2025 PLP 1528 (CLD)

SYED MUDASSER AMEER, J.

The instant petition has arisen out of Arbitration proceedings. Petitioner is aggrieved of the Orders of the Courts below who have not made the escalation amount of Rs.1717454.43, calculated by the Arbitrators Rule of the Court due to some extraneous remarks made by the Arbitrators in their Award on the issue of escalation.

2. Petitioner being registered and licensed Contractor was awarded a contract for construction of three (3) Regional Offices for the respondents. The petitioner after completing the work, handed over the buildings to the department. Meanwhile, some disputes arose between the parties regarding non-payment of measured work and escalation amount. Petitioner approached the Court by filing an Application under section 20 of The Arbitration Act, 1940 for Reference to the arbitration as per provisions of the agreement. Accordingly, Civil Judge-I/RC, Abbottabad, vide order dated 13.03.2018, made Reference to the arbitrators, both Engineers and ex-officials of respondents, one from each side, for determination of dispute between the parties. The arbitrators framed two issues (1) Whether claim of contractor amounting to Rs.3.262 million is admissible or otherwise and (2) Whether the contractor is entitled to claim the escalation amount of Rs.2.5 million. The arbitrators vide Award dated 24.05.2018 with respect to issue No.1 held petitioner entitled to an amount of Rs.2.042 million instead of Rs.3.262 million, while with respect to Issue No.2, petitioner's claim for escalation amounting to Rs.2.5 million was declared not tenable being repugnant to the Pakistan Engineering Council guidelines. Findings of the arbitrators on the 2nd issue are reproduced below for ready reference:- "The contractor has a claim for escalation amounting to Rs.2.500 (M)... The claim was discussed and argued thread bare by both the parties. The following facts are brought on record which governs the claim for escalation. a. Going through the contract agreement, escalation clause 5-A was found attached duly signed by the Divisional Officer and contractor. (underlining supplied) b. The defending Department was of the view that Clause 5-A was mistakenly attached for the reason that the Pakistan Engineering Council guidelines clearly state, category C-5 contract (limit upto Rs.30.00 million) shall be treated as fixed price contract and the contractor shall have no claim for any escalation. The C-5 contract limit was later enhanced to Rs.50 million, during the year 2013-14. So far that matter, the contractor's claim is still not valid on the grounds that his contract was enhanced to Rs.38.00 million. F. RESOLUTION: The Arbitrators are of the firm view that the Pakistan Engineering Council guide lines take precedence, hence the claim of the contractor is not tenable"

3. Petitioner while accepting decision of arbitrators regarding issue No.1, submitted objections regarding issue No.2, under section 30 read with section 33 of The Arbitration Act, 1940. Vide order dated 07.01.2019 Civil Judge-I/RC, Abbottabad after rendering its view that contract deed clearly mentions it and it is also admitted fact that all contractors are paid escalation amount due to inflation and increase of construction costs with passage of time, set aside the Award to the extent of issue No.2 and referred the matter back to arbitrators for decision afresh on issue No.2 according to law. Relevant portion of the order is given below for ready reference:- "As far as the objections of petitioner regarding claim of escalation amount is concerned, the Court is of the view that contract deed clearly mentions it and it is also admitted fact that all contracts all paid escalation amount due to inflation and increase of instruction cost with passage of time. The stance of arbitrator that the view of Pakistan Engineering council takes precedence does not carry any weight because department concerned was well aware of the said view and inspite of that they entered into a contract of escalation with contractor. Award to the extent of issue No.2 is set aside and the matter is referred back to arbitrators for decision a fresh on issue No.2 according to law." (underlining supplied) However, the second report dated 04.02.2019 submitted by the arbitrators was also not in accordance with the direction of Court contained in order dated 07.01.2019 and they had clearly exceeded their authority by completely disregarding the Terms of Reference. After a detailed discussion on the powers and jurisdiction of the Court and the Arbitrators under the Arbitration Act, 1940, and how the Court had no power to set aside their interpretation of the contract clauses and the applicable laws and to send the matter back to them, the worthy Arbitrators yet again concluded that escalation was not applicable. Relevant portion of their findings are reproduced below: "

7. In view of Para 5 and 6, if the claim of the petitioner is accepted, it will open a flood gate of claims by all such contractors falling under the contracts having value equal to or less than category C-5 limit, which is considered as fixed price contract, shall ultimately cause a severe and undue burden on the Govt. exchequer. Hence the claim for escalation under clause 5A is not valid in the instant case. Report is submitted as desired by the Court."

4. Again petitioner filed objection against the aforesaid second report of arbitrators and in the wake thereof Civil Judge-I/RC, Abbottabad, vide order dated 09.10.2019 again sent the matter back to arbitrators with strict orders to obey the directions of the Court and determine the escalation amount. Relevant portion of the order is reproduced below:- " The arbitrators did not follow the instructions given by the court for determination of escalation amount in its true letter and spirit, their second report was not in accordance with the directions of the court and found divergent from the same. Therefore, to resolve matter once for all as per directions of the court, vide order sheets #23 dated 07.01.2019, the matter is sent back to the arbitrators to obey the directions of the court in determination of the escalation amount. It is further directed to the arbitrators not to divert from the court orders. File to come up for report of arbitrator on 05/11/2019." In pursuance thereof, arbitrators submitted third report dated 28.01.2020 and calculated the escalation amount as Rs.1717454.43 to be paid to petitioner, however, again certain extraneous remarks were made regarding admissibility of the escalation amount. The learned Referee Court after hearing arguments of the parties, made rule of the Court / decreed petitioner's suit only to the extent of issue No.1 and his claim for escalation was declared inadmissible vide judgement dated 10.10.2020. Feeling aggrieved, petitioner filed appeal before District Judge, Abbottabad under section 39 of The Arbitration Act, 1940, which too was dismissed by District Judge vide judgment and decree dated 07.09.2021. Hence, the instant petition.

5. Arguments of learned counsel for the parties heard in considerable detail and the record perused with their able assistance.

6. Perusal of record reveals that petitioner/Contractor was awarded a contract for construction of three (3) Regional Offices vide agreement No.119-CE/EQAA/C&W/2012-13 dated 19.07.2012. Subsequently, a Notification bearing No.SOG/W&S/11-129/2005 dated 30.06.2005 containing Clause 5A which provides Escalation/De-escalation Clause, duly signed by Executive Engineer (C&W) Division Abbottabad, was made part of the said agreement between the parties which fact is also fully reflected in the initial Award dated 24.05.2018. Therefore, the contention of respondents that Clause 5A was mistakenly attached with the same holds no water.

7. Even otherwise, the two successive orders of learned Civil Judge-I/RC, Abbottabad dated 07.01.2019 and 09.10.2019 whereby Award dated 24.05.2018 to the extent of issue No.2, declining escalation amount to petitioner on the ground that clause 5-A was mistakenly attached, was set aside and it was observed that contract clearly mentions claim of escalation amount and it is also admitted fact that all contractors are paid escalation amount due to inflation and increase of construction costs with passage of time and the matter was repeatedly referred back to arbitrators for calculation of the escalation amount, were not challenged by the respondents and as such attained finality. The earlier findings related to escalation having been set aside and the matter having been referred to the arbitrators only for calculation of escalation amount, the authority of arbitrators was confined to calculation only. It was not open for the arbitrators to give any findings on the admissibility of escalation or the applicability of "clause 5A" to the contract. Any findings to that extent were clearly beyond the scope of reference and must be discarded.

8. It is settled law that arbitrators cannot interpret a document in a manner to replace their own views as against the express terms of that documents (Sh. Muhammad Saleem v. Saadat Enterprises: 2009 CLD 390). This principle has also been elaborated by a Division Bench of the Hon'ble Sindh High Court in the case of Messrs Jaffar Bros. Ltd. v. Islamic Republic of Pakistan, etc reported as PLD 1978 Karachi 585, at page No.592 in the following terms:- "Where an arbitrator states reasons for his decision, and they are erroneous on a point of law, there is an error of law on face of the award and the award is liable to be set aside : Firm of Mahomedali A. Karimji & Sons v. Charatsing Budsing (AIR 1925 Sind 51). Again, as in the present case if an arbitrator construes a contract between the parties and gives his own construction or interpretation of the document as a reason for his award, it is open to the Court to examine the reason and set aside the award if the error in the construction is apparent on the face of the award : The Union of India v. Premchand Satram Das and another (AIR 1951 Pat. 201) we, therefore, hold that the award of the arbitrator suffers from an error of law on the face of the award and cannot be sustained on this head of claim. In our view, the learned Single Judge arred in failing to so hold."

9. It seems that the arbitrators were influenced by their past experiences and were therefore adamant on their interpretation/construction of the contract. It is not the function of the arbitrator to be influenced by his own imagination and experience in finding faults with the relevant clauses of the contract between the parties rather they should construe the contract as it was (Pakistan v. Ms. Rajastan Alloy and Steel (Pvt.) Ltd.: 2002 CLD 61). An arbitrator derives power from the contract or, as the case may be, the terms of reference which provide the extent of his authority. Award, therefore, must be in conformity with terms of reference both in substance and spirit. Whenever it is established that the arbitrator has traversed beyond the scope of his authority, or the terms of reference, award submitted by him would lose its legal sanction (Syed Tariq Farooq v. Nasruddin and another: PLD 1980 Quetta 1).

10. The learned Referee Court had rightly remitted the matter pertaining to issue No.2 to the arbitrators. It is settled that while making an award Rule of the Court, the Court was not supposed to act in a mechanical manner, like a post office and put its seal on it but had to look into the award and if it found patent illegality on the face of the award, it could remit the award or any of the matters referred to arbitrator for reconsideration or set aside the same. The arbitrator could not act arbitrarily, capriciously, irrationally or independent of the contract and a deliberate departure or conscious disregard of the contract not only manifested disregard of his authority or misconduct on his part but it may tantamount to mala fide action and vitiate the award (Gerry's International (Pvt.) Ltd. v. Aerofloat Russian International Airlines: 2018 SCMR 662)

11. Subject to the terms of reference an arbitrator was the judge on both the points of fact and law. Where, however, the arbitrator went patently and blatantly wrong on facts, such as assumption of facts not existing on record or ignoring the facts duly established on record and especially going wrong on the points of law or construction/interpretation of contract, the Court had ample powers to correct such a wrong (Karachi Dock Labour Board v. Ms. Quality Builders Ltd.: PLD 2016 SC 121). In such a situation the Court may on its own motion modify or set aside the award if the facts and dictates of justice so demand (Pakistan v. Ms. QMR Expert Consultants: PLD 1980 SC 800).

12. It also merits to mention here that after attaining finality of trial Court orders dated 07.01.2019 and 09.10.2019, no findings or award whatsoever existed in field with respect to Issue No.2. Though in second Award dated 04.02.2019 arbitrators stuck to their earlier stance embodied in first Award dated 24.05.2018, it stands on record that they have neither recorded fresh reasons on issue No.2 nor rendered any operative findings in their second Award. Having said that, their stance in this regard does not carry weight, for as per 10th Running Bill (available on file) dated 17.03.2015, petitioner's contract amount clearly shows to have been enhanced upto 38.00 million, which establishes that it was not a fixed price contract. Thus even if clause 5A of the Notification was not applied to petitioner's contract, the Pakistan Engineering Council restriction was only applicable to contracts below 30 million and petitioner's contract having been admittedly enhanced to Rs.38 million did not fall within that limit. Moreover, the enhancement of C-5 limit to Rs.50 million by Pakistan Engineering Council in the year 2014 could also not be applied retrospectively to effect petitioner's contract which had been executed much prior.

13. Last but not the least, order passed by Civil Judge-I/RC, Abbottabad dated 09.10.2019 vide which matter was again sent back to arbitrators for obeying the directions of the Court, was also not challenged by the respondents, rather arbitrators in compliance of "finality attained Court orders" dated 07.01.2019 and 09.10.2019, vide their third Award, on issue No.2, dated 28.01.2020, calculated the escalation amount as Rs.1717454.43 to be paid to petitioner. However, astonishingly, both the Courts below dismissed petitioner's claim qua escalation amount while relying on the extraneous remarks of the arbitrators, which ought to have been outrightly discarded. The order of Civil Judge-I/RC Abbottabad dated 10.10.2020 to the extent of issue No.2 is not a speaking order for want of rendering operative findings in this respect rather merely referring to the third report of arbitrators. The impugned order of appellate Court dated 07.09.2021 seems to be the result of sub-silentio, for it lost sight of the fact that orders of Civil Judge-I/RC Abbottabad dated 07.01.2019 (whereby first very Award to the extent of issue No.2 was set aside) and 09.10.2019 (whereby the matter was again sent back to arbitrators to obey the directions of the Court in determination of the escalation amount) were not challenged by the respondents and had attained finality.

14. Though the respondents supported the verdicts of the two Courts below and contended that an Award being final decision of the arbitrator(s) cannot be set aside however, confronted with the fact that the chapter of setting aside the first Award had already been closed, they restricted their arguments to the petitioner's entitlement qua escalation amount in the wake of third Award of the arbitrators. The Supreme Court of Pakistan in the case titled "State Bank of Pakistan v. Khyber Zaman and others" reported as 2004 SCMR 1426 has observed as follow: " in order to resolve such ambiguity and to ascertain the real intention of the parties, can have resort to the correspondence preceding and/or subsequent to the execution of the contract document, conduct of the parties and the attending circumstances." Similarly, in the case titled "Societe Generale De Surveillance S.A. v. Pakistan through Secretary, Ministry of Finance Revenue Division, Islamabad" reported as 2002 SCMR 1694 has observed as under: "The agreement between the parties the subject-matter of these appeals is to be tested on the touchstone of true meaning of the word "investment". In order to decide this question, it could be necessary to examine the agreement itself to arrive at a decision as to its scope and nature. It has to be construed strictly, carefully keeping in view the purpose for which the same was executed."

15. After elaborate and chorological scrutiny of the facts and circumstances of the case, this Court is of the view that what stands in field and binding between the parties with respect to Issue No.2 is third Award (report) dated 28.01.2020 particularly last para which for ready reference is reproduced below: "The claim amount was thoroughly checked and it works out to Rs.1,717,454.43 only against Rs.2,499,726.53 (calculation attached)."

16. It would not be out of place to mention here that Supreme Court of Pakistan in Civil Appeal No.851/2014 decided on 21.10.2016 between the same parties pertaining to a similar contract, allowed escalation to the petitioner under the provisions of clause 5A of the same Notification. Besides that, the Supreme Court of Pakistan in another case titled "Director Housing, A.G's Branch, Rawalpindi v. M/s. Makhdum Consultants Engineers and Architects" reported as 1997 SCMR 988 has held as under: "There is no allegation that the agreement containing the" above arbitration clause was executed under duress, undue influence or on account of any misrepresentation on the part of appellant at the time of its execution. The arbitration clause clearly and unequivocally provides that all disputes between the employer (appellant) and the contractor (respondent) will be referred to A.G. GHQ Pakistan Army or a person so nominated by him who shall be the sole arbitrator and his decision will be final and binding on the parties. The respondents having entered into the contracts voluntarily which contained the above arbitration clause, could not be allowed to avoid the arbitration agreement lightly."

17. To sum up the discussions, based on admitted facts and settled law, it is concluded that: firstly, erroneous interpretation of law and/or clauses of contract made by the Arbitrators can be set aside by the Referee Court and the Referee Court vide Orders dated 07.01.2019 and 09.10.2019 had rightly concluded that escalation was part of the contract and the provisions of Pakistan Engineering Council guidelines had been wrongly applied to the contract, therefore Arbitrators' interpretation in this regard was validly set aside. Secondly, regardless of the correct interpretation of the relevant clause of the contract and the legal position in this regard the orders dated 07.01.2019 and 09.10.2019 had never been challenged and duly implemented, thus attained finality and were binding on the Arbitrators who were bound to follow the same. Thirdly, the Arbitrators went way beyond the terms of reference as well as their powers and jurisdiction by sitting as a court of appeal on the Referee Court's orders and any such remarks given by them being extraneous to the Terms of Reference ought to have been discarded by the Referee Court from issue No.2 of the Award. Fourthly, the calculations thus finally made by the Arbitrators ought to have been made rule of the Court.

18. In view of the above, order of Civil Judge-I/RC Abbottabad dated 10.10.2020 as well as impugned order of appellate Court dated 07.09.2021, to the extent of issue No.2, are not sustainable in the eye of law. As such, the same are set aside to that extent. The remarks made by the Arbitrators in the third Award regarding non-admissibility of the escalation are discarded. Consequently, the calculations made in the third Award (report) dated 28.01.2020 with respect to Issue No.2, is made a Rule of the Court and petitioner's suit in addition to the amount decreed on issue No.1, is also decreed on Issue No.2 for escalation amount to the tune of Rs.1,717,454.43 only as worked out by the arbitrators. MH/107/P Order accordingly.