The Delhi High Court while adjudicating an application filed under Section 34 of the Arbitration and Conciliation Act, 1996, held that a party, while challenging the reference order itself, cannot participate in the arbitral proceedings, contest the claims and subsequently raise jurisdictional objection without contesting it before the Arbitrator.
Salar Jung Museum ( Museum/ Petitioner) and M/s Design Teams , a firm of Architects from, New Delhi ( Architects/Respondent) entered into a contract on 17.01.1991 for designing, making detailed architectural drawings, and supervision of construction of additional buildings of the Museum. The contract was for a period of 5 years (upto 16.01.1996), and the preliminary estimated cost of construction was initially ₹5.94 crores. Under the contract, the Architects were entitled to a fee of 4% of the approved preliminary cost estimate and consultancy fees.
On 01.05.1991, the Architects intimated that the cost of construction had to be increased to ₹10.52 crores which, however, was not approved by the Petitioners.
The Architects submitted a further revised estimate of the cost of construction on 11.08.1993, in the amount of Rs 7.52 crores which was accepted by the Petitioners. The Architects were subsequently informed through letters dated 04.01.1994 and 13.01.1994 to prepare estimates not exceeding an outlay of Rs 7.52 crores, but the Petitioner stipulated that professional charges would be payable to the respondent on the initial preliminary cost estimate, being Rs 5.94 crores. The parties were unable to agree on the amount due to the Architects under the contract.
The Architects stated that in addition to the consultancy fees stipulated in Clause 5 of the agreement, supervision charges were to be paid on the work completed after 16.01.1996 as the work was delayed. The Petitioners, on the other hand, contended that the Architects were only entitled to remuneration based on the estimate of Rs 5.94 crores, which they had submitted at the stage of the design competition. Further, the Petitioners contended that the amount of supervision charges were not payable from 16.01.1996 as the contract with the Architects had ended on that date.
In the interregnum, the Architects, initially constituted as a partnership firm, had reconstituted into a private limited company by the name of ‘Design Team Consultants Pvt. Ltd.’ It is this company which made the claim in the arbitration proceedings, and was the Respondent in the section 34 petition before the Court. The Petitioners resisted the claim on this ground also, arguing that the takeover of the Architects’ firm by the company could not relate back to the contract, which had expired on 16.01.1996. The Respondents contended, on the other hand, that the company had taken over all the assets and liabilities of the erstwhile firm, and the same was conveyed to the Petitioner by way of a communication dated 19.09.1996.
The disputes led to invocation of arbitration by the Architects, and an application filed by them before the Court under Section 11 of the Act. By an order dated 27.08.2002, the Court appointed Justice R.P. Gupta, a former Judge of this Court, as the sole arbitrator.
By way of the impugned award dated 26.12.2008, the learned arbitrator awarded consultancy fee in favour of the Architects, reckoned upon the final cost estimate of Rs 7.52 crores. The balance amount awarded under this head was computed as Rs 8,96,315/-. In addition, the learned arbitrator directed refund of the security money deducted from the consultancy fee paid to the respondent [Rs 2,13,840/-] and from the supervision charges [Rs 49,540/-]. Interest was awarded, not at the rate of 24% p.a. as claimed by the Architects, but at the rate of 6% p.a. An award was therefore made in favour of the Architects, for the sum of Rs 18,10,706/- [with further interest at 6% p.a.], and costs of Rs 96,000/-. 11. By the present petition under Section 34 of the Act, the Museum seeks setting aside of this Award interalia on the ground that Arbitrator had exceeded his jurisdiction by deciding claims other than the claim for consultancy fees.He relied upon the order dated 27.08.2002, passed by this Court under Section 11 of the Act, in support of his contention that the disputes which were referred to arbitration concerned the alleged shortfall in consultancy fees alone, and none other. Although the said objection was not raised during the Arbitral proceedings. The other issue was that the awards on account of supervision charges and refund of security deposit were beyond the scope of the contract, and inadmissible in favour of the Respondents after their reconstitution as a company.
While answering whether a jurisdictional objection can be taken for the first time in proceedings under Section 34 of the Act, the Court held that the challenge was not based upon any inherent lack of jurisdiction in the arbitrator but upon the reference order itself. In such a case, the party concerned cannot be permitted to participate in the arbitration proceedings, contest the claim on merits, and thereafter raise a jurisdictional objection. Where the jurisdictional objection is capable of waiver by the affected party, the failure to raise it before the arbitrator signifies consent to the arbitrator’s jurisdiction. A party cannot, in such a case, participate in the proceedings without demur and then seek to assail the validity of the proceedings in the face of an unfavourable award.
The court observed that this approach is consistent with the recent judgment of the Supreme Court in Quippo Construction Equipment Limited vs. Janardan Nirman Pvt. Limited 2020 SCC OnLine SC 419
On the challenge to the award on merits, the Court held that the scope of Section 34 of the Act is limited; interpretation of the agreement and appreciation of the evidence are both matters within the domain of the arbitrator….. The award was well within the discretion of the arbitrator and does not call for interference.
The decision of the Delhi High Court is plausible as it eliminates the possible misuse of the provision of setting aside of the award by narrowing the scope of review.
Bharti Badesra (Senior Partner)
O.P. Khaitan & Co