Holding

The arbitrator did not exceed jurisdiction nor commit misconduct; the award stands, with interest fixed at 9% per annum throughout.

Summary

The Food Corporation of India (FCI) awarded a contract to A.M. Ahmed & Co. for cargo‑handling services without an escalation clause. During the contract, the State Government raised statutory wages, and the contractor sought additional payment for the increased labour cost. An arbitrator was appointed, who allowed the escalation claim and awarded a sum with interest, which the High Court upheld, dismissing objections under Sections 30 and 33 of the Arbitration Act, 1940. FCI appealed, arguing that the arbitrator exceeded his jurisdiction and had committed misconduct. The Supreme Court held that the arbitrator had jurisdiction to consider the wage‑revision claim, did not misconduct himself, and that the award was not vitiated by error. The Court modified the interest component, fixing it at 9% per annum for the entire period, and allowed the appeal in part.

Issues considered

The arbitrator exceeded his jurisdiction by awarding escalation in the absence of an escalation clause in the contract.
Whether the arbitrator committed legal misconduct under Sections 30 and 33 of the Arbitration Act, 1940, justifying setting aside the award.
Whether the award can be set aside on the ground of error of law or fact.
The appropriate rate of interest to be awarded.

Legislation cited

Arbitration Act, 1940s. 30, s. 33

Subjects

arbitrationescalation clauseaward challengelegal misconductinterest ratecontractual wage revisionjurisdictionSection 30Section 33Arbitration Act 1940

Judgment

A FOOD CORPORATION OF INDIA
v.
M/S. A.M. AHMED & CO. AND ANR.
'
OCTOBER 31, 2006

B (DR. AR. LAKSHMANAN AND ALTAMAS KABIR, JJ.)

Arbitration Act, 1940: Sections 30 and 33.

Arbitration award-Challenge of-Legal misconduct of arbitrator-
C Absence of escalatfon clause in the contract-Effect of-Escalation due to
revision of wages-Jurisdiction of arbitrator to go into escalation due to
revision of wages-Corporation gave the contractor a contract relating to
the woi·k of clearing, stevedoring, forwarding, exporting, handling, transport
etc. and delive1y of food grains and other commodities for a period of two
D years-During the currency of the contract the State Government increased
'..;;.<- '
the statutory wages-However, the Corporation rejected the contractor's
claim for review of its case for revision of rates due to revision of wages-
Arbitrator allowed the escalation in the claim of the contractor and awarded
a certain sum with interest-Award made rule of the Court-Held: Escalation
is normal and a routine incident arising out of gap of time in this inflationary:
E age in pe1forming any contract of any type-The arbitrator has fozind that
there was escalation by way of statutmy wage revision and, therefore, he
came to the conclusion that it was reasonable to allow escalation under the
claim-The award is, therefore, not vitiated by any error of fact or law on
the face of the record and that the arbitrator has not committed any
F misconduct.
The appellant-Corporation gave the respondent-contractor a contract
relating to the work of clearing, stevedoring, forwarding, exporting, handling,
transport etc. and delivery of food grains and other commodities for a period
of two years from 8.4.1981 to 7.4.1983. On 1.9.1981, the State Government
G issued a notification in the Gazette notifying the settlement arrived at between
the Port Users and Cargo Handling labour of the Port. The respondent-
contractor pointed out the revision of wages and asked the appellant to review
its case for revision of rates. However, the claim for escalation made by the
respondent was rejected by the appellant as there was no escalation clause in

H 148
FOOD CORPRN. OF INDIA t'. A.M. AHMED & CO. 149

the contract. A
The respondent filed a petition for appointment of an arbitrator in the
dispute regarding escalation. The High Court directed the Managing Director
of the appellant-Corporation to appoint an arbitrator. The arbitrator passed
an award for a certain sum with interest@ 9% p.a. from 8.8.1989 till date of
the award and future interest@ 12% p.a. till date of decree or realization. B
The High Court dismissed the objections filed by the appellant under
Sections 30 and 33 of the Arbitration Act, 1940 and made the award rule of
the court. Hence the appeal.

Allowing the appeal in part, the Court c
h HELD: 1. The award is not vitiated by any error of fact or law on the
face of the record and that the arbitrator has not committed any misconduct
within the meaning of the Arbitration Act, 1940. The High Court has correctly
dismissed the objection raised by the appellant on the issue of absence of any D
escalation clause in the contract. (159-B, Cl

2.1. The Corporation had raised a specific question ·before the
arbitrator that escalation in rates claimed by the contractor could not be
granted for the simple reason that the agreement did not provide for any grant
of the escalated rates during the tenure of contract and hence no enhanced E
rates other than the rates agreed upon can be granted. The arbitrator
specifically rejected the above contention on the basis of the subsequent
acceptance of responsibility by the appellant. (162-B, CJ

2.2. The arbitrator has not mis-conducted himself and that the award
has been passed in consonance with the principles of natural justice. The High F
Court has also upheld the award of the arbitrator rightly holding that there
is no error apparent on the face of the record. [162-DI

3. Escalation is normal and a routine incident arising out of gap of time
in this inflationary age in performing any contract of any type. In this case, G
the arbitrator has found that there was escalation by way of statutory wage
revision and, therefore, he came to the conclusion that it was reasonable to
allow escalation under the claim. Once it was found that the arbitrator had
jurisdiction to find that there was delay in execution of the contract due to
the conduct of the appellant, the Corporation was liable for the consequences
of the delay, namely, increase in statutory wages. Therefore, the arbitrator · H
150 SUPREME COURT REPORTS [2006) SUPP. 8 S.C.R.

A had jurisdiction to go into this question. He has gone into that question and
has awarded as he did. The arbitrator by awarding wage revision has not mis-
conducted himself. The award was, therefore, made rule of the High Court
rightly. (165-E, F, GI

Hyderabad Municipal Corporqtion v. M. Krishnaswami Mudaliar &
B Anr., (1985] 2 SCC 9 and P.M. Paul v. Union of India, AIR (1989) SC 1034,
relied on.

State ofOrissa v. Sudhakar Das, (2000) 3 SCC 27, S. Harcharan Singh
v. Union of India, (1990) 4 SCC 647, Associated Engineering Company v.
C Govt. ofA.P., (1999) 4 SCC 93, Rajasthan State Mines and Minerals Limited
v. World Engineering Enterprises, (1999) 9 SCC 283, Ramachandra Reddyv.
State of Andhra Pradesh, (2002) I SCC 659 and State of Rajasthan v. New
Bharat Construction Company, (2002) I SCC 659, referred to.

CIVIL APPELLATE JURISDICTION : Civil Appeal Nos. 5244-5246 of
D 2003

From the Judgment and Final Order dated I 3-8-2002 of the High Court
of Judicature Madras in O.S.A. Nos. 157, 158 and 159/1997

K.Mohan, A.S.G., Ajit Pudussery and K. Vijayan for the Appellant.
E
R. Anand Padmanabha and G. Ramakrishna Prasad for the Respondents.

The Judgment of the Court was delivered by

DR. AR. LAKSHMANAN, J. The appellant - Food Corporation oflndia
F (hereinafter called th~ 'FCI') preferred the above appeals against the judgment
and final order dated I 3.08.2002 passed by the Division Bench of the High
Court of Judicature at Madras in OSA Nos. 157-159of1997 whereby the High
Court dismissed the appeals filed by the FCI and passed a decree in terms
of the Award together with interest @ 12% p.a. from the date of the decree
till the date of the payment.
G
The present dispute and differences arise out of the contract relating
to the work of clearing, stevedoring, forwarding, exporting, handling and
transport contract and delivery of foodgrains, sugar, flour, for the users, gift,
hospital/suppliers and other commodities and gunny/twine bales imported at
H the Port ofTuticorin at the FCI Storage Godowns in and around Tuticorin for
a period of two years from the date of contract i.e. 08.04.1981 in pursuance

'·
FOOD CORPRN. OF INDIA v. A.M. AHMED & CO. [AR. LAKSHMANAN, J.] 151
of Work Order No. SPC.l(l)/80 dated 20.04.1981 issued by the Senior Regional A
Manager, FCI, Madras. The respondent-contractor/claimant submitted his offer
on 20.02.1981 along with covering letter. On 07.04.1981, a communication was
issued by the FCI to the claimant accepting their offer which had been
reduced through negotiation to 397% ASOR. According to the FCI, a perusal
of the said tender document shows that in addition to cargo handling work B
at the Port, the respondent-contractor had to perform various other duties
including unloading of food grains from railway wagons, machine-stitching of
food grain bags, loading into trucks and other vehicles, etc. etc. According.
to the FCI, the tender agreement did not provide for any escalation clause and
also stated that other than the rates agreed between the parties, the contractor
would not be entitled to any other payments. On 01.09.1981, the Tamil Nadu C
Government issued a notification in the Gazette notifying t~e settlement
arrived at between the Port Users and Cargo Handling labour of Tuticorin Port
regarding implementing of the settlement dated 04.01.1981. The respondent,
by his letter dated 07.09.1981 to the FCI, pointed out the revision of wages
and asked the FCI to review its case for revision of rates and pass necessary
orders for revising the rates. The claim for escalation made by the respondent D
was rejected by the FCI by its letter dated 14.03 .1984. The respondent filed
O.P. No. 49 of 1986 in the Subordinate Court, Tuticorin for appointment of an
Arbitrator in the dispute regarding escalation. The said Court passed an order
appointing an Arbitrator in the matter. The High Court of Madras modified
the order passed by the Subordinate Court and directed the Managing Director E
of the FCI to appoint an Arbitrator in terms of contract between the parties.
The special leave petition filed against the aforesaid order was dismissed by
this Court on 05.05.1989. The special leave petition was filed by the FCI being
aggrieved by the finding that the dispute between the parties was an arbitrable
dispute, since the only question to be determined was payment of escalation
which was not provided for in the contract, therefore, could not have been F
referred to arbitration.

Following the dismissal of the special leave petition, the FCI appointed
respondent No. 2 Mr. 8.S.Hegde Joint Secretary and Legal Advisor Government
of India as Sole Arbitrator. Respondent No. I filed Statement of Claim raising G
several claims. The FCI filed a counter claim. The Arbitrator, on 10.04.1992,
passed the Award awarding a sum of Rs.57, I0,517/- and Rs. 22,84,207/- under
... claims (i) and (ii) respectively with interest @ 9% p.a. from 08.08.1989 till date
of the award and future interest @ 12% p.a. till date of decree or realization.

The FCI filed 0.P.No. 350of1992 under Section 14(2) of the Arbitration H
152 SUPREME COURT REPORTS [2006] SUPP. 8 S.C.R.

-· - A Act praying for a direction to the Arbitrator to file the Award ·before the High
Court· so as to enable it to challenge the same. Respondent No. 2 filed the
Award before the Sub-Court Tuticorin on 30.06.1992. The claimant filed.a
petition before the Subordinate Court for making the Award rule of Court and
a decree in terms of the Award. The Division Bench of the Madras High Court
B in appeal preferred by the FCI against the dismissal of O.P. No. 350 of 1992
directed withdrawal of the O.J>. filed before the Tuticorin Court to the High
Court. The FCI, upon being informed by the Registry of the High Court
regarding transfer of OPs and their re-numbering as O.P.Nos. 441 and 441A
of 1993, filed objections to the Award under Sections 30 and 33 of the
Arbitration Act which was numbered as O.P. No. 697of1993. A learned Single
C Judge of the High Court dismissed the objections filed by the FCI by holding
the same to be time-barred and made the Award as rule of Court and passed
decree in terms of the Award. The FCI preferred an appeal to the Madras High
Court which was dismissed by the Division Bench o.f the said Court on
14.07.1997. The High Court, vide judgment and order in Special Leave Petition
Nos. 21377-21379 of 1997, set aside the dismissal and remanded the matter
D back to the Division Bench of the High Court for disposal on merits. The
Division Bench, after dismissing the objections filed by the FCI, passes a
decree in terms of the Award together with interest@ 12% p.a. from the date
of the decree till the date of the payment. Aggrieved by the dismissal of the
appeal by the High Court, the FCI preferred the above appeals.
E
We heard Mr. K. Mohan, learned senior counsel and ASG appearing for
the appellant and Mr. R. Anand Padmanabha, learned counsel for respondent
No. 1.

Mr. K. Mohan, learned senior counsel appearing for the appellant, made
F the following submissions:

l. In the absence of an escalation clause in the contract, the
Arbitrator could not have awarded any amount towards escalation
and, therefore, the Arbitrator has erred in awarding and the
courts below in upholding the escalation awarded by the
G Arbitrator;
2. The High Court completely erred in not noticing that Clause 7 of
the contract deals with payment of minimum wages and this is
different from the wage increase in the present case which is not
....
minimum wages but are wages prescribed through settlement
H and, therefore, erred in holding that there was an implied provision
FOOD CORPRN. OF INDIA v. A.M. AHMED & CO. [AR. LAKSHMANAN,J.] 153
in the contract to pay the wages; A
3. The High Court ought not to have taken into account the ex-
gratia payment made by the Corporation to bypass the absence
of the escalation clause and in holding that despite absence of
escalation clause, the contractor would be entitled to escalation.

4. Relying on the judgment of this Court reported in [2000] 3 SCC B
27 State ofOrissa v. Sudhakar Das (dead) by LRs submitted that
in the absence of any escalation clause, an arbitrator cannot
assume any jurisdiction to award any amount towards escalation
and, therefore, that part of the award which grants escalation
charges is clearly not sustainable and suffers from patent error; c
5. Relying on the judgment of this Court reported in [1990] 4 SCC
647 S. Harcharan Singh v. Union of India for the proposition
that only when there is provision for variation the arbitrator can
award escalation and since there was no such clause the arbitrator
, has exceeded his jurisdiction; D
6. Associated Engineering Company v. Govt. of A.P., reported in
[1999] 4 SCC 93 was relied on for the purpose that the award in
question was rendered beyond the limits of contract and that the
arbitrator cannot depart from the contract and award;
7. He placed strong reliance on Rajasthan State Mines and Minerals E
Limited v. World Engineering Enterprises and Ors, [1999] 9 SCC
283 for the very same proposition that the award cannot be
against the stipulation in the contract;
8. [200 I] 4 SCC 241 Ramachandra Reddy v. State ofAndhra Pradesh
was cited for the proposition that the escalation in rates of labour F
and materials can only be granted on the basis of agreement;
9. He also relied on [2002] l SCC 659 State of Rajasthan v. New
Bharat Construction Company for the proposition that award of
9% interest for the period 08.08.1989 to l 0.04.1992 and 12% interest
for the future is excessive. He placed strong reliance on para 8 G
of the said judgment wherein this Court reduced the rate of

-· interest from 18% and 15% to 6% through out;

10. He also drew our attention to the award passed by the arbitrator,
orders passed by the different courts and also the relevant clauses
in the agreement with reference to the appointment of wages etc.; H
154 SUPREME COURT REPORTS (2006) SUPP. 8 S.C.R.

A I I. Concluding his argument, Mr. Mohan submitted that the High
Court has completely erred in not noticing that the award suffers
from the gross errors apparent on the face of the record and that
the arbitrator has not gone into the evidence as to the amount
of enhanced wages actually paid by the respondent to the workers
and has merely awarded an assumed amount without giving any
B reason as to how the amount was arrived ·at.

Mr. Anand Padmanabha, learned counsel, made the followin~
submissions by way of reply to the arguments advanced by the appellant's
counsel:

C I. there is no specific bar to the claim for escalation being made and
that the conduct of the FCI when it requested the claimant to
continue their work would amount to promissory or equitable
estoppel;

2. the claim for escalation is justifiable on the ground that the
D claimant could never have anticipated the sudden wage increase
and other statutory obligations imposed by the Government under
any stretch of imagination while tendering for the work as early
as February, I 981. It is further submitted that the claimant had
quoted for the work based on the then prevailing wages at the
time of tender who by providing them with a marginal increase
E for feasibility of execution.
3. The statutory obligation to pay higher wages arose under the
notification published in the Tamil Nadu Gazette extraordinary
published in Part-6 Section 3a dated 0 I.09.198 I marked as Exhibit-
C5.
F
4. The above claim of unawareness of increase in wages consequent
to Tuticorin being declared as a major Port entailing higher wages
on par with wages being paid to dock labour in other major ports.

5. Owing to the enonnous losses that mounted up, the claimants
G had represented the matter to the FCI reiterating the grave and
disastrous monetary losses, sustained by them and requesting
for relief by neutralizing the increased operational cost and its
payment. Thereafter, ~he FCI had appointed a series of committees
who had gone into the requests made and although the committees
have recognized the need to neutralize the increase of extra costs
H
FOODCORPRN. OF INDIA v. A.M. AHMED & CO. [AR. LAKSHMANAN, J.] 155
. '·
incurred by the claimants on labour, as it has occasioned by an A
order of Government, but to the dismay of the claimant, no
adequate relief was granted by the FCI. Various representations
were made by the claimants to the official hierarchy of the FCI
as early from 07.09.1981, 06.11.1981, 23.12.1981 during the currency
of the contract and thereafter effective persuasion continued
since then. Notwithstanding the fact that the FCI hierarchy was
B
fully convinced to be just and proper in neutralizing these losses,
it was only marginally met with by the Zonal Manager (South)
who had reimbursed a paltry sum as an interim relief and
recommended for sanction of appropriate escalation to be granted.
Although the claimants were given the sang~ine hope for their c
entitlement as genuine and reasonable, no final decision was
taken during the tenure of contract including extended period of
three months which the claimant was called upon to continue for
the storage operations.

6. Large amounts were expended by the claimants to meet this extra D
cost incurred to pay the new wage structure and additional
benefits given to Jabour as per the directives of the Government.
The unexpected expenditure incurred by the wage hike,
necessitated immediate requirement of enormous outlay which
crippled the claimants resources. Consequently, the claimants
had to raise additional funds from private sources at exorbitant E
interest to meet these contingencies. Instead of resorting to a
cease work out of frustration in contract by a supervening event
which was not within the contemplation of the parties at the time
of entering into the contract, the claimants had carried on with
the work effectively making enhanced wage payments in sizable
F
amounts on the strength and faith of the assurance given by the
FCI hierarchy. The huge expenditure· incurred in mobilizing
resources at exorbitant interest to meet the emergent situatiOn
had created additional burden on the claimants by way of
accumulation of interest alone, owing to the indecisions of the
FCI in settling this matter. Therefore, the claimants have claimed G
to 10% contractor's profit or interest as damages as the case may
be on the amounts clai1~ed for reimbursement. Ever since
07 .09.1991, various representations submitted by the claimants
seeking redressal of their grievances, the matter remained pending
for want of final decision. Although the claims of the claimants
H
156 SUPREME COURT REPORTS [2006] SUPP. 8 S.C.R.

A were justified and had every reason for granting the same as
recommended by the FCI officials at, different levels, of late, it
has been turned down and denied to the claimants. Therefore1 •.
disputes and differences had arisen between the parties to the
subject contract.

B 7. The claimants acted upon and carried on the work on the strength
and faith of the assurance given by the FCI to meet the claimants
demand and in the interest of smooth working of the contract and
in order to avoid the stoppage of work a decision was taken to
grant enhanced rates w.e.f. 01.09.1981.

C We have carefully considered the rival submissions with reference to
the records, pleadings, judgments and with reference to the rulings cited by
both the sides.

This Court, while issuing notice dated 13.12.2002. in the special leave
petition passed the following order
D
"ORDER"

Learned Attorney General argues that there. is no clause providing
for escalation to reimburse the expenses-incurred by the contractor in
the contract agreement. In spite of the same the Arbitrator has awarded
E escalation in expenses.

Issue notice on SLPs as also on the prayer for interim relief."

In our opinion, the argument of the learned senior counsel for the FCI
that there is no clause in the contract providing for escalation to reimburse
F the expenses and, therefore, the arbitrator had exceeded his jurisdiction has
no substance. The issue of jurisdiction of the arbitrator to go into the claim
of the claimant towards compensation and neutralization· of the extra
expenditure incurred on account of statutory wage revisions had already
concluded in the earlier proceedings arising out of the application filed by the
claimant firm under Section 20 of the Arbitration Act for appointment of the
G arbitrator. The FCI in the said proceedings specifically contended that there
was no escalation clause in the co~tract, the claim of the claimants for
compensation on account of wage revision should not be referred to arbitration
and that the said claim was non~arbitrable. However, the learned Subordinate
Judge, Tuticorin by order dated 16.02.1987 in 0.P. No. 49of1986 rejected the
H said contention holding that the said claim was arbitrable. On appeal filed by

.1
FOODCORPRN. OF INDIA v. A.M. AHMED & CO. [AR. LAKSHMANAN, J.] 15 7
the FCI before the High Court the High Court also confirmed the same by A
order dated 01.03.1989 in CMA No. 291of1987. This.Court also dismissed
the Special Leave Petition No. 5213 of 1989 filed by the FCI by order dated
05.05.1989. Thus, the FCI is barred by resjudicata from raising the same issue
again in the present proceedings.

Even on merits, the claimants firm is entitled to be paid the said B
compensation, in view of clause 7 of the contract dealing with payment of
wages.

PAYMENT OF WAGES TO WORKERS:

The contractors shall pay not less than minimum wages to the workers C
engaged by them on either time-rate basis or piece rate basis on the work.
Minimum wages both for the time rate and for the piece rate work shall mean
the rate(s) notified by the appropriate authority at the time of inviting tenders
for the work. Where such wages have not been so notified by the appropriate
authority, the wages prescribed by the Senior Regional manager as minimum D
wage shall be made applicable. The contractors shall maintain necessary
records and registers like wage book and wage slip etc., register of unpaid
wages and Register of fines and deductions giving the particulars as indicated
in appendix VI. The minimum wages prescribed for the time being for piece-
rate and time-rate workers are as indicated below:-
E
(I) Time Rate

Worker (Male) : Rs.5.50 (Rupees Five and paise fifty only per
day)

Time Rate

Worker (Female): Rs.5.50 (Rupees Five and paise fifty only per
F
day)

(2) Piece rate

Workers: Rs.5.50 (Rupees Five and paise fifty only per day)"
G
It is also submitted that in the subsequent correspondence with the
claimant firm also the FCI agreed to pay the expenditure incurred on account
of wage revision. In this regard, the learned Arbitrator after elaborately
considering the correspondence between the parties has found in the impugned
award as follows:-
H
158 SUPREME COURT REPORTS [2006] SUPP. 8 S.C.R.

A "Whatever may be the arguments now put forth by the respondents,
from the admitted facts, it is borne out and evident that the respondents
had accepted their responsibility to compensate the extra expenditure
sustained by the claimants. Having not made any reservations about
its responsibility to neutralize the extra expenditure of the claimants
by enhancing the contract rates, the respondents had accepted its
B liability after an exhaustive study of the matter, including the aspects
of the arguments now put forth-by the respondents and finally accorded
sanction for enhancement in the contract rates. Since the relief was
meager and inadequate, the claimants again appealed for the balance
due to them which too was not protested or denied but on the
c contrary was acted upon. The respondents sincerely wanted to know
the actual expenditure incurred by the claimants and its bonajides, for
which purpose the District Officers at Tuticorin were deputed . in
Oct.81 for verification of payments vouchers a,nd other relevant records
connected wirh the discharge of one Vess.el prior to 01.09.1981 and
one after 01.09.1981. This aspect is very relevant and has a direct
D bearing on the issues relating to claims I & II.

ft is borne out from the records and argued by the claimants that
soon after the completion of the claimant's contract, the next contract
was awarded b}' the Food Corporation to d Stevedoring Agency for
I 297% ASOR for port operations alone (vi de Ex. C24) as against the
E claimants' rate of 397% ASOR for port as well as godown and
railhead operations combined, which was offered prior to the
introduction of the new working pattern and increased wages in
labour rates. According to the claimants, the tenders for godown
operations were separately called for and was awarded by the Food
F Corporation at a rate o: 777% ASOR which was the lowest tender
received. The percentage and the figures of this statement submitted
by the claimants are accepted to be correct by the respondents FCI.
The claimants reiterated that this will be ample justification and
testimony to prove and establish the rates that prevailed for the port
operations and godown operations in Tuticorin at the time of execution
G of the work by the claimants and thereafter. The rates are reflected in
terms and ASOR by virtue of the acceptance of these percentage by
the Food Corporation for the subsequent years' work obtained as the
lowest offer on the competitive tenders invited by the Food
Corporation. It was also stated that the other users of Tuticorin Port
H viz. Mis SPIC and Railways had also accepted the revised notification
FOOD CORPRN. OF INDIA v. A.M. AHMED & CO. [AR. LAKSHMANAN, J.) 159
as mandatory and binding on all Port Users being statutory in character A
and accordingly had reimbursed the difference by way of escalated
rates fully neutralizing the excess expenditure incurred by its
contra~tors. The claimants had also produced documents by way of
Exhibits to this effect as certificates issued by the respective
organizations for having reimbursed the difference of escalated rates. B
Respondents do not dispute these aspects, but state that the payment
by other Port Users cannot fasten them with any similar liabilities nor
is it binding on them."

We have carefully perused the award. The award, in our view, is not
vitiated by any error of fact or law on ·the face of the record and that the C
arbitrator has not committed any misconduct within the meaning of the Act.
The High Court has also in para 19 of the impugned judgment correctly
dismissed the objection raised by the FCI on the issue of absence of any
escalation clause in the contract while rendering the following finding, Raviraja
Pandian, J. speaking for the Bench, held;
D
"From the payment of wages clause (Clause l) of the letters referred
to above and also of the fact that, a committee of the High Officials
of the appellant has been constituted to go in depth of the factual
position as to the payment of wage hike as per che notification dated
Oi.09.1981 and the further fact that, the committee has gone into and
· submitted a report as to the actual payment· and also the interim E
payment made by the appellant would clearly prove that, the appellant
had by the above said actions alive to the circumstance of payment
of enhanced wages considered the just demand of increase of rates
and not stick to his stand that there was no escalation clause in the
agreement and as such the claim of the respondents not maintainable. F,
Hence, we are of the view that, the learned counsel for the appellant
is not well placed in the contention that, the arbitrator has mis-
conducted himself and passed an award for escalation of price without
their being any clause for escalation in the contract and the same has
to be rejected and is rejected."
G
The respondent claimant was awarded the contract for carrying out the
work of clearing, forwarding, :>tevedoring etc. from the Ports at Tuticorin for
the period and from 08.04.1981to07.04.1983. During the currency of the
contract w .e.f. 30.08.1981, the wages of the workmen employed in the ·cargo
handling was sharply increased to almost three-fold consequent upon the
settlement arrived under Section 12(3) of the Industrial Disp1 tes Act. The H
160. SUPREME COURT REPORTS [2006] SUPP. 8 S.C.R.

A Stare Government notified the same in the Gazette on 01.09.1981. In view of
the statutory increase in the wages payable to the port labourers, the claimant
made a representation dated 07.09.1981 to the FCI to revise the rates in
respect of the contract besides pointing out that the Claimant would be
constrained to discontinue the work as the work at the contracted rates would
result in large loss. The claimant again wrote a letter on 23.12.1981 to the FCI
B detailing the. handling cost in view of the revised wage pattern and for early
order on the representation. In the said letter, the claimant has also mentioned
that it had offered its explanations on 22.12.1981 to the Committee appointed
by the FCI and visited the FCI in this behalf. The Committee constituted by
the FCI made a report dated 15.0l.1982 to the FCI after inspecting the place
C of contract and after examining the issue. The said Committee recommended.
for allowing the escalated rates specified therein, supplementing with details.
The first respondent wrote another letter 09, 19 .0 l.1982 expressing anguish
over the non-grant of relief claimed and inability to carry on the works from
25.01.1982 as notified in the letter dated 25.12.1982. The FCI in its reply dated
21.01.1982 stated as follows:
D
"The Committee's report is under examination. You are requested not
to bring about any stoppage in the work as contemplated by you as
this will complicate matters. "

The claimant was also served a phonogram dated 23.01.1982 which
E reads thus:
"Your request for escalation of rates is under consideration of the
Zonal Manager. Pending decision, request continue work without
stoppage."

F The claimant was acting and carrying on the contract work without
bringing any stoppage of work from 25.0l.1982 incurring heavy loss, as it was
thus made to believe that it would be adequate!} compensated.

While the matter stood so, the FCI appointed Mr. P.N.Chinnaswamy,
Joint Manager, New Delhi to look into the matters relating to the demand of
G the contractor for increase in rates consequent upon the implementation of
the settlement arrived at between the representatives of Port Users and cargo
handling labour in Tuticorin which is effective from 01.09.1981. Mr.
'Chinn~swamy in his report dated 17 .02.1982 under the head "Final
~ecommendati.:ms" stated as follows:

H
- FOOD CORPRN. OF INDIA v.. A.M. AHMED & CO. [AR. LAKSHMANAN, J.] 161

''There is definitely a necessity for escalating the rates of the present
contractors. Contractors were not aware of the definite shape of
A

matters to take place when they submitted their tender initially in
February 1981. Enhanced rates of payment have become statutory as
the scheme has also been published in the Gazette consequent upon
settlement of 31.08.198 l.." He recommended for 962% over SOR for
the operations at New Port and 1108% over SOR for the Operations
B
at Old Port at Tuticorin instead of 397% ASOR originally agreed for
both the ports."

The claimant did not get any response from the FCI even after the
report of Mr. P .N.Chinnaswamy, a letter dated 24.02.1982 was sent to the FCI C
that it would become impossible for the contractor to continue the work ifthe
issue was not settled as the FCI did not keep the promise that the issue would
be settled by 04.03.1982.

The FCI by its letter dated 28.03.1982 communicated the contractor as
follows: D
"With reference to your telephonic information given, that you will be
stopping the work from Monday the 29th March, 1982 at the port and
at Godowns in the absence of a decision on your demand for escalation
of rates, please be Informed that, our Regional office at Madras have
already taken up the matter with Head Office, New Delhi and a decision E
is awaited. In the meantime please arrange to continue the work at
the port as well as at the godowns without any interruption. "

However, the FCI by its letter dated 13.04.1982 accorded sanction of
488% of ASOR instead of 397% ASOR in relation to old port operations and
which would workout to an increase of91% only and 430% of ASOR instead F
of 397% of ASOR for the operations at new port and which would come to
an increase of 31% only.

The claimant accepted the same under protest and without prejudice by
its letter dated 17.04.1982 and requested the FCI, New Delhi for review of the
decision:. of the above grant of marginal relief. G
It is seen from the records that the contract period was from 08.04. l 98 l
to 07 .04.1983 for a period of two years. Wage revision came into effect from ·
01.09.1981. From 07.09.1981 to 28.02.1984, the contractor made various
representations during the currency of the contract. The FCI did not allow the
H
162 SUPREME COURT REPORTS (2006) SUPP. 8 S.C.R.

A contractor to discontinue the contract work during the currency of the contract
promising that the revision of wages is under their consideration. It is stated
by the contractor that they had handled about I .68 lacs metric tones of
foodgrains at both the ports incurring huge loss and after the contractor had
completed the performance of the contract the FCI by its letter dated I 4.03.1984
informed the contractor that the request for escalation of rates had not been
B agreed to by their Head Quarters, New Delhi which compelled the contractor
to approach the court for redressal of its grievances.

The Corporation had raised a specific question before the arbitrator that
escalation in rates claimed by the contractor could not be granted for the
C simple reason that the agreement did not provide for any grant of the escalated
rates during the tenure of contract and hence no enhanced rates other than
the rates agreed upon can be granted~ The learned arbitrator specifically
rejected the above contention on the basis of the subsequent acceptance of
responsibility by the FCI. _,.,·

D In our view, the arbitrator has not mis-conducted himself and that the
award has teen passed in consonance with the principles of natural justice.
The High Court of Madras has also upheld the award of arbitrator rightly
holding that there is no error apparent on the face of the record.

As aln:;ady noticed, the subject matter relates to the performance of the
E contract between the periods from 08.04.198 I to 07.04. 1983. Now that 23 years
and odd had already elapsed since the contract period and that the contractor
is being prevented by the FCI to receive the monies spent by him as awarded
by the arbitrator. It is also seen from the records that the quantum claimed
by the respondents was never disputed by the FCI and it is an· admitted fact
F that the wage revision.came into force w.e.f. 01.09.1981 and the contractor firm
had paid the workers revised wages from 01.09.1981.

It was argued by Mr. Mohan that the award of interest @9% for the
period 08.08.1989 to 10.04.1982 and 12% for the future is excessive and in
support of the said contention 2002 (I) SCC 659 was relied on. During the
G pendency of the appeal, this Court while granting special leave directed the
FCI to deposit 50% of the awarded amount which cannot be withdrawn by
the respondent-contractor. It is stated in the I.A. Nos. 4-6 of2003 that the FCI
had deposited only a sum of Rs.39,97,362/- on 22.0~.2003 which is 50% of the
principal amount in the award and that the FCI had not deposited 50% of the
total amount awarded which includes the principal amount of Rs.79,94,724/-
H and interest @ 9% p.a. from 08.08.1989 till date of publication of the award
FOODCORPRN. OF INDIA v. A.M. AHMED & CO. [AR. LAKSHMANAN, J.] 163

i.e. l 0.04.1992 and future award@ 12% p.a. till the date of realization. Therefore, A
an appli<;ation was moved to pass appropriate orders directing the FCI to
deposit the balance of the amount as per the directions of this Court dated
25.07.2003. In clarification of the order dated 25.07.2003, this Court directed
the FCI to deposit half of the amount awarded by the arbitrator with interest
and permitted the contractor to withdraw the said amount on furnishing bank B
guarantee of a nationalized bank to the satisfaction of the Registrar of this
Court. 3 months time was granted for depositing the amount.

Pursuant to the Court's order, an amount of Rs.l ,04, 10,664/- has been
deposited and kept in FD and the same is renewed from .time to time.
Accordingly, the amount has been released to the contractor on their submitting C
the bank guarantee to cover the entire amount. However, it was alleged that
the bank guarantee submitted on 12.08.2005 has since expired on 15.08.2006
·• and that the contractor has not taken steps to submit fresh bank guarantee
to cover the amount. The contractors are liable for the consequences theretJf.
In the circumstances, the FCI prayed for a direction to produce fresh bank
guarantee or to renew the existing bank guarantee so that the amount is D
secured as per the directions of this Court. On 31.08.2006, the Contractor filed
extended bank guarantee and the validity of the same is up to 15.02.2007.

Two judgments of this Court on escalation and legal misconduct of the
arbitrator can be beneficially referred to, followed and applied to the case on
hand. E
The first judgment is in Hyderabad Municipal Corporation v. M
Krishnaswami Mudaliar & Anr., [1985] 2 SCC 9. The only question argued
by the counsel for the Hyderabad Muncipal Corporation was that the
respondent contractor was not entitled to claim 20% extra over and above the F
rates originally agreed upon between the parties under the contract. Under
the contract, drainage work in question was entrusted to the respondent and
under the terms of the contract the work was to be completed by the contractor
within a period of one year. Admittedly, at the instance of the Executive
Engineer, PWD due to financial difficulties less budget having been provided
for in the year in question, therefore the respondent-contractor was requested G
to spread over the work for two years more that is to say to complete the same
in three years but the contractor was agreeable to spread over the work for
two years as suggested on condition that extra payment will have to be made
to him in view of increased rates of either material or wages. The Government
did not intimate to the contractor that no extra payment on account of H
164 SUPREME COURT REPORTS (2006] SUPP. 8 S.C.R.

A increased rates would be paid to him or that he will have to complete the work
on the basis of original rates. In fact, no reply was sent by the Government
-
l

and a studied silence was maintained by the Government in regard to the
contractor's demand for extra payment, in spite of several reminders in that
behalf, till the contractor actually completed the work during the spread over
B period. After completion of work, the contractor submitted his final bill claiming
20% extra over and above the. rates originally agreed upon between the
parties. The Government stated that he was not entitled to increased rates.
The High Court, after considering the correspondence exchanged between
the parties has taken the view that the government was liable to make extra
payment for the work done as there was no dispute that the rates of material,
C etc. had increased during the extended period of two years and the contractor
was entitled to such extra payment. This Court, after considering the relevant
material on record, was also of the view that both in equity and in law the
contractor is entitled to receive extra payment and the High Court was right
in deciding the question in contractor's favour. This Court held that the
D liability to make this extra payment has been property saddled on the Municipal
Corporation.

The second judgment is in P.M Paul v. Union of India, AIR (1989) SC
1034. In this case, the dispute that was referred to the arbitrator was as to
who is responsible for the delay, what are the repercussions of ithe delay in
E completion of the building and how to apportion the consequences of the
responsibility. The arbitrator found that there was escalation and, therefore,
he came to the conclusion that it was reasonable to allow 20% of the
compensation under the claim. He accordingly allowed the same. Counsel
..
appearing for the Union of India submitted before this Court that the arbitrator
had granted a sum of Rs. 2 lakhs as escalation charges and cost in the
F absence of escalation clause was not a matter referred to the arbitrator. In
other words, it was urged that the arbitrator had travelled beyond his
jurisdiction in awarding the escalation cost and charges. This Court in
paragraphs 11 & 12 of the judgment held thus:

11. It is well-settled that an award can only be set aside under
G Section 30 of the Act, which enjoins that an award of an arbitrator/
umpire can be set aside, inter a/ia, ifhe has misconducted !himself or
the proceeding. Adjudicating upon a matter which is not the subject-
· matter of adjudication, is a legal misconduct for the arbitrator. The
dispute that was referred to the arbitrator :-vas, as to who is responsible
H for the delay, what are the repercussions of the delay in completion
FOODCORPRN. OF INDIA 11. A.M. AHMED & CO. [AR. LAKSHMANAN, J.] 165
of the building and now to apportion the consequences of the A
responsibility. In the objections filled on behalf of the respondent, it
has been stated that ifthe work was not completed within the stipulated
time the party has got a right for extention of time. On failure to grant
extention of time, it has been asserted, the contractor can claim
difference in prices.
B
12. In the instant case, it is asserted that the extension of time was
granted and the arbitrator has granted ·20% of the escalation cost.
Escalation is a normal incident arising out of gap of time in this
inflationary age in performing any contract. The arbitrator has held
that there was delay, and he has further referred to this aspect in his C
award. The arbitrator has noted that Claim I related to the losses
caused due to increase in prices of materials and cost of labour and
transport during the extended, period of contract from 9.5 .1980 for the
work under phase I, and from 9.1 1.80 for the work under phase 11. The
total amount shown was Rs. 5,47,618.50. After discussing the evidence
and the submissions the arbitrat<'r found that it was evident that there D
was escalation and, therefore, he came to the conclusion that it was
reasonable to allow 20% of the compensation under Claim I, he was
accordingly allowed the same. This was a matter which was within the
jurisdiction of the arbitrator and hence, the arbitrator had not
misconducted himself in awarding the amount as he has done.
E
The above two cases, in our opinion, squarely apply to the facts and
circumstances of the case on hand.

Escalation, in our view, is normal and routine incident arising out of gap
of time in this inflationary age in performing any contract of any type. In this F
case, the arbitrator has found that there was escalation by way of statutory
wage revision and, therefore, he came to the conclusion that it was reasonable
to allow escalation under the claim. Once it was found that the arbitrator had
jurisdiction to find that there was delay in execution of the contract due to
the conduct of the FCI, the Corporation was liable for the consequences of
the delay, namely, increase in statutory wages. Therefore, the arbitrator, in our G
opinion, had jurisdiction to go into this question. He has gone into that
question and has awarded as he did. The Arbitrator by awarding wage
revision has not mis-conducted himself. The award was, therefore, made rule
of the High Court, rightly so in our opinion.

H
166 SUPREME COURT REPORTS (2006] SUPP. 8 S.C.R.

A In our opinion, having considered the totality of the circumstances, we
'.. feel'that it would be just and proper to award interest @9% p.a. throughout
instead of 12% as awarded by the arbitrator for the period in question. The
amount already received by the claimant will be acljusted towards the entire
claim and the balance amount together with interest at 9% p.a. shall be paid
by the FCI within 2 months from the date of this order failing which the said
B balance amount shall carry interest@I2% from the date of its due till realiz.ation.
In view of this order in this judgment, the bank guarantee furnished by the
respondent-contractor shall stand discharged. The Supreme Court Registry is ·
directed to do the needful. immediately.

c appealsTheareimpugned judgment of the High Court is modified accordingly. The
thus partly allowed as above leaving the parties to bear their own
costs.

v.s.s Appeals partly allowed.