Holding

An arbitrator is a creature of the agreement and must operate strictly within its four corners; any award that contravenes the contractual limits is ultra vires and must be set aside.

Summary

The appellant, New India Civil Erectors Ltd., entered into a contract with ONGC to construct 304 prefabricated housing units. After termination of the contract, disputes were referred to two arbitrators who awarded the appellant a net sum of Rs. 67,82,620. The appellant sought to make the award a rule of court; the single judge did so, but ONGC challenged the award. On appeal, the Division Bench upheld ONGC's objections on three specific claims: cement shortage, inclusion of balcony area in built‑up area measurement, and escalation charges. The Supreme Court held that arbitrators must act within the four corners of the agreement; they exceeded jurisdiction by awarding amounts contrary to the tender and contractual stipulations. Accordingly, the Court allowed the appeal only on the cement‑shortage claim (upholding the award of Rs. 3,70,221.50) and dismissed the appeal on the other two claims.

Issues considered

Whether the arbitrators exceeded their jurisdiction by awarding compensation for cement shortage contrary to the tender stipulation.
Whether the arbitrators exceeded their jurisdiction by including balcony area in the measurement of built‑up area despite the agreement excluding it.
Whether the claim for escalation charges is barred by the express stipulation in the acceptance letter and whether the arbitrators erred in awarding such amount.

Subjects

arbitrationjurisdiction of arbitratoraward setting asidecontract interpretationescalation clausemeasurement of built‑up areacement shortagearbitrator's authority

Judgment

A THE NEW INDIA CIVIL ERECTORS {P) LTD.
v.
OIL AND NATIONAL GAS CORPORATION

FEBRUARY 17, 1997

B [B.P. JEEVAN REDDY AND SUJATA V. MANOHAR, JJ.]

Arbitration Act-Powers of Arbitratol"-Setting aside award-Grounds
of-Arbitrator-Exceeding jurisdictiolt-Held-Arbitrator a creature of an
agreement and has to follow limits incorporated in agreement and he cannot
C interpret-An arbitrator to act within the four comers of the agreement.

The appellant entered into a contract for construction of 304 pre·
fabricated housing units for the Respondent. The contract could not be
completed even within an extended period. The contract was terminated
by the Respondent and the work was done through another agency. There
D were disputes between the Appellant and Respondent which were referred
to a team of two Arbitrators.

The Appellant had made claims under 19 heads, out of which a total
sum of Rs.1,09,04,789 was awarded on 11 claims only. The Respondents
E made 3 claims, ·Out of which one claim was rejected and two claims were
allowed partly to an extent of Rs. 41,22,178. Therefore, the Appellant was
held entitled to a net amount of Rs. 67 ,82,620 with interest at the rate of
18% p.a. from date of award till date of payment.
1
The Appellant moved the single judge for making the award a rule
F of Court. The Respondent flied objections seeking to have the awa.rd set
aside. The single judge over ruled the objection and made the Award a rule
of Court.

On Appeal before the Division Bench, the Respondent confined its
G challenge to claims under five heads only and did not contest other claims.
The Division Bench upheld the Respondent's contentions as regards three
claims and rejected the rest.

On Appeal before this Court, the Appellant contended that there
were shortages of cement in the bags supplied by the Respondent and that
H the Appellant had in t.heir correspondences specillcally stipulated that
86
NEW INDIA CIVIL ERECTORS (P) LTD. v. 0.N.G.C. 87

each bag shall contain SO kg. of cement, that the arbitrators exceeded their A ·
authority in awarding the amount under this head, that the Division bench
had erred in not including the area of the balconies in the measurement
of the built-up area since there were no balconies at all as per the modified
plan, and that the claim under escalation charges were wrongfully rejected
by the Division Bench. The Respondents contested the appeal on the B
ground that supply of cement was irrespective of variation in weight, that
the stipulation in the Tender was not modified by the Appellant's letter,
that as regards area covered by balconies, the tender conditions stipulate
that it is liable to be excluded from the measurements, that the claim of
escalation charges is not admissible under the contract till completion of

-- work and that the arbitrators could not have awarded any amount on this C
ground.

Allowing the Appeal partly this Court

HELD : 1. Since there is formal contract and the terms of
agreement have to be inferred from the Tender notice and the correspon-
D
dence between parties, and the attempt of the court is always to support
the award within the letter of law, the award is upheld as regards
variation in ~ement bags. [90-G]

2. The findings of the Division Bench that the arbitrators overstepped E
their authority by including the area of the balconies in the measurement
of the built up area is upheld. The arbitrators being a creature of the
·agreement, must operate within the four corners of the agreement and
canrlot travel beyond it. The arbitrators cannot award any amount which
is ruled out or prohibited by the terms of the agreement. [91-H, 92-H] F

3. The decision of Division Bench as regards rejection of escalation
charges is affirmed. The Single Judge was not right in holding that the
prohibition of claiming escalation charges is confined to the original
contract period and does not operate thereafter. It is not a case of the
arbitrators construing the agreement. It is a clear case of the arbitrators G
acting contrary to the specific stipulation/condition contained in the agree·
ment between the parties. [92-D-H]

Sudharsha11 Trading Company v. Govt. of Kera/a, AIR (1989) SC 890,
relied on. ~
y
88 SUPREME COURT REPORTS [1997] 2 S.C.R.

A CIVIL APPELLATE JURISDICTION : Civil Appeal No. 808 of
1997.

From the Judgment and Order dated 1.8.96 of the Bombay High
Court in A. No. 913 of 1994.

B F.S. Nariman, Gopal Subramanium, S.K. Gambhir, Vivek Gambhir
and Diwakar Chaturvedi for the Appellant.

Ashok H. Desai, Attorney General, R.F. Nariman, Krishnan Venug-
poal, Ms. Anuradha and R. Sasiprabhu for the Respondent.

C The Judgment of the Court was delivered by

B.P. JEEVAN REDDY, J. Leave granted. Heard Shri F.S. Nariman,
learned counsel for the appellant and the learned Attorney General for the
respondent-corporation.

D A contract was entered into between the appellant and the Oil &
Natural Gas Corporation (O.N.G.C.), whereunder the appellant undertook
to construct304 pre-fabricated housing units at Panvel, Phase-I. The
appellant commenced the construction but did not complete at even within
the extended period. The respondent thereupon terminated the contract
E and got the said work done through another agency. Disputes arose be-
tween the parties in the above connection, each party raising claims against
the other, which are referred for decision to two arbitrators Goint Ar-
bitrators). By their award dated 18th June, 1991, the arbitrators decided
that while the O.N.G.C. shall pay to the appellant a sum of ~s. 1,09,04,789,
the appellant shall pay to the O.N.G.C. a sum of Rs. 41,2Z,178. In other
F words the appellant was held entitled to a m;t amount of Rs. 67, 82, 620
with interest at the rate of 18 per cent per annum from the date of award
till the date of payment or till the date of decree whichever was earlier.
While the appellant applied for making the said award a Rule of the Court,
the respondent-corporation filed objections seeking to have the award set
G aside. The learned Single Judge overruled the objections of the respon-
dent- corporation and made the award a Rule of the Court. Corporation
appealed against the same, which has been partly allowed by the Division
Bench.

The appellant had claimed various amounts under as many as 19
H heads, while the respondent-corporation claimed certain amounts under
NEWINDIACIVILERECTORS(P)LTD.v. O.N.G.C. (B.P.JEEVANREDDY,J.] 89

three heads. The arbitrators rejected the appellant's claim under heads 3, A
5, 7, 8, 10, 11, 12 and 18. They awarded various amounts under the other
heads, the total of which came to Rs. 1,09,04,789. So far as the respondent's
claims are concerned, the arbitrators rejected claim No. 2 but accepted
claim No. 1 (partly) and claim No. 3 (partly) and awarded various amounts
totalling Rs. 41,22, 178.
B
In the appeal before the Division Bench the respondent- corporation
confined its attack only to claims 1, 4, 6, 9 and 13. The Division Bench
rejected the respondent's contentions with respect to claims 1 and 13 but
upheld the same with respect to claims 4, 6 and 9. Only the appellant has
come to this Court challenging the Judgment of the Division Bench. We C
shall deal with these three claims in their proper order.

Claim No. 4 : Appellant's claim No. 4 arises on account of the
shortage of cement in the bags supplied by the respondent. The appellant's
case was that the corporation had undertaken to supply cement to it in
bags, each bag containing 50 kg. of cement, but as a matter of fact, the D
cement actually found in the bags was less. The appellant complained of
the same to the officers of the corporation from time to time and a record
of the shortages has indeed been kept by the parties. On this count, the
appellant claimed a sum of Rs. 3, 96,984.50 p., against which the arbitrators
awarded an amount of Rs. 3,70,221.50 paise. The defence of the corpora- E
tion was that according to the stipulation contained in Schedule - A to the
Tender notice, the corporation was not to be held responsible for any
variation in the weight of the cement in the bags supplied by them. The
relevant stipulation read as follows :

"Ordinary Port-land Ex Commission's F
construction cement MT830 Godown, Greater
Bombay,

·' NOTE : 20 (Twenty bags) bags of cement shall mean one metric
tonne for the purpose of recovery irrespective of variation in stand- G
ard weight of cement filled in bags."

The appellant's case, however, was that though the Schedule to the
Tender riotice did contain the above stipulation, the appellant had, in its
letter dated 5th March, 1984, which was in the nature of a counter-offer,
clearly stipulated that "ordinary portland cement; Rs. 8.30 per metric H
y
(
~·

90 SUPREME COURT REPORTS [1997] 2 S.C.R.

A tonne, (each 50 kg. bag)" will be supplied by the corporation "at site". The·
appellant had stipulated in the said letter that the terms set out by it therein
"shall take precedence over. ............ tender conditions". It is pointed out by
Shri Nariman that the said letter forms part of the contract between the '
parties and that indeed it is this letter which contains the arbitration clause

B
whereunder the disputes between the parties have been adjudicated by the
arbitrators. It is further submitted by the learned counsel that in .their
acceptance letter dated 10th January, 1985, the respondent-corporation
merely stated that the cement will be supplied only at Bombay and not at
the site, but did not say anything with respect to the stipulation in the
appellant's letter dated 5th March, 1984 (counter-offer) that each bag of
'
C cement supplied to it shall contain 50 kg. of cement.

The Division Bench has not referred to the letter dated 5th March,
1984 nor to the acceptance letter dated 10th January, 1985, but has rejected
the appellant's claim only and exclusively with reference to the stipulation
D in the schedule to the Tender notice. Mr. F.S. Nariman submits that the
Division Bench was in error in holding that the arbitrators exceeded their
authority in awarding the said amount. According to him, the arbitrators
merely construed the relevant stipulation as contained in the schedule to
the Tender notice read with the appellant's letter dated 5th March, 1984
(counter-offer) and the corporation's acceptance letter dated 10th January,
E 1985 - which they were entitled to do. It is submitted that since the award
is a non- speaking award (though it has awarded separate amounts under
each head of claim) no interference is permissible on the ground that the
arbitrators have misconstrued the terms of the agreement. On the other
hand, the learned Attorney General submitted that the stipulation
p aforesaid in the Tender notice was not modified or qualified in any manner
by the appellant's letter dated 5th March, 1984 or by the Respondent's
acceptance letter dated 10th January, 1985, and, therefore, the Division
Bench was right in rejeCting this claim as prohibited hy the agreement
between the parties. We are of the opinion that this appears lo be a border-
line case. It is possible to take either view. It must be remembered that in
G this case there is 1zo f annal contract and the terms of agreement have to be
inferred from the Tender notice and the correspondence between the
parties. Since the attempt of the Court should always be to support the
award within the letter of law, we are inclined to uphold the award on this
count (claim No. 4). Accordingly, we reverse the judgment of the Division
H Bench to the above extent. The amount awarded by the arbitrators under
NEW INDIA CIVIL ERECTORS (P) LID. v. O.N.G.C. [B.P. JEEVAN REDDY, J.] 91

this claim is affirmed. A
Claim No. 6: The claim of the appellant under this head is in a sum·
of Rs. 53,ll,735.60p, against which the Arbitrators have awarded an
amount of Rs. 49,91,327. The dispute between the parties is with respect
to the method/mode of measuring the constructed area. The case of the
respondent is that according to the tender conditions, as well as clause (10) B
of the aforesaid letter dated 5th March, 1984 (written by the appellant to
the corporation), the area covered by balconies is liable to be excluded
from the measurements. We may refer to clause (10) of the appellant's own
Jetter dated 5th March, 1984 which reads as follows :
c
·- "Mode of measurement : We have based our price on the total
built-up area of one floor (four flats) including stair- case and
common corridor but excluding balconies only. Hence work should
be measured on the built-up area, excluding balcony areas."

The tender condition is to the same effect. · D
The above stipulation clearly says that total -built-up area of a floor
shall include stair case and common corridor but shall exclude balconies.
It expressly provides that "work should be measured on the built-up area
excluding balcony area". It is undisputed that in the plan of flats attached
to the Tender notice, balconies are provided. Shri Nariman contended thaL E
the said plans were modified later and that the flats as finally constructed,
did not have any balconies and, hence, no. question of excluding the
balconies' area can arise. Shri Nariman could not, however, bring to our
notice any agreed or sanctioned plan modifying the plan. attached to the
Tender notice. The appellant could not have constructed flats except in F
accordance with the plans. attached to the Tender notice, unless of course
there was a later mutually agreed modified plan - and there is none in this
case. We cannot, therefore, entertain the contention at this stage that there
are no balconies at all in the flats constructed and that, therefore,_ the
aforesaid stipulation has no relevance. We must proceed on the assumption
that the plans attached to the Tender notice are the agreed plans and that G

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•
construction has been made according tO them and that in the light of the
agreed stipulation referred to above, the areas covered by balconies should
be excluded. In this view of the matter we agree with the Division Bench
that the arbitrators over-stepped their authority by including the area of
the balconies in the measurement of the built-up area. It is exiomatic that H
92 SUPREME COURT REPORTS (1997] 2 S.C.R. ·

A the arbitrator being a creature of the agreement, must operate within the
four corners of the agreement and cannot travel beyond it. More par:.
ticularly, he cannot award any amount which is ruled out or prohibited by
the terms of the agreement. In this case, the agreement between the parties
clearly says that in measuring the built-up area, the balcony areas should
B be excluded. The arbitrators could not have acted contrary to the said
stipulation and awarded any amount to the appellant on that account. We,
therefore, affirm the decision of the Division Bench on this score (Claim
No. 6).

Claim No. 9: The appellant claimed an amount of Rs. 32,21,099.89p.
C under this head, against which the arbitrators have awarded a sum of
Rs.16,31,425. The above claim was made on account of escalation in the
cost of construction during the period subsequent to the expiry of the
original contract period. The appellant's claim on this account was resisted
by the respondent-corporation with reference to and on the basis of the
D stipulation in the corporations' acceptance letter dat~d 10th January, 1985
which stated clearly that "the above price is finn and is not subject to any '
escalation under whatsoever ground till the completion of the woi'k". The
Division Bench has held, and in our opinion rightly, that in the face :of the
said express stipulation between the parties, the appellant could not have
E claimed any amount on account of escalation in the cost of construction
carried on by him after the expiry of the original contract period. The
aforesaid stipulation provides clearly that there shall be no escalation on
any ground whatsoever and the said prohibition is effective till the comple-
tion of the work. The learned arbitrators, could not therefore have awarded
any amount on the ground that the appellant must have incurred extra
F expense in carrying out the construction after the expiry of the original
contract period. The aforesaid stipulation between the parties is binding
upon them both and the arbitrators. We are of the opinion that the learned
single Judge was not right in holding that the said prohibition is confined
to the original contract period and does not operate thereafter. Merely
G because the time was made the essence of the contract and the work was
contemplated to be completed within 15 months, it does not follow that the,_
aforesaid stipulation was confined to the original contract period. This is
not a case of the arbitrators construing· the agreement. It is a clear case of
the arbitrators acting contrary to the specific stipulation/condition con-
H tained in the agreement between the parties. We, therefore, affirm the
NEW INDIA CIVIL ERECTORS (P) LTD. v. O.N.G.C. [B.P. JEEVAN REDDY, J.] 93

decision of the Division Bench on this court as well (Claim No. 9). A
So far as the position of law on the subject is concerned, there is
hardly any dispute between the parties. It is sufficient to refer to the well
considered decision of this Court in Sudarsha11 Trading Company v.
Government of Kera/a, AI.R. (1989) S.C. 890, wherein it has been held:
"......... if the parties set limits to action by the arbitrator, then the arbitrator B
had to follow the limits set for him and the court can finu that he exceeded
his jurisdiction on proof of such excess......... Therefore, it appears to us
that there are two different and distinct grounds involved in many of the
cases. One is the error apparent on the face of the award, and the other
is that the arbitrator exceeded his jurisdiction. In the latter case, the courts C
can look into the arbitration agreement but in the former, it cannot, unless
the agreement was incorporated or recited in the award".

For the above reasons, the appeal is allowed in part, i.e., to the extent ·
of claim No. 4 (in a sum of Rs. 3,70,221.50). In other respects, the appeal
is dismissed. There shall be no order as to costs. D
V.M. Appeal partly allowed.

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