application filed by the respondent-herein under Sections 30 and 33
of the Arbitration Act, 1940 questioning an award dated 29.4.2002 passed
by three learned arbitrators appointed by this Court.

B BACKGROUND FACTS:
Army Welfare Housing Organization (for short 'A WHO') and
Sumangal Services Pvt. Ltd. (for short 'Sumangal') entered into an
agreement for development of land and construction of a composite
C housing project on a tum-key basis on approximately 17.9 acres of land
situate on the VIP Road, in the town of Kolkata. For the said purpose a
draft agreement initially drawn up was given finality by Articles of
Agreement dated 28.8.1993. Certain terms and conditions, however, had
been altered therein with mutual consent.

D The project was envisaged to be completed in three phases.
Considerable progress was made in the matter of construction of work in
Phase I. The plots where the said work was being carried out fell under
the local administration of Gopalpur Arjunpur Gram Panchayat. The
building plan for Phase I was sanctioned by the said Gram Panchayat in
E September, I 991 in terms whereof I I blocks of houses could be constructed.
The said area, however, became a municipality in terms of the West Bengal
Municipal Act, 1932 known as Rajarhat Gopalpur Municipality. West
..
Bengal Municipality Act, 1932, however, was repealed and replaced by
West Bengal Municipal Act, I 993.

F It is not in dispute that pursuant to or in furtherance of the said
agreement Sumangal entered into negotiations with the owners of the
agricultural lands for sale thereof wherefor sale deeds in respect of 2.32
acres of land were executed by the owners in favour of A WHO. Sumangal
received the. am0tmt for consideration from A WHO paid to the owners
G upon furnishing a Bank guarante~ also subject to the condition that it
will get the said land converted into Bastu.

Lands measuring about 13 acres had already been converted into
Bastu. On or about 8.12.J 994, an application was made by A WHO for
H modifications or revisions in the Master Plan wherefor a revised Master
M.D., ARMY WELFARE HOUSING ORGANISATION v. SUMANGAL SERVICES P. LTD. [SINHA, I.) 395
Plan was submitted for approval of the Municipality stating: A
"Tel: 30 I 0820 Army Welfare Housing Organisation
South Hutments, Kashmir House,
Rajaji Marg, New Delhi-I 10011

B/03020/CAL-II/AWHO 8 Dec 94 B

The Chairman,
Rajarhat Gopalpur Municipality
Raghnunathpur,
Calcutta-700059 c
SUBMISSION AND FINAL APPROVAL OF
PLAN FROM MUNICIPAL AUTHORITY

Dear Sir,
D
I. This is to bring to your kind notice that our organization has
undertaken the construction of "Own your own House"
housing project for the benefit of our Defence Personnel at
no Profit no Loss basis. We have engaged Mis Dulal
Mukherjee & Associates as consulting Architect for the E
project.

2. As per demand/requirements for the housing for Army
personnel, our Architect made a Master Plan of the project
and also plans for 04 types of Dwelling Units (05 Storyed) F
which were approved by the Gram Panchayat vide Sanction
No.181191 dated 18 Sep. 91.

3. In this connection we would like to mention that due to site
· constraints and also. to meet t~e de.mand fo~ ~ousing among· G
Army personnel, mmor Mod1ficat1ons/Rev1s1ons have been
made to the Master Plan and also to the Individual Dwelling
Units which were sanctioned earlier.

4. We are submitting herewith the revised Master Plan and also
individual Plan for Dwelling Units (Additions and Alterations) H
396 SUPREME COURT REPORTS [2003] SUPP. 4 S.C.R.

A for your approval. We therefore make an appeal to your
goodselfto kindly give special consideration to our plan and
approve the same at the earliest. '

Yours faithfully,

B (Raghu Nandan)
Brig (Retd)
DT& DY MD
For Managing Director"

C Such permission was granted only on 9.3.1995.

According to Sumangal, despite the fact that no builqing plan was
filed or sanctioned for Phase II and Phase Ill but as per instruction of
A WHO it proceeded with the construction of Phase II. Such an application
was filed for the first time on 19 .5 .199 5. It stands admitted that the
D~ proposed height of the towers was more than the permissible one.

The municipal authorities vide its letter dated 23.5.1995 directed
stoppage of work in six/seven blocks ··where allegedly unauthorized
construction was being carried out stating:

E "We came to learn that some 8 blocks of 5 storied buildings were
approved by erstwhile panchayat before the origination of the
above municipality. After the birth on 13.01.94 as per norms of
W.B.M. Act '93 and Calcutta Gazette, new plans if any, or
construction job if any, has to be approved of by this Municipal
F Authority.

We learnt some additional 6/7 blocks are being constructed at
your VIP project for which no plan was submitted to the
Engineering Division of this office for approval. This is a gross
violation of W.B.M. Act '93 and '79 T & C Development
Planning Act.

It is further learnt that the 7/8 blocks constructed by you on the
basis of the plan sanctioned by erstwhile panchayet has also been
severely deviated from actuality-which is also punishable under
H the law.
M.D., ARMY WELFARE HOUSING ORGANISATION 1·. SUMANGALSERVICES P. LTD. [SINHA, J.] . 397

We strongly believe that an esteemed organization like you, will A
not indulge in such illegal activities and refrain from all such
unapproved/unauthorized works."

Sumangal thereafter sought advice of AWHO by a letter dated 24th
May, 1995 pointing out therein that if any construction activity is carried B
out despite objections of Local Authority, persons involved would be liable
for punishment both under criminal as well as civil law. It reiterated the
said stand by a letter dated 25th May, 1995 drawing A WHO's attention
to the.provisions of Sections 204, 214 and 440 of the West Bengal
Munic'ipal Act, 1993 and requesting it for its response also to its earlier
letter dated 24th May, 1995. Sumangal did not receive any reply thereto C
/
and hence by its letter dated 27th May, 1995 stated:

"If clear out instructions are not received from you by 29th May,
we shall be compelled to demobilize. Please advise urgently. We
shall be constrained to consider your silence as your agreement D
to our demobilization."

The engineers of municipality visited the project site a number of
times but the sanctioned plan had allegedly not been produced. In the
aforementioned situation, the Chairman of the Municipality issued. a letter
to the Project Manager, A WHO on 2 l. 7.1995 stating : E
"Dear Sir,

Our engineers have visited your project site number of times and
discussed with your engineers about the drawing, design and other F
infrastructurals projects placed before them. The undersigned also
took the opportunity to meet with you and talk to your Mis Dula!
Mukherjee & Associates where we have inter changed our views
and the norms of Municipal Rules & Regulations.

Our engineer has been asking you for the erstwhile panchayat G
recommended plan by which you have constructed already 8-9
blocks. All the time he has come back without result.

You would appreciate that without a plan already approved by
erstwhile panchayat, we can not check/judge the present position H
398 SUPREME COURT REPORTS {2003) SUPPA S.C.R.
' ', ', A , . or th~viability of yo~r project. Bene~ ihe q~;~iion of you~
infrastructural development like construction ofRoad, Drains etc.
does nqt arise, at al/. {Jt the 11J,Oment.

· We would request you fervently to submit the panchayat
~ B .•'. · ·· recommended plan on the basis of which we will proceed further.

Thanking you"
(Emphasis supplied)

In the meantime the architect and the project engineer ,of A WHO
C met the Chairman of the. Municipality and it was allegedly agreed that the
work need not be stopped in the buildings for which the plans have aiready
been approved. Sumangal, therefore, was advised not to stop the work for
which plans have already been approved. (See letter of A WHO to
Sumangal dated 27.5.1995).
D AWHO by their letters dated 25th July, 1995 and I Ith August, 1995
advised Sumangal to reorganize and recommence its work by employing
sufficient strength of labour and bringing the required material to site by
I Ith September, 1995 to ensure thatthe progress of the work is substantially
increased. It was threatened thatif suitable action is not taken in this behalf
E by Sumangal AWHO may be compelled to take action under clause 129(e)
of the Contract.

It appears that Sumangal replied thereto by its letter dated 14th
August, 1995. In its response to the said letter dated 14th August, 1995,
F A WHO drew the attention of Sumangal to the fact that there are certain
types of work which would not come within the purview of the stop work
notice by the Municipality and as such the same could have been carried
out. It was stated:

" ... You are again advised to reorganise your work by employing
G sufficient labour and bringing in the req1,1ired material to ensure
that the pro~ess of the work is substantially increased by 15 Sep
95 failing which A WHO may be compelled to take action under
clause 129 (e) on page 176 of Contract Agreement. This is
without prejudice to any other right or remedy which shall have
H accrued or shall accrue to the Organisation."
M.D., ARMY WELFARE HOUSING ORGANISATION v. SUMANGAL SERVICES P. LTD. (SINHA, J.) 399

Some correspondences thereafter passed between the parties and by A
its letter dated 10th October, 1995 A WHO ultimately cancelled the contract
with effect from 17th October, 1995.

A civil suit was filed by Sumangal before the 1st Assistant District
Judge at Barasat being suit No. 867 of 1995 praying for a declaration that B
the contract was void. Certain consequential reliefs were also prayed
therein in relation to the said termination of contract. ·

An application purported to be under Section 20 of the Arbitration
Act, 1940 was filed by the AWHO before the Delhi High Court which was
marked as Suit No. 2442 of 1995 for appointment of an arbitrator in terms C
of the arbitration agreement contained in Clause 136 of the general terms
and conditions of the contract.

In the said civil suit Sumangal prayed for an order of injunction which
was refused whereagainst an appeal was preferred in the High Court of D
Calcutta and by reason of an interim order dated 28.3.1996 the parties were
directed to maintain status quo. A SLP was filed by A WHO against the
said order.

This Court in the said S.L.P., however, without going intq the
correctness or otherwise of the interim order dated 28.3 .1996 of the High E
Court passed the following order:

"Leave granted.

This appeal calls in question the order of the High Court of F
Calcutta dated 28.3.1996.

In view of the developments which have taken place in this
Court, it is not necessary to refer to the detailed facts of the case.
Admittedly, disputes and differences have arisen between the
parties and those are pending adjudication in the Court of the First G
Assistant District Judge, Barasat (Title Suit No. 867 of 1995) and
in the High Court of Delhi (Suit No. 2442 of 1995). It is agreed
to by learned counsel for the parties that those disputes and
differences be referred for adjudication to an arbitrator. With
consent of~he parties, we refer the disputes arising out of the two H
400 SUPREME COURT REPORTS [2003] SUPP. 4 S.C.R.

A suits noticed above to Shri H.R. Khanna, Former Judge· of this
Court, who shall enter upon the reference and make his Award
within the statutory period. The learned Arbitrator shall fix his
own fee and the manner of its payment. The parties shall be at
I
liberty to file their claims/counter-claim before the Arbitrator.
B With the referertce of the disputes and differences between
the parties to the learned Arbitrator, the two suits pending at
Barasat and in the Delhi High Court shall stand withdrawn from .
the respective courts where those are pending. Copy of this order
shall be sent to the concerned courts for due compliance.
c
The learned Arbitrator shall file the Award in this Court. It
is directed that no other court shall interdict the arbitration
proceedings.

The appeal is disposed of accordingly. No costs."
D
Even before filing the statements of claims and counter-claims;' the
parties jointly requested the learned arbitrator to pass an interim award as
regard the ownership of the lands as to whether AWHO by reason of the
purported deeds of sale became the absolute . owner of the property
E comprising 14.17 acres of land wherefor the following issues were raised
by Sumangal:

"a) Whether or not AWHO/Party No. 2 is the absolute
owner of the suit property comprising of 14. l 7 acres
of land vide registered Sale Deeds, mutation and
F
conversion certificates issued by the competent
authority, in favour of the petitioner including the
properties built thereon and that the Ian? so acquired
absolutely and for ever by the Party No.2/A WHO and
the property built thereon is not a retumal;>le security,
G which property pursuant to the cancellation of contract
is neither refundable nor ~an be same be reconveyed
to Party No. I and/or land sellers?

b) Whether Party No.2 and/or Party No. I and/or the land
H sellers have a first and paramount charge on the said
M.D., ARMY WELFARE HOUSING ORGANISATION v. SUMANGAL SERVICES P. LTD. [SINHA, J) 40 I
land sold/transferred to the Party No. 2 absolutely and A
forever, particulars whereof are given the Annexures I
(Colly), annexed hereto, and that whether after sale of
the said plots of land by the land sellers, to the. Party
No. 2 vide registered sale deed based upon an
understanding as spelied out in the developer's
B
agreement and power of attorney and affidavits etc.
executed by and between the land seller and Party
No.I, which as is alleged by Party No. I have since
become void and inoperative, and therefore, is the
Party No. I entitled for the payment of a sum of Rs. 38
lakhs 4 7 thousand as pleaded in paragraph 56 of its c
Title Suit No.867 of I 995?

c) Whether the Party No. I has a first and paramount
charge on the construction, buildings and all other
materials that are lying at and within the land transferred/ D
sold by the land sellers through Party No. I to the Party
No.2 for it's claim on the basis of item rate contract as
alleged claimed for the alleged loss and damages
suffered by the Party No.I as stated in it's Title Suit
No.876 of 1995?
E
d) Whether in alternative a decree for specific performance
of the agreement referred to in paragraph 69 of the
aforesaid title suit above and reconveyance of the lands
mentioned in Schedule G to the Suit in favour of the
Party No. I or the land seller can be decreed either in F
favour of the Party No. I and/the land sellers who had
sold absolutely and for ever their plots of land vide
registered sale deeds which were subsequently mutated
and its land use changed from agricultural to residential
by the competent authority under the West Bengal
G
Land Reform Act in favour of the Party No. 2, but are
now claiming that the Deed· of Sale was in reality a
document or security?

e) Whether or not the keys of the god own at contract site
which the Party No.I is illegally holding in it's custody H

-i
402 SUPREME COURT REPORTS (2003] SUPP. 4 S.C.R.
A be given back to Party No.2 to utilize the stores
contained therein before commencing the work.

f) Any other relief in the circumstances of the case may
also be passed/awarded."

B The learned arbitrator, however, was not inclined to accede to the said
request. Thereafter, an application was filed by A WHO before the learned
Arbitrator to the effect that it may be allowed to commence and complete
uninterrupted construction work as well as development of the housing
project at the risk of Sumangal. Sumangal filed· a reply to the said
C application.

An order was passed on the said application of A WHO by the learned
arbitrator on 1.11.1997 subject to the following conditions:

D (a) The question as to whether such an order can be passed at the risk
of Sumangal can be raised only at the time of final award.

(b) The development work may be confined to 14.17 acres of land
which was the subjei;t matter of sale and which it Wa5 stated had been
demarcated at the site.
E
(c) All those works could be subject to the ultimate decision of the
case.

(d) A WHO shall not give final possession of any of those flats or
part of the land to any one including the person described as allottees.
F
( e) The said order was without prejudice to any of the contentions
which may be raised by the parties.

(f) Constructions and development work would b~ of the same kind
G and specifications as were provided in the contract at competitive rates
through an established contractor after inviting tenders therefor.

It was further stated therein :

"It is agreed by both the parties that the contract produce for the
H construction of 16 towers and such 16 towers already exist on the ·
M.D., ARMY WELFARE HOUSING ORGANISATION v. SUMANGAL SERViCES P LTD. [SINHA, J.J 403

site. If any new tower is constructed by party No. 2 or its A
contractor, party No. I would not be liable for it."

A review application was filed before the Arbitrator by Sumangal
wherein several questions including the power of arbitrator to pass
an interim order of injunction were raised but the same was rejected B
stating :

"It has been vehemently argued that the Arbitrator has no power
to make the kind of interlocutory order made on November I,
1997. In this respect learned counsel for party no. I has also
emphasized that effected the once the prayer for interim award has C
not been granted, the order dated November I, 1997 which was
in the nature of an interim award was unwarranted. I find myself
unable to accede to this contention. So far as that order is
concerned, it was made expressly clear that the said order would
be without prejudice to any of the contentions which might be D
raised by the parties. It was also added that all the works which
party no.2 is being allowed to do would be subject to the ultimate
decision of the case, the order thus makes it clear that there was
no finality attached to that order and that it would be subjected
to the ultimate decision of the case. As such the order cannot be
deemed to be an interim award. E
Coming to the other contention that the Arbitrator has no power
to make an interlocutory order dated November l, 1997. I find
that the work of measurements has been smoothly carried out and
the results of measurements have been accepted by both the F
parties. As the proceedings of arbitratio.n would take considerable
time before the final award is giveh, to«~xpedite the execution of
the remaining unfinished work, party no.2 was allowed to
commence and complete the unfinished work which was the
subject matter of the contract between the parties. In my opir.ion
the order made on November l, 1997 was in the interest of justice G
and not to let the remaining work reaming unfinished till the time
of the final award. As the order was made ex debito justitiae it
call for no review or modification. In any case, it has been made
clear that this order would be subject to the final decision of the
case and without prejudice to any of the rights of the parties. H
404 SUPREME COURT REPORTS (2003] SUPP. 4 S.C.R.

A Another point made in the application of party no. I is that it was
working as stated in the order ofNovember I, 1997 that 16 blocks/
buildings existed at site have gone through the order dated
November l, 1997, and no where it is stated therein that 16 blocks/
buildings exist at the site.
B
I, therefore, find no ground to review/modify the order dated
November I, 1997. The application accordingly stands disposed
of'.

C The learned Arbitrator, therefore, did not determine the question as
to whether he had jurisdiction to pass an interim order or not.

No Award was not passed by the Arbitrator for a long time although
several extensions had been granted. On or about 26.2.2000 an application
for revocation of the authority of the arbitrator was filed by Sumangal and
D by an ord~r dated 11.5.2000 this Court constituted a board of three
arbitrators instead and place of the sole arbitrator..

The award was filed before this Court on 29.4.2002 by the learned
arbitrators whereagainst Sumangal filed an application on' or about 8th
E July, 2002 under Sections 30 and 33 of the Act.

AWARD:

Before the arbitrators both the parties filed their respective claims.
Claim No. 1 of AWHO related to the title, ownership and po~session of
F 14.17 acres of land. Claim No. 2 of A WHO relat~d to cost of completion
of balance work at the risk and expense of Suman gal. Both the claims were
allowed by the learned· arbitrators.

Claim No. 3 related to compensation for delay in performance of the
G contract by Sumangal, whereas claim No. 4 related to damages for non-
completion of work resulting in loss of rentals to allottees of A WHO.
Claim No. 5 related to reimbursement of ·payments made by A WHO
towards the premium on Sumangal's all risk insurance policy. Claim No.
6 related to damages for delay in transfer of land: All these claims were
H disallowed.
M.D., ARMY WELFARE HOUSING ORGANISATION 1·. SUMANGALSERVICES P. LTD. [SINHA, J.] 405

The claim on interest contained in claim No. 7 and claim of costs of A
arbitration in claim No. 8 were also allowed.

The claim of Sumangal relating to title of 14.17 acres of land. and
claim for an amount of Rs. 11,40,85,000/-, being an alternative claim was
disallowed. B

The learned arbitrators in making the award formulated as many as
29 issues which have been answered in the following terms:

"Issue No. I
c
Since we have found that SSPL had failed to discharge their
obligation in terms of the Agreement dated August 27, 1993, the
issue is decided against SSPL and in favour of AWHO.

Issue No. 2
D

Since we have found that AWHO were entitled to terminate
the said contract and to get the balance work executed at the
expense and risk of SSPL, the issue is decided in favour of AWHO
and against SSPL. E

Issue No. 3

Since we have found that A WHO are the full owner and in
possession of 14.17 acres of land in dispute and the property built F
thereon, the issue is decided in favour of A WHO and against
SSPL.

Issues Nos. 4 & 5
G
Since we are of the view that the sale deeds executed in
favour of A WHO cannot be regarded as documents by way of
security for the advance taken by SSPL from A WHO and that no
charge was created on the Ifilids in dispute, the issues are decided
in favour of A WHO and against SSPL. H
406 SUPREME COURT REPORTS [2003] SUPP. 4 S.C.R.

A Issue No. 6

Since we have held that the claims made by A WHO fall
within the ambit of the scope ofreference as laid down in the order
of the Hon 'hie Supreme Court, the issue is decided in favour of
AWHO and against SSPL.
B
Issues Nos. 7 & 8

No submission was made on behalf ofSSPL with regard to
these issues. The issues are decided against SSPL and in favour
C of AWHO.

Issues Nos. 9 & JO

Since we have found that as per the agreement between
A WHO and DMA, the Architect was to provide drawings and
D specifications of the proposed flats and external services and it
was the duty of SSPL to take follow up action in the matter of
obtaining sanction from the statutory bodies and it was not the
responsibility of the Architect to obtain sanction.from the statutory
bodies including the Municipality, the issues are decided against
E SSPL and in favour of AWHO.

Issues Nos. I I & 12

Since we have found that the Agreement dated August 27,
1993 and the preceding Letter of Intent dated January 4, 1991 and
F the Draft Agreement dated December 26, 1991 cannot be said to
have become impossible of perfonnance and cannot be regarded
to have become void on the ground of frustration, the issues are
decided against SSPL and in favour of A WHO.

G Issue No. 13

It has been found that the construction in respect of the units
in Phase I was started after obtaining the sanction for the plans
from the Gram Panchayat and though there were some deviations
H and alterations from the .sanctioned plan but the same could be
M.D., ARMY WELFARE HOUSING ORGANISATION v. SUMANGAL SERVICES P. LTD. [SINHA, J.) 407
regularized. As regards the units which were to be constructed A
in Phase II it has been found that the said construction was made
without obtaining the sanction for the plans from the competent
authority but the plans had been submitted for approval during the
course of construction and the said plans were subsequently
approved on April 23, 1997 and the plans for the whole project B
were also revalidated. This issue is dec!ded accordingly.

Issue No. 14

We have found that the deviations and the alterations in
respect of construction in Phase I were not very material in nature C
and could be regularized and were in fact regularized when the
revised plans were sanctioned and revalidated by the Municipality.
This issue is decided accordingly.

Issue No. 15 D
We have found that payments for the RARs for the
construction work upto August 1992 were not made since SSPL
failed to abide by their commitment to transfer the balance land
by February 15, 1992 and subsequently on the transfer of the
balance land in August 1993 and after execution of the Agreement E
,· dated August 27, 1993, the payments for the said work were made.
This issue is decided accordingly.

Issue No. 16
F
We have found that SSPL never raised any objection regarding
construction in respect of works in Phase II on the ground that
there were no sanctioned plans for the same and SSPL obtained
benefit in the matter of release of payments on the basis of the
order placed for such construction. This issue is decided against G
SSPL and in favour of A WHO.

Issue No. 17

It has been found that the Municipality stopped construction
work in Phase II but subsequently the plans for Phase II were H
408 SUPREME COURT REPORTS [2003] SUPP. 4 S.C.R.

A approved by the Municipality on April 23, 1997. The issue is
decided accordingly.

Issue No. 18

We have found that A WHO issued the working drawings for
B the project to SSPL and the delay in issuing some of the drawings
was not very material. The issue is decided accordingly.

Issue No. 19

c No submissions were made by SSPL in support of this issue.
The issue is accordingly decided against SSPL and in favour of
AWHO.

Issues Nos. 20 & 22

D The alterations in the lay out of the built up area of Phase
I buildings were made by A WHO in the full knowledge of SSPL
and the said alterations were not material because they were
subsequ~ntly revalidated by the Municipality in sanctiQning the
revised plans. The issues are accordingly decided against SSPL
and in favour of AWHO.
E
Issue No. 21

There was no change in the height of the buildings in respect
of Phase I inasmuch as the height of the blocks in Phase I were
F not above the heights as pe~ the sanctioned plans. The heights
of the blocks constructed in Phase II for which plans had not been
approved were in excess of the height limitations prescribed in the
buildings regulations. No Objection Certificate has been granted
by the Airport Authorities of India Ltd. and it was open to the
State Government to relax ttie height limitation. The issue is
G accordingly decided against SSPL and in favour of A WHO.

Issue .No. 23

We have found that the title to the lands transferred in favour
H of AWHO under the various sale ·deeds passed in favour of
M.D., ARMY WELFARE HOUSING ORGANISATION"· SUMANGAL SERVICES P. LTD. [SINHA, J.) 409
AWHO independent of the turnkey project and failure of the A
turnkey project did not have any bearing on the transfer of title.
The issue is accordingly decided in favour of AWHO and against
SSPL.

Issue No. 24
B
No submissions were made by SSPL with regard to this issue
and the issue is decided against SSPL.

Issue No. 25

We have found that AWHO are entitled to compensation C
under claim no. 2 towards cost of completion of the balance work
at the risk and expense of SSPL since SSPL failed to perform their
part of the obligation under the contract. The issue is decided in
favour of AWHO and against SSPL.
D
Issue No. 26

We have found that the title, ownership and possession of
14.17 acres of land which was transferred in favour of A WHO .
under the various sale deeds vests exclusively with A WHO and
Claim No. I made by A WHO has, therefore, been allowed. The E
issue is decided in favour of A WHO accordingly.

Issue No. 27

We have found that SSPL are not entitled to reversion of F
land. The issue is accordingly decided against SSPL.

Issue No. 28

We have found that SSPL are not entitled to recover any
amount from A WHO. The issue is, therefore, decided against G
SSPL.

Issue No. 29

Since we have found Issue No.28 against SSPL and found
that SSPL are not entitled to recover any amount from A WHO, H
410 SUPREME COURT REPORTS [2003] SUPP. 4 S.C.R.

A therefore, the question of their entitlement to recover interest from
A WHO does not arise. The said issue is decided against SSPL."

In tenns of the aforementioned findings, the learned arbitrators
awarded:

B "We make the Award in the following terms:

I. Th~ claim of SSPL that land admeasuring 14.17 acres and
structures thereon comprising of the 14 Blocks/buildings or
any other construction that maybe done by AWHO during
c the pendency of the arbitration proceedings, vests and is
owned fully, exclusively and absolutely by SSPL is
disallowed.

2. The alternative claim of SSPL for an amount of
Rs.l l,40;85-,000.00 is disallowed.
D
3. Claim No.I of AWHO in respect of title, ownership and
possession of land admeasuring 14.17 acres of land located
·at Mauza Tighonia and Koikhali, VIP Road, 24 Parganas
(North), Calcutta transferred in their favour by various
E Vendors/Land Owners is allowed.

4. Claim No. 2 of A WHO for cost of completion of balance
work at the risk and expenses of SSPL is allowed to the
extent of Rs. 6,97,00,000.00.
F
5. Claim No.3 of A WHO is disallowed.

6. Claim No.4 of A WHO is di~Uowed,

7. Claim ~o.5 of A WHO is disallowed ..
G
8. Claim No.6 of AWHO Is ~isaJiowed.

9. Claim No.7 of A WHO is allowed to the extent that interest
would be payable @ 12 per cent per annum on the amount
H of Rs.6,97,00,000.00 awarded under Claim No.2 .. Interest
M.D., ARMY WELFARE HOUSING ORGANISATION v. SUMANGAL SERVICES P. LTD. [SINHA, J.] 411
shall be payable from the date of the award till payment is A
made.

IO. Claim No.8 of AWHO regarding costs is allowed to the·
extent that SSPL will reimburse AWHO towards half share
of the arbitrators' fee, administrative expenses and the other B
incidental expenses for the conduct of the arbitral proceedings.
Each party shall bear the costs and expenses incurred by it
for prosecuting the arbitral proceedings."

SUBMISSIONS:
c
Mr. K.N. Bhat, the learned senior counsel appearing on behalf of
Sumangal would raise the following contentions:

(i) A bare perusal of the award would show that the learned
arbitrators ignored the terms of the agreement. D
(ii) In terms of Clause 130 of the general conditions of contract,
AWHO could maintain a claim as regard excess amount required for
completion of the unfinished work only if the work was completed before
a claim was raised or an e~timate of the cost of completion is certified by E
the named architect. Despite the fact that none of the aforementioned
conditions were fulfilled, the award wa$ made allegedly on the ground that
Clause 130 will have no application while the completion was permitted
by an order passed in a judicial/ arbitral proceedings. Mr. Bhat would
contend that the arbitrators being creature of the agreement were required F
to act within the fourcomers thereof and cannot by reason of an interim
order override t}ie basis of the agreement.

(iii) Clause 130 of the general conditions of contract would come
iato play only when the contract is validly terminated in terms of cl~use
129. The termination of contract by A WHO was on the ground that G
Sumangal did not resume work in relation whereto the learned Arbitrators
failed to consider that the question of resumption of work by it did not arise
as the Municipality had banned further construction activities. Furthermore,
the Arbitrators proceeded also on a wrong premise that Sumangal failed
to obtain sanction of Building Plans from the Munidpal Authorities. H
412 SUPREME COURT REPORTS (2003] SUPP. 4 S.C.R.
A (iv) As the plans were not sanctioned at the relevant time by statutory
authorities; Section 56 of the Contract Act was attracted having regard to
the fact that it was commercially incapable of being performed upon
passing of the ban order.

B (v) An award ignoring material and relevant documents would be
rendered illegal and. bad in law. As in the case the arbitrators ignored the
letter dated 8th December, 1994 of A WHO for regularization of deviations
and thus thereby they must be deemed to have admitted that deviations
were done by them deliberately to suit their own convenience, and as such
the Arbitrators must be held to have misconducted themselves and the
C proceeding.
,
(vi) Furthermore, being a reasoned award, wrong application of law
would vitiate the award.

D (vii) The award of the arbitrators is vitiated in law as an agreement
purported to have been entered into by and between AWHO and the
architect was enforced against Sumangal although it was not a party
thereto.

(viii) The finding of the arbitrator that the frustration was a self-
E induced one is not based on any pleadings or materials on record. In any
event collusion between Sumangal and the municipal authorities was
neither pleaded nor proved.

(ix) In any view of the matter the learned arbitrator committed a lega1
F misconduct insofar as they applied a wrong principle of law as regard
determination of quantum of damages.

In support of the aforementioned contentions, reliance has been
placed by Mr. Bhat on Stef!/ Authority of India Ltd. v. J.C. Budharaja,
Government and Mining Contractor, [l,999] 8 SCC 122, Shyama Charan
G Agarwala & Sons v. Union of India, (2002] 6 SCC 201, McGregor on
Damages, 16th edition, pages 1142 and 1143 and Mertens v. Home
Freeholds Co. Ltd and Others [1921] All E.R. Rep. 372.

Mr. Arvind Kumar Tiwari, the learned counsel.appearing on behalf
H of the appellant, on the other hand, would submit that as the learned
M.D., ARMY WELFARE HOUSING ORGANISATION v. SUMANGAL SERVICES P. LTD. [SINHA, J.] 413

arbitrator passed an interim order with the consent of the parties, Sumangal A
at a later stage cannot be pennitted to take a different stand. In view bf
the interim order passed by one of the learned arbitrators, a notice inviting
tender was issued whereafter contract was awarded to a third party and,
thus, the bid made pursuant thereto could validly be made the basis of
detennination of quantum of damages. The plea of frustration of contract B
raised by Sumangal has rightly been rejected by the learned arbitrators as
the same was a self-induced one having regard to the fact that it itself got
the ban orders issued by the municipal authorities. In any event Sumangal
in tenns of the contract being liable for obtaining sanction of the building
plans, must be held to have failed to perfonn its part of contract and C
consequentially has rightly been held liable for damages.

FINDINGS:

INTERIM ORDER PASSED BY ONE OF THE ARBITRATORS:

A bare perusal of the order of the learned Arbitrator dated lst D
November, 1997 would clearly show that interim award was prayed for by
the parties which would have granted substantial reliefs sought for by them
in relation to the title in respect of 14.17 acres of land. It is admitted that
the parties cooperated with each other in the matter of measurement of
completed and incompleted works in terms of the Arbitrator's order dated E
12th May, 1997 passed in the arbitration proceedings, the compliance
whereof was recorded in minute of order dated 19th August, 1997.

The learned arbitrator admittedly was not inclined to pass an interim
award on the requests of the parties; whereafter only on or about 23rd p
October, 1997 an application was filed by A WHO stating :

"That the development of the housing project is carried out by
Party No.2 for it's allottees on no profit no ioss basis which is self
financed by the allottees of Party No.2. Due to breach ·of contract
committed by the Party No. I, allottees of Party No.2 have been G
denied shelter as well as their life time investments and are
suffering for the want of shelters for themselves and their families.
Substantial time has already been lost due to non-performance of
Party No.1 and any delay in commencement of the coqstruction
activity will cause immense financial misery and loss of further H
414 SUPREME COURT REPORTS [2003] SUPP. 4 S.C.R. ·

A time (which cannot be given bac.k by any one) to the allottees. In
order to obviate the sufferings of hundreds of allottees who have
invested their hard earned money. PartY No.2 therefore prays to
the Hon'ble Arbitrator to grant Party No.2 following relief:"

The prayer therein is as under:
.B
"In the premise, it is ·most respectfully prayed that in order to
enabie Party No.2 to commence early and unjustified completion
ofunfinished work as well as development of the housing project
at the risk of the Party No. I permission and liberty may be granted
c · to Party No.2fapplicant to forthwith take such steps to commence
and complete the unfinished works including all such development
work on 14.17 acres of.land owned by Party No.2 at VIP Road,
Calcutta as may be fit and appropriate for the normal functioning
of the housing project and peaceful and safe habitation of the
D allottees of the Party No.2/applicant.

Party No.I, it's Directors, Officers, employees, agents and/or
attorneys be also directed to hand over the keys of the stores,
offices, and material lying at contract site which keys the Party
E No.1 is illegally holding in it's custody. The materials lying at
site have already been paid for by Party No:2.

Party No. I, it's directors, employees, agents and/or attorneys be
directed not to interfere in any manner in the development and
construction of the unfinished housing project by Party No.2
F through such agencies as Party No.2 may deem fit and proper."
•
Sumangal filed a .detailed reply thereto.

Sumangal further stated that the AWHO was not the owner of the
G property and the real object for such an application was to dispossess
Sumangal.

It was further pointed out that such undertaking of the contract job
by a third party would frustrate the present arbitration agreement as a result
H whereof further disputes may arise. It was contended·:
M.D., ARMY WELFARE HOUSING ORGANISATION v. SUMANGAL SERVICES P. LTD. [SINHA, 1.)- 4 I5
"IO. The adjudication of this application without a full-fledged A
examination of the issues which have been raised by the parties
in these proceedings would renderthe entire arbitration proceedings
infructuous. It is further stated that after such directions as prayed
for are given, the Party No. I will be deprived of the fruits of any
relief which it might obtain on final resolution of the disputes B
involved in this arbitration proceedings.

I l. The allegations contained in the petition are denied (except
those which are admitted in records of proceedings). The purported
cancellation or termination is wrongful. The question of completing
the balance work/construction at the risk and cost of Party No. I C
does not arise. The basis of the development of the housing
project between Party No.2 and its allottees are not known and
are neither admitted. It is denied that Party No. I has committed
any breach. The allegation relating to shelter and/or lifetime
investments or suffering are not admitted and in any event, cannot D
override legal rights. It is denied that time has been lost due to
alleged non-performance of Party No. I. Since the Party No. I is
willing to return all moneys which are due to the Party No.2, the
question of suffering financial misery of loss cannot arise and the
Party No.2 cannot put the blame on the Party No. I in these facts E
and circumstances.

I2. The construction work commenced on I4 blocks only out of
a total ordered I6 blocks over an area of 6.36 acres approximately.
The said total area of 6.36 acres and the construction thereon
belongs to the Party No. I and the Party No. I is entitled to deal F
with the same. The area of 7.8 I acres over which no construction
have been made also belongs to the Party No. I and the Party No.1
is entitled to deal with the same."

It is, therefore, not correct to contend that the said order was passed G
on consent of the parties. For all intent and purport, Sumangal could not
have consented to grant of such a prayer which would virtually put a final
seal over the disputes. We have hereto- before quoted the purported order
dated 1st September, I 997 which ex facie demonstrate that the arbitrator
assumed jurisdiction to pass the said interim order at the behest of AWHO. H
416 SUPREME COURT REPORTS [2003] SUPP. 4 S.C.R.
A Furthermore, as noticed hereinbefore, Sumangal filed a review application
which was also dismissed in the manner noticed hereinbefore. The saii:i
interim order was, thus, not passed with consent of parties. If the learned
arbitrator has no jurisdiction to pass an interim order, even by consent no
such jurisdiction could be conferred. (See The United Commercial Bank
B Ltd v. Their Workmen, AIR (1951) SC 230 and Hakam Singh v. Mis
Gammon (India) Ltd, AIR (1971) SC 740).

In Hiscox v. Outhwaite, [1991] 2 Lloyd's Law Reports l,.it is stated:

"No act of the parties can create in the courts a jurisdiction which
c Parliament has said shall vest, not in the courts, but exclusively
in some other body. Nor again can a party submit to, so as to
make effective, a jurisdiction which does not exist: which is
perhaps another way of saying the same thing. The argument we
are here rejecting seems to be based on a confusion between two
D distinct kinds of jurisdiction: The Supreme Court may, by statute,
lack jurisdiction' to deal with a particular matter-in this case
matters .including superannuation claims under s.8-but it has
jurisdiction to decide whether or not it has jurisdiction to deal with
such matters. By entering an unconditional appearance, a litigant
E submits to the second of these jurisdictions (which exists), but not
to the first (which does not)."

An arbitrator in a situation of this nature had no jurisdiction to pass
the interim order under the Arbitration Act, 1940 in absence of any specific
F agreement in relation thereto. The learned arbitrator by an interim order
, the parties to a situation which would travel beyond
could not have placed
the subject of disputes and differences referred to the arbitration. As no
claim and counter-claim had been filed before the arbitrator, the arbitrator
was not even aware of the nature of claims of the parties. He neither found
any prima facie case nor balance of convenience for passing the said
G interim order. Furthermore, an arbitrator is bound by the terms of
reference.

An arbitral tribunal is not a court of law. Its orders are not judicial
orders. Its functions are not judicial functions. It cannot exercise its power
H ·ex debito justitiae. The jurisdiction of the arbitrator being confined to the
M.D., ARMY WELFARE HOUSING ORGANfSATJON v_ SUMANGAL SERVICES P. LTD. [SINHA,].) 417

fourcomers of the agreement, he can only pass such an order which may A
be subject matter of reference.

In Morgan Stanley Mutual Fund v. Kartick Das, [1994] 4 SCC 225
the jurisdiction of the Consumer Disputes Redress al Forum to pass an order
of injunction came up for consideration. This court having regard to the B
fact situation obtaining therein formulated the following questions:

"(l) Whether the prospective investor could be a 'consumer'
within the meaning of Consumer Protection Act, 1986 ?

(2) Whether the appellant company 'trades' in shares ? c
(3) Does the Consumer Disputes Redressal Forum have
jurisdiction in matters of this kind?

(4) What are the guiding principles in relating to the grant D
of an ad interim injunction in such areas of the functioning of the
capital market and public issues of the corporate sectors arid
whether certain 'venue restriction clauses' would require to be
evolved judicially as has been done in cases such as State of
W. B. v. Swapan Kumar Guha and Sanchaita Investments, [1982] E
1 sec 561 : [1982] sec Cri 283?

(5) What is the scope of Section 14 of the Act?"

This Court held that a prospective investor like the respondent therein F
is not a consumer. The question of the appellant-company trading in shares
does not arise and in that_ view of the matter the Consumer Disputes
Redressal Forum has no jurisdiction whatsoever to pass an o~der of interim
injunction.

Having regard to Section 14 of the Consumer Protection Act, it was G
held:

''44. A careful reading of the above discloses that there is no
power under the Act to grant any interim relief of (sic or) even
an ad interim relief. Only a final relief could be granted. If the H
418 SUPREME COURT REPORTS [2003] SUPP. 4 S.C.R.

A jurisdiction of the Forum to grant relief is confined to the four
clauses mentioned under Section 14, it passes our comprehension
as to how an interim injunction could ever be granted disregarding
even the balance of convenience."
A-

B In absence of an agreement to the contrary, in terms of the provisions
of Arbitration Act, 1940 an arbitrator can pass only an interim award or
a final award. Such awards are enforceable in law. The award of an
arbitrator whether interim or final are capable of being niade a rule of court,
decree prepared and drawn up in terms thereof and put to execution.

c It is well-settled that for the purpose of obtaining an interim order a
party to the arbitration proceeding during pendency of an arbitral proceeding
can only approach a court of law in terms of Section 41 (b) of the
Arbitration Act, 1940 and not otherwise. The said provision reads thus:

D "41. Procedure and powers of Court.- Subject to the provisions
of this Act of rules made thereunder :

xxx xxx xxx

(b) the Court shall have, for the purpose of, and in relation to
E arbitration proceedings, the same power of making orders in
respect of any of the matters set out in the Secohd Schedule as
it has for the purpose of, and in relation to any proceedings before
the Court:

F Provided that nothing in Cl.(b) shall be taken to prejudice any
power which may be vested in an arbitrator or umpire for making
orders with respect to any of such maj:ters."

In the instant case the proviso has no application as the Arbitrator was
G not vested with such power.

Jurisdiction of courts in terms of Section 4 I of the Act is enumerated
in the Second schedule, rules l and 4 whereof are as under:

"I. The preservation, interim custody or sale of any goods which .
H are the subject-matter of the reference.
M.D., ARMY WELFARE HOUSING ORGANISATION>·. SUMANGAL SERVICES P LTD. [SINHA, 1.] 419

4. Interim injunctions or the appointment of a receiver." A
Even the Court's jurisdiction under Section 4l(b) of the Act is limited
as it is confined to "for the purpose of and in relation to arbitration
proceedings".

Courts, thus, have also no power to grant injunction ex debito B
justitiae.

See Union of India v. Raman Iron Foundry, [l 974] 2 SCC 231 and
Mis HM Kamal_uddinAnsariandCo. v. UnionofindiaandOthers, [1983]
4 sec 417. C
We may observe that even provision for stay in a suit under section
10 C.P.C. is not applicable in relation to an arbitration proceeding.

In Indrajit Sinha v. B.L. Rathi, AIR (1984) Cal 281, it is stated:
D
"When Section 32, Arbitration Act, completely prohibits a Civil
Court from deciding the existence and validity of the arbitration
agreement and Section 41, Arbitration Act lays down that the
Civil Procedure Code will apply subject to the provisions and
rules of the Arbitration Act, 1940, then Section IO, C.P.C., cannot E
apply on the facts and circumstances of this case and the question
of its applicability cannot arise.

So far as Court's inherent jurisdiction under Section 151, C.P.C.
is concerned, I do not think that on the facts and circumstances F
of this case inherent jurisdiction can be exercised to stay the
pending application in view of the fact that the City Civil Court
is incompetent to decide the issues pending before me in the
application under Sec. 33 of the Act."

In Debendra Nath Singha and Others v. Dwijendra Nath Singha and G
Others, reported in AIR (1970) Cal 255, the law is stated in the following
terms:

"On a proper construction of Section 41 of the Arbitration Act and
of Section 41 (b) in particular, I am of the opinion, that the Court H
420 SUPREME COURT REPORTS [2003] SUPP. 4 S.C.R.

A has the power and jurisdiction to appoint a receiver or to make
any order of interim injunction or to make orders in respect of
other matters set out in the Second Schedule in appropriate cases
for the purpose of, and in relation to arbitration proceedings; but
this power and jurisdiction of the Court cannot be exercised, if
the exercise of any such power would prejudice any power which
B
might be vested _in an Arbitrator or Umpire for making orders with
respect to any of such matters. I am further of the opinion that
in view of the provisions contained in Section 41 of the Arbitration
Act, the power and jurisdiction of the Court to appoint a receiver
or to make any order of interim injunction or any order in respect
c of the other matters set out in the Second Schedule are now
governed, controlled and regulated by the said section, and apart
from the power and jurisdiction conferred by the said section, the
Court has no power andjurisdiction independently ofthe provisions
contained in the said Section 4 I to appoint a receiver, to make
D any order ofinterim injunction or any order in respect ofthe other
matters set out in the Second Schedule."

It is useful to notice that such a power has been expressly conferred
on the arbitrator in terms of Section 17 of foe Arbitration and Conciliation
E Act, 1996 which is as under:

"17. Interim measures ordered by arbitral tribunal.--(1) Unless
otherwise agreed by the parties, the arbitral tribunal may, at the
request of a party, order a party to take any interim measure of
protection as the arbitra~ tribunal may consider necessary in
F respect of the subject-matter of the dispute.

(2) The arbitral tribunal may require a party to provide
appropriate security in connection with a measure ordered under
sub-section (I)."
G
A bare perusal of the aforementioned provisions would clearly show
that even under Section 17 of the 1996 Act the power of the arbitrator is
a limited one. It cannot issue any -direction which would go beyond the
reference or the arbitration agreement. Furthermore, an award of the
· H arbitrator under the 1996 Act is not required to be made a rule of court;
M.D., ARMY WELFARE HOUSING ORGANISATION v. SUMANGAL SERVICES P. LTD. [SINHA, J.) 421
the same is enforceable on its own force. Even under Section 17 of 1996 A
Act, an interim order must relate to the protection of subject matter of
dispute and the order may be addressed only to a party to the arbitration.
·It cannot be addressed to other parties. Even under Section 17 of the 1996
Act, no power is conferred upon the Arbitral Tribunal to enforce its order
nor does it provide for judicial enforcement thereof. The said interim order B
of the learned Arbitrator, therefore, being coram non judice was wholly
without jurisdiction and, thus, a nullity. (See Kiran Singh and Others v.
Chaman Paswan and Others, AIR (1954) SC 340 (6), Srimathi Kaushalya
Devi & Others v. Shri KL. Bansal, (1969] I SCC 59, Union of India v.
Tarachand Gupta and Bros:, (1971] 1 SCC 486 at 496, Sushi! Kumar
Mehta v. Gobind Ram Bohra (Dead) through His Lrs., (1990] I SCC 193 C
and Smt. Kanak & Anr. v. UP. Avas Evam Vikas Parishad & Ors., (2003]
7 SCALE 157.

WHETHER THE AWARD IS VITIATED AS GENERAL CONDITIONS OF
CONTRACT HAD N,OT BEEN COMPLIED WITH? D
Before the learned arbitrators a question was raised as regard
applicability of Clauses 129(e) and 130 of the general conditions of
contract which read as follows:

"DETERMINATION E
129. The Organization may, without prejudice to any other right
or remedy which shall have accrued or shall accrue thereafter to
the Organization, cancel the contract in part or whole in any of
the following cases :
F
If Contractor :-

(a) xxx xxx

(b) xxx xxx
G
(c) xxx xxx

(d) xxx xxx

(e) In the op1mon of the Organisation/Architect at any time
whether before or after the date or extended date for completion H
422 SUPREME COURT REPORTS [2003] SUPP. 4 S.C.R.

A makes defaults in proceeding with the work with due diligence
and continues in that state after reasonable notice from the
Architect and or Organisation or ·

(f) xxx xxx
B (g) xxx xxx"

"130. Whenever the Organisation exercises his authority to cancel
the contract under clause 129, he may complete the works by any
means at the contractor's risk and expense provided always that
c in event of cost of completion after alternative arrangements have
been finalized by the Organisation ~.<> get the works completed or
estimated cost of completion (as certified by the Architect) and
approved by Organisation being less than the contract cost, the
advantage shall accrue to the Organisation. If the cost of
D completion after the alternative arrangements have been fianlised
by the Organisation to get the work completed or estimated cost
of completion (as certified by the Architect) and approved by the
Organisation exceeds the money due to the contractor under this
contract, the contractor shall either pay the excess amount assessed
r
by the Architect or the same shall be recovered from the contractor '
E
by other means."
I
The learned arbitrators refused to enter into the questions as to
whether the A WHO had made out a case for canceling the contract and '
\
invoking the risk and expense clause stating :
F
"We do not consider it necessary to go into the question whether
clause 130 requires certificate by the Architect in case completion
of the work is done at the risk and expense as urged by SSPL or
only where the alternative arrangements for completion of the
G work have not been fianlised and estimated cost of completion is
to be considered, as submitted by A WHO. In our opinion, clause
130 deals with a situation where AWHO completes or decides to
complete the work on their own and has no application where the
completion of the work is being permitted under an order passed
H in ajudiciaVarbitral proceeding. The certification by the Architect
M.D., ARMY WELFARE HOUSING ORGANISATION v. SUMANGAL SERVICES P. LTD. [SINHA, l] 4 23
is intended as a check against an arbitrary claim towards cost of A
completion. Such a check is not required when the completion
of the work is done in pursuance of an order in a judicial/arbitral
proceeding because the court/Arbitral Tribunal would examine
any such grievance of the other party. Si~ce in the present matter
AWHO were allowed to complete the work under the order of the B
Sole Arbitrator dated November 1, 1997 which contained
appropriate directions regarding the manner in which the contract
shall be given, the certification of the Architect contemplated by
clause 130 was not required."

The approach to the question by the learned arbitrators was wholly C
erroneous.

An award made pursuant to an order which has been passed without
jurisdiction necessarily must be held to be a nullity. Refusal on the part
of the learned arbitrator to consider the effect of clause 130 of the D
agreement would amount to a legal misconduct. Having regard to the facts
'
and circumstances of the case, as would be discussed in details hereinafter,
it was incumbent on the part of the Arbitrators to apply "due diligence"
clause contained in clause 129(e), more cautiously. They were further
required to consider as to whether "due diligence" clause be applied where E
the alleged violation of contract was only in relation to a small part thereof.
The learned arbitrators were, in law, bound to consider the relevant
provisions of the contract and in particular those which deal with the rights
and liabilities of the parties.

This aspect of the matter has not been taken into consideration by the F
learned arbitrators while making the award. Thus, they failed to take into
consideration a relevant fact.

In Steel Authority ofIndia Ltd (supra), this Court categorically stated
the law thus: G

"It was not open to the arbitrator to ignore the said conditions
which are binding on the contracting parties. By ignoring the
same, he has acted beyond the jurisdiction conferred upon him.
It is settled law that the arbitrator derives the authority from the H
424 SUPREME COURT REPORTS l2003] SUPP. 4 S.C.R.

A contract and if he acts in manifest disregard of the contract, the
award given by him would be an arhilrary one. This deliberate
departure from the contract amounts not only to manifest disregard
<?f the authority or misconduct on his part, but it may tantamount
to ma/a fide act1on."
B
It was stated"

"Further, the Arbitration Act does not give any power to the
arbitrator to act arbitrarily or capriciously. His existence depends
upon the agreement and his function is to act within the limits of
c the said agreement. In Continental Construction Co. Ltd. v. State
of MP., {1988} 3 SCC 82 this Court considered the clauses of
the contract which stipulated that the contractor had to complete
the work in spite of rise in the prices of materials and also rise
in labour charges at the rates stipulated in the contract.
D
It is to be reiterated that to find out whether the arbitrator
has travelled beyond his jurisdiction and acted beyond the
terms of the agreement between the parties, the agreement
· is required to be looked into. It is true that interpretation of
a particular condition in the agreement would be within the
E
jurisdiction of the arbitrator. However, in cases where there
is no question of interpretation of any term of the contract,
but of solely reading the same as it is and still the arbitrator
ignores it and awards the amount despite the prohibition in
the agreement, the award would be arbitrary, capricious and
F without jurisdiction. Whether the arbitrator has acted beyond
the terms of the contract or has travelled beyond his
jurisdiction would depend upon facts, which however would
be jurisdictional facts, and are required to be gone into by
the court. The arbitrator may have jurisdiction to entertain
G claim and yet he may not have jurisdiction to pass award for
particular items in view of the prohibition contained in the
contract and, in such cases, it would be a jurisdictional error.
For this limited purpose reference to the terms of the contract
is a must.
(Emphasis Supplied)
H
M.D., ARMY WELFARE HOUSING ORGANISATION v. SUMANGAL SERVICES P. LTD. [SINHA, J.] 425

In Shyama Charan Agarwala (supra) this Court referred to the said A
decision.

A Bench of this Court recently in Bharat Coking Coal Ltd. v. Mis.
Annapurna Construction, [2003] 7 SCALE 20 upon referring to a large
number of decisions stated:
B
"The question is as to whether the claim of the contractor is d'hors
the terms or not was a matter which fell for consideration before
the arbitrator. He W<!S bound to consider the same. The
jurisdiction of the arbitrator in such a matter must be held to be
confined to the four-comers of the contract. He could not have C
ignored an important clause in the agreement; although it may be
open to the arbitrator to arrive at a finding on the materials on
records that the claimant's claim for additional work was otherwise
justified."
D
As regard the duty· of the arbitrator to take into consideration the
relevant provisions contained in the agreement, it was observed:

"So far as these items are concerned, in our opinion, the
learned sole arbitrator should have taken into consideration the
relevant provisions contained in the agreement as also the E
correspondences passed between the parties. The question as to
whether the work could not be completed within the period of four
months or the extension was sought for on one condition or the
other was justifiable or not, which are relevant facts and were
required to be taken into consideration by the arbitrator. F
It is now well settled that the Arbitrator cannot act arbitrarily,
irrationally, capriciously or independent of the contract."

This Court further opined :
G
"There lies a clear distinction between an error within the
jurisdiction and error in excess of jurisdiction. Thus, the role of
the arbitrator is to arbitrate within the terms of the contract He
has no power apart from what the parties have given him under
the contract. If he has travelled beyond the contract, he would be H
426 SUPREME COURT REPORTS [2003] SUPP. 4 S.C.R.

A acting without jurisdiction, whereas if he has remained inside the
parameter of the contract, his award cannot be questioned on the
ground that it contains an error apparent on the face of the
records."

B Referring to paragraph 577 of Halsbury's Laws of England, 4th
edition, Commercial Arbitration by Mustill and Boyd at page 598, Alopi
Parshad & Sons Ltd v. Union of India, [1960] 2 SCR 793, Heyman v.
Darwin, [1942] 1 All ER 327, Associated Engineering v. Govt. of A.P.,
[1991] 4 SCC 93, State ofOrissa v. Dandasi Sahu, [1988] 4 SCC 12, K.P.
C Poulose v. State of Kera/a, [1975] 2 SCC 236, K. V. George v. The
Secretary to Government, Water and Power Dept, Tri-vendrum, [1989] 4
SCC 595, Satish Kumar v. Surinder Kumar, AIR (1970) SC 833, Union
of India v. Jain Associates and Another, [1994] 4 SCC 665, Sikkim Subba
Associates v. State of Sikkim, [2001] 5 SCC 629, Maharashtra State
Electricity Board v. Sterilite Industries (India) and Another, [200 l] 8 SCC
D 482, W.B. State Warehousing Corporation and Another v. Sushi! Kumar
Kayan and Others, [2002] 5 SCC 679, Bharat Coking Coal Ltd v. L.K.
Ahuja & Co., [2001] 4 SCC 86 and !spat Engineering & Foundry Works,
B.S. City, Bokaro v. Steel Authority ofIndia Ltd, B.S. City, Bokaro, [2001]
6 SCC 34 7 this Court observed:
E
"However, as noticed hereinbefore, this case stands on a
different footing, namely, that the arbitrator while passing the
award in relation to some items failed and/or neglected to take into
consideration the relevant clauses of the contract, nor did he take
into consideration the relevant materials for the purpose of
F arriving at a correct (sic finding of) fact. Such an order would
amount to misdirection in law."

Before the learned arbitrators a question arose as to whether certification
of architect as regard estimated cost of completion was a condition
G precedent for determination of the quantum of damages. Construction of
clauses 129 and 130 having regard to the fact situation obtaining herein
was mandatorily required to be considered by the learned arbitrators. They
could not have been simply ignored the same on the premise that an interim
order has been passed by the arbitrator. An arbitrator cannot be equated
H with a court of law. Whereas court has an inherent power; an arbitrator
M.D., ARMY WELFARE HOUSING ORGANISATION i: SUMANGAL SERVICES P. LTD. [SINHA, J] 427
does not have. It is a tribunal of limited jurisdiction. Its jurisdiction is A
circumscribed by the terms and reference. An arbitrator can act only within
the fourcomers of the agreement and not beyond thereto.

Yet again this Court in Union of India v. Mis. V Pundarikakshudu
... and Sons and Anr., [2003] 7 SCALE 323 dealt in details about an award B
which was found to be inconsistent, observing:

"The question as to whether one party or the other was responsible
for delay in causing completion of the contract job, thus, squarely
fell for consideration before the arbitrator. The arbitrator could
not have arrived at a finding that both committed breaches of the c
terms of contract which was ex facie unsustainable being wholly
inconsistent. Clause 54 of the contract could be invoked only
when the first respondent committed breach of the terms of the
contract. An action in terms thereof could be taken recourse to
in its entirety or not at all. If one part of the award is inconsistent D
with the other and furthermore if in determining the disputes
between the parties the arbitrator failed to take into consideration
the relevant facts or based his decision on irrelevant factors not
germane therefor; the arbitrator must be held to have committed
a legal misconduct." E
This Court made a distinction between an award passed within
jurisdiction and an award without jurisdiction stating:

"In this case the District Judge as also the High Court of Madras F
clearly held that the award cannot be sustained having regard to
the inherent inconsistency contained therein. The arbitrator, as has
been correctly held by the District Judge and the High Court,
committed a legal misconduct in arriving at an inconsistent
finding as regard breach of the contract on the part of one party
or the other. Once the arbitrator had granted damages to the first G
respondent which could be granted only on a finding that the
appellant had committed breach of the terms of contract and, thus,
was responsible therefor, any finding contrary thereto and

- inconsistent therewith while awarding any sum in favour of the
appellant would be wholly unsustainable being self H
428 SUPREME COURT REPORTS [2003] SUPP. 4 S.C.R.

A contradictory."

This Court cannot sit in appeal over the award of the Arbitrator but
can certainly interfere when the award suffers from non-application of
mind or when relevant fact is ignored or irrelevant fact not germane for
B deciding the dispute is taken into consideration.

Where an order has been passed without jurisdiction, the principles
of estoppel, waiver and acquiescence will have no application. There is
no estoppel against statute.

C The award, therefore, suffers from legal misconduct on the part of
the arbitrators.

ROLE OF AN ARCHITECT:

An architect plays an important role in execution of a building
D contract.

In Hudson's Building and Engineering Contracts at page 243, it is
stated:

E "An architect is a person who professes skill in the art of designing
buildings to rneet his client's need, in the organization of the
contractual arrangements for their construction, and in the
supervision of work and contractual administration until final
completion. So a major part of an architect's activities will be
concerned with the preparation of contracts, the obtaining and
F recommending for acceptance of estimates from builders, the
selection of specialist contractors, the inspection of work carried
out, the solution of difficulties encountered during the course of
erecting the building, condemning and dealing with defective
work, the issue of certificates under the terms of the contract and
G advising or ruling on disputes between the owner and the contractor.
Thus it will be seen that although it is the primary and vital
function of the architect to create new ideas of amenity and design
and to set down those ideas on a drawing-board, his duties extend

H
far into other fields of technical knowledge and business
management. On the other hand, while he will remain primarily -
M.D., ARMY WELFARE HOUSING ORGANISATION"· SUMANGAL SERVICES P. LTD. [SINHA, J.] 429
responsible to the owner for all matters of design, modem A
techniques of construction and specialized building products and
processes in fact demand expertise and skill for which he will
inevitably not always be personally qualified. The employment
of outside consultants or the less satisfactory (from the legal point
of view if the employer's interest is to be properly protected) B
device of delegating important design functions to specialist and
sub-contractors and suppliers, are therefore a frequent and inevitable
accompaniment of many major building projects but, as will be
seen, the architect is the "captain of the ship" and will be the
person to whom the owner will normally look if a design failure C
occurs, though in some, but not all, cases he -will adequately
discharge his own overall responsibility if he exercises due
professional care in referring matters outside his own expertise to
a consultant or specialist supplier or contractor, particularly if
these latter are engaged on behalf of the owner and not by the
architect himself." D

An Architect has, thus, various roles to play including independently
ruling on disputes between the owner and the contractor.

In R. v. Architects' Registration Tribunal, ex. P. Jaggar [1945] 2 All E
ER 131, it is stated: ·

"An architect is one who possesses, with due regard to aesthetic
as well as practical consideration, adequate skill and knowledge
to enable him (i) to originate, (ii) to design and plan, (iii) to F
arrange for and supervise the erection of such buildings or other
works calling for skill in design and planning as he might in the
course of his business reasonably be asked to carry out or in
respect of which he offers his services as a specialist."

An architect has a great role to play in making an estimate. He is G
expected to neither under-estimate nor can over-estimate value of the
works. He is bound by his conduct to the owner. He can be sued for his
negligence. For his misconduct, fees payable to him may be forfeited. He
may incur other liabilities not only under the contract but also under
statute. H
430 SUPREME COURT REPORTS [2003] SUPP. 4 S.C.R.
A Clause 130 of the contract casts a burden upon an architect to estimate
the damages when a risk and cost clause is invoked against the contractor.
It is possible to hold that the invocation of arbitration clause would be
subject to exercise of the jurisdiction by the architect as a demand has to
be made upon the contractor depending on such estimate made by the
B architect.

In a given case having regard to the reasonableness of the estimated
amount a contractor may pay the same or challenge the same either by an
arbitrator or by a court of law. A dispute may fall for adjudication by an
arbitrator or by a court of law only in the event a contractor refuses to
C accept such estimate.

In G. T Gajria 's Law Relating to Building and Engineering Contracts
in India, Fourth Edition at page 563, it is stated:

"In a contract, where there is certificate clause which is a
D condition precedent to payment and an arbitration clause of some
third person other than the architect, the builder cannot recover
without the certificate, and neither the arbitrator nor the court
(apart always from some misconduct of the architect), has
jurisdiction to consider any matters. In respect of which the
E certificate of the architect by the terms of the contract is made a
condition precedent."

An architect sometimes is appointed as an arbitrator and no payment
can be made except on his certificate and sometimes his position is that
p of a person whose certificate is held to be a condition precedent for
invoking the arbitration clause [See Bristol Corporation v. John Aird &
G,o., (1911-13) All E.R. Rep. 1076, Hickman and Co. v. Roberts, (1911-
13) All E.R. Rep. 1485 and South India Rly. Co. Ltd. v. S.M Bhashyam
Naidu, AIR (1935) Mad. 356.

G These decisions were considered by a Division Bench of the
Madhya Pradesh High Court in Heavy Electricals (India) Ltd. Bhopal v.
Pannalal Devchand Malviya, AIR (1973) MP 7.

In this view of the matter, we are of the opinion that the arbitrator
H could not have ignored the role of the architect in terms of clause 130 of
M.D., ARMY WELFARE HOUSING ORGANISATION v. SUMANGAL SERVICES P. LTD. [ S!NHA,J.] 43 J

the agreement only on the ground that A WHO had been permitted to raise A
construction, pursuant to or in furtherance of an interim order. Non-
consideration of the said clause in proper perspective by the Arbitrator
would amount to a legal misconduct on their part.

WHOSE DUTY IT WAS TO GET THE PLAN SANCTIONED:
B
Mis. Dulal Mukherjee & Associates had been the architect of
Sumangal. By reason of the agreement, however, he became an architect
of the employer. It was in the aforementioned situation, the following was
agreed between the parties and the same was recorded in the contract
agreement as under : C
"26. Company informed that they have negotiated with Mis Dulal
Mukherjee & Associates, 28-B, Shakespeare Sarani, Calcutta as
Architects for providing all Architectural Services for this tum
key project. · As per the understanding of the Company with the D
Architect, the Company has to pay to the Architect at the firm rate
of Rs. 6 per sq. ft. of built-up area excluding stilt area for the tum
key project. The stilt area is not to be taken into account while
calculating the amount of fee payable to the Architect. Architect
fee for all internal services, development of land, all external E
services and stilt area is deemed to be included in the rates of Rs.
6.00 per sq. ft. for built up area.

27. It is hereby mutually agreed and accepted that the services of
the Architect Mis Dulal Mukherjee & Associates, with immediate
effect shall be controlled by the Organisation and the payments F
due to the Architects will be made by the Organisation direct. For
making this payment an amount calculated at Rs.6.00 per sq. ft.
of built up area as per para 16(d) above shal! not be released by
the Organisation to the Company. The payments due to the
Architect for his architectural services shall be released by the G
Organisation in terms of separate agreement entered by the
Organisation with Mis Dulal Mukherjee & Associates, the
Architects. For the Architectural Services rendered by the
Architect upto the signing of this agreement, the Company is fully
responsible for any omissions and commissions. For all H
432 SUPREME COURT REPORTS [2003] SUPP. 4 S.C.R.
A. architectural services after the signing of this agreement, the
-'
Organisation will take the responsibility. The Company has paid
a sum of Rs. 5.00 lacs as adhoc advance to the Architect. This
amount shall be reimbursed by the Organisation to the Company
• and shall be adjusted against the total amount payable to the
B Architects by the Organisation."

Architectural services have not been defined in the agreement.
However, in a letter dated 12.6.1991 issued by A WHO to Mis. Dula!
Mukherjee & Associates it was mentioned that obtaining and getting
preparation of municipal drawings and obtaining sanctions was the architect's
C responsibility, stating:

"1. Please refer to your letter of 04 Jun ~I following the detailed
discussions on the project held on 03 &- 04 Jun 91 at this HQ.

D 2. As per understanding arrived at between A WHO and Mis.
Sumangal Services Pvt. Ltd. your employment and payment will
be controlled by A WHO. Please note that the rate of Rs. 6 per
sq. ft. as agreed between you and Mis. Sumangal Services Pvt.
Ltd. remain operative for Architectural services including·
supervision.
E
3. For the release of payment the amount of Rs. 5 lacs that is
already been paid by Mis. Sumangal Services Pvt. Ltd. to you as
on date will also be taken into account. Recoveries @ Rs. 6 per
sq. ft. will be considered as overall payment and will be recovered
F from Mis. Sumangal Services Pvt. Ltd. during execution of
project and paid to you on time to time through your bills.

4. It is also understood that pdor to issue of this letter following
works towards the project has already been undertaken by you.
G a) Preparation of conceptual plan.

b) Interaction with local sanctioning authorities.

c) Preparation of Municipal drawings and obtaining
H sanction.
M.D., ARMY WELFARE HOUSING ORGANISATION'" SUMANGAL SERVICES P. LTD. [SINHA, J.] 433
5. Based on the discussions between A WHO, Mis. Sumangal A
Services Pvt. Ltd. and you held in Delhi on 03 & 04 Jun 91 it is
decided that till Project Manager and staff has been posted, you
will monitor the progress on behalf of AWHO. You will also
forward a weekly report on the same.

6. The contract documents between you and AWHO is under B
drafting and would come in effect when ready.

7. Please acknowledge."

Despite the fact, by reason of the contract agreement the services of C
the architect were placed solely at the disposal of A WHO, it purported to
have entered into another agreement wherein Sumangal was not a party
on or about 24th February, 1992 wherein the responsibility of the architect
was defined as under:

"I 2. Architects Responsibilities. Except to the extent otherwise D
stipulated in this agreement, the responsibility and services of the
Architect shall include the responsibilities and obligations of
Architects as laid down by the Indian Institute of Architects
(except net liability and net schedule of payments) and will
P.articularly include the following obligations of the Architect :- E

(e) Preparation of drawings for submission to civil agencies
excluding obtaining sanctions which will be done by· builder/
contractor but should guide the builder/contractor but should
guide the builder/ contractor in obtaining the same."
F
Legally the said agreement was not binding on Sumangal as it was
not a party thereto.

Para 17 of the agreement provides for stages for release of payments
which reads thus:
G
"Stage Rate per sq. ft.
of plinth area

(aa) Sanction of plans by Zila Rs. 3.00
Parishad/Gram Panchayat H
434 SUPREME COURT REPORTS [2003] SUPP. 4 S;C.R.

A (ab) On registration of converted Rs. 33.00
land

(ac) De-watering land and clearance Rs. 2.00
of hyacinth

B (ad) Survey and soH test Rs. LOO
-~~.

(ae) Filling of earth to raise the Rs. 12.00
level to VIP Road

c (at) A-longwith the. progress of
building construction
Rs. 15;-00

Total . Rs. 66.00"

It does not appear to be the case of the A WHO that there is a
D contractual obligation on the part of Sumangal to get the plan sanctioned.
__ .,Jn any event, such a contractual obligation for the purpose ofattracting the
penal clauses must appear from the contract itselfand ·not from any other
document.

E The learned arbitrators in their award did not point out any specific
clause in terms whereof it was for Sumangal to get the plan sanctioned.
It merely relying or on the basis of a letter of Sumangal made it partially
liable therefor.
..
L

No document exists to.show that Sumangal had any legal liability to
F get the Municipal plan sanctioned.

Section 204 of the· West Bengal Municipal Act, 1993 prohibits·
erection of any building excepting with the previous sanction of the Board
of Councillors. In terms of Section 205 it is for the person who intends
G to erect or re-erect a building to submit an application with a building plan
in such form.

The provisions of the West Bengal Municipal Act, 1993 go to show
that it was for A WHO to submit an application for sanction of the building
plan together with requisite documents therefor. Ordinarily, the duty to
H pursue sanction of a plan is of the owner or its authorised representative.
M.O., ARMY WELFARE HOUSING ORGANISATION•. SUMANGAL SERViCES P. LTD. [SINHA, J.) 435
Such a job, it is common experience, is done by a qualified architect or A
the per-sons·having regard to their duties to prepare a building plan in tenns
ofthebuilding laws so as to enable them to make clarifications as and when
called upon-by the statutory authorities or in a given case make modifications
or alterations- thereof. The building plans prepared by the architects only
would be subject-matter of sanction by the municipal authorities. B
Furthermore, from the letter dated 8.12.1994 also it is evident that AWHO
prayed for alterations of the Master Plan and in the said letter it has clearly
been stated that Mis Dula! Mukherjee & Associates had been appointed
by them as consulting architect for the project. From a perusal of the letter
dated 21:7.1995 issued by the Rajarhat Gopalpur Municipality to Shri C
Manohar Singh, Project Manager, AWHO, it would appear that the author
thereof had discussed the matter with Shri Manohar Singh as also with
Mis Dula! Mukherjee & Associates and only with them, views were
exchanged as regard the norms of Municipal Rules and Regulations. From
the letter dated 27.5.1995 issued by AWHO to Sumangal, it appears that
Shri Manohar Singh, its Project Manager along with representatives of D
Mis Dulal Mukherjee & Associates had a detailed meeting with Chairman,
Rajarhat Gopalpur Municipality wherein it was agreed that the work need
not be stepped for which its plans had already been approved. The alleged
responsibility of Sumangal to get the plan sanctioned has been raised only
in July-August, .J 995, i.e. after the dispute between the parties started. E

. The municipality made AWHO responsible for coordination and
construction activities. The stop work notice was served· upon AWHO.
AWHO in its letter, as noticed hereinbefore, categorically stated that its
representative with the authorised representative of the architect saw the F
Chairman in 1995. AWHO and not Sumangal made other correspondences
with the Municipality. If Sumangal was assisting them in getting the plan
passed, it, in law, did not incur any liability·therefor. The findings of the
learned arbitrators, therefore, do not borne out from the records and are
perverse.
G
It will amount to giving of premium to illega!ity if it be held that a
party can ignore statutory injunction on the specious plea that the same is
minor in nature and maybe validated by the statutory authorities in future.
Neither any party can undertake any construction activity on the pains of
facing criminal charge nor any court of Jaw/Arbitral Tribunal encourage H
436 SUPREME COURT REPORTS (2003] SUPP.4 S.C.R.
. A ·such violation_ either directly or indirectly. · " '· '· ·
Furthennore, risk and cost clause cannot be invoked 01i failure of the
party to respond to its self-imposed obligation, Damages: are to be ·paid
for willful breach of the tenns or conditions of the contract. Such a breach
B must be in relation to an' express agreement entered into by and betwe.en
the parties. An alleged breach on th~ part'of a~builder cannot be founded
on a mere ipse dixit. The learned arbitrators
' .
ht tlieif- award
·, -
purported.to
have held : ·· · ·· ·
"
c " ... That SSPL had a role in getting the-plans san'ctioned bY. the
competent authority is' bo~e out by letter of AWHO to'SSPL
dated October 25, 1995 (Ex.· E-45, A WHO; Vol. 3', p. '356) and
the reply of SSPL dated December 9, 1~94, (Ex'.E-103, A WHO,
'Vol. 17, p. 154) to the said letter of AWHO. In .the 'said letter.of
AWHO dated Octob~r is, 1994, itwas.stated :· ·
rn . .- .• ..... ' ' '

"7. San~tioni~iofbuilding ;Ian ana revised l;zy~ut
plan Sanction of buildhig pl;n ~n-d revised .la'y out
pla~s .has. already been. conside~ably.
'.•
del~yed.
- -
This is
effecting the progress of the· work ~iso .. Though DMA
is taking action. but th~ follo'w up action as a part of .
the turnkey project is to .be taken, by you. Please ensure
that the sanction is. qbtained without. further delai"
(AWHO Vol. 3, p. 357,para.7) · •'

F SSPL in their reply date.d Decem,:ber 9, 1994 said :

"g). Sanction!ng of bu_ilding plan.,...you havt'. been
inforined during several discussions in your .office in
New Delhi that there had been structural change in the
G local authority system affecting the project area. For
·.some considerable period v.a~uum existed in many
standard local. govt ·functions. However, the new·
Municipality authority has recently been·fonned. We
. are following up with the new authoritY in respect of
H the sanctioning process." (AWHO, Vol.'17, p: 56(g)]
M.D., ARMY WELFARE HOUSING ORGANISATION v. SUMANGAL SERVICES P. LID. [SINHA, 1) 43 7
The letter dated 25. l O·.l994 referred to in the award clearly shows that A
the architect was asked to take action but allegedly the follow up action
was to be taken by Sumangal only on the ground that the project was a
turnkey one._ Sumangal's letter dated 9.12.1994 merely stated that there
had bee~. structural change in the local authority system affecting the
project area and there· had been some vacuum in many standard local B
government functions and that they had been following up with the new
authority in respect_ of the _sanctioning process. Presumably in the
aforementioned backdrop,. the learned arbitrators observed :

"We are, therefore, unable to hold that the entire responsibility for
obtaining sanction for the plans from the competent authority had C ·
. been tr~nsferred from SSPL to A WHO after June 12, 1991 and
the_reaft~r A WHO and DMA were responsible for obtaining the
said saqction."

Thus, merely some role.had been attributed to Sumangal in the matter D
of getting the plan sanctioned- and not a breach of contract leading to
incurring its liability under clause 130 of the agreement.

EFFECT OF SUCH AGREEMENT,
'. '• - - ASSUMING THERE WAS ONE

There cannot be an agreement that somebody would be bound to E
obtain a· statutory order from the statutory authorities, as thereover, he
would have no control. ' '

In the Law Lexicon, the maxim 'Ex turpi causa non oritur actio' is
defined as: F
"On a bad (illegal) consideration on action can arise."

As regard the question:as to whether such a contract in its entirety
or to some extent would be illegal or not which would give rise to further
question as regard its enforceability, we may notice the following passage G
from Immami Appa Rao and Others v. Gollapa/li Ramalingamurthi and
Ors., [1962] 3; SCR 739 :

"Reported decisions· bearing on this question show that
cqnsideration of this problem often gives rise to what may be H
438 SUPREME COURT REPORTS [2003]SUPP:4 S.C.R.
A described as a battle of legal maxims. The appellants emphasised
that the doctrine which is pre-eminently applicable to the present
case is ex dolo malo non orituractio or ex turpi cause non oritur
actio. In other words, they contended ·that the right of action
cannot arise out of fraud or out of transgression of law; and
B according to them it is necessary in such a case that possession
should rest where it lies in pari delicto potior est conditio
possidenties; where each party is.equally in fraud:the law favours
him who is actually in pl>ssession, or where both parties are
equally guilty the estate will lie where it falls. On·the otherhand,
respondent I argues that the proper maxim to ilpply is nemo
c
0

allegans suam turpitudinum (1Udiendum est, whc>ever has first to
plead turpitudinum should fail; that .party fails who first has to
allege fraud in which he participated. In other words, the principle
invoked by resj>ondent I· is that a man cannot plead his own fraud.
In deciding the question as to which maxim should govern the
D present case it is necessary to recall what Lord Wright, M R.
observed about these maxims in Berg v. Sadler Qnd Moore, [1937]
2 K. B. 158, 162. Refe"ing to the maxim ex turpi causa non oritur
actio Lord Wright observed that "this maxim, though veiled in the
dignity oflearned language, is a statement ofa principle ofgreat
E importance; but like most maxims it is much too vague and much
too general to admit ofapplication without a careful consideration
ofthe circumstances and ofthe various· definite rules which have
been laid down by the authorities".

In Kuju Collieries Ltd v. Jharlchand Mines Ltd and Others. AiR
F (1974) SC 1892 : [1974] 2 sec 533 this Court·held that in relation to a
contract whkh is hit by Section 23 of the Contract Act Section 65 and
Section 70 of the Contract Act shall not apply. Only in a case where a
contract has become void due to subsequent happenings, the advantage
gained by a person should be restored.
G
The building plans would be sanctioned provided the same are in
accordance with the statutory building rules. If admittedly the plans as also
the constructions were not in terms .of rules, question of g~ing them
sanctioned by a statutory authority ,would not arise. Such a contract, it is
H reiterated, would be illegal. Principle of estoppel will ha\'e not application
MD., ARMY WELFARE HOUSING ORGANISATION v. SUMANGAL SERVICES P. LTD. [SINHA, J.) 439
in relation thereto as that part of the agreement itself would not be A
enforceable. In the event, however, the builder was merely required to take
follow-up action in the matter with the authorities, the contract may be
valid but in that event it must not only be pleaded and proved that there
existed an agreement in that behalf, but also to how and to what extent the
builder failed to perform its part of the contract. The findings of the learned B
arbitrators are without any materials and without applying the correct legal
principles and, thus, the same cannot be sustained.

Admittedly, the deviations which were minor ones were regularized
only on 23rd April, 1997. The contract, however, stood terminated on 17th
October, 1995. C
Even in the ordinary course, Sumangal could not have carried out any
construction activities in anticipation that such deviations might be
regularized. Whether such deviations would be regularized in respect of
Phase I or whether building plans for Phase II and Phase III would be D
sanctioned and if so within what time could only be a matter of speculation
but the same would be irrelevant for determining the liabilities of the
parties which was required to be guided by commercial considerations.

The liability to pay damages must arise out of contract and not
otherwise. The award does not specifically say so. E
FRUSTRATION OF CONTRACT:

Section 56 of the Indian Contract Act reads thus:
F
"Agreement to do impossible act:- An agreement to do an act
impossible in itself is void.

Contract to do act afterwards becoming impossible or unlawful:-
. A contract to do an act which, after the contract is made, becomes
impossible, or, by reason of some event which the promisor could G
not prevent, unlawful, becomes void when the act becomes
impossible or unlawful.

Compensation for loss through non-performance of act known to
be impossible or unlawful :- Where one person has promised to H
440 SUPREME COURT REPORTS [2003) SUPP. 4 S.C.R.
A do something which he knew, or, with re:asonabie diligence; might
have known, and which, the. promisee did not know, to be.
impossible or unlawful, such promisor must make compensation
·.to such promisee · for any loss which such promisee sustains
. through the non-performance of.the promise;'.' 1
.). ,-(':. , [, ~ j~ t J #' "t • 4 ', ,;• f •! I •

Imposs!bility to fulfill ~he ~ontractual obligation may arise in ~ifferent
fact situations. ..111;'

Statutory injunction by a statutory authority may. be one of such
causes.· A· building bye-la~ ~ust be s~mpu'io~sly ·followed. Violation of
• ~ • .I. ~ • ,:

C Sectio1.1 204 of the West Bengal Muni<;ipal Act, 1993 attracts penal
provisions contained in Section 440. It is, therefore, mandatory in nature.
The correspondences between A WHO and the Municipality clearly show
that ev_en ?ifrastructural works were. not. perm!tted to . be carried out.
Sumangal, therefore, cannot be said to;have .colllmitted any illegality in
D complying.with the stop work notice. To,"'.hat extent it committed breach
of the terms of the contract, assuming th_atit could haye_ carried out some
job as pointed out by A WHO would depei:id upon the commercial viability
as a large number of workmen were to ~e engaged although it cannot carry
out the major construction work, which was a relevant factor for determining
the quantum of damages. Sumangal might have been partially liable but
E it cannot be faulted when it refused to .carry out any constructional work
in violation of the stop work notice which would attract the penal
provisions of Section 440 of the West Bengal Municipal Act, 1993.

The learned arbitrators were also bound to take into consideration this
F aspect of the matter. They failed to do so and misdirected themselves in
law.

In an interesting article titled "The Principle of Impossibility in
Contract" by H.W.R. Wade published in Law Quarterly Review Volume
G 56 page 519, it is stated:

"Two points emerge from the argument so far: (I) There can exist
no duty to do an impossible act. (II) A promise is; normally and ···
primarily, a promise of performance simply, and not of damages
in the alternative. The effect of supervening impossibility on an
H existing duty can now be determined; and in view of conclusion
•

.,;;..---·

M.D., ARMY WELFARE HOUSING ORGANISATION v. SUMANGAL SERVICES P. LTD. [ SINHA, 1.] 441
(I) the answer is a simple one. It must be that the impossibility A
causes the duty to cease to exist. For a duty either exists or it does
not-that is to say, every duty continues until it is discharged, and
discharge is the only process known to the law by which a duty
once legally undertaken can be put off the shoulders of the
obligee. Its effect is a complete removal of the obligation, and B
discharge by impossibility of performance is no less perfect than
discharge by the performance of the original promise. In the
words of Professor Corbin already cited, 'society no longer
commands performance'-nothing more can be demanded of the
promisor."
c
In Emden and Gill's Buildings Contracts and Practice, Seventh
Edition, page 162-163, it is stated that liability to pay damages for non.:
performance of an impossibility only arises where the contract is absolute
and unrestricted by any condition expressed or implied. It is further stated
that a difficulty may not in all circumstances amount to impossibility. But D
even in that event the terms and conditions relating to performance of the
contract may stand eclipsed.

The transaction was a commercial one. Sumangal could not plead
frustration of contract if it itself had abandoned it. (See Hauman v. Nortje, E
[1914] A.D. 293, at p. 297 and Hoenig v. Jssacs [1952] 2 All E.R. 176,
at p. 178H).

It is well-settled that a builder renouncing his obligations could not
claim substantial performance.
F
In Hudson's Building and Engineering Contracts at page 484, the law
is stated as:

"A further overriding principle to be deduced from the cases, it
is submitted, is that a party consciously in breach, a fortiori a party G
repudiating an obligation or abandoning work, should not be
enabled to abuse the doctrine by maintaining that position while
at the same time suing for remuneration under the contract. Thus
in South Africa, there is long-standing authority that substantial
performance is not available where work is abandoned, or the H
442 SUPREME COURT REPORTS [2003] SUPP. 4 S.C.R.

A method of performance is inconsistent with an hones~ intention to
.carry out the work in accordance with the contract. Sumpter v.
Hedges and Ibmac y, Marshall were clear cases of abandonment."

Such a case of abandonment was not made out. What was made out
was a case of self-inducement frustration. We repeatedly asked Mr. Tiwari
B to show before us any P.leading as regard self~induced frustration on the
part of Sumangal. He failed to do so. No material far less any pleading
has also been placed before us to show that there had been collusion by
and between Sumangal and municipal authorities in getting the work
stopped. There exists a presumption as regard the official transactions
C having been done in regular course of business. the onus of proving that
plea of frustration was self-induced one is on the party who alleges that·
this is the case. (See Joseph Constantine Steamship Line Ltd v. Imperial
Smelting Corpora_tion Ltd, [1942] A.C. 154.

In Treitel's Law ofContract, Seventh Edition at page 701, it is stated: .
D
"The onus of proving that frustration is self-induced is on the
party who alleges that this is the case. In Joseph Constantine SS
Line v. Imperial Smelting Corp. Ltd, (1942) AC 154 a ship was
disabled by an explosion from performing her obligatio_ns _under
E a charter party. The owners were sued for damages and pleaded
that the explosion frustrated the charterparty. The charters argued
that the owners must prove that the explosion was not due to their
fault, but the House of Lords rejected this argument and upheld
the defence of frustration although the cause of the explosion was
never explained. The rule is open to the objection that the
F
charterer is much less likely than the owner to be able to show
how the explosion occurred. This reasoning does, indeed, prevail
in one group of cases: a person to whom goods have been bailed,
and who seeks to rely on their destruction as a ground of
frustration of the contract of bailment, must show that the
G destruction was not due to any breach of his duty as a bailee. But,
this special situation excepted, the rule as to burden of proof laid
down in the Joseph Constantine case can be defended on the
ground that generally catastrophic events which prevent
performance do occur without the fault of either party. To impose
H the burden of disproving fault on the party relying on frustration
M.0., ARMY WELFARE HOUSING ORGANISATION i·. SUMANGAL SERVICES P. LTD. [SINHA, l] 443
is therefore less likely than the converse rule to lead to the right A
result in the majority of cases."

It is interes•ing to note that at page 700 of the said treatise, the learned
author states:

"The further question arises whether a contract can be frustrated B
by an event brought about by the negligent act of one of the
parties. Lord Simon has put the case of a prima donna who lost
her voice through carelessly catching cold. He seemed to incline
to the view that she could plead frustration so long as the
incapacity "was not deliberately induced in order to get out of the C
engagement." This particular result can perhaps be justified by the
difficulty of foreseeing the effect of conduct on one's health. But
it is submitted that generally negligence should exclude frustration:
for example, the plea should have failed in Taylor v. Caldwell if
the fire had been due to the negligence of the detendants. In such D
a case it would be unjust to make the other party bear the loss.
A negligent omission should likewise exclude frustration."

In Cheshire, Fifoot & Funnston's Law of Contract (14th Edition) at
page 643, the law is stated, thus:
~ E
"This rule, that a party cannot claim to be discharged by a
frustrating event for which he is himself responsible, does not
require him to prove affirmatively that the event occurred without
his fault. The onus of proving that the frustration was self~induced
rests upon the party raising this allegation. For instance : F
On the day before a chartered ship was due to load her
cargo an explosion of such violence occurred in her
auxiliary boiler that the performance of the charterparty
became impossible. The cause of the explosion could G
not be definitely ascertained, but only one of three
possible reasons would have imputP.d negligence to the
ship'lwners.

It was held by the House of Lords that, since the charterers were
unable to prove that the explosion was caused by the fault of the H
444 SUPREME COURT REPORTS [2003]SUPP. 4 S.C.R.

A owners, the defence of frustration succeeded and the contract was
discharged. It should perhaps be noted that in many.cases·a·self-
induced frustrating event will be a breach of contract but this will
not necessarily be so. In Maritime National Fish Ltd. v. Ocean
Trawlers Ltd, (1935) AC 524, the applicants were not contractually·
bound to licence the chartered trawler but could not excuse failure
B
to pay hire by relying on the absence of a licence:" - '

Even no case of negligence on the part of Sumangal made out.
.,.
The burden of proof in relation to all these pleas, thus,· was on
C A WHO. It _failed to discharge the same.

QUANTUM OF DAMAGES :

It is not necessary for us to go into the questi<:m of qul!.ntum of
D damages in details but we may observe that_ the learned _arbitrators
proceeded on a wrong premise even in rel~tioh t~ereto. It took into
consideration the subsequent events. Purported subsequent c?nduct on the
part of Sumangal became the bed-rock of the findings against it by the
learned arbitrators. The disputes and differences between the parties were
required to be determined as on 10.10.1995. Conduct of the parties
E subsequent thereto was wholly irrelevant. Thus, there exists an error
. apparent on the face of the award.

Liability to pay damages would indisputably arise only in the event
a breach of contract has taken place. Clause 130 of the general conditions
F of the contract could be invoked only in the event of breach on the part
of Sumangal and if AWHO could in law take recourse to_ CJause 129 of
the Contract.

For the purpose of invoking clause 129(d) of the general conditions
of contract, it was incumbent upon the learned arbitrators to arrive at a
G specific finding that a breach of the terms of condition has been committed
by Sumangal. · Such breach must be in relation to a term of the contract
between the parties.

If a breach has occurred in respect of an agreement, to which
H, Sumangal is not a party, clause 129 could not have been invoked.
M.D., ARMY WELFARE HOUSING ORGANISATION v. SUMANGAL SERVICES P. LTD. [SINHA, J.) 445
The law relating to damages in this behalf is stated in McGregor on A
Damages, 16th edition at paras 1142 and 1143 in the following terms :

"The normal measure of damages is the cost ·to the owner of
completing the building in a reasonable manner less the contract
price, and possibly, in addition, the value of the use of the B
premi~es lost by reason of the delay. This measure of cost of
completion less contract price is laid down by the Court of Appeal
in Mertens v. Home Freeholds Co., (1921) 2 K.B. 526, CA., which
inust be regarded perforce as the leading case since it proves to
be the only one dealing with this issue. The defendant contracted
to build a house for the plaintiff and was to begin work immediately C
after possession of the site was given to him. The defendant
worked well for a month, but then deliberately failed to proceed
with due dispatch in the knowledge that a government embargo
on building without licence was to be imposed. Had he worked
according to contract, the roof could have been on to the house D
before· the embargo descended. Two or three years later the
plaintiff completed the work himself, when building was again
permitted but when co~ts had risen. It was held that the proper
measure of damages was the cost to the plaintiff of completion
in a reasonable manner at the earliest moment that he was allowed E
to proceed with building, less the amount he would have had to
pay the defendant had the defendant completed the house as far
as the roofing-in at the time agreed by the terms of the contract.
The Court of Appeal reversed the Divisional Court which had
taken for its basic. figure not the cost-of completion but the market F
value that the completed building would have had at the contractual
time due for completion. Of this Lord Stemdale M.R. said :.

"They (the Divisional Court) have treated the contract
as if it were one for the sale of goods and have held
that the measure of damages is the difference between G
the market price of the day of what the plaintiff ought
to have had and what he got. In my humble opinion
that is an entirely wrong way of looking at the contract.
There is no contract to deliver goods, and there is no
market price for a roofed house." H
446 SUPREME COURT REPORTS {2003] SUPP. 4. S.C.R.

A Mertens v. Home Freeholds Co., (1921] 2 K.B. 526, C.A., is also.
authority for taking the cost of completion .as aUhe time when
it became once again legal to build, although between·breach~and
the. removal of the government embargo on building -two .or·three
years afterwards costs had risen substantially. And· conversely,
B ·as Younger L.J. pointed out, "ifthe cost of building had-deer.eased
in that time the damages would have been correspondingly
diminished". This rule .is however subject to the general principles
of mitigation so that, in· the words of Lord Stemdale,

"the building owner must set to work to buiid his bouse
c at a reasonable time and in a. reasonable manner, and
is not entitkrl to delay for several years and then, if
prices have gone up, ,charge the defaulting builderwith
the increased. price."

D We may, however, notice that in Clark and Anotherv. Woor, (1965}
l W.L.R. 650 and East Ham Borough Corporation v. Bernard Sunley &
Sons Ltd, (1966) AC 406, law almost to the sbnilar .effect has been laid
down.

E In Hudson's Building and.Engineering Contracts at page 1034-35, it
is stated:

"Builders. constructed a school with serious defects in fixing the
stone facing. The contract was in the 1956 ·RIBA standard form.
Some years after the final certificate, a sto~e fell :and the owners
F discovered the defects. The arbitrator found that the defects could
have been, but in fact were not, discovered or noticed by the
architect during the course of his normal supervision of the work.
At the date of the breach (which the. parties agreed should for
purposes of convenience be treated as the date of completing the
G work), the cost of repair would have been considerably less, due
to rising prices, than it was when the owners finally discovered
the defects. Held, by Melford ·Stevenson J., distinguishing
Phil/ipsv. Ward, (f956) I W.L.R.471 thats~cetheownershad
· been guilty of no unreasonable delay once they discovered the
defects, they were entitled to the greater cost of the repairs at the
M.D., ARMY WELFARE HOUSING ORGANISATION v. SUMANGAL SERVICES P. LID. [SINHA, J.) 44 7
time they carried them out. Held, by the House of Lords, A
affirming the judge, that the parties must have contemplated that
the architect might fail to notice defective work. The cost of repair
at the date of discovering the breach was "on the cards" or a "loss
liable to result" from the breach within the test formulated by
Asquith L.J. in the Victoria Laundry case. Per Lord Upjohn: B
"where the cost of reinstatement is the proper measure of damages
it necessarily follows as a matter of common sense that in the
ordinary case the cost must be asse:;sed at the time when the defect
is discovered and put ri~ht and it is not suggested here that the
building owner unreasonably delayed the work of repair after C
discovery of the defect...! am at a loss to understand why the
negligent builder should be able to limit his liability by reason of
the fact that at some earlier stage the architect failed to notice
some defective work. .. " East Ham Borough Council v. Bernard
Sunley Ltd., (1966) A.C. 406."
D
Reference may also be made to illustrations given in Hudson's
Building and Engineering Contracts at pages 1038-39.

-
In Emden and Gill's Buildings Contracts and Practice, Seventh
Edition, at page 267, the law is stated thus :
E
"The measure of damages for failure by the contractor to complete
a building or engineering contract will include first, the difference
(if any) between the price of th,e work as agreed upon in the
contract and the cost the employer is actually put to in its
completion (i), and cost of completion means cost of the F
completion of the contract work itself.

Illustration

A builder agreed in May, 1916, to build a house for
plaintiff for a lump sum, complete within a specified G
time. After starting the work the builder intentionally
delayed progress for the purpose of ensuring that the
Ministry of Munitions should refuse a licence for
construction of the house under Defence of the Realm
regulations, and that he would thereby (as he thought) H
448 SUPREME COURT REPORTS [2003] SUPP. 4 S.C.R.

A be released from the contract. The licence was refused,
and the work had to be entirely suspended till 1919,
when plaintiff completed the building.-Held: The
builder could not take advantage of a prevention
brought about by his own act, and the proper measure
of damages was what· it cost the plaintiff to complete
B
the house as soon as the statutory restriction ceased,
less any amount which have been due and payable to
the builder if he had proceeded with due diligence up
to the date when the licence was refused. ·,

c In a leading case, the. House of Lords has held that the proper
measure of damages is the cost of re-instatement, such cost must
be assessed at the time when the defects are discovered and are
put right."

D Sumangal, thus, could. have been found liable for drawings if inter
alia it was guilty of one or the other misconducts as referred to hereinbefore.

TITLE IN RESPECT OF 14.17 ACRES OF LAND:

E Claim No. I related to title of 14.17 acres ofland. Sumangal entered
into an agreement on a tum-key basis. The contention of Sumangal is that
, the lands were transferred in the name of AWHO by way of security. This
~ay or may not be so .. But, herein we are only concerned with the question
as to whether the award can be set aside or not. · The learned arbitrator took
' .
F into consideration the respective contentions of the parties and came to the
conclusion that title has, by reason of· the deeds of sale, passed on to
A WHO. While arriving at the said finding, the arbitrator has not applied
wrong principle of law. Sumangal procured land on behalf of AWHO. It
for ~ specific purpose and with a view to avoid double payment of stamp
duty entered into an arrangement whereby the owners of the agricultural
G. land· executed sale deeds in favour of AWHO. Subject of course to
furnishing bank guarantee Sumangal received consideration. Sumangal
stated that by gett!ng the land transferred in the their name by way of
security at a nominal price, as part of the tum key project,· AWHO has
gained enormously to the tune of about 11.40 crores which they are not
-.
H entitled to retain lawfully. They, thus, have unjustly enriched themselves.
M.D., ARMY WEI.FARE HOUSING ORGANISATION.-. SUMANGAL SERVICES P. LTD. [SINHA,!.] 449

It does not appear that such a case has· been made out before the learned A
arbitrators. The plea of unjust enrichment, therefore, cannot be allowed
to be raised at this juncture. Such consideration was passed on to the
owners of the land. Requirements of Section 54 of the Transfer of Property
Act in respect of sale transaction were fully complied with. Title to the
said land, thus, apparently vested in AWHO and has become absolute its B
owners. No exception, thus, to that part of the award can be taken.

CONCLUSION:

However, we would like to clarify that the observations made
hereinbefore were meant for the purpose of demonstrating that the learned C
arbitrators failed to apply the correct principles of law but not for the
purpose of determining finally the !is between the parties. In other words,
the questions have been posed and answered for the limited purpose as to
whether the award of the learned arbitrators suffer from any legal infirmity
within the meaning of Sections 30 and 33 of the Arbitration Act and no D
more.

We, therefore, for the aforementioned reasons, while upholding
Claim No. l of the award are of the opinion that the award of the
arbitrations in relation to Claim No. 2 must be set aside. Consequently,
no interest thereupon shall be payable. E
The I.A. No. 11 of2002 is allowed to the aforementioned extent. No
costs.

v.s.s. Appeal disposed of. F