Holding

The Supreme Court held that the Division Bench erred in setting aside the arbitral award, which was not liable to be interfered with under Section 30 of the Arbitration Act, 1940.

Summary

Indu Engineering & Textiles Ltd. supplied hard coke to the Delhi Development Authority (DDA) under a contract containing a price‑escalation clause. The clause was later modified to apply only when there was a statutory increase in price. DDA refused to pay the escalated price for hard coke, leading to arbitration. The arbitrator awarded the escalated price to Indu, which the single Judge of the Delhi High Court upheld as a rule of court. On appeal, the Division Bench set aside the award, holding that there was no material before the arbitrator and that the escalation clause was prospective. The Supreme Court held that the Division Bench exceeded its jurisdiction; the award did not suffer from any manifest error, and the court could not interfere under Section 30 of the Arbitration Act, 1940. Consequently, the appeal was allowed, the Division Bench order set aside, and the single Judge’s order confirming the award reinstated.

Issues considered

Whether the Division Bench of the Delhi High Court was justified in setting aside the arbitral award under Section 30 of the Arbitration Act, 1940.
Whether the price‑escalation clause in the contract was prospective and thus inapplicable to the hard‑coke price escalation.
Whether the arbitrator erred in finding that the appellant was entitled to the enhanced price of hard coke.
Whether a court may interfere with an arbitral award on the basis of factual error or a non‑manifest error of law.

Legislation cited

Arbitration Act, 1940s. 30, s. 35, s. 39
Indian Contract Act, 1872s. 70

Subjects

ArbitrationArbitral awardSection 30Price escalation clauseHard cokeContract interpretationCourt interferenceNatural justiceError apparent on the faceProspective operation

Judgment

A INDU ENGINEERING AND TEXTILES LTD.
II.

DELHI DEVELOPMENT AUTHORITY

JULY 11, 2001

B [A.P. MISRA AND D.P. MOHAPATRA, JJ.]

Arbitration Act, 1940

Section 30-Arbitration-Award-lnte1ference by Court-Permissibility
C of-Contract to supply hard-coke-Price escalation clause in agreement-
Subsequent denial of enhanced rate-Dispute-Arbitration-Award entitling
enhanced price-Award made Rule of Court-On appeal, Division Bench of
High Court setting aside the Award-Validity of-Held, Award of arbitrator
was a plausible one-Does not suffer from any manifest en·or or wholly
.D improbable or perverse-Thus, High Court was not justified in setting aside
the award.

Arbitration Award on facts-/nteiference by Court-Permissibility of-
Held, even if erroneous cannot be interfered with. /.

E Respondent-Development Authority floated a tender for supply of iiard-
coke. In response, appellant offered to supply the material and the offer letter
contained a price escalation clause stipulating that any escalation in price
after submission of the tender will entitle the supplier to claim higher price.
Subsequently the price escalation clause was modified to the effect that
escalation would be payable when there was statutory enhancement in the price
F of the commodity. However, on submission of bills respondent denied its
liability to pay enhanced price for hard-coke. Thus a dispute arose between
the parties which was referred to a sole Arbitrator who passed an award
accepting the claim of appellant. Single Judge of High Court made the award
Rule of Court. However, on appeal, Division Bench of High Court set aside
G the award holding that the Arbitrator had no material evidence before it to
allow the claim and the price escalation clause agreed had only prospective
application. Hence the present appeal.

Allowing the appeal, the Court
•
H HELD: i:t. Division Bench of the High Court erred in setting "aside the
916
INDU ENGINEERING v. D.D.A. 917
award passed by the arbitrator which was made rule of the court by the single A
Judge. (924-E)

1.2. An Arbitrator is a Judge appointed by parties and as such the award
passed by him is not to be lightly interfered with. The scope for interference
by the court with an award passed by the Arbitrator is limited. An arbitration
award can be interfered with if it is (i) violative of principles of natural B
.· justice; (ii) there is error apparent on the face of the award; (iii) that the
Arbitrator has ignored or deliberately violated a clause in the agreement
prohibiting dispute of the nature entertained; (iv) that the award on the face
of it is based on a proposition of law which is erroneous, etc. (921-D)

1.3. In the instant case, the only question that arose for consideration C
was whether the appellant was entitled to claim the enhanced price of hard
coke supplied by it to the respondent. Under the contract a specific quantity
of fh:e material was to be supplied during the period fixed under the agreement.
Right from the beginning while submitting the tender the appellant had
included a price escalation clause in which it was stipulated that any escalation D
of the price after submission of the tender will entitle the supplier to claim
higher price from the other party. This clause was subsequently revised only
to the effect hat the price escalation will be applicable when there is statutory
enhancement in the price of the commodity. No dispute was raised before the
Arbitrator or the court that the escalated price claimed by the appellant was
not the statutorily enhanced price of hard coke. The view taken by the E
Arbitrator, in the circumstances of the case, was a plausible one and the same
could not be said to be suffering from any manifest error on the face of the
award or wholly improbable or perverse one. Thus, it was not open to the court
to interfere with the award within the statutory limitation laid down in Section
30 of the Act. So also High Court was not justified in holding that the price p
escalation clause in the agreement had prospective operation. [923-C-F]

U.P. Hotels and Others v. UP. State Electricity Board, (1989) 1 SCC
359, relied on.

2. The Division Bench exceeded its jurisdiction in entering into the G
facts of the case by interpreting the agreement and correspondence between
the parties. What was the price of the commodity to be paid by the respondent
to the appellant was essentially a question of fact. Even assuming that the
·~ Arbitrator had committed an error in coming to the conclusion that the
app~llant was entitled to the claim of the escalated price of the commodity
(hard coke) under the terms of the agreement, it was not open to the Court H
~
\

918 SUPREME COURT REPORTS [200 I] 3 S.C.R.

A to interfere with the award on that score. (923-H; 924-A-B)
CIVIL APPELLATE JURISDICTION: Civil Appeal No. 12881 of
1996.

From the Judgment and Order dated 18.5.96 of the Delhi High Court in
B F.A.O. (OS) No. 219 or 1995.
Sanjay Parikh, A.N. Singh and R.R. Chandrachud for the Appellant.

Mukul Rohtagi Additional Solicitor General and V.B. Saharye Advs. for
Saharye Co., for the Respondent.

The Judgment of the Court was delivered by
c
D.P. MOHAPATRA, J. Whether the appellant, on the evidence on
record, is entitled to the price of hard coke supplied by it to the respondent
at the enhanced rate, is the controversy raised in this case. The dispute was
referred to an arbitrator pursuant to the arbitration clause in the agreement
D entered by the parties. The arbitrator held in favour of the appellant and
accepted its claim of Rs. 234097.41. A single Judge of the Delhi High Court
rejecting the objections raised by the respondent against the award, made it
rule of the court. On appeal, the Division Bench of the High Court reversed
the order of the single Judge and set aside the award passed by the arbitrator. l
As such the claimant is in appeal before this court challenging the judgment
E of the Division Bench of the High Court.

The factual matrix of the case leading to the present proceeding may be
shortly stated thus: The Delhi Development Authority (for short 'DDA'),
respondent herein, floated a tender enquiry on 30th January, 1981 for supply
of hard coke. M/s.lndu Engineering & Textiles Ltd., appellant herein, submitted
F its offer for supply of the mateh't~'.,,"1n response to the said notice on 12th
February, 1981. The offer letter contained a price escalation clause to the
following effect:

"Our prices are based on the prevailing prices of pig iron, premium
hard coke and ferro-silicon as announced by the Joint Plant Committee,
G Bharat Coking Coal Ltd., or any other agency authorised for this
purpose, plus sales tax, cost of transportation and handling from main
producers to our works at Agra. Any upward revision in the prices
of pig iron, hard coke and ferro-silicon shall have corresponding
effect on our prices as per formula given below.

H Such revision in prices shall be effective from all material in transit,
INDU ENGINEERING v. D.D.A. [MOHAPATRA, J.] 919

or tendered for inspection immediately from the date of announcement A
of revised prices by J.P.C., Bharat Coking Coal Ltd., etc."

The tenders wer~ opened by the respondent on 20th February, 1981. On
14th February, 1981 there was an escalation of the price of hard coke notified
by Coal India Ltd. (a subsidiary of Bharat Coking Coal Ltd.). The price
escalation was published in the newspapers on 1st March, 1981. On 16th B
April, 1981 negotiations were held with the parties who submitted offers,
pursuant to which rates in respect of supply of ferro-silicon and the price
escalation in respect of the same were reduced/dropped. However, the escalation
clause with regard to premium hard coke and pig iron (no dispute in this
proceeding) was maintained with certain modification. Regarding price C
escalation it was stated as follows :

"Price Escalation: We agree to modify this clause to the same form as
accepted by the Department in the previous tender with Indo-Swedish
Pipes from whom this factory was bought by us. Under that escalation
clause, escalation is payable only on st.atutory increase in prices of D
pig iron and premium hard coke."

\ On 6th May, 1981 the respondent communicated its acceptance with the
following clause regarding price escalation:

"Enhancement and deduction in pipes to be regulated on the basis of E
the pig iron and hard coke price of JPC and Bharat Coking Coal Ltd."

This was followed by a confirmation letter by the appellant in which it was
specifically stated· that the escalation clause shall be effective for any increase/
decrease after the date of the tender i.e. 12th February, 1981. The agreement
)-
incorporating the price escalation clause was signed between the parties on F
14th May, 1981. When the appellant submitted bills for the hard coke and pig
iron supplied to the respondent at the escalated price with effect from 14th
February, 1981 the respondent denied its liability to pay the enhanced price
for hard coke while admitting the liability for the escalated price in respect of
Pig iron. A dispute therefore, arose between the parties. G

The dispute was referred to the arbitrator - Shri Banarasi Dass,
Superintendent Engineer by Engineer Member, DDA. The arbitrator, by a
reasoned award passed on 16.5.1985, accepted the claim of the appellant in
respect of the three items of claim including the claim in respect of hard coke.
(item no. 2). The respondent raised an objection to the award only in respect H
\

920 SUPREME COURT REPORTS [2001) 3 S.C.R.

A of item no. 2 i.e. hard coke. A single Judge of the High Court by the order
passed on 7.4.1989 remitted the matter to the arbitrator for fresh decision after
taking into consideration the effect of the letter dated 9.6.1982. Pursuant to
the said decision the arbitrator passed the award dated 3.10.1989 after hearing
both the parties. He gave detailed reasons in support of the award accepting
the claim of the appellant in respect of item no. 2 He gave reasons for not
B accepting the letter dated 9 .6.1982 as binding on the appellant holding that
it was obtained after an year of the agreement and under duress and that the
offer dated 12th February, 1981 itself was sufficient to justify the claim of the
appellant. By the order dated 20th February, 1995 a single Judge of the High
Court rejected the objections filed by the respondent against the award and
C made the award dated 3.10.1989 rule of the court.

The respondent filed the appeal, FAO(OS) 219/95, against the said order
which was allowed by a Division Bench of the Court holding inter alia that
the award of the arbitrator accepting the claim of the appellant for ·escalated
price of hard coke was without evidence. The Division Bench held inter alia
D that in the negotiations held on 16.4.1981 between the parties the price of hard
coke as quoted by the appellant was not increased. The Division Bench
further held that the price escalation clause agreed to on 16.4.1981 would have i
prospective application i.e. increase in price after that date. Recording its f
finding that there was no evidence or material before the arbitrator whatsoever
E for grant of the escalation dated 14 .2 .1981 in price of hard coke the Division
Bench declined to accept the contention raised on behalf of the appellant that
it had no awareness of the increase dated 14.2.1981 when it submitted the
tender on 12.2.1981 since the firm is very much in this line of business. It was
further held that the price escalation clause which was modified did not
include the enhancement made on 14.2.1981. On such discussion, the Division
F Bench held that the case was one of no evidence. The Division Bench
rejected the contention raised on behalf of the appellant that the respondent
in similar circumstances having accepted. the escalation in price of pig iron
should not decline to grant similar claim in respect of hard coke, holding that
by conceding to the claim in respect of pig iron it could not be said that the
G respondent agreed to pay the escalated price for hard coke.

The scope for interference by the court with an award passed by the
arbitrator is limited. Section 30 oHhe Arbitration Act, 1940 (for short 'the
Act') provides in somewhat mandatory terms that an award shall not be set
aside except on one ot more of the grounds enumerated in the provision. The
H three grounds set out in the Section are :
j

JNDU ENGINEERING v. D.D.A. [MOHAPATRA, J.] 921
(a) that an arbitrator or umpire has misconducted himself or the A
• proceedings;
f-
... (b) that an award has been made after the issue of an order by the
Court superseding the arbitration or atler arbitration proceedings
have become invalid under Section 35;
(c) that an award has been improperly procured or is otherwise B
invalid.

Interpreting the statutory provision Courts have laid stress on the limitations
on exercise of jurisdiction by the Court for setting aside or interfering with
an award in umpteen cases. Some of the well recognised grounds on which
interference is permissible are : c

- (1)

(2)

(3)
Violation of principle of natural justice in passing the award;
Error apparent on the face of the award;
The arbitrator has ignored or deliberately violated a clause in the
agreement prohibiting dispute of the nature entertained; D
(4) The award on the face of it is based on a proposition of law
which is erroneous, etc.
\
":; In U.P. Hotels and Others v. U.P. State Electricity Board, [1989] 1 SCC 359,
this Court in paras 17& 18 observed as follows: E
"17. It appears that the main question that arises is : whether the
decision of this Court in Indian Aluminium co. v. Kera/a State
Electricity Board, [1975] 2 SCC 414 case was properly understood
and appreciated by the learned Umpire and whether he properly applied
the agreement between the parties in the light of the aforesaid decision. F
It was contended that the question whether the sums payable under
clause 9 included discounts. On the aforesaid basis it was contended
that there was an error of law and such error was manifest on the face
of the award. Even assuming, however, that there was an error of law
in arriving at a conclusion, such an error is not an error which is G
amenable to correction even in a reasoned award under the law.
Reference may be made to the observations of this Court in Coimbatore
District P. T. Samgam v. Bala Subramania Foundry, [1987] 3 SCC 723,
where it was reiterated that an award can only be set aside if there
is an error..on its face. Further, it is an error of law ,and not mistake
of fact committed by the arbitrator which is justiciable in the application H
922 SUPREME COURT REPORTS (2001) 3 S.C.R.

A before the court. Where the alleged mistakes or errors, if any, of which .- .
grievances were made were mistakes of facts if at all, and did not ~
amount to error of law apparent on the face of the record; the objections
were not sustainable and the award could not be set aside. See also ~
the observations of this Court in Delhi Municipal Corpn. v. Mis
Jagan Nath Ashok Kumar, (1987] 4 SCC 497, where this Court reiterated.
B that reasonableness of the reasons given by an arbitrator in making
his award cannot be challenged. In that case before this Court, there
was no evidence of violation of any principle of natural justice, and
~
in this case also there is no violation of the principles of natural
justice. It may be possible that on the same evidence some court
c might have arrived at some different conclusion than the one arrived
at by the arbitrator but that by itself is no ground for setting aside
the award of an arbitrator. Also see the observations in Halsbury's
Laws of England, 4th edn., Vol. 2, at pages 334 and 335, para 624,
where it was reiterated that an arbitrator's award may be set aside for
--
error of law appearing on the face of it, though that jurisdiction is not
D lightly to be exercised. If a specific question of law is submitted to the
arbitrator for his decision and he decides it, the fact that the decision
is erroneous does not make the award bad on its face so as to permit
)
it being set aside; and where the question referred for arbitration is
.-"
a question of construction, which is, generally speaking, a question ' ~

E of law, the arbitrator's decision cannot be set aside only because the
~
court would itself have come to a different conclusion; but if it
appears on the face of the award that the arbitrator has proceeded
illegally, as, for instance, by deciding on evidence which was not
admissible, or on principles of construction which the law does not
countenance, there is error in law which may be ground for setting
~
F aside the award.

18. It was contended by Mr. F.S. Nariman, counsel for the appellant,
that a specific question of law being a question of construction had
been referred to the Umpire and, hence, his decision, right or wrong,
had to be accepted. In view of Clause 18, it was submitted that in this
G
case a specific reference had been made on the interpretation of the
..,'
agreement between the parties, hence, the parties were boun~ by the ~

decision of the Umpire. Our attention was drawn to the observations
of this Court in Mis. Hindustan Tea Co. v. Mis. K. Sashikant & Co.,
~ "
[I 986] Supp. SCC 506, where this Court held that.under the law, the
H arbitrator is made the final arbiter of the dispute between the parties,
INDU ENGINEERING v. D.D.A. [MOHAPATRA, J.) 923
referred ~ him. The award is not open to challenge on the ground that A
the arbitrator has reached a wrong conclusion or has failed to
appreciate facts. Where the award which was a reasoned one was
challenged on the ground that the arbitrator had acted contrary to the
provisions of Section 70 of the Contract Act, it was held that the same
could not be set aside."
B
This Court, while dealing with the power of courts. to interfere with an
award passed by arbitrator, had consistently laid stress on the position that
an arbitrator is a Judge appointed by the parties and as such the award
passed by him is not to be lightly interfered with. In the case on hand the
only question that arose for consideration was whether the appellant was C

-
entitled to claim the enhanced price of hard coke for the quantity supplied
by it to the respondent. Under the contract a specific quantity of the material
was to be supplied during the period fixed under the agreement. Right from
the beginning while submitting the tender the appellant had included a price
escalation clause in which it was stipulated that any escalation of the price
after submission of the tender will entitle the supplier to claim higher price D
from the other party. This clause was subsequently revised only to the effect
that the price escalation will be applicable when there is statutory enhancement
in the price of the commodity. No dispute was raised before the arbitrator or
the court that the escalated price claimed by the appellant was not the
statutorily enhanced priCe of hard coke. It was also not in dispute that even E
accepting the appellant's claim for escalated price of the commodity, it was
entitled to the claim only in respect of a part Qi-the quantity supplied and not
the entire quantity. In these circumstances, the arbitrator had not attached
importance to the non-mention of the enhanced price of hard coke in course
of negotiations between the parties. The view taken by the arbitrator, in the
circumstances of the case, was a plausible one and the same could not be F
said to be suffering from any manifest error on the face of the award or wholly
improbable or perverse one. As such it was not open to the court to interfere
with the award within the statutory limitations laid down in Section 30 of the
Act. The single Judge, therefore, rightly declined to interfere with the award
passed by the arbitrator and made it rule of the court.
G
As noted earlier, the Division Bench in appeal filed under Section 39 of
the Act, reversed the order passed by the single Judge and set aside the
award holding that there was no material before the arbitrator for accepting
the clai,.tn of the appellant. The Division Bench exceeded .the limits of its
jurisdiction in entering into the facts of the case and in interpreting the H
924 SUPREME COURT REPORTS (2001) 3 S.C.R.

A agreement between the parties and correspondence which was a part of the .....
said agreement. What was the price of the commodity to be paid by the -+ .
respondent to the appellant was essentially a question of fact. Even assuming .
that the arbitrator had committed an error in coming to the conclusion that ..-
the appellant was entitled to the claim of the escalated price of the commodity
B (hard coke) under the terms of the agreement and the Division Bench felt that
the conclusion should have been otherwise, it was not open to it to interfere
with the award on that score. Another fallacy committed by the Division
Bench in the judgment is recording the fmding that the escalation clause in
the agreement had prospective operation with effect from 14.5.1981 i.e. the
date on which the agreement was entered into by the parties. As noted earlier,
C under the agreement a specified quantity of the commodity was to be supplied
by the appellant to the respondent within the period specified in the agreement
·.and the appellant, while submitting its tender, had made it clear that any
subsequent upward change in price of the commodity will entitle it to claim
at such rate and subsequently the price escalation clause was modified in a
manner not relevant for deciding the dispute referred to the arbitrator, the
D question of the price escalation clause having prospective effect was of no
consequence. If the claimant was entitled to the enhanced price the respondent
was. liable to pay the same for the entire stock supplied. If the position was
I ,
otherwise, the claim of the appellant was to be rejected in toto.

E On the discussions in the foregoing paragraphs, we are clearly of the
view that the Division Bench of the High Court erred in setting aside the
award passed by the arbitrator which was made rule of the court by the single ,.
Judge. In the result, the appeal is allowed. The judgment dated 15.5.1996 in
FAO (OS) 219/95 is set aside and the order of the single Judge dated 20.2.1995
in Suit No. 944 of 1985 is confirmed. No costs.
F
S.V.K. Appeal allowed.