MANU/DE/8198/2007

Equivalent Citation: 2007(3)ARBLR314(Delhi)

IN THE HIGH COURT OF DELHI

O.M.P. No. 28 of 2002
Decided On: 25.05.2007
Appellants: Delhi Jal Board
Vs.
Respondent: Esskay Kohli
Hon'ble Judges/Coram:
Vipin Sanghi, J.
Counsels:
For Appellant/Petitioner/plaintiff: Arvind Nayar and Vikas Agarwal, Advs
For Respondents/Defendant: Jagjit Singh, Adv.
JUDGMENT
Vipin Sanghi, J.
1. The petitioner, Delhi Jal Board has preferred the instant petition under Section 34
of the Arbitration and Conciliation Act, 1996 (for short 'the Act') challenging the
award dated 14th October, 2001 passed by the Sole Arbitrator Shri K. D. Bali,
Additional Secretary (Retd.), Ministry of Urban Development.
2. The respondent was awarded the work of construction of underground reservoir at
Deer Park vide work order dated 28.12.1995 at a total cost of Rs. 1,39,93,995/-. As
per the work order, work was to commence from 29.1.1996 and was to be completed
by 28.4.1997 i.e. within a period of 15 months. The respondent apparently took
various steps to gear itself up to start the work. However, there was one stumbling
block. The permission for felling trees on the site was not made available. While this
uncertainty was looming large, a formal contract dated 8.5.1996 was executed by the
parties. Even thereafter, the requisite permission was not received and eventually on
29-1-2000 the decision to close the contract was finally taken. Earnest money was
released on 24.2.2000. The respondent invoked the arbitration clause claiming a total
of Rs. 41.76 lakhs plus interest under seven heads of claim. The Arbitrator entered
upon reference on 14.5.2001 and the award was passed after hearing the parties on
14.10.2001.
3. The petitioner has assailed the award in question on the ground that it violates the
principles of natural justice. The award in question has been passed allowing the
claims made by the respondent herein before the Arbitrator, without there being any
evidence to support the claims in respect of claim Nos. 2(ii), 2(iii) & 3. The damages
awarded by the Arbitrator are unsustainable in law as not even one percent of the
awarded work was executed by the respondent. The petitioner during the course of
his arguments took me through the award and tried to contend how the decision
pertaining to each one of these claims was bad.
4 . I find force in these submission of the petitioner. What is relied upon as

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documentary evidence in support of claims are only letters written by the respondent
claiming that he has become entitled to certain amounts as damages on account of
non-communication of necessary permission to cut trees. No other documentary
evidence, except for expenditure incurred on salaries of employees was produced in
support of various claims. The Arbitrator has allowed these claims (except claim No.
4) on the premise that the various claims contained in the communications of the
respondent were not refuted by the petitioner.
5. It is trite law that a party to an action must stand on its own legs and cannot rely
on the inaction on part of his opponent to succeed therein. Loss of profit on account
of closure of contract (under claim No. 4) which may be calculated as a percentage of
the unfinished work, on the one hand, and claim for expenditures on the ground that
they were incurred on account of the Contractor being kept in waiting, such as
overheads, depreciation of machinery lying idle, salary to staff, etc., incurred during
the currency of the contract on the other hand, stand on different footings.
6 . While, for the determination of the former, the value of the contract remaining
unfinished and total contractual value are material, in the latter case, actual
expenditure, or the taking of effective steps and incurring financial obligations have
to be established by adducing evidence.
7 . This fundamental requirement of law of contract contained in Section 73 of the
Contract Act has been totally ignored by the Arbitrator. The award is based on
conjectures and surmises, without any evidence being led by the claimant/respondent
herein. Consequently, it is not sustainable in respect of claims 2(ii), 2(iii) and 3 for
these reasons.
8. Quiet apart from this, I find that the learned Arbitrator has ignored a very material
term of the contract. The formal agreement dated 8th may, 1996 which has been
referred to in the Award itself, in its last clause reads as follows:
The work shall be completed within 15 months. The stipulated date of start
as per work order shall be reckoned from 29-1-1996. However due to non
availability of site, the date of start is amended as from the date of
communication of permission for cutting of trees at proposed site by the
department. Time shall be the essence of the contract.
9 . However, this aspect has not been canvassed by the petitioner in its Objection
Petition. Can this Court still go into it? In my view, not only is the Court entitled to
got into this issue, it is obliged to do so. The scheme of Section 34 of the Act is
clear. Under Clause (a) of Sub-section (2), are listed those objections which a party
aggrieved by an arbitral award may raise and is obliged to furnish proof of. However,
in respect of aspects covered by Clauses b(i) and b(ii) of Section 34(2) of the Act,
there is no obligation on the aggrieved party to furnish proof to establish those
grounds. It is for the Court to act in order to to set aside the award if it "finds" that
the award challenged before it is covered by either Clause b(i) or b(ii) or both, while
examining the same. Where the Court finds that the award suffers from lacunae
stated in Clause (i) and (ii) of Section 34(2)(b) of the Act, it must set aside the same
or that part of it, which is severable and laconic.
1 0 . The expression "public policy of India" has received a wider interpretation in
ONGC v. Saw Pipes Ltd MANU/SC/0314/2003 : [2003]3SCR691 . The Court held that
if a narrower meaning is given, some of the provisions of the Act would become
nugatory. On the contrary, if wider meaning is given, then, patently illegal award

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passed by an Arbitral Tribunal could be set aside.
11. It was held that an award could be set aside if it is:
a) Against the Fundamental Policy of Indian Law.
b) In the interest of India; or
c) Patently illegal.
12. The Court emphasised the duty of the Arbitrator to consider the terms of the
contract, and to enforce a promise which the parties have made and to uphold the
sanctity of the contract. The ratio of the above decision is that an award passed in
violation of, or in utter disregard to the terms of the contract is liable to be set aside
as being opposed to the Public Policy of India.
1 3 . I Therefore proceed to deal with the effect of the said term in the formal
agreement dated 8.5.1996 on the various claims made before the Arbitrator.
14. This term unequivocally stipulates that date of start of the work stands amended
and was now to run only from the date of communication of permission for cutting of
trees at the proposed site by the department. Thus, when this formal agreement was
signed between the parties, at least from then onwards the respondent knew that it
was no longer obligatory on his part to be ready with his equipment/machinery etc at
the site, at any time before he receives a communication informing him that the
clearance for removal of trees has been received.
15. The setting in which this amended term was introduced in the formal agreement
is also clear. The clearance for removal of trees had not been received, even though
the Work Order had been issued to the respondent on 28-12-1995, requiring the
commencement of work by the respondent on 29-1-1996 and completion on 28-4-
1997. The formal agreement was signed only on 8-5-1996 i.e. after over five months
of the issuance of the Work Order. In view of the uncertainty regarding the said
clearance, the petitioner, which is a public body dealing with public funds, and is
Therefore expected to act with prudence, while executing the formal agreement,
amended the date of start of work by making the same relatable to the date when the
clearance for removal of trees is communicated.
16. Thus, the respondent was unequivocally put to notice that he need not remain in
readiness, in anticipation of the elusive clearance for removal of trees. If, even after
the said clear and unequivocal amendment, the respondent preferred to remain
entrenched, as is claimed by him, at the site and in full readiness to start the work
with his machines, equipment, tools, tackles, men, etc. the alleged resultant loss
suffered on account of such imprudent action, if any, which no reasonable person
would take, cannot be saddled by the respondent upon the petitioner. The exchange
of communication between the parties i.e the letter dated 28.8.1997 written by the
respondent to close the contract and the response thereto by the petitioner stating
that the same shall remain open does not alter the position either. This exchange
merely shows that the petitioner was hopeful that it would obtain the permission for
clearance of trees and Therefore kept the contract alive. However, in view of the
aforesaid clause the respondent was relieved of its obligation to remain in readiness
to execute the contract and to incur any financial obligations while awaiting the
permission for clearance of trees.

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1 7 . Since, the learned Arbitrator has not considered the aforesaid clause of the
agreement between the parties and consequently failed to segregate claims towards
losses/expenses incurred before the execution of the formal agreement dated
08.05.1996, and those incurred thereafter, for the latter claim was clearly not
admissible, the award so far as it relates to claims 2(i), 2(ii), 2(iii) and 3 cannot be
sustained and is consequently set aside. I now deal with claim No. 4. While allowing
claim 4, which was towards loss of profit which the Respondent would have earned
out of the contract, if the work was allowed to be executed, the Arbitrator held that
the Respondent before it was in breach of the Contract as the site was not made
available and awarded an amount equal to 10% of the value of the work that
remained unfinished as loss of profit suffered by the claimant.
1 8 . This inference is founded on the premise that there was an absolute liability
created by the contract against the petitioner, in the event of the failure of the
petitioner to get the permission for cutting of the trees without which, the clear site
could not be made available to the respondent for performance of the contract. As
aforesaid, the Arbitrator failed to consider and deal with the aforesaid important
stipulation contained in the Agreement dated 8.5.96, which rendered the contract as a
contingent contract. No doubt, the contract as is contained in the initial work order
was definite and the performance thereof was not dependent upon the occurrence or
arising of any contingency. However, when the parties executed the written
agreement with the aforesaid condition, which indefinitely postponed the date of start
of work and at the same time made it dependant on the permission for cutting of
trees being granted, the original contract stood novated into a contingent contract,
dependent upon the grant of the aforesaid permission.
1 9 . The learned Arbitrator has, while failing to notice the aforesaid clause in the
agreement, failed to even consider this crucial aspect, and its resultant impact on the
mutual rights and obligations of the parties.
20. A division bench of this court in R.S. Amar Nath Mehra & Co. v. Union of India
and Ors. 1993 III AD (Del) 735 analyzed the concept of 'Novation' in Section 62 of
the Indian Contract Act in the following manner:
Novation operates as a release of the original debtor and its effect is to
discharge a party from its obligation under the old contract. Section 62 of the
Indian Contract Act defines novation as under:
Section 62:
Effect of novation, rescission and alteration of contract------
---- If the parties to a contract agree to substitute a new
contract for it, or to rescind or alter it, the original contract
need not be performed.
21. Blacks Law Dictionary Sixth Edition at page 1064 defines 'Novation' thus:
Novation. A type of substituted contract that has the effect of adding a party,
obligor or oblige, who was not a party to the original duty. Substitution of a
new contract, debt or obligation for an existing one, between the same or
different parties....
The requisites of a novation are a previous valid obligation, an agreement of
all the parties to a new contract, the extinguishment of the old obligation,

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 and the validity of the new one. Blyther v. Pentagon Federal Credit Union,
D.C. Mun. App. 182 A2d 892, 894.
22. Relying on Scarf v. Jardine 7 AC 345 this court in R.S. Amar Nath Mehra & Co.
(Supra) further observed:
Novation is a legislative expression of the common law of England. It is a
term derived from English civil law and it means-that there being a contact in
existence some new contract is substituted for it either between the same
parties or between different parties, the consideration being the discharge of
the old contract.
2 3 . In 'Kailash Nath & Associates v. New Delhi Municipal Committee'
MANU/DE/0538/2002 : 99(2002)DLT361 , this court held that in building contracts,
multiplicity of reciprocal promises usually exist. In its rudimentary aspect, the
Builder/Contractor undertakes to complete the work according to time and
specification, and the owner correspondingly agrees to make payments. However
usually there are many other obligations, such as supply of material and/or drawings
etc. to be performed at different stages of the contract. A default in respect of any of
them would result in delay, giving rise to claims for damages. In a typical building
contract, the work is to be completed within a specified period. The owner must make
the site available, and on his failure to do so within the agreed time, it would be
unfair to hold the Contractor bound to his time of delivery or performance. The
Contractor may, however, estimate that despite the delay in handing over the site, he
would nonetheless be able to complete the project within the contracted time. He
may succumb to the pressure on the likelihood of his security deposit being forfeited;
or the uncertainty and delay in collecting damages. He may also not want to lose the
profits that he had calculated he would earn from the project. He would thus prefer to
take over the site on the day on which it is offered to him by the owner rather than
treat the contract as having been breached. In doing so without any recorded
reservations, he would be precluded from claiming damages at a later date.
24. The court further held that extension of time for the completion of the project is
essentially a novation in the contract, and by application of Section 62 and 63 of the
Contract Act, relieves the opposite party from performing the obligations pertaining
to time as contained in the original contract. Where the extension of time is
unconditional, the original date is substituted by the extended date sans any liability.
25. Returning to the facts of the present case, when the said formal agreement dated
8.5.1996 was entered into, the scenario was that the Petitioner was in breach of its
obligation to provide the complete site for commencement of the work. The
respondent was, at that stage entitled to rescind the contract and claim damages.
However, till the contract was so rescinded, the Respondent was also obliged to be
prepared with all his equipment, manpower and be ready to proceed with the work
since the time stipulated by the original agreement was ticking. However, the
Respondent with open eyes entered into the said formal agreement on 8.5.1996. The
said agreement dated 8.5.1996 necessarily arrested the running/commencement of
the time period for the completion of the work indefinitely. The Respondent did not
reserve its right to claim the damages sustained on account of the breach of the
original agreement by the Petitioner up to 8.5.1996.
26. The matter the arbitrator was bound to consider was the intention of the parties
when they entered into the subsequent agreement and the effect it produced. The

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arbitrator failed to appreciate the fact that the parties had substituted a material term
of the original Contract and discharged each other of the mutual obligations existing
under the original contract till such time the permission to cut trees was obtained.
This substitution constitutes a 'Novation' as per Section 62 of the Contract Act and
absolved the parties of their liabilities accrued under the original contract. Since this
has been clearly ignored by the Arbitrator, the award stands vitiated.
27. In this view of the matter, it is imperative to examine whether there was a breach
of the subsequent contract by the Petitioner, to be made liable in law to any claim for
damages.
28. It is clear from the terms of the said agreement dated 8.5.96 that the parties
contemplated that to make the contract effective, permission to cut trees must be
obtained. This was without an iota of doubt an essential term of the contract for it
was known to both parties at the time of execution of the said subsequent agreement
that work would not commence till the permission was obtained. The permission was
essential to enable both the parties to the contract to perform their respective
obligations. The Contractor could not have carried on work without such permission
having been obtained. The employer (Petitioner herein) could not have sought
enforcement of the obligation to construct against the Contractor unless the
permission was obtained.
29. The obtaining of such permission was a requirement of law, and it was not open
for any of the parties to have waived that condition and insist on performance
contrary to the said provision. Since the condition was a vital one, it became
impossible for the parties to complete the transaction as contemplated by the parties
in its absence.
3 0 . Though the contract was a concluded one, its performance was nevertheless
contingent upon the grant of permission to cut trees on the site. Thus, the
subsequent contract was a contingent contract and as the contingency failed to occur,
the contract became void. [Section 32 of the Contract Act].
31. It is pertinent to mention here that it was not the case of the claimant before the
Arbitrator that the breach of this condition was due to any fault of the Petitioner
herein. The Petitioner had applied for permission to the appropriate authorities and if
the permission failed to materialize, no fault could be attributed to the Petitioner.
MANU/PR/0088/1947 : AIR 1947 PC 182
32. The Arbitrator failed to apply this fundamental principle of Contract law and thus,
misconducted himself. Accordingly, the award so far as it relates to claim 4 is also
set aside.
3 3 . Accordingly, this petition is disposed of and the award is modified in the
following terms:
a) The amount of Rs. 3,04,940/- awarded under claim No. 2 and Rs.
80,000/- awarded under claim No. 3 is illegal and consequently set aside.
b) The amount of Rs. 12,71,721/- awarded under claim No. 4 is also bad and
consequently set aside.
c) The award so far as it relates to claim No. 1 and 5 is justifiable in law and
the same is upheld to that extent.

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 d) Keeping in mind the reduced rate of inflation over the past several years,
the interest @ 18% awarded under claim No. 6 being on the higher side is
reduced to 12 % per annum for the sums awarded under claim Nos. 1 and 5
from 16.10.2000 till the date of the award. The respondent would be entitled
for future interest from date of award till date of actual payment @ 12% p.a.
on the amounts due against claim Nos. 1 and 5.
34. Parties are left to bear their own respective cost.

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