LAW FOR ALL

Friday, July 22, 2011

The State authority has decided to establish a toll road as it was not having sufficient funds. In case the claim of the private appellant is allowed and as the State is not in a position to grant further facility to collect the toll fee at such a belated stage, the purpose of establishing the toll road itself stands frustrated. More so, the toll fee cannot be collected to recover the amount never spent by the contractor. It is evident from the discourse in pre-bid meetings of the parties that it had been decided that compensation would be worked out on the basis of investment made by concerned contractor. More so, the statutory notification dated 10.2.1997 provided to recover the cost of construction and maintenance including interest thereon. Therefore, the question of non-execution of work of second phase of the contract becomes very material and relevant to determine the real controversy. The State authorities for the reasons best known to them, did not make reference to the arbitration proceedings for non- execution of the work of the second phase of the contract. However,

REPORTABLE

IN THE SUPREME COURT OF INDIA

CIVIL APPELLATE JURISDICTION

CIVIL APPEAL NO. 5416 OF 2011

M/s. MSK Projects (I) (JV) Ltd. ... Appellant

Versus

State of Rajasthan & Anr. ...Respondents

with

CIVIL APPEAL NO. 5417 OF 2011

J U D G M E N T

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 Bench) in Civil Misc. Appeal No.1581 of

2006 under Section 37(1)(A) of the Arbitration and Conciliation Act,

1996 (hereinafter called "Act 1996") against the order dated

17.1.2006 passed by the District Judge, Jaipur City, Jaipur in

Arbitration Case No.89/2004 whereby the application filed by the

State of Rajasthan under Section 34 of the Act 1996 for setting aside

the arbitral award dated 1.12.2003 had been allowed.

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

A. The Public Works Department of the State of Rajasthan

(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 stipulation that the work

would be executed on the basis of Build 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.

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 Rs.1,325 lacs was accepted vide letter dated

2

5.2.1998 and 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 months 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/dispute to refer the matter to the

Arbitrator.

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 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 clause raising the dispute with

respect to:

3

(a) Delay in issuance of Notification prohibiting entry of

commercial vehicles into Bharatpur town and diverting

traffic through the bye-pass; and

(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 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 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 Rajasthan 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 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

4

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 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 monetary compensation under clause 10 of the

concession agreement, but only entitled to extension of concession

period, 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 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

question of grant of compensation on that account for the traffic loss

5

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 India.

Hence, these two appeals.

3. Mr. K.K. Venugopal, learned senior counsel appearing for the

private appellant, has submitted that it was implied in the agreement

and there has been an understanding between the parties that State

Government would issue notification barring the vehicles driven

through the markets of Bharatpur City. This was not even an issue

before the Tribunal and thus, could not be agitated by the State at all.

Thus, the courts below erred in setting aside the award of arbitral

tribunal to that extent, and secondly, that the rate of interest as

reduced from 18 per cent to 10 per cent by the District Court as well

as the High Court is in contravention of the terms of contract between

the parties which fixed the rate of interest at 20 per cent. Further

opposing the appeal by the State of Rajasthan, Shri Venugopal has

submitted that Bharatpur-Deeg patch was an integral part of the

project as there was only one composite contract of the entire bye-

pass and, therefore, the private appellant was entitled to collect the toll

fee from the users of that part of the road also.

6

4. Per contra, Dr. Manish Singhvi, learned Additional Advocate

General for the State of Rajasthan, has submitted that arbitration

proceedings could not be proceeded in contravention to the terms of

agreement and statutory provisions. There was no obligation on the

part of the State authorities to issue the notification restraining the

entry of vehicles to the market side of the city. The rate of interest has

rightly been reduced considering the prevailing rate of interest in

banking transactions during the relevant period of contract. In support

of the appeal of the State, it has been submitted that there was a clear

understanding between the parties that the private appellant shall not

collect any toll fee on the Bharatpur-Deeg patch and to that extent the

Tribunal and the courts below committed an error. It has further been

submitted that the total contract had been for a sum of Rs.13.25 crores

including interest. The project was to be executed in two phases. The

second phase for a sum of Rs.3.24 crores had never been executed by

the private appellant. The contractor could collect the compensation

only on the basis of investment made by it. The concept of toll fee is

of compensatory in nature wherein the State which has spent huge

amount on construction of roads/bridges etc. has a right to get the said

amount reimbursed, and therefore, in such a contract the concept of

profit which prevails in other forms of contract cannot be the relevant

7

component.

5. We have considered the rival submissions made on behalf of

the parties and perused the record.

In the appeal filed by the private contractor, MSK Projects,

two issues are involved; namely, whether it was mandatory/necessary

in view of the agreement/contract or on the basis of pre-bid under-

standing that the State had to issue the notification barring the

vehicles through the markets of Bharatpur city; and secondly whether

the rate of interest could be reduced from 18% to 10% by the courts

below.

In the State appeal, the only issue required to be considered is

whether the private appellant had a right to collect the toll fee on the

patch between Bharatpur - Deeg.

6. The issue regarding the jurisdiction of the Arbitral Tribunal to

decide an issue not referred to is no more res integra. It is a settled

legal proposition that special Tribunals like Arbitral Tribunals and La-

bour 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

8

cannot be exercised by the Tribunal so as to enlarge materially the

scope of reference itself.

If the dispute is within the scope of the arbitration clause, it is

no part of the province of the court to enter into the merits of the dis-

pute on the issue not referred to it. If the award goes beyond the refer-

ence or there is an error apparent on the face of the award it would

certainly be open to the court to interfere with such an award. (Vide:

Grid Corporation of Orissa Ltd. & Anr. v. Balasore Technical

School, AIR 1999 SC 2262; and Delhi Development Authority

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

7. In Associated Engg. Co. v. Govt. of Andhra Pradesh &

Anr., AIR 1992 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 by so doing, his

award would be liable to be set aside. Thus, an arbitrator cannot be al-

lowed to assume jurisdiction over a question which has not been re-

ferred to him, and similarly, he cannot widen his jurisdiction by hold-

ing contrary to the fact that the matter which he wants to decide is

within the submission of the parties.

9

8. If the arbitrator commits an error in the construction of the

contract, that is an error within his jurisdiction. But if he wanders out -

side the contract and deals with matters not allotted to him, he com-

mits a jurisdictional error. Extrinsic evidence is admissible in such

cases because the dispute is not something which arises under or in re-

lation 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 ra-

tionale of this rule is that the nature of the dispute is something which

has to be determined outside and independent of what appears in the

award. Such a jurisdictional error needs to be proved by evidence ex-

trinsic to the award. (See: Gobardhan Das v. Lachhmi Ram & Ors.,

AIR 1954 SC 689; Seth Thawardas Pherumal v. The Union of In-

dia, 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).

9. In Kishore Kumar Khaitan & Anr. v. Praveen Kumar

Singh, (2006) 3 SCC 312, this Court held that when a court asks itself

10

a wrong question or approaches the question in an improper manner,

even if it comes to a finding of fact, the said finding of fact cannot be

said to be one rendered with jurisdiction. The failure to render the

necessary findings to support its order would also be a jurisdictional

error liable to correction.

(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:

"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 misdirection in law."

11. This Court, in Oil & Natural Gas Corporation Ltd. v. 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 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

11

emerges to the effect that the arbitral tribunal cannot travel beyond

terms of reference; however, in exceptional circumstances where a

party pleads that the demand of another party is beyond the terms of

contract and statutory provisions, the tribunal may examine by he

terms of contract as well as the statutory provisions. In the absence of

proper pleadings and objections, such a course may not be

permissible.

13. Be that as it may, in the instant case, a reference to the

Tribunal had been made on the basis of statement of facts, claims by

the private appellant, defence taken by the respondent-State and re-

joinder by the claimant. After completing the formalities of admission

and denial by each party in respect of each other's documents and

submission of draft proposed issues and respective oral evidence, the

Tribunal on 4.1.2003 framed the following issues:

1. Whether claimant as per agreement is entitled to recover

its amount of claim of Rs.453.69 lacs upto 31.12.2002 and on-

wards or not?

2. Whether there was delay on part of State in issuing noti-

fication for restriction of traffic through the Bharatpur 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 concession period as averred by respond-

ent?

12

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

contract?

4. Whether the claimant is entitled to claim interest on its

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 arbitra-

tion incurred and claimed by, each party? If so, what amount

and to which party?

6. Any other if any demanded by any party during proceed-

ings.

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 pro-

ceeded with the arbitration proceedings. The State of Rajasthan had

not taken the defence that it was not agreed between the parties to is-

sue the notification barring the traffic through the markets of Bharat-

pur city. The only issue remained as to whether there was delay in is-

suance of notification and implementation thereof. In such a fact-situ-

ation and considering the settled legal propositions, we are of the

view that the District Judge as well as the High Court fell in error con-

sidering the issue which was not taken by the State before the

Tribunal during the arbitration proceedings.

13

15. Furthermore, it is a settled legal proposition that the arbitrator

is competent to award interest for the period commencing with the

date of award to the date of decree or date of realisation, whichever is

earlier. This is also quite logical for, while award of interest for the

period prior to an arbitrator entering upon the reference is a matter of

substantive law, the grant of interest for the post-award period is a

matter of procedure.

(Vide: Seth Thawardas Pherumal (Supra); Union of 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 & Ors. v. G.C. Roy, AIR 1992 SC

732; Hindustan Construction Co. Ltd. v. State of Jammu & Kash-

mir, AIR 1992 SC 2192; Executive Engineer, Dhenkanal Minor Ir-

rigation Division, Orissa v. N.C. Budharaj (Dead) by Lrs., AIR

2001 SC 626; Bhagawati Oxygen Ltd. v. Hindustan Copper

Ltd., AIR 2005 SC 2071; and Indian Hume Pipe Co. Ltd. v. State

of Rajasthan, (2009) 10 SCC 187).

14

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, relev-

ant part of which reads as under:

"(1) In any proceedings for the recovery of any debt or

damages or in any proceedings in which a claim for in-

terest in respect of' any debt or damages already paid is

made, the court may, if it thinks fit, allow interest to the

person entitled to the debt or damages or to the person

making such claim, as the case may be, at a rate not ex-

ceeding the current rate of interest...." (Emphasis ad-

ded)

Thus, it is evident that the aforesaid provisions empower the

Court to award interest at the rate prevailing in the banking transac-

tions. Thus, impliedly, the court has a power to vary the rate of in-

terest agreed by the parties.

17. This Court in Krishna Bhagya Jala Nigam Ltd. v. G. Har-

ischandra Reddy & Anr., AIR 2007 SC 817, while dealing with the

similar issue held as under:

"...after economic reforms in our country the interest re-

gime has changed and the rates have substantially re-

duced 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%."

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

15

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 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 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 no scope for us to

interfere with the rate of interest fixed by the courts below.

20. The issue raised by the State before this Court in its appeal as

to whether the Bharatpur-Deeg patch was an integral or composite

part of the project and the private appellant could collect the toll fee

on that part also stands concluded by the High Court after considering

the entire evidence on record.

21. It is evident from the record as well as the judgments of the

courts below that bid documents contained data collected on the flow

16

of traffic on 14th and 15th April, 1994 to find out the viability and re-

quirement of the establishment of Bharatput bye-pass and it included

the traffic flow on the Bharatpur-Deeg section also which indicates

that this particular patch had also been an integral part of the project.

22. In pre-bid conference the interveners wanted a clarification as

to whether the persons using this particular patch of road between

Bharatpur-Deeg could be liable to pay toll fee. It was clarified by the

respondent-State authorities that the users of this patch would be re-

quired to pay the toll fee.

23. Clause 5 of the Concession agreement also provided that Gov-

ernment would levy and charge the fee from all persons using the pro-

ject facilities. The project was not in parts rather it was a composite

and integrated project which included the Bharatpur-Deeg section

also. Hence, it was not permissible for the respondent-State to take

the plea that persons using such section of the road were not liable to

pay the toll fee. We do not find any force in the submission made by

Dr. Manish Singhvi, learned counsel for the State that it was not a

newly constructed road. However, he is not in a position to deny that

the said portion of road had been widened and strengthened by the

private appellant and could not be termed as service road which could

17

be used free of charge in view of clause 7 of the concession agreement

as service road has been defined as any road constructed temporarily

for use of traffic for short period during construction of the main

road. Such a facility had to be provided in order to maintain the free

flow of traffic during the construction of the road.

24. Thus, in view of the above, the issue raised by the State that

Bharatpur-Deeg section of the road was out of the project and the

private appellant was not entitled to collect the toll fee on that part of

the road, stands settled in favour of the private appellant.

25. Determination of the aforesaid three issues brings us to the en-

titlement of the private appellant.

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' as a sum of money taken in re-

spect 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 further held:

"Although the section has empowered the State

18

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 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."

(Emphasis added)

26. In fact, the toll fee under the Tolls Act, 1851 is of

compensatory in nature wherein the Government can reimburse itself

the amount which it had spent on construction of road/bridge etc.

Clause IV(a) of the statutory notification dated 10.2.1997

which entitled the government to give present road on toll is

reproduced below:

"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 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 as total

cost of construction and maintenance including interest thereupon is

recovered. A person is debarred by law and statutory inhibition as

contained in Clause IV(a) of the notification from collection of toll

beyond the recovery of cost of construction.

19

27. Thus, from the above referred provisions, it is evident that toll

fee is compensatory in nature and can be collected by the State to

reimburse itself the amount it has spent on construction of the

road/bridge etc. The State is competent to levy/collect the toll fee only

for the period stipulated under the Statute or till the actual cost of the

project with interest etc. is recovered. However, it cannot be a source

of revenue for the State.

28. In common parlance, "reimbursement" means and implies

restoration of an equivalent for something paid or expanded.

Similarly, "Compensation" means anything given to make the

equivalent. (See: State of Gujarat v. Shantilal Mangaldas & Ors.,

AIR 1969 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).

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 claimed on account of

20

breach of contract.

30. In M/s. A.T. Brij Paul Singh & Ors. v. State of Gujarat,

AIR 1984 SC 1703, while interpreting the provisions of Section 73 of

the Indian Contract Act, 1972, this Court held that damages can be

claimed by a contractor where the government is proved to have

committed breach by improperly rescinding the contract and for

estimating the amount of damages, court should make a broad

evaluation instead of going into minute details. It was specifically

held that where in the works contract, the party entrusting the work

committed breach of contract, the contractor is entitled to claim

the damages for loss of profit which he expected to earn by

undertaking the works contract. Claim of expected profits is legally

admissible on proof of the breach of contract by the erring party. It

was further observed that what would be the measure of profit would

depend upon facts and circumstances of each case. But that there shall

be a reasonable expectation of profit is implicit in a works contract

and its loss has to be compensated by way of damages if the other

party to the contract is guilty of breach of contract cannot be

gainsaid.

21

31. In B.S.N.L v. Reliance Communication Ltd., (2011) 1 SCC

394, this court held as under:

"53. Lastly, it may be noted that liquidated

damages serve 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 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 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 the amount so named.

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...."

33. Thus, the case requires consideration in the light of the aforesaid

settled legal principles.

Undoubtedly, the total construction was for Rs. 13.25 crores. It

is evident from the Bid-documents filed by the private appellant that

the work was to be executed in two phases and the relevant part

22

thereof reads as under:

PHASE - I

Year Const. Supervision Total Interest @ Total Upto date

Charges @ 20% investment investment
Cost
10% of Strs
(in lacs) (in lacs)
(in lacs)

1998-99

6/98 75 7.5 82.50 4.12 86.62 86.62

9/98 80 8.0 88.00 8.52 92.52 183.14

12/98 80 8.0 88.00 12.92 100.92 284.06

3/99 80 8.0 88.00 17.32 105.32 389.32

Total 315 31.5 346.50 42.88 389.38 389.88

1999-2000

6/99 110 11.0 121 23.37 144.37 533.75

9/99 120 12.0 132.0 29.97 161.97 695.72

12/99 120 12.0 132.0 36.57 168.57 864.29

3/2000 125 12.50 137.50 43.44 180.94 1045.23

Total 475 47.50 522.50 133.35 655.85 1045.23

Grand 790 79.0 869.0 176.23 1045.23 1045.23

Total

PHASE - II

2005-06

6/2005 150 15.0 165 8.25 173.25 173.25

9/2005 150 15.0 165 16.50 181.50 354.75

Total 300 30.0 330 24.75 354.75 354.75

23

The documents further reveal that phase II work was of worth

Rs.354.75 lacs and it included repairing, maintenance and second

layer of bitumen on the entire road. Admittedly, this part of the

contract had never been executed by the private appellant. More so,

the chart filed by the State of Rajasthan shows that the estimated cost

of the work had been recovered by the private appellant as the

schedule prepared for repayment tally with the amount collected by

the private appellant as toll fee within the stipulated period.

34. In the first phase, the private appellant spent about Rs.10.45

crores and recovered the said amount with certain profit, though the

actual figure i.e. the toll fee recovered has not been disclosed. So far

as the second phase is concerned, admittedly, the amount of Rs.354.75

lacs has not been spent by the private appellant. This issue has been

agitated by the State of Rajasthan before this Court in its Counter

Affidavit wherein it is stated as under:

"It is respectfully submitted that as per the terms of

the 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 made any

investment for the second phase and, therefore, 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

24

is trying to give wrong picture about investment

made and has not come to this Hon'ble Court 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 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 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...."

Thus, there is no specific denial of the allegations/averments

taken by the State as required by the principle 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 terms of

contract and has acted in contravention of the terms of agreement

claims that he was entitled to earn more profit. The private appellant

cannot be permitted to claim damages/compensation in respect of the

amount of Rs.13.25 crores, as he did not spend the said amount

stipulated in the terms of agreement. Private appellant cannot claim

25

the amount of Rs. 7.13 crores for a period of three years for a small

patch of 1.25 kilometres out of the total length of the road to the

extent of 10.85 kilometres.

37. In fact, the tribunal has dealt with the issue in correct

perspective only to the extent the period of delay by which the

notification barring the heavy vehicles through market of Bharatpur

had been issued stating as under:

"The traffic survey conducted by the claimant

on 17th, 18th & 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

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 of 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 commercial vehicles

only as Rs.26.34 lacs from 12/4/2000 to

30/9/2000."

As the notification had been issued, and it was not the

responsibility of the State to establish a police chowki etc. to

26

implement the notification, there was no occasion for the tribunal to

proceed further. Therefore, any award in favour of the private

appellant in that respect for non-issuance of notification beyond the

date of the notification, cannot be held to be justified and the same is

liable to be set aside.

38. The State authority has decided to establish a toll road as it

was not having sufficient funds. In case the claim of the private

appellant is allowed and as the State is not in a position to grant

further facility to collect the toll fee at such a belated stage, the

purpose of establishing the toll road itself stands frustrated. More so,

the toll fee cannot be collected to recover the amount never spent by

the contractor. It is evident from the discourse in pre-bid meetings of

the parties that it had been decided that compensation would be

worked out on the basis of investment made by concerned contractor.

More so, the statutory notification dated 10.2.1997 provided to

recover the cost of construction and maintenance including interest

thereon. Therefore, the question of non-execution of work of second

phase of the contract becomes very material and relevant to determine

the real controversy. The State authorities for the reasons best known

to them, did not make reference to the arbitration proceedings for non-

execution of the work of the second phase of the contract. However,

27

the relief claimed by the private appellant would prove to be a

"windfall profit" without carrying out the obligation to execute the

work just on technicalities. We have held in this very case, that the

arbitrator cannot proceed beyond the terms of reference and,

therefore, the question of considering the non-execution of work of

second phase of the work was neither permissible nor possible as it

had arisen subsequent to the date of award in the arbitration

proceedings.

Be that as it may, in order to do complete justice between the

parties and protect the public exchequer, we feel that the matter

requires adjudication and reconsideration on the following points by

the arbitration tribunal:

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?

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 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

28

or it could be adjusted in the final accounts bills. With these

observation, the appeals stand disposed of. No costs.

.............................J.

(P. SATHASIVAM)

.............................J.

(Dr. B.S. CHAUHAN)

New Delhi,

July 21, 2011

29

Thursday, July 21, 2011

".....Where the personal income of the wife is insufficient she can claim maintenance under Section 125 CrPC. The test is whether the wife is in a position to maintain herself in the way she was used to in the place of her husband. In Bhagwan Dutt v. Kamla Devi it was observed that the wife should be in a position to maintain a standard of living which is neither luxurious nor penurious but what is consistent with status of a family. The expression "unable to maintain herself" does not mean that the wife must be absolutely destitute before she can apply for maintenance under Section 125 CrPC."

REPORTABLE

IN THE SUPREME COURT OF INDIA

CIVIL APPELLATE JURISDICTION

CIVIL APPEAL NOs. 5831-5833 OF 2011

(Arising out of SLP (C) Nos. 20518-20520 of 2009

Vinny Parmvir Parmar .... Appellant (s)

Versus

Parmvir Parmar .... Respondent(s)

J U D G M E N T

P. Sathasivam, J.

1) Leave granted.

2) These appeals are filed against the final order dated

24.04.2009 passed by the High Court of Bombay in Family

Court Appeal Nos. 110 of 2004 and 127 of 2004 and the order

dated 17.07.2009 in Review Petition Stamp No. 15671 of 2009

whereby the appellant's appeal was dismissed in entirety and

the petition filed by the respondent in Family Court for divorce

on ground of cruelty was converted into divorce by mutual

1

consent and the marriage was dissolved by a decree under

Section 13-B of the Hindu Marriage Act, 1955 (hereinafter

referred to as "the Act").

3) Since the parties have dissolved their marriage by

consent and a fresh decree of divorce by consent has been

directed, the other question adjudicated before the High Court

was about the amount of maintenance/permanent alimony in

terms of Section 25 of the Act. By the impugned order, the

High Court confirmed the order passed by the Family Court

fixing the amount of permanent alimony at Rs. 20,000/- per

month. While disposing of the appeals, as an alternative

measure, the High Court also fixed the amount of permanent

alimony at Rs. 20 lakhs in lump sum to be paid by the

husband to his wife within a period of 3 months from the date

of the order. Being not satisfied with the maintenance fixed at

Rs. 20,000/- per month, the appellant-wife filed these appeals

for enhancement by pointing out her difficulties and the

income of the respondent.

2

4) Heard Mr. Nidish Gupta, learned senior counsel for the

appellant-wife and Ms. Indu Malhotra, learned senior counsel

for the respondent-husband.

5) The only point for consideration in these appeals is what

would be the reasonable amount the appellant-wife is entitled

by way of maintenance from the husband in terms of Section

25 of the Act.

6) Considering the fact that after the marriage the appellant

herein resigned from the post of Air Hostess in Cathay Pacific

Airlines and after dispute between them she was not employed

and getting regular income, she was staying with her sister at

Mumbai and also taking note of the financial status of the

husband, namely, his salary as a Sr. Commander in Air India

and rental income from his properties, the Family Court fixed

maintenance at Rs. 20,000/- per month which was affirmed

by the High Court. While arriving at such amount, the Family

Court has determined the income of the husband as

Rs. 1,40,000/- per month.

3

Discussion:

7) Mr. Nidish Gupta, learned senior counsel for the

appellant, by drawing our attention to various factual details

placed before the Family Court, High Court and in this Court,

submitted that from the salary slips it is seen that even after

income tax deductions the respondent's income from salary

and allowances alone for the period 01.04.2009 to 31.03.2010

was Rs. 83,19,031/-. In support of the above claim, the

appellant has produced TDS certificate issued by his

employer/the Income-Tax Department. According to him,

apart from the above salary income, the respondent has rental

income between Rs. 7,20,000 and Rs. 10,80,000 from his

properties. He further highlighted that in addition to the

salary and the rental income, the respondent has huge bank

deposits, investment in shares and mutual funds. He also

highlighted that the respondent being 42 years of age and a

Sr. Commander in Air India has a promising career with bright

chances of further promotions. With these facts and figures,

Mr. Nidish Gupta prayed for intervention of this Court by

4

fixing reasonable amount towards maintenance and welfare of

the appellant.

8) In reply to the same, Ms Indu Malhotra, learned senior

counsel for the respondent-husband submitted that the

figures furnished by the appellant before the courts below as

well as in this Court are exaggerated. In any event, according

to her, the income shown above includes allowance and other

benefits which cannot be construed as actual salary or income

as claimed. She also pointed out that apart from the salary

from Air India he owns 1 acre of land in Pune and 1 Bedroom

flat in Mumbai. All other properties, according to the learned

senior counsel, belong to his father and he is not entitled for

anything from it at this moment. She further highlighted that

at present respondent-husband has married and having a

child apart from taking care of his parents. She finally

submitted that the amount determined by the Family Court as

affirmed by the High Court is quite reasonable and, therefore,

there is no valid ground for interference by this Court

exercising jurisdiction under Article 136 of the Constitution of

India.

5

9) Before considering the rival claims based on facts and

figures, it is useful to refer to Section 25 of the Act which

reads as under:-

" 25. Permanent alimony and maintenance.- (1) Any court

exercising jurisdiction under this Act may, at the time of

passing any decree or at any time subsequent thereto, on

application made to it for the purpose by either the wife or

the husband, as the case may be, order that the respondent

shall pay to the applicant for her or his maintenance and

support such gross sum or such monthly or periodical sum

for a term not exceeding the life of the applicant as, having

regard to the respondent's own income and other property, if

any, the income and other property of the applicant, the

conduct of the parties and other circumstances of the case,

it may seem to the court to be just, and any such payment

may be secured, if necessary, by a charge on the immovable

property of the respondent.

(2) If the court is satisfied that there is a change in the

circumstances of either party at any time after it has made

an order under sub-section (1), it may, at the instance of

either party, vary, modify or rescind any such order in such

manner as the court may deem just.

(3) If the court is satisfied that the party in whose favour an

order has been made under this section has remarried or, if

such party is the wife, that she has not remained chaste, or,

if such party is the husband, that he has had sexual

intercourse with any woman outside wedlock, it may at the

instance of the other party vary, modify or rescind any such

order in such manner as the Court may deem just."

10) In Shri Bhagwan Dutt vs. Smt. Kamla Devi and Anr.

(1975) 2 SCC 386, though this Court has considered the

amount of maintenance payable to wife under Section 488 of

6

the Code of Criminal Procedure, 1898, the principle laid down

is applicable to the case on hand. In para 19, this Court held:

"19. The object of these provisions being to prevent vagrancy

and destitution, the Magistrate has to find out as to what is

required by the wife to maintain a standard of living which is

neither luxurious nor penurious, but is modestly consistent

with the status of the family. The needs and requirements of

the wife for such moderate living can be fairly determined,

only if her separate income, also, is taken into account

together with the earnings of the husband and his

commitments."

11) In Chaturbhuj vs. Sita Bai, (2008) 2 SCC 316, which

also relates to maintenance claim by deserted wife under

Section 125 of the Code of Criminal Procedure, 1973. The

following statement in para 8 is relevant which reads as

under:

".....Where the personal income of the wife is insufficient she

can claim maintenance under Section 125 CrPC. The test is

whether the wife is in a position to maintain herself in the

way she was used to in the place of her husband. In

Bhagwan Dutt v. Kamla Devi it was observed that the wife

should be in a position to maintain a standard of living

which is neither luxurious nor penurious but what is

consistent with status of a family. The expression "unable to

maintain herself" does not mean that the wife must be

absolutely destitute before she can apply for maintenance

under Section 125 CrPC."

7

12) As per Section 25, while considering the claim for

permanent alimony and maintenance of either spouse, the

respondent's own income and other property, and the income

and other property of the applicant are all relevant material in

addition to the conduct of the parties and other circumstances

of the case. It is further seen that the court considering such

claim has to consider all the above relevant materials and

determine the amount which is to be just for living standard.

No fixed formula can be laid for fixing the amount of

maintenance. It has to be in the nature of things which

depend on various facts and circumstances of each case. The

court has to consider the status of the parties, their respective

needs, the capacity of the husband to pay, having regard to

reasonable expenses for his own maintenance and others

whom he is obliged to maintain under the law and statute.

The courts also have to take note of the fact that the amount

of maintenance fixed for the wife should be such as she can

live in reasonable comfort considering her status and mode of

life she was used to live when she lived with her husband. At

the same time, the amount so fixed cannot be excessive or

8

affect the living condition of the other party. These are all the

broad principles courts have to be kept in mind while

determining maintenance or permanent alimony.

13) It is not in dispute that before their marriage, the

appellant-wife was working as Air Hostess with Cathay Pacific

Airlines and getting sizeable income. It is also brought to our

notice that after marriage, at the instance of the respondent,

she resigned from her job. The particulars furnished also

show that at present she is living with her sister at Mumbai

and she does not possess any immovable property at Mumbai.

14) According to the respondent-husband, at the time of filing

of petition under Section 25, she suppressed her employment

and income thereon and on this ground her entire case has to

be rejected. The fact remains, though she was employed for a

shorter period which was not stated so subsequently, she

clarified that she had earned only an amount of Rs. 1.5 lakhs

from casual assignments from July, 2004 to September, 2009.

She also asserted that her income was not fixed or regular and

she is struggling to take up casual assignments of interior

decoration even though she was not formally trained for the

9

same. She also explained that at particular time her

employment with JJ Valaya Couture was only transitory in

nature and was not permanent, it was not a source of regular

and permanent income for her and that she had not been

issued even any letter of appointment setting out the terms of

employment and she further explained that at the relevant

time she was earning an ad hoc remuneration of Rs. 20,000/-

per month. There is no reason to either reject or disbelieve her

explanation. In the same way, though she had highlighted

salary income of the respondent, admittedly, those figures

include allowances and other payments under various heads

of salary. The respondent has also placed certificates from

income tax authorities such as Form 16C etc.

15) In the light of the details furnished by both the parties,

we are of the view that the amount of Rs. 1,40,000/-

determined as net monthly income of the respondent-husband

is not acceptable. Equally, direction for payment of

maintenance at the rate of Rs. 20,000/- per month to the

appellant-wife is also inadequate. It is relevant to point out

that the status of the appellant before her marriage is also one

1

of the relevant factors for determining the amount of

maintenance. It is not in dispute that before her marriage

with the respondent, she was working as an Air Hostess in

Cathay Pacific Airlines and after marriage she resigned from

the said post. Considering the conditions prescribed in

Section 25 of the Act relating to claim of permanent

alimony/maintenance and the fact that the appellant is not

permanently employed as on date and residing with her sister

at Mumbai, taking note of the respondent's income from salary

as Sr. Commander in Air India, other properties standing in

his name, age being 42 years, future employment prospects

and also considering the fact that the respondent re-married,

having a child and also to look after his parents, we feel that

the ends of justice would be met by fixing maintenance at the

rate of Rs.40,000/- per month instead of Rs.20,000/- per

month as fixed by the Family Court and affirmed by the High

Court. The same shall be payable from the date of her

application and continue to pay in terms of Section 25 of the

Act. The respondent is granted one year time from 01.08.2011

to pay all the arrears payable in six equal instalments. It is

1

made clear that if there is any change in the circumstance of

either party, they are free to approach the Court concerned to

modify or rescind. As suggested and fixed by the High Court,

in the alternative, we fix the amount of permanent

alimony/maintenance at Rs. 40 lakhs in lump sum to be paid

by the respondent within a period of six months from

01.08.2011 which will forfeit all her claims. The respondent

is free to opt any one mode to comply with the same. If the

respondent opts the first method, the same is subject to the

conditions prescribed in sub-Section (3) of Section 25 of the

Act. The appeals are allowed to the extent mentioned

hereinabove. No order as to costs.

...............................J.

(P. SATHASIVAM)

...............................................J.

(DR. B.S. CHAUHAN)

NEW DELHI;

JULY 20, 2011.

1

The respondents herein were appointed on adhoc officiating post in the year 1988 for a fixed term which was continued. They were regularised in the year 2004 under the Uttaranchal Regularization of Ad Hoc Appointments (Posts under the purview of Public Service Commission) Rules, 2002 ( for short 'the Rules'). The respondents claimed benefit of their service from 1988 to 2004 for the purpose of seniority

IN THE SUPREME COURT OF INDIA REPORTABLE

CIVIL APPELLATE JURISDICTION

CIVIL APPEAL NO.5130 OF 2009

State of Uttarakhand & Another ..Appellants

versus

Archana Shukla & Others ..Respondents

WITH

CIVIL APPEAL NO.1474 OF 2007

O R D E R

Civil Appeal No.5130 of 2009

Heard learned counsel for the parties.

This Appeal has been filed against the impugned judgment

and order dated 06th March, 2006 passed by the High Court of

Uttarakhand at Nainital in Writ Petition No. 140/2005.

The facts have been set out in the impugned judgment and

hence we are not repeating the same here except wherever

necessary.

The respondents herein were appointed on adhoc

officiating post in the year 1988 for a fixed term which was

continued. They were regularised in the year 2004 under the

Uttaranchal Regularization of Ad Hoc Appointments (Posts

under the purview of Public Service Commission) Rules, 2002

( for short 'the Rules'). The respondents claimed benefit

of their service from 1988 to 2004 for the purpose of

seniority and this has been granted by the High Court.

Hence, this appeal.

CIVIL APPEAL NO.5130 OF 2009 etc.

-2-

We are afraid, we cannot agree with the view taken by the

High Court.

Rule 7(1) of the Rules states as under:

"A person appointed under these rules shall
be entitled to seniority only from the date
of order of appointment after selection in
accordance with these rules and shall, in
all cases, be placed below the persons
appointed in accordance with the relevant
service rules or as the case may be, the
regular prescribed procedure, prior in the
appointment of such person under these
rules."

Admittedly, the respondents were appointed after a

selection under the Regularization Rules in the year 2004.

Hence, in our view, they can get seniority only from the

year 2004 and not from 1988. The rule is clear and hence we

cannot debar from the clear meaning of the rule.

It has been held in Raghunath Rai Bareja & Another vs.

Punjab National Bank & Others (2007) 2 SCC 230 that when

there is a conflict between law and equity, it is the law

which has to prevail in accordance with the latin maxim

'dura lex sed lex' which means 'the law is hard but it is

the law'. Equity can only supplement the law, but it cannot

supplant or override it. This view was followed in Civil

Appeal No.2684 of 2007 titled B.Premanand & Others vs. Mohan

Koikal & Others decided on 16th March, 2011.

In the present case, Rule 7 is very clear and hence the

CIVIL APPEAL NO.5130 OF 2009 etc.

-3-

respondents are not entitled to the benefit of their service

from 1988 to 2004 for the purpose of their seniority.

Accordingly, this appeal is allowed and the impugned

judgment of the High Court is set aside. No costs.

Civil Appeal No.1474 of 2007

In view of our order passed today in Civil Appeal No.

5130 of 2009, this appeal is also allowed and the impugned

judgment of the High Court is set aside. No costs.

.........................J.
[MARKANDEY KATJU]

NEW DELHI; .........................J.
JULY 20, 2011 [CHANDRAMAULI KR. PRASAD]

i) Whether an arbitration agreement contained in an unregistered (but compulsorily registrable) instrument is valid and enforceable? (ii) Whether an arbitration agreement in an unregistered instrument which is not duly stamped, is valid and enforceable? (iii) Whether there is an arbitration agreement between the appellant and respondent and whether an Arbitrator should be appointed?

1

Reportable

IN THE SUPREME COURT OF INDIA

CIVIL APPELLATE JURISDICTION

CIVIL APPEAL NO. 5820 OF 2011

[Arising out of SLP [C] No.24484/2010]

M/s. SMS Tea Estates Pvt. Ltd. ... Appellant

Vs.

M/s. Chandmari Tea Co. Pvt. Ltd. ... Respondent

J U D G M E N T

R.V.RAVEENDRAN, J.

Leave granted. Heard.

2. The appellant filed an application under section 11 of the Arbitration

& Conciliation Act, 1996 (`Act' for short) for appointment of an arbitrator.

The averments made in the said application in brief were as under :

2.1) On 7.10.2006 the appellant requested the respondent to grant a

long term lease in respect of two Tea estates (Chandmari Tea Estate and

2

Burahapahar Tea Estate). A lease deed dated 21.12.2006 was executed

between the respondent and appellant under which respondent granted a

lease to the appellant for a term of 30 years in regard to the said two Tea

estates with all appurtenances. Clause 35 of the said lease deed provided for

settlement of disputes between the parties by arbitration. As the estates were

hypothecated to United Bank of India, on 27.12.2006, the respondent

requested the said bank for issue of a no objection certificate for entering

into a long term lease. The Bank sent a reply dated 17.7.2007, stating that it

would issue a no objection certificate for the lease, if the entire balance

amount due to it was deposited by 14.8.2007.

2.2) Prior to the execution of the said lease deed, on 29.11.2006 the

respondent had offered to sell the two Tea estates to the appellant for a

consideration of Rupees four crores. The appellant agreed to purchase them

subject to detailed verification. The appellant wrote a letter dated 27.6.2007

to the respondent agreeing to purchase the said two Tea estates.

2.3) The appellant invested huge sums of money for improving the tea

estates in the expectation that it would either be purchasing the said estates

or have a lease for 30 years. The respondent however abruptly and illegally

evicted the appellant from the two estates and took over their management in

3

January 2008. The appellant thereafter wrote a letter dated 28.3.2008 to the

respondent expressing its willingness to purchase the said two estates for a

mutually agreed upon consideration and also discharge the liability towards

the bank.

2.4) The appellant issued a notice dated 5.5.2008 calling upon the

respondent to refer the matter to arbitration under section 35 of the lease

deed. The respondent failed to comply. According to appellant the dispute

between the parties related to the claim of the appellant that the respondent

should either sell the estates to the appellant, or permit the appellant to

continue in occupation of the estates for 30 years as lessees or reimburse the

amounts invested by it in the two estates and the payments made to the

Bank.

3. The respondents opposed the said application. The respondents

contended that the unregistered lease deed dated 21.12.2006 for thirty years

was invalid, unenforceable and not binding upon the parties, having regard

to section 107 of Transfer of Property Act 1882 (`TP Act' for short) and

section 17 and section 49 of the Registration Act, 1908 (`Registration Act'

for short); that the said lease deed was also not duly stamped and was

therefore invalid, unenforceable and not binding, having regard to section 35

4

of Indian Stamp Act, 1899; that clause 35 providing for arbitration, being

part of the said lease deed, was also invalid and unenforceable. The

respondent denied that they had agreed to sell the two tea estates to the

respondent for a consideration of Rupees four crores. The appellant also

denied that the respondent had invested any amount in the tea estates. It

contended that as the lease deed itself was invalid, the appellant could not

claim appointment of an arbitrator under the arbitration agreement forming

part of the said deed.

4. The learned Chief Justice of Guwahati High Court dismissed the

appellant's application by order dated 28.5.2010. He held that the lease deed

was compulsorily registrable under section 17 of the Registration Act and

section 106 of the TP Act; and as the lease deed was not registered, no term

in the said lease deed could be relied upon for any purpose and therefore

clause 35 could not be relied upon for seeking reference to arbitration. The

High Court also held that the arbitration agreement contained in clause 35

could not be termed as a collateral transaction, and therefore, the proviso to

section 49 of the Registration Act would not assist the appellant. The said

order is challenged in this appeal by special leave.

5

5. On the contentions urged the following questions arise for

consideration :

(i) Whether an arbitration agreement contained in an unregistered (but

compulsorily registrable) instrument is valid and enforceable?

(ii) Whether an arbitration agreement in an unregistered instrument which

is not duly stamped, is valid and enforceable?

(iii) Whether there is an arbitration agreement between the appellant and

respondent and whether an Arbitrator should be appointed?

Re : Question (i)

6. Section 17(1)(d) of Registration Act and section 107 of TP Act

provides that leases of immovable property from year to year, or for any

term exceeding one year or reserving a yearly rent, can be made only by a

registered instrument. Section 49 of the Registration Act, 1908, sets out the

effect of non-registration of documents required to be registered. The said

section is extracted below :

"49.Effect of non-registration of documents required to be

Registered.- No document required by section 17 or by any provision of

the Transfer of Property Act, 1882 (4 of 1882)], to be registered shall--

(a) affect any immovable property comprised therein, or

(b) confer any power to adopt, or

6

(c) be received as evidence of any transaction affecting such property or

conferring such power,

unless it has been registered:

provided that an unregistered document affecting immovable property and

required by this Act or the Transfer of Property Act, 1882 (4 of 1882), to

be registered may be received as evidence of a contract in a suit for

specific performance under Chapter II of the Specific Relief Act, 1877 (3

of 1877) as evidence of any collateral transaction not required to be

effected by registered instrument."

Section 49 makes it clear that a document which is compulsorily registrable,

if not registered, will not affect the immovable property comprised therein in

any manner. It will also not be received as evidence of any transaction

affecting such property, except for two limited purposes. First is as evidence

of a contract in a suit for specific performance. Second is as evidence of any

collateral transaction which by itself is not required to be effected by

registered instrument. A collateral transaction is not the transaction affecting

the immovable property, but a transaction which is incidentally connected

with that transaction. The question is whether a provision for arbitration in

an unregistered document (which is compulsorily registrable) is a collateral

transaction, in respect of which such unregistered document can be received

as evidence under the proviso to section 49 of the Registration Act.

7

7. When a contract contains an arbitration agreement, it is a collateral

term relating to the resolution of disputes, unrelated to the performance of

the contract. It is as if two contracts -- one in regard to the substantive terms

of the main contract and the other relating to resolution of disputes -- had

been rolled into one, for purposes of convenience. An arbitration clause is

therefore an agreement independent of the other terms of the contract or the

instrument. Resultantly, even if the contract or its performance is terminated

or comes to an end on account of repudiation, frustration or breach of

contract, the arbitration agreement would survive for the purpose of

resolution of disputes arising under or in connection with the contract.

Similarly, when an instrument or deed of transfer (or a document affecting

immovable property) contains an arbitration agreement, it is a collateral term

relating to resolution of disputes, unrelated to the transfer or transaction

affecting the immovable property. It is as if two documents - one affecting

the immovable property requiring registration and the other relating to

resolution of disputes which is not compulsorily registrable - are rolled into

a single instrument. Therefore, even if a deed of transfer of immovable

property is challenged as not valid or enforceable, the arbitration agreement

would remain unaffected for the purpose of resolution of disputes arising

with reference to the deed of transfer. These principles have now found

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statutory recognition in sub-section (1) of section 16 of the Arbitration and

Conciliation Act 1996 (`Act' for short) which is extracted below :

"16. Competence of arbitral tribunal to rule on its jurisdiction. - (1)

The arbitral tribunal may rule on its own jurisdiction, including ruling on

any objections with respect to the existence or validity of the arbitration

agreement, and for that purpose,--

(a) an arbitration clause which forms part of a contract shall be treated as

an agreement independent of the other terms of the contract; and

(b) a decision by the arbitral tribunal that the contract is null and void shall

not entail ipso jure the invalidity of the arbitration clause."

8. But where the contract or instrument is voidable at the option of a

party (as for example under section 19 of the Indian Contract Act, 1872), the

invalidity that attaches itself to the main agreement may also attach itself to

the arbitration agreement, if the reasons which make the main agreement

voidable, exist in relation to the making of the arbitration agreement also.

For example, if a person is made to sign an agreement to sell his property

under threat of physical harm or threat to life, and the said person repudiates

the agreement on that ground, not only the agreement for sale, but any

arbitration agreement therein will not be binding.

9. An arbitration agreement does not require registration under the

Registration Act. Even if it is found as one of the clauses in a contract or

instrument, it is an independent agreement to refer the disputes to arbitration,

9

which is independent of the main contract or instrument. Therefore having

regard to the proviso to section 49 of Registration Act read with section

16(1)(a) of the Act, an arbitration agreement in an unregistered but

compulsorily registrable document can be acted upon and enforced for the

purpose of dispute resolution by arbitration.

Re : Question (ii)

10. What if an arbitration agreement is contained in an unregistered (but

compulsorily registrable) instrument which is not duly stamped? To find an

answer, it may be necessary to refer to the provisions of the Indian Stamp

Act, 1899 (`Stamp Act' for short). Section 33 of the Stamp Act relates

to examination and impounding of instruments. The relevant portion thereof

is extracted below :

"33.Examination and impounding of instruments.-(1) Every person

having by law or consent of parties authority to receive evidence, and

every person in charge of a pubic office, except an officer of police, before

whom any instrument, chargeable, in his opinion, with duty, is produced

or comes in the performance of his functions, shall, if it appears to him

that such instrument is not dull stamped, impound the same.

(2) For that purpose every such person shall examine every instrument so

chargeable and so produced or coming before him in order to ascertain

whether it is stamped with a stamp of the value and description required

by the law in force in India when such instrument was executed or first

executed :

x x x x "

1

Section 35 of Stamp Act provides that instruments not duly stamped is

inadmissible in evidence and cannot be acted upon. The relevant portion of

the said section is extracted below :

"35. Instruments not duly stamped inadmissible in evidence, etc. -- No

instrument chargeable with duty shall be admitted in evidence for any

purpose by any person having by law or consent of parties authority to

receive evidence, or shall be acted upon, registered or authenticated by

any such person or by any public officer, unless such instrument is duly

stamped :

Provided that--

(a) any such instrument shall be admitted in evidence on

payment of the duty with which the same is chargeable, or,

in the case of an instrument insufficiently stamped, of the

amount required to make up such duty, together with a

penalty of five rupees, or, when ten times the amount of the

proper duty or deficient portion thereof exceeds five

rupees, of a sum equal to ten times such duty or portion."

x x x x x

Having regard to section 35 of Stamp Act, unless the stamp duty and penalty

due in respect of the instrument is paid, the court cannot act upon the

instrument, which means that it cannot act upon the arbitration agreement

also which is part of the instrument. Section 35 of Stamp Act is distinct and

different from section 49 of Registration Act in regard to an unregistered

document. Section 35 of Stamp Act, does not contain a proviso like to

section 49 of Registration Act enabling the instrument to be used to establish

a collateral transaction.

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11. The scheme for appointment of arbitrators by the Chief Justice of

Guwahati High Court 1996 requires an application under section 11 of the

Act to be accompanied by the original arbitration agreement or a duly

certified copy thereof. In fact, such a requirement is found in the

scheme/rules of almost all the High Courts. If what is produced is a certified

copy of the agreement/contract/instrument containing the arbitration clause,

it should disclose the stamp duty that has been paid on the original. Section

33 casts a duty upon every court, that is a person having by law authority to

receive evidence (as also every arbitrator who is a person having by consent

of parties, authority to receive evidence) before whom an unregistered

instrument chargeable with duty is produced, to examine the instrument in

order to ascertain whether it is duly stamped. If the court comes to the

conclusion that the instrument is not duly stamped, it has to impound the

document and deal with it as per section 38 of the Stamp Act. Therefore,

when a lease deed or any other instrument is relied upon as contending the

arbitration agreement, the court should consider at the outset, whether an

objection in that behalf is raised or not, whether the document is properly

stamped. If it comes to the conclusion that it is not properly stamped, it

should be impounded and dealt with in the manner specified in section 38 of

Stamp Act. The court cannot act upon such a document or the arbitration

1

clause therein. But if the deficit duty and penalty is paid in the manner set

out in section 35 or section 40 of the Stamp Act, the document can be acted

upon or admitted in evidence.

12. We may therefore sum up the procedure to be adopted where the

arbitration clause is contained in a document which is not registered (but

compulsorily registrable) and which is not duly stamped :

(i) The court should, before admitting any document into evidence or

acting upon such document, examine whether the instrument/document is

duly stamped and whether it is an instrument which is compulsorily

registrable.

(ii) If the document is found to be not duly stamped, Section 35 of Stamp

Act bars the said document being acted upon. Consequently, even the

arbitration clause therein cannot be acted upon. The court should then

proceed to impound the document under section 33 of the Stamp Act and

follow the procedure under section 35 and 38 of the Stamp Act.

(iii) If the document is found to be duly stamped, or if the deficit stamp

duty and penalty is paid, either before the Court or before the Collector (as

contemplated in section 35 or 40 of the Stamp Act), and the defect with

reference to deficit stamp is cured, the court may treat the document as duly

stamped.

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(iv) Once the document is found to be duly stamped, the court shall

proceed to consider whether the document is compulsorily registrable. If the

document is found to be not compulsorily registrable, the court can act upon

the arbitration agreement, without any impediment.

(v) If the document is not registered, but is compulsorily registrable,

having regard to section 16(1)(a) of the Act, the court can de-link the

arbitration agreement from the main document, as an agreement independent

of the other terms of the document, even if the document itself cannot in any

way affect the property or cannot be received as evidence of any transaction

affecting such property. The only exception is where the respondent in the

application demonstrates that the arbitration agreement is also void and

unenforceable, as pointed out in para 8 above. If the respondent raises any

objection that the arbitration agreement was invalid, the court will consider

the said objection before proceeding to appoint an arbitrator.

(vi) Where the document is compulsorily registrable, but is not registered,

but the arbitration agreement is valid and separable, what is required to be

borne in mind is that the Arbitrator appointed in such a matter cannot rely

upon the unregistered instrument except for two purposes, that is (a) as

evidence of contract in a claim for specific performance and (b) as evidence

of any collateral transaction which does not require registration.

Re : Question (iii)

13. Where a lease deed is for a term of thirty years and is unregistered, the

terms of such a deed cannot be relied upon to claim or enforce any right

1

under or in respect of such lease. It can be relied upon for the limited

purposes of showing that the possession of the lessee is lawful possession or

as evidence of some collateral transaction. Even if an arbitrator is appointed,

he cannot rely upon or enforce any term of the unregistered lease deed.

Where the arbitration agreement is not wide and does not provide for

arbitration in regard to all and whatsoever disputes, but provides only for

settlement of disputes and differences arising in relation to the lease deed,

the arbitration clause though available in theory is of little practical

assistance, as it cannot be used for deciding any dispute or difference with

reference to the unregistered deed.

14. In this case, clause 35 of the lease deed reads as under :

"That any dispute or difference arising between the parties in relation to or

in any manner touching upon this deed shall be settled by Arbitration in

accordance with the provisions of the Arbitration and Conciliation Act,

1996 which shall be final and binding on the parties hereto. The

Government law will be Indian. The venue of Arbitration shall be at

Assam and Court at Assam alone shall have jurisdiction for disputes and

litigations arising between the lessor/first party and the lessee/second party

in context with the above mentioned scheduled property."

Having regard to the limited scope of the said arbitration agreement

(restricting it to disputes in relation to or in any manner touching upon the

lease deed), the arbitrator will have no jurisdiction to decide any dispute

which does not relate to the lease deed. Though the Arbitrator will have

1

jurisdiction to decide any dispute touching upon or relating to the lease deed,

as the lease deed is unregistered, the arbitration will virtually be a non-

starter. A party under such a deed may have the luxury of having an

arbitrator appointed, but little else. Be that as it may.

15. Before an Arbitrator can be appointed under section 11 of the Act, the

applicant should satisfy the learned Chief Justice or his designate that the

arbitration agreement is available in regard to the contract/document in

regard to which the dispute has arisen. For example if the parties had entered

into two agreements and arbitration clause is found only in the first

agreement and not in the second agreement, necessarily an arbitrator can be

appointed only in regard to disputes relating to the first agreement and not in

regard to any dispute relating to the second agreement. This court in Yogi

Agarwal vs. Inspiration Clothes & U - (2009) 1 SCC 372 held :

"When Sections 7 and 8 of the Act refer to the existence of an arbitration

agreement in regard to the current dispute between the parties, they

necessarily refer to an arbitration agreement in regard to the current

dispute between the parties or the subject-matter of the suit. It is

fundamental that a provision for arbitration, to constitute an arbitration

agreement for the purposes of Sections 7 and 8 of the Act, should satisfy

two conditions. Firstly, it should be between the parties to the dispute.

Secondly, it should relate to or be applicable to the dispute."

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16. In this case, the appellant seeks arbitration in regard to the following

three distinct disputes: (a) for enforcing an alleged agreement of sale of two

tea estates, (b) for enforcing the lease for thirty years; and (c) for recovery of

amounts spent by it in regard to the estates on the assumption that it was

entitled to purchase the property or at least have a lease of 30 years.

17. It is clear from the petition averments (Para 11 of the application) that

the alleged agreement of sale was entered prior to the lease deed dated

21.12.2006 and there was no arbitration agreement in regard to such

agreement of sale. When admittedly there is no arbitration agreement in

regard to the alleged agreement of sale, the appellant cannot seek arbitration

with reference to any dispute regarding such agreement of sale, whether it is

for performance or for damages for breach or any other relief arising out of

or with reference to the agreement of sale.

18. An Arbitrator can no doubt be appointed in regard to any disputes

relating to the lease deed. But as noticed above, as the lease deed was not

registered, the Arbitrator can not rely upon the lease deed or any term

thereof and the lease deed cannot affect the immovable property which is the

subject matter of the lease nor be received as evidence of any transaction

1

affecting such property. Therefore, the Arbitrator will not be able to

entertain any claim for enforcement of the lease.

19. Lastly we may consider the claim for recovery of the amounts

allegedly spent towards the tea estates, as a consequence of respondents not

selling the estates or not permitting the appellant to enjoy the lease for 30

years. If this claim is treated as a claim for damages for breach in not

granting the lease for 30 years then it would be for enforcement of the terms

of the lease deed which is impermissible under section 49 of the Registration

Act. If it is treated as claim de hors the lease deed then the arbitrator may not

have jurisdiction to decide the dispute as the arbitration agreement (clause

35) is available only to settle any dispute or difference arising between the

parties in relation to or in any manner touching upon the lease deed and not

in regard to disputes in general.

20. In paras 18 and 19 above, we have considered and stated the general

legal position for guidance in arbitrations, even though the same does not

directly arise for consideration within the limited scope of the proceedings

under section 11 of the Act.

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Conclusion

21. In view of the above this appeal is allowed, the order of the High

Court is set aside and the matter is remitted to the learned Chief Justice of

Guwahati High Court to first decide the issue of stamp duty, and if the

document is duly stamped, then appoint an arbitrator in accordance with law.

..............................J.

(R V Raveendran)

New Delhi; .............................J.

July 20, 2011. (A K Patnaik)

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