LEGAL ISSUE: Whether an arbitrator’s award can be sustained if it does not provide reasons for its conclusions, especially when the contract requires it.
CASE TYPE: Arbitration Law
Case Name: Chandigarh Construction Co. Pvt. Ltd. vs. State of Punjab & Anr.
[Judgment Date]: 14 February 2020
Date of the Judgment: 14 February 2020
Citation: Not Available
Judges: R. Banumathi, J., A.S. Bopanna, J.
Can an arbitrator’s award be valid if it doesn’t explain how it arrived at its decision, especially when the contract between the parties requires it to do so? The Supreme Court of India addressed this question in a case involving a construction contract dispute. The Court examined whether the arbitrator’s decision to award a premium of 93.12% on extra work was justified without providing a clear explanation. The bench comprised Justices R. Banumathi and A.S. Bopanna, with the majority opinion authored by Justice A.S. Bopanna.
Case Background
Chandigarh Construction Co. Pvt. Ltd. (the claimant) entered into a contract with the State of Punjab (the opposite party) on 05 February 1985 for the construction of the Sutlej Yamuna Link Canal. The project involved earthwork, drainage, and cement concrete lining. The initial estimated cost was Rs. 31 lakhs, but the contract was valued at Rs. 59,86,732. The work was to be completed within eight months.
During the project, the claimant contended that the scope of work significantly increased due to additional earthwork, sloughing of banks, and changes in soil conditions. The claimant sought additional payment, which the opposite party disputed, leading to arbitration under the Arbitration Act, 1940. The claimant filed a claim statement before the Arbitrator, and the opposite party filed objections.
Timeline
| Date | Event |
|---|---|
| 05 February 1985 | Contract agreement between Chandigarh Construction Co. and State of Punjab for canal construction. |
| 14 November 1986 | Identification of soil agreed to. |
| 05 January 1987 | Executive Engineer communicated that the percentage above the departmental rates has been approved at 35.02%. |
| 09 March 1987 | Test results submitted identifying the strata encountered as DALDAL. |
| March 1988 | Work completed. |
| 31 August 1994 | Arbitrator passed the Award, favoring the claimant. |
| 21 October 1995 | Senior Sub-Judge modified the Arbitrator’s award, rejecting Claim No. 1 and reducing interest to 12%. |
| 06 November 2007 | District Judge rejected the claimant’s cross-appeal and allowed the State of Punjab’s appeal, setting aside awards under Claim Nos. 2, 3, 8, 12, and 16. |
| 08 April 2011 | High Court partly allowed the revision, modifying the judgments of the Trial Court and First Appellate Court, allowing only Claim No. 1. |
| 14 February 2020 | Supreme Court modified the High Court’s order, allowing claims 2, 3, 8, and 12 with a premium of 35.02%. |
Course of Proceedings
The Arbitrator awarded the claimant the full amount sought, along with 18% interest. However, the Senior Sub-Judge, Ropar, modified the award, rejecting Claim No. 1 and reducing the interest rate to 12%. The State of Punjab appealed to the District Judge, Ropar, who set aside the amounts awarded under Claim Nos. 2, 3, 8, 12, and 16. The claimant then filed revision petitions before the High Court of Punjab & Haryana, which were partly allowed, but only to the extent of Claim No. 1. The claimant then appealed to the Supreme Court.
Legal Framework
The case was primarily governed by the Arbitration Act, 1940. Clause 63 of the contract between the parties stipulated that all awards amounting to Rs. 1 lakh and above must state the reasons for the amount awarded. Note 6 of the schedule of work stated that extra items of work shall be paid at the rate worked out on the basis of the relevant Punjab Common Schedule of Rates, plus the sanctioned premium at the time of tendering.
Clause 39 of the contract agreement specified that the contractor must submit monthly returns detailing any claims for extra work. Failure to do so would be deemed a waiver of such claims.
The Supreme Court also considered the principle that quasi-judicial orders must be supported by reasons, as established in previous cases.
Arguments
Claimant’s Arguments:
- The claimant argued that the basis for Claim No. 2 should also apply to Claim Nos. 3 and 12. They contended that the additional amount for Claim No. 8 should be calculated similarly for extra items used.
- The claimant asserted that Note 6 of the contract schedule dictates that extra work should be paid based on the Punjab Common Schedule of Rates plus the sanctioned premium at the time of tendering.
- The claimant stated that the difference between the estimated cost (Rs. 31 lakhs) and the contract amount (Rs. 59,86,732) represents a sanctioned premium of 93.12%, which should be applied to extra work.
- The claimant contended that the arbitrator’s decision, even without detailed reasons, should be upheld since the basis for the 93.12% premium was evident from the contract.
Opposite Party’s Arguments:
- The opposite party argued that the arbitrator failed to provide any reasons for concluding that a 93.12% premium was admissible.
- The opposite party referred to Clause 63 of the contract, which requires all awards over Rs. 1 lakh to state the reasons for the amount awarded.
- The opposite party contended that the arbitrator did not justify the 93.12% premium, only stating that it was “as per agreement.”
- The opposite party cited a communication dated 05.01.1987, which indicated that the approved premium above departmental rates was 35.02%, not 93.12%.
- The opposite party argued that Claim No. 8 relating to extra payment for DALDAL (swampy area) was not made within the time provided and should be rejected.
Submissions Table
| Main Submission | Claimant’s Sub-Submissions | Opposite Party’s Sub-Submissions |
|---|---|---|
| Premium Calculation |
|
|
| Claim No. 8 (DALDAL Area) |
|
|
Issues Framed by the Supreme Court
The Supreme Court framed the following issues:
- Whether the arbitrator had appropriately considered the matter in its correct perspective.
- Whether the award of the amount at the premium of 93.12% would be justified.
- Whether the manner of consideration by the learned Arbitrator without assigning reasons for his Award is sustainable.
- Whether the First Appellate Court as also the High Court were justified in rejecting the claim raised by the claimant.
Treatment of the Issue by the Court
| Issue | Court’s Decision and Reasoning |
|---|---|
| Whether the arbitrator had appropriately considered the matter in its correct perspective. | The Court found that the arbitrator did not appropriately consider the matter, particularly in awarding a 93.12% premium without providing reasons. |
| Whether the award of the amount at the premium of 93.12% would be justified. | The Court held that the 93.12% premium was not justified, as it was based solely on the difference between the estimated and contract amounts, without considering the Punjab Common Schedule of Rates. |
| Whether the manner of consideration by the learned Arbitrator without assigning reasons for his Award is sustainable. | The Court concluded that the arbitrator’s award was not sustainable because it did not provide reasons for awarding the 93.12% premium, as required by Clause 63 of the contract. |
| Whether the First Appellate Court as also the High Court were justified in rejecting the claim raised by the claimant. | The Court modified the orders of the First Appellate Court and the High Court, holding that while the 93.12% premium was not justified, the claims should not have been rejected outright. The Court determined that a premium of 35.02% was applicable. |
Authorities
Cases Relied Upon by the Court:
| Authority | Court | How the Authority was Used | Legal Point |
|---|---|---|---|
| Indian Oil Corporation vs. Indian Carbon Ltd. (1988) 3 SCC 36 | Supreme Court of India | The claimant argued that if the reason as to how the Arbitrator has drawn the inference is apparent the same would be sufficient. The opposite party argued that the court also held that a quasi-judicial function must record its reasons. | Requirement of reasons in quasi-judicial orders. |
| Ispat Engineering and Foundry Works, B.S. City, Bokaro vs. Steel Authority of India Ltd. B.S. City Bokaro (2001) 6 SCC 347 | Supreme Court of India | The claimant argued that if there are reasons, interference would still not be available unless there exist a total perversity in the Award or the judgment is based on wrong proposition of law. | Interference with arbitral awards. |
| D.C.M Ltd. vs. Municipal Corporation of Delhi & Anr. (1997) 7 SCC 123 | Supreme Court of India | The claimant argued that even in the case of a non-speaking award, if the arbitrator has proceeded without overlooking any term of the contract, the same cannot be considered as an error apparent on the face of the Award. | Non-speaking awards. |
| M/s Naraindas R. Israni vs. Union of India DRJ (1993) 25 | High Court of Delhi | The claimant argued that the arbitrator is not required to give detailed reasons like a Civil Court but must give out the trend of his thought process. | Reasoning in arbitral awards. |
| Raipur Development Authority & Ors. vs. M/s Chokhamal Contractors & Ors. (1989) 2 SCC 721 | Supreme Court of India | The opposite party argued that the court held that an award can be set aside if the arbitration agreement requires it to give reasons. | Requirement of reasons in arbitral awards. |
| Gora Lal vs. Union of India (2003) 12 SCC 459 | Supreme Court of India | The opposite party argued that the court held that the arbitrator is required to indicate a finding along with the sum awarded separately on each individual item of the dispute. | Requirement of findings in arbitral awards. |
Legal Provisions Considered by the Court:
- Arbitration Act, 1940: The primary legislation governing the arbitration proceedings in this case.
- Clause 63 of the Contract: Stipulated that awards over Rs. 1 lakh must state the reasons for the amount awarded.
- Note 6 of the Schedule of Work: Specified that extra items of work shall be paid based on the Punjab Common Schedule of Rates plus the sanctioned premium at the time of tendering.
- Clause 39 of the Contract Agreement: Required the contractor to submit monthly returns detailing claims for extra work.
Judgment
How each submission made by the Parties was treated by the Court?
| Submission | How it was treated by the Court |
|---|---|
| Claimant’s argument that 93.12% premium is justified. | Rejected. The Court held that the 93.12% premium was not justified as it was based solely on the difference between the estimated cost and the contract amount. |
| Opposite party’s argument that the arbitrator did not provide reasons for the 93.12% premium. | Accepted. The Court agreed that the arbitrator failed to provide reasons for the premium, as required by the contract. |
| Opposite party’s argument that the approved premium was 35.02%. | Accepted. The Court found that the premium should be calculated at 35.02% based on the communication dated 05.01.1987. |
| Claimant’s argument for Claim No. 8 (DALDAL area). | Partially Accepted. The Court held that the claim should not be rejected outright due to a technicality, but the premium should be calculated at 35.02%. |
| Opposite party’s argument that Claim No. 8 was not made within the time provided. | Partially Rejected. The Court held that while the claim was not made as per the contract, it should not be rejected outright if the work was actually done. |
How each authority was viewed by the Court?
- The Court considered the case of Indian Oil Corporation vs. Indian Carbon Ltd. (1988) 3 SCC 36* and held that while reasons are necessary for quasi-judicial orders, the arbitrator’s award was deficient in this regard.
- The Court referred to Ispat Engineering and Foundry Works, B.S. City, Bokaro vs. Steel Authority of India Ltd. B.S. City Bokaro (2001) 6 SCC 347*, but found that the arbitrator’s award was perverse due to the lack of reasons.
- The Court considered D.C.M Ltd. vs. Municipal Corporation of Delhi & Anr. (1997) 7 SCC 123*, but distinguished it, stating that the arbitrator had overlooked a key term of the contract.
- The Court considered the case of M/s Naraindas R. Israni vs. Union of India DRJ (1993) 25* and held that the arbitrator must give the trend of his thought process.
- The Court relied on Raipur Development Authority & Ors. vs. M/s Chokhamal Contractors & Ors. (1989) 2 SCC 721* to emphasize that an award must provide reasons if the arbitration agreement requires it.
- The Court cited Gora Lal vs. Union of India (2003) 12 SCC 459* to highlight that the arbitrator must provide findings on each disputed item.
What weighed in the mind of the Court?
The Supreme Court’s decision was significantly influenced by the lack of reasoning in the arbitrator’s award, particularly concerning the 93.12% premium. The Court emphasized that when a contract explicitly requires reasons for an award, the arbitrator must comply. The Court also considered the principle that quasi-judicial orders must be supported by reasons. Additionally, the Court took note of the communication dated 05.01.1987, which specified that the approved premium was 35.02%. While acknowledging the claimant’s argument that extra work was indeed done, the Court was not persuaded that the premium should be at 93.12% without any basis. The Court also considered the time lapse since the original dispute (1994). The Court sought to balance the need for adherence to contractual terms with the need for equitable outcomes.
| Sentiment Analysis | Percentage |
|---|---|
| Contractual Compliance | 40% |
| Reasoning in Arbitral Awards | 30% |
| Factual Basis of Claims | 20% |
| Equitable Outcome | 10% |
| Ratio Analysis | Percentage |
|---|---|
| Fact | 30% |
| Law | 70% |
Logical Reasoning:
The Court rejected the claimant’s argument that the 93.12% premium was justified, as it was not supported by the contract or any evidence. The Court also rejected the argument that the lack of detailed reasons in the arbitrator’s award was not fatal, as the contract explicitly required reasons for awards over Rs. 1 lakh. The Court considered the opposite party’s argument that the premium should be 35.02%, based on the communication dated 05.01.1987.
The Court considered alternative interpretations but rejected them, emphasizing the explicit requirement for reasons in the contract and the need for a factual basis for the premium. The Court also considered the time lapse since the original dispute.
The Court’s decision was that the claims for extra work (Claim Nos. 2, 3, 8, and 12) should be awarded, but with a premium of 35.02% instead of 93.12%. The Court also upheld the reduction of interest to 12% per annum.
The Court stated, “As per agreement premium works out to 93.12% which is awarded.”, this was the conclusion of the arbitrator. The Court also noted, “All awards shall, be in writing and in case of awards amounting to Rs.1 lakh and above, such awards shall state the reasons for the amount awarded.”, which was the condition in the contract. The Court further stated, “Extra other items shall be paid for each such items of work at thorough rate worked out on the basis of relevant Punjab Common Schedule of Rates basis plus sanctioned premium (at the time of tendering), plus or minus percentage above or below worked out by the department by reference to department’s estimated cost of tender.”, which was the method of calculation as per the contract.
There were no dissenting opinions. The decision was unanimous.
The Court’s reasoning was based on the explicit terms of the contract, the lack of reasoning in the arbitrator’s award, and the need for a factual basis for the premium. The Court also considered the principle that quasi-judicial orders must be supported by reasons.
This judgment has implications for future cases involving arbitration, particularly in cases where the arbitration agreement specifies the requirement for reasons in the award. It highlights the importance of arbitrators adhering to the terms of the contract and providing a clear basis for their decisions.
No new doctrines or legal principles were introduced. The Court applied existing principles of arbitration law.
Key Takeaways
- Arbitrators must provide reasons for their awards, especially when the arbitration agreement requires it.
- The premium for extra work should be based on the contract terms and the Punjab Common Schedule of Rates, not just the difference between estimated and contract costs.
- Technicalities should not be used to deny legitimate claims if the work was actually done.
- The Supreme Court can modify orders of lower courts to ensure equitable outcomes.
Directions
The Supreme Court directed the opposite party to calculate the amounts due to the claimant under Claim Nos. 2, 3, 8, and 12, using a premium of 35.02%. The calculation was to be completed and paid within six weeks from the date of the judgment, failing which, the amount would carry an interest of 18% per annum. The Court also upheld the High Court’s decision on Claim No. 1.
Development of Law
The ratio decidendi of this case is that an arbitrator’s award must provide reasons for its conclusions, especially when the contract requires it. This case reinforces the principle that arbitrators must adhere to the terms of the contract and provide a clear basis for their decisions. There is no change in the previous positions of law, but it reinforces the existing law.
Conclusion
The Supreme Court modified the orders of the First Appellate Court and the High Court, holding that while the arbitrator’s award of a 93.12% premium was not justified, the claims should not have been rejected outright. The Court directed that the claims for extra work (Claim Nos. 2, 3, 8, and 12) should be awarded with a premium of 35.02%. The Court also upheld the reduction of interest to 12% per annum. The judgment emphasizes the importance of arbitrators providing reasons for their awards, particularly when the arbitration agreement requires it.
Category
Parent Category: Arbitration Law
Child Categories:
- Arbitration Act, 1940
- Arbitral Award
- Contractual Interpretation
- Reasoned Awards
- Construction Contracts
Parent Category: Contract Law
Child Categories:
- Clause 63, Contract Law
- Clause 39, Contract Law
- Breach of Contract
- Contractual Obligations
FAQ
Q: What was the main issue in this case?
A: The main issue was whether an arbitrator’s award could be sustained if it did not provide reasons for its conclusions, especially when the contract required it.
Q: What did the Supreme Court decide about the 93.12% premium?
A: The Supreme Court decided that the 93.12% premium was not justified because the arbitrator did not provide any reasons for it and it was not based on the contract terms. The Court held that the premium should be 35.02%.
Q: What is the significance of Clause 63 in the contract?
A: Clause 63 of the contract stipulated that all awards amounting to Rs. 1 lakh and above must state the reasons for the amount awarded. This clause was central to the Supreme Court’s decision to modify the arbitrator’s award.
Q: What did the court say about Claim No. 8 related to the DALDAL area?
A: The Court held that while the claim was not made as per the contract, it should not be rejected outright if the work was actually done. The premium was to be calculated at 35.02%.
Q: What is the practical implication of this judgment?
A: The judgment emphasizes the importance of arbitrators providing reasons for their awards, especially when the arbitration agreement requires it. It also clarifies how premiums for extra work should be calculated in construction contracts.