Holding

The award was not set aside because the arbitrator acted within his jurisdiction and did not misconduct himself.

Summary

P.M. Paul, a contractor, entered into a two‑phase construction contract with the Union of India. A dispute arose over the handover of the site and alleged delays, leading the parties to invoke the arbitration clause in the contract. The Supreme Court appointed a former judge, Justice V. Khalid, as arbitrator, who awarded the contractor Rs 2,00,216.18 as escalation costs, finding that price escalation due to delay was within the contract's scope. The Union of India challenged the award, contending that the arbitrator had exceeded his jurisdiction by granting escalation charges without an explicit escalation clause, and sought to set aside the award under Section 30 of the Arbitration Act, 1940. The Court held that adjudicating on escalation costs was a matter within the arbitrator's jurisdiction and did not constitute misconduct or a legal excess of jurisdiction. Consequently, the Court refused to set aside the award and ordered the respondent to pay the arbitrator’s remuneration and costs. The civil miscellaneous petition was therefore disposed of.

Issues considered

Whether an arbitral award can be set aside under Section 30 of the Arbitration Act, 1940 on the ground that the arbitrator adjudicated a matter not within the subject‑matter of the reference.
Whether the arbitrator had jurisdiction to award escalation costs in the absence of an explicit escalation clause in the contract.
Whether the objection to the award was filed within the statutory time limit prescribed under Section 30.

Legislation cited

Arbitration Act, 1940s. 12, s. 14, s. 17, s. 30, s. 33, s. 5

Subjects

ArbitrationAward setting asideJurisdiction of arbitratorEscalation clauseContract delaySection 30 Arbitration Act 1940Civil Miscellaneous Petition

Judgment

P.M. PAUL A
v.
UNION OF INDIA

JANUARY 16, 1989
•
-)'., [SABYASACHI MUKHARJI AND S, RANGANATHAN, JJ.] B

Arbitration Act 1940: Sections 14, 17, 30 and 33-Award-
Setting aside of-Whether arbitrator has misconducted himself or
proceedings-Adjudicating upon matter not subject matter of adjudica-
tion-Legal misconduct.

The appellant, a contractor entered into a contract with the
c
-{
respondent for the construction of a building. The contract consisted of
two phases. The date of commencement of both the phases was March
10, 1979, the date of completion of Phase I was June 9, 1980 and that of
Phase II was November 9, 1980. Dispute arose about the handing over
of the site. The appellant's case was that the site was not handed over as D
stipulated and consequently the work could not either be commenced or
completed as stipulated. The respondent asserted that the appellant had
X abandoned the work and committed a breach of contract. This was
negated by the appellant.

As the contract provided for settlement of disputes by an arbitrator, E
the appellant filed a suit for the appointment of an arbitrator.

The matter came up in appeal to this Court, and one of its former

/
l Judges was appointed as an arbitrator. The Arbitrator entered upon
the reference, examined the documents, heard the parties, considered
the evidence, and made an award after inspecting the sites. F

The respondent aggrieved by the award filed a petition and con-
tested the same. It was contended that the arbitrator had travelled
beyond his jurisdiction in awarding a sum of Rs.2 lakhs as escalation
cost and charges in respect of claim I.
G
·,/ Disposing of the Civil Miscellaneous Petition the Court,

HELD: I. It is well-settled that an award can only be set aside
under section 30 of the Arbitration Act, if the Arbitrator has miscon-
ducted himself or the proceeding. [121 C-D I
H

115
116 SUPREME COURT REPORTS [1989] 1 S.C.R.

2. Adjudicating upon a matter which is not the subject-matter of -t
A
adjudication, is a legal misconduct for the Arbitrator. [121D I

3. Escalation is a normal ineident arising out of gap of time in this
inflationary age in performing any contract. [12IF]

B In the instant case, the dispute that was referred to the arbitrator :¥-
was, as to who was responsible for the delay, what are the repercussions
of the delay in completion of the building, and how to apportion the
consequences of the responsibility. Aller discussing the evidence and
the submission of the parties to the contract, the arbitrator, found ihat
it was evident that there was escalation and, therefore, he came to
the conclusion that it was reasonable to allow 20% of the compen-
c sation under claim I, he accordingly allowed the same. This was a
matter which was within the jurisdiction of the arbitrator, and the
arbitrator had not misconducted himself in awarding the amount as he
has done. [121D-E, G-H; 122A]

D 4. Once it was found that the arbitrator had jurisdiction to find
that there was delay in execution of the contract due to the conduct of
the respondent, the respondent was liable for the consequences of the
delay, namely, increase in prices. [122C-DJ

CIVIL APPELLATE JURISDICTION:: Civil Miscellaneous )(.
E ·Petition No. 26519 of 1988.

IN
Civil Appeal No. 2632 of 1987.
'
From the Judgment and Order dated 10.6.1985 of the Kerala ,\
F High Courtin W.P. No. 210 of 1985 in O.P. No. 897 of 1984. . \

Mrs. Baby Krishnan for the Appellant.
•
A.K. Srivastava and C. V.S. Rao for the Respondent.

G The Judgment of the Court was delivered by

SABY ASACHI MUKHARJI, J. This is an application for )<'
making the award dated 17th February, 1988 passed by Mr V. Khalid,
a former Judge of this Court, in a dispute referred to hini by thiS
Court's order dated 6th October, 1987, final and to give consequen-
H tial directions thereupon.
'

P.M. PAUL v. U.0.1. [MUKHARJI, J.) 117

On 7th April, 1979 there was a contract for construction of the
A
building in question. The contract consisted of two phases. The date of
commencement of both the phases was 10th March, 1979: the date of
completion of phase-I was 9th .June, 1980 and for phase-II 9th
November, 1980. The dispute arose about the handing over of the
site. According to the appellant, the site was not handed over to him as
agreed upon and therefore, the work could not either be commenced
or completed as stipulated. He, therefore, accused the respondent of
obstructionist tactics also. According to the respondent, however, the
claims put forward by the appellant were imaginary excuses to gain
time and that he put forward various demands for extension of time
and for payment of compensation to which he was not entitled.

Clause 70 of the general conditions of the contract provided for
c
settlement of disputes by arbitration. The appellan.t resorted to this
clause and addressed a letter dated 13th September, 1980 to the Chief
Engineer, South West Zone, Cochin, informing him that if the said
disputes were not settled to his satisfaction within 15 days from the
date of receipt of the notice, he would be taking appropriate steps to D
refer the disputes to arbitration in accordance with the said clause.
This request of the appellant was turned down by the Chief Engineer,
as according to him, work was in progress and the question of grant-
~- ing reasonable extension of time was under examination. Dissatisfied
with this, the appellant took the mattet to the Engineer-in-Chief by his
letter dated 14th October, 1980 calling upon him to appoint an E
Engineer Officer as the sole arbitrator to adjudicate upon the disputes
between the parties. This request was not acceded to. The relationship
between the parties becaine strained.
'
, The respondent asserted that the appellant had abandoned the
}
work and committed breach of contract. Thereafter, the appellant vi de F
a notice dated 4th October, 1982 called upon the Engineer-in-Chief to
appoint an Engineer Officer as the sole arbitrator. After further cor-
respondence, the Engineer-in-Chief by his letter dated 9.6.1983
appointed one Mr. K.C.S. Rao, Chief Engineer, Poona Zone, as the
arbitrator in respect of the disputes. Mr Rao, it is asserted, entered
into reference. The appellant asserted that Mr Rao was incompetent to G
-{ function as arbitrator for it was he who had terminated the contract
when he was officiating as the Chief Engineer of Sought West Zone.

Aggrieved by this appointment, he filed a suit in the Court of
... Subordinate Judge, Cochin, seeking leave to revoke the authority of
the appointed arbitrator under section 5 of the Arbitration Act. H
118 SUPREME COURT REPORTS [1989] 1 S.C.R.
\~
A (hereinafter referred to as 'the Act'), and for appointment of another
person as arbitrator under section 12 of the Act. It is not necessary to
set out the various stages of litigation thereafter. Ultimately, the
matter came to this Court and by an order passed by this Court on 25th
August, 1987 in Civil Appeal No. 2632/87, it was observed as follows;-

B "Having regard to the facts and circumstances of the case, ·.:f-.
.we are of the opinion that all the disputes mentioned in the
Paper Book be arbitrated by a former retired Judge of this
Court. We accordingly appoint Mr. Justice v. Khalid
(Retd.) a former Judge of this Court, as the Arbitrator.
The Arbitrator will decide his remuneration as he thinks fit
and the parties will pay the same in equal shares. The
c parties will also bear the costs and charges of holding the
"\-·
proceedings including the remuneration and other assis· I

tance of Stenographers etc. Counce! for both the parties
have no objection to the aforesaid order. The learned
Arbitrator will enter into reference within a fortnight from
D the receipt of the copy of the order and will make the award
within four months thereafter. Costs of the parties in the
Arbitration proceedings will abide by the decision of the
Arbitrator".

The arbitrator entered upon the reference, examined the docu-
E ments, heard the parties and considered the evidence. He made his
award after inspecting the sites on 20th December, 1987 and 21st
January, 1988. The claims of the appellants contractor were as follows:

"1. On account of losses caused due to increase in prices of
materials and cost of labour and transport during the
F extended period of contract from 9.6.80 work for
under phase I and from 9.11.80 for work under
phase II. 5,47,612.15

2. On Account of work done under the contract including
fully executed and partly executed items at the origi-
G nally agreed rates and for the cost of materials lying at
site and taken over by the Department as well as for the
value of machinery, tools and plants lying over the site
and taken over by Department. 7,27,095.01

3. On account of losses caused due to added and infructu-
H ous expenditure on overheads, establishments, and
P.M. PAUL v. U.0.1. IMUKHARJI, J.) li9

·j- supervision during the extended period of contract upto
A
3.12.81, the date of termination, 1,28,864.00

4. On account of losses caused by way of gains prevented
due to unlawful repudiation of the contract by the
Department and the consequent termination of the con-
-t'. tract by the contractor. 1,04,424.58 B

5. (a) Release of Bank Guarantee for Rs.1,25.000 (Bank
Guarantee No. G/19/80 dated 28.4.80 issued by the
State Bank of India, Willingdon Island, Conchin-3).

(b) Refund of the retention amounts recovered by the
Department from the Running Account Bills. Amount not c
indicated
6. Interest on all the amounts due and payable. @18% PA from
9.12.81 till
actual date
of payment
or realisation''. D
The claims on behalf of the respondent, were as under:

"1. Excess cost which had to be borne by the Department i9,16,198.82
on account of the defaults of the contractor and subse-
quent cancellation of the contract after adjusting other
amounts due from the contractor under this contract. E

2. Cost of reference to Arbitration 7,000.00"

I
./
The arbitrator by his award asked the respondent to pay the
following: F

"(a) On claim No. I, a sum of Rs.2,00,216.18 with interest
at 10% from 9.12.1981 till the date of this Award.

(b) On claim No. II, a sum of Rs.2,47,269.69 with interest
at 10% from 9.12.1981 till the date of this Award. G

(c) Claim No. III-Disallowed.

(d) Claim No. IV-Disallowed.

(e) On claim No. V(a), the respondent is directed to H
120 SUPREME COURT REPORTS. [1989] 1 S.C.R.

A refund the Bank Guarantee sum of Rs.1,25,000 to the
Cliamant with interest at 10% from the date of the encash-
ment till the date of this Award.

II. The remuneration of the Arbitrator is Rs.75,000.
Rs.50,000 has already been deposited. The claimant and
B the Respondent are directed to· remit the balance equally
(Rs.12,5000 each) to the Arbitrator to his Madras address
by Account payee Draft within two weeks of receipt of the
notice under Section 14 of the Arbitration Act, 1940.

III. The respondent is directed to pay to the Claimant by
way of cost Rs.17,500 towards Arbitrator's remuneration
c and Rs.10,000 towards Advocates' fees and cost.

IV. The respondent is directed to suffer their cost.

V. The counter claims preferred by the Respondent
D against the Claimant are disallowed."

A petition was filed on behalf of the respondent, wherein it was
stated as follows:

"Regarding petitioner's claim No. 1, in the absence of any
E escalation clause, it is not permissible to the Arbitrator to
grant any escalation price as sought by the petitioner. On
the other hand, if the .work is not completed within the
~pecifiet! time, he has got right to ask for extension of time.
Failure to grant extension of time, the contractor can claim
difference of prices. That is not the case here. Extension of
F time l!(llS granted and the Arbitrator after considering the
contentions put-forth before him has granted 20% of the
escalation price which is not in accordance with the terms
of the contract. Though the term of the cotract envisages
that the entire site should be handed over in-time for com-
pletion of the work entrusted to him as referred to above in
G civil works before starting of the work, the contrator is
required to put up some preliminary work like construction
of temporary store sheds, temporary office which requires
sometime and within that time if the other area or the site is
not handed over the contractor has got grievances to comp-
lain against the Department. Further, by not handing over
H the· site how much damage or loss is sustained has not been
P.M. PAUL v. U.0.1. [MUKHARJI, J.) 121

apprised off. Therefore, it is submitted that Claim No. 1 of A
the Contractor should have been considered as outside the
scope of the contract and hence the arbitrator has exceeded
his jurisdiction."

Mr Ashok Srivastava, counsel appearing for the Union of India,
submitted before us that this is a reasoned award and the learned B
arbitrator had granted a sum of Rs.2 lakhs as escalation charges and
costs. Mr Srivastava tried to urge that the right to get escalation
charges and costs in the absence of escalation clause was not a matter
referred to the arbitrator. In other words, it was urged that the
arbitrator had travelled beyond his jurisdiction in awarding the escala-
tion cost and charges. It is difficult to accept this objection for reason
more than one. c

It is well-settled that an award can only be set aside under section
30 of the Act, which enjoins that an award of an arbitrator/umpire can
be set aside, inter alia, if he has misconducted himself or the proceed-
ing. Adjudicating upon a matter which is not the subject-matter of D
adjudication, is a legal misconduct for the arbitrator. The dispute that
was referred to the arbitrator was, as to who is responsible for the
delay, what are the repercussions of the delay .in completion of the
l~ building and how to apportion the consequences of the responsibility.
In the objections filed on behalf of t)le respondent, it has been stated
that if the work was not completed within the stipulated time the party E
has got a right for extention of time. On failure to grant extension of
time, it has been asserted, the contractor can claim difference in prices.

the instant case, it is assert~d that the extension of time was
} grantedIn ·and the arbitrator has granted 20% of the escalation cost.
Escalation is a normal incident arising out of gap of time in this infla- F
tionary age in performing any contract. The arbitrator has held that
there was delay, and he has further referred to this aspect in his award.
The arbitrator has noted that Claim I related to the losses caused due
to increase in prices of materials and cost of labour and transport
during the extended period of contract from 9.5.1980 for the work
under phase I, and from 9.11.80 for the work under phase II. The total G
( amount shown was Rs.5,47,618.50. After discussing the evidence and
the submissions the arbitrator found that it was evident that there was
escalation and, therefore, he came to the conclusion that it was
reasonable to allow 20% of the compensation under Claim I, he has
accordingly allowed the same. This was a matter which was within the
jurisdiction of the arbitrator and, hence, the arbitrator had not mis- H
122 SUPREME COURT REPORTS 11989] 1 S.C.R.

A conducted himself in awarding the amount as he has done.

It was submitted that if the contract work was not completed
within the stipulated time which it appears, was not done then the
contractor has got a right to ask for extension of time, and he could
claim difference in price. This is precisely what he has done and has
B
obtained a portion of the claim in the award. It was submitted on

I
behalf of the Union of India that failure to complete the contract was
not the case. Hence, there was no substance in the objections raised.
Furthermore, in the objections raised, it must be within the time pro-

r
vided for the application under section 30 i.e., 30 days during which
the objection was not specifically taken, we are of the opinion that
c there is no substance in this objection sought to be raised in opposition
llio •w.m. °""' ;,
WU"""" lli• U. """•W "" j•ri- m
find that there was delay in execution of the contract due to the con- \
I
duct of the respondent, the respondent was liable for the consequences
of the delay, namely, increase in prices. Therefore, the arbitrator had
jurisdiction to go into this question. He has gone into that question
D
and lias awarded as he did.

Claim I is not outside the purview of the contract. It arises as an
incident of the contract and the arbitrator had jurisdiction. In that
view of the matter the objections raised against the award, cannot be _,.
sustained. No other objection was urged before us. The award, there-
E fore, must be made the rule of the Court and there will be a decree in
terms of the award, and the respondent is directed to pay Rs.17,500 as
the arbitrator's remuneration and Rs.10,000 as advocates' fees and
costs.

F
The Civil Miscellaneous Petition is disposed of accordingly. ,.\
N.V.K. Petition disposed of.