M/S. State Industries Promotion vs M/S. Ircon International Ltd on 2 November, 2009

Madras High Court

Dated : 02..11..2009

C O R A M

The Honourable Mrs. Justice Prabha Sridevan

and

The Honourable Mr. Justice M. Sathyanarayananan

O.S.A. Nos.369 of 2008

M/s. State Industries Promotion

Corporation of Tamil Nadu Ltd.

(A Govt. of Tamil Nadu Undertaking),

Rep. by its Asst. General Manager (Law)

Mrs. C. Indira,

19-A, Rukmani Lakshmipathy Road,

Egmore, Chennai-8. .. Appellant

versus

1. M/s. Ircon International Ltd.,

Rep. by its Zonal Manager,

Kences Towers, 4th Floor,

4-A, Ramakrishna Street,

T. Nagar, Chennai-17.

2. Justice G. Ramanujam (Retd.),

Sole Arbitrator,

15, 4th Main Road, Kasturba Road,

Chennai-84. .. Respondents

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Prayer : Appeal filed under Clause 15 of the Letters Patent and Order XXXVI, Rule 1 of the Original Side Rules of the Madras High Court against the order passed by a learned single Judge of this Court dated 12.8.2008 in O.P. No.919 of 2006.

- - - - -

For Appellant : Mr. G. Masilamani, Senior Counsel

for Mr. G. Nagarajan

For Respondent-1 : Mr. V.T. Gopalan, Senior Counsel

for Mr. V.G. Suresh Kumar

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J U D G M E N T

Prabha Sridevan, J.

The appellant-State Industries Promotion Corporation Of Tamil Nadu Ltd. (hereinafter referred to as 'SIPCOT') alleges misconduct on the part of the Sole Arbitrator on the ground that the learned Arbitrator had relied completely and totally on an award passed by him in another proceedings between the respondent herein and another, to which the appellant was not a party, although the subject matter of the contract may be the same in both the proceedings. It is contended that the absence of independent application of mind, total reliance on the proceedings where the appellant herein was not a party and therefore, violation of the principles of natural justice would vitiate the award. There is no doubt nor any dispute that the award in this matter was passed in favour of the first respondent herein almost entirely because of the fact that in the other proceedings, the award was passed against the first respondent herein. Even the first respondent herein does not deny it, but according to the first respondent, this was justified, whereas according to the appellant, this amounts to gross misconduct.

2. The matter relates to the construction of internal road to bituminous standards for SIPCOT Irungattukottai Complex, Sriperumbudur Taluk. The first respondent herein, M/s. IRCON International Ltd. (hereinafter referred to as 'IRCON'), was the successful bidder. The agreement was entered into between the parties on 10.7.1997, which included the arbitration clause. The agreement barred sub-letting except with the permission of SIPCOT. By two separate agreements, IRCON sub-contracted the project to M/s. Vinay Heavy Equipment (hereinafter referred to as 'VHE'), which is not a party hereto. The contract was executed and the final bill was also submitted. On 12.11.200, VHE invoked the arbitration clause. VHE moved this Court for appointment of an arbitrator under Section 11 of the Arbitration and Conciliation Act, 1996 (hereinafter referred to as the 'Act'). By order dated 27.7.2001, the second respondent herein (hereinafter referred to as the 'learned Arbitrator') was appointed as the Sole Arbitrator to resolve the dispute between IRCON and VHE. IRCON also invoked the arbitration clause and sought for arbitration and had moved another application under Section 11 of the Act. By order dated 1.11.2002, the second respondent herein was appointed as the sole arbitrator to resolve the dispute between the parties in this matter as well. The appellant raised the issue of the learned Arbitrator's jurisdiction to hear this matter since he was also the arbitrator in the other matter. This was rejected. On 6.10.2003, an award was passed in the VHE-IRCON dispute, allowing almost all the claims of VHE. On 9.11.2003, IRCON moved an application to amend its claims since an award had been passed against it in the other matter. A copy of the award was enclosed with the application. On 3.9.2004, an award was passed in this dispute. On 9.9.2005, O.P. Nos.107 and 108 of 2004 along with Application Nos.2651 and 2652 of 2004 filed under Section 34 of the Act as against the award passed in the VHE-IRCON dispute were dismissed by this Court. On 7.12.2006, O.S.A. Nos.312 and 313 of 2005 filed by IRCON against the above orders were also dismissed by the Division Bench. Against that judgment, IRCON has filed a Special Leave Petition which is pending. On 12.8.2008, O.P. No.919 of 2006 was filed by the appellant under Section 34 of the Act was dismissed. This is the order under challenge. These are the relevant dates with regard to the proceedings in the two matters, both before the learned Arbitrator and before this Court.

3. In the statement of claim filed by IRCON, it is admitted that even before bidding for this tender, IRCON had decided to obtain principal bid quotations from contractual agencies to sub-contract the work in case it is awarded to IRCON, and among the terms stipulated were that, all the terms and conditions laid down by SIPCOT would be applicable to the tenderers on back-to-back basis and that the work would be completed in ten months. According to IRCON, the size of the contract was relatively small. Therefore, it did not consider it worthwhile to shift their own machinery and manpower for execution of the work and in consultation with the Head Office, they split up the work into four parts, viz., Packages 'A', 'B', 'C1' and 'C2'. Packages 'C1' and 'C2' were awarded to VHE and the cost thereof worked out to Rs.4,87,66,573.08, whereas the contracted amount between SIPCOT and IRCON was Rs.13,06,16,557/-. As per the usual practice, the agreement between SIPCOT and IRCON contained Bill of Quantities (BOQ) with regard to the scheduled items. Item-2 of the BOQ related to excavation of earth by cutting through the natural ground wherever such ground was higher than the proposed road. Items-3 and 4 related to forming embankments with the soil so obtained. Item-5 related to disposal of the excess cut earth. The BOQ under Item-2 referred to the Ministry of Surface Transport (MOST) Specifications. According to IRCON, though Clause-10 of the Sub-conditions of Contract specified that there shall be no sub-letting without the approval of the first respondent, both the respondent (referring to SIPCOT) SIPCOT and M/s. Rail India Technical and Economic Services (hereinafter referred to as 'RITES'), which was employed as a consultant in the matter of execution, dealt officially with VHE, which could be seen in the entries in the Site Order Book and the minutes of the meeting. After the work commenced, IRCON claimed that the excavation was actually a non-scheduled item and a fresh route must be worked out. But the claim made by IRCON was not agreed. There was a dispute between SIPCOT and IRCON as to whether Items-2, 3, 4 and 5 were part of the BOQ or were non-scheduled items. According to IRCON, after the soil was excavated, it was discovered that the quantity would not be adequate for construction of embankment. Therefore, IRCON "borrowed earth" from a plot which came to be known as MARCUBEAN Area. The payment for leveling this area was also not made by SIPCOT in spite of repeated requests. According to IRCON, the claim made with regard to the construction of embankment was not for separation of materials, but for the extra cost involved in handling different type of material and this extra cost must be borne by SIPCOT. The final bill was submitted for a gross value of Rs.5,92,75,421/-. RITES cut out from the bill all its claims for the non-scheduled items and drastically reduced it. After completion of the project, IRCON continued pressing for payments for the non-scheduled items of work, and for increased quantities in respect of BOQ items. They were all rejected. In the meanwhile, VHE pressed for payment for the non-scheduled items of work. According to IRCON, the primary issue in the entire matter is the role of IRCON and that in the mater of making payments to VHE, IRCON depended entirely on the payments to be made by SIPCOT and after paying them, the balance would be retained by IRCON towards its profits and IRCON cannot make payments "out of their own funds". According to IRCON, even at the time of inviting tender in IRCON's agreement with VHE, the concept of back-to-back was explained and that even payments would be made on back-to-back basis and this meant that IRCON would not make any payment to VHE unless such work is accepted by SIPCOT and corresponding payment is received by IRCON from SIPCOT. According to IRCON, the claim made by VHE was exorbitant and when IRCON made the claim, the claim of VHE was pending consideration and even before the learned Arbitrator, IRCON juxtaposed in a tabular statement the amount claimed by VHE and their corresponding claim against SIPCOT. Claim No.1 related to cutting of soil, and while according to IRCON, the quantity of earth work was 324343.293 cub. mts. at the rate of Rs.51/50 per cub. mtr., the claim of VHE was for 80952.815 cub. mts. at the rate of Rs.184 per cub. mtr. Claim No.2 related to loading the excavated boulders and stacking them. There are 25 such claims and we will deal with the independent claims only if necessary, since we are not sitting in appeal.

4. In the counter affidavit, the claim made by IRCON was denied and specifically with regard to the reference to VHE, it was stated in paragraph 31 that SIPCOT is not privy to the contract between IRCON and VHE and that SIPCOT :was neither a party nor a witness between the arbitration dispute" between VHE and IRCON, "nor did they get approval" from SIPCOT. Then, the application to amend the claim statement was filed after the award was passed in the other dispute. The objections of the appellant were rejected and thereafter, an award came to be passed in this case.

5. Mr. G. Masilamani, learned senior counsel appearing for the appellant-SIPCOT submitted that every head of the claim was decided only on the basis of the award passed earlier in the other proceedings. There was no independent consideration and read out the award to demonstrate this fact. As regards the dispute regarding Items-2, 3, 4 and 5 of the BOQ, it was submitted that hard rocks alone were excepted in the BOQ and what was found was admittedly laterite and not hard rock and hence, there was no necessity for blasting. So, this was covered under the BOQ and it was not a non-scheduled item of work. It was submitted that there is discrepancy even in the quantity of earth excavated. While in the claim made by IRCON, the quantity mentioned is three lakhs and odd cub. mtr., according to VHE, it was only 80,000/-. It was submitted that when the award between VHE and IRCON was not marked in evidence, reliance on that would be unjustified since the appellant had no opportunity to either cross-examine the witnesses who had appeared in the other arbitration proceedings or examine the documents based on which that award was passed. The learned senior counsel further submitted that it is not enough to enclose the award along with the amendment application. The party relying on that must plead and prove it. It was submitted that the dispute not inter partes was not binding on the appellant unless it was marked in evidence. According to the learned senior counsel, any decision could be relied on as a precedent on law but not as a precedent on facts. The learned senior counsel submitted that even on facts, the learned Arbitrator had misconstrued or failed to see the relevant evidence in this regard. The learned senior counsel also submitted that VHE was the contractor even for the construction of administration office. Therefore, the presence of VHE in the site would not mean that SIPCOT had acquiesced in the sub-letting. The learned senior counsel submitted that the fact that the terms and conditions of the contract between SIPCOT and IRCON were identical to that between IRCON and VHE is really not relevant and that by itself would not bind SIPCOT. Learned senior counsel further submitted that even on the basis of their own pleadings, this award could not have been passed. The learned senior counsel submitted that the decision had thrown to the winds all principles of natural justice and fair play and in fact, the award was based on no evidence at all. The learned senior counsel also submitted that with regard to the non-scheduled items of work, the claim should be made within three months, i.e., once a quarter, a claim should be made, but this has been filed long after even the final bill has been submitted and therefore, the claim itself was time barred. The learned senior counsel further submitted that even assuming that the earlier award had been filed into Court, SIPCOT could neither have argued for dislodging the award nor change the award since it was a third party to that dispute. He further submitted that when the amendment application was filed and it was strongly objected to, the learned Arbitrator had rejected the objection on the ground that the fact that the claims have been amended would not by itself prejudice SIPCOT, since the decision on the claims would be subject to proof. Having said that, the learned Arbitrator ought to have required IRCON to prove its amended claims and not granted the claims merely because he had granted to VHE its claims against IRCON. Learned senior counsel relied on several judgments to support his submissions.

6. Mr. V.T. Gopalan, learned senior counsel appearing on behalf of the first respondent-IRCON, on the other hand, submitted that the work was the same, the terms were the same, the project was completed, SIPCOT had taken over the roads for which work the tender had been called for and it is now not open to SIPCOT to refuse to make payment for the work completed. Learned senior counsel referred to the counter affidavit to the amendment claim where SIPCOT had clearly stated that they had no objection to the award being received. He also submitted that for the first time in the appeal it is contended that VHE was present at the discussion in its own right. This was never pleaded before. Learned senior counsel submitted that the question of limitation cannot be raised if it had not been raised before the learned Arbitrator. In any event, the final bill was paid only in the year 2005 and therefore, the claim was made well in time. The first respondent had reserved its right to amend its claims if necessary and therefore, the learned Arbitrator was correct in allowing the amendment application. Learned senior counsel submitted that it is too late in the day to object on the ground of violation of the principles of natural justice since SIPCOT knew that VHE was in the picture and had acquiesced to it and there was nothing to stop SIPCOT from requesting the learned Arbitrator to summon VHE if they so desired it. The learned senior counsel strenuously denied that the decision was a wholesale import of the arbitration award passed in the other claim between VHE and IRCON. On several vital issues, there was independent consideration. Learned senior counsel submitted that it would, no doubt, be ironic if on the same set of facts different constructions are drawn, one in the VHE-IRCON award and one in the award between SIPCOT and IRCON. Learned senior counsel submitted that SIPCOT should have produced the evidence to show that the conclusions in the earlier award were wrong and unless fresh materials are brought in, the findings in the earlier award cannot be differed from. Learned senior counsel submitted that there was clear evidence to show that what was removed were boulders and that when admittedly poclain was used, it would come under non-scheduled items and for this purpose, he referred to the relevant clauses. Learned senior counsel submitted that the scope for interference with the decision of the Arbitral Tribunal is narrow and the learned single Judge had rightly dismissed the O.P.

7. We will first consider whether the learned Arbitrator had considered the pleadings and evidence in this mater, before relying on the other award.

8. In the statement of claim made initially, in paragraph 46, it is stated, "Viewed in an objective manner, the claimant would be satisfied with their own amount of claim for each item. However, under circumstances explained, the claimant pleads that any award made to the claimant under any item of claim may be subject to the condition that the amount awarded to the claimant would not be less than the amount awarded to VHE for a corresponding item of claim in their case against IRCON". From this, it is clear that under this contract, what they are entitled to is what they have claimed. But they want more only because they fear that VHE may be awarded more in the other arbitration proceedings. In paragraph 49 of the claim statement, it is stated as follows :- "In 4 out of 21 such common claims (i.e. Claim Nos.2, 3, 5 and 21), the claim of Vinay Heavy Equipments against IRCON is higher than the claim of IRCON against SIPCOT. In these 4 cases, it has been prayed by the present Claimant (IRCON) in the concluding part of the claim that in case the Hon'ble Arbitrator were to be pleased to award the higher amount to Vinay Heavy Equipments, the same amount might be awarded to IRCON also. In 11 out of 21 common claims (i.e. Claim Nos.4, 6, 10, 11, 12, 13, 14, 15, 18, 19 and 20), IRCON have no claims of their own against SIPCOT. But claims have been made by Vinay Heavy Equipments against IRCON. In these 11 cases also, it has been prayed by the present Claimant (IRCON) that in case the Hon'ble Arbitrator were to be pleased to award the amount claimed by Vinay Heavy Equipments against IRCON, the same amount might be awarded to IRCON also. In 5 out of 21 common claims (i.e. Claim Nos.1, 7, 8, 16 and 17), the claim of IRCON against SIPCOT is higher than the claim of Vinay Heavy Equipments against IRCON. In these cases, it has been prayed that Hon'ble Arbitrator might award the claim amount of IRCON. In the remaining 1 claim (i.e. Claim No.9), the claims of IRCON and of Vinay Heavy Equipments are the same." Therefore, on their own pleadings, they are entitled only to what they originally claimed. Similarly, the award should be based on this contract and what is claimed. When the first respondent admittedly "has no claims of its own against the appellant, with what justification can the burden of a third party be shifted to the appellant?

9. Now we will look at the amendment application. In the amendment application, what they have said is that the award passed in the proceedings in favour of VHE would essentially represent the cost of non-scheduled items and therefore, SIPCOT is liable to make good that amount. This is how the amendment application is filed and they have also pleaded that the learned Arbitrator should treat the common award as an exhibit. In the counter affidavit filed originally, the first respondent had, apart from denying the specific claims, in paragraph 31, stated as follows :- "The averments in Para 38 of claim statement are contra to he terms of the agreement. The respondent submits that he respondent is not privy to the contract executed between the claimant and M/s. Vinay Heavy Equipments and the respondent was neither a party nor a witness in the arbitration dispute between M/s. Vinay Heavy Equipments and the claimants or either got approved from the respondent." It was also pleaded that the term 'back-to-back basis' is outside the conditions of contract between SIPCOT and IRCON and IRCON had only to execute the work as per the conditions of the contract under the supervision of RITES. It was also pleaded that when it is IRCON's own admission that the claim of VHE is exorbitant, there was nothing to stop IRCON to have summoned RITES as a witness to report on the correctness and justifiability of the claims made by VHE. It pleaded that the arbitral tribunal can only decide in accordance with the terms of the contract between the parties and it was not open to IRCON to pray for award of a claim subject to the condition that it should not be less than the amount awarded to VHE. While it is true that SIPCOT had stated that it had no objection to treat the award as an exhibit on its merits and demerits, but they had clearly qualified it by saying that "the award had been passed by the same arbitrator and neither SIPCOT nor RITES, the consultant, whose certificate played a crucial role, was privy to the arbitration proceedings as witnesses to depose before the Honourable Arbitrator on the bona fide of the various claims, both in terms of the quantity and the value therefor". Therefore, this objection that has been raised.

10. The learned Arbitrator is also aware that the appellant has nothing to do with VHE's claims. In paragraph 13 of the VHE-IRCON award, the learned Arbitrator had held, "To say that it will pay only when SIPCOT pays for those works on the ground that the contracts are 'back-to-back' basis is to throw the blame on a third party who is not a party to the contracts and against whom no liability can be enforced by the claimant. I have already held in the earlier paragraphs that 'back-to-back' arrangement will apply only to specifications, the quality and quantum of works and not to the rate and payment clauses. In my considered view, IRCON is primarily liable to pay the claimant for the various items of work, both scheduled and non-scheduled and it has to work out its rights as against SIPCOT as per the terms of its contract with SIPCOT. Therefore, the learned Arbitrator was quite conscious that since SIPCOT was not privy to the contract, it could not be asked to pay what VHE claimed. After holding that the blame cannot be thrown on a third party who is not a party to the contract against whom no liability can be cast, the learned Arbitrator had thrown the liability on the appellant based on an award, to which the appellant was a third party. The learned Arbitrator ought to have tested IRCON's claim against SIPCOT in terms of the contract between them, as he had rightly said in the award passed in VHE's claim, whereas indirectly, he has done exactly what he had frowned upon IRCON for attempting to do.

11. Now, we will look at those clauses in the present award which make this abundantly clear. The learned Arbitrator finds that it is quite clear that IRCON is the contractor and VHE is the sub-contractor with regard to the same identical work and when SIPCOT contended that no separate claim can be made for the non-scheduled and additional scheduled items of work since they would come under the items of BOQ, the learned Arbitrator said that it would be dealt with while individually dealing with each item of claim and when amendment was sought for, the learned Arbitrator said that the arbitral tribunal will find on evidence the actual quantity of boulders excavated and that, "that issue is one of factual proof" and therefore, the mere mention of a higher figure by way of amendment will not prejudice SIPCOT. Thereafter, with regard to Item-2 which is about stacking, all that is said is that "this item of work is found to have been executed and evaluated in the earlier award" and the same amount is awarded to IRCON against SIPCOT. No further ado, just that. And the same goes with respect to Item Nos.3, 4, 5, 6, 7, 8, 10, 12, 14, 15, 16, 17, 18, 19 and 20. As far as 25 items of claim which were dealt with itemwise, though the learned Arbitrator had assured in the earlier paragraphs that they will be dealt with while dealing with individual items, he had merely referred to the earlier award and had awarded the same amount to IRCON against SIPCOT.

12. With regard to the award of sub-contract by IRCON to VHE, the learned Arbitrator accepted that there is no specific approval of SIPCOT therefor. However, certain circumstances were relied on to hold that SIPCOT did not object to the work done by VHE during the course of the execution of contract. It is the case of SIPCOT that there was no evidence to show that SIPCOT had acquiesced. In any event, the learned Arbitrator held that the person who got the benefit of the work done by another not intending to do it gratuitously should compensate that other person. The duty to compensate for this work was IRCON's and not SIPCOT's. SIPCOT had paid the claims made by IRCON which even IRCON stated it would be satisfied with. The learned Arbitrator held with regard to additional rate for boulders and extra lead that inspite of RITES' recommendation for payment, SIPCOT did not pay. The learned Arbitrator does not appear to be right and just one exhibit, viz. Ex.P.71 proves it.

13. On 3.4.2000, IRCON wrote a letter to SIPCOT claiming 14 items. SIPCOT called for a report from RITES on the genuineness of the claim. According to the learned Arbitrator, RITES had sent a letter dated 30.6.2000 recommending two claims, i.e., additional financial implication with reference to additional rate for boulders and extra lead on earthwork works out to Rs.13.50 crores and SIPCOT, without reference to the said recommendation, rejected the claim by its letter dated 6.6.2000, though it is the engineer who is the authority to determine the cost of such items. The letter dated 30.6.2000 is Ex.C.71. RITES had analysed the claim which is seen from Ex.C.71 that RITES, by their letter dated 23.10.1998, had processed the non-scheduled items recommending the items which can be entertained, they had also analysed each claim based on the claim made by IRCON and it appears from this document that SIPCOT had asked for further particulars and one of the salient points is that RITES should give specific recommendations. Thereafter, RITES had addressed a letter for giving their assessment for the non-scheduled items claimed by IRCON. It is seen that RITES had sent a letter dated 18.1.2000 stating that the recommendation made by RITES are only tentative and subject to final approval and the claim is between SIPCOT and IRCON. Thereafter, on a detailed report as requested by SIPCOT, RITES had investigated the mater and it is stated, inter alia, (i) that IRCON had asked to stack the boulders for assessing the quantities, however, they have not done so; and (2) that no measurements were recorded in the measurement books for individual classification and IRCON has not mentioned in the measurement books while accepting the measurement, except corresponding through their letters. It is also stated that for extra lead which has been used for carrying on the work, the chainage has to be certified by SIPCOT and RITES for assessing the additional financial implication. These extracts were pointed out on behalf of the appellant to show that there was no recommendation in fact and even according to RITES, it was a tentative recommendation and it is for SIPCOT to decide, and therefore, the conclusion of the learned Arbitrator is based on a wrong reading of evidence.

14. As regards the claim made that the rocks that were removed were hard rocks and therefore, they were non-scheduled items, we only have to look at the pleadings of the appellant in paragraph 16 of the claim statement :-

"The Claimant states that he work was started by the Claimant on packages C1 & C2 on 10.7.97 through the agency of the Contractor M/s. Vinay Heavy Equipments, on the same date on which the Claimant signed the Contract Agreement with the Respondent. Within a few days of the commencement of the work in the field, it was seen that the nature of the soil met with at the location of the first point of excavation in a cutting was not an easy type of soil to excavate. It was not removable by ordinary digging or dozing equipments. On the surface, it was red earth covered in fairly dense growth of grass, but below the surface, it was red earth of a hard, cementatious nature. As excavation progressed deeper, it was that the soil was getting harder, and was mixed with gravel. At lower depths, it was a type of soft reek known as laterite. Big lumps of laterite of over 1 to 2 m in cross-dimension were occurring mixed with red earth and gravel, and had to be dug up. Although these lumps could not be strictly termed 'boulders', in as much as they did not need blasting for removal, they came to be referred to only as 'boulders' since considering the density of the material, the term was not totally inappropriate. These boulders could not be removed merely by bulldozers. The surrounding earth of each large boulder had to be loosened first by an excavating-cum-lifting equipment known as 'poclain' equipment before it could be pulled out, lifted and removed from the road alignment. Blasting of the boulders would have made the removal job easier, but blasting was not resorted to as it was felt that the formalities involved in obtaining permits for buying explosives and using them would have delayed the progress. Similar sized boulders came out adhering to the earth and gravel and had to be lifted and loaded into dumpers with much greater care than would be required for ordinary earth. After the boulder was thus removed and loaded, the surrounding loosened red earth and gravel was dozed and dug out, and loaded into dumpers. This matter was immediately brought to the notice of M/s. RITES, the consultant of the Respondent and recorded in the minutes of meetings that he Claimant held with RITES on 4.7.97 and 24.7.97." Therefore, even according to the appellant, these lumps were not boulders. The term is used only because of the density of the materials. They had to be loosened and pulled out. It is admitted that there was no blasting. The following MOST Specifications were read out :-

"301.2. Classification of Excavated Material

301.2.1. Classification : All materials involved in excavation shall be classified by the Engineer in the following manner

(a) Soil

This shall comprise topsoil, turf, sand, silt, loam, clay, mud, pest, black cotton soil, soft shale or loose moorum, a mixture of these and similar material which yields to the ordinary application of pick, spade and/or shovel, rake or other ordinary digging implement. Removal of gravel or any other nodular material having dimension in any one direction not exceeding 75 mm occurring in such strata shall be deemed to be covered under this category. (b) Ordinary Rock (not requiring blasting) This shall include

(i) rock types such as laterites, shales and conglomerates, varieties of limestone and sandstone etc., which may be quarried or split with crow bars, also including any rock which in dry states may be hard, requiring blasting but which, when wet, becomes soft and misnageable by means other than blasting;

(ii) macadam surfaces such as water bound and bitumen/tar bound; soling of roads, paths, etc. and hard core; compact moorum or stablised soil requiring grafting tool or pick or both and shovel, closely applied; gravel and cobble stone having maximum dimension in any one direction between 75 and 300 mm;

(iii) lime concrete, stone masonry in lime mortar and brick work with in lime/cement mortar below ground level, reinforced cement concrete which may be broken up with crow bars or picks and stone masonry in cement mortar below ground level; and

(iv) boulders which do not require blasting having maximum dimension in any direction of more than 300 mm, found lying loose on the surface or embedded in river bed, soil, talus, slope wash and terrace material of dissimilar origin.

This shall comprise :

(i) any rock or cement concrete for the excavation of which the use of mechanical plant and/or blasting is required;

(ii) reinforced cement concrete (reinforcement cut through but not separated from the concrete) below ground level; and

(iii) boulders requiring blasting.

(d) Hard Rock (blasting prohibited)

Hard rock requiring blasting as described under (c) but where blasting is prohibited for any reason and excavation has to be carried out by chiselling, wedging or any other agreed method.

(e) Marshy Soil

This shall include soils like soft clays and peats excavated below the original ground level of marshes and swamps and soils excavated from other areas requiring continuous pumping or bailing out of water.

301.2.2. Authority for classification : The classification of excavation shall be decided by the Engineer and his decision shall be final and binding on the Contractor. Merely the use of explosives in excavation will not be considered as a reason for higher classification unless blasting is clearly necessary in the opinion of the Engineer."

Admittedly, there is no evidence to show that the Engineer had certified the classification of the rocks. The learned Arbitrator, while dealing with this item, had held that it cannot be mere earthwork as urged by SIPCOT and RITES should have done soil investigation. R.W.1 and R.W.2 are the Project Officers. They were overseeing the work of RITES and they have, in their evidence, said that only soft bumps or boulders were met with here and there in certain areas and there was no hard laterite at all and that the laterite excavated were not stacked and re-stacked at any point of time and that IRCON had disposed of the laterite in ordinary course. BOQ Item-2 covers all soil specifications and that no additional payment can be claimed by IRCON for execution the work of stacking boulders and re-stacking them. This evidence is rejected by the learned Arbitrator because of the instructions given by IRCON in the Site Order Book. It stands to reason that the instructions are given before the work commences. The evidence of the Project Officers is what they saw at the site and that is not all. It is IRCON's own claim which was extracted above which shows that they were not boulders at all, but only laterite. When these are the materials before the learned Arbitrator, the learned Arbitrator was not justified in saying that he cannot accept the evidence of R.W.1 and R.W.2. That evidence conforms with the pleadings of the claimant/first respondent.

15. In McDermot International Inc. vs. Burn Standard Co. Ltd., (2006) 11 S.C.C. 181, the Supreme Court held as follows :-

"52. The 1996 Act makes provision for the supervisory role of courts, for the review of the arbitral award only to ensure fairness. Intervention of the court is envisaged in few circumstances only, like, in case of fraud or bias by the arbitrators, violation of natural justice, etc. The court cannot correct errors of the arbitrators. It can only quash the award leaving the parties free to begin the arbitration again if it is desired. So, the scheme of the provision aims at keeping the supervisory role of the court at minimum level and this can be justified as parties to the agreement make a conscious decision to exclude the courts jurisdiction by opting for arbitration as they prefer the expediency and finality offered by it. ...

58. In Renusagar Power Co. Ltd. v. General Electric Co., 1994 Supp (1) S.C.C. 644, this Court laid down that the arbitral award can be set aside if it is contrary to (a) fundamental policy of Indian law; (b) the interests of India; or (c) justice or morality. A narrower meaning to the expression public policy was given therein by confining judicial review of the arbitral award only on the aforementioned three grounds. An apparent shift can, however, be noticed from the decision of this Court in ONGC Ltd. v. Saw Pipes Ltd., (2003) 5 S.C.C. 705 (for short ONGC). This Court therein referred to an earlier decision of this Court in Central Inland Water Transport Corpn. Ltd. v. Brojo Nath Ganguly, (1986) 3 S.C.C. 156, wherein the applicability of the expression public policy on the touchstone of Section 23 of the Indian Contract Act and Article 14 of the Constitution of India came to be considered. This Court therein was dealing with unequal bargaining power of the workmen and the employer and came to the conclusion that any term of the agreement which is patently arbitrary and/or otherwise arrived at because of the unequal bargaining power would not only be ultra vires Article 14 of the Constitution of India but also hit by Section 23 of the Indian Contract Act. In ONGC6 this Court, apart from the three grounds stated in Renusagar5, added another ground thereto for exercise of the courts jurisdiction in setting aside the award if it is patently arbitrary.

59. Such patent illegality, however, must go to the root of the matter. The public policy violation, indisputably, should be so unfair and unreasonable as to shock the conscience of the court. Where the arbitrator, however, has gone contrary to or beyond the expressed law of the contract or granted relief in the matter not in dispute would come within the purview of Section 34 of the Act. However, we would consider the applicability of the aforementioned principles while noticing the merits of the matter.

60. What would constitute public policy is a matter dependant upon the nature of transaction and nature of statute. For the said purpose, the pleadings of the parties and the materials brought on record would be relevant to enable the court to judge what is in public good or public interest, and what would otherwise be injurious to the public good at the relevant point, as contradistinguished from the policy of a particular Government. (See State of Rajasthan v. Basant Nahata, (2005) 12 S.C.C. 77)".

16. Learned senior counsel appearing for the first respondent referred to the following well known decisions of the Supreme Court with regard to the scope of interference by courts :

D.D. Sharma vs. Union of India, (2004) 5 S.C.C. 325

BOC India Ltd. vs. Bhagwati Oxygen Ltd., (2007) 9 S.C.C. 503

Satna Stone & Lime Co. vs. Union of India, 2008 (7) SCALE 699

M/s. Bhakthi Constructions vs. Union of India, O.S.A. No.418 of 2003 dated 4.12.2007.

We are quite conscious of the limitations. But where the award is unacceptable, as in the instant case, we do not think we will be committing any mistake in interfering with the award.

17. In 2008 (7) SCALE 699 cited supra, the Supreme Court had held that where there is an error apparent on the face of the record where the arbitrator has not followed the statutory legal provision, the Court would be justified in interfering :-

"18. From the discussion of the aforementioned cases, it is clear that the error apparent on the face of the award contemplated by Section 16(1)(c) as well as Section 30(c) of the Arbitration Act is an error of law apparent on the face of the award and not an error of fact. Same principle has been reiterated in Thawardas Pherumal v. Union of India, [1955] 2 S.C.R. 48. The court reiterated the legal position that an arbitrator cannot ignore the law or misapply it in order to do what he thinks is just and reasonable. The legal position has been crystallized in a series of judgments of this Court that the arbitrator has got ample power in giving an award. The arbitrator is the sole judge of the quality as well as the quantity of evidence and it will not be for the court to take upon itself a task of being a judge of the evidence before the arbitrator. The court should approve the award with the desire to support it, if that is reasonably possible rather than to destroy it, by calling it illegal. This Court has very limited jurisdiction to interfere with the reasoned award. Only when the award is based upon a proposition of law which is unjustified in law, the error of law must appear from the award itself or from any document or note incorporated in it or appended to it. It is not permissible to travel beyond and consider material not incorporated in or appended to the award."

18. The learned senior counsel appearing for the first respondent referred to Sohan Lal Gupta vs. Asha Devi Gupta, (2003) 7 S.C.C. 492 which dealt the freedom which an arbitrator has to manage the procedure. We have no doubt that the arbitrator has the freedom to formulate and lay down his own procedure for the conduct of the arbitration proceedings before him according to law. But in the same judgment, we find that the Supreme Court had laid down certain conditions for constituting reasonable opportunity, which are reproduced hereunder :-

"23. For constituting a reasonable opportunity, the following conditions are required to be observed :

1. Each party must have notice that the hearing is to take place.

2. Each party must have a reasonable opportunity to be present at the hearing, together with his advisers and witnesses.

3. Each party must have the opportunity to be present throughout the hearing.

4. Each party must have a reasonable opportunity to present evidence and argument in support of his own case.

5. Each party must have a reasonable opportunity to test his opponents case by cross-examining his witnesses, presenting rebutting evidence and addressing oral argument.

6. The hearing must, unless the contrary is expressly agreed, be the occasion on which the parties present the whole of their evidence and argument."

In this case, the appellant did not have the opportunity to test its opponent's case by rebutting the VHE-IRCON award. The award was, no doubt, enclosed along with the amendment application. But, we have seen the list of exhibits and the VHE-IRCON award. Even otherwise, even in that award, the learned Arbitrator had said that a third party to the contract cannot be bound or asked to pay the claim and on that ground, made IRCON principally liable to VHE's claim, in which case, he ought to have examined independently and assessed whether the claim made by IRCON against SIPCOT purely because VHE had succeeded in establishing its claim was justifiable. After all, the claim made by IRCON against SIPCOT must be tested only by the terms of the contract. It has not been pointed out to us that there was any condition or any understanding that if IRCON sub-contracted the project to others, any claim made by the sub-contractor must be answered by SIPCOT. If there is such a term or condition, it has not been brought to our notice.

19. As regards the binding effect of a judgment not inter partes, the decision in Surendra Kumar Vakil vs. Chief Executive Officer, (2004) 10 S.C.C. 126 and Board of Trustees of the Port of Bombay vs. Jai Hind Oil Mills Co., A.I.R. 1987 S.C. 622 are relevant. In the former, the Supreme Court held as follows :-

"10. ... The decision of the Nagpur High Court cannot be relied on by the review petitioner as a precedent because there is no such point of law decided as may be capable of being read as precedent for the purpose of this case. If the judgment though not judgment inter partes, is yet sought to be relied on as a piece of evidence, then it should have been tendered in evidence which has not been done. ..." In the latter, it was held thus :-

"12. ... The Port Trust being a body corporate constituted under the Act is entitled to be heard by the court before any order which affects its interests prejudicially is passed. This case serves as an illustration to what is stated above. The Port Trust has been asked to permit the clearance of goods in respect of which demurrage charges of Rs 3,53,514.75 are payable in the event of Respondent 1 being held liable in law to pay the full demurrage charges. The orders passed by the High Court in the proceedings to which the Port Trust was not a party which had the effect of prejudicially affecting the interests of the Port Trust would not be binding on it in view of the violation of the principles of natural justice. ..." Therefore, the test is, whether it was marked in evidence. In this case, SIPCOT had no opportunity to contest or challenge the award passed against IRCON in the other proceedings. We are unable to accept the findings of the learned single Judge that the quantum of work was not disputed by the appellant herein. In fact, the quantum of work was disputed by the appellant.

20. As regards the issue as to the actual quantity of boulders excavated, the learned single Judge holds that it is a matter of evidence, but there was no discussion of any evidence by the learned Arbitrator in this regard.

21. With regard to the question whether the effect of the words 'permission and approval', the following observations of the Supreme Court in U.P. Avas Evam Vikas Parishad vs. Friends Co-op. Housing Society Ltd., A.I.R. 1996 S.C. 114 were pointed out on behalf of the first respondent :-

"This Court in Life Insurance Corpn. of India v. Escorts Ltd., A.I.R. 1986 S.C. 1370, considering the distinction between special permission and general permission, previous approval or prior approval in para 63 held that: We are conscious that the word prior or previous may be implied if the contextual situation or the object and design of the legislation demands it, we find no such compelling circumstances justifying reading any such implication into Section 29(1) of the Act. Ordinarily, the difference between approval and permission is that in the first case the action holds good until it is disapproved, while in the other case it does not become effective until permission is obtained. But permission subsequently granted may validate the previous Act. As to the word approval in Section 33(2)(b) of the Industrial Disputes Act, it was stated in Lord Krishna Textiles Mills Ltd. v. Workmen2, that the Management need not obtain the previous consent before taking any action. The requirement that the Management must obtain approval was distinguished from the requirement that it must obtain permission, of which mention is made in Section 33(1)." "It is to be seen that the language employed therein is that the approval of the State Government is necessary. Question is whether it would be prior approval or approval given subsequent to the notification under Section 28 or declaration under Section 32 is valid in law. If prior approval would have been a precondition for further steps, the Act would have said so. This not having been done, it seems to us what is material is to obtain approval of the State Government. The reason appears to be that when the schemes have been framed, the land suitably required for effective implementation of the scheme alone should be acquired and not in excess in the guise of framing the schemes." But this need not really engage us, since we are deciding the matter on the ground that the award is illegal. Similarly, in Secretary, Irrigation & Power Department, Government of Orissa vs. Niranjan Swain, (1998) 8 S.C.C. 651, it was held that the ground of limitation cannot be raised before the Court if it has not been raised before the arbitrator :-

"2. The learned counsel for the appellant raised three contentions: (i) that the claim was time-barred; (ii) the Arbitrator could not have awarded interest; and (iii) that the award was based on no evidence. On the first and the last questions, we see no merit for the simple reason that the question of limitation was not raised before the Arbitrator and the Arbitrator was not required to go into it." In State of Orissa vs. Asis Ranjan Mohanty, (1999) 9 S.C.C. 249, it was held that if the respondent had reserved its right to amend the pleadings, then the amendment should be ordered. In Vijay Packaging vs. Spectra Packs Private Ltd., 2002 (2) C.T.C. 705, a Division Bench decision of this Court was relied on to hold that the arbitrator is not confined by the technical rules of evidence so long as the principles of fairness and the well established principles of evidence are not violated.

22. The learned single Judge has relied on the findings of the Division Bench in the O.S.A. that arose in the matter between VHE and IRCON. There, all that the Division Bench had stated was that IRCON had contended before the learned Arbitrator that if a similar award is passed in their favour in the arbitration claim against SIPCOT, they had no objection to an award being passed against them in VHE's dispute. That was in the context of those proceedings, but we cannot accept that merely because a party would say that he had no objection to an award being passed against it if a similar award is passed in its favour in another case, the learned Arbitrator should automatically pass an award in its favour. The decision in these proceedings should be based on the materials on record. For that, we do not really need any precedent. In fact, the Division Bench, in O.S.A. Nos.312 and 313 of 2005, rejected the stand taken by the IRCON that 'back-to-back basis' meant that they would pay only if their claims are accepted by SIPCOT. Therefore, this itself should be sufficient to quash this award which has been passed "back-to-back". Merely because the work entrusted to the sub-contractor was one and the same does not mean that an award should automatically be passed against SIPCOT. We do not know on what basis IRCON defended its case against VHE. SIPCOT clearly laid down its requirements with regard to excavation, stacking on the road etc. and there is no independent assessment of evidence in this regard and the evidence of the Project Officers, on the basis of their personal inspection, after the work was over, has been rejected by the learned Arbitrator on the basis of the instructions given, which is totally unjustifiable. The learned single Judge also refers to a personal visit of the learned Arbitrator. The personal visit of the learned Arbitrator was long after the road was laid, when the stacked boulders would not have been visible and the size of the boulders could hardly be determined.

23. We are aware that judicial intervention in the award passed by an Arbitral Tribunal must be minimal. But, however, in K.V. Mohammad Zakir vs. Regional Sports Centre, 2009 (4) Arb. LR 21 (SC), the Supreme Court has held that in certain circumstances, the Court can interfere :

"We are of the view that the settled position in law is that court should not substitute its own view for the view taken by the arbitrator while dealing with the proceedings for setting aside an award. It is equally well settled, where the arbitrator acts within jurisdiction, 'the reasonableness of the reasons' given by the arbitrator is not open to scrutiny by courts. However, if the reasons are such as no person of ordinary prudence can ever approve of them or if the reasons are so 'outrageous in their defiance of logic' that they shock the conscience of the court, then it is a different situation. And in an appropriate case the court may interfere. However, the degree of such unreasonableness must be greater than the standard in a certiorari proceeding." In the present case, we are unable to accept the decision given by the arbitral tribunal purely on the basis of the award given in a matter where the appellant was not a party. Therefore, we feel justified in interfering with the same.

24. In the present case, we find that there was

(a) no independent assessment of each claim;

(b) acceptance of each claim solely and only because that claim was held in favour of VHE in the earlier proceedings;

(d) total reliance on an award to which the appellant was not a party and therefore, violation of principles of natural justice; and

(e) reliance on a judgment not inter partes, though it was not marked as evidence.

25. For all the reasons stated above, we have no other alternative but to set aside the award of the learned Arbitrator and consequently the order of the learned single Judge in the original petition. The original side appeal is accordingly allowed. But there shall be no order as to costs. M.P. No.1 of 2008 is closed.

It appears that by an interim order, the appellant herein had deposited Rs.4 Crores. Since we have allowed the appeal, the appellant is entitled to refund of the above amount.

sra/ab