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M/S. Ennore Port Ltd... v. Hindustan Constructi...
Structured Summary of the Opinion (P. Kalaiyarasan, J.)
Factual and Procedural Background
The dispute arises from a Rock Quarrying and Transportation contract dated 06.06.1996 between the Chennai Port Trust (predecessor-in-interest of the Appellant) and the first respondent for quarrying and transporting rock to construct breakwaters at Ennore. The transported rock was to be stockpiled in the Port. Due to insufficient space and non-removal of rock, an additional stockpile was created within the Port and a claim was made for the costs of creating that additional stockpile.
The Disputes Review Board (DRB) issued recommendations on 05.04.2001 concerning Dispute No. 8 (Variation Order) and Dispute No. 9 (non-release of certain payments). Part of the additional stockpile (9000 sq.m) was found by the Arbitrators to have been used by a C-4 contract, and the Arbitrators excluded the cost attributable to those 9000 sq.m when computing the award.
The first respondent referred the matter to Arbitration under Clause 67.4 of the contract due to alleged failure to comply with DRB recommendations. The Arbitral Tribunal reduced the DRB-recommended monetary award on Dispute No. 8 from Rs. 51.91 lakhs to Rs. 41.07 lakhs, and reduced the DRB-recommended interest rate from 18% to 14.5%/15% for Disputes Nos. 8 and 9.
The first respondent filed O.P. No. 202 of 2004 seeking to set aside the Arbitral decisions in respect of Dispute No. 8 and the reduction of interest in Disputes Nos. 8 & 9. The appellant filed O.P. No. 208 of 2006 seeking to reduce the rate of interest according to the then-current rate prevailing for the relevant period.
The learned single Judge, by order dated 13.11.2006 in O.P. Nos. 202 of 2004 and 208 of 2006, allowed O.P. No. 202 of 2004 and set aside the Arbitral award insofar as Dispute Nos. 8 and 9, holding that the Arbitral Tribunal exceeded its jurisdiction by reopening and modifying the DRB recommendations rather than passing an award based on those recommendations. The single Judge dismissed O.P. No. 208 of 2006. The appellant challenged that order by preferring these two Original Side Appeals (O.S.A. No. 155 of 2008 and O.S.A. No. 79 of 2010).
Legal Issues Presented
- Whether, when a dispute is referred to arbitration due to failure to comply with DRB recommendations under the contract, the Arbitral Tribunal must merely endorse (rubber-stamp) the DRB recommendations or is entitled to independently decide the dispute and give its own findings in accordance with the contract and applicable law.
- Whether the Arbitral Tribunal exceeded its jurisdiction in modifying the DRB recommendations in respect of Dispute Nos. 8 and 9, thereby rendering the award susceptible to being set aside under Section 34(2)(iv) of the Arbitration and Conciliation Act, 1996.
- Whether the rate of interest awarded by the Arbitral Tribunal should be reduced further to reflect the current rate of interest prevailing during the relevant period (as contended by the appellant).
Arguments of the Parties
Respondent's Arguments
- The primary ground urged by the respondent was that the Arbitrators exceeded their jurisdiction in contravention of the terms of the contract (i.e., by reopening and modifying the DRB recommendations rather than accepting them), which was relied upon as a ground under Section 34(2)(iv) of the Arbitration and Conciliation Act, 1996.
Appellant's Arguments
- The appellant sought a reduction of the rate of interest according to the current rate of interest prevailing at the relevant period, as pursued in O.P. No. 208 of 2006 and in one of the appeals.
Table of Precedents Cited
| Precedent | Rule or Principle Cited For | Application by the Court |
|---|---|---|
| Associate Builders v. DDA, (2015) 3 SCC 49 | Limits on judicial interference with arbitral awards under Section 34 of the Arbitration and Conciliation Act, 1996; Section 34 does not permit re‑examination of merits except in narrow circumstances (e.g., public policy). | The Court relied on the principles set out in this Supreme Court decision to frame the standard of review: interference under Section 34 is limited to the grounds enumerated in Sections 34(2) and (3). The opinion used this authority to conclude that merits-based re-appraisal is not permissible and to assess whether any enumerated ground for setting aside existed. |
| DDA v. Associate Builders, (2012) SCC OnLine Del 769 (Division Bench judgment) | Referenced in the discussion as a decision whose parameters were criticised in Associate Builders; cited in explaining the legal background on limitations of court interference under Section 34. | The Court referenced the Division Bench judgment primarily to note that the Supreme Court in Associate Builders commented on it; the instant opinion invoked the Supreme Court's corrective exposition rather than relying on the Division Bench judgment as controlling law. |
Court's Reasoning and Analysis
The Court proceeded by construing the relevant contractual provisions (notably Sub-Clauses 67.1, 67.3 and 67.4) and by applying the statutory framework governing interference with arbitral awards under the Arbitration and Conciliation Act, 1996 (specifically Section 34 and Section 5).
Key contractual interpretation points by the Court:
- Sub-Clause 67.1 provides that DRB recommendations are binding and final for disputes up to prescribed monetary thresholds; for other disputes the parties have 14 days to accept or reject the Board's recommendation, failing which the recommendations are deemed accepted.
- Sub-Clause 67.3 prescribes that any dispute whose DRB recommendation has not become final and binding shall be finally settled by arbitration (the clause also expressly permits the arbitration to consider evidence and arguments not previously put before the Engineer or the Board, and does not preclude calling DRB members as witnesses).
- Sub-Clause 67.4 addresses failure to comply with a recommendation that has become final and binding: where a recommendation has become final and binding but is not complied with, the affected party may refer the failure to arbitration in accordance with Sub-Clause 67.3; in such a reference the provisions of Sub-Clause 67.1 (dealing with finality of recommendations) shall not apply to that arbitration reference.
From these clauses, the Court concluded that when a dispute is referred to the Arbitrators because of a failure to comply with DRB recommendations (i.e., under Clause 67.4), the matter is to be treated as one "not becoming final and binding" for the purposes of arbitration under Clause 67.3 and the Arbitrators are not prevented from conducting a fresh inquiry or making independent findings. In short, the contract did not require the Arbitrators merely to "rubber-stamp" the DRB recommendations.
The Court then applied the statutory limitation on judicial review of arbitral awards as articulated in Associate Builders v. DDA: interference by the Court is permissible only on the narrow grounds set out in Sections 34(2) and (3) (for example, incapacity, invalid arbitration agreement, lack of notice, award dealing with matters beyond the scope of submission to arbitration, composition or procedure defects, or conflict with public policy). The Court emphasized that Section 34 does not provide a forum for re-examining merits except in the circumscribed circumstances recognized by statute and case law.
Applying these principles to the facts, the Court found:
- The Arbitral Tribunal's decision to exclude the cost attributable to the 9000 sq.m portion used by the C-4 contractor and thereby reduce the claim from Rs. 51.91 lakhs to Rs. 41.07 lakhs was a decision taken in terms of the contract on the materials available to the Tribunal. That decision fell within the Tribunal's jurisdiction and was a merits determination permissible under Clause 67.3/67.4.
- On the question of interest, the contract's Sub-Clause 60.8 and the Appendix specified an interest rate fixed at 15%. The DRB had recommended 18% but the Arbitrators awarded 14.5%/15% in accordance with contractual terms; consequently, the Tribunal's award on interest conformed to the contract.
- The respondent's contention that the arbitrators exceeded their jurisdiction was considered under Section 34(2)(iv) (that an award contains decisions beyond the scope of submission). The Court concluded that the award did not fall outside the scope of submission or exceed jurisdiction; therefore the statutory ground to set aside the award was not made out.
- The appellant's contention that the interest rate should be further reduced to reflect some other "current rate" was rejected: the Court held this contention not sustainable in view of the contractually specified rate and the Tribunal's adherence to the contract.
On this combined contractual and statutory analysis, the Court held that the learned single Judge erred in setting aside the Arbitrators' award insofar as Dispute Nos. 8 and 9.
Holding and Implications
Holding: The appeal in O.S.A. No. 155 of 2008 is allowed; the order dated 13.11.2006 of the learned single Judge in O.P. No. 202 of 2004 is set aside, and the Arbitral Award dated 24.07.2002 insofar as Dispute Nos. 8 and 9 is confirmed. In view of that result, O.S.A. No. 79 of 2010 is dismissed. No costs were awarded and the connected miscellaneous petition is closed.
Implications:
- The direct effect is that the Arbitral Tribunal's determinations (reduction of the monetary claim from Rs. 51.91 lakhs to Rs. 41.07 lakhs and the award of interest at 14.5%/15%) are restored and enforceable between the parties as decided by the Arbitral Tribunal on 24.07.2002.
- The Court reaffirmed the principle that where a contract provides for arbitration following failure to comply with DRB recommendations (Clause 67.4 read with Clause 67.3), the Arbitral Tribunal is entitled to independently examine the dispute and is not mechanically bound to adopt the DRB recommendations; therefore a tribunal's merits determination in such a reference is not lightly to be disturbed by courts except on the narrow statutory grounds in Section 34.
- The opinion applies settled law limiting judicial interference under Section 34 of the Arbitration and Conciliation Act, 1996, and does not purport to lay down a novel precedent beyond the cited authorities; it upholds the Arbitral Tribunal's exercise of jurisdiction in the particular contractual and factual matrix of this case.
This summary is strictly confined to information explicitly contained in the provided opinion and does not infer or add facts or legal positions beyond that text.
P. Kalaiyarasan, J.:— These two Original Side Appeals in O.S.A No. 155 of 2008 and O.S.A No. 79 of 2010 are directed against the common order of the learned single Judge of this Court, dated 13.11.2006 passed in O.P Nos. 202 of 2004 and 208 of 2006.
2. The facts of the case in nutshell are that the Chennai Port Trust, predecessor-in-interest of the Appellant and the first respondent entered into Rock Quarrying and Transportation contract, dated 06.06.1996 to quarry and transport rock required for construction of break waters at Ennore. The rock transported from the quarry was to be stockpile in the port. On account of insufficiency of space and non-removal of the rock, additional stockpile was created within the Port. A claim was made for the costs of creation of the additional stockpile. The Arbitrators found that a part of additional stockpile, i.e, 9000 sq.mts was utilized by the first respondent for another C-4 contract. Hence, cost of creation of 9000 sq.mts was excluded by the Arbitrators, while calculating the cost for creating additional stockpile.
3. As per the contract, in the event of any dispute arising between the employer and the contractor, the dispute is required to be referred in the first place, to a Disputes Review Board (DRB). If either of the parties are dissatisfied with recommendations of the DRB, the dispute is to be referred to Arbitration. Either party may if the other party fails to comply with the recommendations of DRB, which become final, refer failure to Arbitration in accordance with Clause 67.3 of the Contract.
4. The first respondent raised certain disputes in the matter of Variation Order (Dispute No. 8) and in the matter of non-release of certain payments (Dispute No. 9) before the DRB, as stipulated in the contract. The DRB, had on 05.04.2001, given its recommendations on Dispute No. 8 and Dispute No. 9. Since the recommendations of DRB have become final and binding, the first respondent referred the dispute of Arbitration under Clause 67.4, due to failure of compliance.
5. The Arbitrators reduced the amount recommended by the DRB with regard to Dispute No. 8 from Rs. 51.91 lakhs to Rs. 41.07 lakhs. The Arbitral Tribunal also reduced the rate of interest from 18% recommended by the DRB to 14.5%/15% in both the Dispute Nos. 8 and 9.
6. O.P No. 202 of 2004 has been filed by the first respondent to set aside the decisions of the Arbitrators made in respect of Dispute No. 8 - Variation Order and reduction of the rate of interest in respect of claim in Dispute Nos. 8 & 9. The appellant as petitioner filed O.P No. 208 of 2006 to reduce the rate of interest, according to the current rate of interest prevailing at the relevant period.
7. The learned single Judge allowed the O.P No. 202 of 2004 by setting aside the Arbitral award in so far as dispute Nos. 8 and 9, holding that the Arbitral Tribunal exceeded its jurisdiction to reopen the dispute and to modify the recommendations instead of passing an Award on the basis of the recommendations of the DRB and dismissed O.P No. 208 of 2006. Aggrieved against the said order, the appellant preferred both the Original Side Appeals.
8. The short point that arises in these appeals is as to whether Arbitrators are to give their findings, after finalising the dispute as per the contract between the parties or to affix the rubber stamp approving the findings of the DRB as binding.
9. The relevant portions of the Clause in the contract essential to understand and resolve the above issue and dispute between the parties are extracted below:
“Sub-Clause 67.1 Board's Decision:
If a dispute of any kind whatsoever arises between the Employer and the Contractor in connection with, or arising out of the Contract or the execution of the works, whether during the execution of the works or after their completion and whether before or after the repudiation or other termination of the Contract, including any disagreement by either party with any action, inaction, opinion, instruction, determination, certificate or valuation of the Engineer, the matter in dispute shall, in the first place, be referred to the Disputes Review Board (hereinafter referred to as “the Board”) established pursuant to the Disputes Review Board Agreement (hereinafter referred to as “the Board Agreement”).
Board's recommendations shall be binding on the Employer and the Contractor in respect of disputes involving individual claims up to one percent of the contract value subject a ceiling of Rs. 1(one) million for contracts valued upto Rs. 300 (Three hundred) million or and (ii) a ceiling of Rs. 10 (Ten) million for contracts valued above Rs. 300 (Three hundred) million. In all other cases, upon receipt of the Board's recommendation(s) the parties shall within 14 days or such other time as the Board may specify give written notice to each other, the Board, may specify given written notice to each other, the Board and the Engineer of their acceptance or rejection of each Recommendation, failing which notice all of the Recommendation(s) shall be deemed accepted. Accepted and deemed accepted Recommendations shall be final and binding on the parties.
Sub-Clause 67.3 Arbitration
Any dispute in respect of which the Recommendation(s), if any, of the Board has not become final and binding pursuant to Sub-Clause 67.1 shall be finally settled by arbitration as set forth below:
(i) A dispute with an Indian Contractor shall be finally settled by arbitration in accordance with the Indian Arbitration Act, 1940 or any statutory amendment thereof. The arbitral tribunal shall consist of 3 arbitrators, one each to be appointed by the Employer and the Contractor and the third to be appointed by the President of the Institution of Engineers (India). For the purposes of this Sub-Clause, the term “Indian Contractor” means a Contractor who is registered in India and is a juridic person created under Indian law as well as joint venture between such a Contractor and a Foreign Contractor.
(iii) Neither party shall be limited in the proceedings before such arbitrators to the evidence or arguments already put before the Engineer or the Board, as the case may be, for the purpose of obtaining its/his said Recommendations/decision. No such Recommendations/decision shall disqualify the Engineer or any of the members of the Board, as the case may be, from being called as a witness and giving evidence before the arbitrators or any matter whatsoever relevant to the dispute.
Sub-Clause 67.4 Failure to comply
Where neither the Employer nor the Contractor has given notice of intention to commence arbitration of a dispute within the period stated in Sub-Clause 67.1 and the related Recommendation or decision, as the case may be, has become final and binding, either party may, if the other party fails to comply with such Recommendation or decision, as the case may be, and without prejudice to any other right it may have, refer the failure to arbitration in accordance with Sub-Clause 67.3 The provisions of Sub-Clause 67.1 shall not apply to any such reference.”
10. As per Clause 67.1 of the Contract, recommendations of the DRB is final and binding in respect of disputes of a value of less than Rs. 1 (one) crore. With respect to the recommendations in respect of dispute, the value of which exceeds Rs. 1 (one) crore, either party who is dissatisfied with the recommendations has to issue notice within 14 days rejecting the recommendations and expressing its intention to commence arbitration. The Arbitration is to be held as per Clause 67.3 of the Contract. In cases, wherein either party records its rejection, the recommendations of DRB become final. If the recommendation which became final is not complied with, then as per Clause 67.4, the affected party is required to refer the failure to Arbitration in accordance with sub-clause 67.3 When failure of compliance is referred to the Arbitrators, it is to be dealt with in accordance with Clause 67.3 of the contract and the provisions of sub-clause 67.1 shall not apply to such reference.
11. From the cumulative reading of the above mentioned Clauses in the contract, it is crystal clear that the dispute arising due to failure of compliance of the recommendations of DRB is to be treated as one not becoming final and binding and the dispute shall be finally settled by the Arbitration in accordance with the Arbitration and Conciliation Act, 1996. From the terms of the contract, there is no doubt that the Arbitrators are not bound to affix the rubber stamp approving the findings of the DRB, though the value of the dispute is below Rs. 1 (one) crores, when the dispute is referred to the Arbitrators due to failure of the compliance of the recommendations by one party to the contract.
12. Here in this case, the first respondent was also the contractor under the ECPP/C4 contract for construction of break waters. For want of space, to stockpile the rock transported from the quarry, additional stockpile was created within the port. The Arbitrators found that a part of the additional stockpile, i.e, 9000 sq.mts was utilized by the C-4 contractor and therefore, while calculating the cost for creating additional stockpile, they excluded the cost for 9000 sq.mts Thus, they reduced the claim of the first respondent from Rs. 51.91 lakhs to Rs. 41.07 lakhs. The decision of the Arbitrators is purely in terms of the contract between the parties, on the basis of the available materials placed before them.
13. As far as interest is concerned, sub-clause 60.8 recites as follows:
“In the event of the failure of the Employer to make or notify payment within the times stated, the Employer shall pay to the Contractor interest compounded monthly at the rate(s) stated in the Appendix to Bid upon all sums unpaid or not notified from the date upon which the same should have been paid or notified, in the currencies in which the payments are due.”
In the Appendix, rate of interest under the head fixed is given as 15%. Though DRB recommended for 18% interest, the Arbitral Tribunal awarded 14.5%/15% interest, as per the Contract. Therefore, the Award passed by the Arbitrator with respect to Dispute No. 8 as well as 9 is inconformity with the terms of contract between the parties.
14. It is well settled that the Court can interfere with the Award passed by the Arbitral Tribunal, only on the grounds under Section 34(2) and (3) of the Arbitration and Conciliation Act, 1996.
15. The only ground urged on the side of the respondent is that the arbitrators exceeded their jurisdiction in contravention to the terms of the contract.
16. The Hon'ble Supreme Court held as to the limitations of the Court to interfere with the Arbitral award under Section 34 in Associate Builders v. DDA, reported in (2015) 3 SCC 49, wherein it has been held as follows:
“13. Inasmuch as serious objections have been taken to the Division Bench judgment (DDA v. Associate Builders, 2012 SCC OnLine Del 769) on the ground that it has ignored the parameters laid down in a series of judgments by this Court as to the limitations which a Judge hearing objections to an arbitral award under Section 34 is subject to, we deem it necessary to state the law on the subject.
14. Section 34 of the Arbitration and Conciliation Act reads as follows:
“34. Application for setting aside arbitral award.—(1) Recourse to a court against an arbitral award may be made only by an application for setting aside such award in accordance with sub-section (2) and sub-section (3).
(2) An arbitral award may be set aside by the court only if—
(a) the party making the application furnishes proof that—
(i) a party was under some incapacity; or
(ii) the arbitration agreement is not valid under the law to which the parties have subjected it or, failing any indication thereon, under the law for the time being in force; or
(iii) the party making the application was not given proper notice of the appointment of an arbitrator or of the arbitral proceedings or was otherwise unable to present his case; or
(iv) the arbitral award deals with a dispute not contemplated by or not falling within the terms of the submission to arbitration, or it contains decisions on matters beyond the scope of the submission to arbitration:
Provided that, if the decisions on matters submitted to arbitration can be separated from those not so submitted, only that part of the arbitral award which contains decisions on matters not submitted to arbitration may be set aside; or
(v) the composition of the Arbitral Tribunal or the arbitral procedure was not in accordance with the agreement of the parties, unless such agreement was in conflict with a provision of this Part from which the parties cannot derogate, or, failing such agreement, was not in accordance with this Part; or
(b) the court finds that—
(i) the subject-matter of the dispute is not capable of settlement by arbitration under the law for the time being in force, or
(ii) the arbitral award is in conflict with the public policy of India.
Explanation.—Without prejudice to the generality of sub-clause (ii), it is hereby declared, for the avoidance of any doubt, that an award is in conflict with the public policy of India if the making of the award was induced or affected by fraud or corruption or was in violation of Section 75 or Section 81.
(3) An application for setting aside may not be made after three months have elapsed from the date on which the party making that application had received the arbitral award or, if a request had been made under Section 33, from the date on which that request had been disposed of by the Arbitral Tribunal:
Provided that if the court is satisfied that the applicant was prevented by sufficient cause from making the application within the said period of three months it may entertain the application within a further period of thirty days, but not thereafter.
(4) On receipt of an application under sub-section (1), the court may, where it is appropriate and it is so requested by a party, adjourn the proceedings for a period of time determined by it in order to give the Arbitral Tribunal an opportunity to resume the arbitral proceedings or to take such other action as in the opinion of Arbitral Tribunal will eliminate the grounds for setting aside the arbitral award.”
15. This section in conjunction with Section 5 makes it clear that an arbitration award that is governed by Part I of the Arbitration and Conciliation Act, 1996 can be set aside only on grounds mentioned under Sections 34(2) and (3), and not otherwise. Section 5 reads as follows:
“5. Extent of judicial intervention.—Notwithstanding anything contained in any other law for the time being in force, in matters governed by this Part, no judicial authority shall intervene except where so provided in this Part.”
16. It is important to note that the 1996 Act was enacted to replace the 1940 Arbitration Act in order to provide for an arbitral procedure which is fair, efficient and capable of meeting the needs of arbitration; also to provide that the tribunal gives reasons for an arbitral award; to ensure that the tribunal remains within the limits of its jurisdiction; and to minimise the supervisory roles of courts in the arbitral process.
17. It will be seen that none of the grounds contained in sub-section (2)(a) of Section 34 deal with the merits of the decision rendered by an arbitral award. It is only when we come to the award being in conflict with the public policy of India that the merits of an arbitral award are to be looked into under certain specified circumstances.”
17. In the instant case, the argument of the learned counsel appearing for the first respondent that the Award is in contravention with the terms of the Contract, falls under Section 34(2)(iv) of the Arbitration and Conciliation Act, 1996. As already discussed, this Court is of the considered view that the Award passed by the Arbitrators is well within parameters of the terms of the contract between the parties and the Arbitrators has not exceeded their jurisdiction in deciding the dispute referred to them due to failure of compliance of the recommendations of DRB by one party.
18. As pointed out earlier, the Arbitrators reduced the interest from 18% to 14.5%/15% in terms of the Contract. The contention of the appellant that the rate of interest is to be further reduced as per the current rate of interest prevailing during the relevant period is not sustainable.
19. The order of the learned single Judge is not correct in setting aside the Award with respect to the claim and interest of the first respondent in Dispute Nos. 8 & 9. Plea in another appeal of the appellant to reduce the rate of interest according to the current rate of interest prevailing at the time is to be negatived as the award of the Arbitrators has been upheld in these appeals.
20. In fine, O.S.A No. 155 of 2008 is allowed by setting aside the order, dated 13.11.2006 of the learned single Judge made in O.P No. 202 of 2004 and accordingly, the Award of the Arbitrators, dated 24.07.2002 with respect to Dispute Nos. 8 and 9 is confirmed. In view of the order passed in O.S.A No. 155 of 2008, O.S.A No. 79 of 2010 is dismissed. No costs. Consequently, connected miscellaneous petition is closed.
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