January 18 2011
In Oil and Natural Gas Corporation v Wig Brothers Builders and Engineers Pvt Ltd the Supreme Court reaffirmed the principle that, pending adjudication before it, an arbitral tribunal cannot go beyond the scope of the contract.(1) The court held that in the event that any arbitral award is found to violate the express provision contained in the contract which is the subject matter of the proceeding, such award will be beyond the tribunal's jurisdiction and thus merit interference. In the present case the arbitrator, while passing his award, overlooked a clause of the contract which imposed a specific bar on the award of any compensation for any act which led to a delay in the execution of the work, and awarded damages for a delay in completion of the work. The Supreme Court set aside the award to the extent that the arbitrator had proceeded in manifest disregard of the express terms of the contract.
The appellant entrusted a construction job to the respondent under a contract dated October 11 1983. Clause 25 of the contract provided for the settlement of disputes by arbitration. Certain disputes arose between the parties and the parties were referred to a sole arbitrator under the contract. Several claims and counterclaims were made, and the arbitrator held, among other things, that the delay in completion of the work was due to the fault of both the appellant and the respondent contractor, and that both were equally liable for the delay. Accordingly, the arbitrator awarded damages against the appellant for the loss incurred on account of the delay in completion of the contract, which was attributable to the appellant.
The appellant challenged the award by filing a petition under Sections 30(2) and 33(3) of the Arbitration Act 1940. The civil court dismissed the petition and made the award rule of the court. On appeal, the High Court upheld the judgment of the civil court. Aggrieved by the above decision, the appellant challenged the arbitrator's award before the Supreme Court, insofar as he had awarded compensation for the delay in completion of the contract on account of the appellant's failure to perform its contractual obligations under the first claim.
The Supreme Court allowed the appeal and held that the arbitrator had exceeded his jurisdiction by awarding damages against the appellant while ignoring the express bar contained in Clause 5A of the contract. This clause specifically barred any claim for damages and provided for a time extension for the completion of work in case delay was caused by any act of the appellant in the execution of the work.(4)
While considering the matter before it, the court reiterated the following well-settled principles:
While allowing the appeal, the court referred to and relied on several judgments. It observed that in Associated Engineering Co v Government of AP(5) and Rajasthan State Mines and Minerals Ltd v Eastern Engineering Enterprises,(6) it had already been established that:
"the arbitrator is the creature of the contract between the parties and hence if he ignores the specific terms of the contract, it would be a question of jurisdictional error which could be corrected by the court and for that limited purpose, agreement is required to be considered. Therefore, the arbitrator cannot award an amount which is ruled out or prohibited by the terms of the agreement."
The Supreme Court observed that in Ramnath International Construction (P) Ltd v Union of India(7) it had considered a similar situation wherein the contract contained a clause which provided a clear bar to any claim for compensation for delays, in respect of which extensions had been sought and obtained. The court held that:
"such a clause amounts to a specific consent by the contractor to accept extension of time alone in satisfaction of claims for delay and not to claim any compensation; and that in view of such a bar contained in the contract in regard to award of damages on account of delay, if an arbitrator awards compensation, he would be exceeding his jurisdiction."
In view of the above, the appeal was allowed in part and the court concluded that the arbitrator had exceeded his jurisdiction by awarding damages and ignoring the express bar contained in the contract. The court observed that
"in the event of the work being delayed for whatsoever reason, the Respondent will only be entitled to extension of time for completion of work but will not be entitled to compensation or damages."
With regard to the other claims, the award was not disturbed and the judgment of the lower courts was affirmed.
The Supreme Court has once again clarified that an arbitral tribunal cannot exercise its power ex debito justitiae (as a matter of right). The arbitrator's jurisdiction is confined to the four corners of the agreement from which it derives authority, and only such orders may be passed as may be the subject matter of reference. The arbitral tribunal has no jurisdiction to make an award against the specific terms of the contract executed between the parties. Therefore, any award made in manifest disregard of the contract, despite being bona fide, will be deemed arbitrary.
For further information on this topic please contact Jasleen K Oberoi or Bahaar Dhawan at Amarchand & Mangaldas & Suresh A Shroff & Co by telephone (+91 11 4159 0700), fax (+91 11 2692 4900) or email (firstname.lastname@example.org or email@example.com).
"Grounds for setting aside award:
An award shall not be set aside except on one or more of the following grounds, namely:
(a) that an arbitrator or umpire has misconducted himself or the proceedings;
(b) that an award has been made after the issue of an order by the Court superseding the arbitration or after arbitration proceedings have become invalid under Sec. 35;
(c) that an award has been improperly procured or is otherwise invalid."
(1) It is not incompatible with an arbitration agreement for an arbitral tribunal to encourage settlement of the dispute and, with the agreement of the parties, the arbitral tribunal may use mediation, conciliation or other procedures at any time during the arbitral proceedings to encourage settlement.
(2) If, during arbitral proceedings, the parties settle the dispute, the arbitral tribunal shall terminate the proceedings and, if requested by the parties and not objected to by the arbitral tribunal, record the settlement in the form of an arbitral award on agreed terms.
(3) An arbitral award on agreed terms shall be made in accordance with section 31 and shall state that it is an arbitral award.
(4) An arbitral award on agreed terms shall have the same status and effect as any other arbitral award on the substance of the dispute."
"in the event of delay by the Engineer-in-charge to hand over to the contractor possession of lands necessary for the execution of work or to give the necessary notice to the contractor to commence work or to provide the necessary drawing or instructions or to do any act or thing which has the effect of delaying the execution of the work, then notwithstanding anything contained in the contract or alter the character to any damages or compensation thereof but in all such cases in Engineer-in-charge may grant such extension or extensions of the completion date as may be deemed fair and reasonable by the Engineer-in-charge and such decision shall be final and binding."
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