M/s. MSK Projects (I) (JV) Ltd. v. State of Rajasthan (SC) BS269010
SUPREME COURT OF INDIA

Before:- P. Sathasivam and B.S. Chauhan, JJ.

Civil Appeal Nos. 5416 and 5417 of 2011. D/d. 21.7.2011.

M/s. MSK Projects (I) (JV) Ltd. - Petitioner

Versus

State of Rajasthan and anr. - Respondents

A. Arbitration and Conciliation Act, 1996, Section 34(2) - Arbitration award - Arbitral tribunal although cannot travel beyond terms of reference but in exceptional circumstances when party pleads that demand by another party is beyond the terms of contract and statutory provisions may warrant examination of terms of contract as well as statutory provisions by tribunal - Absence of proper pleadings and objections, such course may not be permissible - (2006)4 SCC 445 relied on.

[Paras 11 and 12]

B. Interest Act, 1978, Section 3 - Rate of Interest - Recovery of any debt or damages - Proceedings of Section 3 of Act empowers Court to award interest at prevailing rate in banking transactions - Court, thus, impliedly has power to vary rate of interest agreed by parties.

[Para 16]

C. Tolls Act, 1851, Sections 2 and 3 - Toll fee - Under Act, 1851, toll fee - Compensatory in nature where State competent to levy toll fee only for period stipulated under statute or till recovery of actual cost of project with interest - Cannot be source of revenue for State.

[Paras 26 and 27]

D. Contract Act, 1872, Section 73 - Damages - Contract by Government with private party for construction of roads - Non-execution of work of second phase of contract - Non-compliance with terms of contract and acting in contravention of terms of agreement - Relief claimed was windfall profit without carrying out obligation to execute work just on technicalities - Thus, contractor cannot claim damages in respect of work not completed by him.

[Paras 36 and 38]

Cases Referred :-

1. Alopi Parshad & Sons. Ltd. v. Union of India, AIR 1960 Supreme Court 588.

2. Associated Engg. Co. v. Govt. of Andhra Pradesh, AIR 1992 Supreme Court 232.

3. B.S.N.L v. Reliance Communication Ltd., (2011) 1 SCC 394.

4. Bhagawati Oxygen Ltd. v. Hindustan Copper Ltd., AIR 2005 Supreme Court 2071.

5. Bihar State Housing Board v. Arun Dakshy, (2005) 7 SCC 103.

6. Cellular Operators Association of India v. Union of India, (2003) 3 SCC 186.

7. Delhi Development Authority v. R.S. Sharma and Company New Delhi, (2008) 13 SCC 80).

8. Dwaraka Das v. State of Madhya Pradesh , AIR 1999 Supreme Court 1031.

9. Executive Engineer, Dhenkanal Minor Irrigation Division, Orissa v. N.C. Budharaj (Dead) by Lrs., AIR 2001 Supreme Court 626.

10. Executive Engineer, Irrigation, Galimala v. Abnaduta Jena, AIR 1988 Supreme Court 1520.

11. Ghaziabad Development Authority v. Balbir Singh, AIR 2004 Supreme Court 2141.

12. Gobardhan Das v. Lachhmi Ram, AIR 1954 Supreme Court 689.

13. Grid Corporation of Orissa Ltd. v. Balasore Technical School, AIR 1999 Supreme Court 2262.

14. Gujarat Water Supply & Sewerage Board v. Unique Erectors (Gujarat) (P) Ltd., AIR 1989 Supreme Court 973.

15. H.U.D.A v. Prem Kumar Agarwal, JT 2008 (1) SC 590.

16. H.U.D.A v. Raj Singh Rana, AIR 2008 Supreme Court 3035.

17. Haryana Urban Development Authority v. Manoj Kumar, (2005) 9 SCC 541.

18. Hindustan Construction Co. Ltd. v. State of Jammu & Kashmir, AIR 1992 Supreme Court 2192.

19. Hindustan Zinc Ltd. v. Friends Coal Carbonisation, (2006) 4 SCC 445.

20. Indian Hume Pipe Co. Ltd. v. State of Rajasthan, (2009) 10 SCC 187.

21. Jivarajbhai Ujamshi Sheth v. Chintamanrao Balaji, AIR 1965 Supreme Court 214.

22. Kishore Kumar Khaitan v. Praveen Kumar Singh, (2006) 3 SCC 312.

23. Krishna Bhagya Jala Nigam Ltd. v. G. Harischandra Reddy, AIR 2007 Supreme Court 817.

24. M/s. A.T. Brij Paul Singh v. State of Gujarat, AIR 1984 Supreme Court 1703.

25. Oil & Natural Gas Corporation Ltd. v. SAW.Pipes Ltd., AIR 2003 Supreme Court 2629.

26. Renusagar Power Co. Ltd. v. General Electric Company, AIR 1985 Supreme Court 1156.

27. Secretary, Irrigation Department Govt. of Orissa v. G.C. Roy, AIR 1992 Supreme Court 732.

28. Union of India v. Bungo Steel Furniture Pvt. Ltd., AIR 1967 Supreme Court 1032.

29. Seth Thawardas Pherumal v. Union of India, AIR 1955 Supreme Court 468.

30. State of Gujarat v. Shantilal Mangaldas, AIR 1969 Supreme Court 634.

31. State of U.P. v. Devi Dayal Singh, AIR 2000 Supreme Court 961.

32. Tata Iron & Steel Co. Ltd. v. Union of India, AIR 2000 Supreme Court 3706.

33. Union of India v. Kishorilal Gupta & Bros., AIR 1959 Supreme Court 1362.

34. Williams v. Lourdusamy, (2008) 5 SCC 647.

JUDGMENT

Dr. B.S. Chauhan, J. - Both these appeals have been preferred by the rival parties against the judgment and order dated 24.4.2007 passed by the High Court of Rajasthan (Jaipur Bench) in Civil Misc. Appeal No. 1581 of 2006 under Section 37(1)(A) of the Arbitration and Conciliation Act, 1996 (hereinafter called "Act 1996") against the order dated 17.1.2006 passed by the District Judge, Jaipur City, Jaipur in Arbitration Case No. 89/2004 whereby the application filed by the State of Rajasthan under Section 34 of the Act 1996 for setting aside the arbitral award dated 1.12.2003 had been allowed.

2. Facts and circumstances giving rise to these appeals are:

Hence, these two appeals.

3. Mr. K.K. Venugopal, learned senior counsel appearing for the private appellant, has submitted that it was implied in the agreement and there has been an understanding between the parties that State Government would issue notification barring the vehicles driven through the markets of Bharatpur City. This was not even an issue before the Tribunal and thus, could not be agitated by the State at all. Thus, the courts below erred in setting aside the award of arbitral tribunal to that extent, and secondly, that the rate of interest as reduced from 18 per cent to 10 per cent by the District Court as well as the High Court is in contravention of the terms of contract between the parties which fixed the rate of interest at 20 per cent. Further opposing the appeal by the State of Rajasthan, Shri Venugopal has submitted that Bharatpur-Deeg patch was an integral part of the project as there was only one composite contract of the entire bye-pass and, therefore, the private appellant was entitled to collect the toll fee from the users of that part of the road also.

4. Per contra, Dr. Manish Singhvi, learned Additional Advocate General for the State of Rajasthan, has submitted that arbitration proceedings could not be proceeded in contravention to the terms of agreement and statutory provisions. There was no obligation on the part of the State authorities to issue the notification restraining the entry of vehicles to the market side of the city. The rate of interest has rightly been reduced considering the prevailing rate of interest in banking transactions during the relevant period of contract. In support of the appeal of the State, it has been submitted that there was a clear understanding between the parties that the private appellant shall not collect any toll fee on the Bharatpur-Deeg patch and to that extent the.Tribunal and the courts below committed an error. It has further been submitted that the total contract had been for a sum of Rs. 13.25 crores including interest. The project was to be executed in two phases. The second phase for a sum of Rs. 3.24 crores had never been executed by the private appellant. The contractor could collect the compensation only on the basis of investment made by it. The concept of toll fee is of compensatory in nature wherein the State which has spent huge amount on construction of roads/bridges etc. has a right to get the said amount reimbursed, and therefore, in such a contract the concept of profit which prevails in other forms of contract cannot be the relevant component.

5. We have considered the rival submissions made on behalf of the parties and perused the record.

In the appeal filed by the private contractor, MSK Projects, two issues are involved; namely, whether it was mandatory/necessary in view of the agreement/contract or on the basis of pre-bid understanding that the State had to issue the notification barring the vehicles.through the markets of Bharatpur city; and secondly whether the rate of interest could be reduced from 18% to 10% by the courts below.

In the State appeal, the only issue required to be considered is whether the private appellant had a right to collect the toll.fee on the patch between Bharatpur-Deeg.

6. The issue regarding the jurisdiction of the Arbitral Tribunal to decide an issue not referred to is no more res integra. It is a settled legal proposition that special Tribunals like Arbitral Tribunals and Labour Courts get jurisdiction to proceed with the case only from the reference made to them. Thus, it is not permissible for such.Tribunals/authorities to travel beyond the terms of reference. Powers cannot be exercised by the Tribunal so as to enlarge materially the scope of reference itself.

If the dispute is within the scope of the arbitration clause, it is no part of the province of the court to enter into the merits of the dispute on the issue not referred to it. If the award goes beyond the reference or there is an error apparent on the face of the award it would certainly be open to the court to interfere with such an award. (Vide: Grid Corporation of Orissa Ltd. & Anr. v. Balasore Technical School, AIR 1999 Supreme Court 2262; and Delhi Development Authority v. R.S. Sharma and Company, New Delhi, (2008) 13 SCC 80).

7. In Associated Engg. Co. v. Govt. of Andhra Pradesh & Anr.,.AIR 1992 Supreme Court 232, this Court held that an umpire or arbitrator cannot.widen his jurisdiction by deciding a question not referred to him by the parties. If he exceeded his jurisdiction by so doing, his award would be liable to be set aside. Thus, an arbitrator cannot be allowed to assume jurisdiction over a question which has not been referred to him, and similarly, he cannot widen his jurisdiction by holding contrary to the fact that the matter which he wants to decide is within the submission of the parties.

8. If the arbitrator commits an error in the construction of the contract, that is an error within his jurisdiction. But if he wanders outside the contract and deals with matters not allotted to him, he commits a jurisdictional error. Extrinsic evidence is admissible in such cases because the dispute is not something which arises under or in relation to the contract or dependent on the construction of the contract or to be determined within the award. The ambiguity of the award can, in such cases, be resolved by admitting extrinsic evidence. The rationale of this rule is that the nature of the dispute is something which has to be determined outside and independent of what appears in the award. Such a jurisdictional error needs to be proved by evidence extrinsic to the award. (See: Gobardhan Das v. Lachhmi Ram.& Ors., AIR 1954 Supreme Court 689; Seth Thawardas Pherumal v. The Uni-.on of India, AIR 1955 Supreme Court 468; Union of India v. Kishorilal Gupta.& Bros., AIR 1959 Supreme Court 1362; Alopi Parshad & Sons. Ltd. v. Union.of India, AIR 1960 Supreme Court 588; Jivarajbhai Ujamshi Sheth & Ors. v. Chintamanrao Balaji & Ors., AIR 1965 Supreme Court 214; and Renusagar Power Co. Ltd. v. General Electric Company & Anr., AIR 1985 Supreme Court 1156).

9. In Kishore Kumar Khaitan & Anr. v. Praveen Kumar Singh, (2006) 3 SCC 312, this Court held that when a court asks itself a wrong question or approaches the question in an improper manner, even if it comes to a finding of fact, the said finding of fact cannot be said to be one rendered with jurisdiction. The failure to render the necessary findings to support its order would also be a jurisdictional error liable to correction.

10. In Cellular Operators Association of India & Ors. v. Union of India & Ors., (2003) 3 SCC 186, this Court held as under:

11. This Court, in Oil & Natural Gas Corporation Ltd. v. SAW.Pipes Ltd., AIR 2003 Supreme Court 2629; and Hindustan Zinc Ltd. v. Friends Coal Carbonisation, (2006) 4 SCC 445), held that an arbitration award contrary to substantive provisions of law, or provisions of the Act, 1996 or against terms of the contract, or public policy, would be patently illegal, and if it affects the rights of the parties, it would be open for the court to interfere under Section 34(2) of the Act 1996.

12. Thus, in view of the above, the settled legal proposition.emerges to the effect that the arbitral tribunal cannot travel beyond terms of reference; however, in exceptional circumstances where a party pleads that the demand of another party is beyond the terms of contract and statutory provisions, the tribunal may examine by he terms of contract as well as the statutory provisions. In the absence of proper pleadings and objections, such a course may not be permissible.

13. Be that as it may, in the instant case, a reference to the Tribunal had been made on the basis of statement of facts, claims by the private appellant, defence taken by the respondent-State and rejoinder by the claimant. After completing the formalities of admission and denial by each party in respect of each other's documents and submission of draft proposed issues and respective oral evidence, the Tribunal on 4.1.2003 framed the following issues:

14. The Tribunal considered the relevant agreement provisions as well.as land lease deed, total package documents, minutes of pre-bid meetings and deed authorising collection of toll fee etc., and proceeded.with the arbitration proceedings. The State of Rajasthan had not taken the defence that it was not agreed between the parties to issue the notification barring the traffic through the markets of Bharatpur city. The only issue remained as to whether there was delay in issuance of notification and implementation thereof. In such a fact-situation and considering the settled legal propositions, we are of the view that the District Judge as well as the High Court fell in error considering the issue which was not taken by the State before the Tribunal during the arbitration proceedings.

15. Furthermore, it is a settled legal proposition that the arbitrator is competent to award interest for the period commencing with the date of award to the date of decree or date of realisation, whichever is earlier. This is also quite logical for, while award of interest for the period prior to an arbitrator entering upon the reference is a matter of substantive law, the grant of interest for the post-award period is a.matter of procedure.

16. So far as the rate of interest is concerned, it may be necessary to refer to the provisions of Section 3 of the Interest Act 1978, relevant part of which reads as under:

(Emphasis added).

Thus, it is evident that the aforesaid provisions empower the.Court to award interest at the rate prevailing in the banking.transactions. Thus, impliedly, the court has a power to vary the rate of.interest agreed by the parties.

17. This Court in Krishna Bhagya Jala Nigam Ltd. v. G..Harischandra Reddy & Anr., AIR 2007 Supreme Court 817, while dealing with.the similar issue held as under:

18. In H.U.D.A v. Raj Singh Rana, AIR 2008 Supreme Court 3035, this Court considered various earlier judgments of this Court including Ghaziabad Development Authority v. Balbir Singh, AIR 2004 Supreme Court 2141; Bihar State Housing Board v. Arun Dakshy, (2005) 7 SCC 103; Haryana Urban Development Authority v. Manoj Kumar &.Anr., (2005) 9 SCC 541; H.U.D.A v. Prem Kumar Agarwal & Anr., JT 2008 (1) SC 590 and came to the conclusion:

19. Be that as it may, the High Court while dealing with the rate of interest has relied upon the judgment of this Court in Krishna Bhagya Jala Nigam Ltd. (supra) and thus, there is no scope for us to interfere with the rate of interest fixed by the courts below.

20. The issue raised by the State before this Court in its appeal as to whether the Bharatpur-Deeg patch was an integral or composite part of the project and the private appellant could collect the toll fee on that part also stands concluded by the High Court after considering the entire evidence on record.

21. It is evident from the record as well as the judgments of the courts below that bid documents contained data collected on the flow of traffic on 14th and 15th April, 1994 to find out the viability and requirement of the establishment of Bharatput bye-pass and it included the traffic flow on the Bharatpur-Deeg section also which indicates that this particular patch had also been an integral part of the project.

22. In pre-bid conference the interveners wanted a clarification as to whether the persons using this particular patch of road between Bharatpur-Deeg could be liable to pay toll fee. It was clarified by the respondent-State authorities that the users of this patch would be required to pay the toll fee.

23. Clause 5 of the Concession agreement also provided that Government would levy and charge the fee from all persons using the project facilities. The project was not in parts rather it was a composite and integrated project which included the Bharatpur-Deeg section also. Hence, it was not permissible for the respondent-State to take the plea that persons using such section of the road were not liable to pay the toll fee. We do not find any force in the submission made by Dr. Manish Singhvi, learned counsel for the State that it was not a newly constructed road. However, he is not in a position to deny that the said portion of road had been widened and strengthened by the private appellant and could not be termed as service road which could be used free of charge in view of clause 7 of the concession agreement as service road has been defined as any road constructed temporarily for use of traffic for short period during construction of the main road. Such a facility had to be provided in order to maintain the free flow of traffic during the construction of the road.

24. Thus, in view of the above, the issue raised by the State that Bharatpur- Deeg section of the road was out of the project and the private appellant was not entitled to collect the toll fee on that part of the road, stands settled in favour of the private appellant.

25. Determination of the aforesaid three issues brings us to the entitlement of the private appellant.

(Emphasis added)

26. In fact, the toll fee under the Tolls Act, 1851 is of.compensatory in nature wherein the Government can reimburse itself the amount which it had spent on construction of road/bridge etc. Clause IV(a) of the statutory notification dated 10.2.1997.which entitled the Government to give present road on toll is reproduced below:

(Emphasis added)

It is evident that Clause IV(a) of the Notification dated 10.02.1997 envisages that toll can only be collected as long as total cost of construction and maintenance including interest thereupon is recovered. A person is debarred by law and statutory inhibition as contained in Clause IV(a) of the notification from collection of toll beyond the recovery of cost of construction.

27. Thus, from the above referred provisions, it is evident that toll fee is compensatory in nature and can be collected by the State to reimburse itself the amount it has spent on construction of the.road/bridge etc. The State is competent to levy/collect the toll fee only for the period stipulated under the Statute or till the actual cost of the project with interest etc. is recovered. However, it cannot be a source of revenue for the State.

28. In common parlance, "reimbursement" means and implies restoration of an equivalent for something paid or expanded. Similarly, "Compensation" means anything given to make the equivalent. (See: State of Gujarat v. Shantilal Mangaldas & Ors., AIR 1969 Supreme Court 634; Tata Iron & Steel Co. Ltd. v. Union of India & Ors., AIR 2000 Supreme Court 3706; Ghaziabad Development Authority(Supra); and H.U.D.A v. Raj Singh Rana, (Supra).

29. However, in Dwaraka Das v. State of Madhya Pradesh & Anr., AIR 1999 Supreme Court 1031, it was held that a claim by a contractor for.recovery of amount as damages as expected profit out of contract cannot be disallowed on ground that there was no proof that he suffered actual loss to the extent of amount claimed on account of breach of contract.

30. In M/s. A.T. Brij Paul Singh & Ors. v. State of Gujarat, AIR 1984 Supreme Court 1703, while interpreting the provisions of Section 73 of the Indian Contract Act, 1972, this Court held that damages can be claimed by a contractor where the Government is proved to have committed breach by improperly rescinding the contract and for estimating the amount of damages, court should make a broad evaluation instead of going into minute details. It was specifically held that where in the works contract, the party entrusting the work committed breach of contract, the contractor is entitled to claim the damages for loss of profit which he expected to earn by undertaking the works contract Claim of expected profits is legally admissible on proof of the breach of contract by the erring party. It was further observed that what would be the measure of profit would depend upon facts and circumstances of each case. But that there shall be a reasonable expectation of profit is implicit in a works contract and its loss has to be compensated by way of damages if the other party to the contract is guilty of breach of contract cannot be gainsaid.

31. In B.S.N.L v. Reliance Communication Ltd., (2011) 1 SCC 394, this court held as under:

32. This Court further stated in Oil & Natural Gas Corporation Ltd. v. SAW Pipes Ltd. (Supra):

33. Thus, the case requires consideration in the light of the aforesaid settled legal principles.Undoubtedly, the total construction was for Rs. 13.25 crores. It is evident from the Bid-documents filed by the private appellant that the work was to be executed in two phases and the relevant part thereof reads as under:

PHASE - I

Year Const. Cost (in lacs) Supervisio Charges @ 10% Total (in lacs) Interest 20% Total investment of Strs Upto date investment (in lacs)
1998-99
6/98 75 7.5 82.50 4.12 86.62 86.62
9/98 80 8.0 88.00 8.52 92.52 183.14
12/98 80 8.0 88.00 12.92 100.92 284.06
3/99 80 8.0 88.00 17.32 105.32 389.32
Total 315 31.5 346.50 42.88 389.38 389.88
1999-2000
6/99 110 11.0 121 23.37 144.37 533.75
9/99 120 12.0 132.0 29.97 161.97 695.72
12/99 120 12.0 132.0 36.57 168.57 864.29
3/2000 125 12.50 137.50 43.44 180.94 1045.23
Total 475 47.50 522.50 133.35 655.85 1045.23
Grand Total 790 79.0 869.0 176.23 1045.23 1045.23
PHASE - II

2005-06
6/2005 150 15.0 165 8.25 173.25 173.25
9/2005 150 15.0 165 16.50 181.50 354.75
Total 300 30.0 330 24.75 354.75 354.75

The documents further reveal that phase II work was of worth Rs. 354.75 lacs and it included repairing, maintenance and second layer of bitumen on the entire road. Admittedly, this part of the contract had never been executed by the private appellant. More so, the chart filed by the State of Rajasthan shows that the estimated cost of the work had been recovered by the private appellant as the schedule prepared for repayment tally with the amount collected by the private appellant as toll fee within the stipulated period..

34. In the first phase, the private appellant spent about Rs. 10.45 crores and recovered the said amount with certain profit, though the actual figure i.e. the toll fee recovered has not been disclosed. So far as the second phase is concerned, admittedly, the amount of Rs. 354.75 lacs has not been spent by the private appellant. This issue has been agitated by the State of Rajasthan before this Court in its Counter Affidavit wherein it is stated as under:

35. The aforesaid allegations have not been denied by the private.appellant while submitting its rejoinder Relevant part of the.rejoinder affidavit reads:

Thus, there is no specific denial of the allegations/averments.taken by the State as required by the principle enshrined in Order 8 Rule 5 of the Civil Procedure Code, 1908,

36. It is strange that a person who has not complied with terms of contract and has acted in contravention of the terms of agreement claims that he was entitled to earn more profit. The private appellant cannot be permitted to claim damages/compensation in respect of the amount of Rs. 13.25 crores, as he did not spend the said amount stipulated in the terms of agreement. Private appellant cannot claim the amount of Rs. 7.13 crores for a period of three years for a small patch of 1.25 kilometres out of the total length of the road to the extent of 10.85 kilometres.

37. In fact, the tribunal has dealt with the issue in correct perspective only to the extent the period of delay by which the notification barring the heavy vehicles through market of Bharatpur.had been issued stating as under:

As the notification had been issued, and it was not the responsibility of the State to establish a police chowki etc. to implement the notification, there was no occasion for the tribunal to.proceed further. Therefore, any award in favour of the private appellant in that respect for non-issuance of notification beyond the date of the notification, cannot be held to be justified and the same is liable to be set aside.

38. The State authority has decided to establish a toll road as it was not having sufficient funds. In case the claim of the private appellant is allowed and as the State is not in a position to grant further facility to collect the toll fee at such a belated stage, the purpose of establishing the toll road itself stands frustrated More so, the toll fee cannot be collected to recover the amount never spent by the contractor. It is evident from the discourse in pre-bid meetings of the parties that it had been decided that compensation would be worked out on the basis of investment made by concerned contractor. More so, the statutory notification dated 10.2.1997 provided to recover the cost of construction and maintenance including interest thereon. Therefore, the question of non-execution of work of second phase of the contract becomes very material and relevant to determine the real controversy. The State authorities for the reasons best known to them, did not make reference to the arbitration proceedings for non-execution of the work of the second phase of the contract. However, the relief claimed by the private appellant would prove to be a "windfall profit" without carrying out the obligation to execute the work just on technicalities. We have held in this very case, that the arbitrator cannot proceed beyond the terms of reference and, therefore, the question of considering the non-execution of work of second phase of the work was neither permissible nor possible as it had arisen subsequent to the date of award in the arbitration proceedings.

Be that as it may, in order to do complete justice between the parties and protect the public exchequer, we feel that the matter requires adjudication and reconsideration on the following points by the arbitration tribunal:

Order accordingly.