As there is a Clause in the agreement providing complete mechanism for determination of liability to levy damages for delay in executing a contract, is exclusively conferred upon the Superintending Engineer and when such compensation is levied by the Superintending Engineer, the same is final and binding on the parties - and the same could not have been the subject matter of arbitration.
REPORTABLE
IN THE SUPREME COURT OF INDIA
CIVIL APPELLATE JURISDICTION
CIVIL APPEAL NO.5511 OF 2012
M/S. MITRA GUHA BUILDERS
(INDIA) COMPANY ...Appellant
VERSUS
OIL AND NATURAL GAS
CORPORATION LIMITED …Respondent
WITH
CIVIL APPEAL NO.5512 OF 2012
J U D G M E N T
R. BANUMATHI, J.
These two appeals arise out of the judgment dated
16.02.2009 passed by the High Court of Delhi in FAO(OS) No.6 of
2008 and FAO(OS) No.7 of 2008 in and by which the Division
Bench of the High Court has set aside the order of the learned
Single Judge and also of the learned Arbitrator by holding that the
levy of liquidated damages is an “excepted matter” under Clause 2
read with Clause 25 of the contract and the same is not arbitrable.
2. Brief facts which led to filing of these appeals are as follows:-
1
Appellant-M/s. Mitra Guha Builders (India) Company and the
respondent-Oil and Natural Gas Corporation Limited (ONGC)
entered into a contract on 05.01.1996 bearing
No.DHL/Civil/NOIDA/6/94 for construction of Multi-storeyed
Residential flats 28 Nos. ‘C’ type guest house multipurpose hall
service block underground water tank etc. and other work for
ONGC. The appellant-claimant raised certain claims which were
refuted by the respondent and thus, the claimant invoked the
arbitration Clause 25 of the General Conditions of the contract vide
letter dated 07.09.2001. The appellant-claimant had also entered
into a contract dated 05.01.1996 bearing No.DHL/Civil/NOIDA/5/94
for construction of Multi-storeyed Residential flats 20 Nos. ‘B’ type
for ONGC. The appellant-claimant raised certain claims which were
refuted by the respondent and here again, the claimant invoked the
arbitration Clause 25 of the General Conditions of the contract vide
letter dated 07.09.2001.
3. The designated authority vide its order dated 03.01.2002
appointed Justice P.K. Bahri (Retd.) as the sole Arbitrator to
adjudicate upon the claims of the parties. The learned Arbitrator
vide award dated 01.07.2005 allowed the claim of the claimant and
disallowed the liquidated damages/compensation and rejected the
2
counter claim of respondent-ONGC. Various claims made by the
contractor and the amount awarded by the learned Arbitrator in both
the arbitration cases are as under:-
Arbitral Award in Arbitration Case No.297/2002 dated 01.07.2005
Claim
No.
Particulars of claim of the
Petitioner before the Ld.
Arbitral Tribunal
Amount
claimed by the
Petitioner
Amount
awarded by Ld.
Arbitrator
1. Balance payment claimed
by the Petitioner towards
Final Bill
Rs.21,22,249/- Rs.21,18,975/-
2. Amount allegedly withheld
by ONGC
Rs.9,00,000/- Rs.9,00,000/-
3. Escalation claimed by the
Petitioner as per provisions
of the contract
Rs.27,92,189/- Rs.27,92,189/-
4. Losses and damages
incurred by the Petitioner in
the shape of overheads due
to prolongation of contract
Rs.21,60,375/- Claim rejected
by the Ld.
Arbitrator
5. Loss of turnover suffered by
the Petitioner due to
prolongation of contract
Rs.55,58,428/- Claim rejected
by the Ld.
Arbitrator
6. Declaration sought by the
Petitioner that the penalty
under Clause 2 imposed by
ONGC was illegal and
unwarranted and the
amount withheld by ONGC
was payable to the
Petitioner with interest @
24%
Rs.30,18,975/-
[amount that
was withheld by
ONGC towards
liquidated
damages]
Amount of
Rs.30,18,975/-
withheld by
ONGC as
liquidated
damages was to
be refunded and
adjusted
towards
payment of
Claim No.1 and
2
7. Interest payable on final bill - -
8. Interest payable on withheld
amount
- -
9. Interest payable on
escalation amount
- -
10. Interest payable on looses
and damages
- -
11. Interest pre-suit pendente
lite and future interest @
24%
- 10% interest
12. Cost of Arbitration Rs.1,00,000/- Rs.2,00,000/-
Total amount awarded by Ld. Arbitrator
(Claim 1 + 2 + 3)
Rs.58,11,164/-
3
Arbitral Award in Arbitration Case No.297A/2002 dated 01.07.2005
Claim
No.
Particulars of claim of the
Petitioner before the Ld.
Arbitral Tribunal
Amount
claimed by the
Petitioner
Amount
awarded by Ld.
Arbitrator
1. Balance payment claimed
by the Petitioner towards
Final Bill
Rs.25,91,225/- Rs.24,80,142/-
2. Amount allegedly withheld
by ONGC
Rs.12,00,000/- Rs.12,00,000/-
3. Escalation claimed by the
Petitioner as per provisions
of the contract
Rs.29,56,110/- Rs.29,56,110/-
4. Losses and damages
incurred by the Petitioner in
the shape of overheads due
to prolongation of contract
Rs.18,23,613/- Claim rejected
by the Ld.
Arbitrator
5. Loss of turnover suffered by
the Petitioner due to
prolongation of contract
Rs.46,91,973/- Claim rejected
by the Ld.
Arbitrator
6. Declaration sought by the
Petitioner that the penalty
under Clause 2 imposed by
ONGC was illegal and
unwarranted and the
amount withheld by ONGC
was payable to the
Petitioner with interest @
24%
Rs.36,80,142/-
[amount that
was withheld by
ONGC towards
liquidated
damages]
Amount of
Rs.36,80,142/-
withheld by
ONGC as
liquidated
damages was to
be refunded and
adjusted
towards
payment of
Claim No.1 and
2
7. Interest payable on final bill Rs.9,84,680/- -
8. Interest payable on withheld
amount
Rs.6,36,000/- -
9. Interest payable on
escalation amount
Rs.18,91,910/- -
10. Interest payable on looses
and damages
Rs.40,39,666/- -
11. Interest pre-suit pendente
lite and future interest @
24%
- 10% interest
12. Cost of Arbitration Rs.1,00,000/- Rs.2,00,000/-
Total amount awarded by Ld. Arbitrator
(Claim 1 + 2 + 3)
Rs.66,36,252/-
4
The learned Arbitrator allowed the claim of the claimant and
disallowed the liquidated damages/compensation of Rs.32,79,828/-
in Arbitration Case No.297A of 2002 and Rs.42,08,940/- in
Arbitration Case No.297 of 2002 presuming the same to be a
penalty.
4. Challenging the award, the respondent filed petitions bearing
OMP Nos.358 and 359 of 2005 under Section 34 of the Arbitration
and Conciliation Act, 1996 before the High Court of Delhi and the
same were dismissed by the Single Judge vide order dated
02.11.2007. The learned Single Judge held that the Arbitrator has
found that under the garb of liquidated damages, what was sought
to be imposed was penalty. The learned Single Judge found that
almost 60% of the delay was attributable to the respondent-ONGC
while 273 days - 40% delay was attributable to the appellant. The
learned Single Judge held that when the respondent-ONGC
themselves are responsible for substantive part of the delay, it can
hardly be said that respondent is entitled to recovery of liquidated
damages or penalty. While upholding the award passed by the
Arbitrator, the learned Single Judge in Arbitration Case No.297A of
2002 corrected the award amount as Rs.66,36,252/- from
Rs.69,36,252/- which was on account of clerical mistake.
5
5. The respondent-ONGC filed appeals under Section 37 of the
Arbitration Act, 1996 before the High Court of Delhi. The
respondent contended that the pre-estimated liquidated damages of
Rs.32,79,828/- in Arbitration Case No.297A of 2002 and
Rs.42,08,940/- in Arbitration Case No.297 of 2002 claimed by the
respondent-ONGC in terms of Clause 2 of the contract between the
parties was wrongly disallowed by the Arbitrator presuming the
same to be a penalty.
6. The issue involved before the Division Bench of the High
Court was interpretation of Clause 2 of the contract regarding
liquidated damages/compensation levied by the Superintending
Engineer and the finality attached to it. Before the Division Bench, it
was contended by the respondent-ONGC that the decision of the
Superintending Engineer to levy liquidated damages under Clause
2 being final, the same was an “excepted matter” and not arbitrable.
7. The Division Bench set aside the findings of the award
passed by the learned Arbitrator and the order of the learned Single
Judge by holding that Clause 2 of the agreement provided that the
decision of the Superintending Engineer on the question of levy of
liquidated damages is final and that the same could not have been
agitated in the arbitration proceeding. The Division Bench held that
6
when the parties have consciously provided that the decision of the
Superintending Engineer shall be final only to exclude the issue of
“excepted matter” from the scope of the arbitration, the Arbitrator
ought not to have dealt with the same and passed the award. The
Division Bench has also pointed out that when the respondentONGC first gave notices to the appellant-contractor to rectify the
defects and thereafter, gave a notice to levy liquidated damages on
15.05.2001 followed by the letter dated 25.05.2001 to the appellantcontractor that the final bill was ready and that the appellant was
required to reconcile the final bill to ensure the settlement of the
account, it cannot in such circumstances be said that the liquidated
damages were imposed as a counter blast to the appellant’s claim.
With those findings, the Division Bench reversed the findings of the
learned Single Judge and set aside the award.
8. Assailing the above judgment of the Division Bench, Mr. Bipin
Prabhat, learned counsel for the appellant contended that the High
Court failed to appreciate that Clause 25 of the contract which
authorises the quantum of reduction as well as the reduction of
rates for substantive works cannot be construed to empower the
Superintending Engineer to determine the issue of levy of liquidated
damages. It was submitted that the High Court failed to appreciate
7
that the dispute relating to levy of compensation for delay provided
under Clause 2 read with Clause 25 of the contract is not an
“excepted matter” and the same has been rightly adjudicated upon
by the learned Arbitrator. The learned counsel further contended
that the Division Bench, in exercising its power under appellate
jurisdiction under Section 37 of the Act, erred in reappreciating the
evidence and in upsetting the findings of the learned Arbitrator and
the learned Single Judge.
9. Per contra, Mr. K.M. Natraj, learned Additional Solicitor
General (ASG) assisted by Mr. Akshay Amritanshu, learned counsel
submitted that the learned Arbitrator wrongly disallowed the
estimated liquidated damages and reasonable compensation of
Rs.32,79,828/- in Arbitration Case No.297A of 2002 and
Rs.42,08,940/- in Arbitration Case No.297 of 2002 presuming the
same to be a penalty. The learned ASG further contended that the
learned Arbitrator travelled beyond the terms of the contract and
disallowed the liquidated damages to the respondent even though it
was an “excepted matter”, not falling within his jurisdiction. It was
submitted that the Division Bench of the High Court has rightly held
that the imposition of liquidated damages by the respondent was
8
not a counter-blast or an afterthought and prayed for dismissal of
the appeals.
10. We have carefully considered the contentions of both sides
and perused the impugned judgment and materials on record. The
following points arise for consideration in these appeals:-
(i) Whether the levy of pre-estimated liquidated damages
and reasonable compensation by the Superintending
Engineer in terms of Clause 2 of the contract between
the parties is “arbitrable”?
(ii) Whether the respondent-ONGC is right in contending
that the levy of liquidated damages in terms of Clause 2
of the contract is final and an “excepted matter” not
falling within the jurisdiction of the Arbitrator and whether
the learned Arbitrator has travelled beyond the terms of
the contract?
11. ONGC’s claim of liquidated damages in terms of Clause 2
of the agreement:- The salient features of the contract in
Arbitration Case No.297A/2002 are that the work was to commence
on 22.02.1996 and was stipulated to be completed by 21.08.1997.
But the work was completed only on 24.05.1999. Insofar as
Arbitration Case No.297/2002, the work was to commence on
21.02.1996 and was stipulated to be completed by 21.08.1997. But
the work was completed only on 24.05.1999. In its statement of
9
defence, the respondent-ONGC asserted that there has not been
any significant delay caused by the respondent-ONGC which could
delay the work of the claimant. In its statement of defence, the
respondent-ONGC mentioned that total delay which has occurred
was 640 days out of which claimant is responsible for the delay of
39 weeks (39 × 7 = 273 days) and on this account, the claimant is
liable to pay compensation in terms of Clause 2 of the contract
which stipulate compensation payable @ ½% per week subject to
maximum 10% of the cost of the executed work and the decision of
the Superintending Engineer in this regard is final. The respondentONGC has thus claimed Rs.32,79,828/- in Arbitration Case No.297A
of 2002 and Rs.42,08,940/- in Arbitration Case No.297 of 2002
recoverable from the claimant as compensation for the delay
caused by the claimant in completing the work.
12. After reference to various correspondences between the
respondent-ONGC and the appellant and after a detailed
discussion, the learned Arbitrator recorded a finding of fact that the
respondent-ONGC was responsible to an extent for the prolongation
of the contract and the claimant was also to some extent
responsible which resulted in slow progress of the work.
Considering the delay alleged by the respondent-ONGC, the
10
learned Arbitrator has observed that there was delay of 640 days
and both the respondent-ONGC and the appellant were responsible
for the delay and observed as under:-
“….The date of commencement of the work stipulated in the contract
was the 22nd February 1996 and the work was to be completed on the
22nd August 1997. According to the respondent, the actual date of
commencement of the work was the 13th March 1996 and the work was
completed on the 24th May 1999. Thus, there took place delay of 640
days. The respondent was responsible for only 160 days of delay
whereas the claimant was responsible for delay of 371 days. It is not
understood how the respondent has quantified the delay imputed to
either of the parties.”
13. By upholding the award of the learned Arbitrator, the learned
Single Judge held that the delay in completion of the work was on
account of both parties and by applying the equitable principles, the
learned Single Judge held that the damages were payable by either
of the parties.
14. The learned Single Judge, in our view, failed to note the
implication of Clause 2 of the contract and also various
correspondences between the parties, while affirming the award
passed by the learned Arbitrator. In terms of Clause 2 of the
agreement dated 05.02.1996 between the parties, the contractor is
to proceed with the work with due diligence throughout the contract
period. In case of delay or failure to ensure good progress during
11
execution of the work, Clause 2 of the agreement provides for
determination/quantification of compensation for delay or certain
inactions, on the part of the contractor. In terms of Clause 2 of the
agreement, the Superintending Engineer shall assess and quantify
the compensation. By the terms of the agreement, the parties have
consciously agreed that in case the contractor fails to comply with
the conditions and complete the work with due diligence, the
Superintending Engineer may decide the compensation in terms of
Clause 2 of the agreement.
15. In order to appreciate the claim of ONGC in levying the
damages in terms of Clause 2, it is necessary to refer to Clause 2 of
the agreement which reads as under:-
“Clause 2: Compensation for Delay
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 the
essence of the contract on the part of the contractor and shall be
reckoned from the 15th 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 compensation on amount
equal to ½ % per week as the Superintending Engineer (whose decision
in writing shall be final) may decide on the amount of the contract, value
of the whole work as shown in the agreement, for every week that the
work remains uncommenced, or unfinished, after the proper dates. After
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
12
work exceeds, one month (save the special jobs) to complete one-eighth
of the work, before one-fourth of the whole time allowed under the
contract has elapsed and three-eights of the work, before one-half of
such time has elapsed, and three-fourth 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 ½ % per week as
the Superintending Engineer (whose decision in writing shall be
final) may decide on the said contract value if the whole work for
every week that the due quantity of works remains incomplete
provided always that the entire amount of compensation to be paid
under the provisions of the clause shall not exceed ten per cent
(10%) of the tendered cost of the work as shown in the tender.”
[Emphasis added]
A reading of Clause 2 makes it clear that the Superintending
Engineer has been conferred with not only a right to levy
compensation; but it also provides a mechanism for determination
of the liability/quantum of compensation. The very Clause 2 itself
would show that such a decision taken by the Superintending
Engineer shall be final. The finality clause in the contract in terms of
Clause 2 makes the intention of the parties very clear that there
cannot be any further dispute on the said issue between the parties;
much less before the arbitrator.
16. Clause 25 of the agreement – Settlement of disputes by
Arbitration, reads as under:-
13
“Clause 25 – Settlement of disputes by Arbitration
If any dispute, difference, question or disagreement shall, at any time,
hereafter arises between the parties hereto or the respective
representatives or assigns in connection with or arising out of the
contract, or in respect of meaning of specifications, design, drawings,
estimates, scheduled, annexures, orders, instructions, the construction,
interpretation of this agreement, application of provisions thereof or
anything hereunder containing or arising hereunder or as to rights,
liabilities or duties of the said parties hereunder or arising hereunder any
matter whatsoever incidental to this contract or otherwise concerning the
works of execution or failure to execute the same whether during the
progress of work or stipulated/extended period or before or after the
completion or abandonment thereof shall be referred to the sole
arbitration of the person appointed by a Director of ONGC Ltd. at the
time of dispute. There will be no objection to any such appointment that
the arbitrator so appointed is an employee of ONGC Ltd. or that he had
to deal with the matters to which the contract relates and that in the
course of this duties as ONGC Ltd. employees, lie had expressed views
on all or any of the matters in dispute or difference.
If the arbitrator to whom the matter is originally referred dies or refuses
to act or resigns for any reason from the position of arbitrator, it shall be
lawful for the Director of ONGC Ltd. to appoint another person to act as
arbitrator in the manner aforesaid. Such person shall be entitled to
proceed with the reference from the stage at which it was left by his
predecessor if both the parties consent to this effect, failing which the
arbitrator will be entitled to proceed de-novo.
………..
It is also a term of the contract that if the contractor(s) do/does not make
any demand for arbitration in respect of any claim(s) in writing within 90
days of receiving the intimation from the corporation that the bill is ready
for payment, the claim of the contractor(s) will be deemed to have been
waived and absolutely barred and the Corporation shall be discharged
and released of all liabilities under the contract in respect of these
claims.
14
The decision of the Superintending Engineer regarding the
quantum of reduction as well as his justification in respect of
reduced rates for sub-standard work, which may be decided to be
accepted, will be final and would not be open to arbitration.
………..”. [Emphasis added]
The intention of the parties to exclude some of the decisions of the
Superintending Engineer from the purview of arbitration is clearly
seen from the abovesaid clause. Claim No.6 made by the appellant
is to declare that the penalty imposed by ONGC under Clause 2
was illegal and unwarranted and the amount withheld by ONGC
was payable to the appellant. The very prayer to declare the
amount levied by the Superintending Engineer as illegal is against
the tenor of the terms of the contract (Clause 2) between the
parties. By virtue of the finality clause in the contract, any decision
taken by the Superintending Engineer in levying compensation
cannot be referred to an arbitrator. The parties have consciously
agreed to have finality to the decision of the Superintending
Engineer and the same cannot be frustrated by challenging the
same as illegal. Any other meaning to the finality clause in the
contract and allowing further adjudication by another authority would
make the agreed Clause 2 and Clause 25 of the agreement
meaningless and redundant.
15
17. As held by the Division Bench of the High Court, whether
there was delay in completion of work and the levy of liquated
damages, could not have been determined by the arbitrator. Vide
letters dated 08.12.1999, 09.12.1999, 17.12.1999, 11.02.2000 and
17.04.2000, ONGC called upon the respondent/contractor to
remove the defects failing which it would get the defects remedied
at his cost. According to ONGC, the completion time was extended
without prejudice to the right of ONGC to recover compensation in
accordance with Clause 2 of the agreement. The contention of
ONGC is that by the letter dated 15.05.2001, the contractor was put
on notice that in exercise of the power conferred on the
Superintending Engineer under Clause 2, the contractor is liable to
pay 10% of the contract value by way of compensation. The
contractor was informed by the said letter dated 15.05.2001 that the
compensation is levied on him for the period of 39 weeks at half per
cent per week subject to maximum of 10% of the contract value and
that the actual amount of compensation shall be worked out on
checking the final bill and the same shall be recovered by ONGC
from the final bill. By the subsequent letter dated 25.05.2001, the
claimant was informed that the final bill is ready and the claimant
was required to reconcile the final bill after adjusting the
compensation.
16
18. A reading of the other terms of the contract would further
indicate that under Clauses 13 and 14 of the agreement, the parties
have agreed for payment of compensation and non-payment of
compensation in certain situations. Significantly, Clauses 13 and 14
of the agreement do not have any finality clause which indicates
that any dispute arising out of such clauses may be a dispute
referable to arbitration. However, in respect of levy of compensation
for the delay, Clause 2 of the agreement specifically makes the
decision of the Superintending Engineer, final. The entire contract
between the parties and the terms thereon have to be read as a
whole to decide the rights and liabilities of the parties arising out of
the contract. In claim No.6, the contractor has sought for declaration
“that the penalty under Clause 2 imposed by ONGC was illegal and
unwarranted and the amount withheld by ONGC was payable to the
contractor with interest @ 24%”. Claim No.6 sought for by the
contractor is clearly in violation of Clause 2 of the agreement
between the parties, in and by which, the parties have agreed that
the decision taken by the Superintending Engineer levying
compensation shall be final. The finality clause in the contract
cannot therefore be frustrated by calling upon the arbitrator to
decide on the correctness of levy of compensation by the
Superintending Engineer.
17
19. While considering similar contractual provisions viz. Clause 2
of the agreement as in the present case, in Vishwanath Sood v.
Union of India and Another (1989) 1 SCC 657, the Supreme Court
held as under:-
“8. ……… As we see it, clause 2 contains a complete machinery for
determination of the compensation which can be claimed by the
Government on the ground of delay on the part of the contractor in
completing the contract as per the time schedule agreed to between the
parties. The decision of the Superintending Engineer, it seems to us, is
in the nature of a considered decision which he has to arrive at after
considering the various mitigating circumstances that may be pleaded by
the contractor or his plea that he is not liable to pay compensation at all
under this clause. In our opinion the question regarding the amount of
compensation leviable under clause 2 has to be decided only by the
Superintending Engineer and no one else.
9. ……..After referring to certain judicial decisions regarding the meaning
of the word “final” in various statutes, the Division Bench concluded that
the finality cannot be construed as excluding the jurisdiction of the
arbitrator under Clause 25. We are unable to accept this view. Clause 25
which is the arbitration clause starts with an opening phrase excluding
certain matters and disputes from arbitration and these are matters or
disputes in respect of which provision has been made elsewhere or
otherwise in the contract. These words in our opinion can have reference
only to provisions such as the one in parenthesis in clause 2 by which
certain types of determinations are left to the administrative authorities
concerned. If that be not so, the words “except where otherwise provided
in the contract” would become meaningless. We are therefore inclined to
hold that the opening part of clause 25 clearly excludes matters like
those mentioned in clause 2 in respect of which any dispute is left to be
decided by a higher official of the Department. Our conclusion, therefore,
is that the question of awarding compensation under clause 2 is outside
18
the purview of the arbitrator and that the compensation, determined
under clause 2 either by the Engineer-in-charge or on further reference
by the Superintending Engineer will not be capable of being called in
question before the arbitrator.
10. ……. But we should like to make it clear that our decision regarding
non-arbitrability is only on the question of any compensation which the
Government might claim in terms of Clause 2 of the contract. We have
already pointed out that this is a penalty clause introduced under the
contract to ensure that the time schedule is strictly adhered to. It is
something which the Engineer-in-charge enforces from time to time
when he finds that the contractor is being recalcitrant, in order to ensure
speedy and proper observance of the terms of the contract. This is not
an undefined power. The amount of compensation is strictly limited to a
maximum of 10 per cent and with a wide margin of discretion to the
Superintending Engineer, who might not only reduce the percentage but
who, we think, can even reduce it to nil, if the circumstances so warrant.
It is this power that is kept outside the scope of arbitration. We would like
to clarify that this decision of ours will not have any application to the
claims, if any, for loss or damage which it may be open to the
Government to lay against the contractor, not in terms of clause 2 but
under the general law or under the Contract Act. As we have pointed out
at the very outset so far as this case is concerned the claim of the
Government has obviously proceeded in terms of clause 2 and that is
the way in which both the learned Single Judge as well as the Division
Bench have also approached the question. Reading clauses 2 and 25
together we think that the conclusion is irresistible that the amount of
compensation chargeable under clause 2 is a matter which has to be
adjudicated in accordance with that clause and which cannot be referred
to arbitration under clause 25”. [Underlining added]
The ratio of the above decision squarely applies to the present
case. Once the parties have decided that certain matters are to be
19
decided by the Superintending Engineer and his decision would be
final, the same cannot be the subject matter of arbitration.
20. In this regard, reliance was also placed upon Food
Corporation of India v. Sreekanth Transport (1999) 4 SCC 491
wherein, the Supreme Court interpreted Clause 12 of the agreement
thereon. Clause 12 of the agreement in Food Corporation of India
reads as under:-
“The decisions of the Senior Regional Manager regarding such
failure of the contractors and their liability for the losses etc.
suffered by the Corporation shall be final and binding on the
contractors….”.
21. While interpreting the clause on ‘excepted matters’, in Food
Corporation of India, the Supreme Court held as under:-
“3. “Excepted matters” obviously, as the parties agreed, do not require
any further adjudication since the agreement itself provides a named
adjudicator — concurrence to the same obviously is presumed by
reason of the unequivocal acceptance of the terms of the contract by the
parties and this is where the courts have been found out lacking in their
jurisdiction to entertain an application for reference to arbitration as
regards the disputes arising therefrom and it has been the consistent
view that in the event of the claims arising within the ambit of excepted
matters, the question of assumption of jurisdiction of any arbitrator either
with or without the intervention of the court would not arise. The parties
themselves have decided to have the same adjudicated by a particular
officer in regard to these matters; what these exceptions are however
are questions of fact and usually mentioned in the contract documents
and form part of the agreement and as such there is no ambiguity in the
20
matter of adjudication of these specialised matters and being termed in
the agreement as the excepted matters.
……..
9. ……... The Food Corporation, therefore, as a matter of fact desired an
adjudication of their claim to the extent of Rs 1,89,775 together with
interest at the rate of 18 per cent per annum from the civil court rather
than relying on the adjudicatory process available in the contract itself
through their own Senior Regional Manager. The agreement as noticed
above expressly provides that the adjudication shall be effected by the
Senior Regional Manager and by no other authority and the decision, it
has been recorded in the agreement, of the Senior Regional Manager
would be final and binding on the parties…..”.
In the present case, the parties themselves have agreed that the
decision of the Superintending Engineer in levying compensation is
final and the same is an “excepted matter” and the determination
shall be only by the Superintending Engineer and the correctness of
his decision cannot be called in question in the arbitration
proceedings and the remedy if any, will arise in the ordinary course
of law.
22. The learned counsel for the appellant has relied upon Bharat
Sanchar Nigam Limited and another v. Motorola India (P) Ltd.
(2009) 2 SCC 337 and by referring to Clause 16(2) in the concerned
agreement submitted that for quantification of liquidated damages,
first of all, there has to be a delay and for ascertaining as to who
was responsible for the delay, such an issue will be within the
21
jurisdiction of the arbitrator. The learned ASG however, submitted
that in the present case, Clause 2 of the agreement is not only a
mechanism for quantification of liquidated damages, but Clause 2
also makes the contractor liable for payment of the same and in
terms of Clause 2 of the agreement, the decision of the
Superintending Engineer is final and the present case is therefore,
distinguishable from BSNL’s case.
23. As rightly contended by the learned ASG, in BSNL’s case,
Clause 16(2) of the agreement does not create any kind of liability
to pay liquidated damages; but only provides for entitlement of
BSNL to collect the damages in case of any delay in supply on the
part of the supplier under Clause 16(2). While interpreting Clause
16(2) and Clause 21 of the contract which was under consideration
in BSNL’s case, in paras (23) and (26), the Supreme Court held as
under:-
“23. The question to be decided in this case is whether the liability of the
respondent to pay liquidated damages and the entitlement of the
appellants, 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 Motorola 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
22
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.
………..
26. Quantification of liquidated damages may be an excepted matter as
argued by the appellants, under Clause 16.2, but for the levy of
liquidated damages, there has to be a delay in the first place. In the
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 appellants 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.”
24. In BSNL’s case, Clause 16 provided for entitlement of the
party to recover liquidated damages. In Clause 16(2), the phrases
used “value of delayed quantity” and “for each week of delay”
clearly show that it is necessary to find out whether there has been
delay on the part of the supplier in discharging his obligation. Thus,
in BSNL’s case, in determining whether there is delay or not, a
process of adjudication is envisaged. Per contra, in the present
case, Clause 2 of the agreement is a complete mechanism for
determination of liability. The right to levy damages for delay is
exclusively conferred upon the Superintending Engineer and Clause
23
2 of the present agreement is a complete mechanism for
determination of liability and when such compensation is levied by
the Superintending Engineer, the same is final and binding. The
parties have also consciously agreed that for the delay caused, the
Superintending Engineer shall levy the compensation of the amount
equal to half per cent and the said amount shall not exceed from
10% of the cost of the work and the determination by the
Superintending Engineer is final and cannot be the subject matter of
arbitration. In claim No.6, the prayer sought for by the contractor to
declare the compensation levied by the Superintending Engineer as
illegal is contradictory to the agreed terms between the parties. So
far as the liquidated damages determined and levied, by virtue of
Clause 2, is out of the purview of the arbitration especially in view of
the fact that under the very same clause, the parties have agreed
that the decision of the Superintending Engineer shall be final.
25. Learned Single Judge erred in proceeding under the
presumptive footing that the compensation levied by the
Superintending Engineer was in the nature of penalty. It was
actually levy of liquidated damages/compensation in terms of
Clause 2 of the agreement. Levy of compensation of
Rs.32,79,828/- in Arbitration Case No.297A of 2002 and
24
Rs.42,08,940/- in Arbitration Case No.297 of 2002 in terms of
Clause 2 of the agreement is final and the same could not have
been the subject matter of arbitration. Applying the ratio of
Vishwanath Sood, the Division Bench of the High Court rightly set
aside the order of the learned Arbitrator with regard to claim No.6 by
holding that levy of liquidated damages/compensation is adjustable
against the final bill payable to the appellant. The impugned
judgment does not therefore, suffer from any infirmity warranting
interference.
26. As per the chart filed by the respondent-ONGC, total amount
awarded by learned Arbitrator in favour of the appellant is
Rs.1,24,47,416/- (Rs.66,36,252/- + Rs.58,11,164/-). Total amount
of compensation/liquidated damages withheld by ONGC is
Rs.66,99,117/- (Rs.36,80,142/- + Rs.30,18,975/-). Towards
satisfaction of the arbitral award, ONGC has deposited an amount
of Rs.2,10,41,965/-. As per the order of the Division Bench of the
Delhi High Court, the appellant was directed to refund an amount of
Rs.74,88,768/- (amount withheld by ONGC + accrued interest). In
compliance of the order of the Supreme Court dated 09.04.2009,
the appellant has deposited Rs.75,00,000/- before the Supreme
Court and the same has been invested in a nationalised bank. The
25
amount of Rs.74,88,768/- along with accrued interest is ordered to
be paid to the respondent-ONGC. The balance of Rs.11,232/-
(Rs.75,00,000 – Rs.74,88,768/-) along with accrued interest be
refunded to the appellant.
27. In the result, the appeals are dismissed. No order as to cost.
………………………..J.
[R. BANUMATHI]
………………………..J.
[A.S. BOPANNA]
….………………………..J.
[HRISHIKESH ROY]
New Delhi;
November 08, 2019
26
REPORTABLE
IN THE SUPREME COURT OF INDIA
CIVIL APPELLATE JURISDICTION
CIVIL APPEAL NO.5511 OF 2012
M/S. MITRA GUHA BUILDERS
(INDIA) COMPANY ...Appellant
VERSUS
OIL AND NATURAL GAS
CORPORATION LIMITED …Respondent
WITH
CIVIL APPEAL NO.5512 OF 2012
J U D G M E N T
R. BANUMATHI, J.
These two appeals arise out of the judgment dated
16.02.2009 passed by the High Court of Delhi in FAO(OS) No.6 of
2008 and FAO(OS) No.7 of 2008 in and by which the Division
Bench of the High Court has set aside the order of the learned
Single Judge and also of the learned Arbitrator by holding that the
levy of liquidated damages is an “excepted matter” under Clause 2
read with Clause 25 of the contract and the same is not arbitrable.
2. Brief facts which led to filing of these appeals are as follows:-
1
Appellant-M/s. Mitra Guha Builders (India) Company and the
respondent-Oil and Natural Gas Corporation Limited (ONGC)
entered into a contract on 05.01.1996 bearing
No.DHL/Civil/NOIDA/6/94 for construction of Multi-storeyed
Residential flats 28 Nos. ‘C’ type guest house multipurpose hall
service block underground water tank etc. and other work for
ONGC. The appellant-claimant raised certain claims which were
refuted by the respondent and thus, the claimant invoked the
arbitration Clause 25 of the General Conditions of the contract vide
letter dated 07.09.2001. The appellant-claimant had also entered
into a contract dated 05.01.1996 bearing No.DHL/Civil/NOIDA/5/94
for construction of Multi-storeyed Residential flats 20 Nos. ‘B’ type
for ONGC. The appellant-claimant raised certain claims which were
refuted by the respondent and here again, the claimant invoked the
arbitration Clause 25 of the General Conditions of the contract vide
letter dated 07.09.2001.
3. The designated authority vide its order dated 03.01.2002
appointed Justice P.K. Bahri (Retd.) as the sole Arbitrator to
adjudicate upon the claims of the parties. The learned Arbitrator
vide award dated 01.07.2005 allowed the claim of the claimant and
disallowed the liquidated damages/compensation and rejected the
2
counter claim of respondent-ONGC. Various claims made by the
contractor and the amount awarded by the learned Arbitrator in both
the arbitration cases are as under:-
Arbitral Award in Arbitration Case No.297/2002 dated 01.07.2005
Claim
No.
Particulars of claim of the
Petitioner before the Ld.
Arbitral Tribunal
Amount
claimed by the
Petitioner
Amount
awarded by Ld.
Arbitrator
1. Balance payment claimed
by the Petitioner towards
Final Bill
Rs.21,22,249/- Rs.21,18,975/-
2. Amount allegedly withheld
by ONGC
Rs.9,00,000/- Rs.9,00,000/-
3. Escalation claimed by the
Petitioner as per provisions
of the contract
Rs.27,92,189/- Rs.27,92,189/-
4. Losses and damages
incurred by the Petitioner in
the shape of overheads due
to prolongation of contract
Rs.21,60,375/- Claim rejected
by the Ld.
Arbitrator
5. Loss of turnover suffered by
the Petitioner due to
prolongation of contract
Rs.55,58,428/- Claim rejected
by the Ld.
Arbitrator
6. Declaration sought by the
Petitioner that the penalty
under Clause 2 imposed by
ONGC was illegal and
unwarranted and the
amount withheld by ONGC
was payable to the
Petitioner with interest @
24%
Rs.30,18,975/-
[amount that
was withheld by
ONGC towards
liquidated
damages]
Amount of
Rs.30,18,975/-
withheld by
ONGC as
liquidated
damages was to
be refunded and
adjusted
towards
payment of
Claim No.1 and
2
7. Interest payable on final bill - -
8. Interest payable on withheld
amount
- -
9. Interest payable on
escalation amount
- -
10. Interest payable on looses
and damages
- -
11. Interest pre-suit pendente
lite and future interest @
24%
- 10% interest
12. Cost of Arbitration Rs.1,00,000/- Rs.2,00,000/-
Total amount awarded by Ld. Arbitrator
(Claim 1 + 2 + 3)
Rs.58,11,164/-
3
Arbitral Award in Arbitration Case No.297A/2002 dated 01.07.2005
Claim
No.
Particulars of claim of the
Petitioner before the Ld.
Arbitral Tribunal
Amount
claimed by the
Petitioner
Amount
awarded by Ld.
Arbitrator
1. Balance payment claimed
by the Petitioner towards
Final Bill
Rs.25,91,225/- Rs.24,80,142/-
2. Amount allegedly withheld
by ONGC
Rs.12,00,000/- Rs.12,00,000/-
3. Escalation claimed by the
Petitioner as per provisions
of the contract
Rs.29,56,110/- Rs.29,56,110/-
4. Losses and damages
incurred by the Petitioner in
the shape of overheads due
to prolongation of contract
Rs.18,23,613/- Claim rejected
by the Ld.
Arbitrator
5. Loss of turnover suffered by
the Petitioner due to
prolongation of contract
Rs.46,91,973/- Claim rejected
by the Ld.
Arbitrator
6. Declaration sought by the
Petitioner that the penalty
under Clause 2 imposed by
ONGC was illegal and
unwarranted and the
amount withheld by ONGC
was payable to the
Petitioner with interest @
24%
Rs.36,80,142/-
[amount that
was withheld by
ONGC towards
liquidated
damages]
Amount of
Rs.36,80,142/-
withheld by
ONGC as
liquidated
damages was to
be refunded and
adjusted
towards
payment of
Claim No.1 and
2
7. Interest payable on final bill Rs.9,84,680/- -
8. Interest payable on withheld
amount
Rs.6,36,000/- -
9. Interest payable on
escalation amount
Rs.18,91,910/- -
10. Interest payable on looses
and damages
Rs.40,39,666/- -
11. Interest pre-suit pendente
lite and future interest @
24%
- 10% interest
12. Cost of Arbitration Rs.1,00,000/- Rs.2,00,000/-
Total amount awarded by Ld. Arbitrator
(Claim 1 + 2 + 3)
Rs.66,36,252/-
4
The learned Arbitrator allowed the claim of the claimant and
disallowed the liquidated damages/compensation of Rs.32,79,828/-
in Arbitration Case No.297A of 2002 and Rs.42,08,940/- in
Arbitration Case No.297 of 2002 presuming the same to be a
penalty.
4. Challenging the award, the respondent filed petitions bearing
OMP Nos.358 and 359 of 2005 under Section 34 of the Arbitration
and Conciliation Act, 1996 before the High Court of Delhi and the
same were dismissed by the Single Judge vide order dated
02.11.2007. The learned Single Judge held that the Arbitrator has
found that under the garb of liquidated damages, what was sought
to be imposed was penalty. The learned Single Judge found that
almost 60% of the delay was attributable to the respondent-ONGC
while 273 days - 40% delay was attributable to the appellant. The
learned Single Judge held that when the respondent-ONGC
themselves are responsible for substantive part of the delay, it can
hardly be said that respondent is entitled to recovery of liquidated
damages or penalty. While upholding the award passed by the
Arbitrator, the learned Single Judge in Arbitration Case No.297A of
2002 corrected the award amount as Rs.66,36,252/- from
Rs.69,36,252/- which was on account of clerical mistake.
5
5. The respondent-ONGC filed appeals under Section 37 of the
Arbitration Act, 1996 before the High Court of Delhi. The
respondent contended that the pre-estimated liquidated damages of
Rs.32,79,828/- in Arbitration Case No.297A of 2002 and
Rs.42,08,940/- in Arbitration Case No.297 of 2002 claimed by the
respondent-ONGC in terms of Clause 2 of the contract between the
parties was wrongly disallowed by the Arbitrator presuming the
same to be a penalty.
6. The issue involved before the Division Bench of the High
Court was interpretation of Clause 2 of the contract regarding
liquidated damages/compensation levied by the Superintending
Engineer and the finality attached to it. Before the Division Bench, it
was contended by the respondent-ONGC that the decision of the
Superintending Engineer to levy liquidated damages under Clause
2 being final, the same was an “excepted matter” and not arbitrable.
7. The Division Bench set aside the findings of the award
passed by the learned Arbitrator and the order of the learned Single
Judge by holding that Clause 2 of the agreement provided that the
decision of the Superintending Engineer on the question of levy of
liquidated damages is final and that the same could not have been
agitated in the arbitration proceeding. The Division Bench held that
6
when the parties have consciously provided that the decision of the
Superintending Engineer shall be final only to exclude the issue of
“excepted matter” from the scope of the arbitration, the Arbitrator
ought not to have dealt with the same and passed the award. The
Division Bench has also pointed out that when the respondentONGC first gave notices to the appellant-contractor to rectify the
defects and thereafter, gave a notice to levy liquidated damages on
15.05.2001 followed by the letter dated 25.05.2001 to the appellantcontractor that the final bill was ready and that the appellant was
required to reconcile the final bill to ensure the settlement of the
account, it cannot in such circumstances be said that the liquidated
damages were imposed as a counter blast to the appellant’s claim.
With those findings, the Division Bench reversed the findings of the
learned Single Judge and set aside the award.
8. Assailing the above judgment of the Division Bench, Mr. Bipin
Prabhat, learned counsel for the appellant contended that the High
Court failed to appreciate that Clause 25 of the contract which
authorises the quantum of reduction as well as the reduction of
rates for substantive works cannot be construed to empower the
Superintending Engineer to determine the issue of levy of liquidated
damages. It was submitted that the High Court failed to appreciate
7
that the dispute relating to levy of compensation for delay provided
under Clause 2 read with Clause 25 of the contract is not an
“excepted matter” and the same has been rightly adjudicated upon
by the learned Arbitrator. The learned counsel further contended
that the Division Bench, in exercising its power under appellate
jurisdiction under Section 37 of the Act, erred in reappreciating the
evidence and in upsetting the findings of the learned Arbitrator and
the learned Single Judge.
9. Per contra, Mr. K.M. Natraj, learned Additional Solicitor
General (ASG) assisted by Mr. Akshay Amritanshu, learned counsel
submitted that the learned Arbitrator wrongly disallowed the
estimated liquidated damages and reasonable compensation of
Rs.32,79,828/- in Arbitration Case No.297A of 2002 and
Rs.42,08,940/- in Arbitration Case No.297 of 2002 presuming the
same to be a penalty. The learned ASG further contended that the
learned Arbitrator travelled beyond the terms of the contract and
disallowed the liquidated damages to the respondent even though it
was an “excepted matter”, not falling within his jurisdiction. It was
submitted that the Division Bench of the High Court has rightly held
that the imposition of liquidated damages by the respondent was
8
not a counter-blast or an afterthought and prayed for dismissal of
the appeals.
10. We have carefully considered the contentions of both sides
and perused the impugned judgment and materials on record. The
following points arise for consideration in these appeals:-
(i) Whether the levy of pre-estimated liquidated damages
and reasonable compensation by the Superintending
Engineer in terms of Clause 2 of the contract between
the parties is “arbitrable”?
(ii) Whether the respondent-ONGC is right in contending
that the levy of liquidated damages in terms of Clause 2
of the contract is final and an “excepted matter” not
falling within the jurisdiction of the Arbitrator and whether
the learned Arbitrator has travelled beyond the terms of
the contract?
11. ONGC’s claim of liquidated damages in terms of Clause 2
of the agreement:- The salient features of the contract in
Arbitration Case No.297A/2002 are that the work was to commence
on 22.02.1996 and was stipulated to be completed by 21.08.1997.
But the work was completed only on 24.05.1999. Insofar as
Arbitration Case No.297/2002, the work was to commence on
21.02.1996 and was stipulated to be completed by 21.08.1997. But
the work was completed only on 24.05.1999. In its statement of
9
defence, the respondent-ONGC asserted that there has not been
any significant delay caused by the respondent-ONGC which could
delay the work of the claimant. In its statement of defence, the
respondent-ONGC mentioned that total delay which has occurred
was 640 days out of which claimant is responsible for the delay of
39 weeks (39 × 7 = 273 days) and on this account, the claimant is
liable to pay compensation in terms of Clause 2 of the contract
which stipulate compensation payable @ ½% per week subject to
maximum 10% of the cost of the executed work and the decision of
the Superintending Engineer in this regard is final. The respondentONGC has thus claimed Rs.32,79,828/- in Arbitration Case No.297A
of 2002 and Rs.42,08,940/- in Arbitration Case No.297 of 2002
recoverable from the claimant as compensation for the delay
caused by the claimant in completing the work.
12. After reference to various correspondences between the
respondent-ONGC and the appellant and after a detailed
discussion, the learned Arbitrator recorded a finding of fact that the
respondent-ONGC was responsible to an extent for the prolongation
of the contract and the claimant was also to some extent
responsible which resulted in slow progress of the work.
Considering the delay alleged by the respondent-ONGC, the
10
learned Arbitrator has observed that there was delay of 640 days
and both the respondent-ONGC and the appellant were responsible
for the delay and observed as under:-
“….The date of commencement of the work stipulated in the contract
was the 22nd February 1996 and the work was to be completed on the
22nd August 1997. According to the respondent, the actual date of
commencement of the work was the 13th March 1996 and the work was
completed on the 24th May 1999. Thus, there took place delay of 640
days. The respondent was responsible for only 160 days of delay
whereas the claimant was responsible for delay of 371 days. It is not
understood how the respondent has quantified the delay imputed to
either of the parties.”
13. By upholding the award of the learned Arbitrator, the learned
Single Judge held that the delay in completion of the work was on
account of both parties and by applying the equitable principles, the
learned Single Judge held that the damages were payable by either
of the parties.
14. The learned Single Judge, in our view, failed to note the
implication of Clause 2 of the contract and also various
correspondences between the parties, while affirming the award
passed by the learned Arbitrator. In terms of Clause 2 of the
agreement dated 05.02.1996 between the parties, the contractor is
to proceed with the work with due diligence throughout the contract
period. In case of delay or failure to ensure good progress during
11
execution of the work, Clause 2 of the agreement provides for
determination/quantification of compensation for delay or certain
inactions, on the part of the contractor. In terms of Clause 2 of the
agreement, the Superintending Engineer shall assess and quantify
the compensation. By the terms of the agreement, the parties have
consciously agreed that in case the contractor fails to comply with
the conditions and complete the work with due diligence, the
Superintending Engineer may decide the compensation in terms of
Clause 2 of the agreement.
15. In order to appreciate the claim of ONGC in levying the
damages in terms of Clause 2, it is necessary to refer to Clause 2 of
the agreement which reads as under:-
“Clause 2: Compensation for Delay
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 the
essence of the contract on the part of the contractor and shall be
reckoned from the 15th 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 compensation on amount
equal to ½ % per week as the Superintending Engineer (whose decision
in writing shall be final) may decide on the amount of the contract, value
of the whole work as shown in the agreement, for every week that the
work remains uncommenced, or unfinished, after the proper dates. After
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
12
work exceeds, one month (save the special jobs) to complete one-eighth
of the work, before one-fourth of the whole time allowed under the
contract has elapsed and three-eights of the work, before one-half of
such time has elapsed, and three-fourth 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 ½ % per week as
the Superintending Engineer (whose decision in writing shall be
final) may decide on the said contract value if the whole work for
every week that the due quantity of works remains incomplete
provided always that the entire amount of compensation to be paid
under the provisions of the clause shall not exceed ten per cent
(10%) of the tendered cost of the work as shown in the tender.”
[Emphasis added]
A reading of Clause 2 makes it clear that the Superintending
Engineer has been conferred with not only a right to levy
compensation; but it also provides a mechanism for determination
of the liability/quantum of compensation. The very Clause 2 itself
would show that such a decision taken by the Superintending
Engineer shall be final. The finality clause in the contract in terms of
Clause 2 makes the intention of the parties very clear that there
cannot be any further dispute on the said issue between the parties;
much less before the arbitrator.
16. Clause 25 of the agreement – Settlement of disputes by
Arbitration, reads as under:-
13
“Clause 25 – Settlement of disputes by Arbitration
If any dispute, difference, question or disagreement shall, at any time,
hereafter arises between the parties hereto or the respective
representatives or assigns in connection with or arising out of the
contract, or in respect of meaning of specifications, design, drawings,
estimates, scheduled, annexures, orders, instructions, the construction,
interpretation of this agreement, application of provisions thereof or
anything hereunder containing or arising hereunder or as to rights,
liabilities or duties of the said parties hereunder or arising hereunder any
matter whatsoever incidental to this contract or otherwise concerning the
works of execution or failure to execute the same whether during the
progress of work or stipulated/extended period or before or after the
completion or abandonment thereof shall be referred to the sole
arbitration of the person appointed by a Director of ONGC Ltd. at the
time of dispute. There will be no objection to any such appointment that
the arbitrator so appointed is an employee of ONGC Ltd. or that he had
to deal with the matters to which the contract relates and that in the
course of this duties as ONGC Ltd. employees, lie had expressed views
on all or any of the matters in dispute or difference.
If the arbitrator to whom the matter is originally referred dies or refuses
to act or resigns for any reason from the position of arbitrator, it shall be
lawful for the Director of ONGC Ltd. to appoint another person to act as
arbitrator in the manner aforesaid. Such person shall be entitled to
proceed with the reference from the stage at which it was left by his
predecessor if both the parties consent to this effect, failing which the
arbitrator will be entitled to proceed de-novo.
………..
It is also a term of the contract that if the contractor(s) do/does not make
any demand for arbitration in respect of any claim(s) in writing within 90
days of receiving the intimation from the corporation that the bill is ready
for payment, the claim of the contractor(s) will be deemed to have been
waived and absolutely barred and the Corporation shall be discharged
and released of all liabilities under the contract in respect of these
claims.
14
The decision of the Superintending Engineer regarding the
quantum of reduction as well as his justification in respect of
reduced rates for sub-standard work, which may be decided to be
accepted, will be final and would not be open to arbitration.
………..”. [Emphasis added]
The intention of the parties to exclude some of the decisions of the
Superintending Engineer from the purview of arbitration is clearly
seen from the abovesaid clause. Claim No.6 made by the appellant
is to declare that the penalty imposed by ONGC under Clause 2
was illegal and unwarranted and the amount withheld by ONGC
was payable to the appellant. The very prayer to declare the
amount levied by the Superintending Engineer as illegal is against
the tenor of the terms of the contract (Clause 2) between the
parties. By virtue of the finality clause in the contract, any decision
taken by the Superintending Engineer in levying compensation
cannot be referred to an arbitrator. The parties have consciously
agreed to have finality to the decision of the Superintending
Engineer and the same cannot be frustrated by challenging the
same as illegal. Any other meaning to the finality clause in the
contract and allowing further adjudication by another authority would
make the agreed Clause 2 and Clause 25 of the agreement
meaningless and redundant.
15
17. As held by the Division Bench of the High Court, whether
there was delay in completion of work and the levy of liquated
damages, could not have been determined by the arbitrator. Vide
letters dated 08.12.1999, 09.12.1999, 17.12.1999, 11.02.2000 and
17.04.2000, ONGC called upon the respondent/contractor to
remove the defects failing which it would get the defects remedied
at his cost. According to ONGC, the completion time was extended
without prejudice to the right of ONGC to recover compensation in
accordance with Clause 2 of the agreement. The contention of
ONGC is that by the letter dated 15.05.2001, the contractor was put
on notice that in exercise of the power conferred on the
Superintending Engineer under Clause 2, the contractor is liable to
pay 10% of the contract value by way of compensation. The
contractor was informed by the said letter dated 15.05.2001 that the
compensation is levied on him for the period of 39 weeks at half per
cent per week subject to maximum of 10% of the contract value and
that the actual amount of compensation shall be worked out on
checking the final bill and the same shall be recovered by ONGC
from the final bill. By the subsequent letter dated 25.05.2001, the
claimant was informed that the final bill is ready and the claimant
was required to reconcile the final bill after adjusting the
compensation.
16
18. A reading of the other terms of the contract would further
indicate that under Clauses 13 and 14 of the agreement, the parties
have agreed for payment of compensation and non-payment of
compensation in certain situations. Significantly, Clauses 13 and 14
of the agreement do not have any finality clause which indicates
that any dispute arising out of such clauses may be a dispute
referable to arbitration. However, in respect of levy of compensation
for the delay, Clause 2 of the agreement specifically makes the
decision of the Superintending Engineer, final. The entire contract
between the parties and the terms thereon have to be read as a
whole to decide the rights and liabilities of the parties arising out of
the contract. In claim No.6, the contractor has sought for declaration
“that the penalty under Clause 2 imposed by ONGC was illegal and
unwarranted and the amount withheld by ONGC was payable to the
contractor with interest @ 24%”. Claim No.6 sought for by the
contractor is clearly in violation of Clause 2 of the agreement
between the parties, in and by which, the parties have agreed that
the decision taken by the Superintending Engineer levying
compensation shall be final. The finality clause in the contract
cannot therefore be frustrated by calling upon the arbitrator to
decide on the correctness of levy of compensation by the
Superintending Engineer.
17
19. While considering similar contractual provisions viz. Clause 2
of the agreement as in the present case, in Vishwanath Sood v.
Union of India and Another (1989) 1 SCC 657, the Supreme Court
held as under:-
“8. ……… As we see it, clause 2 contains a complete machinery for
determination of the compensation which can be claimed by the
Government on the ground of delay on the part of the contractor in
completing the contract as per the time schedule agreed to between the
parties. The decision of the Superintending Engineer, it seems to us, is
in the nature of a considered decision which he has to arrive at after
considering the various mitigating circumstances that may be pleaded by
the contractor or his plea that he is not liable to pay compensation at all
under this clause. In our opinion the question regarding the amount of
compensation leviable under clause 2 has to be decided only by the
Superintending Engineer and no one else.
9. ……..After referring to certain judicial decisions regarding the meaning
of the word “final” in various statutes, the Division Bench concluded that
the finality cannot be construed as excluding the jurisdiction of the
arbitrator under Clause 25. We are unable to accept this view. Clause 25
which is the arbitration clause starts with an opening phrase excluding
certain matters and disputes from arbitration and these are matters or
disputes in respect of which provision has been made elsewhere or
otherwise in the contract. These words in our opinion can have reference
only to provisions such as the one in parenthesis in clause 2 by which
certain types of determinations are left to the administrative authorities
concerned. If that be not so, the words “except where otherwise provided
in the contract” would become meaningless. We are therefore inclined to
hold that the opening part of clause 25 clearly excludes matters like
those mentioned in clause 2 in respect of which any dispute is left to be
decided by a higher official of the Department. Our conclusion, therefore,
is that the question of awarding compensation under clause 2 is outside
18
the purview of the arbitrator and that the compensation, determined
under clause 2 either by the Engineer-in-charge or on further reference
by the Superintending Engineer will not be capable of being called in
question before the arbitrator.
10. ……. But we should like to make it clear that our decision regarding
non-arbitrability is only on the question of any compensation which the
Government might claim in terms of Clause 2 of the contract. We have
already pointed out that this is a penalty clause introduced under the
contract to ensure that the time schedule is strictly adhered to. It is
something which the Engineer-in-charge enforces from time to time
when he finds that the contractor is being recalcitrant, in order to ensure
speedy and proper observance of the terms of the contract. This is not
an undefined power. The amount of compensation is strictly limited to a
maximum of 10 per cent and with a wide margin of discretion to the
Superintending Engineer, who might not only reduce the percentage but
who, we think, can even reduce it to nil, if the circumstances so warrant.
It is this power that is kept outside the scope of arbitration. We would like
to clarify that this decision of ours will not have any application to the
claims, if any, for loss or damage which it may be open to the
Government to lay against the contractor, not in terms of clause 2 but
under the general law or under the Contract Act. As we have pointed out
at the very outset so far as this case is concerned the claim of the
Government has obviously proceeded in terms of clause 2 and that is
the way in which both the learned Single Judge as well as the Division
Bench have also approached the question. Reading clauses 2 and 25
together we think that the conclusion is irresistible that the amount of
compensation chargeable under clause 2 is a matter which has to be
adjudicated in accordance with that clause and which cannot be referred
to arbitration under clause 25”. [Underlining added]
The ratio of the above decision squarely applies to the present
case. Once the parties have decided that certain matters are to be
19
decided by the Superintending Engineer and his decision would be
final, the same cannot be the subject matter of arbitration.
20. In this regard, reliance was also placed upon Food
Corporation of India v. Sreekanth Transport (1999) 4 SCC 491
wherein, the Supreme Court interpreted Clause 12 of the agreement
thereon. Clause 12 of the agreement in Food Corporation of India
reads as under:-
“The decisions of the Senior Regional Manager regarding such
failure of the contractors and their liability for the losses etc.
suffered by the Corporation shall be final and binding on the
contractors….”.
21. While interpreting the clause on ‘excepted matters’, in Food
Corporation of India, the Supreme Court held as under:-
“3. “Excepted matters” obviously, as the parties agreed, do not require
any further adjudication since the agreement itself provides a named
adjudicator — concurrence to the same obviously is presumed by
reason of the unequivocal acceptance of the terms of the contract by the
parties and this is where the courts have been found out lacking in their
jurisdiction to entertain an application for reference to arbitration as
regards the disputes arising therefrom and it has been the consistent
view that in the event of the claims arising within the ambit of excepted
matters, the question of assumption of jurisdiction of any arbitrator either
with or without the intervention of the court would not arise. The parties
themselves have decided to have the same adjudicated by a particular
officer in regard to these matters; what these exceptions are however
are questions of fact and usually mentioned in the contract documents
and form part of the agreement and as such there is no ambiguity in the
20
matter of adjudication of these specialised matters and being termed in
the agreement as the excepted matters.
……..
9. ……... The Food Corporation, therefore, as a matter of fact desired an
adjudication of their claim to the extent of Rs 1,89,775 together with
interest at the rate of 18 per cent per annum from the civil court rather
than relying on the adjudicatory process available in the contract itself
through their own Senior Regional Manager. The agreement as noticed
above expressly provides that the adjudication shall be effected by the
Senior Regional Manager and by no other authority and the decision, it
has been recorded in the agreement, of the Senior Regional Manager
would be final and binding on the parties…..”.
In the present case, the parties themselves have agreed that the
decision of the Superintending Engineer in levying compensation is
final and the same is an “excepted matter” and the determination
shall be only by the Superintending Engineer and the correctness of
his decision cannot be called in question in the arbitration
proceedings and the remedy if any, will arise in the ordinary course
of law.
22. The learned counsel for the appellant has relied upon Bharat
Sanchar Nigam Limited and another v. Motorola India (P) Ltd.
(2009) 2 SCC 337 and by referring to Clause 16(2) in the concerned
agreement submitted that for quantification of liquidated damages,
first of all, there has to be a delay and for ascertaining as to who
was responsible for the delay, such an issue will be within the
21
jurisdiction of the arbitrator. The learned ASG however, submitted
that in the present case, Clause 2 of the agreement is not only a
mechanism for quantification of liquidated damages, but Clause 2
also makes the contractor liable for payment of the same and in
terms of Clause 2 of the agreement, the decision of the
Superintending Engineer is final and the present case is therefore,
distinguishable from BSNL’s case.
23. As rightly contended by the learned ASG, in BSNL’s case,
Clause 16(2) of the agreement does not create any kind of liability
to pay liquidated damages; but only provides for entitlement of
BSNL to collect the damages in case of any delay in supply on the
part of the supplier under Clause 16(2). While interpreting Clause
16(2) and Clause 21 of the contract which was under consideration
in BSNL’s case, in paras (23) and (26), the Supreme Court held as
under:-
“23. The question to be decided in this case is whether the liability of the
respondent to pay liquidated damages and the entitlement of the
appellants, 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 Motorola 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
22
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.
………..
26. Quantification of liquidated damages may be an excepted matter as
argued by the appellants, under Clause 16.2, but for the levy of
liquidated damages, there has to be a delay in the first place. In the
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 appellants 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.”
24. In BSNL’s case, Clause 16 provided for entitlement of the
party to recover liquidated damages. In Clause 16(2), the phrases
used “value of delayed quantity” and “for each week of delay”
clearly show that it is necessary to find out whether there has been
delay on the part of the supplier in discharging his obligation. Thus,
in BSNL’s case, in determining whether there is delay or not, a
process of adjudication is envisaged. Per contra, in the present
case, Clause 2 of the agreement is a complete mechanism for
determination of liability. The right to levy damages for delay is
exclusively conferred upon the Superintending Engineer and Clause
23
2 of the present agreement is a complete mechanism for
determination of liability and when such compensation is levied by
the Superintending Engineer, the same is final and binding. The
parties have also consciously agreed that for the delay caused, the
Superintending Engineer shall levy the compensation of the amount
equal to half per cent and the said amount shall not exceed from
10% of the cost of the work and the determination by the
Superintending Engineer is final and cannot be the subject matter of
arbitration. In claim No.6, the prayer sought for by the contractor to
declare the compensation levied by the Superintending Engineer as
illegal is contradictory to the agreed terms between the parties. So
far as the liquidated damages determined and levied, by virtue of
Clause 2, is out of the purview of the arbitration especially in view of
the fact that under the very same clause, the parties have agreed
that the decision of the Superintending Engineer shall be final.
25. Learned Single Judge erred in proceeding under the
presumptive footing that the compensation levied by the
Superintending Engineer was in the nature of penalty. It was
actually levy of liquidated damages/compensation in terms of
Clause 2 of the agreement. Levy of compensation of
Rs.32,79,828/- in Arbitration Case No.297A of 2002 and
24
Rs.42,08,940/- in Arbitration Case No.297 of 2002 in terms of
Clause 2 of the agreement is final and the same could not have
been the subject matter of arbitration. Applying the ratio of
Vishwanath Sood, the Division Bench of the High Court rightly set
aside the order of the learned Arbitrator with regard to claim No.6 by
holding that levy of liquidated damages/compensation is adjustable
against the final bill payable to the appellant. The impugned
judgment does not therefore, suffer from any infirmity warranting
interference.
26. As per the chart filed by the respondent-ONGC, total amount
awarded by learned Arbitrator in favour of the appellant is
Rs.1,24,47,416/- (Rs.66,36,252/- + Rs.58,11,164/-). Total amount
of compensation/liquidated damages withheld by ONGC is
Rs.66,99,117/- (Rs.36,80,142/- + Rs.30,18,975/-). Towards
satisfaction of the arbitral award, ONGC has deposited an amount
of Rs.2,10,41,965/-. As per the order of the Division Bench of the
Delhi High Court, the appellant was directed to refund an amount of
Rs.74,88,768/- (amount withheld by ONGC + accrued interest). In
compliance of the order of the Supreme Court dated 09.04.2009,
the appellant has deposited Rs.75,00,000/- before the Supreme
Court and the same has been invested in a nationalised bank. The
25
amount of Rs.74,88,768/- along with accrued interest is ordered to
be paid to the respondent-ONGC. The balance of Rs.11,232/-
(Rs.75,00,000 – Rs.74,88,768/-) along with accrued interest be
refunded to the appellant.
27. In the result, the appeals are dismissed. No order as to cost.
………………………..J.
[R. BANUMATHI]
………………………..J.
[A.S. BOPANNA]
….………………………..J.
[HRISHIKESH ROY]
New Delhi;
November 08, 2019
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