Supreme Court of India

STATE OF RAJASTHANversusPURI CONSTRUCTION CO. LTD. AND ANOTHER

Citation: 1994 INSC 396
Decided: 16 September 1994
Disposal: Disposed off
Bench: M N VENKATACHALIAH

Holding

The Court held that the State’s objection was barred by limitation and waived by acquiescence, so the arbitral award stands and no additional interest is payable.

Summary

The State of Rajasthan and Puri Construction Co. Ltd. entered into a dam‑construction contract containing an arbitration clause. Disputes were referred to two retired judges as arbitrators, who awarded Rs 1 crore in favour of the contractor. The State challenged the award on grounds of arbitrator misconduct (one arbitrator had acted as counsel for the contractor in a separate court case) and alleged errors of fact and law, also seeking interest from the date of breach and at a higher rate. The Supreme Court held that the State had knowledge of the arbitrator’s dual role, had not raised any objection during the arbitration, and had acquiesced by participating in the proceedings, thus waiving the right to complain. The objection was also barred by the 270‑day limitation under the Limitation Act. Consequently, the award was upheld, no interest from 1979 was granted, and the enhanced interest rate was rejected. The petition was dismissed.

Issues considered

The validity of the objection to the arbitrator’s alleged misconduct for having acted as counsel in a separate case.
Whether the objection was filed within the limitation period prescribed under the Limitation Act, 1963.
The scope of judicial power to set aside an arbitral award under Sections 15, 16 and 30 of the Arbitration Act, 1940.
Whether errors of fact or law apparent on the face of the record constitute grounds for setting aside the award.
Whether interest can be awarded from the date of breach (24‑Feb‑1979) and at an enhanced rate of 18% per annum.

Legislation cited

Arbitration Act, 1940s. 15, s. 16, s. 17, s. 18, s. 20, s. 28, s. 29, s. 30, s. 35
Limitation Act, 1963s. Article 119

Subjects

ArbitrationArbitral awardSection 30 Arbitration ActLegal misconductLimitation periodInterest awardLumpsum awardJudicial review of arbitrationWaiver and acquiescence

Judgment

.A STATE OF RAJASTHAN
v.
PURI CONSTRUCTION CO. LTD. AND ANOTHER

SEPTEMBER 16, 1994

B [M.N. VENKATACHALIAH, C.J. AND G.N. RAY, J.]

Arbitration Act, 1940-Section 30-Scope of-Setting aside of
award--Grounds for-Legal misconduct-Meaning of-evidence cannot be
reappraised by the Court-Conclusion on a question of law referred to the
C Arbitrator cannot be reversed merely because a different opinion is pos-
sible-Lumpsum award without detailed computation may be made-Sections
15 and 16--Arbitration Act, 1940.

Arbitration Act, 1940-Section 30-Misconduct-Meaning and scope
D of-Arbitrator accepting brief for a party during pendency of arbitration
proceedings-Fact within the knowledge of the other party-No objection
raised-Held, -misconduct cannot be alleged before the Court.

Limitation Act, 1963-Article 119-0bjection to award not raised
within 270 days of notice of filing of award-Held, barred by limitation.
E
Arbitration Act, 1940-Sections 29, 15, 17 and 2o-Interest-Claim of
interest from date of breach at an enhanced rate-Held, cannot be allowed
in the facts and circumstances of the case.

The applicant and the respondent entered into a contract for con-
F struction of a dam. The contract had an arbitration clause. During the
course of the execution of the contract, certain disputes arose between the
parties. The High Court in a petition under Section 20 of the Arbitration
Act, 1940 referred the disputes for arbitration. Against the order of the
High Court, the applicant filed a Special Leave Petition before this Court.
G This Court appointed the nominee of the applicant, Shri C.M. Lodha and
the nominee of the respondent Shri A.B. Rohtagi as the arbitrators. Both
were retired High Court judges. A retired judge of this Court was ap-
pointed as the Umpire.

On 21.11.1992, the arbitrators made a joint award of Rupees one
H crore in favour of the respondent and filed it before this Court as per the
(\/ 616
STAIB v. PURI CONSTN. CO. LID. 617

direction of this Court. The applicant filed an objection petition to the said A
award alleging misconduct by the arbitrators. The applicant further al-
leged that the arbitrators misconstrued the clause of the contract, misap-
preciated evidence of the witnesses and that they have recorded incorrect
findings which are contrary to the record.

The respondents filed its written statement to the objection petition B
filed by the applicant stating that the objections raised in the objection
petition were not admissible and the award could not be set aside or
modified or remitted to the arbitrators for reconsideration within the
ambit of Sections 15, 16 and 30 of the Arbitration Act, 1940. The respon-
dent also filed an application under Sections 15, 17, 18, 28 and 29 of the c
Arbitration Act, 1940 for making the award the rule of the Court, for award
of interest from 24.2.1979 of in lieu thereof from 30.5.1979 i.e., the date of
breach of contract by the appellant, and for enhancement of the rate of
interest to 18%.

The applicant filed an additional objection by way of affidavit of one D
of its employees in which it was alleged that the nominee of the respondent

- Shri A.B. Rohatgi had accepted a brief for the respondent during the
pendency or the arbitration proceedings and had argued the appeal before
this Court. This, according to the applicant, amounted to grave and
serious misconduct on the part of the arbitrator. The respondent, in reply, E
contended that the applicant had participated in the arbitration proceed-
ings having full knowledge that Shri Rohatgi had appeared for the respon-
dent in the appeal, but never raised any objection to his continuance as
an arbitrator. The respondent had also agreed to extend the time for
making of the award despite knowledge of the abov~ fact. The respondent
further contended that the additional objection filed by the applicant was F
barred having been filed ~70 days after the notice of filing of the award.

Rejecting the objections raised by the applicant while disposing of
application, this Court:

HELD : 1.1. The a}>plicant was aware of Shri Rohatgi's appearance as G
a counsel of the respondent in an appeal before this Court but despite such
knowledge, it did not raise any objectio'l either before the arbitrators or
before this Court during the pendency of the arbitration proceedings but
chose to make various submissions from time to time before the arbitrators
and invited adjudication on the reference to arbitration. Both the parties H
618 SUPREME COURT REPORTS [1994) SUPP. 3 S.C.R.

A agreed to extend the time for finally making the award by the joint ar-
bitrators despite the knowledge that Shri Rohatgi had represented one of
the parties in a case before this Court. It is, therefore, quite evident that
even if there was any disability of one of the arbitrators, in spite o( the
knowledge of such disability, the appellant had participated in the arbitra- ,·
tion proceedings, agreed to the extension of time for making the award and
B invited adjudication on the reference. Accordingly, the appellant cannot be
permitted to raise any objection about the validity of the award on the score
of disqualification of one of the arbitrators. (629-B, C, 630-D to F]

1.2. Such objection has not been filed within the period of limitation
C but the same has been sought to be raised after 270 days of the notice of
filing the award before this Court. Therefore, the aforesaid objection as to
the validity of the award on account of the alleged disqualification of one of
the arbitrators is devoid of any substance and must be rejected. [630-F, G]

M/s. Neelkantan & Bros. construction v. Superintending Engineer, Na-
D tional Highways, Salem and others, (1988] 4 SCC 462; Prasun Roy v. Calcutta
MtJtropolitan Development Authority and another, (1987] 4 SCC 217; Reserve
Bank of India v. S.S. Investments and others, (1992] 4 SCC 671; Chowdhri
Murtaza Hossein v. Mussamat Bibi Bechunnissa, 3 I.A. 209 and N. Chellap-
pan v. Secretary, Kerala Electricity Board, (1975] 1 SCC 289, relied on.
E Jupitor Calcutta Insurance Co. Ltd. v. Corporation of Calcutta, AIR
(1956) Cal 1472, approved.

State of Rajasthan v. R.S. Shanna, (1988] 4 SCC 353; Puri Construc-
tion Pvt. Ltd. v. Union of India, (1989] 1 SCC 411; Bansidhar v. State of
F Rajasthan, (1989] 2 SCC 557 and Mehmood Alam Tariq v. State of Rajas-
than, (1988] 3 sec 241, referred to.

2.1. A court of competent jurisdiction has both right and duty to
decide the lis presented before it for adjudication according to the best
understanding of law and facts involved in the lis by the judge presiding
G over the court. Such decision, even if erroneous, either in factual deter-
minati()n or application of law correctly, is a valid one and binding inter
. parties. It does not, therefore, stand to reason that the arbitrator's award
will be per se invalid ~nd inoperative for the simple reason that the
arbitrator has failed to appreciate the facts and has committed error in
H appreciating correct legal principle in basing the award. An erroneous
STAIB v. PURI CONS1N. CO. LID. 619

decision of a Court of law is open to judicial review by way of appeal or A
revision in accord~nce with the provisions of law. 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 arbitration by way B
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; By and large the courts have disfavoured interference with arbitration
award on account of error of law and fact on the score of misappreciation
and misreading of the materials on record and have shown definite inclina- C
tion 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 challengie to an award by the arbitrator so that
the award does not get undesirable immunity. In recent times, error in law D
and fact in basing an award bas not been given the wide immunity as
enjoyed earlier, by expanding the import and implication of legal
'misconduct' of an arbitrator so that 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. E
Precisely for the aforesaid reasons, the erroneous application of law
constituting the very basis of the award and improper and inco~ct
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 caution that in the anxiety to render justice to
F
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. Such exercise of power which can be exercised by an
appellate court with power to reverse the finding of fact, is alien to the G
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 the
various possible view points, the interference with award based on er-
roneous finding of fact is permissible. Similarly, if an award is based by H
620 SUPREME COURT REPORTS [1994] SUPP. 3 S.C.R.

A applying a principle of law which is patently erroneous, and but for such
erroneous application of legal principle, the award could not have 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.
[639-G, H, 640-A to H, 641-A, BJ
B Mis. Sudarshan Trading Co. v. Government of Kera/a and another,
[1989) 2 SCC 38; Municipal Corporation of Delhi v. Mis. Tapan Nath Ashok
Kumar and another, (1987) 4 SCC 497; Mis Alopi Prasad v. Union of India,
(1960) 2 SCR 799; Mis Kapoor Nilokhery Cooperative Dairy Fann Society
Ltd. v. Union of India and others, (1973) 1 SCC 78; Indian Oil Corporation
Ltd. v. lndian Carbon Ltd., (1988) 3 SCC 36; State of Rajasthan v. Mis R.S.
C Sharma and Co., (1988) 4 SCC 353; State of Orissa and other v. Mis Lall
Brothers, (1988] 4 SCC 153 and Firm Madan/al Roshanlal Mahajan v. Hum-
chand Mills Ltd. Indore, [1967) 1 SCR 105, relied on.

2.2. Error apparent on the face of the rec~rd does not mean tha! on
D closer scrutiny of the import of documents and materials on i'ecord, the
finding made by the arbitrator may be held to be erroneous. [641-F]

2.3. It is not necessary to indicate in the award computation made for
various heads a°:d it is open to the arbitrator to give a lumpsum award.
[639-C]
E ·State of Rajasthan v. Mis. R.S. Sharma & Co., [1988] 4 SCC 353,
referred to.

2.4. The appellant has failed to demonstrUte that any finding made
by the arbitrator is either fanciful or not referable to th.e materials on
record. The arbitrators have given the award by referring to various docu-
F ments and statements available on record and indicating the reasons for
basing the findings. Even if it is assumed that on the materials on record,
a different view could have been taken and the arbitrators have failed to
consider the documents and materials on record in their proper perspec·
tive, the award is not liable to be struck down. [637-D, 641-E, 1'.'1
G 3. Considering the facts and circumstances of the case no interest can
be awarded from February 24, 1979. or from May 30, 1979 and the prayer
for enhancement of the rate of interest at 18% is also not allowed. Since the
total damages suffered by the respondent has been quantified by the ar-
bitrator in the award at Rs. 1 crore without indicating different heads for
H the computation of said sum, it should be presumed that the arbitrators
STATE v. PURI CONS1N. CO. LID. [G.N. RAY, J.] 621

had taken into consideration all relevant facts in assessing the actual loss A
suffered up to the date of award. [644-F, G]

Secretary, Irrigation Department v. G.C. Roy, (1992) 1 SCC 508; Ex-
ecutive Engineer (Irrigation), Balimela and others v. Abhudata Jena, [1988)
1 SCC 418 and Santosh Singh Arora v: Union of India, (1992) 1 SCC 492,
referred to. B
CIVIL APPELLATE JURISDICTION : Interlocutory Application
No. 3.

IN
c
Special Leave Petition (C) No. 9089 of 1984.

From the Judgment and Order dated 10.10.83 of the Delhi High
Court in C.M. No. 3087/83 in F.A.O. (OS) No. 5 of 1983.

K.T.S. Tulsi, Additional Solicitor General, G. Parkash and Rajeev D
Sharma for the Petitioner.

Kapil Sibal, Arun J aitely, Maninder Singh, Ms. Monika Mohil and
Ms. Bina Gupta for the Respondents.

The Judgment of the Court was delivered by E
G.N. RAY, J. Both the parties have appeared through their respective
counsel and oral and written submissions besides filing objections and
counter objections to the validity of the impugned award of the joint
arbitrators have been made.
F
The short facts concerning the arbitration award in question may be
stated as follows : .

A contract for the construction of second portion of Mahi Bajaj
Sagar Dam, Banswara was given to the respondent company, Puri Con-

-- struction (P) Ltd. by the appellant State of Rajasthan in April 1975. G
Differences and disputes arose between the parties. The respondent con-
tractor invoked the provisions of the arbitration agreement and nominated
a retired Chief Justice of Delhi High Court, Mr. Justice S.N. Andley as an
Arbitrator. The appellant State of Rajasthan appointed as its nominee Sri
S. Adiappa, a retired Chief Engineer, P.W.D. (B & R) Rajasthan as an H
622 SUPREME COURT REPORTS [1994) SUPP. 3 S.C.R. ..

A arbitrator. However, the proceedings before the said arbitrator~ did not
continue. The respondent contractor filed a petition under section 20 of
the Arbitration Act before the Delhi High Court. Such application was
registered as Suit No. 758 A of 1982. By an order passed on 9.11.82 by the
Delhi High Court, the arbitration agreement between the parties was filed
and reference to arbitration was made. The parties thereafter sought for
B variation of the reference order dated 9.11.82. Instead of reference to a
sole arbitrator, reference was made to arbitrators namely Sri Manohar Lal
being, the nominee of appellant State of Rajasthan and Sri Guru Charan
Singh being the nominee of the State of respondent contractor. The State
of Rajasthan moved the Division Bench of Delhi High Court for stay of
C arbitration procee~gs. The said arbitrator Sri Lal and Sri Singh thereafter
resigned. Against the order of the Delhi High Court, the appellant, State
of Rajasthan filed a special leave petition before this Court being S.L.P.
(Civil) No. 9089 of 1984.

D In the said S.L.P. (C) No. 9089of1984 it was agreed to refer all the
subsisting disputes and differences between the parties to the arbitration
of Mr. Justice C.M. Lodha, retired Chief Justice of Rajasthan and Mr.
Justice A.B. Rohtagi, a retired Judge of the Delhi High Court. The parties
agreed to refer all the disputes and differences including subject matter of
Civil Suit No. 4 of 1979 pending in the Court of the District Judge,
E Banswara, Civil Suit No. 4 of 1980 pending before the District Judge,
Jaipur, and the said Suit No. 758Aof1982 pending before the High Court
at Delhi, FA.O. (OS) No. 5of1983 and suit pending under Order 37 C.P.
Code before the District Judge Banswara filed by the State of Rajasthan
for recovery of Bank Guarantee amounts.
F
By an order dated 25.2.1985 passed in S.L.P. (C) No. 9089 of 1984
this Court noted that the parties for the said S.L.P. having agreed to refer
all the disputes arising out of the agreement dated 2.6.1975 between the
Government of Rajasthan and the respondent contractor the appellant
G State of Rajasthan has appointed as its nominee Sri C.M. Lodha, a senior
Advocate and retired Chief Justice of Rajasthan High Court and the
respondent No. 1 contractor M/s Puri Construction (P) Ltd. has appointed
as its nominee a retired Judge of the Delhi High Court Sri A.B. Rohtagi
as an arbitrator. On the prayer of the learned counsel of both the parties
this Court appointed Mr. Justice A.C. Gupta, a retired Judge of this Court
H . as the umpire. This Court on the basis of the said agreement since filed
STATEv.PURICONS1N.CO.LID.(G.N.RAY,J.] 623

before this Court eVidencing the desire of the parties to refer the matter A
to arbitration, referred the disputes to the arbitration of Mr. Justice C.M.
Lodha and Mr. Justice AB. Rohtagi.

The arbitration proceedings before the said arbitrators continued for
about seven years and about seventy hearing had taken place before the B
said arbitrators. On 21.10.1992, the said arbitrators made a joint award in
the said arbitration proceedings. As per direction of this Court the ar-
bitrators filed the award before this Court on 18.1.1993. The respondent
contractor made an application for making the award decree of the court
and for certain reliefs by way of interest and damages and costs. The State
of Rajasthan, the appellant herein, filed on 6.3.1993 the petition of objec- C
tion to the award and the respondent contractor also filed written state-
ment to the said petition of objection.

The respondent contractor made an application under Sections 15,
17, 18, 28 and 29 of the Arbitration Act, 1940 for the prayers that (a) award D
of Rs. 1 crore in favour of the said applicant be made rule of court (b) the
interest be awarded from 24.2.1979 or in lieu thereof from 30.5.1979 i.e.
date of breach (c) modify the award and decree the award of interest at
10% per annum calculated with quarterly interest on the entire sum of Rs.
1 crore from 24.2.1979 and 30.5.1979. and to allow further interest on the E
sum decreed at 15% per annum from the date of dt!cree till date of
payment (d) that the bank guarantees of Rs. 19.25 lakhs be returned and
cancelled (e) the State of Rajasthan be allowed to withdraw approximate
sum of Rs. 25 lakhs or Rs. 26 lakhs that have been realised from the sale
of the applicant contractor's assets under the orders 'Of this Court and as
set out in the award, after the State of Rajasthan has satisfied the decree F
that would be passed by this Court in the facts of the case and in the
interest of justice (f) the time for making the award be extended in terms
of the agreement between the parties (g) the State of Rajasthan be directed
to pay the applicant costs of Rs. 10 lakhs in addition to the amounts that
this Court would decree towards principal and interest (h) the State of ,..,
Rajasthan be directed io pay the balance fee of the arbitrator Sri Lodha. u
The said application was made by the respondent contractor on February
17, 1993.

In the petition of objection the State of Rajasthan, the appellant
herein has contended that the Arbitrators misconducted in misinterpreting H
624 SUPREME COURT REPORTS [1994) SUPP. 3 S,C.R.

A and misconstruing various clauses of the said agreement pertaining to the
work of the construction of the dam since allotted to the respondent
contract and also failed to appreciate evidence of Sri Adi Anklesaria and
on misconception of facts and misinterpretation of documents on record
and by failing to consider some of the relevant facts and circumstances, the
erroneous and illegal award was made. Some of the findings on the basis
B of which the impugned award was made, consequent upon misreading and
misinterpreting relevant documents and evidences adduced are erroneous
on the face of the record and have resulted in misconduct on the part of
the arbitrators, thereby rendering the award illegal and invalid. In support
of such contention reference to various findings of the arbitrators and the
C alleged impropriety of such findings with reference to certain facts and
materials on record have been indicated. A written submissions have also
been filed challenging the validity and legality of the award pointing out
legal an factual errors. As such contentions raised in the written submis-
sions will be. scrutinised hereafter, it is not necessary to refer to all the
D contentions made in the said petition of objection in greater detail at this
stage.

On March 18, 1993, the respondent contractor filed a written state-
ment by way of counter to the objections made by the appellant State of
Rajasthan contending inter alia that the objections raised against reasoned
E award are not admissible within the limited ambit of challenge admissible
within the scheme of the Arbitration Act. It has been contended that if a
question is submitted to the arbitrator, and the arbitrator answers it, the
fact that the answer invokes erroneous decision on a question of law does
not make the award bad on its face so as to permit of its being set aside.
F The respondent contractor has further contended that the arbitrators were
nominees of the respective party to the arbitration and the arbitrators being
men of Unimpeachable integrity and the award running 39 pages and
containing detailed findings on all the issues that were framed is quite legal
and valid. Some of the important conclusions reached by the arbitrators by
giving reasons therefor have been indicated in the counter. It has been
G contended that an award can be either set aside or modified or remitted
to the arbitrators for reconsideration strictly within the ambit of Sections
15, 16 and 30 of the Arbitration Act. It has been averred in the said counter
that vague allegation of error apparent on the face of the record and vague
allegations that the clauses of agreement have been erroneously interpreted
H by the arbitrators are of no consequence and the objections raised by the
STATEv. PURICONS1N. CO. LTD. [G.N.RAY,J.] 625

appellant are liable to be rejected in limine. The court should not substitute A
its own evaluation of the conclusion of law or fact made by the arbitrator
for the purpose of holding that such conclusion· being contrary to the
contract the arbitrator has acted beyond jurisdiction. It has been further
contended that unless reference to arbitration specifically so requires the
arbitrator is not bound to deal with each claim separately but can deliver B
a consolidated award. It has also been alleged that the first part of the work
of Mahi Bajaj Sagar Dam, Banswara was given to M/s R.S .. Sharma and
the respondent contractor was given part II of the work. In the case of M/s
R.S. Sharma arbitrators were named on 13.6.1982 and the arbitrators gave
their award for lumpsum amount Rs. 75,41,7.55 in favour of Mis R.S. C
Sharma. Although M/s R.S. Sharma was permitted to remove the
machinery the respondent contractor was prohibited by an injunction from
the court of District Judge, Banswara to remove its assets. The respondent
contractor has alleged that machinery of the respondent contractor was
twice in value to the machinery of M/s R.S. Sharma and the replacement
costs of the machinery would not be less than Rs. 250 takhs. The arbitrators D
gave no reasons for the lump sum award in favour of Mis R.S. Sharma.
This court upheld the award vide judgment in State of Rajasthan v. RS.
Sharma, [1988] 4 SCC 353. In the counter, statements and submissions
made in various paragraphs of the objection petition were referred to and
the contentions and submissions made therein have been denied and E
disputed and in support of submissions as to true legal position concerning
an arbitration award various decisions of this Court and English Law Court
have been referred to. It has also been contended' that the respondent
contractor had borrowed money for undertaking the construction works of
the said Mahi Bajaj Sagar Dam. In 1979 the appellant State of Rajasthan F
rescinded the contract of the respondent contractor and refused to make
payment for the work executed at contract rates and also refused to make
payments for extra items of work. The appellant seized all the machinery
and assets of the respondent contractor and even on the depreciated value
of the said assets, a sum of 32 lakhs was realised. The respondent contrac-
tor could not take them for oth~r contract work of similar nature and the G
respondent contractor was reduced to a· State of bankruptcy. In 1987
Punjab and Sind Bank filed a suit No. 1337 of 1987 in the High Court of
Delhi and the Bank is seeking a decree for a sum of Rs .. 1,00,48,978 and
interest at 17.5% per annum from the date of institution of the suit till date
of realisation. The Bank is also seeking no sale of the mortgaged property H
626 SUPREME COURT REPORTS [1994] SUPP. 3 S.C.R.

A being the residential house of the Managing Director of the respondent
contractor. In support of such statement a. copy of the plaint in the said in
suit filed by the Bank has been annexed to the counter. Various factual and
legal contentions raised in the counter disputing the contentions made in
the petition of objection need not be elaborated and indicated in detail at
this stage.
B
It may be stated here that by an order dated 26.3.1993 passed in I.A.
No. 3 in S.L.P. (C) No. 9089 of 1984, this court directed that the claim
made by the arbitrator Sri Lodha towards his fee of Rs. 46,904 be paid
and it was further directed that one half of the award including interest
C accrued thereon would be paid to the respondent contractor against bank
guarantee to the satisfaction of the Registrar of this Court.

It may also be .. indicated here that the appellant State of Rajasthan
has filed additional objections. In the additional objections raised in the
D affidavit of Sri Zakir Hussain Executive Engineer, Mahi Menudam Division
I,. it has been alleged that one of the arbitrators, Sri AB. Rohatgi was
nominated by the respondent company but subsequent to his appointment
as an arbitrator in the case in question and during the pendency of the
arbitration proceedings the said Sri Rohatgi chose to accept the brief for
the claimant before this court in Civil Appeal No. 4649of1984 which was
E heard by this Court on January 20, 1989. Alleging that Sri Rohatgi did ndt
disclose the fact of his· accepting the brief for one of the parties it has been
urged that in view of his identifying with the interest of one of the parties
although in a different cause of action, the arbitrator lost the neutrality
required to be maintained by an arbitrator and in the aforesaid facts, there
F has been serious misconduct on the part of the arbitrator thereby rendering
his award invalid. In the counter to such additional affidavit, the respon-
dent had contended that the respective nominee of the parties was quite
close to each of the parties and the nominee of the appellant Sri Lodha
was appearing as a counsel for the appellant in various matters but as the
arbitrators were men of unimpeachable character, both the parties did not
G object to their nominations. Moreover, despite full knowledge of the fact
that Sri Rohtagi had appeared for the respondent in a case, the appellant
wilfully participated in the arbitration proceedings and invited adjudica-
tion. Hence allegations· of misconduct on that score cannot be permitted.
It has also been contended that such additional objection by way of an
H affidavit hftving been filed after 270 days, of the notice of filing the award
STATEv. PURI CONS1N. CO. LID. [G.N.RAY,J.] 627

in this court such objection need not be considered at all being time barred A
under Article 119 of the Limitation Act.

On the scope and ambit of the power of interference by the Court
-, with an award made by an arbitrator in a valid reference to arbitration,
various decisions have been made from time to time by Law Courts of India
including this Court and also by the Privy Council and the English Courts.
B
Both the parties have referred to such decisions in support of their respec-
tive contentions. The factual contentions of the respective parties are
proposed to be scrutinised and then the facts are proposed to be tested
within the conspectus of judicial decisions governing the issues involved.
c
Before we deal with the various facts referred to by the respective
parties, we may refer to the objection that has been raised by way of an
additional affidavit affirmed by an executive engineer of the Government
of Rajasthan, Shri Zakir Hussain, raising the question of misconduct of one
0

of the arbitrators and in the written submissions filed by Shri Tulsi the D
learned Additional Solicitor General appearing for the State of Rajasthan,
such misconduct and consequential disqualification of arbitrator has been
specifically contended. It has been alleged that one of the arbitrators,
namely, Shri AB. Rohtagi, disqualified himself from acting as an arbitrator
in the arbitration proceedings in question by accepting a brief from the
claimant-respondent in respect of a case though concerning a different E
cause of action, and representing the respondent- claimant in this Court in
Civil Appeal No. 4649 of 1984 (Puri Construction Pvt. Ltd. v. Union of
India). The decision rendered in the said appeal is reported in AIR 1989
SC 777 and in 1989 (1) JT 132. It has been alleged that the said Shri
Rohatgi did not disclose the said fact before acceptance of the brief and F
also thereafter. Such act is therefore, not only inconsistent with his duty as
an arbitrator but the same tantamounts to misconduct thereby rendering
the award invalid. Disputing the allegation that the factum of Sri Rohtagi's
appearing in a case before this court for the appellant was not known to
the appellant it has been contended that the State of Rajasthan being G
represented by eminent lawyers were fully aware that Shri Rohtagi had
appeared before this Court in an appeal on behalf of the respondent-Con-
tractor. It has been further contended that the said decision was mentioned
by Sri Sarupriya and Shri Arun Jaitley, Senior Advocate, appearing for the
State of Rajasthan before the Arbitrators and despite the knowledge of the
appellant that Shri Rohatgi had represented the respondent in an appeal H
628 SUPREME COURT REPORTS (1994] SUPP. 3 S.C.R.

A before this Court, no objection was raised at any point of time that by
accepting such brief from the respondent, Shri Rohtagi had disqualified
himself to act any further as an arbitrator. According to the respondent,
the arbitration proceedings thereafter continued till August, 1992 but the
appellant chose not to make any demurrer against the impartiality of the
said arbitrator. The plea taken by the deponent Shri Hussain that he was
B advised not to raise any objection against the arbitrator but to point out
the aforesaid fact before this Court at a later stage has been criticised by
Shri Sibal learned counsel appearing for the respondent, as void of any ,_-
substance. It has been urged that such objection being hopelessly barred
by limitation, cannot be considered. It has been contended by Shri Sibal
c that even on merits, such objection is liable to be rejected. The question
of raising objection by the appellant about the validity of the award would
not have arisen if the award was not made against the appellant. Shri Sibal
has contended that even in spite of the knowledge of Shri Rohtagi's acting
as a counsel of the Respondent in an appeal, the appellant did not object
D to his functioning as an arbitrator but on the contrary the appellant had

-
participated in the arbitration proceedings in all the sittings and made
submissions before the arbitrators. After taking a chance to succeed in the
arbitration, the appellant cannot be permitted to raise any contention of
misconduct of Shri Roliatgi on account of his acting as a counsel for the
respondent in a case. Shri Sibal has contended that reference to arbitration
E was made by this Court in the Special Leave Petition which is pending.
There was no impediment to mention "the said fact before this Court and
seeking appropriate direction against .Shri Roht&gi if the appellant had any
doubt about the neutrality of the said arbitrator. Shri Sibal has submitted
that the other arbitrator Sri Lodha had also appeared for the appellant
State of Rajasthan as an Advocate during the subsistence of arbitration
F
proceeding when he was acting as an arbitrator and such fact may be
convincingly demonstrated by referring to the reported decisions of this
Court namely [1989] 2 SCC 557 and [1988] 3 SCC 241. Mr. Sibal has
submitted that senior counsel appearing for a client owe a duty to the
institution and they do not identify with the interests of the client in matters
G in which they are not appearing. Senior Advocates appearing for one
litigant appear against him in other matters. Such appearance is neither
illegal nor improper. Shri Sibal has submitted that the appellant and the
respondent had never doubted about the impartiality and integrity of the
said arbitrators who are men of unimpeachable character and precisely for
H
STAIB v. PURI CONS'IN. CO. LID. (G.N. RAY, J.] 629

the said reasons, there was no oceasion on the apart of the appellant to A
ritise any objection against the functioning of Shri Rohatgi as an arbitrator
and the said plea of Shri Rohatgi's disability in the aforesaid facts as sought
to be raised, is an after thought and made in despair.

Considering the facts and circumstances of the case, it is quite B
evident that the appellant was aware of Shri Rohatgi's appearance as a
counsel for the respondent in an appeal before this Court but despite such
knowledge, appellant did not raise any objection either before the ar-
bitrators or before this Court during the pendency of the arbitration
proceedings but the appellant chose to make various submissions from time
to time before the arbitrators and invited adjudication on the reference to C
arbitration. In this connection, reference may be made to a decision of this
Court in M/s. Neelkantan & Bros. Constroction v. Superintending Engineer
National Highways, Salem and others, reported in AIR (1988) SC 2045. In
that case the arbitrator, a senior engineer entered upon the reference and
proceeded for some time but in view of his transfer he could not complete D
the same and successor of his office had taken up the arbitration case from
the stage wherefrom the said arbitrator entering upon the reference had
left and the said successor in office thereafter gave the award in question.
Questioning the validity of the award it was contended that as the former
arbitrator had entered upon the reference and statements of the parties
were filed before him and witnesses were also examined before him, the E
successor engineer has no jurisdiction to proceed with the arbitration
matter from the stage left by the arbitrator. Such challenge to the invalidify
of the award was, however, not accepted by this Court by holding that as
the fact of taking over the arbitration proceedings by the suceessor en-
gineer was known to the parties and no objection was raised about his F
continuing with the arbitration proceedings, the parties had acquiesced to
the functioning of the said successor engineer. Accordingly, a party who
had acquiesced to the arbitration by the successor engineer was precluded
from objecting to such arbitration and giving award or the reference.
Referring to the Comments on Russel on Arbitration 18 Edition 105, it has
been pointed out in the said decision that attending and taking part in G
proceedings with full knowledge of the relevant fact will amount to acquies-
cence. This Court has also referred to an old decision of the Judicial
Committee in Chowdhri Murtaza Hossein v. Mussunat Bibi Bechunnissa,
(reported in 3 I.A. 209). Reliance was also made to the observations in the
decision of the Calcutta High Court in the case of Jupitor Cakutta In- H
630 . SUPREME COURT REPORTS (1994] SUPP. 3 S.C.R.

A surance Co. Ltd. (reported in AIR 1956 Calcutta 1472). Reference was also
made to another decision of this Court in N. Chellappan v. Secretary Kera/a
Electricity Board (reported in (1975] 1 SCC 289) holding that acquiescence
defeat the right of the appellant at a later stage. Similar view was also
expressed in another decision of t.his Court in Prasun Roy v. Calcutta
B Metropolitan Development Authority and another, reported in AIR (1988)
SC 205. Similar view has also been expressed in a recent judgment of this
Court in Reserve Bank of India v. S.S. Investments and others, reported· in
[1992] 4 SCC 671. In the said decision, this Court has negatived the
contention that Umpire's entering upon the reference was invalid by hold-
ing that a party objecting to the Umpire's entering upon the reference, had
C agreed to extend the time to enable the Umpire to make the award. Having
agreed to extend such time,.it must be held that such party had waived its
objection to-the umpire's entering upon the reference.

In the instant case, admittedly both the parties agreed to extend the
D time for finally making the award by the joint arbitrators despite the
knowledge that Shri Rohtagi had represented one of the parties in a case
before this Court. No objection to his functioning was either raised before
the arbitrators or before this Court in the pending special leave petition
but the appellant had taken part in all the sittings before the arbitrators
and made oral and written submissions and invited the adjudication on the
E reference. It is, therefore, quite evident that even if there was any disability
of one of the arbitrators, inspite of the knowledge of such disability, the
appellant had participated in the arbitration proceedings, agreed to the
extension of time for making the award and invited adjudication on the
reference. Accordingly, the appellant cannot be permitted to raise any
p objection about the validity of the award on the score of disqualification
of one of the arbitrators. That apart, such objection has not been filed
within the period of limitation but the same has been sought to be raised
after 270 days of the notice of filing the award before this Court. Therefore,
the aforesaid objection as to the validity of the award on account of the
alleged disqualification of one of the arbitrators is devoid of any substance
G and must be rejected.

The challenge to the invalidity of the award on account of various
errors and omissions apparent on the face of the record as alleged by the
appefufut in the written argument for the appellant may be summarised as
H follows:
STATE v. PURI CONS1N. CO. LID~ [G.N. RAY, J.) 631

(a) the arbitrators clearly misconstrued clause 8 of the special con- A
ditions in the contract and the arbitrator failed to take into account that
clause 2 to the special conditions only dealth with the "handing over of the
site" and that clalise 8 only dealt with the measurements prior to start of
the work which was to be done on the request of the contractor to enable
him to prepare the bill.
B
(b) the arbitrators misread the statement at page 148 Vol. II relating
to the dates of handing over site and the dates of taking of measurements.
Several dates mentioned in the award in the respect are contrary to the
statements at page 148 Vol. II.

(c) the arbitrators have taken the date of handing over of the flank
c
block 23 prior to monsoon of 1976. Such finding is contrary to the record
placed before the arbitrators.

( d) the arbitrators misread the statement of Sri Adi Anklesaria,
because the arbitrators have only referred to answer to question No.27. D
They have failed to consider the notes to question No. 147 wherein the said
witness explained that it was not necessary in the case of construction of
dam that the entire site should be made available before the work could
start.

(e) the arbitrators have again misread the statements of Sri Adi E
Anklesaria in holding that the progress of the claimant was so fast that the
claimant was directed to go slow to avoid flooding of Banswara township.
It is contended that the documents on record clearly contradict the fu{ding
that the contractor was asked to go slow. '

(t) the arbitrators failed to take into account the letter dated May 6, F
1975, written by the claimant (Ex.R-44) wherein the claimant himself
expressed difficulty in commencing the work before October 15, 1975 and
sought to utilise the said period for the construction of other enabling
works.
G
(g) the finding of the arbitrators about the delay in handing over the
site to the contractor is wrong.

(h) the arbitrators have committed a fundamental error in awarding
damages on account of alleged delay in carrying out the measurements
prior to the work being started without going into the question wl!ether the H
632 SUPREME COURT REPORTS [1994} SUPP. 3 S.C.R.

A claimant suffered any loss on account of any such delay. In this connection,
it is also alleged that the arbitrators have not recorded any finding that the
target was ever completed or exceeded by the contractor in any of the
working seasons, and in the absence of such evidence and in view of
evidence to the contrary, there was no question that the claimant had
suffered any loss as a result of any delay in getting the measurement done
B for being able to start work on the site in his possession.

(i) there is no material on record that the claimant ever sought
measurement of particular site but the same was delayed and refused by
the appellant.
c G) that the finding of the arbitrators that there was a delay on the
part of the State in supplying the material is erroneous and contrary to the
records and arbitrators have failed to take into account special conditions
to which the materials were to be supplied by the States on availability. In
the absence of any evidence produced by the claimant that as a result of
D delay in supplying the materials, the construction work was held up and
the claimant had suffered loss, the award of damages on the basis of the
fmding of about non supply of materials in time, tantamounts to an error
apparent on record.

E (k) that the actual proof of loss suffered by the claimant is sine-qua
non for award of damages and in the absence of finding of actual loss
suffered by the claimants, the award of damages is patently erroneous. In
· this connection, it has been urged that the arbitrators have misused the
letters of Chief Engineer with regard to shortage of gelatin (Ex.R-148). It
is contended that the letter of the engineer was written in the context of
F · future requirement of entire project but the same did not deal with the
requirement of the contractor.

(1) the statement with regard to the shortage of cement referred by
Shri Anldesaria has also been read out of context. The arbitrators in
G recording the finding of delay in supplying the cement ignored the plea of
the appellant in the written statement ap.d there was not even one incident
to show that on account of non availability of cement, the claimant's work
suffered:

(m) the finding of the arbitrator that the claimant was entitled to
H extension has been assailed by contending that the arbitrators failed to take
STATE v. PURI CONS1N. CO. LID. (G.N. RAY, J.] 633

into account the plea of the appellant raised at page 164 Vol II of the A
written submissions that the claimant had failed to apply for extension of
time within the stipulated period as per clause 5 and has also failed to give
cogent reason for extension.

The award of damages without quantifying the same in accordance
with any rational principle has been assailed by contending that in a case B
of speaking award, the quantification of damages must be based on some
principle and cannot be quantified arbitrarily by adopting rule of thumb.
It has also been contended that the damages of Rs. 1 crore awarded by the
arbitrators are patently excessive and disproportionate to any loss suffered
by the claimants. In this connection, it has been allC'\ged that the amount C
for which the tender was submitted by the claimants was Rs. 6,36,76,741
and average rate for the claim of masonary and concrete work. work is Rs. ,
1.35 per cubic mtr. The quantity payable to the claimant from 1975-78 is
Rs. 1,85,000 cubic mtrs. and at the rate of 1.35 ~r cubic mtr. amount
payable to claimant comes to 2,49,75,000 and the amount actually paid to
the claimant in respect of the work done is Rs. 2,73,00,000. It has been D
contended that in fact, the c1aimant received excessive payment for the
total work performed by him. It is contended that the award of Rs.1 crore
in favour of the claimant when he had also received Rs. 24 1akh in excess
of his tender price, is patently unjust.
E
Disputing the aforesaid contentions about the invalidity of the award
on account of error in fact and in law it has been contended by the
respondent that the arbitrators have specifically held that :

(a) appellant was in breach of its fundamental obligation
F
(b) the appellant repudiated the material provisions of the contract,

(c) in para 28 of the Written Statement, the appellant admitted that
in the first working season only 59.64% of the site could be progressively
handed over. '
G
(d) for the second working season the site could only be handed over
for another 11.89%

(e) the appellant State of Rajasthan delayed giving possession of the
complete site by three years. It has also been alleged that in coming to H
634 SUPREME.COURT REPORTS (1994] SUPP. 3 S.C.R.

A such findings the arbitrators have relied upon the record of the proceedings
of Mahi Control Board and the contemporaneous reports of the Chief
Engineers of the State to the said Board. The arbitrators also relied upon
the evidence of Shri Anldesaria, the principal witness produced by the
State of Rajasthan. The arbitrators have held that the admissions made by
Shri Anklesaria in cross examination, were further evidenced by the report
B
of the Chief Engineers to the Mahi Control Board. The arbitrators have
also held that the State should have granted extension of time under the
provisions of Clause 5 and in terms of the Force Majure clause of the
contract. The arbitrators also held that beside floods, there was shortage
of raw materials over which the contractor had not control like the non
C ·availability of the stone, sand, short supply of cement, power and gelatin.
The arbitrators have also held that the refusal of the State to extend time
and the invocation of clauses 2 and 3 resulted in the breach of the contract
by the State of Rajasthan. Disputing the contention that there was any error
in the findings of the arbitrators about the delay in handing over the site
D and the other fundamental breaches committed by the State, reference has
been made to the depositions before the arbitrators of the principal witness
of the state of Rajasthan, Shri Anklesaria, by indicating the answers given
in respect of question Nos. 235, 236, 237 and also question Nos. 208, 209,
204, 157, 138, 118 and question Nos. 24, 31, 81 and 166. In the written
E submissions filed on behalf of the respondent, such questions· and the
corresponding answers have been quoted. It is also contended that the
arbitrators have placed reliance on three separate reports submitted by
three separate Chief Engineers to the Mahi Control Boards. Such reports
were made by Shri Gurucharan Singh, Shri B.K. Mehra and Shri J.I.
Gianchandani. In the said reports the danger of the flooding of Banswara
F township was mentioned. The delayed handing over of flank blocks was
admitted. The proposal to take up the work at the risks and costs of the
contractor after invoking clauses 2 and 3 of the contract was also indicated.
The Chief Engineers reported about the critical short supply of cement,
power, gelatin, face stone, stone from Aeru Quarry and short supply of
G sand. It is also contended that to avoid financial liability, a proposal to
invoke clauses 2 and 3 of the contract was forwarded to the Mahi Control
Board and in the said reports there are admissions about the fundamental
breaches of obligations of the State of Rajasthan. In was decided to cancel
the contract without granting any extension of time. The report of Shri
H Gurucharn Singh, Chief Engineer, revealed that the bottlenecks requiring
STATE v. PURI <?ONS1N. CO. LID. (G.N. RAY, J.) 635

immediate removal were the short supply of cement and dynamite, short A
availability of stone and sand, short availability of face masonry, inadequate
power and settlement of the financial claims of the contractor.

Shri Gianchandani, another Chief Engineer in his report categorical-
ly admitted that the contractor gave satisfactory report during the working B
season 1977-78. On October 6, 1977, the Chief Engineer in his note to the
Mahi Control Board stated :

"as per conditions of contract the rates tendered by them were
valid for a period of 5 y~ars and thereafter escalation is to be paid"

"............ it will be in the interest of the Government to limit the
c
amount of work to be carried out beyond April 1980 to the
minimum so that the unascertained liability on the department is
reduced to the minimum."

It has been urged by the respondent that based upon these reports D
and other evidences available before the arbitrators, the arbitrators have
held:

"consequently, the State's exercise of power to terminate the con-
tract was unlawful. The State's election to take the performance
of contract out of the hands of the contractor was unjustified. The E
State's action to seize the plant and machinery of the contractor
was wholly illegal."

It has been contended that the arbitrators have held that the State of
Rajasthan did not perform their part of the bargain and the State wrong- F
fully invoked the provisions of clauses 2 and 3, and worngfully invoked the
provisions of clause 2 and 3, and wrongfully denied the claimant extension
of time. The arbitrators have held that forfeiture under clause 4 could have
only been e.xercised if the invocation of clause 2 was rightfully made.
Exercise of power under clause 4 was invalidated as the delay was caused G
by the State. The arbitrators have held that the remedy for wrongful
forfeiture is to award damages as would put the claimant contractor in as
nearly as possible the same position as if no such wrong was committed. It
has bee~ contended by the respondent claimant that since the State was
guilty of breach and repudiation of the contract, and had also resiled from
its contractual obligations, it was not entitled to claim any liquidated H
636 SUPREME COURT REPORTS (1994] SUPP. 3 S.C.R.

A damages from the claimant. If the State was even partly responsible for the
delay, the State could not invoke clause 2 and 3 and levy liquidated
damages. In view of an agreed liquidated damage clause, the State's claim
for unliquidated damage is also not sustainable.

In support of the cont_ention that coming to an erroneous decision
B on facts by the arbitrator is not a misconduct and it is also not misconduct
if the relevant facts are misunderstood and misappreciated, several
decisions have been referred to. It has been urged by Mr. Sibal that
appraisement of evidence by the arbitrator is ordinarily a matter which the
Courts do not question and consider and the Court has no jurisdiction to
C substitute its own evaluation of the conclusion in law or fact.

It has been contended that the arbitrators were men of wide judicial
experience. They had taken pains in referring to various facts in detail in
basing their findings in support of the award. Both the parties were given
adequate opportunities to lead evidences and to make submissions. The long
D award runs over 38 pages containing cogent reasons for basnig the various
findings in support of the award with reference to materials on record. Even
if it is held that the arbitrators have failed to appreciate the evidences and
material on record in the proper perspective, the findings made by the ar-
bitrators on misunderstanding or misappreciation of the law and fact do not
E render the award invalid warranting interference by the Court.

It has been urged by Mr. Sibal that the appellant State of Rajasthan
has miserably failed to point out that the arbitrators have referred to any
proposition of law which is patently illegal on the face of it. There is no
material to show that the award is so patently erroneous and perverse that
F it shocks the judicial conscience of the Court and no reasonable man would
have arrived to the conclusions made by the arbitrators· on the face of
materials on record. It has been contended that when a case is referred to
arbitration, the award rendered by a judge by the choice of the parties,
should be accepted and preserved as far as possible and unless there is
G gross error apparent on the face of the record or the misconduct of the
arbitrator can otherwise be convincingly demonstrated, interference with
an award is not called for and the law is well settled in this regard.

After considering the respective contentions of the parties and sub-
missions made by the learned counsel of the parties and the award im-
H pugned, it appears to us that the arbitrators have not taken into
STATE v. PURI CONS'IN. CO. LTD. (G.N. RAY, J.) 637

consideration any matter outside the scope of reference. On the basis of A
agreement between the parties and in terms of the nomination of the
respective arbitrator by the parties, the dispute and differences covered by
the written agreement had been referred for arbitration by the said ar-
bitrators. It is nobody's case that the. arbitrators are incompetent to enter
upon the reference. It is also not the case of the either of the parties that B
any extraneous matter has been taken into consideration by the arbitrators.
There is also no allegation that reasonable opportunity of being heard has
not been given to either of the parties by the arbitrators or the arbitrators
have considered any document behind the back of any party. It prima facie
appears to us that in basing the findings in the award, the arbitrators have
referred to and relied upon the materials on record and it cannot be C
reasonably contended that there was no basis whatsoever to base ·the
findings made by the arbitrators upon consideration of the materials on
record.

In our view, the appellant has failed to demonstrate any finding made D
by the arbitrator is either fanciful or not refer~ble to be materials on
record. What has been sought to be contended by the appellant is that the
arbitrators have failed to properly appreciate various clauses of the agree-
ment between the parties relating to the project of Mahi Bajaj sagar Dam.
The appellant has also contended that the evidence given by Shri
Anklesaria has been misappreciated, misunderstood and has been ap- E
preciated out of context. The arbitrators have considered the deposition of
Sri Anklesaria and reports of the Chief Engineers out of their context and
on misappreciation and misreading of the materials on record, the er-
roneous findings are arrived at.
F
The arbitrator is the final arbiter for the dispute between the parties
and it is not open to challenge the award on the ground that the arbitrator
has drawn his own conclusion or has failed to appreciate the facts. In Mis
Sudarshan Trading Co. v. Government of Kerala and another (reported in
[1989] 2 sec 38) it has been held this court that there is a distinction
between disputes as to the jurisdiction of the arbitrator and the disputes G
as to in what way that jurisdiction should be exercised. There may be a
conflict as to the power of the arbitrator to grant a particular remedy. One
has to determine the distinction between an error within the jurisdiction
and an error in excess of the jurisdiction. Court cannot substitute its own
evaluation of the conclusion of law or fact to come to the conclusion that the H
638 ·SUPREME COURT REPORTS [1994] SUPf. 3 S.C.R.

A arbitrator had acted contrary to the bargain between the parties. (emphasis
supplied). Whether a particular amount was liable to be paid is a decision
within the competency of the arbitrator. By purporting to construe the
contract the Court cannot taken upon itself the burden of saying that this
was contrary to the contract and as such beyond jurisdiction. If on a view
B taken of a contract, the decision of the arbitrator on certain amounts
awarded is a possible view though perhaps not the only correct view, the
award cannot be examined by the Court. Where the reasons have been
given by the arbitrator in making the award the Court cannot examine the
reasonableness of the reasons. If the parties have selected their own forum,
the deciding forum must be conceded the power of appraisement of
C. evidence. The arbitrator is the sole judge of the quality as well as the
quantity of evidence and it will be for the court to take upon itself the task
of being a judge on the evidence before the arbitrator.

In Munidpal Corporation of Delhi v. Mis Jagan Nath Ashok Kumar
D and another, reported in (1987] sec (4) 497 it has been held by this Court
that appraisement of evidence by the arbitrator is ordinarily never a matter
which the Court questions and considers. It may be possible that-on the
same evidence the Court may arrive at a different conclusion than the one
arrived at by the .arbitrator but that by itself is no ground for setting aside
the award. It has also been held in the said decision that it is difficult to
E give an exact definition of the word 'reasonable. Reason varies in its
conclusions according to the idiosyncrasis of the individual and the time
and circumstances in which he thinks. In cases not covered by authority,
the verdict of a jury or the decision of a judge sitting as a jury usually
determines what is reasonable in each particular case. The word reasonable
F has in law prima facie meaning of reasonable in regard to those circumstan-
ces of which the actor, called on to act reasonably knows or ought to know.
An arbitrator acting as a judge has to exercise a discretion informed by
tradition, methodized by analogy, disciplined by system and subordinated
to the primordial necessity of order in the social life. Therefore, where
reasons germane and relevant for the arbitrator to hold in the manner he
G did, have been indicated, it cannot be said that the reasons are un-
reasonable.

In this case, claimS before the arbitrators arise from the. contract
between the parties. It is well settled that if a question of law is referred
1:1 to arbitrator and the ai:bitrator comes to a conclusion, it is not open to
STATE v. PURI CONS1N. CO. LID. [G.N. RAY, J.] 639

challenge the award on the ground that an alternative view of law is A
possible. In this connection, reference may be made to the decisions of this
Court in Mis Alopi Prasad v. Union of India, reported in [1960) 2 SCR 799
and Kapoor Nilokheri Cooperative Diary Fann Society, (reported in [1973)
1 SCC 78). In Indian Oil Corporation Ltd. v. Indian Carbon Ltd., (reported
in [1988) 3 sec 36), this Court has held that the Court does not sit in B
appeal over the award and review the reasons. The Court can set aside the
award only if it is apparent from the award that there is no evidence to
support the conclusions or if the award is based upon any legal proposition
which is erroneous.

It may also be mentioned here in that it is not necessary to indicate in C
the award computation made for various heads and it is open to the ar-
bitrator to give a lumpsum award. In this connection, reference may be made
to the decisions made in State of Rajasthan v. M/s. B..S. Shanna and Co.,
reported in (1988) 4 SCC 353 and in State of Orissa and others v. Mis Lall
Brothers, reported in [1988) 4 SCC 153 and in Finn Madan/al Roshanlal D
Mahajan v. Hu'lalmchand Mills Ltd. Indore, reported in [1967) 1SCR105.

In the State of Orissa v. Ms. Lall Brothers (supra) it has been held
that an award is conclusive as a judgment between the parties and the court
is entitled to set aside an award only if the arbitrator has misconducted
himself in the proceedings or when the award has been made after the issue E
of an order by the Court superseding the arbitration or after arbitration
proceedings have become invalid under Section 35 of the Arbitration Act
or where an award has been improperly procured or is otherwise invalid
under Section 30 of the Act. An award .may be set aside by the Court on
the ground of error on the fact of award, but an award is not invalid merely p
because by a process of inference and argument, it may be demonstrated that
the arbitrator has committed some mistake in arriving at his conclusion
(emphasis supplied).

A court of competent jurisdiction has both right and duty to decide
the 1is presented before it for adjudication according to the best under- G
standing of law and facts involved in the lis by the judge presiding over the
court. Such decision even if erroneous either in factual determination or .
application of law correctly, is a valid one and being inter parties. It does
not, therefore, stand to reason that the arbitrator's award will be per se
invalid and inoperative for the simple reason that the arbitrator has failed H
640 SUPREMECOURTREPORTS [1994]SUPP.3S.C.R.

A to appreciate the facts and has committed error in appreciating correct
legal principle in basing the award. An .erroneous decision of a court of
law is open to judicial review by way of appeal or revision on accordance
with the provisions of law. 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,
B and more often than not, a person with little or no legal background, the
adjudication of disputes by an arbitration by way of an award can be
challenged only within the limited scope of several provisions of the Ar-
bitration 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,
C judicial decisions have indicated the parameters of such challenge consis-
tent 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 misappreciation and misreading of the
material on record and have shown definite inclination to preserve the
D award as far as possible. As reference to arbitration of disputes in com-
mercial 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 an award by the arbitrator of the award does not get
undesirable immunity. In recent times, error in law and fact in basing an
award has not given the wide immunity as enjoyed earlier, by expanding
E the import and implication of legal misconduct' of an arbitrator so that
award by the arbitrator does not perpetrate gross miscarriage of justice ·
and the same is not reduced to mockery of a fair decisions of the 1is
between the parties to arbitration. Precisely for the aforesaid reasons, the
erroneous application of law constituting the very basis of the award and
F 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 not of caution that in the anxiety to render
justice to tJ-.::- .party to arbitration, the court should not reappraise the
evidence intrinsically with a close scrutiny for finding out that the con-
G clusion drawn from some facts, by the arbitrator is, according to the
understanding of the court, erroneous. Such exercise of power which -can
be exercised by an appellate court with power to reverse the finding of fact,
is alien to scope and ambit of challenge of an award ;.mder the Arbitration
Act. Where the error of finding of facts having a bearing on the award is
STATE v. PURI CONS'IN. CO. LID. (G.N. RAY, J.] 641

patent and is easily demonstrable without the necessity of carefully weigh- A
ing the various possible view points, 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 have been made,
such award is liable to be aside by holding that there has been legal B
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 fad and patently erroneous finding easily demonstrable from the
materials on record and application of principle of law forming the basis
of the award which is patently erroneous. It may be indicated here that
however objectively the problem may be viewed, the subjective element C
inherent in the judge deciding the problem, is bound to creep in and
influence the decision. By long training in the art of dispassionate analysis,
such subjective element is, however, reduced to minimum. Keeping the
aforesaid principle in mind, the challenge to the vali~ity of the impugned
award is to be considered with reference ·to judicial decisions on the D
subject.

The contentions about factual errors and omissions apparent on the
face of record as raised in the written argument are essentially errors and
omissions in not properly considering the materials on record, in misread-
ing and misconstruing such materials and consideration of some documents E
and statements out of their contexts. The arbitrators have given the award
by referring to various documents and statements available on record and
indicating the reasons for basing the findings. Even if it is assumed that on
the materials on record, a different view could have been taken and the
arbitrators have failed to consider the document and materials on record F
in their proper perspective, the award is not liable to be struck down in
view of judicial decisions referred to hereinbefore. Error apparent on the
face of the record does not mean that on closer scrutiny of the import of
documents and material on record, the finding made by the arbitrator may
be held to be erroneous. Judicial decisions. over the decades have indicated G
that an error of law or fact committed by an arbitrator by itself does not
constitute misconduct warranting interference with the award. It does not
appear to us that the findings made by the arbitrators are without any basis
whatsoever and are not referable to documents relied upon and such
findings are so patently unjust or perverse that no reasonable man could
have arrived to such findings. Hence, on the score of alleged misreading, H
642 SUPREME COURT REPORTS [1994] SUPP. 3 S.C.R.

A misconstruction, misappreciation of the materials on record or failure to
consider some of the materials in their proper perspective, the impugned
award is not liable to be set aside. It has been urged that computation of
lumpsum damage in the absence of any material showing actual loss
suffered by the contractor is patently unjust and improper warranting
interference by this Court. Lumpsum award by itself is not illegal as held
B
a number of decisions of this Court. The contractor's case was that because
of delay in handing over the site and for non supply or delayed supply of
materials essential for the construction work thereby putting obstacles and
hindeances to execute the work within the stipulated time and ultimately
repudiating the contract and seizing machineries etc. of the contractors, he
C not only suffered huge loss but was practically reduced to bankruptcy. It is
the case of the contractor that on account of illegal seizure of costly
machineries by the appellant, he was prevented from undertaking other
works of contract. A part of machineries seized by the appellant have been
sold for Rs. 20 lakhs. In the award, the arbitrators have recorded that the
D appellant admitted that the remaining machineries would cost about Rs. 5
lakhs. That apart, constructions of labour quarters, laying of roads etc. at
substantial cost incurred by the contractor have been utilised by the appel-
lant after repudiation of contact. It may be stated here that the first part
of construct work of Mahi Bajaj Sagar Dam was given to M/s R.S. Sharma~
E A lumpsum award of Rs. 75,41,755 was awarded in favour of M/s R.S.
Sharma. The machineries of Mis Sharma were not seized by the appellant.
Such lumpsum award of more than Rs. 75 lakhs without indicating how
such quantum was determined has been upheld by this Court and the
decision is reported in State of Rajasthan v. Mis R.S. Shanna & Co.,
(supra). The respondent contracfor has urged that the machineries includ-
F ing those seized and sold at depreciated value will now cost about 2.5
crores of rupees. Considering the magnitude of work involving costly
machineries and materials, if the two arbitrators in their wide experience
have quantified the total damage and has given the award for Rs. 1 crore
in favour of the respondent, it cannot be held that such award is so patently
G unjust and irrational and shocking to the conscience of the court, that the
same should be interfered with. As already indicated, in the case of other
contractor concerning first part of the work in Mahi Bajaj Sagar Dam,"
namely, R.S. Sharma & Co. the arbitrators quantified damages to the
extent of over Rs. 75 laldts without indicating how such damages had been
H quantified. But challenge to such award by the State of Rajasthan failed
STATE v. PURI CONS1N. CO. LID. (G.N. RAY, J.) 643

and the award has been upheld by this Court. We, therefore, dismiss the A
petition of objection and additional objection challenging the validity of the
award.

We are now left with the claim of further interest besides the interest
J awarded by the arbitrators in favour of the respondent on the said sum of
Rs. 1 crore @.15% per annum from September 30, 1986 till the date of B
payment of decree whichever is earlier. The respondent Contractor in its
application under' Sections 15, 17, 20 and 29 of the Arbitration Act filed
in -the said Special leave petition (Civil) No. 9089 of 1984 has prayed for
modification of the award of interest. It has been contended by the respon-
dent contractor that the arbitrators had jurisdiction to award interest from C
24.2.1979 when the subject matter of dispute was pending arbitration. It
has been contended that in the Constitution Bench Judgment of this Court
in the case of Secretary, Irrigation Department v. G.C. Roy, reported in
[1992] 1 SCC 508, the decision made inAbhu Data Jena, reported in [1988]
1sec418 was overruled. The Constitution Bench stated with approval the D
passage in the 4th Edition Vol. 2 para 534 in Halsbury's Laws of England
where it is stated that the arbitrator must decide the dispute in accordance
with the ordinary law. The Constitution Bench has also held in the said
decisions that :

(i) a person deprived of the use of money to which he is legitimately E
entitled has a right to be compensated for the deprivation, call it by any
name. It may be called interest, compensation or damages. This basic
consideration is as valid for the period the dispute is pending before the
arbitrator as it is for the period prior to the arbitrator entering upon the
reference. This is the principle of Section 34, Civil Procedure Code and
there is no reason or principle to hold otherwise in the case of arbitrator. F

(ii) an arbitrator is an alternative forum for resolution of disputes
arising between the parties. If so, he must have the power to decided all
the disputes for differences arising between the parties. If the arbitrator
has no ·power to award interest pendente lite, the party claiming it would G
have to approach the court for that purpose, even though he may have
obtained satisfaction in respect of other claims from the arbitrator. This
would lead to multiplicity of proceedings.

(iii) an arbitrator is the creature of an agreement. It is open to the
parties to confer upon him such powers and prescribe such procedure for H
644 SUPREMECOU~TREPORTS [1994] SUPP. 3~.C.R.

A him to follow as they think fit so long as they are not opposed to law. All
the same, the agreement must be in conformity with law. The arbitrator
must also act and make his award in accordance with the general law of
the land and the agreement.

The Constitution Bench has pointed out that over the years, the
B English and Indian Courts have acted on the assumption that where the
agreement does not prohibit and a party to the reference makes a claim
for interest, the arbitrator must have the power to award interest pendente
lite and until Jena' case, almost all the courts in the country had upheld
the power of the arbitrator to award interest pendente lite. It has aJso been
C indicated in the said Constitution Bench decision that the interest pendente
lite is not a mater of substantive law, like interest for the period anterior
to reference (pre-reference period). For doing complete justice between
the parties, such power has always been inferred.

D In the case of Santosh Singh Arora v. Union of India, "reported in
[1992] 1 SCC 492, relying on the said Constitution Bench decision in G.C.
Roy's case, this Court held that the appellant in the said case was entitled
to be compensated for denial of his legitimate dues. This Court has allowed
interest from December 18, 1968 when the arbitrator was named and not
from November 21, 1983 when the matter was referred to the arbitration
E of Shri Justice AC. Gupta. The respondent has claimed that interest be
awarded from February 24, 1979 or from May 30, 1979 that is the date of
the breach and the award should be modified and decreed on that basis
by allowing interest @ 18% per annum.

p Considering the facts and circumstances of the case, we are, however,
not inclined to award any interest from February 24, 1979 or from May 30,
1979 and the prayer for enhancement of the rate of interest at 18% is also
not allowed. Since the total damages suffered 'by the respondent has been
quantified by the arbitrator in the award at Rs. 1 crore without indicating
G different heads for the computation of the said sum, it should be presumed
that the arbitrators had taken into consideration all relevant facts in
assessing the actual loss suffered upto the date of award. The appellant
State of Rajasthan will be allowed to withdraw a sum of Rs. 25 lakhs or
Rs: 26 lakhs that has been realised from the sale of the respondent's assets
under the order of this Court and as set out in the award, after the State
H of Rajasthan ~atisfies the award which is made a rule of Court. The prayer
STAIB v. PURI CONS'IN. CO. LID. [G.N. RAY, J.] 645

for cost of Rs. 10 lakhs in addition to the amounts under the award to be A
paid to the respondent is also rejected. The bank guarantee, if any, fur-
nished by the respondent under the order of this Court made in Special
leave petition (civil) No. 9089 of 1984 stands discharged in favour of the
respondent. The application is accordingly disposed of without any order B
as to costs. No further order need be passed on the pending application.
The Interim Application therefore stands disposed of.

B.K.M. Petition disposed of.

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