Holding

The Supreme Court set aside the arbitrator's awards on claim 1 and claim 37A due to legal misconduct and error apparent on the face of the award, reduced the interest rate to 9% per annum, and upheld the remaining awards.

Summary

The State of Rajasthan entered into a contract with Ferro Concrete for a water‑pipeline project. After the contractor failed to complete the work, arbitration was instituted and the arbitrator awarded various sums, including loss of profit (claim 1), idle‑machinery compensation (claim 37A), and interest at 18% per annum. The employer challenged the award, alleging legal misconduct and errors apparent on the face of the award, particularly that the arbitrator ignored contract terms on mobilization advance and awarded interest above the permissible rate. The Supreme Court held that the arbitrator had committed legal misconduct and made a clear error in claims 1 and 37A, setting those awards aside and reducing the interest rate to 9% p.a., while upholding the remainder of the award. The appeals were partly allowed, modifying the award accordingly.

Issues considered

When did the arbitrator commit legal misconduct or an error apparent on the face of the award in claim 1 (loss of profit) and claim 37A (idle‑machinery compensation)?
Whether the award of interest at 18% per annum under the Arbitration Act, 1940 and the Interest Act, 1978 exceeds the permissible rate and is therefore erroneous.
Whether the arbitrator had jurisdiction to award interest for pre‑reference, pendente‑lite and future periods in the absence of an express contractual bar.
Whether claim 37A was beyond the reference as it was based on a claim not made and on a hypothetical future breach.
Whether any other claims or counter‑claims suffered from infirmities that would justify setting aside the award.

Legislation cited

Subjects

ArbitrationSection 30 Arbitration ActLegal misconductError apparent on the face of the awardInterest awardMobilization advanceContract breachJurisdiction of arbitratorAward modification

Judgment

-I
[2009) 10 S.C.R. 31
"<

1
STATE OF RAJASTHAN & ANR. A
v.
MIS. FERRO CONCRETE CONSTRUCTION PVT. LTD.
(Civil Appeal No.· 2764 of 2009)
APRIL 22, 2009
B
[R.V. RAVEENDRAN AND LOKESHWAR SINGH
PANTA, JJ.]

ARBITRATION ACT, 1940
c
s.30- Setting aside of award- Held: When there is no
allegation of moral misconduct against arbitrator, award can
be attacked if there was legal misconduct on the part of the
~ arbitrator in making the award and/or if there was an error
apparent on the face of the award - In the instant case, the
D
arbitrator, in respect of claims 1 and 37-A of the contractor
and rate of interest payable to contractor (claims 12 and 13)
committed a legal misconduct by ignoring terms of contract
and it was also a case of error apparent on the face of award
- In a reasoned award if claim of contractor is equated to proof
of the claim, then it is obviously a legal misconduct and an E
.-4
error apparent on the face of award - Allowing of interest at
18% in an award governed by 1978 Act was an error on the
face of award - The rate of interest could not exceed the
current rate of interest - As regards the award in respect of
other claims and counter claims, neither want of jurisdiction F
nor legal misconduct nor any error apparent on the face of
award was made out, therefore, the award in respect of those
claims and counter-claims is upheld - Award modified
accordingly - Interest Act, 1978.
~
G
INTEREST ACT, 1978 :

S.3- Interest on claims allowed in an award made under
.. Arbitration Act, 1940 - Held: In the absence of an express bar,
31 H
-
32 SUPREME COURT REPORTS [2009] 10 S.C.R.
~

arbitrator had jurisdiction to award interest for pre-reference, •
A
~
pendente lite and future periods - However, award of interest
at a rate higher than the current rate is an error on the face of
award - Award modified accordingly - Arbitration Act, 1940.

The appellant (employer) entered into a contract with
B
the respondent-contractor for manufacture, laying,
testing and commissioning of water pipeline at a length ~
•
of 37.41 kilometers. The value of the work as per the work
order was Rs. 9,91,94,602.50. Since the contractor could
not complete the work within the stipulated time, the
c employer got the work completed through alternate
agency by treating the contract as having been
abandoned. As regards the settlement of disputes
between the parties through arbitration, the matter
reached the Supreme Court and ultimately a sole
D arbitrator was appointed. Before the arbitrator the
.
contractor filed its claim in 43 heads aggregating to
Rs.6,21,29,626/-. The employer, besides filing its reply to
the claim statement, made five counter claims to the tune
of Rs.11,55,98,388/-. The arbitrator allowed certain claims
E of the contractor amounting to about Rs.1,&7,00,000 and
one counter claim of the employer (amounting to
Rs.59,42,275/-. The contractor filed an application to make
j.
the award a rule of the court. The civil court allowed the
application subject to modification of the award made on
F claim 37-A of the contractor (direction to employer to pay
Rs.12,072/- per day towards idle charges for machinery
and staff etc. from the date of award) holding that the said
charges would be payable per day from the date of
decree. Both, the employer as also the contractor filed
G appeals. The High Court dismissed the appeal of the
i-
employer and allowed that of the contractor restoring the
direction of the arbitrator to pay the compensation of
Rs.12,072/- per day from the date of the award.

In the appeals filed by the employer, the question for
H
STATE OF RAJASTHAN v. FERRO CONCRETE 33
CONSTRUCTION PVT. LTD.
_,
consideration before the Court was : whether there was A
any legal misconduct or error apparent on the face of the
award, in regard to the award of the arbitrator in respect
of the claims and counter-claims.

Allowing the appeals in part, the Court B
HELD: 1.1. Section 30 of the Arbitration Act, 1940 inter
alia provides that the award can be set aside on the
ground that the arbitrator had misconducted himself or
the proceedings, or that the award had been improperly
procured or is otherwise invalid. An error apparent on the c
face of the award, is a ground for setting aside the award
u/s 30 or for remitting the award to the arbitrator u/s 16(1)
(c) of the Act. [Para 13] [46-8-C]
. ~

Champsey Bhara & Co. vs. Jivraj Ba/loo Spinning & D
Weaving Co. Ltd. AIR 1923 PC 66, referred to.

1.2. Under the Arbitration Act, 1940, an award was not
open to challenge on the ground that the arbitrator
reached a wrong conclusion or failed to appreciate facts, E
as under the law the arbitrator is made the final arbiter of
the dispute between the parties. While considering the
.J challenge to an award, the court will not sit in appeal over
the award nor re-appreciate the evidence for the purpose
of finding whether on the facts and circumstances, the
F
award in question could have been made. When there is
no allegation of moral misconduct ~gainst the arbitrator
with regard to the award, and where the arbitration has
not been superseded there were only two grounds of
attack (i) that there was legal misconduct on the part of
the arbitrator in making the award and (ii) that there was G
an error apparent on the face of the award. [Para 13] [46-
E-H; 47-A]

State of Rajasthan vs. Puri Construction Co. Ltd. 1994
(6) sec 485, referred to. H
34 SUPREME COURT REPORTS [2009] 10 S.C.R.

A 2.1. In the instant case, as regards claim-1 of the
contractor towards loss of profits and overheads on
account of alleged inordinate delay in releasing the
mobilization advance, it is true that clause 3 of Common
Terms Reference did not contemplate the mobilization
B advance being released in 3 installments. But the CTR
was followed by work order dated 23.8.1988 and by
amendment dated 8.11.1988 which specifically stated that
the mobilization advance would be paid in 3 installments
of which the second and the third installments would be
c paid on production of a certificate of the Chartered
Accountant about utilization of the previously paid
amount on verification by the department towards
progress of the factory. The arbitrator has held that the
said clause was unilaterally introduced and,. therefore,
0 was not binding on the contractor. On the face of it, this
is erroneous. [Para 18] [53-B-E]

2.2. It is evident that the mobilization advance had to
be released only against bank guarantee to be furnished
liy the contractor. The mobilization amount
E corresponding to the first bank guarantee was released
within two days. The amount corresponding to the
second and third bank guarantees was to be released
only after the contractor had produced a certificate in
regard to the utilization of the earlier advance. Therefore,
J! it cannot be said that there was delay or breach on the
part of the employer in releasing mobilization advance. If
at all there was any delay, it was on the part of the
contractor. (Paras 18 and 19] (54-C, E-G; 55-A-B]

G 2.3. The fact that release of mobilization advance was
governed by clause 5(1 )(b) of the work order (as amended
on 8.11.1988) and clause 7 of the agreement dated
11.1.1989 was totally overlooked by the arbitrator by
proceeding on the basis that mobilization advance was
H governed by the CTR alone. The arbitrator committed a
STATE OF RAJASTHAN v. FERRO CONCRETE 35
CONSTRUCTION PVT. LTD.
legal misconduct by ignoring the terms of contract, i.e., A
the agreement dated 11.1.1989, which specifically
provided that in addition to the CTR, the work order and
amendment to work order dated 8.11.1988 would also
form part of the contract. The arbitrator also overlooked
the fact that the additional provision regarding 8
mobilization advance was introduced in the agreement
itself. Therefore, the mobilization advance was governed
by the terms in the CTR, the work order, the amendment
to the work order dated 8.11.1988 and the agreement
dated 11.1.1989 read together. If so read, it was clear that C
there was no breach on the part of the employer but the
contractor itself was responsible for the delay and,
therefore, the question of compensating the contractor on
that score does not arise. [Para 19) [55-A-E]

3.1. Claim No. 37-A i.e. compensation at the rate of D
Rs. 12,072/- per day towards idle charges for machinery,
staff etc. was linked to mobilization advance. The
arbitrator considered claim 37-A with three other claims
(36, 36-A and 37) and held that none of the 4 claims was
maintainable as the factory built out of mobilization E
advance had been mortgaged in favour of the employer.
As a consequence, he did not award any amount in.
res.pect of these 4 claims, still he directed payment of
Rs.12,072/- per day from the date of award not because
he held that there was any loss of production as a F
consequence of any breach by the employer, but
because he had made an award against the contractor
in favour of the employer for Rs. 59,42,275/- with interest.
The arbitrator was of the view that if that sum was
adjusted against the amount due by the employer, there G
was no need for the mortgage of the plant to continue and,
therefore, the employer should release the document of
title deposited by way of equitable mortgage, within 30
days from the date of award; and if the employer failed .
ito do so, the employer should pay the contractor Rs. H
36 SUPREME COURT REPORTS (2009] 10 S.C.R.

A 12,072/- per day from the date of the award till the date
of release of the mortgage. Thus, the award under claim
37-A was made not on account of any breach committed
by the employer, but in respect a breach if made in future
after the date of the award. There was no such claim and
B the award was, therefore, beyond the refere:ice. It is a
clear case of an error apparent on the face of the award
and a legal misconduct. [Paras 21, 23 and 24] [56-B; 57-
B-C-F-H; 58-A-F-H; 59-A-B]

3.2. It is significant to note that as per the award of
c the arbitrator, made under claim 37-A , on a claim that
was never made, the amount that would become due at
Rs.12,072/- per day from 21.9.1994 to date will be
approximately Rs.6,42,70,000/-. This is a strange situation
where the arbitrator makes an award in favour of the
D employer directing the contractor to refund the employer
Rs.59,42,275/- with interest at 18% per annum from
18.9.1990 upto date of decree/payment and then even
though the said payment was not made, awards
damages to the contractor which works out to
E Rs.6,42,70,000/-. This again is a legal misconduct and an
error apparent on the face of the award. [Para 26] [60-8-
D]
3.3. In a reasoned award if the claim of a contractor
F is equated to proof of the claim, then it is a legal
misconduct and an error apparent on the face of the
award. While the quantum of evidence required to accept
a claim may be a mater within the exclusive jurisdiction
of the arbitrator to decide, if there was no evidence at all
and if the arbitrator makes an award of the amount
G
claimed merely on the basis of the claim statement
without anything more, it has to be held that the award
on that count would be invalid. In the instant case, the
sum of Rs. 12,072/- per day under claim 37-A was claimed
as damages by the contractor in a two line calculation
H ,
STATE OF RAJASTHAN v. FERRO CONCRETE 37
CONSTRUCTION PVT. LTD.

without any supporting evidence document. The claim is A
-· made on the ground that the contractor was disabled
from manufacturing the stated number of pipes
elsewhere. There is no evidence that it had other
contracts where it was required to manufacture that
number of pipes or that it could not manufacture the B
required pipes for want of plant and machinery. However,
in the award the arbitrator neither considered the validity
of the claim of Rs.12,072/- per day-nor did he accept the
said claim as valid or correct. Therefore, the entire award
under this head being wholly illegal and beyond the C
jurisdiction of the arbitrator, cannot be sustained and is
set aside. [Paras 27 and 29] [61-D, E; 60-G, H; 61-C]

4.1. So far as claims 12 and 13 of the contractor are
concerned, it is no doubt true that the position of law
0
earlier was that in regard to award of damages, interest
was not payable before quantification by a court. But, the
position regarding award of interest after the Interest Act,
1978 came into force, can be stated thus : (a) where a
provision has been made in any contract, for interest on E
any debt or damages, interest shall be paid in accordance
with such contract; (b) where payment of interest on any
debt or damages is expressly barred by the contract, no
interest shall be awarded; (c) where there is no express
bar in the contract and where there is also no provision
for payment of interest then the principles of s.3 of Interest F
Act will apply in regard to the pre-suit or pre-reference
period and consequently interest will be payable: (i)
where the proceedings relate to a debt (ascertained sum)
payable by virtue of a written instrument at a certain time,
then from the date when the debt is payable to the date G
of institution of the proceedings, (ii) where the
proceedings is for recovery of damages or for recovery
of a debt which is not payable at a certain time, then
interest will be payable from the date mentioned in the
H
38 SUPREME COURT REPORTS [2009] 10 S.C.R.

A written notice (given by the person making a claim to the
person liable for the claim), to date of institution of
proceedings; (d) payment of interest pendente lite (date
of institution of proceedings to date of decree) and future
interest (from the date of decree to date of payment) shall
8 not be governed by the provisions of Interest Act, 1978
but by the provisions of s.34 of Code of Civil Procedure,
1908 or the provisions of the law governing Arbitration
as the case may be. In the instant case, there was no ..
express bar in the contract in regard to interest and,
c therefore, the arbitrator had the jurisdiction and authority
to award interest for all the three periods- pre reference,
pendente lite and future. Since interest has been awarded
only from 3.9.1990, i.e. the date of the petition u/s 20 of
the Act for appointment of arbitrator, there is no reason
to alter the date of commencement of interst. [Paras 31,
0
32 and 34-35] [63-E; 65-C-H; 66-A-B-E]

Bhagwati Oxygen vs. Hindustan Copper Ltd. 2005(6)
SCC 462; Secretary, Irrigation Department, Government of
Orissa vs. G.C. Roy 1992(1) SCC 508 and Executive
E Engineer, Dhenkana/ Minor Irrigation Division vs. N. C.
Budharaj 2001(2) SCC 721, relied on.

Iron & Hardware {India) Co. vs. Firm Sham/al & Bros. AIR
1954 Bombay 423, referred to.
F
4.2. However, the awarding of interest at 18% per
annum, in an award governed by the Arbitration Act, 1940
was an error apparent on the face of the award. In regard
to award of interest governed by the Interest Act, 1978,
the rate of interest could not exceed the current rate of
G interest which means the highest of the maximum rates
at which interest may be paid on different classes of ....
deposits by different classes of scheduled banks in
accordance with the directions given or issued to
banking companies generally by the Reserve Bank of
H
STATE OF RAJASTHAN v. FERRO CONCRETE 39
CONSTRUCTION PVT. LTD.
India under the Banking Regulation Act. Therefore, pre- A
-+ reference interest_ should be only at the rate of 9% per
annum. It is appropriate to award the same rate of
interest even by way of pendente lite interest and future
interest upto date of payment. [Para 36] [66-F-H; 67-At
·B
5. As regards allowing or rejecting of other claims or
counter claims, by the arbitrator, the awards on these
counts do not suffer from any infirmity which can be the
basis for interference either u/s 30 or u/s 16 of the
Arbitration Act, 1940. Neither want of jurisdiction, nor C
legal misconduct, nor any error apparent on the face of
the award, are made out in regard to these claims. No
ground is made out to interfere with the same. Judgments
of courts below modified accordingly.
[Paras 37, 38 and 40) (67-E, G; 68-G]
D
Case Law Reference:

AIR 1923 PC 66 referred to Para 13..

1994(6) sec 485 referred to Para 13
E
2005(6) sec 462 relied on . Para 31

1992(1) sec 508 relied on Para 31
"' 2001(2) sec 121 relied on Para 31
F
AIR 1954 Bombay 423 referred to Para 32

CIVIL APPELLATE JURISDICTION : Civil Appeal No.
2764 of 2009.

From the Judgment & Order dated 5.2.2007 of the High G
Court of Rajasthan Jaipur Bench, Jaipur in S.8. Civil Misc.
- J Appeal No. 872 of 2003.

WITH
H
40 SUPREME COURT REPORTS [2009] 10 <;;'>('.} R

A C.A. No. 2767 of 2009.

Vijay Hansaria, Jatinder Kumar Bhatia, B.N. Jha and Sneh
Kalita for the Appellants.

Dushyant Dave, Ravindra Shrivastava, Kishore
8 Shrivastava, Kunal Verma, Rajul, Shrivastava, Aniruddh Rajput,
Manish Chaudhary, C. G. Solshe for the Respondents.

The Judgment of the Court was delivered by ..
c R.V. RAVEENDRAN, J. 1. Leave granted. Heard learned
counsel.

2. The appellants (also referred to as 'employer') invited
tenders for the manufacture, laying, testing and commissioning
of water pipeline of a length of 37.41 km. under a water supply
0
scheme in Ajmer District. Tenders were received from various
tenderers including respondvnt (hereinafter referred to as the
'contractor'). As different tenderers had stipulated different
terms and conditions, the tenderers were invited for
discussions, and common terms of reference (for short 'CTR')
E were formulated on 22.2.1988 and the original tender
conditions stood modified to the extent of the alterations in the
CTR.

3. Thereafter the offer of the respondent was accepted and
F a work order dated 23.8.1988 was issued to him stipulating the
period for completing the contract as two years from that date.
There was an amendment to the work order on 8.11.1988. The
employer and the contractor entered into an agreement dated
11.1.1989 enumerating and stipulating the documents which
G will form part of the contract and the modifications agreed in
regard to certain terms. The value of the work as per the work
order was Rs.9,91,94,602.50. Ten percent of the value of work ~ ...
(Rs.99.19 lakhs) which was agreed to be released as

H ' .
mobilization advance, was released to the contractor betweenJ
STATE OF RAJASTHAN v. FERRO CONCRETE 41
CONSTRUCTION PVT. LTD. [R.V. RAVEENDRAN, J.]
25.1.1989 and 5.5.1989. The contractor created an equitable A
-I- mortgage over its plant by depositing its title deeds thereto as
..... security for the mobilization advance. By letter dated
15.12.1990, the contractor confirmed that the original title
deeds will remain in deposit with the employer till the entire
amount of advance was repaid in full with interest. B

4. The contract (clause 23 of General Conditions of
... Contract) provided for settlement of disputes by arbitration. By
letter dated 18.6.1990 respondent invoked the provision for
arbitration and sought appointment of an arbitrator to decide
its claims aggregating to Rs.2,01,66,547, arising on account
c
of certain alleged omissions and commissions of the employer.
Another dispute was raised in respect of the rate payable for
work done subsequent to the due date of completion
(22.8.1990). On 22.8.1990 the contractor stopped the work. By
that date it had manufactured 15.26 km. of pipes and had laid D
11.6 km. out of them anc. tested only 1.4 km. of pipeline as
against the total contracted quantity of 37.41 km. On 13.9.1990
the··employer notified the contractor that if he did not resume
the Work, the balance of the work would be got executed through
.an alternative agency in terms of the contract, by treating the E
contract as having been abandoned on 22.8.1990, and recover
the excess cost from the contractor.
,, 5. The respondent-contractor sent a reply dated 3.11.1990
stating its efforts to complete the work were rendered futile on F
account of the delays and breaches on the part of the employer;
and it was necessary to enter into a fresh agreement as the
tender was not accepted in the manner in which it ought to have
been accepted. The contractor did not resume the work. The
contractor's stand was that in the absence of an extension of G

- ,\
time for completion by mutual consent before the stipulated date
for completion, it was not liable to continue the work on the
tendered rates. The employer on 30.3.1991 made a final
. demand calling upon the contractor to state whether it was ready
i to re-start and complete the remaining work and if so to submit
H
42 SUPREME COURT REPORTS [2009] 10 S.C.R.

A a revised time schedule for such completion. As the contractor +
did not resume the work, the employer initiated steps to get the
.;
balance work executed through an alternative agency. In the
meanwhile the contractor filed a suit against the appellant in the
District Court, Ajmer and obtained a temporary injunction
B restraining the employer from imposing liquidated damages.
6. The contractor made an application to the District Court,
Aimer, under section 20 read with section 8 of the Arbitration ...
Act, 1940 (Act for short) for filing the arbitration agreement into
c cpurt and seeking appointment of an arbitrator. The District
Court. Ajmer by order dated 27.4.1991 held that it had
jurisdiction to appoint an arbitrator but deferred the actual
appointment to a future date. The contractor revised its claim
to Rs.5,51,90,306/- in the notice of appointment of arbitrator.
The employer challenged the order of the District Judge and
D the High Court allowed the appeal on 9.8.1991 and set aside
the order of the District Judge. The contractor in turn
· approached this Court. On 12.11.1991, this Court recorded the
consent of parties for appointment of Mr. B L Mathur as sole
arbitrator and directed the employer (Chief Engineer, Public
E Health Engineering Department, State of Rajasthan) to appoint
him as the arbitrator. On being appointed, the arbitrator entered
upon the reference and the contractor filed a claim statement
before the arbitrator on 13.1.1992 making 43 claims.
aggregating to Rs.6,21,29,626/-.
F
7. The employer filed its reply to the claim statement, and
al~o made five counter-claims aggregating for Rs.863,46,505/
- before the arbitrator. In the meanwhile, the employer having
concluded the arrangements to get the work completed through
G an alternative agency, on the contractor's failure to resume the
work, awarded the work to M/s. Indian Hume Pipes Co. Ltd. on
10.8.1992. On the basis of the contract value in regard to the
ba'lance work, the employer revised its counter claim No. 2
relating to extra cost to Rs.6,66,62,000/-and consequently the
+
-
total of the counter claims stood increased to Rs.11,55,98,388.
H
STATE OF RAJASTHAN v. FERRO CONCRETE· 43
CONSTRUCTION PVT. LTD. [RV. RAVEENDRAN, J.]
~- 8. After considering the claims and counter claims, the A
learned arbitrator made an award dated 21.9.1994. He rejected
claim nos. 4, 7,8,10, 14 21,22,23,26,36,36A, 37,38,39,40,41,
& 41 A,42, & 42A and 43 of ·the contractor. He awarded the
following amounts to the contractor in regard to the remaining
claims: B
S. Claim Description of Amount Amount
No No. claim claimed awarded
Rs. Rs.
1. 1 Loss of profitability due to late 83,49,913 33,06,500
release of mobilization advance c
2. 2 & 16 Refund of excess sales tax 2,94, 142 2,94,142
deducted
3. 3 & 15 5% amount withheld for testing 14,70,956 14,70,956
of pipeline
4. 5 & 18 Excess recovery of security 13,28,457 13,28,457
D
deposit
5. 6 & 17 Price escalation 58,83,854 43,47,520
6. 9 & 19 Refusal of employer for re- 10, 11,354 6,95,910
designing pressure pipes from
higher into lower.
E
7. 11 & 20 Slow progress due to reduction 21,32,496 21,07, 195
of width of trench
8. 24 Refund of deduction for want of 4,31,926 4,31,926
BG renewal
9. 27 & 28 Gap pipes fitted 2,60,200 67,098
F
10. 29 Payment for 8 kg pipes but paid
for 6 kg pipes
11. 30 Refunds for paint of specials 9,759 9,759
12. 31 Deduction from running bill for 22,385 22,385
pipes
G
13. 32 Refund for deduction for 46,569 46,569
insufficient refilling
14. 33 Less measurement of pipe 1, 15,738 1, 15,738
15. 35 with Difference in final bill bedding 1,47,00,000 23,74,458
25 Less payment re: sand 7,31,676
H
44 SUPREME COURT REPORTS [2009] 10 S.C.R.

A 34 Payment for excavation 2,50,740 ..
16. 37A Idle charges for machinery. 12.072 12,072 per
staff etc. per day from day from
13.1.92 date of
award, if
B the factory
was not
leased from
mortgage
security
within 30
c days.
17. 12 & 13 Interest (pre-reference, 18% per 18% per
pendente lite and future) annum annum

The arbitrator rejected counter claims 1, 2, 4 and 5 of the
employer. In regard to counter-claim No. 3 (Rs.79,87,846/- ~
D
towards refund of mobilization advance with interest), the
arbitrator awarded a sum of Rs.59,42,275 with interest at 18%
per annum from 18 9.1990 up to the date or decree or payment
whichever was earlier.

E 9. The contractor made an application for making the
award, a rule of the court. The employer challenged the award
by filing objections under section 30 read with section 33 of the
Act. By orde.r dated 17 .2.2003, the District Judge, Ajmer ..
allowed the application of the contractor and made the award
F a rule of the court subject to a modification in regard to the
award made on claim No.37 A. In place of the award made by
the Arbitrator (direction to employer to pay Rs.12072/- per day
from the date of award), the District Judge directed that the
employer shall return the original title deeds to the contractor
G and pay the amounts awarded to the contractor after deducting
the amount awarded by way of counter-claim (that is .. ...
Rs.59,42,275/- towards refund of mobilization advance due
with 18% interest) within 30 days from the date of decree, failing
which, the employer shall pay Rs.12072 per day from the date
of decree.
H
STATE OF RAJASTHAN v. FERRO CONCRETE 45
CO~'STRUCTION PVT. LTD. [R.V. RAVEENDRAN, J.]
•· 10. The employer filed an appeal (Civil Misc. Appeal A
No.872/2003) against the said judgment and decree
contending that the award ought to have been set aside. The
contractor also filed an appeal (Civil Misc. Appeal No. 910/
2003) aggrieved by the modification by the Learned District
Judge directing compensation of Rs.12,072/- per day only from B
the date of decree (instead of the date of award). The High court
I dismissed the appeal filed by the employer by judgment dated
5.2.2007. The High Court allowed the appeal filed by the
contractor by judgment dated 30.5.2007 and restored the
direction of the arbitrator that the payment of compensation at c
Rs.12,072/- per day should be from the date of the award itself
(21.9.1994). The High Court also granted interest at 18% per
annum from the date of the award. Thus the High Court upheld
the award .
...
11. Feeling aggrieved the employer has filed these two D
appeals by special leave. The first of the appeals (arising out .
of SLP [CJ No.10818/2007) is against the dismissal of its
appeal on 5.2.2007. The second of the appeals (arising out of
SLP(C)No.22565/2007) is against the judgment dated
30.5.2007 allowing the contractor's appeal. One of the E
contentions urged by the appellants before the court below was

"-
.. that the Arbitrator did not have jurisdiction to enter upon the
reference and make an award, as the appointing authority under
the arbitration clause had merely appointed the arbitrator, but
had not referred any dispute to him for arbitration. The said F
contention was rejected by both courts on the ground that when
the authority competent to appoint the arbitrator appointed the
arbitrator, in pursuance of the agreement reached before this
Court to have the pending disputes of both parties settled by
arbitration, the employer could not be permitted to raise a G
.~ 1 technical plea that the arbitrator had no jurisdiction to proceed
with the arbitration, in the absence of a further specific reference
by the employer. Realising the unsoundness of the said
contention, the appellants did not press it before us.
H
46 SUPREME COURT REPORTS (2009] 10 S.C.R.

A 12. On the contentions urged, the question that arises for
•
consideration is whether there is any legal misconduct or error
apparent on the face of the award, in regard to the award of
the Arbitrator in respect of (i) claims 1 and 37 A; (ii) claims 12
& 13; (iii) claims 2 & 16, 3 & 15, 5 & 18, 6 & 17, 9 & 19, 11 &
B 20, 24, 27 & 28, 29, 30, 31, 32, 3:., 35 (with claim nos. 25,
34); and (iv) counter claims 1, 2, 4 and 5.

13. Section 30 of the Act inter alia provides that an award
can be set aside on the ground that an arbitrator had
misconducted himself or the proceedings, or that the award had
c been improperly procured or is otherwise invalid. An error
apparent on the face of the award, is a ground for setting aside
the award under section 30 or for remitting the award to the
Arbitrator under section 16(1 )(c) of the Act. In Champsey Bhara
& Co. vs. Jivraj Ba/loo Spinning & Weaving Co. Ltd. [AIR
D 1923 PC 66] the Privy Council explained the term ·an error of
law on the face of the award' thus :

"An error of law on the face of the award means that you
can find in the award or a document actually incorporated
E thereto as for instance, a note appended by the arbitrator
stating the reasons for his judgment, some legal
proposition which is the basis of the award and which you
can then say is erroneous." ..
It was well settled that under the Arbitration Act, 1940, an award
F was not open to challenge on the ground that the arbitrator has
reached a wrong conclusion or failed to appreciate facts, as
under the law, the arbitrator is made the final arbiter of the
dispute between the parties. While considering the challenge
to an award, the court will not sit in appeal over the award nor
G re-appreciate the evidence for the purpose of finding whether
·I.
on the facts and circumstances, the award in question could
have been made. When there is no allegation of moral
misconduct against the arbitrator with reference to the award,
and where the arbitration has not been superseded, there were
H only two grounds of attack. First was that there was legal
STATE OF RAJASTHAN v. FERRO CONCRETE 47
'
CONSTRUCTION PVT. LTD. [R.V, RAVEENDRAN, J.]

• misconduct on the part of the arbitrator in making the award. A
Second was that there was an error apparent on the face of
the award. This Court explained the principles relating to
interference with awards under the 1940 Act in State of
Rajasthan v. Puri Construction Co. Ltd. (1994 (6) SCC 485]
thus: B

"Similarly, an award rendered by an arbitrator is open to
.,. challenge within the parameters of several provisions of
the Arbitration Act. Since the arbitrator is a judge by choice
of the parties, and more often than not, a person with little
or no legal background, the adjudication of disputes by an
c
arbitration by way of an award can be challenged only
within the limited scope of several provisions of the
Arbitration Act and the legislature in its wisdom has limited
the scope and ambit of challenge to an award in the
'' Arbitration Act. Over the decades, judicial decisions have D
indicated the parameters of such challenge consistent with
the provisions of the Arbitration Act. By and large the courts
have disfavoured interference with arbitration award on
account of error of law and fact on the score of mis-
appreciation and misreading of the materials on record E
and have shown definite inclination to preserve the award
as far as possible. As reference to arbitration of disputes
... in commercial and other transactions involving substantial
amount has increased in recent times, the courts were
impelled to have fresh look on the ambit of challenge to F
an award by the arbitrator so that the award does not get
undesirable immunity. In recent times, error in law and fact
in basing an award has not been given the wide immunity
as enjoyed earlier, by expanding the import and
implication of "legal misconduct" of an arbitrator so that G
award by the arbitrator does not perpetrate gross
miscarriage of justice and the same is not reduced to
mockery of a fair decision of the lis between the parties
to arbitration. Precisely for the aforesaid reasons, the
erroneous applicatibn of law constituting the very basis of H
48 SUPREME COURT REPORTS (2009) 10 S.C.R.

A the award and improper and incorrect findings of fact, •
which without closer and intrinsic scrutiny, are
demonstrable on the face of the materials on record, have
been held, very rightly, as legal misconduct rendering the
award as invalid. It is necessary, however, to put a note of
B caution that in the anxiety to render justice to the party to
arbitration, the court should not reappraise the evidences
intrinsically with a close scrutiny for finding out that the
conclusion drawn from some facts, by the arbitrator is,
according to the understanding of the court, erroneous.
c Such exercise of power which can be exercised by an
appellate court with power to reverse the finding of fact, is
alien to the scope and ambit of challenge of an award
under the Arbitration Act. Where the error of finding of facts
having a bearing on the award is patent and is easily
demonstrable without the necessity of carefully weighing
0 _;,
the various possible viewpoints, the interference with
award based on erroneous finding of fact is permissible.
Similarly, if an award is based by applying a principle of
law which is patently erroneous, and but for such erroneous
application of legal principle, the award could not have
E been made, such award is liable to be set aside by
holding that there has been a legal misconduct on the part
of the arbitrator. In ultimate analysis, it is a question of
delicate balancing between the permissible limit of error ..
of law and fact and patently erroneous finding easily
F demonstrable from the materials on record and application
of principle of law forming the basis of the award which is
patently erroneous."

Keeping the said principles in mind let us examine the
G various claims.
Re: Claim 1 :

14. The contractor claimed that the mobilization advance
had to be released to it immediately on entrustment of work,
H to enable it to set up the factory for manufacturing the pipes. It
STATE OF RAJASTHAN v. FERRO CONCRETE 49
CONSTRUCTION PVT. LTD. [R.V. RAVEENDRAN, J.]
·-" was contended that prompt release of mobilization advance A
was crucial and fundamental to the contract as manufacture of
pipes depended upon setting up a factory for that purpose.
Even assuming that the mobilization advance could be released
in three instalments, as per modified terms and conditions, the
contractor contended that there was inordinate delay on the part B
of the employer in releasing the instalments, that too, in five
instalments. It was further contended that if the mobilization
advance had been released immediately on award of the work,
it would have set up a factory and commenced production
within three months; that in view of the delay, it lost production c
for a period of eight months that is nearly one third of the
contract period, and that as a consequence they were not able
to execute the work of the value of Rs.5,56,66,086/- and the
loss of profits and overheads on the said amount at a standard
15% was Rs.83,49,913/- and it was entitled to that amount as
'- D
compensation for the breach by the employer. The calculation
of the said loss of profit and overheads in claim no.(1) was as
follows:
Amount of Contract (with "DIV) Rs.9,91,94,602.00
Payment already received from the E
Department Rs. 2,88,28,516.00
-----
Balance Rs. 7,03,66,086.00

F
Amount due to contractor against
work Done Rs.1,47,00,000.00
-------------
Balance Rs. 5,56,66,086.00
----------
G
j. Loss of Profitability & overheads Rs. 83,49,913.00
@ 15% (0.15 x 5,56,66,086) -----------------------
15. The employer resisted the said claim contending that
having regard to the relevant conditions in the work order and
H
50 SUPREME COURT REPORTS [2009] 10 S.C.R.

A the contract agreement, the mobilization advance had to be ;.

released in three instalments against Bank Guarantees; that the
second and third instalments had to be released only on
production of the certificate of a chartered accountant on the
utilization of the previously paid amount and on verification of
8 the department of the progress; and that the mobilization
advance was released in instalments in terms of contract and
there was no delay no breach on their part.

16. We may refer to the relevant provisions of the contract
in this behalf. Clause 8 of the Special Conditions relating to
c establishment of factory at site provided thus :

"Establishment of factory at site :

The contractor, if he so desires, may establish the pipe
D factory at site to avoid transportation of pipes. All material .;,
and equipment and land required for the purpose shall be
arranged by the contractor at his own cost. The department
may assist him in acquisition of land. However, the work
should not be delayed on this account. The firm should
commence and continue to supply the pipes etc. from their
E
existing set up till the factory at site is established. As
already stated, the supply of pipes etc. should commence
within 30 days, from the award of contract."

The above clause was superseded by clause 3 of the Common
F Terms of Reference which is extracted below :

"Mobilisation advance (for PSC Pipes only)

10% of the contract value shall be given against Bank
Guarantee as mobilization advance at a simple interest
G rate of 18%. Recovery of mobilization advance shall be
effecied from 1st Running Bill on pro-rata basis in a way
that complete mobilization advance is recovered by the
time 75% work is complete. Interest shall also be
recovered alongwith recovery of capital mobilization
H
STATE OF RAJASTHAN v. FERRO CONCRETE 51
CONSTRUCTION PVT. LTD. [R.V. RAVEENDRAN, J.]
advance. The assets built by the contractor out of A
mobilization advance so made will be mc,rtgaged to the
department. In case work is left in-complete, liquidated
damages will be imposed as per terms of the document
and the assets built by the contractor for manufacturing
pipe will become the property of the department. Such B
assets can be used by the department for the purpose of
completing the remaining work."

In the subsequent work order issued on 23.8.1988, clause 5.1
relates to mobilization advance. While para (a) of clause 5.1
was a reproduction of clause (3) of the Common Terms of C
Reference, the following was added as para (b) in clause 5.1
of the work order :

'The mobilization advance is being given for establishment
of factory at site. In case the factory is not established in D
3 months period the mobilization advance shall be
recovered by way of the Bank Guarantee given in lieu of
the mobilization advance."

By letter of amendment dated 8.11.1988 issued by the
E
employer, several clauses of the work order including clause
5.1 (b) were amended/replaced. Para 5.1 (b) as replaced is
'"('
extracted below :
~
~ "The mobilization advance is being given for establishment
0J of factory at site. The mobilization advance shall be paid F
in three instalments of which the second and third ·
(J" instalment shall be paid on production of the certificate of
the Chartered Accountant about utilization of the previously
c'l paid amount and on verification by the department of the
~ progress towards setting up of the factory." G
j
...... This was followed by an agreement executed by both parties
•
on 11.1.1989 and clause (7) thereof extracted below dealt with
mobilization advance :
H
52 SUPREME COURT REPORTS [2009] 10 S.C.R.

A "Mobilisation advance:

10% of the contract value shall be given as mobilization
advance@ 18% simple ir.'erest subject to production of
Bank Guarantee from any of the Nationalised Bank equal
to the amount of such advance. The recovery of such
B
advance shall be effected from 1st running bill on prorate
basis in such a way that recovery of this advance is made
by the time when 75% of the work is completed. Amount
of interest is recoverable along with the recovery of
principal amount.
c
(b) The assets built by the contractor out of the mobilization
advance shall be mortgaged with the Government. Such
assets will not be mortgaged with any other agency for any
purposes.
D
(c) In case contractor fails to complete the work in specified
time, the contractor shall pay the compensation as
liquidated damages as per the terms and conditions of the
contract and the assets built by the contractor for
manufacturing of pipes will be the property of the
E
government and the department will have right to use it as
government property for completion of remaining work. x
xx xx
17. The arbitrator held that clause 8 of the special
F tonditions of contract stood superseded by clause 3 of the
Common Terms of Reference which required the mobilization
advance to be released in one instalment and not in three
instalments. He held that clause 5(1 )(b) inserted by the
amendment to the work order dated 8.11.1988 was an
G unilateral incorporation by the employer and was not binding
on the contractor. He further held that the employer ought to
have released the mobilization advance along with the work
order dated 23.8.1988, and the employer had abnormally
delayed the release of mobilization advance by a total period
H of 8.5 months by releasing it in instalments. He held that there
STATE OF RAJASTHAN v. FERRO CONCRETE 53
CONSTRUCTION PVT. LTD. [R.V. RAVEENORAN, J.] ·

was a clear delay of about 8 months and during that period the A
contractor could have executed one third of the work of the·
value of Rs.330,64,867.50, and as the contractor was prevented
from executing the said work on account of the delay, the
contractor was entitled to 10% of the said amount, that is
Rs.33,06,500/- as loss of profit. The said sum was therefore B
awarded to the contractor under claim (1).

18. There is no doubt that clause 8 of the special
conditions of contract has to be read with clause 3 of the CTR.
It is true that Clause 3 of CTR did not contemplate the C
mobilization advance being released in three instalments. But
the CTR was followed by work order dated 23.8.1988 which
was followed by amendment dated 8.11.1988 which specifically
stated that the mobilization advance shall be paid in three
instalments of which the second and third instalments shall be
paid on production of a certificate of the Chartered Accountant D
about u!Hization of the previously paid amounts and on
verification by the department towards progress of the factory.
The arbitrator has held that the said clause was unilaterally
introduced and therefore is not binding by the contractor. On
the face of it this is erroneous. After the work order, the parties E
have executed a bilateral agreement dated 11.1.1989 which
specifically states at para 2 and para 6 that the work order
dated 23.8.1988 and subsequent amendment to the work order
dated 8.11.1988 shall be deemed to be a part of the contract
and will bind both the parties. The agreement dated 11.1.1989 F
itself contains a detailed clause (clause 7) relating to
mobilization advance in addition to what was earlier agreed in
regard to mobilization advance. Therefore obviously the
clauses relating to mobilization advance in the amendment to
work order dated 8.11.1988 and the agreement dated G _
11.1.1989 had to be read in addition to the earlier provision
relating to mobilization advance contained in the CTR. Clause
5(1 )(b) of the work order, as amended, specifically provided
that the contractor had to provide a Bank guarantee for the
mobilization advance. Sub-clause (b) of clause 7 of the H
54 SUPREME COURT REPORTS [2009) 10 S.C.R.

A agreement dated 11.1.1989 provided that assets built by the
contractor by utilizing the mobilization advance should be
mortgaged to the employer. Sub-clause (c) of clause 7 provided
that if the contractor fails to comp!1..te the work, th.e assets built
by the contractor would become the property of the employer
B and the department could use it as government property for
completion of the remaining work. Sub-clause (d) of clause 7
provided that if the contractor failed to establish the factory within
thr~e months of payment the mobilization advance, the said
advance would be recovered by enforcing the bank guarantee
c given in lieu of the mobilization advance. Thus it is evident that
the mobilization advance had to be released only against a bank
guarantee to be furnished by the contractor.

19. If according to the contractor, the mobilization advance
had to be released in a single instalment and if the contractor
D wanted the entire mobilization money to be released in one
lump sum instead of in three instalments, it ought to have given
a single bank guarantee for the entire sum. But strangely the
· contractor did not give such a bank guarantee. It gave four bank
guarantees for Rs.40 lacs on 21.5.1989, Rs.25 lacs on
E 1.2.1989, Rs.15 lacs on 17.2.1989 and Rs.25 lacs on
23.3.1989. It is thus evident that the contractor had also
pnbceeded on the basis that the condition in clause 5(1 )(b) of
the work order amendment letter dated 8.11.1988 governed the
payment of mobilization advance. We find that the mobilization
F amount corresponding to first bank guarantee was released
within two days; mobilization amount corresponding to second
guarantee was released in seven days; and mobilization
amount corresponding to third guarantee, was partly released
in 12 days and the balance in two months. The amount
G corresponding to the second and third bank guarantees had
to be released only after the contractor produced a certificate
in regard to the utilization of the earlier advance. It is seen that
in regard to the first mobilization advance the certificate was
produced on 7.2.1989 and on the same day the second
H instalment was released. Insofar as third instalment, the
STATE OF RAJASTHAN v. FERRO CONCRETE 55
CONSTRUCTION PVT. LTD. [R.V. RAVEENDRAN, J.]
ii
certificate was only received on 4.4.1989. Therefore it cannot A
' ...
.. be said that there was delay or breach on the part of the
employer in releasing the mobilization advance. If at a'! there
was any delay, the delay was on the part of the contractor. The
fact that release of mobilization advance was governed by
clause 5(1 )(b) of the work order (as amended on 8.11.1988) B
and clause 7 of the agreement dated 11.1.1989 was totally
overlooked by the arbitrator by proceeding on the basis that
mobilization advance was governed by the CTR alone. The
Arbitrator committed a legal misconduct by ignoring the terms
of contract: that is the agreement dated 11.1.1989,which c
specifically provided that in addition to the CTR, the work order
and amendment to work order dated 8.11.1988 would also form
,, part of the contract. The Arbitrator also overlooked the fact that
additional provision regarding mobilization advance was
introduced in the agreement itself. Therefore the mobilisation
D
advance was governed by the terms in the CTR, the work order,
the amendment to the work ore.er dated 8.11.1988 and
agreement dated 11 .1.1989 read together. If so read, it was
clear that there was no breach on the part of the employer and
the contractor was itself responsible for the delay. If so, the
question of compensating the contractor on that score does not E
arise.

20. There is yet another aspect. The contractor claimed
compensation on the basis that he could not do work of the
value of Rs.5,56,66,086/- in view of the delay and he was entitled F
to 15% thereof namely Rs.83,49,91~/- as compensation. But
the arbitrator made an award in respect of the claim on the
ground that there was delay in releasing the mobilization
advance and during that period of delay, one third of the contract
work could have been done and the value of the work that could G
have been done was Rs.3,30,64,867, and 10% thereof was the
j
<Y loss of profit. Firstly, there was no such plea. Secondly, we have
already held that the delay relating to mobilisation advance,
was not on the part of the employer. Thirdly, even if there was
delay, it was nobody's case that no work was done or that the H
56 SUPREME COURT REPORTS [2009110 S.C.R.

,_
A contractor had suffered loss for non-execution of the work during
• '
the contract period. Therefore we are of the view that the award
,.
of GOmpensation of Rs.33,03,500/- towards claim no.(1) is
liable to be set aside.

Re : Claim 37A:
B
21. Claim No.37Awas linked to mobilization advance. The
contractor claimed that it had mortgaged its pipe manufacturing
unit in favour of the employer by deposit of title deeds, as
security for repayment of the mobilization advance; that the
c machinery installed in the said factory had not been released
by the employer in its favour and as a consequence, it could
not be shifted to another place to enable it to start the
mcinufacturing process elsewhere; and that on account of the
failure on the part of the employer to release the plant, it had
D to keep the machinery idle and the employer was therefore
liable to reimburse to the contractor the loss of production from
13~1.1992 at the rate of Rs.12,072/- per day. The contractor
contended that if it had been permitted to shift its plant and
m~chinery, it would have produced 15 pipes per day valued at
E Rs.1,20,000/-, that out of which the overhead and profit element
was 15% (that is Rs.18,000/- per day); that as there were 306
working days in a year, the loss of profits/overheads would be
=
18,000 x 306/365 Rs.15,090/- per day; and that if 20% thereof
(Rs.3,018/-) was deducted therefrom towards labour
component, the loss of profit per day on account of non-
F
availability of plant and machinery was Rs.12,072 per day. The
employer resisted the claim by contending that there was no
obligation to release the plant and its title deeds until the
mobilization advance was repaid with interest; that the
contractor had not repaid the mobilization advance and interest
G
thereon in spite of the award; and therefore the question of
compensating any 'daily loss' on that account did not arise. The l ...
employer also contested the correctness of the assumptions
made for calculating the loss.

H 22. The contractor deposited the title deeds relating to the
STATE OF RAJASTHAN v. FERRO CONCRETE 57
CONSTRUCTION PVT. LTD. [R.V. RAVEENDRAN, J.]

.;
plant by way of mortgage of deposit of title deeds, in terms of A
the contract and specifically agreed that the original deeds will
remain in deposit with the employer till the entire m· 1bilization
advance was repaid with interest. It is also not in dispute that
though a mortgage security was created on the plant, it
continued to be in the possession, enjoyment and control of the B
contractor, as the employer did not take over physical
possession of the plant at any point of time.

23. The arbitrator considered Claim 37A with three other
claims - (36, 36A and 37). The particulars of the said claims C
are:
Claim 36
Compensation for idling machinery, labour,
staff due to delay and wrong decisions
(for the period up to 12.1.1992) Rs.48.21 lacs D

Claim 36 A
Comp~nsation for idling machinery, staff &
Labour etc. from 13.1.1992 Rs.6370 per day
E
Claim 37
Compensation for loss of production in the
Factory (for the period upto 12.1.1992) Rs.61.48 lacs

Claim 37A
Compensation for loss of production in the F
Factory from 13.1.1992 Rs.12,072 per day

The arbitrator held that none of the four claims was maintainable
as the factory built out of mobilization advance had been
mortgaged in favour of the employer. As a consequence he did G
not award any amount in respect of the four claims. But strangely
he directed payment of Rs.12,072 per day from the date of
award not because he held that there was any loss of
production as a consequence of any breach by the employer,
H
58 SUPREME COURT REPORTS [2009] 10 S.C.R.

A but on the following reasoning:

"After perusal of the arguments of the parties and the
evidence on record, I come to the finding that it is a case
of real hardship to the claimants for having been denied
the use of the factory and machinery elsewhere in their
B
business venture, but because of legalities involved, such
as mortgage, the claimants cannot be given the benefit of
any award. Had the assets of factory built out of
mobilization advance not being mortgaged in favour of the
respondent I would have considered making an award in
c favour of the claimants. In view of the fact that I have
allowed counter claim No.3 of the respondent for balance
amount of mobilization advance in full along with interest,
there is no reason why the assets built out of mobilization
advance should continue to remain mortgaged with the
D respondents. I therefore direct the respondent to release
the documents relating to mortg~ ge as mentioned above
within a period of 30 days from the date of this award failing
which the claimants shall be entitled to an award of
Rs.12,072 per day from the date of this award till the date
E of release of mortgage. No award in favour of the
claimants for the period I entered upon, reference to the
date of the publication of the award."

[emphasis supplied]
F 24. Thus we find that the award under claims 37A was not
made on account of any finding of breach on the part of the
employer. It was made because the Arbitrator had made an
award against the contractor in favour of the employer for
Rs.59,42,275 with interest. The Arbitrator was of the view that
G if that sum was adjusted against the amounts due by the
employer, there was no need for the mortgage of the plant to
continue and therefore the employer should release the
documents of title deposited by way of equitable mortgage,
within 30 days from the date of award; and that if the employer
H failed to do so, the employer should pay to the contractor
STATE OF RAJASTHAN v. FERRO CONCRETE 59
CONSTRUCTION PVT. LTD. [R.V. RAVEENDRAN, J.]
Rs.12,072 per day from the date of the award till the date of A
release of the mortgage. Therefore, the said award under claim
37A was made, not on account of any breach committed by
the employer, but in respect a breach if made in future after the
date of the award. There was no such claim and the award was
therefore beyond the reference. Further, the reasoning is very B
strange and is a classic case of an error apparent on the face
of the award and a legal misconduct. The arbitrator rejected
..[
the claim No.37A for payment of Rs.12,072/- as compensation
for loss of production from 13.1.1992 (which was the subject
matter of claim) on the ground that the plant had been c
mortgaged in favour of the employer and therefore there was
no justification for the contractor to claim that it should be
·- permitted to remove and take away the plant when the mortgage
subsisted. Having rejected the claim, the Arbitrator evolved a
strange reasoning that though there was a subsisting valid
-I D
mortgage in respect of the mobilization advance with interest

- in favour of the employer, because he had made an award in
favour of the employer for Rs.59,42,275 plus interest, the
mortgage came to an end and the employer became liable to
return the documents and if it failed to return the documents,
the contractor was entitled to damages of Rs.12,072/- per day E
from the date of award.

.1 25. The arbitrator noticed the fact that the plant and
'· machinery was mortgaged by deposit of title deeds in favour
1

of the employer and that the contract was that "the original F
documents will remain in deposit with the employer till the
amount of advance is repaid with full interest." The arbitrator in
fact makes an award for return of Rs.59,42,276 in favour of the
employer with interest at 18% per annum from 1.9.1990 to
17.9.1990 and interest at 18% per annum on Rs.59,42,275/- G
,.., ;. from 18.9.1990 till date of decree or payment, whichever was
earlier. Therefore evidently until the amount of Rs.59,42,275/-
with interest was paid by the contractor to the employer, the
mortgage would continue. If the mortgage continued, there was
no obligation on the part of the employer to return the
H
60 SUPREME COURT REPORTS [2009] 10 S.C.R.

A documents; and if there was no obligation on the part of the
employer to teturn the documents, the contractor could not
complain that the documents were wrongly held by the employer
nor could it claim loss of production as a result of employer
wrongly withholding the documents.
B
26. It is of some interest to note that as per the award of
the arbitrator, made under claim 37A, on a claim that was never
made, the amount that would become due at Rs.12,072/- from
21.9.1994 to date will be approximately Rs.6,42,70,000/-. We
have a strange situation where the arbitrator makes an award
C in favour of an employer directing the contractor to refund the
employer Rs.59,42,275/- with interest at 18% per annum from
18.9.1990 upto date of decree/payment and then even though
the said payment was not made, awards damages to the
contractor which works out to Rs.6,42,70,000/- to the contractor.
D This to say the least is legal misconduct and an error apparent
on the face of the award.

27. We may also refer to another aspect. A sum of
-
Rs.12,072/- per day was claimed as damages by the contractor
E in a two line calculation without any supporting evidence or
document. As noticed above, the claim was on the basis that
the contractor would have manufactured 15 pipes per day of
the value of Rs.1,20,000/- and that the profit and overhead
element out of it would have been 15% or Rs.18,000/- per day.
F By taking the working days as 306 in a year and deducting 20%
of labour component, the loss of profit per day was calculated
to be Rs.12,072/- per day. There is no evidence to show that
the contractor was at any point of time manufacturing 15 pipes
a day of the value of Rs.8000/- each or that he would have made
G a profit of 15% on the cost thereof. The claim is made on the
ground that it is disabled from manufacturing that many number
of pipes elsewhere. There is no evidence that it had other
contracts where it was required to manufacture that number of
pipes or that it could not manufacture the required pipes for
want of plant and machinery. Nor is there any evidence as to
H
STATE OF RAJASTHAN v. FERRO CONCRETE 61
CONSTRUCTION PVT. LTD. [R.V. RAVEENDRAN, J.]

• th~ value of the plant and machinery that had been mortgaged A
toithe employer and what would-be the cost of an alternative
' with a capacity to manufacture 15 pipes per day. If the
plant
plant and machinery was of the value of say Rs.25 lakhs, or if
the contractor could install another similar plant at a cost of
Rs.25 lakhs, then the loss at best would be interest on Rs.25 B
lakhs and not anything more. In fact even though there is no
evidence, while making claim nos.36 and 37 the contractor has
• given value of the plant and machinery as Rs.36,84, 161/-. Even
assuming the said figure. to be true, at best the blocked up
investment was only Rs. 36,84,161/- and the loss would be c
around 1% thereon per month by way of interest which would
be Rs.36,841/- per month. What is more strange is nowhere
in the award the arbitrator considers the validity of the claim of
Rs.12072 per day nor accepts the said claim as valid or
. correct. In a reasoned award if the claim of a contractor is
D
equated to proof of the claim, then it is obviously a legal
misconduct and an error apparent on the face of the award.
While the quantum of evidence required to accept a claim, may
be a matter within the exclusive jurisdiction of the arbitrator to
decide, if there was no evidence at all and if the arbitrator
E
makes an award of the amount claimed in the claim statement,
merely on the basis of the claim statement without anything
more, it has to be held that the award on that account would
l be invalid. Suffice it to say that the entire award under this head
is wholly illegal and beyond the jurisdiction of the arbitrator, and
wholly unsustainable. F

28. Learned counsel for the contractor submitted that
though there was an award in favour of the employer for refund
of mobilization advance of Rs.59,42,275/- with interest, there
was a larger award in its favour aggregating to about Rs.1.67 G
j. crores and interest and it was legitimately entitled to adjust the·
sum of Rs.59,42,275/- with interest towards the amount due by:
the employer under the award namely Rs.1.67 crcires with
interest and therefore as on the date of the award the liability
towards mobilization advance stood wiped out on account of H
62 SUPREME COURT REPORTS (2009] 10 S.C.R.

A the same being adjusted towards the amount claimed by him
and therefore as on the date of the award, the liability to refund _,.
the mobilization advance ceased. This contention is not sound.
The mobilization advance amount was an ascertained sum due
to the employer from the contractor, with a specific provision
B for interest. There was a specific contract for continuation of
the mortgage until the said amount was paid. On the other hand
the amounts that allegedly became due to the contractor under
the award were mostly towards damages and escalation in
prices validity of which were under challenge and there was
c no provision in the contract for payment of interest thereon. As
noticed above at best the arbitrator could have directed return
of the documents of title to the contractor and could not have
directed payment of damages at the rate of Rs. 12072/- per
day.
0 29. We therefore hold that viewed from any angle,
awarding Rs.12,072/- per day as damages, from the date of
award under Claim 37A cannot be sustained and the same is
liable to be set aside.

E Re : Claim Nos. 12 and 13 :

30. The contractor claimed pre-reference interest at 18%
per annum on all its claims from the date of claim to date of
arbitrator entering upon the reference (18.6.1990 to
15.12.1991), as also pendente lite interest from 16.12.1991
F tp 21.9.1994 and future interest from the date of award till date
of payment or decree whichever was earlier. The Arbitrator
awarded the following interest : ia) pre-reference interest on
all sums awarded except claim no.(1), from 3.9.1990 (date of
contractor's application under section 8 and 20 of the Act) to
G 15.12.1991at18% per annum; (b) pendente lite interest on
..I
all sums awarded including claim No. 1, from 16, 12.1991 to ,,;...._

21.9.1994 at 18% per annum; and (c) future interest on all sums
awarded from 22. 9.1994 till date of decree or payment
whichever is earlier at the rate of 18% per annum. The District
H Court did not award any post decretal interest, but the High
STATE OF RAJASTHAN v. FERRO CONCRETE 63
CONSTRUCTION PVT. LTD. [R.V. RAVEENDRAN, J.]
Court, however, granted interest from the date of decree till date A
of payment at 18% per annum.

31. The appellants contend that there was no provision in
the contract for payment of interest on any of the amounts
payable to the contractor and therefore no interest ought to be B
awarded. But this Court has held that in the absence of an
express bar, the arbitrator has the jurisdiction and authority to
award interest fair all the three periods - pre reference,
pendente lite and future (vide decisions of Constitution Bench
in Secretary, Irrigation Department, Government of Orissa vs.
G. C. Roy - 1992 (1) SCC 508, Executive Engineer, C
Dhenkanal Minor Irrigation Division vs. N. C. Budharaj -
2001 (2) SCC 721 and the subsequent decision in Bhagawati
Oxygen vs. Hindustan Copper Ltd - 2005 (6) SCC 462). In this
case as there was no express bar in the contract in regard to.
interest, the Arbitrator could award interest. ""'Q"~
32. The appellant next contended that in regard to claims
in the nature of damages, as contrasted from ascertained sums
due, interest becomes payable only on quantification and
therefore award of interest prior to the date of arbitrator's award E
was illegal. It is no doubt true that the position of law earlier was
that in regard to award of damages, interest was not payable·
before quantification by a court. This was on the assumption
that in so far as damages are concerned, there is no liability
till determination of the quantum of damages. We may refer to F
a decision of the Bombay High Court in Iron & Hardware
(India) Co. v. Firm Sham/a/if& Bros [AIR 1954 Bombay 423],
where Chagla CJ, speaking for the Bench, stated the principle
thus:

"In my opinion it would not be true to say that a person who G
..l commits a breach of the contract incurs any pecuniary
liability, nor would it be true to say that the other party to
the contract who complains of the breach has any amount
due to him from the other party ...... As already stated the
H
64 SUPREME COURT REPORTS [2009) 10 S.C.R.

A only right which he has is the right to go to a Court of law
and recover damages. Now, damages are the
compensation which a Court of law gives to a party for the
injury which he has sustained. But, and this is most
important to note, he does not get damages or
B compensation by reason of any existing obligation on the
part of the person who has committed the breach. He gets
compensation as a result of the fiat of the Court. Therefore,
no pecuniary liability arises till the Court has determined
that the party complaining of the breach is entitled to
c damages. Therefore, when damages are assessed, it
would not be true to say that what the Court is doing is
ascertaining a pecuniary liability which already existed.
The Court in the first place must decide that the defendant
is liable and then it proceeds to assess what that liability
is. But till that determination there is no liability at all upon
D
the defendant."

33. The legal position, ho,.ever, underwent a change after
the enactment of Interest Act, 1978. Sub-section (1) of section
3 of the said Act provided that a court (as also an arbitrator)
E can in any proceedings for recovery of any debt or damages,
if it thinks fit, allow interest to the person entitled to the debt or
damages at a rate not exceeding the current rate of interest,
for the whole or part of the following period, that is to say, -

F (a) if the proceedings relate to a debt payable by virtue
of a written instrument at a certain time, then, from
the date when the debt is payable to the date of
institution of the proceedings;

(b) if the proceedings do not relate to any such debt,
G then, from the date mentioned i~ this regard in a
written notice given by the pers9n entitled or the
person making the claim to the person liable that
interest will be claimed, to the date of institution of
the proceedings.
H
STATE OF RAJASTHAN v. FERRO CONCRETE 65
CONSTRUCTION PVT. LTD. [R.V. RAVEENDRAN, J.]
Sub-section (3) of section 3 made it clear that nothing in that A
section shall apply to any debt or damages upon which interest
is payable as of right, by virtue of any agreement; or to any debt
or damages upon which payment of interest is barred, by virtue
of an express agreement. The said sub-section also made it
clear that nothing in that section shall empower the court to B
award interest upon interest. Section 5 of the said Act provides
that nothing in the said Act shall affect the provisions of section
34 of Code of Civil .Procedure 1908.

34. The position regarding award of interest after the C
Interest Act, 1978 came into force, can be stated thus :

(a) where a provision has been made in any contract,
for interest on any debt or damages, interest shall
be paid in accordance with the such contract.
D
(b) where payment of interest on any debt or damages
is expressly barred by the contract, no interest shall
be awarded.
(c) where there is no express bar in the contract and
·· where there is also no provision for payment of E
interest then the principles of section 3 of Interest
Act will apply in regard to the pre-suit or pre-
reference period and consequently interest will be
payable:
F
(i) where the proceedings relate to a debt
(ascertained sum) payable by virtue of a
written instrument at a certain time, then from
the date when the debt is payable to the date
of institution of the proceedings; G

(ii) where the proceedings is for recovery of
damages or for recovery of a debt which is
not payable at a certain time, then from the
date mentioned in a written notice given by
H
66 SUPREME COURT REPORTS [2009] 10 S.C.R.

A the person making a claim to the person
liable for the claim that interest will be
claimed, to date of institution of proceedings.

(d) payment of interest pendente lite (date of institution
of proceedings to date of decree) and future
B
interest (from the date of decree to date of payment)
shall not be governed by the provisions of Interest
Act, 1978 but by the provisions of section 34 of
Code of Civil Procedure 1908 or the provisions of
the law governing Arbitration as the case may be.
c
35. Therefore, even in regard to claims for damages,
interest can be awarded for a prior to the date of ascertainment
or quantification thereof if (a) the contract specifically provides
for such payment from the date provided in the contract; or (b)
O a written demand had been made for payment of interest on
the amount claimed as damages before initiation of action, from
the date mentioned in the notice of demand (that is from the
date of demand or any future date mentioned therein). In regard
to claims for ascertained sums due, interest will be due from
E the date when they became due. In this case, interest has been
awarded only from 3.9.1990, the date of the petition under
Section 20 of the Act for appointment of arbitrator. We find no
reason to alter the date of commencement of interest.

36. In regard to th' rate of interest, we are of the view that
F the award of interest at 18% per annum, in an award governed
by the old Act (Arbitration Act, 1940), was an error apparenf
on the face of the award. In regard to award of interest governed
by the Interest Act, 1978, the rate of interest could not exceed
the current rate of interest which means the highest of the
G maximum rates at which interest may be paid on different
classes of deposits by different classes of scheduled banks in
accordance with the directions given or issued to banking
companies generally by the Reserve Bank of India. under' the
Banking Regulation Act. Therefore, we are of the view that pre-
H
STATE OF RAJASTHAN v. FERRO CONCRETE 61'
CONSTRUCTION PVT. LTD. [R.V. RAVEENDRAN, J.]
reference interest should be only at the rate of 9% per annum. A
";
It is appropriate to award the same rate of interest even by way
of pendente lite interest and future interest upto date of
payment.

Re: Claims 2 and 16 1 3 and 151 5 and 18 1 6 and 17 1 9 and
B
19 1 11 and 20 1 24 1 27 1 and 28 1 29 1 30 1 31 1 32 1 33 1 35 {with
25 and 34) of the contractor.

37. Claims 9 & 19, 27 & 28, 29, 33, 35 (with 25 & 35) are
for payment for work aone by the contractor. Claims 2 & 16, 3
& 15, 5 & 18/24, 30, 31 and 32 are for release/refund of c
amounts withheld or excess deductions. Claims 6 & 17are for
escalation in prices. Claims 11 & 20 are for compensation for
slow progress due to reduction of width of trench. The arbitrator
has awarded certain amounts against these claims by
examining the material placed before him and the terms of D
contract. He has also assigned reasons for awarding the
amount against these claims. Courts can .not sit in judgment
over the award of the arbitrator, nor re-appreciate the evidence.
The awards on these claims do not suffer from any infirmity
which can be the basis for interference either under Section 30 E
.. or under Section 16 of the Arbitration Act, 1940. Neither want
of jurisdiction, nor legal misconduct, nor any inconsistency nor
error apparent on the face of the award are made out in regard
to awards made in regard to these claims. The awards in
regard to these claims are therefore upheld. F
Re: Claims 41 71 81 101 & 21 1 141 22 1 23 1 26 1 38 1 39 1 40 1 41 &
41A 1 42 & 42A 1 43 of the contractor

38. These claims of the contractor have been examined
and rejected by the Arbitrator and upheld by the courts below. G
No ground is made out to interfere with the same.
>-
Re: Counter claims of the em~lo)ler

39. Out of the five counter-claims of the employer, the
H
68 SUPREME COURT REPORTS [2009] 10 S.C.R. .

A Arbitrator has allowed only counter-claim no.(3). Counter-claim
no. (3) was for refund of mobilization advance (Rs.79,87,846)
with interest and the Arbitrator has awarded Rs.59,42,275/- with
interest at the contract rate of 18% per annum up to the date
of decree/payment whichever was earlier. Counter-claims 1, 2,
s 4 and 5 made by the appellant against the contractor have
been rejected. They are:
Counter Brief description of counter Amount of
claim No. claim . counter claim

c 1 Liquidated damages Rs.99, 19,460/-

2 Extra cost in getting work Rs.6,66,62,000/-
completed through another
agency
D 4. Interest on payments made to Rs.2, 17,42, 168/-
the contractor and not utilized
.
5. Costs Rs.2,50,000/-

E Counter-claims 1, 2, & 4 have been considered by the arbitrator
and rejected by the arbitrator on the ground that the delays/ ,
breaches were on the part of the appellant and therefore, the
question of claiming these amounts does not arise. Rejection
of counter-claim (5) is consequential. As noticed above, the
F court does not sit in appeal over the award of the arbitrator and
cannot re-appreciate the evidence to arrive at a different
conclusion. The award on these items do not attract any of the
· grounds on which award could be set aside. Therefore,
rejection of these claims is also not open to interference.

G 40. We therefore allow these appeals in part and modify
the judgments of the courts below as indicated above.
Resultantly:

(A) The award of Arbitrator on claim no.(1)
H (Rs.33,06,500/-) and claim 37A (Rs.12,072/- per
STATE OF RAJASTHAN v. FERRO CONCRETE 69
CONSTRUCTION PVT. LTD. [R.V. RAVEENDRAN, J.]

day from 21.9.1994 till date of payment) are set A
aside.

(B) The award of Arbitrator on claims 2 and 16, 3 and
15, 5 and 18, 6 and 17, 9 and 19, 11 and 20, 24,
27 and 28, 29, 30, 31, 32, 33, 35 (with 25 & 24)
B
aggregating to Rs.1,34,24,407/- is upheld.

(C) Interest shall be payable at 9% p.a. on
·- Rs.1,34,24,407/- from 3.9.1990 till date of payment.
The award on claims 12 & 13 is modified
accordingly. c
(D) Award of Rs.59,42,275/- in respect of counter-claim
no.(3) of appellant with interest at the rate of 18%
per annum from the respective dates of release upto
the date of payment is upheld. D
(E) The direction for adjustment of the amount due
under counter-claim no.(3) calculated as on
21.9.1994, against the amounts found due to the
contractor calculated as on 21.9.1994 is upheld.
Consequently, the appellant shall release the title E
deeds deposited in regard to the planUmachinery
of the contractor. The contractor will be entitled to
remove the plant, if it is not already done.

(F) Rejection of claims 4, 7, 8, 10 & 21, 14, 22, 23, 26, F
38, 39, 40, 41 & 41A, 42 & 42A and 43 of the
contractor and counter-claims 1, 2, 4, and 5 of the
employer are upheld.

~G) Parties to bear their respective costs.
G
>- R.P. Appeals partly allowed.