M/s. J.G.Engineers
Pvt. Ltd. Vs. Union of India & ANR.
J U D G M E N T
R.V.RAVEENDRAN, J.
1.
This
appeal is directed against the judgment dated 8.2.2005 of the Guwahati High
Court allowing Arbitration Appeal No.1/2004 filed by the respondents and setting
aside the judgment dated 12.12.2003 passed by Additional District Judge,
Kamrup, Guwahati (by which the District court had dismissed the petition filed by
respondents filed under section 34 of Arbitration & Conciliation Act, 1996
and affirmed the Award passed by the Arbitrator dated 5.9.2001, with clerical
corrections made on 22.9.2001).
2.
On
26.3.1993 the respondents awarded the work of "extension of terminal
building" at Guwahati airport to the appellant. As per the contract, the date
of commencement of work was 10.4.1993 and the period of completion of the work
was 21 months, to be completed in different stages. As the appellant (also
referred to as the `contractor') did not complete the first phase of the work within
the stipulated time, the respondents terminated the contract by order dated 29.8.1994.
The termination was challenged
by the appellant in a writ petition filed before the Gawahati High Court. By judgment
dated 27.9.1994, the High Court set aside the termination and directed the
respondents to grant time to the appellant till the end of January 1995 for
completion of the first phase reserving liberty to the appellant to apply for
further extension of time. As the work was not completed, the respondents
granted an extension upto 31.7.1995 by letter dated 24.8.1995, without levying any
liquidated damages. The contractor proceeded with the work even thereafter.
However, as the progress
was slow, the respondents terminated the contract on 14.3.1996 on the ground of
non-completion even after 35 months. The appellant filed a writ petition, challenging
the cancellation. The High Court by order dated 25.6.1996, noticed the
existence of the arbitration agreement and referred the parties to arbitration.
In pursuance of it, on a request by the appellant, the respondents appointed
Mr. C.Vaswani as the sole arbitrator on 14.2.1997.
3.
On
17.4.1997, the appellant filed its statement of claims. Claims 1 to 11 aggregated
to Rs.2,38,86,198.31 (subsequently, reduced to Rs.2,06,70,495/-). Claim 12 was
for interest at 18% per annum on the total claim amount from 20.5.1996 to date of
realization. Claim 13 was for Rs.2,13,729/- as cost of arbitration. On
3.2.1999, the respondents filed their reply and also filed their four counter claims
before the arbitrator aggregating to Rs. 279,54,225/-.
4.
By
award dated 5.9.2001 (as amended on 22.9.2001) the Arbitrator awarded a sum of
Rs.1,04,58,298/- with interest and costs in favour of the appellant and rejected
the counter claims of the respondents. The particulars of the amounts claimed
and the awards thereon are as under: 4 Clai ms by appellantClaim Particulars of
Claim Amount claimed Amount awarded No. by appellant by Arbitrator 1 Claim for
the balance payment of 34th Rs.11,26,518 Rs.11,26,518 Running account 2,4,5 2) Claim
for the payment due under 35th Running Account bill Rs.8,70,517 4) Claim for the
payment for Extra Rs.65,64,544 items of work executed Rs.3,27,335 5) Claim for escalation
in rates for works executed after July 1995 till the Rs.14,59,320 date of
termination Claim for the refund of Security Rs.1,00,000 Rs. 1,00,000 Deposit 6
Claim for the difference in scale Rs. 37,608 Rs. 37,608 weight and sectional
weight of steel7 & 8. 7) Claim for
"on site' overheads
and establishment expenses during the extended period of 14 months beyond the
stipulated date of completion. Rs.25,57,295 Rs.17,50,000 8) Claim for `off-site'
overheads and establishment expenses during the extended period of 14 months beyond
the stipulated date of completion. 9 Claim for loss of hire charges of Rs.30,79,160
Rs.8,75,000 machinery, shuttering materials etc. engaged for execution of the
work for the period beyond the stipulated date of completion. 10 Claim for compensation
for the Rs.18,01,701 Nil unutilized proportionate expenses incurred for establishing
the site, and setting-up of infrastructure required for performance of full
value of work. 11 Claim for the loss of anticipatory profit Rs.54,03,669 Rs.39,12,000
@ 15% on the value of balance work which could not be executed due to termination
of Contract Total Rs.2,06,70,495 Rs.104,58,298 Counter Claims by respondentsCounter
Particulars of Counter Claim Amount claimed Amount awardedClaim No by
Respondents by Arbitrator
a. Excess cost of getting
the work Rs.1,46,69,227 Nil executed through an alternative agency - recoverable
as per clause (3) of the agreement
b. Liquidated damages levied
under Rs.56,84,998 Nil clause (2) of the agreement
c. Escalation that would
be payable to Rs.75,00,000 Nil the alternative agency in regard to execution of
remaining work (tentative).
d. Cost of Arbitration Rs.1,00,000
Nil Total Rs.2,79,54,225 NilThe Arbitrator awarded to the contractor, simple
interest @ 9% per annum on Rs.38,21,298 for the period 14.9.1996 to 31.3.1997
and simple interest @ 15% per annum on Rs.1,04,58,298 for the period 1.4.1997
to date of payment (under Claim No.12). The Arbitrator also awarded Rs.39,610/-
towards costs (under Claim No. 13). All the counter claims of respondents were
rejected.
5.
On
12.12.2001, the respondents filed an application (Misc. Arbn. Case No.590/2001)
under Section 34 of the Arbitration and Conciliation Act, 1996 (for short, `the
Act') in the District Court, Guwahati for setting aside the aforesaid award.
The respondents filed an additional petition in the said proceedings, under section
34 of the Act on 27.1.2003, raising 6additional grounds of challenge. The learned
District Judge, Guwahati dismissed the petition vide order dated 12.12.2003,
holding that none of the grounds under section 34(2) were made out.
This order was
reversed by the Guwahati High Court, by the impugned judgment dated 8.2.2005, in
Arbitration Appeal No.1/2004 filed by the respondents, recording the following findings:
(i) The award on claim Nos.1, 3 and 11 related to `excepted matters' which were
beyond the scope of the arbitration agreement and could not be adjudicated by
the Arbitrator. (ii) The award on Claim No.5 was contrary to the terms of price
escalation clause (clause 10(cc) of the contract) and being patently illegal,
required to be set aside. (iii) The rejection of the counter claims of respondent,
by ignoring the agreed terms of contract and the legal provisions, was also
patently illegal. As a consequence, the award was liable to be set aside fully,
as the respondents would have been entitled to adjust the amounts found due and
payable against claims 2, 4, 6, 7, 8, 9 against their counter-claims, if allowed.
In view of the said
findings the High Court directed as follows : "In view of the above, the
appeal filed by the appellants is allowed. The award passed by the Arbitrator
on 5.9.2001 and corrected on 22.9.2001 as well as the order dated 12.12.2003 passed
by the learned Adhoc Additional District Judge No.2, Kamrup, Guwahati in Misc.
(Arbitration) Case No.590/2001, are set aside. The arbitration proceeding is
remitted back to the learned arbitrator for reconsideration of the counter
claims of the respondents and for passing an award by making necessary adjustment
of the amount payable to the contractor/claimant against his claim nos. 2,4,6,7,8,9
and 13 in terms of the finding recorded by this Court."
6.
The
respondents' contention that the arbitrator has considered and allowed some claims
which were `excepted matters' and therefore, inarbitrable, that grant of some
other claims by the arbitrator violated the express provisions of clause 10(cc)
of the agreement, and that the counter- claims of respondents have been
erroneously rejected, have found favour with the High Court. The appellant
contends that the award does not violate clauses (2) and (3) of the agreement making
certain decisions of Superintending Engineer/Engineer-in-Charge final, nor
clause 10(cc) of the agreement relating to escalations. It is also contended that
respondents committed breach and the counter-claims were rightly rejected. The appellant
contends the award is legal and not open to challenge under any of the grounds
under section 34 of the Act. Questions for consideration
7.
A
Civil Court examining the validity of an arbitral award under section 34 of the
Act exercises supervisory and not appellate jurisdiction over the awards of an arbitral
tribunal. A court can set aside an arbitral award, only if any of the grounds
mentioned in sections 34(2)(a) (i) to (v) 8or section 34(2)(b)(i) and (ii), or
section 28(1)(a) or 28(3) read with section 34(2)(b)(ii) of the Act, are made
out. An award adjudicating claims which are `excepted matters' excluded from the
scope of arbitration, would violate section 34(2)(a)(iv) and 34(2)(b) of the Act.
Making an award allowing or granting a claim, contrary to any provision of the contract,
would violate section 34(2)(b)(ii) read with section 28(3) of the Act. On the
contentions urged, the following questions arise for our consideration :(i) Whether
the High Court was justified in setting aside the award in respect of claims 1,
3, and 11 on the ground that they related to `excepted matters'?(ii) Whether
the High Court was justified in setting aside the award in regard to Claim Nos.
2, 4, 6, 7, 8 and 9?(iii) Whether High Court was justified in holding that claim
5 for escalation was barred by clause 10(cc) of the contract?(iv) Whether the High
Court was justified in setting aside the award rejecting counter-claims 1 to 4?Re
: Question (i):
8.
Claim
No. (1) for Rs.11,26,518 relates to the payment due in regard to the 34th running
bill withheld by the respondent. It comprises Rs.5,90,000/- levied as compensation
under clause (2) of the agreement, Rs.3,17,468 withheld towards alleged risk cost
in getting the work executed by an alternative agency and Rs.2,19,050 being the
escalation in 9regard to the period January 1995 to July 1995 which was
admitted by the respondents to be due. The Arbitrator allowed the entire claim
holding that the appellant was not responsible for the delay and consequently the
rescission/termination was illegal and levy of liquidated damages and recovery of
excess cost in getting the work completed through an alternative agency was not
permissible, was bad.
9.
Claim
No.3 was for refund of security deposit of Rs.100,000/-. The respondents had
encashed the bank guarantee for Rs.1 lakh which had been issued in lieu of
security deposit and forfeited the same on the ground that the contractor was
in breach. The arbitrator held the contractor was not in breach and the forfeiture
was illegal and directed that the said sum of Rupees one lakh should be
refunded to the contractor.
10.
Claim
No.11 was for Rs.54,03,669 being the loss of anticipated profit in regard to the
value of the unexecuted work which would have been executed by the contractor
if the contract had not been rescinded by the respondents. The contractor contended
that the termination was in breach of the contract and but for such termination
the contractor would have legitimately completed the work and earned a profit of
15%. The arbitrator held that the respondents were responsible for the delay,
that the 10contractor was not in breach and the termination was therefore
illegal. He held that the value of the work which could not be executed by the contractor
due to wrongful termination, was Rs.3,91,21,589 and 10% thereof would be the standard
estimate of the loss of profits and consequently awarded Rs.39,12,000/- towards
the loss of profits, which the contractor would have earned but for the wrongful
termination of the contract by the respondents.
11.
As
per the arbitration agreement (contained in Clause 25 of the contract) all questions
and disputes relating to the contract, execution or failure to execute the
work, whether arising during the progress of the work or after the completion
or abandonment thereof, "except where otherwise provided in the
contract", had to be referred to and settled by arbitration. The High Court
held that claims 1, 3 and 11 of the contractor were not arbitrable as they related
to excepted matters in regard to which the decisions of the Superintending Engineer
or the Engineer-in-Charge had been made final and binding under clauses (2) and
(3) of the agreement.
12.
12.
We may refer to the relevant provisions of the said contract document, that is,
clauses 2, 3(Part) and 25 (Part) to decide 11whether the claims 1, 3 and 11 were
excepted matters, excluded from Arbitration: Clause (2): "The time allowed
for carrying out the work as entered in the tender shall be strictly observed by
the contractor and shall be deemed to be essence of the contract and shall be
reckoned from the tenth day after the date on which the order to commence the work
is issued to the contractor.
The work shall throughout
the stipulated period of the contract be proceeded with all due diligence and
the contractor shall pay as compensation an amount equal to one percent or such
smaller amount as the Superintending Engineer (whose decision in writing shall
be final) may decide on the amount of the estimated cost of the whole work as
shown in the tender, for every day that the work remains uncommenced or
unfinished after the proper dates. And further to ensure good progress during
the execution of the work, the contractor shall be bound in all cases in which
the time allowed for any work exceeds, one month (save for special jobs) to
complete one-eighth of the whole of the work before one-fourth of the whole
time allowed under the contract has elapsed, three eighths of the works, before
one-half of such time has elapsed and three-fourths of the work; before
three-fourths of such time has elapsed. However for special jobs if a time-schedule
has been submitted by the Contractor and the same has been accepted by the Engineer-in-Charge.
The contractor shall comply
with the said time schedule. In the event of the contractor failing to comply with
this condition, he shall be liable to pay as compensation an amount equal to one
percent or such small amount as the Superintending Engineer (whose decision in writing
shall be final) may decide on the said estimated cost of the whole work for
every day that the due quantity of work remains incomplete. Provided always that
the entire amount of compensation to be paid under the provisions of this clause
shall not exceed ten per cent, on the estimated cost of the work as shown in
the tender." Clause 3 :
"The
Engineering-in-charge may without prejudice to his right against the contractor
in respect of any delay or inferior workmanship or otherwise or to any claims
for damage in respect of any breaches of the contract and without prejudice to
any rights or remedies under any of the provisions of this contract or otherwise
and whether the date of completion has or has not elapsed by notice in writing absolutely
determine the contract in any of the following cases: 12(i) If the contractor
having been given by the Engineer-in-charge a notice in writing to rectify,
reconstruct or replace any defective work or that the work is being performed in
any inefficient or other improper or unworkmanlike manner, shall omit to comply
with the requirements of such notice for a period of seven days thereafter or
if the contractor shall delay or suspend the execution of the work so that
either in the judgment of the Engineer-in- charge (whose decision shall be
final and binding) he will be unable to secure completion of the work by the date
of completion or he has already failed to complete the work by that date...(ii)
x x x x (not relevant)(iii) If the contractor commits breach of any of the terms
and conditions of this contract.(iv) If the contractor commits any acts mentioned
in Clause 21 hereof.
When the contractor
has made himself liable for action under any of the cases aforesaid, the Engineer-in-Charge
on behalf of the President of India shall have powers:(a) To determine or rescind
the contract as aforesaid (of which termination or rescission notice in writing
to the contractor under hand of the Engineer-in-Charge shall be conclusive evidence)
upon such determination or rescission the security deposit of the contractor
shall be liable to be forfeited and shall be absolutely at the disposal of
Government.(b) x x x x (not relevant)(c) After giving notice to the contractor
to measure up the work of the contractor and to take such part thereof as shall
be unexecuted out of his hands and to give it to another contractor to complete
in which case any expenses which may be incurred in excess of the sum which would
have been paid to the original contractor if the whole work had been executed
by him (of the amount of which excess the certificate in writing of the Engineer-in-Charge
shall be final and conclusive) shall be borne and paid by the original contractor
and may be deducted from any money due to him by Government under this contract
or on any other account whatsoever or from his security deposit 13 or the
proceeds of sales thereof or a sufficient part thereof as the case may
be."
In the event of any
one or more of the above courses being adopted by the Engineer-in-Charge the contractor
shall have no claim to compensation for any loss sustained by him by reason of his
having purchased or procured any materials or entered into any engagements or made
any advances on account or with a view to the execution of the work or the
performance of contract. And in case action is taken under any of provisions aforesaid.
The contractor shall not be entitled to recover or be paid any sum for any work
thereof or actually performed under this contract unless and until the
Engineer-in-Charge has certified in writing the performance of such work and
the value payable in respect thereof and he shall only be entitled to be paid
the value so certified. Clause 25:
"Except where otherwise
provided in the contract all questions and disputes relating to the meaning of
the specifications, designs, drawings, and instructions hereinbefore mentioned and
as to the quality of workmanship or materials used on the work or as to any
other question, claim, right, matter or thing whatsoever in any way arising out
of or relating to the contract designs, drawings, specifications, estimates, instructions,
orders or these conditions or otherwise concerning the works or the execution of
failure to execute the same whether arising during the progress of the work or
after the completion or abandonment thereof shall be referred to the sole
arbitration of the person appointed by the Chief Engineer, C.P.W.D. in charge of
the work at the time of dispute or if there be no Chief Engineer the
administrative head of the said C.P.W.D. at the time of such appointment. It
will be no objection to any such appointment that the arbitrator so appointed is
a Government servant, that he had to deal with the matters to which the
contract relates and that in the course of his duties as Government servant he has
expressed views on all or any of the matters in dispute or difference." (emphasis
supplied)
13.
Clauses
(2) and (3) of the contract relied upon by the respondents, no doubt make certain
decisions by the Superintending Engineer and Engineer-in-Charge final/final and
binding/final and conclusive, in regard 14to certain matters. But the question is
whether clauses (2) and (3) of the agreement stipulate that the decision of any
authority is final in regard to the responsibility for the delay in execution and
consequential breach and therefore exclude those issues from being the subject
matter of arbitration. We will refer to and analyse each of the `excepted
matters' in clauses (2) and (3) of the agreement to find their true scope and
ambit : (i) Clause (2) provides that if the work remains uncommenced or unfinished
after proper dates, the contractor shall pay as compensation for everyday's delay
an amount equal to 1% or such small amount as the Superintending Engineer (whose
decision in writing shall be final) may decide on the estimated cost of the whole
work as shown in the tender. What is made final is only the decision of the
Superintending Engineer in regard to the percentage of compensation payable by the
contractor for everyday's delay that is whether it should be 1% or lesser.
His decision is not made
final in regard to the question as to why the work was not commenced on the due
date or remained unfinished by the due date of completion and who was
responsible for such delay.(ii) Clause (2) also provides that if the contractor
fails to ensure progress as per the time schedule submitted by the contractor,
he shall be liable to pay as compensation an amount equal to 1% or such smaller
amount as the Superintending Engineer (whose decision in writing shall be final)
may decide on the estimated cost of the whole work for everyday the due 15quantity
of the work remains incomplete, subject to a ceiling of ten percent. This provision
makes the decision of the Superintending Engineer final only in regard to the
percentage of compensation (that is, the quantum) to be levied and not on the
question as to whether the contractor had failed to complete the work or the portion
of the work within the agreed time schedule, whether the contractor was
prevented by any reasons beyond its control or by the acts or omissions of the respondents,
and who is responsible for the delay.
The first part of
clause (3) provides that if the contractor delays or suspends the execution of the
work so that either in the judgment of the Engineer-in-Charge (which shall be
final and binding), he will be unable to secure the completion of the work by the
date of completion or he has already failed to complete the work by that date,
certain consequences as stated therein, will follow. What is made final by this
provision is the decision of the Engineer-in-Charge as to whether the contractor
will be able to secure the completion of the work by the due date of
completion, which could lead to the termination of the contract or other
consequences. The question whether such failure to complete the work was due to
reasons for which the contractor was responsible or the department was responsible,
or the question whether the contractor was justified in suspending the
execution of the work, are not matters in regard to which the decision of
Engineer-in-Charge is made final.
The second part of
clause (3) of the agreement provides that where the contractor had made himself
liable for action as stated in the first part of that clause, the Engineer-in-Charge
shall have powers to determine or 16rescind the contract and the notice in writing
to the contractor under the hand of the Engineer-in-Charge shall be conclusive evidence
of such termination or rescission. This does not make the decision of the Engineer-in-Charge
as to the validity of determination or rescission, valid or final. In fact it
does not make any decision of Engineer-in-Charge final at all. It only provides
that if a notice of termination or rescission is issued by the Engineer-in-Charge
under his signature, it shall be conclusive evidence of the fact that the
contract has been rescinded or determined.
After determination or
rescission of the contract, if the Engineer-in-Charge entrusts the unexecuted
part of the work to another contractor, for completion, and any expense is
incurred in excess of the sum which would have been paid to the original contractor
if the whole work had been executed by him, the decision in writing of the Engineer-in-Charge
in regard to such excess shall be final and conclusive, shall be borne and paid
by the original contractor. What is made final is the actual calculation of the
difference or the excess, that is if the value of the unexecuted work as per
the contract with the original contractor was Rs.1 lakh and the cost of getting
it executed by an alternative contractor was Rs.1,50,000/- what is made final is
the certificate in writing issued by the Engineer-in-Charge that Rs.50,000 is
the excess cost. The question whether the determination or rescission of the contractor
by the Engineer-in-Charge is valid and legal and whether it was due to any
breach on the part of the contractor, or whether the contractor could be made
liable to pay such excess, are not issues on which the decision of
Engineer-in-Charge is made final.
14.
Thus
what is made final and conclusive by clauses (2) and (3) of the agreement, is not
the decision of any authority on the issue whether the contractor was
responsible for the delay or the department was responsible for the delay or on
the question whether termination/rescission is valid or illegal. What is made
final, is the decisions on consequential issues relating to quantification, if
there is no dispute as to who committed breach. That is, if the contractor
admits that he is in breach, or if the Arbitrator finds that the contractor is
in breach by being responsible for the delay, the decision of the
Superintending Engineer will be final in regard to two issues. The first is the
percentage (whether it should be 1% or less) of the value of the work that is
to be levied as liquidated damages per day. The second is the determination of the
actual excess cost in getting the work completed through an alternative agency.
The decision as to who is responsible for the delay in execution and who
committed breach is not made subject to any decision of the respondents or its officers,
nor excepted from arbitration under any provision of the contract.
15.
In
fact the question whether the other party committed breach cannot be decided by
the party alleging breach. A contract cannot provide that one party will be the
arbiter to decide whether he committed breach or the other 18party committed breach.
That question can only be decided by only an adjudicatory forum, that is, a court
or an Arbitral Tribunal. In State of Karnataka vs. Shree Rameshwara Rice Mills (1987
(2) SCC 160) this Court held that adjudication upon the issue relating to a
breach of condition of contract and adjudication of assessing damages arising
out of the breach are two different and distinct concepts and the right to assess
damages arising out of a breach would not include a right to adjudicate upon as
to whether there was any breach at all. This Court held that one of the parties
to an agreement cannot reserve to himself the power to adjudicate whether the
other party has committed breach.
This court held : "Even
assuming for argument's sake that the terms of Clause 12 afford scope for being
construed as empowering the officer of the State to decide upon the question of
breach as well as assess the quantum of damages, we do not think that
adjudication by the other officer regarding the breach of the contract can be
sustained under law because a party to the agreement cannot be an arbiter in
his own cause. Interests of justice and equity require that where a party to a contract
disputes the committing of any breach of conditions the adjudication should be
by an independent person or body and not by the other party to the contract. The
position will, however, be different where there is no dispute or there is
consensus between the contracting parties regarding the breach of conditions.
In such a case the
officer of the State, even though a party to the contract will be well within his
rights in assessing the damages occasioned by the breach in view of the
specific terms of Clause 12. We are, therefore, in agreement with the view of
the Full Bench that the powers of the State under an agreement entered into by
it with a private person providing for assessment of damages for breach of
conditions and recovery of the damages will stand confined only to those cases
where the breach of conditions is admitted or it is not disputed."
16.
The
question whether the issue of breach and liability are excluded from
arbitration, when quantification of liquidated damages are excluded from arbitration
was considered by this Court in Bharat Sanchar Nigam Ltd. vs. Motorola India
Ltd. (2009 (2) SCC 337). This court held : "The question to be decided in
this case is whether the liability of the respondent to pay liquidated damages and
the entitlement of the appellant, to collect the same from the respondent is an
excepted matter for the purpose of Clause 20.1 of the General Conditions of
contract. The High Court has pointed out correctly that the authority of the
purchaser (BSNL) to quantify the liquidated damages payable by the supplier Motorolla
arises once it is found that the supplier is liable to pay the damages claimed.
The decision contemplated under Clause 16.2 of the agreement is the decision regarding
the quantification of the liquidated damages and not any decision regarding the
fixing of the liability of the supplier.
It is necessary as a condition
precedent to find that there has been a delay on the part of the supplier in discharging
his obligation for delivery under the agreement. It is clear from the reading
of Clause 15.2 that the supplier is to be held liable for payment of liquidated
damages to the purchaser under the said clause and not under Clause 16.2. The
High Court in this regard correctly observed that it was not stated anywhere in
Clause 15 that the question as to whether the supplier had caused any delay in
the matter of delivery will be decided either by the appellant/BSNL or by anybody
who has been authorized on the terms of the agreement. Reading Clause 15 and 16
together, it is apparent that Clause 16.2 will come into operation only after a
finding is entered in terms of Clause 15 that the supplier is liable for
payment of liquidated damages on account of delay on his part in the matter of
making delivery.
Therefore, Clause
16.2 is attracted only after the supplier's liability is fixed under Clause
15.2. It has been correctly pointed out by the High Court that the question of
holding a person liable for Liquidated Damages and the question of quantifying the
amount to be paid by way of Liquidated Dmages are entirely different. Fixing of
liability is primary, while the quantification, which is provided for under Clause
16.2, is secondary to it. Quantification of liquidated damages may be an
excepted matter as argued by the appellant, under Clause 16.2, but for the levy
of liquidated damages, there has to be a delay in the first place. In the 20 present
case, there is a clear dispute as to the fact that whether there was any delay on
the part of the respondent. For this reason, it cannot be accepted that the appointment
of the arbitrator by the High Court was unwarranted in this case.
Even if the
quantification was excepted as argued by the appellant under Clause 16.2, this
will only have effect when the dispute as to the delay is ascertained. Clause
16.2 cannot be treated as an excepted matter because of the fact that it does not
provide for any adjudicatory process for decision on a question, dispute or
difference, which is the condition precedent to lead to the stage of
quantification of damages." (emphasis supplied)
17.
In
view of the above, the question whether appellant was responsible or
respondents were responsible for the delay in execution of the work, was arbitrable.
The arbitrator has examined the said issue and has recorded a categorical finding
that the respondents were responsible for the delay in execution of the work and
the contractor was not responsible. The arbitrator also found that the respondents
were in breach and the termination of contract was illegal. Therefore, the respondents
were not entitled to levy liquidated damages nor entitled to claim from the
contractor the extra cost (including any escalation in regard to such extra cost)
in getting the work completed through an alternative agency.
Therefore even though
the decision as to the rate of liquidated damages and the decision as to what
was the actual excess cost in getting the work completed through an alternative
agency, were excepted matters, they were not relevant for deciding claims 1, 3 and
11, as the right to levy liquidated damages or claim excess costs would arise
only if the contractor was responsible for the delay and was in breach. In view
of the finding of the arbitrator that the appellant was not responsible for the
delay and that the respondents were responsible for the delay, the question of respondents
levying liquidated damages or claiming the excess cost in getting the work completed
as damages, does not arise.
Once it is held that the
contractor was not responsible for the delay and the delay occurred only on account
of the omissions and commissions on the part of the respondents, it follows
that provisions which make the decision of the Superintending Engineer or the Engineer-in-Charge
final and conclusive, will be irrelevant. Therefore, the Arbitrator would have
jurisdiction to try and decide all the claims of the contractor as also the
claims of the respondents. Consequently, the award of the Arbitrator on items
1, 3 and 11 has to be upheld and the conclusion of the High Court that award in
respect of those claims had to be set aside as they related to excepted
matters, cannot be sustained. Re : Question (ii)
18.
The
arbitrator had considered and dealt with claims (1), (2, 4 and 5), (6), (7 and
8), (9) and (11) separately and distinctly. The High Court found 22that the
award in regard to items 1, 3, 5 and 11 were liable to be set aside.
The High Court did
not find any error in regard to the awards on claims 2, 4, 6, 7, 8 and 9, but
nevertheless chose to set aside the award in regard to these six items, only on
the ground that in the event of counter claims 1 to 4 were to be allowed by the
arbitrator on reconsideration, the respondents would have been entitled to
adjust the amounts awarded in regard to claims 2, 4, 6, 7, 8 and 9 towards the
amounts that may be awarded in respect of counter claims 1 to 4; and that as
the award on counter claims 1 to 4 was set aside by it and remanded for fresh decision,
the award in regard to claim Nos. 2, 4, 6, 7, 8 and 9 were also liable to be
set aside. It is now well-settled that if an award deals with and decides
several claims separately and distinctly, even if the court finds that the
award in regard to some items is bad, the court will segregate the award on
items which did not suffer from any infirmity and uphold the award to that
extent.
As the awards on
items 2, 4, 6, 7, 8 and 9 were upheld by the civil court and as the High Court
in appeal did not find any infirmity in regard to the award on those claims,
the judgment of the High Court setting aside the award in regard to claims 2,4,6,7,8
and 9 of the appellant, cannot be sustained. The judgment to that extent is
liable to be set aside and the award has to be upheld in regard to claims 2, 4,
6, 7, 8 and 9. 23Re : Question (iii)
19.
Section
28(3) of the Act provides that in all cases the arbitral tribunal shall decide
in accordance with the terms of the contract and shall also take into account the
usages of the trade applicable to the transaction. Sub-section (1) of section
28 provides that the arbitral tribunal shall decide the disputes submitted to
arbitration in accordance with the substantive law for the time being in force
in India. Interpreting the said provisions, this court in Oil & Natural Gas
Corporation Ltd. vs. Saw Pipes Ltd. [2003 (5) SCC 705] held that a court can
set aside an award under section 34(2)(b)(ii) of the Act, as being in conflict with
the public policy of India, if it is (a) contrary to the fundamental policy of Indian
Law; or (b) contrary to the interests of India; or (c) contrary to justice or morality;
or (d) patently illegal. This Court explained that to hold an award to be
opposed to public policy, the patent illegality should go to the very root of
the matter and not a trivial illegality. It is also observed that an award
could be set aside if it is so unfair and unreasonable that it shocks the conscience
of the court, as then it would be opposed to public policy.
20.
It
is well-settled that where the contract in clear and unambiguous terms, bars or
prohibits a particular claim, any award made in violation of the terms of the
contract would violate section 28(3) of the Act, and would be considered to be patently
illegal and therefore, liable to be set aside under section 34(2)(b) of the Act.
Claim No.(5) is for payment of escalation under clause 10(cc) of the contract
for work done beyond July, 1995 till the date of termination. Clause 10(cc) of
the agreement reads thus: Clause 10(cc) "... subject to the condition that
such compensation for the escalation in prices shall be available only for work
done during the stipulated period of the contract including such period for which
the contract is validly extended under the provisions of clause 5 of the contract
without any action under clause 2 and also subject to the condition that no such
compensation shall be payable for a work for which the stipulated period of
completion is 6 months or less".
Thus, escalation in
price shall be available only for the work done during the stipulated period of
contract including such period for which the contract was validly extended under
the provisions of clause (5) of the contract, without any action under clause (2)
of the contract. The respondents contend that as the Superintending Engineer
levied penalty (at 10% of the estimated cost of the work) for the period 10.1.1995
to 14.3.1996 under clause (2) of the contract, the contractor was not entitled 25to
payment of escalation under clause 10(cc). The arbitrator held that the contractor
was not responsible for the delay and the respondents were responsible for the delay.
If so, the contractor will be entitled to a valid extension under the provisions
of the contract, without levy of any liquidated damages. If the contractor is
entitled to such extension without levy of penalty, then it follows that under clause
10(cc), the contractor would be entitled to escalation, in terms of the
contract for the work done during the period of extension.
21.
As
noticed above, the stipulated date for completion was 9.1.1995. The respondents
granted the first extension upto 31.7.1995 without levy of liquidated damages,
vide letter dated 24.8.1995. In fact the respondent had paid the escalation in prices
under clause 10(cc) upto June 1995. The contractor was however permitted to
continue the work without levy of any liquidated damages, until termination on 14.3.1996.
It was only on 30.9.1999 after the contractor had submitted its statement of claim
on 17.4.1997, the respondents chose to levy liquidated damages for the period 1.10.1995
to 14.3.1996. In view of the finding of the Arbitrator that the contractor was
not responsible for the delay, the contractor was entitled to second extension from
1.8.1995 also without levy of penalty. In fact, 26having extended the time till
31.7.1995 without any levy of liquidated damages, the respondents could not
have retrospectively levied liquidated damages on 30.9.1999 from 10.1.1995. Be
that as it may.
22.
We
extract below the reasoning of the Arbitrator for grant of escalation for the work
done from 1.8.1995 to 14.3.1996 under clause 10(cc) of the contract: "The escalation
upto July'95 has been covered under claim no.1. The respondent has not paid any
further escalation beyond July, 95, since the extension thereafter has not been
granted and the contract was rescinded........ The respondent has denied the
claim as the escalation is payable only for the stipulated period and period
extended without levy of penalty. As I have already decided that the action of
rescission of the contract and the action of levying the compensation/penalty under
Clause 2 by the respondent is incorrect and the claimant was not responsible for
the delay, the escalation for the total work done, automatically becomes
payable." The High Court therefore committed an error in setting aside the
award in regard to claim No.5 on the ground that it violates clause 10(cc) of the
contract. Re : Question (iv)
23.
Once
the Arbitrator recorded the finding on consideration of the evidence/material,
that the contractor was not responsible for the delay and 27that the
termination was wrongful and that the respondents were liable for the
consequences arising out of the wrongful termination of contract, the question
of respondents claiming any of the following from the contractor does not
arise: (i) Extra expenditure incurred in getting the balance of work completed through
another contractor under clause 3 of the agreement [counter claim (1) for
Rs.1,46,69,277]. (ii) Levy of liquidated damages under clause 2 of the agreement
at 10% of estimated cost of work for the delay between 10.1.1995 to 14.3.1996
[counter claim No.(2) for Rs.56,84,998]. (iii) Claim on account of expected demand
for escalation in rates payable to the alternative contractor in getting the work
completed, in addition to the extra expenditure claimed under counter claim No.1
[counter claim No.(3) for tentative sum of Rs.75 lakhs to be ascertained after the
work was actually completed and the bill of the new agency is settled]. (iv) Claim
for cost of arbitration [counter claim No.(4) for Rs.100,000/-].
The High Court
proceeded on the erroneous assumption that when clauses (2) and (3) of the agreement
made the decisions of the Superintending Engineer/Engineer-in-Charge final as
to the quantum of liquidated damages and quantum of extra cost in getting the
balance work completed, the said provisions also made the decision as to the
liability to pay such liquidated damages or extra cost or decision as to who committed
breach final and therefore, inarbitrable; and that as a consequence, the
respondents were entitled to claim the extra cost in completing the work
(counter claims 1 and 3) and levy liquidated damages (counter claim No.2) and the
arbitration costs (counter claim No.4). Once it is held that the issues relating
to who committed breach and who was responsible for delay were arbitrable, the findings
of the arbitrator that the contractor was not responsible for the delay and
that the termination of contract is illegal are not open to challenge.
Therefore, the rejection of the counter claims of the respondents is
unexceptionable and the High Court's finding that arbitrator ought not to have
rejected them becomes unsustainable. The award of the Arbitrator rejecting the
counter claims is therefore, upheld. Conclusion
24.
No
part of the decision of the High Court is sustainable. The appeal is therefore
allowed, the impugned order of the High Court is set aside and the order of the
District Court dated 12.12.2003, is restored.
...............................J.
(R V Raveendran)
...............................J.
(Markandey Katju)
New
Delhi
April
28, 2011.
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