Holding

The award for claim No. 9 was beyond the arbitrator's jurisdiction and was set aside as legal misconduct.

Summary

The Food Corporation of India (FCI) entered into a construction contract with Chandu Construction for godowns, which required the rate to include both labour and material as per CPWD specifications. After termination of the contract, the claimants sought arbitration and were awarded Rs 8,23,101 for the supply of sand, a claim the FCI contended was contrary to the contract terms. The arbitrator ignored the explicit clause that the rate included material costs and awarded extra payment, leading the FCI to challenge the award under Section 30 of the Arbitration Act, 1940. The Supreme Court held that "misconduct" under Section 30 includes actions that are irrational or contrary to the contract, and that the arbitrator had exceeded his jurisdiction by disregarding the contract, constituting legal misconduct. Consequently, the award for claim No. 9 was set aside and the appeal was allowed.

Issues considered

Whether an arbitrator's award can be set aside under Section 30 of the Arbitration Act, 1940 on the ground of misconduct.
Whether the term "misconduct" under Section 30 includes actions that are irrational or contrary to the contract.
Whether the arbitrator exceeded his jurisdiction by ignoring the explicit contract clause that the rate includes material costs.

Legislation cited

Arbitration Act, 1940s. 30, s. 3(a)

Subjects

ArbitrationSection 30misconductjurisdictional erroraward set asidecontract interpretationCPWD specificationsconstruction contract

Judgment

A FOOD CORPORATION OF INDIA
v.
MIS. CHANDU CONSTRUCTION AND ANR.

APRIL IO, 2007

B [TARUN CHAITERJEE AND D.K. JAIN, JJ.]
I
t
Arbitration Act, 1940-s. 30-Power of Court to set aside award given
by arbitrator-Held: Court can interfere with award when arbitrator -,
C misconducted himself or the proceedings-On facts, arbitrator disregarded
the agreement between the parties ignoring the clear stipulation in the
contract-In the process, the arbitrator misdirected and misconducted
himself-Thus, award on the face of it being beyond his jurisdiction is illegal,
and is set aside.

D s. 3()_ (a)-'Misconduct by arbitrator-Connotation of-Held:
"Misconduct" also comprehends or includes actions by arbitrator which on
the face of award are opposed to all rational or ~easonable principles
resulting in excessive award or unjust result.

Arbitration-Arbitrator-Jurisdiction of-Held: Arbitrator is to operate
E within the terms ofthe contract-A deliberate departure from contract amounts
to noLonly manifest disregard of his authority or a misconduct on his part,
but it may tantamount to a mala fide action-If arbitrator commits e"or in
the construction of contract, it Js an error within his jurisr}iction----Jf he
wanders outside the contract and deals with matters not allotted to him, it
F would be a jurisdictional error.

Appellant-contractor invited tenders for a construction work. The tender
of the respondents was accepted. Parties entered into a contract which
stipulated that the work was to be executed in accordance with the C.P. W.D.
specifications. It provided that the rate would include the cost of materials
G and the labour. Dispute arose between the parties. Arbitration agreement was
invoked. Before the Arbitrator, the respondents raised a claim of
Rs. 8,23,101/- towards price of 5487.34 cubic meters of sand on the ground
that the rate quoted by them for filling the plinth under the floors was only
for the labour and did not cover providing or supplying sand for the said

H 1160
FOOD CORPN. OF INDIA 1•. CHANDU CONSTRUCTION 1161

purpose and since they had supplied sand for such filling, they were entitled A
for extra payment towards price of the sand. The Arbitrator passed an award
in favour of the respondent-claimants. Both the Single Judge and the Division
Bench of High Court upheld the award. Hence the present appeal.

The appellant contended that the claim for supply of sand against Claim
No. 9 was patently opposed to the terms of the contract between the parties; B
that the relevant clause of the contract is clear, unambiguous and admits o(
no such interpretation as has been given by the arbitrator, and that the.

• arbitrator has misconducted himself in awarding additional amount in favour
of the claimants, which part of the award deserves to be set aside.

Allowing the appeal, the Court c
HELD: 1.1. While considering objections under Section 30 of the
Arbitration Act, 1940, the Court can interfere with the award when the
arbitrator has 'misconducted' himself or the proceedings. The word'
"misconduct" in Section 30 (a) of the Act does not necessarily comprehend
or include misconduct or fraudulent or improper conduct or moral lapse but, D
does comprehend and include actions on the part of the arbitrator, which on
the face of the award, are opposed to all rational and reasonable principles
resulting in excessive award or unjust result. (Para 10) (1166-C, DJ

Union of India v. Jain Associates and Anr., [1994) 4 SCC 665, relied
on. E
2.1. The arbitrator being a creature of the agreement between the .
parties, he has to operate within the four corners of the agreement and if he
ignores the specific terms of the contract, it would be a question of
jurisdictiona~ error on the face of the award, falling within the ambit of legal '
misconduct which could be corrected by the Court. However, if the arbitrator F
commits an error in the construction of 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. [Para 11 J (1166-E, F)
2.2. An arbitrator derives his authority from the contract and if he acts
in disregard of the contract, he acts without jurisdiction. A deliberate
departure from contract amounts to not only manifest disregard of his ·G
authority or a misconduct on his part, but it may tantamount to a ma/a fide
action. [Para 15) [1167-F, G)
Associated Engineering Co. v. Government ofAndhra Pradesh and Anr.,
(1991) 4 SCC 93; Rajasthan State Mines and Minerals Ltd. v. Eastern
Engineering Enterprises and Anr., (1999) 9 SCC 283; Mis. A/opi Parshad H
).
)

1162 SUPREME COURT.REPORTS c20011 4 s.c:R.

A and Sons Ltd v. Union of India, AIR (1960) SC 588; The Naihati Jute Mills
Ltd v. Khyaliram Jagannath, AIR ( 1968) SC 522; f:<>ntinental Construction './
Co. Ltd v. State of Madhya Pradesh, [1988) 3 SCC 82 and .Bharat Coking
Coal Ltd v. Annapurna Construction, [2003) 8 SCC 154, relied on.

3.1. From the terms of the agreement, it is manifest that the contract
B was to be executed in accordance with the C.P. W.D. specifications. As per
. para 2.9.4 of the said specifications, ~he rate quoted by the bidder had to be
for both the items required for construction of the godowns, namely, the labour · ·
as well as the materials, particularly when it was a tum key project Filling
up of the plinth with sand under the floors for completion of the project was
·contemplated under the agreement but there was neither any stipulation in
c the tender document for splitting of the quotation for labour and material nor 1l
~as it done by the claimants in their bid. Having accepted the terms of the .
agreement the claimants were bound by its terms and so was the arbitrator.
Thus, it is clear that the claim awarded by the arbitrator is contrary to the
unantbiguous terms of the contract. The arbitrator was not justified ilf ignoring
D the express terms of the contract merely on the ground that in another contract
for a similar work, extra payment for material was provided for. It was not
open to the arbitrator to travel beyond the terms of the contract even if be was
convinced that the rate quoted by the claimants was low and another contractor
had bee';l separately paid for the materialo. ~laimants' claim had to be
adjudicated by the specific terms of their agreement with the FCI and no other.
E [Para 19) [1168-F, G; 1169-A-B)
, 3.2. By awarding extra payment for supply of sand the arbitrator has
out-stepped confines of the contract This error on his part cannot be said to
be on account of misconstruing of the terms of the contract but ·it was by way
of disregarding the contract, manifestly ignoring the clear stipulation in the
F contract By doing so, the arbitrator misdirected and misconducted himself.
Hence, the award made by the arbitration in respect of claim No.9, on the face ·
of it, is beyond his jurisdiction; is illegal and is set aside.
[Para 20) [1169-C, DJ
CIVIL APPELLATE JURISDICTION: Civil Appeal No. 1874 of2007.
G
From the Judgment and Order dated 14.10.2005 of the High Court of I
Judicature at Bombay in Appeal No. 861 and 862 of 2005. \
\
\
,
Ajit Pudussery for the Appellant. I'-

V.N. Shanna,
.
Arun Sha:rina, P.. V.. Y ogeswarari
~ .
andA:K. Sharina
.
for
. the .\
H
FOOD CORPN. OF INDIA v. CHANDU CONSTRUCTION [D.K. JAIN, J.] 1163

.J
Respondents . A
The Judgment of the Court was delivered by

D.K. JAIN, J. I. Leave granted.

2. Challenge in this appeal, by the Food Corporation of India (for short B
"FCI"), is to the final judgment and order dated 14111 October, 2005 passed by
the Division Bench of the High Court of Judicature at Bombay, affirming the
judgment of the learned Single Judge in Arbitration Petition No.334 of2004.
By the impugned order, the award of an amount of Rs.8,23,101/- by the sole
arbitrator against claim No.9 has been upheld.

3. A brief factual background giving rise to the appeal is as follows:
c
The FCI undertook construction of godowns at Panvel, District Raigad
and issued notice inviting tenders for construction of 50000 MT capacity
conventional godowns in 10 units alongwith ancillary work and services.
Pursuant thereto, the respondents (hereinafter referred to as the claimants) D.
submitted tender, which was accepted by the FCI. A formal contract was
executed between the FCI and the claimants on 19th September, 1984. As per
the terms of the contract, the work was to be completed within 10 months from
30th day of issue of the orders and the time was deemed to be of the essence
of the contract.
E
4. As the claimants could not complete the work within the stipulated
time, which was once extended, the FCI issued a show cause notice to them
seeking to terminate the contract. Ultimately the contract was terminated vide
order dated 15111 November, 1987. The claimants invoked the arbitration
agreement and requested the FCI to appoint an arbitrator. Since there was no F
response from the FCI, the claimants filed a suit in the High Court for
appointment of an arbitrator. An arbitrator was appointed, who gave his
award on 27th August, 1998. As payment in terms of the award was not made,
the claimants again moved the High Court. The FCI, in tum, filed a petition
in the High Court for setting aside of the award. With the consent of parties,
the award was set aside and the matter was remitted to the Arbitrator for fresh G
adjudication.

5. In fresh proceedings before the Arbitrator, the stand of the claimants,
qua Claim No.9 was that the rate quoted by them for filling the plinth under
floors including watering, ramming, consolidation arid dressing in terms of
H

-(.
SUPREME COVRT REPORTS [2007) 4 S.C.R.

A item No. l. 7 of the Schedule of rates was only for labour and did not c9ver ·
"providing or supplying" sand for the said purpose and yet they were required
to supply sand for filling. As such the claimants were entitled to be paid extra -
for supply of sand. Accordingly, they made a claim of Rs.8,23,101/- for ,
\
providing and supplying 5487.34 cubic meters of sand.

B 6. The claim was resisted by the FCI on the ground that the scope of
work, specifications and the item rates was governed by the terms of the
contract and as per clause (2) of the agreement dated 1911t September, 1984,
the claimants were .to be paid th~ "respective amount for the work actually
done by him at the 'Schedule ofrates' as contained in the appended Schedule
C and such other sums as may become payable to. the contractor under the
provisions of this contract". The concract clearly stipulated that the work was
to be carried out as per specifications contained in Volume I and II ofC.P.W.D.
manual, para 2.9.4 whereof provided that the "Rate" includes the cost of
materials and labour. Therefore, the claimants were not entitled to any extra
amount for supply of sand. The arbitrator gave his award on 3 lst December,
D 2003 accepting the said claim. For reference, the relevant portion of the award
is extracted below:

"According to defence under the provision of 1967 CPWD specification
·Vol.I & II, the nature of the item incl.udes sand also and not merely
the labour charges, similarly the rate of sand filling is for consolidated
E thickness or loose thickness or voids to any extent and this claim is
denied into to. Now here the dispute between the two parties is over
the words supplying and providing and in respect of this item the
particular words are missing whereas as observed earlier they were
being found in respect of certain other items. According to the .
F Claimants since these words were missing in respect of this item of
work, they took it that the material i.e. sand would be supplied and,
therefore, they quoted only the labour rate. The tender of Mis Gupta
and Co. as pointed out to me, shows that in respect of this item of
work, these words providing and supplying were used. It is submitted
that there can't be two different phrapavlogies in respect of the same
G item and as observed earlier, nothing prevented the FCI from using
those words and not giving rise of arty confusion. Comparative
statement showing contents and details of schedule items based on
tender working with PWD Bombay which clearly provides for rates for
quantity of work for schedule items. The Claimants here are trying to
establish that their quotations ·were based without including the cost
H
FOODCORPN. OF INDIA I'. CHANDU CONSTRUCTION [D.K. JAIN. J.) 1165

of materials supplied. If we see the figures in respect of the items, we A
find substantial force in the say of Claimants that the rate c:uoted by
them is so low that it could not be in respect of price inclusive of cost
of sand. If we see the wording of specification with Contractor M/s.
Gupta & Co., we find additional words supplying and providing have
been added under similar items of the schedule. Why these words
were missing in case of Claimants is difficult to follow. The B
Respondents content that I 967 CPWD's specification in Vol.I & II
covers the specifications not only for labour charges but also for
providing and supplying of the materials required. It is very difficult
to understand this defence, for if we look at the fig11res quoted in the
tenders it would make it absolutely clear that the inclusion of cost of
sand could not have to be in the mind of the Contractor Claimants. C
The figures are very low and I may be pennitted to say that these
figures do not cover the cost of sand. There is force in the say of the
Claimant that he did not vouch that he himself was to supply sand.
Of course, I must say that there is no very satisfactory evidence
about the quantity of sand used, its price and amount paid by the
claimant to his suppliers but when the work was done the FCI was D
bound to take upon it to make the payment though it may appear to
be somewhat arbitrary. I allow this claim of8,23,IOI/- (Rupees Eight
lacs twenty three thousand and one hundred and one only)."

7. Being aggrieved, the FCI filed objections against the award under
Section 30 of the Indian Arbitration Act, 1940 praying for setting aside of the E
award on claim no.9, but without any success. The learned Single Judge
affinned the view taken by the Arbitrator that the rate quoted by the claimant
did not include the cost of the material. The FCI carried the matter in appeal
before the Division Bench. Before the Division Bench, the FCI also attempted
to raise the issue of awru:d of interest by the Arbitrator, which was not
pennitted on the ground that the issue was neither taken up before the F
Arbitrator nor was raised before the learned Single Judge. As noted above,
the Division Bench has dismissed the appeal. Hence, the present appeal.

8. Learned cf>unsel for the petitioner has submitted that the claim for
supply of sand against Claim No.9 was patently opposed to the tenns of the
contract between the parties. It is urged that the relevant clause of the
contract is clear, unambiguous and admits of no such interpretation as has G
been given by the arbitrator. It is, thus, pleaded that the arbitrator has
misconducted himself in awarding additional amount of Rs.8,23, l 01/- in favour
of the claimants, which part of the award deserves to be set aside.

9. On the other hand, learned counsel for the claimants submitted that
H
1166 SUPREME COURT REPORTS (2007] 4 S.C.R.

A it was within the domain· of the arbitrator to construe the terms of contract I

in the light of the evidence placed on record by the claimants, particularly the I

terms of similar contracts entered into by the FCI with the other contractors.
It is asserted that the view taken by the arbitrator being plausible the High
Court was justified in declining to interfere with the award.

B 10. While considering objections under Section 30 of the Arbitration
Act, 1940 (for short 'the Act"), the jurisdiction of the Court to set aside an
award is limited. One of the grounds, stipulated in the Section, on which the
Court can interfere with the award is when the arbitrator has·'miscortducted'
himself or the proceedings. The word "misconduct" has neither been defined
in the Act nor is it possible for the Court to exhaustively define it or to
C enumerate the line of cases in which alone interference either could or could
not be made. Nevertheless, the word "misconduct" in Section 30 (a) of the
Act does not necessarily comprehend or include misconduct or fraudulent or
improper conduct or moral lapse but does comprehend and include actions
on the part of the arbitrator, which on the face of the award, are opposed to
all rational and reasonable principles resulting in excessive award or unjust
D result. (Union of India v. Jain Associates and Anr. 1)

11. It is trite to say that the arbitrator being a creature of the agreement
between the parties, he has to operate within the four comers of the agreement
and if he ignores the specific terms of the contract, it would be a question
of jurisdictional error on the face of the award, falling within the ambit of legal
E misconduct which could be corrected by the Court. We may, however, hasten
to add that if the ll[bitrator commits an error in the construction of contract,
that is an error within his jurisdiction. But, tf he wanders outside the contract
and deals with matters not allotted to him, he commits a jurisdictional error
(see: Associated Engineering Co. v. Government of Andhra Pradesh and
Anr., 2 and Rajasthan State Mines & Minerals Ltd. v. Eastern Engineering
F Enterprises & Anr. 3).
12. In this context, a reference can usefully be made to the observations
of this Court in Mis. A/opi Parshad and Sons, Ltd. v. Union ofIndict, wherein
it was observed. that the Indian Contract Act does not enable a party to a ·
contract to ignore the express covenants thereof, and to claim payment of
consideration for performance of the contract at rates different from the
G stipulated rates, on some vague plea of equity. The Court went on to say that
'
1. [19941 4 sec 665.
2. [19911 4 sec 93.
3. [19991 9 sec 283.
4. AIR [1960] SC 588.
H
(

FOODCORPN. OF INDIA v. CHANDUCONSTRUCTION [D.K. JAIN,J.] 1167

in India, in the codified law of contracts, there is nothing which justifies the A ··- ·
view that a change of circumstances, "completely outside the contemplation.
of parties" at the time when the contract was entered into will justify a Court,
while holding the parties bound by the contract, in departing from the express
terms the~eoJ. Similarly, in The Naihati Jute Mills Ltd v. Khyaliram
Jagannath, s this Court had observed that where there is an express term, the B
Court cannot find, on construction of the contract, an implied term inconsistent
with such express term.
13. In Continental Construction Co. Ltd v. State of Madhya Pradesh,6
it was emphasised that not being a conciliator, an arbitrator cannot ignore t~e
law or misapply it in order to do what he thinks is just and reasonable. He
is a tribunal selected by the parties to decide their disputes according to law C
. and so is bound to follow and apply the law, and if he does not, he can be
set right by the court provided his error appears on the face of the award.
14. In Bharat Coking Coal Ltd v. Annapurna Construction, 1 while
inter alia, observing that the arbitrator cannot act arbitrarily, irrationally,
capriciously or independent of the contract, it was observed, thus: D
"There lies a clear distinction between an error withirr the jurisdiction
and error in excess of jurisdiction. Thus, the role of the arbitrator is
to arbitrate withip the terms of the contract. He has no power apart
from what the parties have given him under the contract. If he has
travelled beyond the contract, he would be acting without jurisdiction, E
whereas if he has remained inside the parameters of the contract, his
award cannot be questioned on the ground that it contains an error
apparent on the face of the record."
15. Therefore, it needs little emphasis that an arbitrator derives his
authority from the contract and if he acts in disregard of the contract, be acts F
without jurisdiction. A deliberate departure from contract amounts to not only
manifest disregard of his authority or a misconduct on his part, but it may
tantamount to a mala fide action [Also see: Associated Engineering Co. v.
Government of Andhra Pradesh & Anr., (supra)].

16. Thus, the issue, which arises for determination, is whether in awarding G
Claim No.9, the arbitrator has disregarded the agreement between the parties
and in the process exceeded his jurisdiction and has, thus, committed legal
5. AIR [1968) SC S22.
6. (19881 3 sec 82.
1. 120031 8 sec 1S4. H
'
)

1168 SUPREME COURT REPORTS [2007) 4 S.C.R.
·1,.

A misconduct?
17. For deciding the controversy, it would be necessary to refer to the
relevant clauses of the contract, which read thus:
"l. GENERAL SPECIFICATIONS:
1.1 The civil sanitary, water supply and road works shall be carried
B
out as per Central Public Works Department specification of
works at Delhi 1967 Volume I & II with correction slips upto
date .... .In the case of civil, sanitary, water supply and road works
and electrical works should there be any difference bt:tween the
Central Public Works Department specifications mentioned above
c and the specifications of schedule of quantities, the latter i.e. the
specification of schedule of quantities, shall prevail. For items of
work not covered in the C.P.W.D. specifications or where the
C.P. W.D. specifications are silent on any particular point, the
relevant specifications or code of practice of the Indian Standard
Institution shall be followed.
D
12 Should any clarification be needed regarding the specifications
for any work the written instructions from the Engineer-in-Charge
shall be obtained."
18. Paragraph 2.9.4 ofthe C.P.W.D. specifications insofar as it is relevant
E for the present appeal, reads as follows:
"Rate:- It includes the cost of materials and labour involved in all the
operations described above'."
19. From the above extracted terms of the agreement between the FCI
and the claimants, it is manifest that the contract was to be executed in
F accordance with the C.P.W.D. specifications. As per para 2.9.4 of the said
specifications, the rate quoted by the bidder 'had to be for both the items
required for construction of the godowns, namely, the labour as well as the
materials, particularly when it was a tum key project. It is to be borne in mind
that filling up of the plinth with sand under the floors for completion of the
project was contemplated under the agreement but there was neither any
G stipulation in the tender document for splitting of the quotation for labour and
material nor was it done by the claimants in their bid. The claimants had
submitted their tender with eyes wide open and if according to them the cost
of sand was not included in the quoted rates, they would have protested at
some stage of execution of the contract, which is not the case here. Having
H accepted the terms of the agreement dated 19th September, 1989, they were
< FOOD CORPN. OF INDIA v. CHANDU CONSTRUCTION [D.K. JAIN, J.] 1169
bound by its terms and so was the arbitrator. It is, thus, clear that the claim· A
awarded by the arbitrator is contrary to the unambiguous terms of the contract.
We are of the view that the arbitrator was not justified in ignoring the express
terms of the contract merely on the ground that in another contract for a
similar work, extra payment for material was provided for. It was not open to
the arbitrator to travel beyond the terms of the contract even if he was
convinced that the rate quoted by the claimants was low and another contractor, B
namely, M/s Gupta and Company had been separately paid for the material.
Claimants' claim had to be adjudicated by the specific terms of their agreement
with the FCI and no other.

20. Therefore, in our view, by awarding extra payment for supply of
sand the arbitrator has out-stepped confines of the contract. This error on his C
part cannot be said to be on account of misconstruing of the terms of the
contract but it was by way of disregarding the contract, manifestly ignoring
the clear stipulation in the contract. In our opinion, by doing so, the arbitrator
misdirected and misconducted himself. Hence, the award made by the arbitratior
in respect of claim No. 9, on the face of it, is beyond his jurisdiction; is illegal D
and needs being set aside.

21. Consequently, the appeal is allowed and the impugned judgment of
the High Court, to the extent it pertains to claim No.9 is set aside. However,
on the facts and circumstances of the case, there shall be no order as to cos~.
E
N.J. Appeal allowed.