General
Manager Northern Railways & Anr Vs. Sarvesh Chopra [2002] Insc 103 (1 March 2002)
R.C.
Lohati & Brijesh Kumar R.C. Lahoti, J.
The
respondent was granted by the appellants work of construction on bored piles
500 mm dia by cast in Situ method for widening and raising of Pul Mithai (S). A
contract was entered into between the parties on 27.4.1985. The contract is
subject to the General conditions of the contract of Railways read with Special
Conditions. Disputes arose between the parties and the respondent moved a
petition under Section 20 of the Arbitration Act, 1940 praying for the
arbitration agreement being filed in the Court and six claims set out in the
petition being referred to the Arbitrator for settlement. The learned Single
Judge of the High Court of Delhi (Original Side) directed two claims to be
referred but as to claims numbers 3 to 6 formed an opinion that the claims
being 'excepted matters' within the meaning of Clause 63 of General Conditions
of Contract were not liable to be referred to arbitration. An intra-Court
Appeal preferred by respondent has been allowed and the four claims have also
been directed to be referred by the Division Bench to arbitrator on forming an
opinion that they were not covered by 'excepted matters'. The appellants have
filed this petition seeking special leave to appeal against the decision of
Division Bench.
Leave
granted.
Clause
63 of the General Conditions of the Contract provides as under:- "Matters
finally determined by the Railway All disputes and differences of any kind
whatsoever arising out of or in connection with the contract, whether during
the progress of the work or after its completion and whether before or after
the determination of the contract, shall be referred by the contractor to the
Railway and the Railway shall within a reasonable time after receipt of the
Contractor's representation make and notify decisions on all matters referred
to by the contractor in writing provided that matters for which provision has
been made in clauses 18, 22(5), 39, 45(a), 55, 55-A(5), 61(2) and 62(1)
(XII)(B)(e)(b) of the General conditions of Contract or in any clauses of the
special conditions of the contract shall be deemed as excepted matters and
decisions thereon shall be final and binding on the contractor provided further
that excepted matters shall stand specifically excluded from the purview of the
arbitration clause and not be referred to arbitration." Clauses 9.2., 11.3
and 21.5 of Special Conditions of contract are as under:- "9.2. No
material price variation or wages escalation on any account whatsoever and
compensation for "Force Majaure" etc. shall be payable under this
contract.
11.3.
No claim whatsoever will be entertained by the Railway on a/c of any delay or
hold up of the works arising out of delay in supply of drawings, changes,
modifications, alterations, additions, omissions, omissions in the site layout
plans or detailed drawings or designs and or late supply of such materials as
are required to be arranged by the Railway or due to any other factor on
Railway Accounts.
21.5.
No claim for idle labour and/or idle machinery etc. on any account will be
entertained.
Similarly
no claim shall be entertained for business loss or any such loss." Claims
numbers 3 to 6 whereon reference is sought for by
the respondent to the Arbitrator are as under:-
3.
There occurred tremendous increase in cost of building materials. 52 Nos. of
piles were bored after the expiry of stipulated completion period and
particularly when the prices were too high.
Additional
cost incurred @ Rs.250/- for these 42 Nos. of piles may please be paid. This
has also been verified by your staff at site, Rs.250 x 42 Rs.10500/-.
4.
Piling rig with diesel driven wench, mixture, machine, driving pipe, wheel
barrows, hoppers and other tools and plants remained idle at site for 24
months, i.e. for 75 days. The entire machinery was procured from the market on
hire charges. Rent was paid @Rs.1070/- per day for this machinery.
Hire
charges amounting to Rs.80,250/- (1070x75) may please be reimbursed.
5. The
site was not made available for one month.
Changes
took place and decisions were delayed.
The
Work which was required to be completed within 3½ months but dragged on for
additional period of 6 months. Establishment period of 6 months at a cost of
Rs.10,000/- per month. These losses may please be paid. (Rs.10,000/-x6
Rs.60,000).
6. The
work of Rs.5,95,000/- was required to be completed within 3½ months meaning
thereby, monthly progress would not be less than Rs.1,75,000/-. As against the
entire work could be completed within a period of 9½ months i.e. Rs.75,000/-
per month. The losses sustained for less output may be compensated and this
comes to Rs.40,000/-." According to the appellants, claims numbers 3, 4
and 5 are covered respectively by Clauses 9.2, 21.5 and 11.3. Claim No.6 is
covered by Clause 11.3 of Special Conditions. On this there does not appear to
be any serious controversy. The core issue is the interpretation of Clause 63
of the General Conditions and Section 20 of the Arbitration Act, 1940.
A bare
reading of Clause 63 shows that it consists of three parts. Firstly, it is an
Arbitration Agreement requiring all disputes and differences of any kind
whatsoever arising out of or in connection with the contract to be referred for
adjudication by arbitration, by the Railways, on a demand being made by the
contractor through a representation in that regard. Secondly, this agreement is
qualified by a proviso which deals with 'excepted matters'. 'Excepted matters'
are divided into two categories:
(i) matters
for which provision has been made in specified clauses of the General
Conditions, and
(ii) matters
covered by any clauses of the Special Conditions of the Contract.
Thirdly,
the third part of the clause is a further proviso, having an overriding effect
on the earlier parts of the clause, that all 'excepted matters' shall stand
specifically excluded from the purview of the Arbitration Clause and hence
shall not be referred to arbitration. The source of controversy is the
expression "matters for which provision has been made..in any clauses of
the Special Conditions of the contract shall be deemed as 'excepted matters'
and decisions thereon shall be final and binding on the contractor." It is
submitted by the learned counsel for the respondent that to qualify as
'excepted matters' not only the relevant clause must find mention in that part
of the contract which deals with special conditions but should also provide for
a decision by an authority of the Railways by way of an 'in-house remedy' which
decision shall be final and binding on the contractor. In other words, if a
matter is covered by any of the clauses in the Special Conditions of the
contract but no remedy is provided by way of decision by an authority of the
Railways then that matter shall not be an 'excepted matter'. The learned
counsel supported his submission by reading out a few clauses of General
Conditions and Special Conditions. For example, vide Clause 18 of General
Conditions any question or dispute as to the commission of any offence or
compensation payable to the Railway shall be settled by the General Manager of
the Railway in such manner as he shall consider fit and sufficient and his
decision shall be final and conclusive. Vide Clause 2.4.2.(b) of Special
Conditions a claim for compensation arising on account of dissolution of
contractor's firm is to be decided by Chief Engineer (Construction) of the
Railway and his decision in the matter shall be final and binding on the
contractor. Vide clause 12.1.2. of Special Conditions a dispute whether the
cement stored in the godown of the contractor is fit for the work is to be
decided by the Engineer of Railways and his decision shall be final and binding
on the contractor. The learned counsel submitted that so long as the remedy of
decision by some one though he may be an authority of the Railways is not
provided for, the contractor's claim cannot be left in lurch by including the
same in 'excepted matters'. We find it difficult to agree.
In our
opinion those claims which are covered by several clauses of the Special
Conditions of the Contract can be categorized into two. One category is of such
claims which are just not leviable or entertainable. Clauses 9.2., 11.3 and
21.5 of Special Conditions are illustrative of such claims. Each of these
clauses provides for such claims being not capable of being raised or adjudged
by employing such phraseology as "shall not be payable", "no
claim whatsoever will be entertained by the Railway", or "no claim
will/shall be entertained". These are 'no claim', 'no damage', or 'no
liability' clauses. The other category of claims is where the dispute or
difference has to determined by an authority of Railways as provided in the
relevant clause. In such other category fall such claims as were read out by
the learned counsel for the respondent by way of illustration from several
clauses of the contract such as General Conditions Clause 18 and Special
Conditions Clause 2.4.2.(b) and 12.1.2. The first category is an 'excepted
matter' because the claim as per terms and conditions of the contract is simply
not entertainable;
the
second category of claims falls within 'excepted matters' because the claim is
liable to be adjudicated upon by an authority of the Railways whose decision
the parties have, under the contract, agreed to treat as final and binding and
hence not arbitrable. The expression "and decision thereon shall be final
and binding on the contractor" as occurring in Clause 63 refers to the
second category of 'excepted matters'.
The
learned counsel for the respondent placed reliance on 491 to strengthen his
submission that an 'excepted matter' should be one covered by a clause which
provides for a departmental remedy and is not arbitrable for that reason. We
have carefully perused both the decisions. Vishwanath Sood's case is one
wherein Clause 2 of the contract envisaged determination of the amount of
compensation for the delay in the execution of work only by the Superintending
Engineer whose decision in writing shall be final. In Food Corporation of India's case also the relevant clause
provided for the decision of Senior Officer being final and binding between the
parties.
Both
were considered to be 'excepted matters'. A decision of this Court is an
authority for the proposition which it decides and not for what it has not
decided or had no occasion to express an opinion on.
The
two decisions relied on by the learned counsel for the respondent hold a Clause
providing a departmental or in-house remedy and attaching finality to decision
therein to be an 'excepted matter' because such were the Clauses in the
contracts which came up for the consideration of this Court. Those decisions
cannot be read as holding nor can be relied on as an authority for the
proposition by reading them in a negative way that if a departmental remedy for
settlement of claim was not provided then the claim would cease to be an
'excepted matter' and such should be read as the decision of this Court.
It was
next submitted by the learned counsel for the respondent that if this Court was
not inclined to agree with the submission of the learned counsel for the
respondent and the interpretation sought to be placed by him on the meaning of
'excepted matter' then whether or not the claim raised by the contractor is an
'excepted matter' should be left to be determined by the arbitrator. It was
submitted by him that while dealing with a petition under Section 20 of the
Arbitration Act, 1940 the Court should order the agreement to be filed and make
an order of reference to the arbitrator appointed by the parties leaving it
open for the arbitrator to adjudicate whether a claim should be held to be not entertainable
or awardable being an 'excepted matter'. With this submission too we find it
difficult to agree. While dealing with a petition under Section 20, the Court
has to examine:
(i) whether
there is an arbitration agreement between the parties,
(ii) whether
the difference which has arisen is one to which the arbitration agreement
applies, and
(iii) whether
there is a cause, shown to be sufficient, to decline an order of reference to
the arbitrator. The word 'agreement' finding place in the expression 'where a
difference has arisen to which an agreement applies', in sub-section(1) of
Section 20 means 'arbitration agreement'. The reference to arbitrator on a
petition filed under Section 20 is not a function to be discharged mechanically
or ministerially by the Court; it is a consequence of judicial determination,
the Court having applied its mind to the requirements of Section 20 and formed
an opinion, that the difference sought to be referred to arbitral adjudication
is one to which the arbitration agreement applies. In the case of Food
Corporation of India (supra), relied on by the learned counsel for the
respondent, it has been held as the consistent view of this Court that in the
event of the claims arising within the ambit of 'excepted matters', the
question of assumption of jurisdiction by any arbitrator either with or without
the intervention of J.C. Budharaja, Government and Mining Contractor - (1999) 8
(1960) 2 SCR 793 at page 804 this Court has unequivocally expressed that an
award by an arbitrator over a claim which was not arbitrable as per the terms
of contract entered into between the parties would be liable to be set aside.
In M/s. Prabartak Commercial Corporation (1991) 1 SCC 498, a claim covered by
'excepted matter' was referred to arbitrator in spite of such reference having
been objected to and the arbitrator gave an award. This court held that the
arbitrator had no jurisdiction in the matter and that the reference of the
dispute to the arbitrator was invalid and the entire proceedings before the
arbitrator including the awards made by him were null and void.
Pradesh,
(1988) 3 SCC 82, the contract provided for the work being completed by the
contractor in spite of rise in prices of material and labour charges at the
rates stipulated in the contract. It was held that on the contractor having
completed the work, it was not open to him to claim extra cost towards rise in
prices of material and labour. An award given by the arbitrator for extra claim
given by the contractor was held to be vitiated on the ground of misconduct of
arbitrator.
There
were specific clauses in the agreement which barred consideration of extra
claims in the event of price escalation.
Anr.,
1994 (5) Scale 67, claim was allowed by arbitrator for "payment of extra
rates for work done beyond agreement time at schedule of rate prevailing at the
time of execution". Clause 59 of A.P. Standard Specifications, which applied
to the contract between the parties, stated that no claim for compensation on
account of delays or hindrances to the work from any cause would lie except as
therein defined. The claim was found to be outside the defined exceptions.
When
extensions of time were granted to the appellant to complete the work the
respondents made it clear that no claim for compensation would lie. For both
these reasons, this Court held that it was impermissible to award such claim
because the arbitrator was required to decide the claims referred to him having
regard to the contract between the parties and, therefore, his jurisdiction was
limited by the terms of the contract.
A
Division Bench decision of High Court of Andhra Pradesh in Hyderabad, AIR 1990
A.P. 294, is of relevance. Jeevan Reddy, J. (as His Lordship then was),
speaking for the Division Bench, held that where clause 59 of the standard
terms and condition of the contract provided that neither party to the contract
shall claim compensation "on account of delays or hindrances of work from
any cause whatever", an award given by an arbitrator ignoring such express
terms of the contract was bad. We find ourselves in agreement with the view so
taken.
In
Hudson's Building and Engineering Contracts (11th Edition, pp.1098-9) there is
reference to 'no damage' clauses, an American expression, used for describing a
type of clause which classically grants extensions of time for completion, for
variously defined 'delays' including some for which, as breaches of contract on
his part, the owner would prima facie be contractually responsible, but then
proceeds to provide that the extension of time so granted is to be the only
right or remedy of the contractor and, whether expressly or by implication,
that damages or compensation are not to be recoverable therefor. These 'no
damage' clauses appear to have been primarily designed to protect the owner
from late start or co-ordination claims due to other contractor delays which
would otherwise arise. Such clauses originated in Federal Government contracts
but are now adopted by private owners and expanded to cover wider categories of
breaches of contract by the owners in situations which it would be difficult to
regard as other than oppressive and unreasonable.
American
jurisprudence developed so as to avoid the effect of such clauses and permitted
the contractor to claim in four situations, namely,
(i) where
the delay is of a different kind from that contemplated by the clause,
including extreme delay,
(ii)
where the delay amounts to abandonment,
(iii) where
the delay is a result of positive acts of interference by the owner, and
(iv) bad
faith. The first of the said four exceptions has received considerable support
from judicial pronouncements in England and Commonwealth. Not dissimilar
principles have enabled some commonwealth courts to avoid the effect of 'no
damage' clauses. [See Hudson, ibid].
In our
country question of delay in performance of contract is governed by Sections 55
and 56 of the Indian Contract Act, 1872. If there is an abnormal rise in prices
of material and labour, it may frustrate the contract and then the innocent
party need not perform the contract. So also, if time is of the essence of the
contract, failure of the employer to perform a mutual obligation would enable
the contractor to avoid the contract as the contract becomes voidable at his
option. Where time is "of the essence" of an obligation, Chitty on
Contracts (Twenty-Eighth Edition, 1999, at p.1106, para 22-015) states "a
failure to perform by the stipulated time will entitle the innocent party to
(a) terminate
performance of the contract and thereby put an end to all the primary
obligations of both parties remaining unperformed; and
(b)
claim damages from the contract- breaker on the basis that he has committed a
fundamental breach of the contract ("a breach going to the root of the
contract") depriving the innocent party of the benefit of the contract
("damages for loss of the whole transaction")." If, instead of
avoiding the contract, the contractor accepts the belated performance of
reciprocal obligation on the part of the employer, the innocent party, i.e. the
contractor, cannot claim compensation for any loss occasioned by the non-
performance of the reciprocal promise by the employer at the time agreed,
"unless, at the time of such acceptance, he gives notice to the promisor
of his intention to do so". Thus, it appears that under the Indian law, in
spite of there being a contract between the parties whereunder the contractor
has undertaken not to make any claim for delay in performance of the contract
occasioned by an act of the employer, still a claim would be entertainable in
one of the following situations:
(i) if
the contractor repudiates the contract exercising his right to do so under
Section 55 of the Contract Act,
(ii) the
employer gives an extension of time either by entering into supplemental
agreement or by making it clear that escalation of rates or compensation for
delay would be permissible,
(iii) if
the contractor makes it clear that escalation of rates or compensation for
delay shall have to be made by the employer and the employer accepts
performance by the contractor in spite of delay and such notice by the
contractor putting the employer on terms.
Thus,
it may be open to prefer a claim touching an apparently excepted matter subject
to a clear case having been made out for excepting or excluding the claim from
within the four corners of "excepted matters". While dealing with a
petition under Section 20 of the Arbitration Act, the Court will look at the
nature of the claim as preferred and decide whether it falls within the
category of "excepted matters". If so, the claim preferred would be a
difference to which the arbitration agreement does not apply, and therefore,
the Court shall not refer the same to the arbitrator. On the pleading, the
applicant may succeed in making out a case for reference, still the arbitrator
may, on the material produced before him, arrive at a finding that the claim
was covered by "excepted matters". The claim shall have to be
disallowed. If the arbitrator allows a claim covered by an excepted matter, the
award would not be legal merely because the claim was referred by the Court to
arbitration. The award would be liable to be set aside on the ground of error
apparent on the face of the award or as vitiated by legal misconduct of the
arbitrator. Russell on Arbitration (Twenty-First Edition, 1997) states vide para
1-027 (at p.15) "Arbitrability. The issue of arbitrability can arise at
three stages in an arbitration; first, on an application to stay the
arbitration, when the opposing party claims that the tribunal lacks the
authority to determine a dispute because it is not arbitrable, second, in the
course of the arbitral proceedings on the hearing of an objection that the
tribunal lacks substantive jurisdiction and third, on an application to
challenge the award or to oppose its enforcement. The New York Convention, for
example, refers to non-arbitrability as a ground for a court refusing to
recognize and enforce an award." To sum up, our conclusion are:
(i)
while deciding a petition under Section 20 of the Arbitration Act, 1940, the
Court is obliged to examine whether a difference which is sought to be referred
to arbitration is one to which the arbitration agreement applies. If it is a
matter excepted from the arbitration agreement, the Court shall be justified in
withholding the reference,
(ii) to
be an excepted matter it is not necessary that a departmental or 'in-house'
remedy for settlement of claim must be provided by the contract. Merely for the
absence of provision for in-house settlement of the claim, the claim does not
cease to be an excepted matter,
(iii)
an issue as to arbitrability of claim is available for determination at all the
three stages - while making reference to arbitration, in the course of arbitral
proceedings and while making the award a rule of the Court.
In the
case before us, the claims in question as preferred are clearly covered by
"excepted matters". The statement of claims, as set out in the
petition under Section 20 of the Arbitration Act, does not even prima facie
suggest why such claims are to be taken out of the category of "excepted
matters" and referred to arbitration. It would be an exercise in futility
to refer for adjudication by the arbitrator a claim though not arbitrable, and
thereafter, set aside the award if the arbitrator chooses to allow such claim.
The High Court was, in our opinion, not right in directing the said four claims
to be referred to arbitration.
After the
hearing was concluded the learned counsel for the respondent cited a few
decisions by making a mention, wherein the view taken is that 'interpretation
of contract' is a matter for arbitrator to decide and the Court cannot
substitute its own decision in place of the decision of the arbitrator. We do
not think that the cited cases have any relevance for deciding the question
arising for consideration in this appeal. None of the cases is an authority for
the proposition that the question whether a claim is an 'excepted matter' or
not must be left to be decided by the arbitrator only and not adjudicated upon
by the Court while disposing of a petition under Section 20 of the Arbitration
Act, 1940. We cannot subscribe to the view that interpretation of arbitration
clause itself can be or should be left to be determined by arbitrator and such
determination cannot be done by Court at any stage.
For
the foregoing reasons we are of the opinion that the view of the 'excepted
matters' taken by the Division Bench of the High Court cannot be sustained. The
appeal is allowed, the impugned decision of the Division Bench of the High
Court is set aside and that of the learned Single Judge is restored. No order
as to the costs.
J.
( R.C.
LAHOTI ) J.
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