K.N. SATHYAPALAN (DEAD) BY LRS. versus STATE OF KERALA AND ANR.

Citation: [2006] SUPP. 9 S.C.R. 864 · Decided: 30-11-2006 · Supreme Court of India · Bench: AR. LAKSHMANAN · Disposal: Appeal(s) allowed

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Judgment (excerpt)

A 
B 
K.N. SATHYAPALAN (DEAD) BY LRS. 
v. 
ST A TE OF KERALA AND ANR. 
NOVEMBER 30, 2006 
[DR. AR. LAKSHMANAN AND ALT AMAS KABIR, JJ.] 
Arbitration Act, 1940-s.17-Non-completion of work within stipulated 
time-Ex_tension of time on co_ndition that contractor not eligible to escalation 
C costs for work done during extended period-Arbitrator allowing the claims 
on account of escalation costs-High Court setting aside the same holding 
that arbitrator had exceeded its jurisdiction in granting award-Justification 
of-Held, not justified as delay had occurred due to law and order problem 
at the work site which should have been avoided by the State Government. 
D 
The appellant entered into an agreement with the Respondent-State 
whereby it undertook the construction work. The whole work could not 
be completed on the scheduled dates and under clause 50 of the General 
Conditions of Contract extension of time was sought by the appellant. The 
respondents_ extended the time of completion but while doing so made it 
conditional that such extension of time would be subject to execution of a 
E Supplemental Agreement to the effect that the contractor would not be 
eligible for any enhanced rate for the work done during the extended 
period. The dispute arose and the matter was referred to the sole 
arbitrator. 
F 
Appellant raised claims under various heads. Arbitrator allowed 
some of the claims and awarded a sum of Rs. 42 lacs with 12% interest 
per annum on account of losses suffered by appellant due to interruption 
of work by anti social elements and failure of State in removing such 
miscreants from the sites causing heavy financial losses by way of idle men 
and machinery; price escalation of material that had taken place during 
G extended period of completion; failure of State to handover a suitable 
quarry which resulted in bringing rubble and metal from far off places 
involving additional transportation costs; and non-availability of a suitable 
dumping yard for dumping excess earth. 
H 
864 
K.N. SATHYAPALAN (DEAD) BY LRS. i·. STATE OF KERALA 
865 
Appellant filed O.P. under S.17 of Arbitration Act for passing a decree A 
in terms of the award. The Respondent-State filed petition under S.30 which 
was dismisse~ On appeal, High Court set aside the award holding that the 
Arbitrator had exceeded its jurisdiction in granting the award. Hence the 
present appeal. 
Allowing the appeal, the Court 
HELD: 1.1. Admittedly, the original Agreement did not contain a clause 
for escalation of rates. On the other hand, the Supplemental Agreement 
contained a specific provision that the contractor would not claim any enhanced 
B 
rate for such item of work on account of the extension of time either due to C 
the increase in the rate of labour or materials or on any other ground 
whatsoever. Ordinarily, the parties would be bound by the terms agreed upon 
in the contract, but in the event one of the parties to the contract is unable to 
fulfil its obligations under the contract which has a direct bearing on the 
work to be executed by the other party, the Arbitrator is vested with the 
authority to compensate the second party for the extra costs incurred by him D 
as a result of the failure of the first party to live up to its obligations. 
(870-G, H; 874-E-F) 
P.M Paul v. Union of India, (19891 Supp. 1 SCC 368; T.P. George v. 
State of Kera/a and Anr., [20.!H I 2. S~C 758; Mis. Alopi Parshad & Sons 
Limited v. The Union of India, [1960) 2 SCR 793 and State of U.P. v. Patel E 
Engg. Co. ltd. and Ors., (2004) 10 SCC 566, referred to. 
1.2. The appellant was prevented by unforeseen circumstances from 
completing the work within the stipulated period of eleven months. Such 
delay could have been prevented had the State Government stepped in F 
to maintain the law and order problem which had been created at the 
work site. It is also clear that the rubble and metal, which should have 
been available at the departmental quarry had to be obtained from 
·quarries which were situated at double the distance, and even more, 
. resulting in doubling of the transportation charges. Even the space for 
dumping of excess earth was not provided by the respondents which G 
compelled the appellant t-0 dump the excess earth at a place which was 
far away from the work site entailing extra costs for the same. (875-B-C) 
2. In the aforesaid circumstances, the Arbitrator appears to have 
acted within his jurisdiction in allowing some of the claims o

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