D.A.DESAI - (1.) IN this appeal by special leave a very interesting question in the field of law of arbitration which 'honest men dread more than the dreaded law suits' arises for our consideration.
(2.) FIRST respondent Cochin Shipyard. Limited ('respondent' for short invited tenders for construction of Building Dock at Cochin. As there was only one tender that of Tarapore and Company, the appellant, the respondent called fresh tenders somewhere in July, 1971. In December, 1971, the respondent invited tenders for construction of a Repair Dock also at Cochin. There were two tenders for Building Dock, namely, one of the appellant and one by M/s. National Building Construction Corporation, a Government of India undertaking, the value of the tender of the latter being double that of the appellant. For the construction of the Repair Dock, the only tender was of the appellant. In view of the limited number of tenders received, the appellant was invited to negotiate the terms of tender. The value of the works to be executed was over Rs. 24 crores. In view of the huge investment in the project, the tenders were examined by a committee called the Tender Committee constituted in accordance with the approval of the Ministry of Shipping and Transport for examining and evaluating the tenders received for the Building Dock and the Repair Dock. The Tender Committee taking note of the poor response to the invitation to tender and costly affair decided to accept the tender of the appellant inter alia for the reasons (i) that works of such complexity and magnitude have not been undertaken before by any Indian contractor, (ii) that the plant and equipment required for the work are not available indigenously, (iii) that if the contractor is to procure the specialised equipment required for this work, there is hardly any assurance that after these works are over, he would find any substantial use for the same, (iv) that excavation and subsequent construction involve dewatering which introduces considerable amount of uncertainty and that during the discussions, the apprehension of the tenders of this kind was voiced and noticed by the Committee, and (v) that RCC Piling also requires highly skilled and complex technical operations and it involves a large element of risk and uncertainty in the work. Both the tenders of the appellant were accepted, and contracts were entered into between the parties. Both the parties while entering into contracts were aware and conscious of the fact that equipment and technical know-how would have to be imported involving a huge outlay of foreign exchange. Appellant-contractor quoted rates on two alternative bases depending-upon whether it had to import equipment and know-how at its cost involving Rs. 2 crores in foreign exchange or the equipment and knowhow were to be imported by the respondent at its cost and made available for use of the appellant in which case the appellant would be liable to pay hire charges for the pile driving plant at the rate of Rs. 23.00 per metre of 600 mm dia. RCC cast-in-situ pipe and Rs. 16.00 per metre of 500 mm dia. RCC cast-in-situ pipe and at the rate of Rs. 300 per forme of steel sheet piles driven to be recovered, from the running bills payable to the appellant-contractor. The appellant was given to understand by a note in the invitation to tender that foreign exchange in Yen Credit to the tune of Rs. 38 lacs is earmarked for the purchase of construction. equipment, accessories etc. from Japan for works of Building Dock, Repair Dock, the three Quays etc. On 24/01/1973, work order for Building Dock and Repair Dock was issued by the respondent in favour of appellant and in this work order as recommended by the Tender Committee, the respondent adopted the alternative B as set out in the tender, namely, that the contractor was to procure the equipment and know-how at a cost of about Rs. 2 crores; in foreign exchange. In order to make this aspect specific, additional condition No. 31 was incorporated in the works order in order to provide for the expense to be incurred and the amount of foreign exchange needed for importing equipment and technical know-how, relevant portion of which reads as under : "Requisite foreign exchange, for importing piling plant and machinery, spares, technical know-how and hiring of experts necessary for both the Dock Works vide Work Order No. 13019/l/71W-II dated 24/01/1973 for Building Dock etc. and Work Order No. 13012/15/71-W-II dated 24/01/1973 for Repair Dock etc., amounting to about Rs. 2.00 crores in all will be made available to the contractor from the 11th Yen Credit subject to his getting indigenous clearance and providing detailed justification. The details of such procurement shall be furnished by the Contractor as soon as they are finalised." In view of the huge investment, it was agreed that the respondent would make an advance payment of 75% of the value of old machinery and 90% of the value of new machinery brought to site by the Contractor and in order to secure this advance payment, equipment would be hypothecated by the Contractor to the respondent and the advance payment were to carry interest at 9 1/2% p.a. on the outstanding balance of advance. The mode of recovery was also specified. The formal contract was signed on 29/01/1973 which included an arbitration clause to which we would turn a little later. It so happened that the required pile driving equipment including the technical know-how against 11th Japanese Yen Credit were not available. The, respondent also made inquiries in this ,behalf but without success. Ultimately, International Foundation Group, Holland agreed to provide the rate of equipment conforming more or less to the same specification for which clearance was sought and received from the Government of India. After the respondent certified that the equipment and know-how offered by International Foundation Group, Holland conform. to the earlier clearance and that the same equipment being not indigenously available or against 11th Japanese Yen Credit, the respondent requested the Government of India to give necessary clearance to the appellant to import the equipment. This approval was received on 1/09/1973 and the foreign exchange to the extent of Rs. 211.80 lakhs equal to 9,442.700 Dutch Florins was released in favour of the appellant. The entire imported equipment was received in four consignments between March/July 1974. During the intervening period, there were variations in the rate of exchange and therefore the foreign exchange cost of equipment alone in terms of rupees worked out at Rs. 177.50 lakhs and of the technical know-how fees payable in 11 instalments worked out at Rs. 105 lakhs. The custom duty went up by Rs. 21 lakhs as a consequence of the increase in rupee value of the imported equipment in terms of Dutch Florin.
(3.) THE appellant made a tentative claim in the amount of Rs. 61.27 lakhs from the respondent on account of increase in cost of pile driving equipment and technical know-how fees on the ground that the contractor was entitled to be compensated by the respondent for the same. in the letter dated 28/05/1975, the appellant has stated that the 'tendered rates were based on certain total cost of machines which. has since gone up considerably rendering the rates no longer workable. THE appellant had provided for a cost of 150 lakhs of rupees for the equipment and the life of the equipment was taken as 12,000 hours and its probable period of engagement on this job was taken as 8,000 hours. On this basis two-thirds of the cost of the equipment will be written off by way of depreciation on this job.' It was also stated that there is an increase in the fees for the technical know-how, THE letter concluded by saying that the loss sustained by the appellant up to 15/05/1975 on account of variation. in the rate of foreign exchange was Rs. 61,27,317 and requested the respondent to compensate the Joss at least up to the tune of Rs. 45 lakhs which is approximately 75% of the loss suffered by the contractor in this behalf. THE respondent responded to this letter as per its letter dated 2/07/1975 saying that the letter dated 14/07/1972 of the appellant which forms part of the contract documents clearly recites that the total foreign exchange required by the contractor for the equipment, spares, technical know-how and hiring of experts, was expected to be about Rs. 2 crores and that the expenditure incurred by the contractor in this behalf so far has been less than Rs. 2 crores and in the circumstances it was found difficult to accept the position that the tender was based on the assumptions indicated in the letter under reply and that the rates for the pile driving should for the future be revised. THEre ensued further correspondence between the parties. Ultimately, the appellant by its letter dated 1/03/1976 informed the respondent that its claim for compensation for increase in the cost of imported pile driving equipment and technical know-how fees has not been entertained for over a year. It was further stated that 'inasmuch as the dispute has thus arisen between us regarding the above claim, we are invoking the provisions for arbitration in our contracts and referring this dispute to arbitration.' On 17/03/1976 Chief Engineer of the respondent replied saying that the matter as set out in the letter dated 1/03/1976 invoking arbitration clause is receiving their immediate attention and the appellant will hear shortly in this behalf. On 29/03/1976, the respondent wrote to the appellant denying the claim for compensation of the appellant. Simultaneously the respondent framed three points covering the dispute so raised for reference to and decision by the arbitrator. THE letter also sets out as required by Clause 40 a panel of three names from which anyone can be chosen by the appellant as the sole arbitrator. THE appellant by its letter dated 19/04/1976 while refuting the contention of the respondent that the dispute would not be covered by Clause 40 i.e. arbitration clause in the contract, stated that the proper course would be to refer the dispute that has arisen between the parties to the decision of the arbitrator and not any particular issue or issues. Ultimately from amongst the three names indicated by the respondent the appellant selected Shri C. Srinivasa Rao, Chief Bridge Engineer, Southern Railway, Madras to be the Sole Arbitrator to decide the dispute. On receipt of this letter the respondent referred the dispute to Shri C. Srinivasa Rao as Sole Arbitrator. While referring the dispute to the sole arbitration of Shri C. Srinivasa Rao, the respondent retained the three points of reference set out in the letter dated 29/03/1976 but added one more. THE Arbitrator entered upon the reference on 2/06/1976. On being called upon by the Arbitrator, the appellant filed its statement of claim on 16/06/1976. THE appellant claimed Rs. 2,03,47,266 as per the Schedule to the Statement of Claim on account of increase in the cost of equipment and technical know-how fees. THE respondent filed, its reply to the Statement of Claim on 19/07/1976.;