Circumstances when the Arbitral Award could be set aside- Supreme Court redefines.
IN THE SUPREME COURT OF INDIA
CIVIL APPELLATE JURISDICTION
CIVIL APPEAL NO.3349 OF 2005
M/s. J.G.Engineers Pvt. Ltd. … Appellant
Vs.
Union of India & Anr. … Respondents
J U D G M E N T
R.V.RAVEENDRAN, J.
This appeal is directed against the judgment dated 8.2.2005 of the
Guwahati High Court allowing Arbitration Appeal No.1/2004 filed by the
respondents and setting aside the judgment dated 12.12.2003 passed by
Additional District Judge, Kamrup, Guwahati (by which the District court
had dismissed the petition filed by respondents filed under section 34 of
Arbitration & Conciliation Act, 1996 and affirmed the Award passed by the
Arbitrator dated 5.9.2001, with clerical corrections made on 22.9.2001).
2. On 26.3.1993 the respondents awarded the work of “extension of
terminal building” at Guwahati airport to the appellant. As per the contract,
the date of commencement of work was 10.4.1993 and the period of
completion of the work was 21 months, to be completed in different stages.
As the appellant (also referred to as the ‘contractor’) did not complete the
first phase of the work within the stipulated time, the respondents
terminated the contract by order dated 29.8.1994. The termination was
challenged by the appellant in a writ petition filed before the Gawahati
High Court. By judgment dated 27.9.1994, the High Court set aside the
termination and directed the respondents to grant time to the appellant till
the end of January 1995 for completion of the first phase reserving liberty
to the appellant to apply for further extension of time. As the work was not
completed, the respondents granted an extension upto 31.7.1995 by letter
dated 24.8.1995, without levying any liquidated damages. The contractor
proceeded with the work even thereafter. However, as the progress was
slow, the respondents terminated the contract on 14.3.1996 on the ground
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of non-completion even after 35 months. The appellant filed a writ petition,
challenging the cancellation. The High Court by order dated 25.6.1996,
noticed the existence of the arbitration agreement and referred the parties to
arbitration. In pursuance of it, on a request by the appellant, the
respondents appointed Mr. C.Vaswani as the sole arbitrator on 14.2.1997.
3. On 17.4.1997, the appellant filed its statement of claims. Claims 1 to
11 aggregated to Rs.2,38,86,198.31 (subsequently, reduced to
Rs.2,06,70,495/-). Claim 12 was for interest at 18% per annum on the total
claim amount from 20.5.1996 to date of realization. Claim 13 was for
Rs.2,13,729/- as cost of arbitration. On 3.2.1999, the respondents filed their
reply and also filed their four counter claims before the arbitrator
aggregating to Rs. 279,54,225/-.
4. By award dated 5.9.2001 (as amended on 22.9.2001) the Arbitrator
awarded a sum of Rs.1,04,58,298/- with interest and costs in favour of the
appellant and rejected the counter claims of the respondents. The
particulars of the amounts claimed and the awards thereon are as under:
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C laim s by appellant
Claim
No.
Particulars of Claim Amount claimed
by appellant
Amount awarded
by Arbitrator
1 Claim for the balance payment of 34th
Running account
Rs.11,26,518 Rs.11,26,518
2,4,5 2) Claim for the payment due under
35th Running Account bill
4) Claim for the payment for Extra
items of work executed
5) Claim for escalation in rates for
works executed after July 1995 till the
date of termination
Rs.65,64,544
Rs.8,70,517
Rs.3,27,335
Rs.14,59,320
3 Claim for the refund of Security
Deposit
Rs.1,00,000 Rs. 1,00,000
6 Claim for the difference in scale
weight and sectional weight of steel
Rs. 37,608 Rs. 37,608
7 & 8. 7) Claim for “on site’ overheads and
establishment expenses during the
extended period of 14 months beyond
the stipulated date of completion.
8) Claim for ‘off-site’ overheads and
establishment expenses during the
extended period of 14 months beyond
the stipulated date of completion.
Rs.25,57,295 Rs.17,50,000
9 Claim for loss of hire charges of
machinery, shuttering materials etc.
engaged for execution of the work for
the period beyond the stipulated date of
completion.
Rs.30,79,160 Rs.8,75,000
10 Claim for compensation for the
unutilized proportionate expenses
incurred for establishing the site, and
setting-up of infrastructure required for
performance of full value of work.
Rs.18,01,701 Nil
11 Claim for the loss of anticipatory profit
@ 15% on the value of balance work
which could not be executed due to
termination of Contract
Rs.54,03,669 Rs.39,12,000
Total Rs.2,06,70,495 Rs.104,58,298
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Counter Claims by respondents
Counter
Claim No
Particulars of Counter Claim Amount claimed
by Respondents
Amount awarded
by Arbitrator
1. Excess cost of getting the work
executed through an alternative
agency - recoverable as per clause
(3) of the agreement
Rs.1,46,69,227 Nil
2. Liquidated damages levied under
clause (2) of the agreement
Rs.56,84,998 Nil
3. Escalation that would be payable to
the alternative agency in regard to
execution of remaining work
(tentative).
Rs.75,00,000 Nil
4. Cost of Arbitration Rs.1,00,000 Nil
Total Rs.2,79,54,225 Nil
The Arbitrator awarded to the contractor, simple interest @ 9% per annum
on Rs.38,21,298 for the period 14.9.1996 to 31.3.1997 and simple interest
@ 15% per annum on Rs.1,04,58,298 for the period 1.4.1997 to date of
payment (under Claim No.12). The Arbitrator also awarded Rs.39,610/-
towards costs (under Claim No. 13). All the counter claims of respondents
were rejected.
5. On 12.12.2001, the respondents filed an application (Misc. Arbn.
Case No.590/2001) under Section 34 of the Arbitration and Conciliation
Act, 1996 (for short, ‘the Act’) in the District Court, Guwahati for setting
aside the aforesaid award. The respondents filed an additional petition in
the said proceedings, under section 34 of the Act on 27.1.2003, raising
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additional grounds of challenge. The learned District Judge, Guwahati
dismissed the petition vide order dated 12.12.2003, holding that none of the
grounds under section 34(2) were made out. This order was reversed by the
Guwahati High Court, by the impugned judgment dated 8.2.2005, in
Arbitration Appeal No.1/2004 filed by the respondents, recording the
following findings: (i) The award on claim Nos.1, 3 and 11 related to
‘excepted matters’ which were beyond the scope of the arbitration
agreement and could not be adjudicated by the Arbitrator. (ii) The award
on Claim No.5 was contrary to the terms of price escalation clause (clause
10(cc) of the contract) and being patently illegal, required to be set aside.
(iii) The rejection of the counter claims of respondent, by ignoring the
agreed terms of contract and the legal provisions, was also patently illegal.
As a consequence, the award was liable to be set aside fully, as the
respondents would have been entitled to adjust the amounts found due and
payable against claims 2, 4, 6, 7, 8, 9 against their counter-claims, if
allowed. In view of the said findings the High Court directed as follows :
“In view of the above, the appeal filed by the appellants is allowed. The
award passed by the Arbitrator on 5.9.2001 and corrected on 22.9.2001
as well as the order dated 12.12.2003 passed by the learned Adhoc
Additional District Judge No.2, Kamrup, Guwahati in Misc. (Arbitration)
Case No.590/2001, are set aside. The arbitration proceeding is remitted
back to the learned arbitrator for reconsideration of the counter claims of
the respondents and for passing an award by making necessary
adjustment of the amount payable to the contractor/claimant against his
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claim nos. 2,4,6,7,8,9 and 13 in terms of the finding recorded by this
Court.”
6. The respondents’ contention that the arbitrator has considered and
allowed some claims which were ‘excepted matters’ and therefore,
inarbitrable, that grant of some other claims by the arbitrator violated the
express provisions of clause 10(cc) of the agreement, and that the counterclaims
of respondents have been erroneously rejected, have found favour
with the High Court. The appellant contends that the award does not violate
clauses (2) and (3) of the agreement making certain decisions of
Superintending Engineer/Engineer-in-Charge final, nor clause 10(cc) of the
agreement relating to escalations. It is also contended that respondents
committed breach and the counter-claims were rightly rejected. The
appellant contends the award is legal and not open to challenge under any
of the grounds under section 34 of the Act.
Questions for consideration
7. A Civil Court examining the validity of an arbitral award under
section 34 of the Act exercises supervisory and not appellate jurisdiction
over the awards of an arbitral tribunal. A court can set aside an arbitral
award, only if any of the grounds mentioned in sections 34(2)(a) (i) to (v)
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or section 34(2)(b)(i) and (ii), or section 28(1)(a) or 28(3) read with section
34(2)(b)(ii) of the Act, are made out. An award adjudicating claims which
are ‘excepted matters’ excluded from the scope of arbitration, would
violate section 34(2)(a)(iv) and 34(2)(b) of the Act. Making an award
allowing or granting a claim, contrary to any provision of the contract,
would violate section 34(2)(b)(ii) read with section 28(3) of the Act. On
the contentions urged, the following questions arise for our consideration :
(i) Whether the High Court was justified in setting aside the award in
respect of claims 1, 3, and 11 on the ground that they related to
‘excepted matters’?
(ii) Whether the High Court was justified in setting aside the award in
regard to Claim Nos. 2, 4, 6, 7, 8 and 9?
(iii) Whether High Court was justified in holding that claim 5 for
escalation was barred by clause 10(cc) of the contract?
(iv) Whether the High Court was justified in setting aside the award
rejecting counter-claims 1 to 4?
Re : Question (i):
8. Claim No. (1) for Rs.11,26,518 relates to the payment due in regard
to the 34th running bill withheld by the respondent. It comprises
Rs.5,90,000/- levied as compensation under clause (2) of the agreement,
Rs.3,17,468 withheld towards alleged risk cost in getting the work
executed by an alternative agency and Rs.2,19,050 being the escalation in
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regard to the period January 1995 to July 1995 which was admitted by the
respondents to be due. The Arbitrator allowed the entire claim holding that
the appellant was not responsible for the delay and consequently the
rescission/termination was illegal and levy of liquidated damages and
recovery of excess cost in getting the work completed through an
alternative agency was not permissible, was bad.
9. Claim No.3 was for refund of security deposit of Rs.100,000/-. The
respondents had encashed the bank guarantee for Rs.1 lakh which had been
issued in lieu of security deposit and forfeited the same on the ground that
the contractor was in breach. The arbitrator held the contractor was not in
breach and the forfeiture was illegal and directed that the said sum of
Rupees one lakh should be refunded to the contractor.
10. Claim No.11 was for Rs.54,03,669 being the loss of anticipated
profit in regard to the value of the unexecuted work which would have
been executed by the contractor if the contract had not been rescinded by
the respondents. The contractor contended that the termination was in
breach of the contract and but for such termination the contractor would
have legitimately completed the work and earned a profit of 15%. The
arbitrator held that the respondents were responsible for the delay, that the
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contractor was not in breach and the termination was therefore illegal. He
held that the value of the work which could not be executed by the
contractor due to wrongful termination, was Rs.3,91,21,589 and 10%
thereof would be the standard estimate of the loss of profits and
consequently awarded Rs.39,12,000/- towards the loss of profits, which the
contractor would have earned but for the wrongful termination of the
contract by the respondents.
11. As per the arbitration agreement (contained in Clause 25 of the
contract) all questions and disputes relating to the contract, execution or
failure to execute the work, whether arising during the progress of the work
or after the completion or abandonment thereof, “except where otherwise
provided in the contract”, had to be referred to and settled by arbitration.
The High Court held that claims 1, 3 and 11 of the contractor were not
arbitrable as they related to excepted matters in regard to which the
decisions of the Superintending Engineer or the Engineer-in-Charge had
been made final and binding under clauses (2) and (3) of the agreement.
12. We may refer to the relevant provisions of the said contract
document, that is, clauses 2, 3(Part) and 25 (Part) to decide
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whether the claims 1, 3 and 11 were excepted matters, excluded from
Arbitration:
Clause (2):
“The time allowed for carrying out the work as entered in the tender
shall be strictly observed by the contractor and shall be deemed to be
essence of the contract and shall be reckoned from the tenth day after the
date on which the order to commence the work is issued to the
contractor. The work shall throughout the stipulated period of the
contract be proceeded with all due diligence and the contractor shall pay
as compensation an amount equal to one percent or such smaller
amount as the Superintending Engineer (whose decision in writing
shall be final) may decide on the amount of the estimated cost of the
whole work as shown in the tender, for every day that the work remains
uncommenced or unfinished after the proper dates. And further to ensure
good progress during the execution of the work, the contractor shall be
bound in all cases in which the time allowed for any work exceeds, one
month (save for special jobs) to complete one-eighth of the whole of the
work before one-fourth of the whole time allowed under the contract has
elapsed, three eighths of the works, before one-half of such time has
elapsed and three-fourths of the work; before three-fourths of such time
has elapsed. However for special jobs if a time-schedule has been
submitted by the Contractor and the same has been accepted by the
Engineer-in-Charge. The contractor shall comply with the said time
schedule. In the event of the contractor failing to comply with this
condition, he shall be liable to pay as compensation an amount equal to
one percent or such small amount as the Superintending Engineer
(whose decision in writing shall be final) may decide on the said
estimated cost of the whole work for every day that the due quantity of
work remains incomplete. Provided always that the entire amount of
compensation to be paid under the provisions of this clause shall not
exceed ten per cent, on the estimated cost of the work as shown in the
tender.”
Clause 3 :
“The Engineering-in-charge may without prejudice to his right against
the contractor in respect of any delay or inferior workmanship or
otherwise or to any claims for damage in respect of any breaches of the
contract and without prejudice to any rights or remedies under any of the
provisions of this contract or otherwise and whether the date of
completion has or has not elapsed by notice in writing absolutely
determine the contract in any of the following cases:
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(i) If the contractor having been given by the Engineer-in-charge a
notice in writing to rectify, reconstruct or replace any defective
work or that the work is being performed in any inefficient or
other improper or unworkmanlike manner, shall omit to comply
with the requirements of such notice for a period of seven days
thereafter or if the contractor shall delay or suspend the execution
of the work so that either in the judgment of the Engineer-incharge
(whose decision shall be final and binding) he will be
unable to secure completion of the work by the date of
completion or he has already failed to complete the work by that
date…
(ii) x x x x (not relevant)
(iii) If the contractor commits breach of any of the terms and
conditions of this contract.
(iv) If the contractor commits any acts mentioned in Clause 21
hereof.
When the contractor has made himself liable for action under any of the
cases aforesaid, the Engineer-in-Charge on behalf of the President of
India shall have powers:
(a) To determine or rescind the contract as aforesaid (of which
termination or rescission notice in writing to the contractor under
hand of the Engineer-in-Charge shall be conclusive evidence)
upon such determination or rescission the security deposit of the
contractor shall be liable to be forfeited and shall be absolutely at
the disposal of Government.
(b) x x x x (not relevant)
(c) After giving notice to the contractor to measure up the work
of the contractor and to take such part thereof as shall be
unexecuted out of his hands and to give it to another contractor to
complete in which case any expenses which may be incurred in
excess of the sum which would have been paid to the original
contractor if the whole work had been executed by him (of the
amount of which excess the certificate in writing of the
Engineer-in-Charge shall be final and conclusive) shall be
borne and paid by the original contractor and may be deducted
from any money due to him by Government under this contract
or on any other account whatsoever or from his security deposit
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or the proceeds of sales thereof or a sufficient part thereof as the
case may be.”
In the event of any one or more of the above courses being adopted by
the Engineer-in-Charge the contractor shall have no claim to
compensation for any loss sustained by him by reason of his having
purchased or procured any materials or entered into any engagements or
made any advances on account or with a view to the execution of the
work or the performance of contract. And in case action is taken under
any of provisions aforesaid. The contractor shall not be entitled to
recover or be paid any sum for any work thereof or actually performed
under this contract unless and until the Engineer-in-Charge has certified
in writing the performance of such work and the value payable in respect
thereof and he shall only be entitled to be paid the value so certified.
Clause 25:
“Except where otherwise provided in the contract all questions and
disputes relating to the meaning of the specifications, designs, drawings,
and instructions hereinbefore mentioned and as to the quality of
workmanship or materials used on the work or as to any other question,
claim, right, matter or thing whatsoever in any way arising out of or
relating to the contract designs, drawings, specifications, estimates,
instructions, orders or these conditions or otherwise concerning the
works or the execution of failure to execute the same whether arising
during the progress of the work or after the completion or abandonment
thereof shall be referred to the sole arbitration of the person appointed by
the Chief Engineer, C.P.W.D. in charge of the work at the time of
dispute or if there be no Chief Engineer the administrative head of the
said C.P.W.D. at the time of such appointment. It will be no objection to
any such appointment that the arbitrator so appointed is a Government
servant, that he had to deal with the matters to which the contract relates
and that in the course of his duties as Government servant he has
expressed views on all or any of the matters in dispute or difference.”
(emphasis supplied)
13. Clauses (2) and (3) of the contract relied upon by the respondents, no
doubt make certain decisions by the Superintending Engineer and
Engineer-in-Charge final/final and binding/final and conclusive, in regard
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to certain matters. But the question is whether clauses (2) and (3) of the
agreement stipulate that the decision of any authority is final in regard to
the responsibility for the delay in execution and consequential breach and
therefore exclude those issues from being the subject matter of arbitration.
We will refer to and analyse each of the ‘excepted matters’ in clauses (2)
and (3) of the agreement to find their true scope and ambit :
(i) Clause (2) provides that if the work remains uncommenced or
unfinished after proper dates, the contractor shall pay as compensation for
everyday’s delay an amount equal to 1% or such small amount as the
Superintending Engineer (whose decision in writing shall be final) may
decide on the estimated cost of the whole work as shown in the tender.
What is made final is only the decision of the Superintending Engineer in
regard to the percentage of compensation payable by the contractor for
everyday’s delay that is whether it should be 1% or lesser. His decision is
not made final in regard to the question as to why the work was not
commenced on the due date or remained unfinished by the due date of
completion and who was responsible for such delay.
(ii) Clause (2) also provides that if the contractor fails to ensure progress
as per the time schedule submitted by the contractor, he shall be liable to
pay as compensation an amount equal to 1% or such smaller amount as the
Superintending Engineer (whose decision in writing shall be final) may
decide on the estimated cost of the whole work for everyday the due
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quantity of the work remains incomplete, subject to a ceiling of ten percent.
This provision makes the decision of the Superintending Engineer final
only in regard to the percentage of compensation (that is, the quantum) to
be levied and not on the question as to whether the contractor had failed to
complete the work or the portion of the work within the agreed time
schedule, whether the contractor was prevented by any reasons beyond its
control or by the acts or omissions of the respondents, and who is
responsible for the delay.
(iii) The first part of clause (3) provides that if the contractor delays or
suspends the execution of the work so that either in the judgment of the
Engineer-in-Charge (which shall be final and binding), he will be unable to
secure the completion of the work by the date of completion or he has
already failed to complete the work by that date, certain consequences as
stated therein, will follow. What is made final by this provision is the
decision of the Engineer-in-Charge as to whether the contractor will be
able to secure the completion of the work by the due date of completion,
which could lead to the termination of the contract or other consequences.
The question whether such failure to complete the work was due to reasons
for which the contractor was responsible or the department was
responsible, or the question whether the contractor was justified in
suspending the execution of the work, are not matters in regard to which
the decision of Engineer-in-Charge is made final.
(iv) The second part of clause (3) of the agreement provides that where the
contractor had made himself liable for action as stated in the first part of
that clause, the Engineer-in-Charge shall have powers to determine or
15
rescind the contract and the notice in writing to the contractor under the
hand of the Engineer-in-Charge shall be conclusive evidence of such
termination or rescission. This does not make the decision of the Engineerin-
Charge as to the validity of determination or rescission, valid or final.
In fact it does not make any decision of Engineer-in-Charge final at all. It
only provides that if a notice of termination or rescission is issued by the
Engineer-in-Charge under his signature, it shall be conclusive evidence of
the fact that the contract has been rescinded or determined.
(v) After determination or rescission of the contract, if the Engineer-in-
Charge entrusts the unexecuted part of the work to another contractor, for
completion, and any expense is incurred in excess of the sum which would
have been paid to the original contractor if the whole work had been
executed by him, the decision in writing of the Engineer-in-Charge in
regard to such excess shall be final and conclusive, shall be borne and paid
by the original contractor. What is made final is the actual calculation of
the difference or the excess, that is if the value of the unexecuted work as
per the contract with the original contractor was Rs.1 lakh and the cost of
getting it executed by an alternative contractor was Rs.1,50,000/- what is
made final is the certificate in writing issued by the Engineer-in-Charge
that Rs.50,000 is the excess cost. The question whether the determination
or rescission of the contractor by the Engineer-in-Charge is valid and
legal and whether it was due to any breach on the part of the contractor,
or whether the contractor could be made liable to pay such excess, are not
issues on which the decision of Engineer-in-Charge is made final.
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14. Thus what is made final and conclusive by clauses (2) and (3) of the
agreement, is not the decision of any authority on the issue whether the
contractor was responsible for the delay or the department was responsible
for the delay or on the question whether termination/rescission is valid or
illegal. What is made final, is the decisions on consequential issues relating
to quantification, if there is no dispute as to who committed breach. That is,
if the contractor admits that he is in breach, or if the Arbitrator finds that
the contractor is in breach by being responsible for the delay, the decision
of the Superintending Engineer will be final in regard to two issues. The
first is the percentage (whether it should be 1% or less) of the value of the
work that is to be levied as liquidated damages per day. The second is the
determination of the actual excess cost in getting the work completed
through an alternative agency. The decision as to who is responsible for the
delay in execution and who committed breach is not made subject to any
decision of the respondents or its officers, nor excepted from arbitration
under any provision of the contract.
15. In fact the question whether the other party committed breach cannot
be decided by the party alleging breach. A contract cannot provide that one
party will be the arbiter to decide whether he committed breach or the other
17
party committed breach. That question can only be decided by only an
adjudicatory forum, that is, a court or an Arbitral Tribunal. In State of
Karnataka vs. Shree Rameshwara Rice Mills (1987 (2) SCC 160) this
Court held that adjudication upon the issue relating to a breach of condition
of contract and adjudication of assessing damages arising out of the breach
are two different and distinct concepts and the right to assess damages
arising out of a breach would not include a right to adjudicate upon as to
whether there was any breach at all. This Court held that one of the parties
to an agreement cannot reserve to himself the power to adjudicate whether
the other party has committed breach. This court held :
“Even assuming for argument’s sake that the terms of Clause 12 afford
scope for being construed as empowering the officer of the State to
decide upon the question of breach as well as assess the quantum of
damages, we do not think that adjudication by the other officer regarding
the breach of the contract can be sustained under law because a party to
the agreement cannot be an arbiter in his own cause. Interests of justice
and equity require that where a party to a contract disputes the
committing of any breach of conditions the adjudication should be by an
independent person or body and not by the other party to the contract.
The position will, however, be different where there is no dispute or
there is consensus between the contracting parties regarding the breach
of conditions. In such a case the officer of the State, even though a party
to the contract will be well within his rights in assessing the damages
occasioned by the breach in view of the specific terms of Clause 12.
We are, therefore, in agreement with the view of the Full Bench that the
powers of the State under an agreement entered into by it with a private
person providing for assessment of damages for breach of conditions and
recovery of the damages will stand confined only to those cases where
the breach of conditions is admitted or it is not disputed.”
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16. The question whether the issue of breach and liability are excluded
from arbitration, when quantification of liquidated damages are excluded
from arbitration was considered by this Court in Bharat Sanchar Nigam
Ltd. vs. Motorola India Ltd. (2009 (2) SCC 337). This court held :
“The question to be decided in this case is whether the liability of the
respondent to pay liquidated damages and the entitlement of the
appellant, to collect the same from the respondent is an excepted matter
for the purpose of Clause 20.1 of the General Conditions of contract. The
High Court has pointed out correctly that the authority of the purchaser
(BSNL) to quantify the liquidated damages payable by the supplier
Motorolla arises once it is found that the supplier is liable to pay the
damages claimed. The decision contemplated under Clause 16.2 of
the agreement is the decision regarding the quantification of the
liquidated damages and not any decision regarding the fixing of the
liability of the supplier. It is necessary as a condition precedent to
find that there has been a delay on the part of the supplier in
discharging his obligation for delivery under the agreement.
It is clear from the reading of Clause 15.2 that the supplier is to be held
liable for payment of liquidated damages to the purchaser under the said
clause and not under Clause 16.2. The High Court in this regard correctly
observed that it was not stated anywhere in Clause 15 that the question
as to whether the supplier had caused any delay in the matter of delivery
will be decided either by the appellant/BSNL or by anybody who has
been authorized on the terms of the agreement. Reading Clause 15 and
16 together, it is apparent that Clause 16.2 will come into operation only
after a finding is entered in terms of Clause 15 that the supplier is liable
for payment of liquidated damages on account of delay on his part in the
matter of making delivery. Therefore, Clause 16.2 is attracted only after
the supplier's liability is fixed under Clause 15.2. It has been correctly
pointed out by the High Court that the question of holding a person liable
for Liquidated Damages and the question of quantifying the amount to
be paid by way of Liquidated Dmages are entirely different. Fixing of
liability is primary, while the quantification, which is provided for under
Clause 16.2, is secondary to it.
Quantification of liquidated damages may be an excepted matter as
argued by the appellant, under Clause 16.2, but for the levy of
liquidated damages, there has to be a delay in the first place. In the
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present case, there is a clear dispute as to the fact that whether there
was any delay on the part of the respondent. For this reason, it
cannot be accepted that the appointment of the arbitrator by the
High Court was unwarranted in this case. Even if the quantification
was excepted as argued by the appellant under Clause 16.2, this will
only have effect when the dispute as to the delay is ascertained.
Clause 16.2 cannot be treated as an excepted matter because of the
fact that it does not provide for any adjudicatory process for
decision on a question, dispute or difference, which is the condition
precedent to lead to the stage of quantification of damages.”
(emphasis supplied)
17. In view of the above, the question whether appellant was responsible
or respondents were responsible for the delay in execution of the work, was
arbitrable. The arbitrator has examined the said issue and has recorded a
categorical finding that the respondents were responsible for the delay in
execution of the work and the contractor was not responsible. The
arbitrator also found that the respondents were in breach and the
termination of contract was illegal. Therefore, the respondents were not
entitled to levy liquidated damages nor entitled to claim from the contractor
the extra cost (including any escalation in regard to such extra cost) in
getting the work completed through an alternative agency. Therefore even
though the decision as to the rate of liquidated damages and the decision as
to what was the actual excess cost in getting the work completed through
an alternative agency, were excepted matters, they were not relevant for
deciding claims 1, 3 and 11, as the right to levy liquidated damages or
20
claim excess costs would arise only if the contractor was responsible for
the delay and was in breach. In view of the finding of the arbitrator that the
appellant was not responsible for the delay and that the respondents were
responsible for the delay, the question of respondents levying liquidated
damages or claiming the excess cost in getting the work completed as
damages, does not arise. Once it is held that the contractor was not
responsible for the delay and the delay occurred only on account of the
omissions and commissions on the part of the respondents, it follows that
provisions which make the decision of the Superintending Engineer or the
Engineer-in-Charge final and conclusive, will be irrelevant. Therefore, the
Arbitrator would have jurisdiction to try and decide all the claims of the
contractor as also the claims of the respondents. Consequently, the award
of the Arbitrator on items 1, 3 and 11 has to be upheld and the conclusion
of the High Court that award in respect of those claims had to be set aside
as they related to excepted matters, cannot be sustained.
Re : Question (ii)
18. The arbitrator had considered and dealt with claims (1), (2, 4 and 5),
(6), (7 and 8), (9) and (11) separately and distinctly. The High Court found
21
that the award in regard to items 1, 3, 5 and 11 were liable to be set aside.
The High Court did not find any error in regard to the awards on claims 2,
4, 6, 7, 8 and 9, but nevertheless chose to set aside the award in regard to
these six items, only on the ground that in the event of counter claims 1 to
4 were to be allowed by the arbitrator on reconsideration, the respondents
would have been entitled to adjust the amounts awarded in regard to claims
2, 4, 6, 7, 8 and 9 towards the amounts that may be awarded in respect of
counter claims 1 to 4; and that as the award on counter claims 1 to 4 was
set aside by it and remanded for fresh decision, the award in regard to
claim Nos. 2, 4, 6, 7, 8 and 9 were also liable to be set aside. It is now wellsettled
that if an award deals with and decides several claims separately and
distinctly, even if the court finds that the award in regard to some items is
bad, the court will segregate the award on items which did not suffer from
any infirmity and uphold the award to that extent. As the awards on items
2, 4, 6, 7, 8 and 9 were upheld by the civil court and as the High Court in
appeal did not find any infirmity in regard to the award on those claims, the
judgment of the High Court setting aside the award in regard to claims
2,4,6,7,8 and 9 of the appellant, cannot be sustained. The judgment to that
extent is liable to be set aside and the award has to be upheld in regard to
claims 2, 4, 6, 7, 8 and 9.
22
Re : Question (iii)
19. Section 28(3) of the Act provides that in all cases the arbitral tribunal
shall decide in accordance with the terms of the contract and shall also take
into account the usages of the trade applicable to the transaction. Subsection
(1) of section 28 provides that the arbitral tribunal shall decide the
disputes submitted to arbitration in accordance with the substantive law for
the time being in force in India. Interpreting the said provisions, this court
in Oil & Natural Gas Corporation Ltd. vs. Saw Pipes Ltd. [2003 (5) SCC
705] held that a court can set aside an award under section 34(2)(b)(ii) of
the Act, as being in conflict with the public policy of India, if it is (a)
contrary to the fundamental policy of Indian Law; or (b) contrary to the
interests of India; or (c) contrary to justice or morality; or (d) patently
illegal. This Court explained that to hold an award to be opposed to public
policy, the patent illegality should go to the very root of the matter and not
a trivial illegality. It is also observed that an award could be set aside if it is
so unfair and unreasonable that it shocks the conscience of the court, as
then it would be opposed to public policy.
23
20. It is well-settled that where the contract in clear and unambiguous
terms, bars or prohibits a particular claim, any award made in violation of
the terms of the contract would violate section 28(3) of the Act, and would
be considered to be patently illegal and therefore, liable to be set aside
under section 34(2)(b) of the Act. Claim No.(5) is for payment of
escalation under clause 10(cc) of the contract for work done beyond July,
1995 till the date of termination. Clause 10(cc) of the agreement reads thus:
Clause 10(cc)
“… subject to the condition that such compensation for the escalation in
prices shall be available only for work done during the stipulated period
of the contract including such period for which the contract is validly
extended under the provisions of clause 5 of the contract without any
action under clause 2 and also subject to the condition that no such
compensation shall be payable for a work for which the stipulated period
of completion is 6 months or less”.
Thus, escalation in price shall be available only for the work done during
the stipulated period of contract including such period for which the
contract was validly extended under the provisions of clause (5) of the
contract, without any action under clause (2) of the contract. The
respondents contend that as the Superintending Engineer levied penalty (at
10% of the estimated cost of the work) for the period 10.1.1995 to
14.3.1996 under clause (2) of the contract, the contractor was not entitled
24
to payment of escalation under clause 10(cc). The arbitrator held that the
contractor was not responsible for the delay and the respondents were
responsible for the delay. If so, the contractor will be entitled to a valid
extension under the provisions of the contract, without levy of any
liquidated damages. If the contractor is entitled to such extension without
levy of penalty, then it follows that under clause 10(cc), the contractor
would be entitled to escalation, in terms of the contract for the work done
during the period of extension.
21. As noticed above, the stipulated date for completion was 9.1.1995.
The respondents granted the first extension upto 31.7.1995 without levy of
liquidated damages, vide letter dated 24.8.1995. In fact the respondent had
paid the escalation in prices under clause 10(cc) upto June 1995. The
contractor was however permitted to continue the work without levy of any
liquidated damages, until termination on 14.3.1996. It was only on
30.9.1999 after the contractor had submitted its statement of claim on
17.4.1997, the respondents chose to levy liquidated damages for the period
1.10.1995 to 14.3.1996. In view of the finding of the Arbitrator that the
contractor was not responsible for the delay, the contractor was entitled to
second extension from 1.8.1995 also without levy of penalty. In fact,
25
having extended the time till 31.7.1995 without any levy of liquidated
damages, the respondents could not have retrospectively levied liquidated
damages on 30.9.1999 from 10.1.1995. Be that as it may.
22. We extract below the reasoning of the Arbitrator for grant of
escalation for the work done from 1.8.1995 to 14.3.1996 under clause
10(cc) of the contract :
“The escalation upto July’95 has been covered under claim no.1. The
respondent has not paid any further escalation beyond July, 95, since the
extension thereafter has not been granted and the contract was
rescinded…….. The respondent has denied the claim as the escalation is
payable only for the stipulated period and period extended without levy
of penalty. As I have already decided that the action of rescission of the
contract and the action of levying the compensation/penalty under
Clause 2 by the respondent is incorrect and the claimant was not
responsible for the delay, the escalation for the total work done,
automatically becomes payable.”
The High Court therefore committed an error in setting aside the award in
regard to claim No.5 on the ground that it violates clause 10(cc) of the
contract.
Re : Question (iv)
23. Once the Arbitrator recorded the finding on consideration of the
evidence/material, that the contractor was not responsible for the delay and
26
that the termination was wrongful and that the respondents were liable for
the consequences arising out of the wrongful termination of contract, the
question of respondents claiming any of the following from the contractor
does not arise:
(i) Extra expenditure incurred in getting the balance of work
completed through another contractor under clause 3 of the
agreement [counter claim (1) for Rs.1,46,69,277].
(ii) Levy of liquidated damages under clause 2 of the agreement at
10% of estimated cost of work for the delay between 10.1.1995 to
14.3.1996 [counter claim No.(2) for Rs.56,84,998].
(iii) Claim on account of expected demand for escalation in rates
payable to the alternative contractor in getting the work
completed, in addition to the extra expenditure claimed under
counter claim No.1 [counter claim No.(3) for tentative sum of
Rs.75 lakhs to be ascertained after the work was actually
completed and the bill of the new agency is settled].
(iv) Claim for cost of arbitration [counter claim No.(4) for
Rs.100,000/-].
The High Court proceeded on the erroneous assumption that when clauses
(2) and (3) of the agreement made the decisions of the Superintending
Engineer/Engineer-in-Charge final as to the quantum of liquidated damages
and quantum of extra cost in getting the balance work completed, the said
provisions also made the decision as to the liability to pay such liquidated
27
damages or extra cost or decision as to who committed breach final
and therefore, inarbitrable; and that as a consequence, the respondents were
entitled to claim the extra cost in completing the work (counter claims 1
and 3) and levy liquidated damages (counter claim No.2) and the
arbitration costs (counter claim No.4). Once it is held that the issues
relating to who committed breach and who was responsible for delay were
arbitrable, the findings of the arbitrator that the contractor was not
responsible for the delay and that the termination of contract is illegal are
not open to challenge. Therefore, the rejection of the counter claims of the
respondents is unexceptionable and the High Court’s finding that arbitrator
ought not to have rejected them becomes unsustainable. The award of the
Arbitrator rejecting the counter claims is therefore, upheld.
Conclusion
24. No part of the decision of the High Court is sustainable. The appeal
is therefore allowed, the impugned order of the High Court is set aside and
the order of the District Court dated 12.12.2003, is restored.
………………………….J.
(R V Raveendran)
28
New Delhi; …………………………J.
April 28, 2011. (Markandey Katju)