Holding

The State was bound to issue the notification, the Bharatpur‑Deeg section is integral to the project and tolls may be collected thereon, the arbitrator may award interest from the date of award and the court may vary the rate, and the tribunal exceeded its jurisdiction by addressing compensation for the unexecuted second phase, which must be remitted for determination.

Summary

The Supreme Court considered a dispute arising from a BOT concession agreement for the Bharatpur bypass road, where the contractor claimed entitlement to tolls and compensation for delay in the State's issuance of a traffic‑restriction notification and for the Bharatpur‑Deeg patch of road. The arbitral tribunal had awarded the contractor Rs.990.52 lacs with 18% interest, but the District Court set aside the award and reduced the interest to 10%; the High Court reversed part of that decision, holding the patch integral to the project and upholding the reduced interest. The Court held that the State had not contested the existence of a contractual duty to issue the notification, so the only issue was the delay, which was within the tribunal's reference; the Bharatpur‑Deeg section was part of the composite project and tolls could be collected thereon; the arbitrator may award interest from the date of award and courts may vary the rate under the Interest Act, so the reduction to 10% was permissible; however, the tribunal could not decide matters beyond its reference, such as compensation for the unexecuted second phase, and that issue was remitted to the arbitral tribunal. Both appeals were dismissed.

Issues considered

Whether the State of Rajasthan was contractually obligated, either expressly or by pre‑bid understanding, to issue a notification barring traffic through the old route.
Whether the Bharatpur‑Deeg patch constitutes an integral/composite part of the bypass project, permitting toll collection.
Whether the courts could lawfully reduce the interest rate awarded by the arbitrator from 18% to 10% under the Interest Act and arbitration law.
Whether the arbitral tribunal had jurisdiction to decide the issue of delay in notification issuance and other matters not expressly referred.
Whether the contractor could claim compensation for the unexecuted second phase of the project.

Legislation cited

Arbitration and Conciliation Act, 1996s. 31(7)(b), s. 34
Code of Civil Procedure, 1908s. Order VIII Rule 5
Interest Act, 1978s. 3
Rajasthan Motor Vehicles Taxation (Amendment) Act, 1994
Tolls Act, 1851

Subjects

concession agreementBOTtoll collectionarbitrationarbitral awardinterest ratejurisdictionnotification delaycomposite projectcompensationpublic works

Judgment

[2011] 9 S.C.R. 402

~
A MIS. MSK PROJECTS (I) (JV) LTD
v.
STATE OF RAJASTHAN & ANR.
(Civil Appeal No. 5416 of 2011)
JULY 21, 2011 I
B '
[P. SATHASIVAM AND DR. B.S. CHAUHAN, JJ.]

Contract:

c Construction of a bypass road - Concession agreement
authorising contractor to collect toll fee - Dispute between
parties as to delay in issuance of notification by State
Government barring the use of old route as also entitlement
of contactor to collect toll fee from vehicles using a specific
D patch of the road - Arbitral tribunal holding that there had
..
been delay on the part of the State in issuing the notification
and the State failed to implement the same and the contractor
was entitled to collect fee even from vehicles using the
specific patch of the road - District Judge and High Court
holding that there was no clause in the agreement to issue
E
notification barring the old route - However, the High Court
held that the contractor could collect toll fee from the specific
patch of the road - HELD: The State Government had not
taken the defence that it was not agreed between the parties
to issue the notification barring the traffic through the old route
F - The only issue remained as to whether there was delay in
issuance of notification and implementation thereof - In such
a fact-situation, the District Judge as well as the High Court
fell in error in considering the issue which was not taken by
the State before the arbitral tribunal during the arbitration
G proceedings and holding that there was no agreement for
issuance of notification by State barring the old route - The
issue as to whether the specific patch of the road was an
integral or composite part of the project and the contractor
could collect the toll fee on that part also stands concluded
H 402
MSK PROJECTS (I) (JV) LTD v. STATE OF 403
~·
RAJASTHAN & ANR.
by the High Court and stands settled in favour of the contractor A
- Rajasthan Motor Vehicles Taxation (Amendment) Act,
1994 - Tolls Act, 1851.

Tolls Act, 1851:
';
• 8
Toll fee - Nature of - Construction of a bypass road -
Concession agreement authorising the contractor to collect
toll fee - Dispute between parties - Arbitration - HELD: Toll
fee is compensatory in nature wherein the Government can
reimburse itself the amount which it had spent on construction
of road/bridge etc. - State is competent to levy/collect the toll c
fee only for the period stipulated under the Statute or till the
actual cost of the project with interest etc. is recovered - It
cannot be a source of revenue for the State - A person is
... debarred by law and statutory inhibition, as contained in
Clause IV(a) of the notification, from collection of toll beyond D
the recovery of cost of construction - In the instant case, the
work was to be executed in two phases - The first phase was
completed and the amount spent by contractor on the said
work was recovered with certain profit - The work of second
phase was never executed - Therefore, contractor cannot be E
permitted to claim damages/compensation on this count -
The arbitrator cannot proceed beyond the terms of reference
and, therefore, the question of considering the non-execution
of the work of second phase was neither permissible nor
possible as it had arisen subsequent to the date of aw_ard. in F
the arbitration proceedings - In order to do complete Justice
between the parties and protect the public exchequer, matter
remitted to arbitral tribunal to work out the entitlement of the
contractor - Arbitration and Conciliation Act, 1996 - Code of
, !., Civil Procedure, 1908 - 0.8, r.5. G
Arbitration:
Jurisdiction of arbitratorlarbitral tribunal - HELD: Special
tribunals like arbitral tribunals and Labour Courts get
jurisdiction to proceed with the case only from the reference H
404 SUPREME COURT REPORTS [2011] 9 S.C.R.

A made to them - Thus, an arbitrator cannot be allowed to ~
assume jurisdiction over a question which has not been
referred to him. Similarly, he cannot widen his jurisdiction by
holding contrary to the fact that the matter which he wants to
decide is within the submission of the parties in the case.
B
Interest - HELD: While award of interest for the period
prior to an arbitrator entering upon the reference is a matter
of substantive law, the grant of interest for the post-award
period is a matter of procedure - Therefore, the arbitrator is
competent to award interest for the period commencing with
C the date of award to the date of decree or date of realisation,
whichever is earlier - So far as the rate of interest is
concerned, s. 3 of Interest Act empowers the court to award
interest at the rate prevailing in the banking transactions -
Thus, impliedly, the court has a power to vary the rate of
D interest agreed by the parties - In the instant case, the High
Court rightly held that the District Judge was justified in
reducing the rate of interest to 10% from 18% as had been
awarded by the arbitral tribunal - Interest Act, 1978 - s. 3 -
Arbitration and Conciliation Act, 1976.
E ..
Words and Phrases:

Expressions, 'compensation', 'reimbursement' -
Connotation of.

F The Public Works Department of the State of
Rajasthan accepted the tender of the appellant-
contractor to construct Bharatpur by-pass road for
Rs.1,325 lacs. The total extent of the road was 10.85 km
out of which 9.6 kms was new construction and 1.25 kms.
G was improvement of existing portion of the Bharatpur-
Deeg road. A concession agreement dated 19.8.1998 was ' .
also entered into between the parties authorising the
contractor to collect the toll fee for a period of 111 months
till 6.4.2008. The agreement contained an arbitration
H clause. According to the contractor, it completed the
MSK PROJECTS (I) (JV) LTD v. STATE OF 405
RAJASTHAN & ANR.
~
work on 10.4.2000. It started collection of toll fee w.e.f. A
28.4.2000. The State issued the Notification preventing
the entry of commercial vehicles into Bharatpur city w.e.f.
1.10.2000. The contractor invoked the arbitration clause
raising the dispute with respect to: (a) delay in issuance
\i
I
of the Notification and (b) collection of toll from vehicles B
using Bharatpur-Deeg patch of the road. The arbitral
tribunal, inter alia, held that there had been delay on the
part of the State in issuing the Notification and the State
failed to implement the same and the contractor was
entitled to collect toll fee even from the vehicles using c
Bharatpur-Deeg part of the road. The State Government
was directed to pay a sum of Rs.990.52 lacs to the
contractor as loss due upto 31.12.2003 with 18% interest
from 31.12.2003 onwards. The State filed objections u/s
) 34 of the 1996 Act. The District Judge set aside the
D
·. arbitral award on the grounds that there was no clause
in the agreement to issue notification barring the entry of
vehicles in the city of Bharatpur; that the arbitral tribunal
erred in taking 1997 survey as basis for calculating the
loss suffered by the contractor; and that the contractor
was only entitled to extension of concession period. The E
rate of interest was reduced from 18% to 10%. On appeal
by the contractor, the High Court held that Bharatpur-
Deeg section was part of the project and the contractor
could collect the toll fee from the users of this part of the
road also; that there was no agreement for issuance of F
Notification by the State barring the use of old route and
directing the vehicles to use the new route alone;
therefore, the question of grant of compensation on that
account for the traffic loss could not arise; and that the
•"'· District Judge was justified in reducing the rate of interest G
from 18% to 10%. Aggrieved, both the contractor as also
the State Government filed the appeals.
The issues for consideration before the Court were:
(i) whether it was mandatory/necessary in view of the H
406 SUPREME COURT REPORTS [2011] 9 S.C.R.

A agreement/contract or on the basis of pre-bid
understanding that the State had to issue the notification
barring the vehicles through the markets of Bharatpur
city; (ii) whether the contractor had a right to collect the
toll fee on the patch between Bharatpur - Deeg; and (iii)
I
B whether the rate of interest could be reduced from 18%
to 10% by the courts below.

Disposing of the appeals, the Court

HELD: 1. The arbitral tribunal considered the relevant
C agreement provisions as well as the land lease deed, the
total package documents, the minutes of pre-bid
meetings and the deed authorising collection of toll fee
etc., and proceeded with the arbitration proceedings. The
State Government had not taken the defence that it was
D not agreed between the parties to issue the notification
barring the traffic through the markets of Bharatpur city.
The only issue remained as to whether there was delay
in issuance of notification and implementation thereof. In
such a fact-situation, the District Judge as well as the
E High Court fell in error in considering the issue which was
not taken by the State before the arbitral tribunal during
the arbitration proceedings; and holding that there was
no agreement for issuance of Notification by the State
barring the use of old route. [para 14, 2G] (422-D-F; 417-
F B-C]
2.1 The issue as to whether the Bharatpur-Deeg
patch was an integral or composite part of the project
and the contractor could collect the toll fee on that part
also stands concluded by the High Court after
G considering the entire evidence on record. It is evident '
from the record as well as the judgments of the courts
below that the bid docliments contained the data
collected on the flow oi traffic on 14th and 15th April,
1994 to find out the viability and requirement of the
H establishment of Bharatput bye-pass and it included the
MSK PROJECTS (I) (JV) LTD v. STATE OF 407
RAJASTHAN & ANR.
·I'
traffic flow on the Bharatpur-Deeg section also which A
indicates that this particular patch had also been an
integral part of the project. Besides, in pre-bid conference,
it was clarified by the State authorities that the users of
Bharatpur-Deeg patch would be required to pay the toll
fee. [para20-22] [424-F-H; 425-A-B] B

2.2 Further, clause 5 of the concession agreement
also provided that Government would levy and charge the
fee from all persons using the project facilities. The
project was not in parts rather it was a composite and
integrated project, which included the Bharatpur-Deeg C
section also. Therefore, it was not permissible for the
State to take the plea that persons using such section of
the road were not liable to pay the toll fee. It has not been
denied that the said portion of road had been widened
and strengthened by the contractor. Thus, the issue D
raised by the State that Bharatpur-Deeg section of the
road was out of the project and the contractor was not
entitled to collect the toll fee on that part of the road,
stands settled in favour of the cotnractor. [para 23-24]
(425-B-F] E
3.1 It is a settled legal proposition that the arbitrator
is competent to award interest for the period
commencing with the date of award to the date of decree
or date of realisation, whichever is earlier. This is also F
quite logical for, while award of interest for the period
prior to an arbitrator entering upon the reference is a
matter of substantive law, the grant of interest for the
post-award period is a matter of procedure. [para 15]
•' [422-G-H] G
Union of India v. Bungo Steel Furniture Pvt. Ltd., 1967
SCR 324 =AIR 1967 SC 1032; Executive Engineer,
Irrigation, Ga/imala & Ors. v. Abnaduta Jena, 1988 (1) SCR
253 = AIR 1988 SC 1520; Gujarat Water Supply & Sewerage
Board v. Unique Erectors (Gujarat) (P) Ltd. & Anr., 1989 (1) H
408 SUPREME COURT REPORTS [2011] 9 S.C.R.

A SCR 318 =AIR 1989 SC 973; Secretary, Irrigation
Department, Govt. of Orissa & Ors. v. G. C. Roy, 1991 (3)
Suppl. SCR 417 = AIR 1992 SC 732; Hindustan
Construction Co. Ltd. v. State of Jammu & Kashmir, 1992 (1)
Suppl. SCR 297 =AIR 1992 SC 2192; Executive Engineer,
B Dhenkanal Minor Irrigation Division, Orissa v. N. C. Budharaj !
(Dead) by Lrs., 2001 (1) SCR 264 =AIR 2001 SC 626;
Bhagawati Oxygen Ltd. v. Hindustan Copper Ltd., 2005 (3 )
SCR 232 = AIR 2005 SC 2071; and Indian Hume Pipe Co.
Ltd. v. State of Rajasthan 2009 (15) SCR 254 = (2009) 10
c sec 187 - relied on
3.2 So far as the rate of interest is concerned, s. 3 of
the Interest Act 1978 empowers the court to award
interest at the rate prevailing in the banking transactions.
Thus, impliedly, the court has a power to vary the rate of
D interest agreed by the parties. In the instant case, the High
Court, while dealing with the rate of interest, has relied
upon the judgment of this Court in Krishna Bhagya Ja/a
Nigam Ltd. and, thus, there is no scope for this Court to
interfere with the rate of interest fixed by the courts below.
E [para 16 and 19) [423-0, F-G; 424-E]

Krishna Bhagya Jala Nigam Ltd. v. G. Harischandra
Reddy & Anr., 2007 (1) SCR 698 = AIR 2007 SC 817;
H.U.D.A v. Raj Singh Rana, 2008 (10) SCR 1034 =AIR 2008
F SC 3035, Ghaziabad Development Authority v. Balbir Singh,
2004 (3) SCR 68 =AIR 2004 SC 2141; Bihar State Housing
Board v. Arun Dakshy, 2005 (2) Suppl. SCR 819 = (2005)
7 SCC 103; Haryana Urban Development Authority v. Manoj
Kumar & Anr., (2005) 9 SCC 541; H.U.D.A v. Prem Kumar
G Agarwal & Anr., 2008 (1) SCR 807 = JT 2008 (1) SC 590 -
relied on. ; •
4. As regards the jurisdiction of the arbitral tribunal
to decide an issue not referred to, it is a settled legal
proposition that special tribunals like arbitral tribunals
H and Labour Courts get jurisdiction to proceed with the
MSK PROJECTS (I) (JV) LTD v. STATE OF 409
RAJASTHAN & ANR.
case only from the reference made to them. Thus, an A
arbitrator cannot be allowed to assume jurisdiction over
a question which has not been referred to him and,
similarly, he cannot widen his jurisdiction by holding
contrary to the fact that the ,matter which he wants to
decide is within the submission of the parties. If the B
dispute is within the scope of the arbitration clause, it is
no part of the province of the court to enter into the merits
of the dispute on the issue not referred to it. If the award
goes beyond the reference or there is an error apparent
on the face of the award, it would certainly be open to the c
court to interfere with such an award. If the arbitrator
commits an error in the construction of the contract, this
is an error within his jurisdiction. But if he wanders
outside the. contract and deals with matters not allotted
;
to him, be commits a jurisdictional error, which needs to 0
be proved by evidence extrinsic to the award. [para 6-8]
[419-B-H; 420-A-B]
Grid Corporation of Orissa Ltd. & Anr. v. Balasore
Technical School, AIR 1999 SC 2262; and Delhi
Development Authority v. R. S. Sharma and Company, New E
Delhi, 2008 (12) SCR 785 =(2008) 13 SCC 80; Associated
Engg. Co. v. Govt. of Andhra Pradesh & Anr.,1991(2) SCR
924 =AIR 1992 SC 232; Gobardhan Das v. Lachhmi Ram &
Ors., AIR 1954 SC 689; Seth Thawardas Pherumal v. The
Union of India, 1955 SCR 48 =AIR 1955 SC 468; Union of F
India v. Kishorilal Gupta & Bros., 1960 SCR 493=AIR 1959
SC 1362; Alopi Parshad & Sons. Ltd. v. Union of India, 1960
SCR 793 =AIR 1960 SC 588; Jivarajbhai Ujamshi Sheth &
Ors . . Chintamanrao Balaji & Ors., 1964 SCR 480 =AIR 1965
SC 214; and Renusagar Power Co. Ltd. v. General Electric G
Company & Anr., 1985 (1) SCR 432 =AIR 1985 SC 1156;
Kishore Kumar Khaitan & Anr. v. Praveen Kumar Singh,
(2006) 3 SCC 312, Williams v. Lourdusamy & Anr., 2008
(6) SCR 929 =(2008) 5 SCC 647; Cellular Operators
Association of India & Ors. v. Union of India & Ors., 2003 (3) H
410 SUPREME COURT REPORTS [2011] 9 S.C.R

•
A SCR 691 = (2003) 3 SCC 186; Oil & Natural Gas
Corporation Ltd. v. SAW Pipes Ltd. 2003 (3) SCR 691 =AIR
2003 SC 2629; and Hindustan Zinc Ltd. v. Friends Coal
Carbonisation (2006) 4 SCC 445 - referred to.

8
5.1 With regard to the entitlement of the contractor, .
A

the State authorities cannot be permitted to use the
collection of toll fee as augmenting the State revenues.
In fact, the toll fee under the Tolls Act, 1851 is
compensatory in nature wherein the Government can
reimburse itself the amount which it had spent on
C construction of road/bridge etc. The State is competent
to levy/collect the toll fee only for the period stipulated
under the Statute or till the actual cost of the project with
interest etc. is recovered. However, it cannot be a source
of revenue for the State. It is evident that Clause IV(a) of
D the Notification dated 10.02.1997 envisages that toll can
only be collected as long as t0tal cost of construction
and maintenance including interest thereupon is
recovered. A person is debarred by law and statutory
inhibition, as contained in Clause IV(a) of the notification,
E from collection of toll beyond the recovery of cost of
construction. (para 25-27) [425-G-H; 426-D-E-H; 427-A-C)

5.2 In common parlance, "reimbursement" means
and implies restoration of an equivalent for something
F paid or expanded. Similarly, "Compensation" means
anything given to make the equivalent. [para 28) [427-D]

State of Gujarat v. Shanti/al Mangaldas & Ors., 1969 (3)
SCR 341=AIR1969 SC 634; Tata Iron & Steel Co. Ltd. v.
Union of India & Ors., 2000 (5) Suppl. SCR 228 =AIR 2000
G SC 3706; Dwaraka Das v. State of Madhya Pradesh & Anr., ~
1999 (1) SCR 524 =AIR 1999 SC 1031; State of U.P. & Ors.
v. Devi Dayal Singh, 2000 (1) SCR 1205 =AIR 2000 SC 961
- relied on.

H 5.3 Claim of expected profits is legally admissible on
MSK PROJECTS (I) (JV) LTD v. STATE OF 411
RAJASTHAN & ANR.
proof of the breach of contract by the erring party. What A
would be the measure of profit would depend upon facts
and circumstances of each case. But, that there shall be
a reasonable expectation of profit is implicit in a works
contract and its loss has to be compensated by way of
damages if the other party to the contract is guilty of breach B
of contract cannot be gainsaid. [para 30] [428-A-C]
Mis. A. T. Brij Paul Singh & Ors. v. State of Gujarat, AIR
1984 SC 1703; B.S.N.L v. Reliance Communication Ltd.,
201 o (15) SCR 705 =(2011) 1 sec 394 - relied on
c
5.4 In the instant case, undoubtedly, the total
construction was for Rs. 13.25 crores. It is evident from
the bid-documents filed by the contractor that the work
was to be executed in two phases. In the first phase, the
,1 contractor spent about Rs.10.45 crores and recovered
D
the said amount with certain profit, by collection of toll
fee within the stipulated period. The documents reveal
that phase II work was of worth Rs.354.75 lacs, but,
admittedly, this part of the contract had never been
executed by the contractor and the said amount of
Rs.354.75 lacs had not been spent by it. This issue has E
been agitated by the State before this Court in its counter
affidavit and the averments made therein have not been
denied by the contractor while submitting its rejoinder.
Thus, there is no specific denial of the allegations/
averments taken by the State as required by the principle F
enshrined in 0 8, r. 5 of the Code of Civil Procedure, 1908.
The contractor cannot be permitted to claim damages/
compensation in respect of the amount of Rs.13.25
crores, as it did not spend the said amount stipulated in
~
.. the terms of agreement. The contractor cannot claim the G
amount of Rs. 7.13 crores for a period of three years for
a small patch of 1.25 kilometres out of the total length of
the road to the extent of 10.85 kilometres. [para 33-34 and
36] [429-A-B; 430-E-F; 431-C-E-H]
5.5 In fact, the tribunal has dealt with the issue in H
412' SUPREME COURT REPORTS (2011] 9 S.C.R.
•
A correct perspective only to the extent the period of delay
by which the notification barring the heavy vehicles
through market of Bharatpur had been issued. As the
notification had been issued, and it was not the
responsibility of the State to establish a police chowki
B etc. to implement the notification, there was no occasion
for the tribunal to proceed further. The arbitrator cannot
proceed beyond the terms of reference and, therefore,
the question of considering the non-execution of the
work of second phase was neither permissible nor
c possible as it had arisen subsequent to the date of award
in the arbitration proceedings. Therefore, any award in
favour of the contractor in that respect for non-issuance
of notification beyond the date of the notification cannot
be held to be justified and the same is set aside. (para 37-
D 38) [432-A-B-F; 433-D-E]
5.6 In order to do complete justice between the
parties and protect the public exchequer, the matter is
remitted to the arbitral tribunal for reconsideration and
adjudication as to: (i) what amount could have been
E recovered by the contractor for Bharatpur-Deeg part of
the road from the vehicles using the road; and (ii) what
could be the effect on the contract as a whole for non-
executing the work of the second phase. The contractor
shall be entitled only to a sum of Rs.26.34 lacs awarded
F by the tribunal for delay in issuing the notification with
10% interest, if not paid already or it could be adjusted
in the final accounts bills. [para 38) [433-E-H; 434-A-B]
Case Law Reference:
AIR 1999 SC 2262 referred to para 6
G
2008 (12) SCR 785 referred to para 6
1991 (2) SCR 924 referred to para 7
1955 SCR 48 referred to para 8
H 1960 SCR 493 referred to para 8
MSK PROJECTS (I) (JV) LTD v. STATE OF 413
RAJASTHAN & ANR.
1960 SCR 793 referred to para 8 A
• 1964 SCR 480 referred to para 8
1985 (1) SCR 432 referred to para 8
! (2006) 3 sec 312 referred to para 9 B
2008 (6) SCR 929 referred to para 9
2003 (3) SCR 691 referred to para 10
2003 (3) SCR 691 referred to para 11
c
2006 (4) sec 445 referred to para 11
1967 SCR 324 relied on para 15

~
• 1988 (1) SCR 253 relied on para 15
1989 (1) SCR 318 relied on para 15 D

1991 (3) Suppl. SCR 417 relied on para 15
1992 (1) Suppl. SCR 297 relied on para 15
2001 (1) SCR 264 relied on para 15 E
2005 (3) SCR 232 relied on para 15
2009 (15) SCR 254 relied on para 15
,;
2007 (1) SCR 698 relied on para 15
F
2008 (10) SCR 1034 relied on para 15
2004 (3) SCR 68 relied on para 15
2005 (2) Suppl. SCR 819 relied on para 15
.. .; G
2005 (9) sec 541 relied on para 15
2008 (1) SCR 807 relied on para 15
2000 (1) SCR 1205 relied on para 25
1969 (3) SCR 341 relied on para 28 H
414 SUPREME COURT REPORTS [2011] 9 S.C.R.

...
A 2000 (5) Suppl. SCR 228 relied on para 28
1999 (1) SCR 524 relied on para 29
AIR 1984 SC 1703 relied on para 30
2010 (15) SCR 705 relied on para 31
B '
CIVIL APPELLATE JURISDICTION: Civil Appeal No.
5416 of 2011.

From the Judgment & Order dated 24.04.2007 of the
c High Court of Judicature at Rajathan at Jaipur in Civil Misc.
Appeal No. 1581 of 2006.
WITH
C.A. No. 5417 of 2011.
D K.K. Venugopal, Shirish Patel, Karan Patel, Ankur Saigal,
Abhay Anand, Gaurav Singh, Bina Gupta for the Appellant.
Dr. Manish Singhvi, AAG, Vinay Verma, Milind Kumar for
the Respondents.
E The Judgment of the Court was delivered by

DR. B.S. CHAUHAN, J. 1. Both these appeals have been
preferred by the rival parties against the judgment and order
dated 24.4.2007 passed by the High Court of Rajasthan (Jaipur
F Bench) in Civil Misc. Appeal No.1581 of 2006 under Section
•
37(1 )(A) of the Arbitration and Conciliation Act, 1996
(hereinafter called "Act 1996") against the order dated
17.1.2006 passed by the District Judge, Jaipur City, Jaipur in
Arbitration Case No.89/2004 whereby the application filed by
G the State of Rajasthan under Section 34 of the Act 1996 for '
setting aside the arbitral award dated 1.12.2003 had been
allowed.
2. Facts and circumstances giving rise to these appeals
are:
H
MSK PROJECTS (I) (JV) LTD v. STATE OF 415
RAJASTHAN & ANR. [DR. B.S. CHAUHAN, J.]

A. The Public Works Department of the State of Rajasthan A
(hereinafter called "PWD") decided in September 1997 to
construct the Bharatpur bye-pass for the road from Bharatpur
to Mathura, which passed through a busy market of the city of
Bharatpur. For the aforesaid work, tenders were invited with a
1 stipulation that the work would be executed on the basis of Build B
Operate and Transfer (BOT). The total extent of the road had
been 10.850 k.ms. out of which 9.6 k.ms. was new construction
and 1.25 k.ms. was improvement, i.e. widening and
strengthening of the existing portion of Bharatpur-Deeg Road.
c
B. After having pre-bid conference/meeting and
completing the required formalities it was agreed between the
tenderers and PWD that compensation would be worked out
\ on the basis of investment made by the concerned
)
entrepreneur. The tender submitted by MSK-appellant for
D
Rs.1,325 lacs was accepted vide letter dated 5.2.1998 arid the
MSK-appellant was called upon to furnish security deposit
which was done on 25.7.1998. Concession agreement dated
19.8.1998 was entered into_between the parties authorising
collection of toll fee by MSK-appellant. According to this
agreement, period of concession had been 111 monlhs E
including the period of construction. The said period would end
on 6.4.2008. It also contained the provisions for making
repayment/collection of toll fee and in case of any difference/
.- A dispute to refer the matter to the Arbitrator.
F
C. MSK-appellant completed the Bharatpur bye-pass
Project on 10.4.2000 and also started collection of toll fee as
provided under the agreement with effect from 28.4.2000. There
had been some problem in collecting the toll fee because of
.<
agitation by local people. The State issued Notification dated G
1.9.2000 under the provisions of the Indian Tolls Act, 1851 and
Rajasthan Motor Vehicles Taxation (Amendment) Act, 1994
(hereinafter called the 'Notification dated 1.9.2000') preventing
the entry of vehicles into Bharatpur city stipulating its operation
with effect from 1.10.2000. MSK-appellant invoked arbitration H
416 SUPREME COURT REPORTS [2011] 9 S.C.R.

A clause raising the dispute with respect to:

(a) Delay in issuance of Notification prohibiting entry
of commercial vehicles into Bharatpur town and
diverting traffic through the bye-pass; and
I
B (b) Collection of toll from vehicles using Bharatpur-
Deeg patch of the road.

D. The State/PWD failed to make appointment of the
Arbitrator. MSK-appellant preferred SB Civil Arbitration
c Application No.31 of 2002 before the High Court and the High
Court vide order 12.4.2002 appointed the Arbitrator. The
Arbitrators so appointed in their meeting on 8.5.2002 appointed
the third Arbitrator. Claim Petition was filed before the Tribunal
by MSK-appellant on 23.9.2002. The State submitted its reply
0 to the claim petition on 7.12.2002.

E. The Arbitral Award was made in favour of MSK-
appellant on 1.12.2003 according to which there had been
delay on the part of the State of Raj~sthan in issuing the
Notification and the State failed to implement the same and the
E contractor was entitled to collect toll fee even from the vehicles
using Bharatpur-Deeg part of the road . The State of Rajasthan
was directed to pay a sum of Rs.990.52 lacs to MSK-appellant
as loss due upto 31.12.2003 with 18% interest from
31.12.2003 onwards. The Tribunal further gave various other
F directions to the State in this regard.
F. Being aggrieved, the State of Rajasthan filed objections
under Section 34 of the Act 1996 and while deciding the same,
the District Judge vide order dated 17.1.2006 set aside the
G Arbitral Award on the grounds that there was no clause in the
agreement to issue notification barring the entry of vehicles in
the city of Bharatpur; and the Tribunal erred in taking 1997
survey as basis for calculating the loss suffered by MSK-
appellant. It held that MSK-appellant was not entitled to any
H monetary compensation under clause 10 of the concession
MSK PROJECTS (I) (JV) LTD v. STATE OF 417
RAJASTHAN & ANR. [DR. B.S. CHAUHAN, J.]
.,.
agreement, but only entitled to extension of concession period, A
and the rate of interest was reduced from 18% to 10%.

G. Being aggrieved, MSK-appellant preferred an appeal
before the High Court wherein the High Court vide impugned
; judgment and order dated 24.4.2007 held that Bharatpur-Deeg B
section was part of the project and the contractor could collect
the toll fee from the users of this part of the road also. Clause
10 of the concession agreement was not attracted in the facts
of the case. There was no agreement for issuance of
Notification by the State barring the use of old route and
directing the vehicles to use the new route alone. Therefore, the
c
question of grant of compensation on that account for the traffic
loss could not arise. The District Judge was justified in reducing
the rate of interest from 18% to 10% in view of the provisions
of Section 31 (7)(b) of the Act, 1996 and economic realities,
' whereby the rate of interest had been reduced by the Banks in D
India.

Hence, these two appeals.

3. Mr. K.K. Venugopal, learned senior counsel appearing E
for the private appellant, has submitted that it was implied in
the agreement and there has been an understanding between
the parties that State Government would issue notification
barring the vehicles driven through the markets of Bharatpur
•A
City. This was not even an issue before the Tribunal and thus,
F
could not be agitated by the State at all. Thus, the courts below
erred in setting aside the award of arbitral tribunal to that extent,
and secondly, that the rate of interest as reduced from 18 per
cent to 10 per cent by the District Court as well as the High
Court is in contravention of the terms of contract between the
.., parties which fixed the rate of interest at 20 per cent. Further G
"'" opposing the appeal by the State of Rajasthan, Shri Venugopal
has submitted that Bharatpur-Deeg patch was an integral part
:>f the project as there was only one composite contract of the
entire bye-pass and, therefore, the private appellant was entitled
:o collect the toll fee from the users of that part of the road also. H
418 SUPREME COURT REPORTS [2011] 9 S.C.R.

A 4. Per contra, Dr. Manish Singhvi, learned Additional
Advocate General for the State of Rajasthan, has submitted that
arbitration proceedings could not be proceeded in contravention
to the terms of agreement and statutory provisions. There was
no obligation on the part of the State authorities to issue the
s notification restraining the entry of vehicles to the market side
of the city. The rate of interest has rightly been reduced
considering the prevailing rate of interest in banking
transactions during the relevant period of contract. In support
of the appeal of the State, it has been submitted that there was
c a clear understanding between the parties that the private
appellant shall not collect any toll fee on the Bharatpur-Deeg
patch and to that extent the Tribunal and the courts below
committed an error. It has further been submitted that the total
contract had been for a sum of Rs.13.25 crores including
interest. The project was to be executed in two phases. The
0
second phase for a sum of Rs.3.24 crores had never been
executed by the private appellant. The contractor could collect
the compensation only on the basis of investment made by it.
The concept of toll fee is of compen::.atory in nature wherein
E the State which has spent huge amount on construction of
roads/bridges etc. has a right to get the said amount
reimbursed, and therefore, in such a contract the concept of
profit which prevails in other forms of contract cannot be the
relevant component.
••
F 5. We have considered the rival submissions made on
behalf of the parties and perused the record.

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

1-f In the State appeal, the only issue required to be
MSK PROJECTS (I) (JV) LTD v. STATE OF 419

., considered is whether the private appellant had a right to collect A
RAJASTHAN & ANR. [DR. B.S. CHAUHAN, J.]

the toll fee on the patch between Bharatpur - Deeg.

6. The issue regarding the jurisdiction of the Arbitral
Tribunal to decide an issue not referred to is no more res
) integra. It is a settled legal proposition that special Tribunals 8
like Arbitral Tribunals and Labour Courts get jurisdiction to
proceed with the case only from the reference made to them.
Thus, it is not permissible for such Tribunals/authorities to travel
beyond the terms of reference. Powers cannot be exercised
by the Tribunal so as to enlarge materially the scope of C
reference itself.

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

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

8. If the arbitrator commits an error in the construction of
the contract, that is an error within his jurisdiction. But if he
wanders outside the contract and deals with matters not allotted
to him, he commits a jurisdictional error. Extrinsic evidence is H
420 SUPREME COURT REPORTS (2011] 9 S.C.R.

A admissible in such cases because the dispute is not something
which arises under or .in relation to the contract or dependent
on the construction of the contract or to be determined within
the award. The ambiguity of the award can, in such cases, be
resolved by admitting extrinsic evidence. The rationale of this
B rule is that the nature of the dispute is something which has to
be determined outside and independent of what appears in the
award. Such a jurisdictional error needs to be proved by
evidence extrinsic to the award. (See: Gobardhan Das
v. Lachhmi Ram & Ors., AIR 1954 SC 689; Seth Thawardas
c Pherumal v. The Union of India, AIR 1955 SC 468; .Union of
India v. Kishorilal Gupta & Bros., AIR 1959 SC 1362; Alopi
Parshad & Sons. Ltd. v. Union of India, AIR 1960 SC 588;
Jivarajbhai Ujamshi Sheth & Ors. v. Chintamanrao Balaji &
Ors., AIR 1965 SC 214; and Renusagar Power Co. Ltd.
v. General Electric Company & Anr., AIR 1985 SC 1156).
0
9. In Kishore Kumar Khaitan & Anr. v. Praveen Kumar
Singh, (2006) 3 sec 312, this Court held that when a court
asks itself a wrong question or approaches the question in an
improper manner, even if it comes to a finding of fact, the said
E finding of fact cannot be said to be one rendered with
jurisdiction. The failure to render the necessary findings to
support its order would also be a jurisdictional error liable to

F
correction.

(See also: Williams v. Lourdusamy &Anr., (2008) 5 SCC
. '

647)

10. In Cellular Operators Association of India & Ors. v.
Union of India & Ors., (2003) 3 SCC 186, this Court held as
under:
G
"As regards the issue of jurisdiction, it posed a wrong
question and gave a wrong answer ................ The
learned TDSAT, therefore, has posed absolutely a wrong
question and thus its impugned decision suffers from a
H misdirection in law."
MSK PROJECTS (I) (JV) LTD v. STATE OF 421
RAJASTHAN & ANR. [DR. B.S. CHAUHAN, J.]
)I

11. This Court, in Oil & Natural Gas Corporation Ltd. v. A
SAW Pipes Ltd., AIR 2003 SC 2629; and Hindustan Zinc Ltd.
v. Friends Coal Carbonisation, (2006) 4 SCC 445), held that
an arbitration award contrary to substantive provisions of law,
or provisions of the Act, 1996 or against terms of the contract,
>· or public policy, would be patently illegal, and if it affects the 8
rights of the parties, it would be open for the court to interfere
under Section 34(2) of the Act 1996.

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

13. Be that as it may, in the instant case, a reference to
the Tribunal had been made on the basis of statement of facts,
claims by the private appellant, defence taken by the
respondent-State and rejoinder by the claimant. After · E
completing the formalities of admission and denial by each party
1
in respect of each other's documents and submission of draft

,.. . proposed issues and respective oral evidence, the Tribunal on
4.1.2003 framed the following issues:
F
1. Whether claimant as per agreement is entitled to
recover its amount of claim of Rs.453.69 lacs upto
31.12.2002 and onwards or not?

2. Whether there was delay on part of State in issuing
• .. notification for restriction of traffic through the Bharatpur G
Town, which has effected the toll tax or not? If so, how much
delay and delay in full rate of safe implementation as on
date, or not? By virtue of it, is the claimant entitled to
recover its claim of Rs.292.17 lacs upto 31.12.2002 and
thereafter onward or not; or merely by extension of H
422 SUPREME COURT REPORTS (2011] 9 S.C.R.

A concession period as averred by respondent?

3. As a consequence of issue 1 &2, which party breached
the contract?

4. Whether the claimant is entitled to claim interest on its
B any due claim amount as per decision of issue 1 & 2? If
so, from what date and at what rate of simple/compound
interest?

5. Whether claimant or respondent is entitled for cost of
c arbitration incurred and claimed by, each party? If so, what
amount and to which party?

6. Any other if any demanded by any party during
proceedings.

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

15. Furthermore, it is a settled legal proposition that the
G arbitrator is competent to award interest for the period
•
commencing with the date of award to the date of decree or
date of realisation, whichever is earlier. This is also quite
logical for, while award of interest for the period prior to an
arbitrator entering upon the reference is a matter of substantive
law, the grant of interest for the post-award period is a matter
H of procedure.
MSK PROJECTS (I) (JV) LTD v. STATE OF 423
RAJASTHAN & ANR. [DR. B.S. CHAUHAN, J.]
(Vide: Seth Thawardas Pherumal (Supra); Union of . A
India v. Bungo Steel Furniture Pvt. Ltd., AIR 1967 SC 1032;
Executive Engineer, Irrigation, Galimala & Ors. v. Abnaduta
Jena, AIR 1988 SC 1520; Gujarat Water Supply & Sewerage
Board v. Unique Erectors (Gujarat) (P) Ltd. & Anr., AIR 1989
,\
SC 973; Secretary, Irrigation Department, Govt. of Orissa & B
Ors. v. G.C. Roy, AIR 1992 SC 732; Hindustan Construction
Co. Ltd. v. State of Jammu & Kashmir, AIR 1992 SC 2192;
Executive Engineer, Dhenkanal Minor Irrigation Division,
Orissa v. N.C. Budharaj (Dead) by Lrs., AIR 2001 SC 626;
Bhagawati Oxygen Ltd. v. Hindustan Copper Ltd., AIR 2005 c
SC 2071; and Indian Hume Pipe Co. Ltd. v. State of
Rajasthan, (2009) 10 SCC 187).

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

"(1) In any proceedings for the recovery of any debt or
damages or in any proceedings in which a claim for
interest in respect of any debt or damages already paid.
is made, the court may, if it thinks fit, allow interest to the E
person entitled to the debt or damages or to the person
making such claim, as the case may be, at a rate not
exceeding the current rate of interest ... ." (Emphasis
add~d)

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

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

• ... after economic reforms in our country the interest
regime has changed and the rates have substantially H
424 SUPREME COURT REPORTS [2011] 9 S.C.R.

A reduced and, therefore, we are of the view that the interest
awarded by the arbitrator at 18% for the pre-arbitration
period, for the pendente lite period and future interest be
reduced to 9%."

B
18. In H.U.D.A v. Raj Singh Rana, AIR 2008 SC 3035, .
i

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

".......the rate of interest is to be fixed in the circumstances
of each case and it should not be imposed at a uniform
D rate without looking into the circumstances leading to a
situation where compensation was required to be paid."

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

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

21. It is evident from the record as well as the judgments
G of the courts below that bid documents contained data collected ~

on the flow of traffic on 14th and 15th April, 1994 to find out
the viability and requirement of the establishment of Bharatput
bye-pass and it included the traffic flow on the Bharatpur-Deeg
section also which indicates that this particular patch had also
been an integral part of the project.
H
MSK PROJECTS (I) (JV) LTD v. STATE OF 425
RAJASTHAN & ANR. [DR. B.S. CHAUHAN, J.]
22. In pre-bid conference the interveners wanted a A
clarification as to whether the persons using this particular patch
of road between Bharatpur-Deeg could be liable to pay toll fee.
It was clarified by the respondent-State authorities that the
,' users of this patch would be required to pay the toll fee.
B
23. Clause 5 of the Concession agreement also provided
that Government would levy and charge the fee from all persons
using the project facilities. The project was not in parts rather
it was a composite and integrated project which included the
Bharatpur-Deeg section also. Hence, it was not permissible for C
the respondent-State to take the plea that persons using such
section of the road were not liable to pay the toll fee. We do
not find any force in the submission made by Dr. Manish
Singhvi, learned counsel for the State that it was not a newly
constructed road. However, he is not in a position to deny that
the said portion of road had been widened and strengthened D
by the private appellant and could not be termed as service road
which could be used free of charge in view of clause 7 of. the
concession agreement as service road has been defined as
any road constructed temporarily for use of traffic for short
period during construction of the main road. Such a facility had E
to be provided in order to maintain the free flow of traffic during
the construction of the road.

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

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

The Court is not oblivious to the fact that the State
authorities cannot be permitted to use the collection of toll fee
as augmenting the State revenues. In State of U.P. & Ors. v.
Devi Dayal Singh, AIR 2000 SC 961, this Court defined 'toll' H
426 SUPREME COURT REPORTS [2011] 9 S.C.R.

A as a sum of money taken in respect of a benefit arising out of
the temporary use of land. It implies some consideration
moving to the public either in the form of a liberty, privilege or
service. In other words, for the valid imposition of a toll, there
must be a corresponding benefit. The Court furtner held:
J

B
"Although the section has empowered the State
Government to levy rates of tolls "as it thinks fit", having
regard to the compensatory nature of the levy, the rate of
toll must bear a reasonable relationship to the providing
of benefit. No doubt, by virtue of Section 8 of the Act, the
c tolls collected are part of the public revenue and may be
absorbed in the general revenue of the State, nevertheless
by definition a toll cannot be used for otherwise
augmenting the State's revenue."

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

F "IV(a). The toll of any of the aforesaid facilities/
..
constructions shall be levied only for so long as the total
cost of its construction and maintenance including
interest thereupon, and the total expenditure in realisation
of toll has not been realised in full or for a period of 30
G years." •
"
(Emphasis added)

It is evident that Clause IV(a) of the Notification dated
10.02.1997 envisages that toll can only be collected as long
H as total cost of construction and maintenance including interest
MSK PROJECTS (I) (JV) LTD v. STATE OF 427
RAJASTHAN & ANR. [DR. B.S. CHAUHAN, J.]
.,,
thereupon is recovered. A person is debarred by law and A
statutory inhibition as conta.ined in Clause IV(a) of the
notification from collection of toll beyond the recovery of cost
of construction.

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

28. In common parlance, "reimbursement" means and
.. · implies restoration of an equivalent for something paid or
expanded. Similarly, "Compensation" means anything given to D
make the equivalent. (See: State of Gujarat v. Shanti/a/
Manga/das & Ors., AIR 1969 SC 634; Tata Iron & Steel Co.
Ltd. v. Union of India & Ors., AIR 2000 SC 3706; Ghaziabad
Development Authority (Supra); and H.U.D.A v. Raj Singh
Rana, (Supra). E
29. However, in Dwaraka Das v. State of Madhya Pradesh
& Anr., AIR 1999 SC 1031, it was held that a claim by a
. ~'
contractor for recovery of amount as damages as expected
profit out of contract cannot be disallowed on ground that there
was no proof that he suffered actual loss to the extent of amount
F
claimed on account of breach of contract.

30. In Mis. A. T. Brij Paul Singh & Ors. v. State of Gujarat,
AIR 1984 SC 1703, while interpreting the provisions of Section
j.
·•. 73 of the Indian Contract Act, 1972, this Court held that G
damages can be claimed by a contractor where the
government is proved to have committed breach by
improperly rescinding the contract and for estimating the
amount of damages, court should make a broad evaluation
instead of going into minute details. It was specifically held that H
428 SUPREME COURT REPORTS [2011] 9 S.C.R.

A where in the works contract, the party entrusting the work
committed breach of contract, the contractor is entitled to
claim the damages for loss of profit which he expected to earn
by undertaking the works contract. Claim of expected profits
is legally admissible on proof of the breach of contract by the
B erring party. It was further observed that what would be the f
.
measure of profit would depend upon facts and circumstances
of each case. But that there shall be a reasonable expectation
of profit is implicit in a works contract and its loss has to be
compensated by way of damages if the other party to the
c contract is guilty of breach of contract cannot be gainsaid.

31. In B.S.N.L v. Reliance Communication Ltd., (2011)
1 sec 394, this court held as under:
"53. Lastly, it may be noted that liquidated damages serve
D the useful purpose of avoiding litigation and promoting
commercial certainty and, therefore, the court should not
be astute to categorise as penalties the clauses described
as liquidated damages."

32. This Court further stated in Oil & Natural Gas
E
Corporation Ltd. v. SAW Pipes Ltd. (Supra):
"64 .... This section is to be read with Section 74, which
deals with penalty stipulated in the contract, inter alia
(relevant for the present case) provides that when a
F contract has been broken, if a sum is named in the contract ~ .
as the amount to be paid in case of such breach, the party
complaining of breach is entitled, whether or not actual loss
is proved to have been caused, thereby to receive from
the party who has broken the contract reasonable
. compensation not exceeding fhe amount so named.
G
Section 74 emphasizes that in case of breach of contract, ~ '
the party complaining of the breach is entitled to receive
reasonable compensation whether or not actual loss is
proved to have been caused by such breach .... "
H 33. Thus, the case requires consideration in the light of the
MSK PROJECTS (I) (JV) LTD v. STATE OF 429
RAJASTHAN & ANR. [DR. B.S. CHAUHAN, J.]
'I aforesaid settled legal principles. A
Undoubtedly, the total construction was for Rs. 13.25
crores. It is evident from the Bid-documents filed by the private
appellant that the work was to be executed in two phases and
the relevant part thereof reads as under:
B
PHASE -1

Year Const Super- Total lnte- Total Upto
Cost vision rest inves- date
Charges @20% tment inves- c
@ 10% of Strs tment
I (in (in (in
lacs) lacs) lacs)

1998-99
D
6/98 75 7.5 82.50 4.12 86.62 86.62
9/98 80 8.0 88.00 8.52 92.52 183.14
12/98 80 8.0 88.00 12.92 100.92 284.06
3/99 80 8.0 88.00 17.32 105.32 389.32 E

Total 315 31.5 346.50 42.88 389.38 389.88 .

1999-2000
F
6/99 110 11.0 121 23.37 144.37 533.75
9/99 120 12.0 132.0 29.97 161.97 695.72
12/99 120 12.0 132.0 36.57 168.57 864.29
G
3/2000 125 12.50 137.50 43.44 180.94 1045.23
Total 475 47.50 522.50 133.35 655.85 1045.23
Grand 790 79.0 869.0 176.23 1045.23 1045.23
Total H
430 SUPREME COURT REPORTS [2011) 9 S.C.R.

A
PHASE -11

2005-06

B 6/2005 150 15.0 165 8.25 173.25 173.25 ''

9/2005 150 15.0 165 16.50 181.50 354.75

30.0
c Total 300 330 24.75 354.75 354.75

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

34. In the first phase, the private appellant spent about
Rs.10.45 crores and recovered the said amount with certain
profit, though the actual figure i.e. the toll fee recovered has not
been disclosed. So far as the second phase is concerned, • .
F admittedly, the amount of Rs.354.75 lacs has not been spent
by the private appellant. This issue has been agitated by the
State of Rajasthan before this Court in its Counter Affidavit
wherein it is stated as under:
"It is respectfully submitted that as per the terms of the •
G I
Agreement, petitioner was required to complete the project
in two phases. In the first phase investment of Rs.1045
lacs and after 5 years in the second phase Rs. 354.75 lacs
was to be made by the petitioner. However, the petitioner
has not abided by the terms of the agreement and has not
H
MSK PROJECTS (I) (JV) LTD v. STATE OF 431
RAJASTHAN & ANR. [DR. B.S. CHAUHAN, J.]
made any investment for.the second phase and, therefore, A
it has breached the terms of the contract and, therefore, it
is respectfully submitted that the contention of the petitioner
that he is entitled to recover its investment, is erroneous
\
and petitioner is trying to give wrong picture about
' investment made and has not come to this Hon'ble Court 91
. with clean hands and, therefore, the present Special Leave
Petition is liable to be dismissed° by the Hon'ble Court. The
concession period has come to an end."

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

"..... the present contention as raised was not part of the
.. arbitration proceeding, before the arbitral Tribunal. It is
further submitted that this contention was never raised D
before the District Court and as well as before the Hon'ble
Court of Rajasthan. The point as raised is subsequent to
completion of the project and work to be done after the
period of 5 years .... "
E
Thus, there is no specific denial of the allegations/
averments taken by the State as required by the principie
enshrined in Order VIII Rule 5 of the Code of Civil Procedure,
1908.
>- _.

36. It is strange that a person who has not complied with F
terms of contract and has acted in contravention of the terms
of agreement claims that he was entitled to earn more profit.
The private appellant cannot be permitted to claim damages/
compensation in respect of the amount of Rs.13.25 crores, as
• he did not spend the said amount stipulated in the terms of G
" agreement. Private appellant cannot claim the amount of Rs.
7.13 crores for a period of three years for a small patch of 1.25
kilometres out of the total length of the road to the extent of
10.85 kilometres.
H
432 SUPREME COURT REPORTS (2011] 9 S.C.R.
w

A 37. In fact, the tribunal has dealt with the issue in correct
perspective only to the extent the period of delay by which the
notification barring the heavy vehicles through market of
Bharatpur had been issued stating as under:
I
"The traffic survey conducted by the claimant on 17th, 18th '
B
& 19th April, 2000 has not been accepted by the
respondent. The arbitral tribunal also feels that this survey,
which has been done by the claimant alone, cannot be
relied upon for this purpose, because respondent is not a
party to this survey. The claim lodged by claimant on its
c own survey as per para 12.3(iii) from 12/4/2000 to 30/9/
2000 is for Rs.31.18 lacs. In this regard tribunal is of the
opinion that traffic survey of 1997 as per agreement in
which both parties bears consent of each other therefore
can safely be relied upon for purpose of assessment Clf
D such losses to the claimant, because the occurrence of loss
as such to the claimant has not been denied by
respondent, which otherwise is an established fact as per
documentary evidence on record. The tribunal has
assessed this part of loss on the traffic survey of 1997 for
E commercial vehicles only as Rs.26.34 lacs from 12/4/2000
to 301912000."

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

as it was not having sufficient funds. In case the claim of the
private appellant is allowed and as the State is not in a position
to grant further facility to collect the toll fee at such a belated
stage, the purpose of establishing the toll road itself stands
H
MSK PROJECTS (I) (JV) LTD v. STATE OF 433
... RAJASTHAN & ANR. [DR. ·s.s. CHAUHAN, J.]
~

frustrated. More so, the toll fee cannot be collected to recover A
the amount never spent by the contractor. It is evident from the
discourse in pre-bid meetings of the parties that it had been
decided that compensation would be worked out on the basis
.• of investment made by concerned contractor. More so, the
statutory notification dated 10.2.1997 provided to recover the B
cost of construction and maintenance including interest thereon.
Therefore, the question of non-execution of work of second
phase of the contract becomes very material and relevant to
determine the real controversy. The State authorities for the
reasons best known to them, did not make reference to the c
arbitration proceedings for non-execution of the work of the
second phase of the contract. However, the relief claimed by
the private appellant would prove to be a "windfall profit" without
carrying out the obligation to execute the work just on
" technicalities. We have held in this very case, that the arbitrator D
cannot proceed beyond the terms of reference and, therefore,
the question of considering the non-execution of work of second
phase of the work was neither permissible nor possible as it
had arisen subsequent to the date of award in the arbitration
proceedings.
E
Be that as it may, in order to do complete justice between
the parties and protect the public exchequer, we feel that the
matter requires adjudication and reconsideration on the
' j following points by the arbitration tribunal:
F
(i) What amount could have been recovered by the
private appellant for Bharatpur-Deeg part of the
road from the vehicles using the road?

.• (ii) What could be the effect on the contract as a whole
' for non-executing the work of the second phase? G

In view of the fact that a long time has elapsed, we request .
the learned tribunal to decide the case as early as possible after
giving due opportunity to the parties concerned. The private
H
434 SUPREME COURT REPORTS [2011] 9 S.C.R.

A appellant shall be entitled only for a sum of Rs.26.34 lacs
awarded by the tribunal for delay in issuing the notification with
10% interest, if not paid already or it could be adjusted in the
final accounts bills. With these observation, the appeals stand

B
disposed of. No costs.
.
•
R.P. Appeals disposed of.

••

j
•