Holding

Arbitrators cannot award amounts that violate the explicit terms of the contract; the escalation award is set aside while the final payment claim of Rs.8,63,953 with interest is upheld.

Summary

The dispute arose from a work contract for port services that was initially for one year and extendable for a second year, subject only to statutory wage increases for dock labourers as per Clause 2.03. The contractor claimed additional payment for wage escalations that occurred after the commencement of the extended period, and also sought the final balance due. An arbitral tribunal awarded both the escalation amount and the final payment, but the High Court set aside the award, a decision later reversed by the Division Bench. The Supreme Court held that arbitrators cannot award amounts that contravene the explicit terms of the contract; the clause allowed wage revisions only up to the start date of the extended period, not thereafter. Consequently, the escalation award was invalid, but the claim for the final payment of Rs.8,63,953 with interest was upheld. The Court ordered the award to be partially set aside and allowed the appeal in part.

Issues considered

The proper construction of Clause 2.03 of the contract regarding statutory wage increases for the extended period
Whether an arbitrator can award amounts that are contrary to the specific terms of the contract
Whether the award can be partially set aside and the valid portion severed
Whether the limitation defence applies to the claim for final payment
Whether the award falls within the jurisdictional limits prescribed under Sections 30 and 33 of the Arbitration Act, 1940

Legislation cited

Arbitration Act, 1940s. 30, s. 33

Subjects

ArbitrationContract interpretationEscalation clauseStatutory wage increaseAward interferenceSeverance of awardLimitationWork contract

Judgment

[2010] 7 S.C.R. 962

A M/S. RASHTRIYA CHEMICALS & FERTILIZERS LTD.
v.
M/S. CHOWGULE BROTHERS & ORS.
(Civil Appeal No. 5286 of 2006)
JULY 7, 2010
B
[AFTAB ALAM AND T.S. THAKUR, JJ.]

Contract -Work contract - Initially granted for one year
- Extendable on the same terms and conditions except the
C statutory increase in the wages of dock labourers - Extension
of contract - Contractor claiming enhanced amount on
account of escalation by statutory increase in the wages of
labourers during the extended period of contract - It also
claimed an amount towards final payment due and payable
D - Arbitrators by majority decision allowed the claim of
contractor - Single Judge of High Court setting aside the
award. - Division Bench upholding the award - Held:
Contractor was not entitled to the claim on account of
escalation due to statutory increase in wages of laboureres -
E The relevant clause of the contract did not envisage
escalation on the basis of the revision post commencement
of the extended period - Arbitrators have no jurisdiction to
make an award against the specific terms of the contract -
However, contractor is entitled to the claim towards final
F payment - Arbitration.

Appellant-Company invited tenders initially for a
period of one year (from 15.1.1983 to 14.1.1984). As per
Clause 2.03 of the Tender Notice, the contract was
extendable at the option of the appellant for a further
G period of one year on the same terms and conditions
except statutory increases in the wages of Dock
Labourers.

Respondent's tender was accepted by appellant and
H 962
RASHTRIYA CHEMICALS & FERTILIZERS LTD. v. 963
CHOWGULE BROTHERS & ORS.
work was granted for the period ending on 14.1.1984. In A
October, 1983, the appellant in' terms of Clause 2.03
extended the contract for a further period of one year
ending on 14.1.1985. The extension was accepted by the
respondent-company asking the appellant to consider
the revised wages of the Dock Labourers, which came B
about during the period of one year. Appellant replied that
Clause 2.03 provided for considering increases on
account of statutory revisions made upto 15.1.1984 and
not the increase under negotiations or those granted at
a later date with retrospective effect. It called upon the c
respondent-company on such basis to furnish
documentary evidence regarding i~crease in wages upto
15.1.1984.

The dispute was referred to a panel of three
arbitrators. Two awards were passed by the arbitrators. D
Majority award decided in favour of the respondent-
company. Appellant filed arbitration petition. Single Judge
of High Court allowed the petition, setting aside the award
holding the same contrary to clause 2.03 of tender notice.
The Court also held the claim barred by time. Division E
Bench of High Court set aside the order of Single Judge
restoring the majority award passed by the two
arbitrators. Hence the present appeal.

Partly allowing the appeal, the Court F
HELD: 1.1 Single Judge of the High Court was
correct in holding that the award made by the Arbitrators
to the extent it directed payment of the additional amount
was unsustainable. The Division Bench, however, fell in
error in taking a contrary view and holding that the G
interpretation placed by the Arbitrators was a plausible
interpretation. [Para 15] [974-F-G]

1.2 The Note to clause 2.03 of NIT envisages that on
H
964 SUPREME COURT REPORTS [2010] 7 S.C.R.

A the completion of the first year and at the beginning of
the extended contract period, the rates applicable shall
have to be determined by reference to the revisions that
have already come into effect as on the date of the
commencement of the extended period. It is manifest
B from a reading of the Note that once an option is
exercised, the rate applicable to the extended period shall
stand revised taking into consideration the revision of
wages if any. Any such revision must of necessity be
made as on the date of the commencement of the
C extended period. Once that is done, the said rate would
remain firm till the end of the second year. The contract
does not, envisage settlement or revision of the rate by
reference to any stage post commencement of the
extended period. Even otherwise a contract for the
extended period could become effective only if rates
0
applicable to that period are settled or are capable of
being ascertained. Rates actually determined or
determinable by reference to 15th January, 1984 i.e. the
date when the extended period commenced, could
include revision in wages made upto that date. Any
E revision in the wages of the dock labourers which the
M.O.L.B. may have ordered subsequent to 15th January,
1984 would have no relevance even if such revision was
made retrospectively from the date of the
commencement of the extended period. The Note makes
F it abundantly clear that revision granted retrospectively
would be of no consequence whatsoever. [Para 12] [973-
A-F]
1.3 While accepting the extension of the contract, the
G respondent-contractor had simply referred to the
statutory revision in the wages by M.D.L.B. during the 'last
year'. Since the letter of acceptance is of 7th December,
1983 the statutory revision which the contractor wanted
tq be taken into consideration were revisions before 1983
H and not those made at any time after the extended period
RASHTRIYA.CHEMICALS &'~FERTltlZE.Ffs t Ttf'v. 965
CHOWGULE BROTHERS & ORS.
of contract. The appellant's letter'dated 127th ~ualluarY, A
1984 sent 'in reply t(fthe letter dated 7tti. DE!cember, 1983
made it clear to the respoilderit that'Clause•2!o3~of 'the
NIT did' not envisage escalation on the basis·•ofithe
revision subsequent to 15th ·:January,· 1984 everHf•such
revisions Were already being discus·sed:or 'i1egotiated'by B
the Dock Workers With the· M~D.LB.-- [Paras"131atia 'f4]
[973·G-H; 974-A, C-D] · ':' ;' " ••-.:' · '' '' ~ ~
t { • ~ '' t:'>:/ t' '' ('. _,. \ -'
.:· 2. An Arbitrator cannot make. an award· contraryJto
the terms· of the-contract executed between the parties:
While it is true that the courts-show)deference :to :the C
findings of fact recorded by the Arbitrators: and :even
opinions, if any, expressed on questions of1Jaw.referred
to them for determination, yetit is,equaUyitrue:that the
Arbitrators have no jurisdiction to make an award against
the specific terms of the contract executed betweemthe D
parties. r[Para 16] [974-H; 975-A~B] ·1 · • •:,, ':':'.~·'

• . :-: ",·'. lt~. · .... ~1-.f·l '·'.#-"i·-·
: $/f!el Authority of ,[ndia . Lt9.; v .. J. p._J~u9.,haraja,
Governr:nent andfv!ining 4r:;ontractRr ,(199,9) 1 ,8 1 5~~· 1.2~; •
Bharat Coking Coal Ltd.
- '
v.. .Anh.apurna
.
Con$truction. .(2003)
--- -!-- -~ ....
E
8 SCC 154; MD, Army Welfare Housing Organisation. v.
sumangal services 'rPJ Ltd. (2004) 9 61'9; Asso'Ciated · :sec,
Engineering Co. v.' Government .of Aridhr~ Prade$ftan.d
J I ~ • .... , ,~ ~ ' ·- • .~ ilo.<- .. • •
Ani.
' ' ; ' ,

AIR 1992 SC 232; Jivarajbhai Ujamshi Sh_eth ,and Or,s . .v:
Chintamanrao Balaji and Ors. AIR 1965 SC 214; State of F
Rajasthan v. Nav Bharat Construction Co. AIR 2005 SC
4430; Food Corpora~ion offndia v. Surendr~, t;Jev~ndra and
Mahendra Transport Co. (2003) 4 SCC 80, relied 'on.
r . · ~ ,1 _ : (·'I
W B. State Warehousing, Corporation and Anr. v. Sushi/
Kumar Kayan and Ors.. (2002) 5 SCC 679-,ireferfed.to. G
3. Before the Arbitrators, the -res~p'ondent had
quantified the claim at Rs.27,91,984.29 .on,,acc,o.unt of
e'scalation of the· rates· consequent 'upo-n slatutory
increases in the wages:of.M.D.l...B. durlng the extended H
966 SUPREME COURT REPORTS (2010] 7 S.C.R.

A period of contract. A further sum of Rs.9,88,713.20 on
account of escalation in the wages of other categories of
workers was also made on the same basis. In addition, a
claim for the recovery of Rs.8,63,953/· towards the final
payment due and payable to the claimant with interest @
B 18% p.a. on the same was also made. The entitlement of
the respondent to claim any amount on account of
escalation consequent upon the increase in the wages
of M.D.L.B. workers is not established. The first two
claims on account of escalation could not, therefore,
c have been allowed by the Arbitrators nor could the
incidental claim for payment of interest on that claim be
granted. However, there was no real justification for
disallowing the claim made by the respondents
representing the balance amount due to the claimant
towards its final bill, especially when the counter-claim
0
made by the appellant has been rejected and the said
rejection was not questioned before the High Court. The
valid part of the award can be saved by severance from
the invalid part. The appeal is allowed in part and to the
extent that the award made by the Arbitrators shall stand
E set aside except to the extent of a sum of Rs.8,63,953/-
wh ich amount shall be payable to the respondent-
contractor with the interest@ 9% p.a. from 1st April, 1985
till the date of actual payment thereof. [Paras 22, 23 and
24] [977-C-H; 978-A-C]
F
Case Law Reference:
(1999) 8 sec 122 Relied on Para 16
(2002) 5 sec 679 Referred to Para 18
G (2003) 8 sec 154 Relied on Para 19
(2004) 9 sec 619 Relied on Para 20
AIR 1992 SC 232 Relied on Para 21
H AIR 1965 SC 214 Relied on Para 21
RASHTRIYA CHEMICALS & FERTILIZERS LTD. v. 967
CHOWGULE BROTHERS & ORS.

AIR 2005 SC 4430 Relied on Para 21 A
(2003) 4 sec ao Relied on Para 21
CIVIL APPELLATE JURISDICTION : Civil Appeal No.
5286 of 2006.
B
From the Judgment & Order dated 05.04.2006 of the High
Court of Judicature at Bombay in Appeal No. 884 of 1997 in
Arbitration Petition No. 19of1993 in Award No. 127 of 1992.

Shyam Divan, M.P. Savla, Jay Savla, Vasuman
Khandelwal for the Appellant. C

S. Ganesh, Atul Desai, Pratap Venugopal, Surekha
Raman, Deepti, K. J. John & Co. for the Respondents.

The Judgment of the Court was delivered by
D
T.S. THAKUR J. 1. This appeal by special leave is
directed against an order dated 5th April 2006 passed by the
High Court of Bombay whereby Appeal No.884 of 1997 has
been allowed, the order passed by a learned Single Judge of
that Court set aside and the majority award passed by the E
arbitrators restored.

2. The appellant, a Government of India undertakin~ invited
tenders for allotment of clearing, forwarding, handling and
stevedoring jobs at Mormugao Port initially for a period of one F
year commencing from 15th January 1983 upto 14th January
1984 but extendable at the option of the appellant for a further
period of one year on the same terms and conditions except
statutory increases in the wages of Dock labourers referred to
in Clause 2.03 of tender notice. In response, the respondent G
submitted a tender which was accepted culminating in the issue
of a work order dated 10th January 1983 in its favour. It is
common ground that the appellant by its communication dated
13th October 1983 exercised the option available to it in terms
H
968 SUPREME eOURT REPORTS [2010) 7 S.C.R.

A of Clause 2.03 of the NIT and extended the contract for a further
period of one year ending 14th January 1985.

3. The extension aforementioned was accepted by the
respondent in terms of its communication dated 7th December
1983 in which it was inter-alia pointed out that statutory revisions
8
in the wages of Mormugao Dock Labour Board (for short
M.D.L.B.) (hat had come fibout during the period of one year
need be considered while extending the contractual period. In
response, the company by its letter dated 27th January 1984
C pointed out that Clause 2.03 of Schedule II of N.l.T. provided
for increases on account of statutory revisions made upto 15th
January 1984 alone to be· considered for purposes of granting
rate escalation. Increases in wages that may have been under
negotiations or those granted on a later date with retrospective
effect could not consequently be considered, said the appellant.
D The respondent-Company was on that basis called upon to
furnish documentary evidence regarding increase if any in
wages allowed by the M.D.L.B. upto 15th January 1984 without
waitin~ for issuance of any fresh circulars.

E 4. It is not the case of the respondents that any revision in
wages effective as on 15th January, 1984 was demonstrated
before the appellant at any time before the commencement of
the extended contractual period. What was alleged by the
respondent was that pursuant to a settlement between the
F M.D.L.B. and the Dock workers the respondent had incurred
an additional amount of Rs.24.74 lakhs towards the increase
in the wages payable to such workers. A claim for
reimbursement of the said amount was accordingly made by
the respondent-company in terms of a legal notice served upon
G the appellant on its behalf, which .claim was refuted by the
appellant on the strength of Clause 2.03 of Schedule II to the
notice inviting tenders forming part of the contract betWeen the
parties. The appellant asserted that the rates at which the
contract was initially awarded had to remain firm throughout the
period of one year from the date of award and were not subject
H
. ~~a
·kAsl-lrRiYA'cHEM1cALs1&'. FERr1L.fzE'Rs1Cfi:f:y. · ::it:>~
CHOWGULE BROTHERS & ORS. [T.S. THAKUR, J.]
to any· esca1auon .wh.atsoever.'J~~·te~ t0f ttie)e>tten8~ci a~?i~8 iA
were also similarly' to' rerrlain«'firrri throughhut\'.t~\~t~xtended
period subjeet to any ·statutory revision··upto·1stW'Januai)t,'1e84
being taken into consideration. Any subsequent increase if{tfii~
"fiarJes; P'\IY,able. to ~he D~ck: l.~,~~~f~f~ 1 ~r~nt~~: r~t.r,~~pectively . ~
by .the M.D ..L.B. was ~~corq;1ng ,tq .the app~llant,;
•· ~·· · i.• ' 0. ·· i • ·• <'
wholly,1 i::s
! ;__ 'f .fl' - ~· ••' · i' •· v .. ·,., • •

, mc;;?nS~\:J~en.t1,al,. .. , , , .,.,.~crirq~·, .,·,,
;; . .
. ,, "·'~•£> ,, t 'HiJ _,·-

·· . ···5. Denial 'oftli'e'plai°m'·maae:byth~· respon'dent fhus·~aOJ
a
rise'to dispute' which :in was 'ief.ms
of.the cont~aci. reterred~tO'
of
a''panel' three Aroit(ator's f~r'adJu,dfoation .. B,efore,the' c
Arb1trators,. the appellahtdlspute~ the'dahn Ori m~r\fa ~s. also
on the ground that tl'le ~ame w~:;'.'tiarred"~y·:nmWation."'fhe
Arbitrators examined 'rival con'ten(!oils urged.~"oefore them 1but
1

•. -_ - : J ,.J . . • '·"' •!""''
1· . ,._ .
• ' ' , .. - .. ~' ~~-
failed to arrive at a· unanimous deeision on the·true and c;:otrect
intetpretatiori.6fClause 2.03. Two kwar,ds, 'the'refor~.·cafn(flo n
be· made', one by Shri-RP. B'~att' wh.o .dism,isse~ the ciaini aria D
· ttie ·other by' Mis R.C. 'Co6pe~iand' N:A': Modi wt1b 'held 'the'
respondents.entitled. to recover from tii'e appella'i1't alurnp 1ifom
atnount of Rs.61,73,667'.90. lfis 1notewoithyfuat whilelhe'awarcf
made by Shr'i·R.P. Bhattwas'a reason'ecfAwarcfiflafri1a"de by'
the'other'tWo'Arbifrafors'.~a!n1oC. ,..,, . 1 ~ ·:' ''.• . • :,., r;< E
~, t. 1·· :J ·-.j n:..1\f; ~ (Jl.i''•l • ~..,:;1H·,;.J· 1. ~-··('.; ~._ ... ~.~ )·''."1··':'...!i!3,-r!;·;.~J:'•

:Je<,6. Aggrieved,by the majority Award·; the'appellant filed
Arbitration Petition No .. 19 of 1993rbefore•.the•HigltrCdurt1of
Bombay for setting aside the same. A Single Judge'of the; High
C~urt of Bombay '(S.N.· Variava, J..as His LordshiR. then was) F
0

allowed
I
that prayer and set aside the , award ..
holdifig·thaUhe
same was contrary t() clause 2.03 of the NIT fe>rming p~rt qf the
contract executed between th'e ·'parties. 1
1
ttie· plea of Eveh·
limitation succeeded before' the 1earned·sihg1e'jiidge Wtic(liei<f1!
that'the claim made by the respqndents was barred by ~1me;· G
· 1' , (-~- .~'·,~I
'¥•l ··'' ;"'·.. ·,~,.,.'"'I~ ·'i°f .,._ (';;. •

Undeterred the respondents assailec.f the, said order beforte ai
o·ivision Bench+ of the:·High'°Cbi.irt lri' App~af.Nci.884 11997 of
which allowed the appealPset 'aside ttieio}der· pa~seCl"t:iy fl'ie' .
Single-Judge ai:\d' restored· ttl'e niajority';t..w~r'd ffi~~~'by tM1~~tWo)
Arbitrators:~rhe High court took tile \/ievhhat'ttle'iiiier'Phftation' · H
970 SUPREME COURT REPORTS [2010) 7 S.C.R.

A placed upon Clause 2.03 of the contract between the parties
by the majority of the arbitrators was a logical interpretation
which could provide a sound basis for the Award made by
them.

B 7. Appearing for the appellant, Shri Shyam Divan did not
pursue the challenge to the validity of the Award on the ground
that the claim made by the respondent was barred by limitation.
The solitary point that was urged by the learned counsel was
that the High Court had committed an error while interpreting
C Clause 2.03 of the contract. Mr. Divan contended that a plain
reading of Clause 2.03 made it amply clear that the rates
stipulated under the contract were to remain firm for the first
year notwithstanding any revision in the wages payable to the
dock workers of M.D.L.B. For the second year also the rates
were to remain firm, subject only to the condition that statutory
D revisions, if any, of the wages would be taken into
consideration. What was according to Mr. Divan evident from
a plain reading of Clause 2.03 was that only such statutory
revisions as were ordered upto the date of commencement of
the contractual period were relevant for the purpose of such
E consideration. Any revision made subsequent to the
commencement of the contractual period even if retrospective
in its application would have had no relevance for the extended
period. Inasmuch as the Division Bench had taken a contrary
view and set aside the order of the learned Single Judge, it had
F not only committed a mistake that was evident but also ignored
the principles governing the construction of documents.

8. Appearing for the respondents Mr. Ganesh, learned
senior counsel on the other hand contended that the power of
G this Court to interfere in an Arbitral Award under Sections 30
and 33 of the Arbitration Act, 1940 was very limited. He
contended that just because an interpretation different from the
one given by the Arbitrators in support of their award was
equally plausible did not make out a case for interference by
the Court. Arbitrators being Judges chosen by the parties the
H
RASHTRIYA CHEMICALS & FERTILIZERS LTD. v. 971
CHOWGULE BROTHERS & ORS. [T.S. THAKUR, J.]

view expressed by them would bind the parties no matter the A
same is found to be erroneous and no matter an alternative view
was equally or even more plausible. He urged that Clause 2.03
of NIT was rightly interpreted by the Division Bench of the High
Court which did not call for any interference by this Court.

9. The validity of the award made by the Arbitrators rests B
entirely upon a true and correct reading of Clause 2.03 of the
Contract. That clause is in the following words:

"2.03: It is hereby agreed that if the Company gives one ·
month's notice to extend the contract for a further period C
of one year from the expiry or the period mentioned in
Clause 2.01, the contractor shall be bound to continue to
do the work and render services on the same terms and
· conditions, as contained herein, during such extended
period, except for the statutory increase in the wages of D
Dock Labour allowed by the Mormugao Dock Labour
Board, for which documentary evidence shall have to be
furnished by the contractor......

E
Note: The rates indicated against first and 2nd year above
have been taken from MOLE'S Circulars from time to
time. But the rates at which the contact is initially awarded
shall remain firm throughout the period of one year from
he date of award and shall not be subject to any escalation F
whatsoever. Similarly, the rates allowed for the extended
period of one year, if any, after considering the statutory
increase, if any, in the wages of Dock Labour will also
remain firm throughout the extended period of one year
and shall not be subject to any escalation whatsoever, G
irrespective of any subsequent increase in the wages of
Dock Labour allowed retrospectively by the Mormugao
Dock Labour Board."

10. A careful reading of the above especially the Note H
972 SUPREME COURT REPORTS [2010] 7 S.C.R.

A appended to Clause 2.03 (supra) l~aves no manner of doubt
that the rate at which the contract was initially awarded was to
remain firm throughout the period of one year from the date of
the award of the contract. What is significant is that for the first
ye~r the said rate was unalterable regardless of any escalation,

8 revision or other ~tatutory increases made during that period.
Shri Ganesh·, learned counsel for the respondents als0 fairly
conceded that insofar as the first year of the contract was
concerned the rates were not subject to any revision and were
to. remain firm. If that be so, the question is how far is that
C principle altered by the later half of the Note which deals with
the rates applicable during the extended period of the contract.
There are tliree different aspects which stand out from a
reading of that part of the Note to Clause 2.03. Firstly, the
second part of the Note dealing with the rates applicable to the
extended period starts with the word 'Similarly'. By using that
0 expression the Note draws an analogy between the firmness
of the rates applicable during the first year and those applicable
for the extended period of second year. The' sentiment
underlying the Note is that the parties intend to keep the
applicable rates firm not only for the first year but also for the
E second year.

11. The second aspect which emerges froni a plain
reading.· of the Note is that the rates for the second year had to
l'Je fixed by taking into consideration the statutory increase£, if
F any, in the wages payable to the Dock labourers whic.h rate
once fixed was also to remain firm and impervious to any
escal~tion. The only difference between the first and the second
year rates thus is that the rates were firm even for the second
year but the same had to be fixed taking into consideration the
G statutory increases in the wages of the dock labourers.

12. The third aspect which in our opinion puts all doubts
about the true intention of the parties to rest is that any
subsequent increase in the wages of the dock labourers would
not result in any escalation of the rates even when such revision
H
. RASHTRIYA CHEMICALS & FERT1Ll?:ER$ LTD.Jg. 9,7~
CHOWGULE BROTHERS & ORS. [T.S. THAKUR, J.]

is "allowed retrospec~ively by the M.D.L.B. What.th.e N,ot~!lli9Wc:J t;..,
_opinion envisages is that on the compl~tion of th~ first y~ar anqJ!
at the beginning of the extended contract pe,rt9q,J~,~.rate.s1
applicable shall have to be determined by reference to the
revisions that have already come into effect as.on the1date of .
ttie commencement of the extended period.·lt is manife'st:from · 8:1

'-'
a reading of the Note that once an option is exercised'.ttie tat~
applicable to the extended period shall stand revised taking~irito ,
consideration the revision of wages if any. Any such revision
must of necessity be made as· on· the dat~.::oJJ:the
commencement of the extended period~ Once that is 'done the Q,
1
said rate would remain firm till the end of the second year. The '
contract does not, in our opinion, envisage settlement or're\/ision
df the rate by reference to any stage post coinme'ri'ce'mehtcfofJ
the extended period. Even otherwise' a· contd:tct''fo'f'tHe'·:
extended period could become effective only if rates'appJica;ble"'' OJ
to that'period are settled or are capable of being'ascert~fn'Eid~'
1

Rates actually determined or determinable by reference'fo 1stti.'
January, 1984 the date when the extended period commehcec( ,
co.uld include revision in wages n;iade uptq that, d~te. Any
revision in the wages of the dock laboure·rs which the fyLD.L.~.
may have ordered subsequent to 15th Januacy, \9)34 \vould. EJ
. have no relevance . even . if such ' :
revision.
.' .
·made
;Ji-~'.).;.:- ~ • :
wa$ .
retrospectively from the date of the commencement Qf, the
ext~~ded period. The Not~ makes it abu_ridantly:;c}e~r:that
rev1s1on granted retrospectively would be.. of no consequence
whatsoever. · ' ' · ,,,, ' · F:.i
· . · ·. ·· · .• •< "'·"'T 7'f
13. There is anothe· angle from which the.matter,c~n
, • •!-'
be, ,
>- _, .• '·· d · H

viewed. As to how the.
parties
-
.understood
•. -
Clause 2.03.is.
f ' (
;=tlso i
:0 ·-\ '"•! • \I •
~ I

an important factor that needs to be kept)ri min,d){,'t?:\17,,,
accepting the e.xtension of the contra~t., the r~,~~of!_P};nJ0 , 1 Cf:,
contractor had simply referred to the statutory rev1s1qt;1 in the....
wages by M.D.L.B. during the 'last year'. ·Since t~~;;1e,t~~& 1 §f,;;
acceptance is of 7th December, 1983 the statutory revision
which the contractor wanted to be taken into consic:ter~tjon,_were
revisions before 1983 <?nd not those made at any tir:ne·after the-:· Ii;
974 SUPREME COURT REPORTS [2010) 7 S.C.R.

A extended period of contract. This position is clear from the
following lines appearing in the letter of acceptance dated 7th
December, 1983 :

"However, we would like to inform you that there are lot of
B statutory revisions in the wages of Mormugao Dock
Labour Board during last 1 year which you will have to
consider while extending our contractual period. In this
connection, the undersigned will call on your office to
discuss the same personally in near future and we expect
your cooperation in this regard."
c
14. The appellant's letter dated 27th January, 1984 sent
in reply to the above made it clear to the respondent that Clause
2.03 of the NIT did not envisage escalation on the basis of the
revision subsequent to 15th January, 1984 even if such
D revisions were already being discussed or negotiated by the
Dock Workers with the M.D.l.B. The following passage from
the said communication makes the position abundantly clear:

"A copy of clause 2.03 of Schedule II of N.1.T. is enclosed.
From this, it will be very clear that whatever increases that
E
have been allowed by M.D.l.B. upto 15.1.84, can only be
considered for the escalation purposes, and not those
increases in wages which are under negotiations, for which
M.D.l.B. circulars will be issued subsequently after
15.1.84, with retrospective effect."
F
15. The learned Single Judge of the High Court was, in
the light of the above, correct in holding that the award made
by the Arbitrators to the extent it directed payment of the
additional amount was unsustainable. The Division Bench,
G however, fell in error in taking a contrary view and holding that
the interpretation placed by the Arbitrators was a plausible
interpretation.

16. That brings us to the question whether an Arbitrator can
H make an award contrary to the terms of the contract executed
RASHTRIYA CHEMICALS & FERTILIZERS LTD. v. 975
CHOWGULE BROTHERS & ORS. [T.S. THAKUR, J.]

between the parties. That question is no longer res integra A
having been settled by a long line of decisions of this Court.
While it is true that the Courts show deference to the findings
of fact recorded by the ~rbitrators and even opinions, if any,
expressed on questions of law referred to them for
determination, yet it is equally true that the Arbitrators have no B
jurisdiction to make an award against the specific terms of the
contract executed between the parties. Reference may be
made, in this regard, to the decision of this Court in Steel
Authority of India Ltd. v. J.C. Budharaja, Government and
Mining Contractor, (1999) 8 SCC 122 where this Court C
observed :

" ........ that it is settled law that the arbitrator derives
authority from the cpntract and if he acts in manifest
disregard of the contract, the award given by him would
be an arbitrary one; that this deliberate departure from the D
contract amounts not only to manifest disregard of the
authority or misconduct on his part, but it may tantamount
to mala fide action ...... "

...... It is true that interpretation of a particular condition in E
the agreement would be within the 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 F
agreement, the award would be arbitrary, capricious and
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 G
into by the court. The arbitrator may have jurisdiction to
entertain 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. ... "
H '
976 SUPREME COURT REPORTS [2010] 7 S.C.R.

A 17. It was further observed:
'' ..... Further, the Arbitration Act does not give any power
to the arbitrator to act arbitrarily or capriciously. His
exisience depends upon the agreement and his function
B .
is to act within the limits of the said agreement ....."

18. In W:B. State Warehousing Corporation & Anr. v.
Sushi/ Kumar Kayan & Ors. (2002) 5 SCC 679, again this
Court observed:

c : " ...... , If there is a specific term in the contract or the law
which does not permit the parties to raise a point before
the arbitrator and if there is a specific bar in the contract
to the raising of the point, then the award passed by the
arbitrcitor in respect thereof would be in excess of his
D jurisdiction .... "

· ·19. In Bharat Coking Coal Ltd. v. Annapurna Construction
(2003) 8 SCC 154, this Court reiterated the legal position in
the .following words:

E 'lThere 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:lf he has travelled beyond the
F contract, he would be acting without jurisdiction, whereas
· t, if he has remained inside the parameters of the contract,
· · his award cannot be questioned on the ground that it
contains an error apparent on the face of the record."
, 20 . In MD, Army Welfare Housing Organisation v.
G Sumanga/ Services (P) Ltd. (2004) 9 SCC 619 also this
., Court took the similar view and observed:
"An Arbifral Tribunal is not a court of law. Its orders are
' not judiciar orders. Its functions are not judicial functions. It
H cannot exercise its power ex debito justitiae. The
RASHTRIYA CHEMICALS & FERTILIZERS LTD. v. 977
CHOWGULE BROTHERS & ORS. [T.S. THAKUR, J.]

jurisdiction of the 'arbitrator being confined to the four A
corners of the agreement, he can only pass such an order
which may be the subject-matter of reference.

21. Reference may also be made to the decisions of this
Court in Associated Engineering Co. v. Government of Andhra 8
Pradesh & Anr. (AIR 1992 SC 232), Jivarajbhai Ujamshi Sheth
& Ors. v. Chintamanrao Balaji & Ors. (AIR 1965 SC 214),
State of Rajasthan v. Nav Bharat Construction Co. (AIR 2005
SC 4430), Food Corporation of India v. Surendra, Devendra
& Mahendra Transport Co. (2003) 4 SCC 80, which sufficiently C
settle the law on the subject.

22. That leaves us with the question whether the valid part
of the award can be saved by severance from the invalid part.
Before the Arbitrators the respondent-Chairman had quantified
the claim at Rs.27,91,984.29 on account of escalation of the D
rates consequent upon statutory increases in the wages of
M.D.L.B. during the extended period of contract. A further slim
of Rs.9,88,713.20 on account of escalation in the wages of
other categories of workers such as Tally Clerks, Stichers,
Foreman, Asst. Foremen, Supervisors etc. was also made on E
the same basis. In addition, a claim for the recovery of
Rs.8,63,953/- towards the final payment due and payable to the
claimant with interest@ 18% p.a. on the same was also made.

23. In the light of the discussions in the ear:Jier part of this
order the entitlement of the respondent to claim,, any amount on F
account of escalation consequent upon the increase in the
wages of M.D.L.B. workers is not established. The first two
claims mentioned above on account of escalation could not,
therefore, have been allowed by the Arbitrators nor could the
incidental claim for payment of interest on that claim be granted. G
The question then is whether there is any lawful justification for
disallowing the only other claim made by the respondents
representing the balance amount due to the claimant towards
its final bill. The only defence which the appellant had offered
to that claim was based on the law of limitation. That defence H
97B SUPREME COURT REPORTS [2010] 7 S.C.R.

A having been withdrawn by Mr. Divan, we see no real justification
for disallowing the said claim especially when the counter-claim
made by the appellant has been rejected and the said rejection
was not questioned before the High Court. In fairness to Mr.
Divan we must record that he did not seriously oppose the
B severance of the award made by the Arbitrators so as to
separate the inadmissible part of the claim based on an
interpretation of Clause 2.03 from the admissible part.

24. In the result we allow this appeal but only in part and
to the extent that the award made by the Arbitrators shall stand
C set aside except to the extent of a sum of Rs.8,63,953/- which
amount shall be payable to the respondent-contractor with the
interest@ 9% p.a. from 1st April, 1985 till the date of actual
payment thereof.

O 25. The parties to bear their own costs through out the
proceedings.

K.K.T. Appeal partly allowed.