Indian Oil
Corporation Ltd. Vs. M/s. SPS Engineering Ltd.
J U D G M E N T
R.V.RAVEENDRAN, J.
1.
Leave
granted.
2.
The
Indian Oil Corporation Limited, the appellant herein, awarded an infrastructure
work relating to drinking water system for its Paradip Refinery project to the
respondent on 17.10.2000 and followed by a formal agreement dated 18.1.2001.
The period stipulated under the contract for completion of the work was 13 months
from the date of issue of the order dated 17.10.2000 and the contract value was
Rs.16,61,17,473/-. The appellant terminated the contract on 29.10.2002 alleging
that the respondent contractor though required to complete the work within 13 months,
had achieved a progress of hardly 15.94% till 30.4.2002 and notified the
respondent that the work will be got completed through an alternative agency, at
the risk and cost of the respondent under Clause 7.0.9.0 of the General Conditions
of Contract.
3.
In
view of the said termination, the respondent raised certain claims against the
appellant and invoked the arbitration agreement contained in the General
Conditions of Contract and filed an application under section 11 of the
Arbitration and Conciliation Act, 1996 (`Act' for short) before the Delhi High Court
for appointment of an arbitrator. The Designate of the Chief Justice of the
High Court, by order dated 17.3.2003, appointed a retired High Court Judge as
the arbitrator.
4.
Before
the arbitrator, the respondent filed a statement of claims raising eight
claims. However in its written submission before the Arbitrator, the contractor
confined its claims to only three, aggregating to Rs.1,31,81,288/-.
5.
The
appellant made several counter-claims aggregating to Rs.92,72,529/-.
Subsequently the statement of counter-claims was amended and the following para
was added in regard to the extra cost in getting the work completed through an
alternative contractor: "Since the aforementioned contract is still pending
and IOCL is in the process of inducting agency (ies) to complete the said work,
the Engineer- in-charge of the said contract, EIL estimated a minimum expenditure
of Rs.18,36,20,000/- for completion of the works under the said contract which
EIL intimated to IOCL by its letter dated 23.5.2002, a copy whereof is annexed hereto
and marked Annexure RY.
The said estimated expenditure
has been revised by IOCL who has arrived at the reduced figure of Rs.2,10,41,626/-
(Rupees Two Crores Ten Lacs Forty One Thousand Six Hundred Twenty Six Only) in its
proposal dated 09.09.2006, a copy whereof is annexed hereto and marked Annexure
RY- 1. Accordingly, IOCL is entitled to recover from SPSEL any additional sums including
the abovementioned Rs.2,10,41,626/- (Rupees Two Crores Ten Lacs Forty One Thousand
Six Hundred Twenty Six Only) that it will according to its estimate incur upon execution
of the balance work by other agencies pursuant to the termination of the said contract
in terms of Clause 7.0.6.0 of GCC along with any other additional expenditure incurred
by IOCL in completion of the said works. IOCL, therefore, is entitled to an
amount of Rs.2,10,41,626/- (Rupees Two Crores Ten Lacs Forty One Thousand Six
Hundred Twenty Six Only) from SPSEL which SPSEL has not paid till date." (emphasis
supplied)The prayer in the counter-claim however remained unaltered and did not
include the claim of Rs.2,10,41,626/- on account of risk - execution of balance
work.
Even after the above
amendment, the prayer continued to be as under : 4 "It is therefore prayed
that the learned Arbitrator may be pleased to:
i.
award
a sum of Rs.92,72,529/- (Rupees Ninety Two Lacs Seventy Two Thousand Five Hundred
Twenty Nine Only) against SPSEL and in favour of IOCL along with the additional
amounts which in IOC's estimate, IOC will incur in further executing and
completing at the Claimant's risk and cost, the balance works remaining incomplete
under the said contract.
ii.
grant
pendent lite interest @ 18% per annum on the awarded amount;
iii.
grant
interest on the awarded amount @ 18% per annum from the date of award till the
date of payment in full;
iv.
grant
cost of arbitration proceedings to IOCL;
v.
grant
such other or further order(s) and/or relief as are deemed appropriate in the
circumstances of the case;"
6.
The
arbitrator made an award dated 27.10.2008. He awarded Rs.91,33,844 towards the claims
of respondent. As against the counter claims aggregating to Rs.92,72,529 made by
the appellant, the arbitrator awarded a sum of Rs.11,10,662. In regard to the averments
made by the appellant in regard to the extra cost involved in getting the work
completed through an alternative contractor, the arbitrator observed thus : "102.
The contract was terminated in October 2002 and till date the balance work of
the contract has not been executed. Such damage could have been allowed to the respondent
if in a reasonable period after termination of the contract, the respondent had
executed the balance work at the risk and costs of the claimant.
In case the costs actually
incurred have been more than the costs which were required to be incurred under
the contract, then the difference between the two costs could have been awarded
as damages to the respondent. There is no proper evidence on the record to show
that what could have been the costs of the balance work if it had been executed
within reasonable period after the termination of the 5 contract. Such damage cannot
be awarded on mere opinion of any particular person or on hypothetical basis. Under
clause 7.0.9.0 of General Conditions of the Contract, the respondent was
entitled at the risk and expenses of the contractor to get completed the balance
work and recover the costs from the claimant.
This clause further
contemplates that on the amount actually expended by the owner for the
completion of the work 15% to be added as supervision charges, the same would have
become recoverable from the claimant. In the present case, no such cost has
been incurred till date. Thus, for these reasons, I reject this counter claim."
(emphasis supplied).The arbitrator adjusted Rs.11,10,662 awarded to the
appellant, towards the sum of Rs.91,33,844 awarded in favour of the respondent
and consequently directed the appellant to pay to the respondent, the balance
of Rs.80,23,182. He further directed that if the amount was not paid within
three months from the date of award, the appellant shall pay interest at the rate
of 12% per annum from the date of award till payment. The appellant did not
challenge the award and it thus attained finality.
7.
The
appellant claims that it entrusted the incomplete work to Deepak Construction Company
for completion in the year 2005, that the said contractor completed the work on
29.12.2007, and that the final bill of the said alternative agency was settled
on 7.5.2008. On that basis, the appellant calculated the actual extra cost
incurred in completing the work and the total amount recoverable from the
petitioner in terms of the contract, as under: 6A. Amount determined as payable
to the alternative agency (Deepak Construction Co.) for the balance work Rs.4,05,74,465.00B.
Material supplied to the alternative agency for completing the work (+) Rs.2,78,68,861.64
----------------------C. Total Cost (A + B) Rs.6,84,43,326.64D. The cost of
such unfinished work, if it had been completed by the respondent, as per its
contract rates. (-) Rs.3,30,93,996.75 ----------------------E. Extra cost
incurred on account of getting the work completed at the risk and cost of
respondent (C - D) Rs.3,53,49,329.89F. Supervision charges at 15% on Rs.6,84,43,326.64
(+) Rs.1,02,66,499.00 ----------------------Total amount recoverable from the
respondent (E+F) Rs.4,56,15,828.89 ----------------------Towards the said claim
against the respondent, the appellant adjusted the sum of Rs.80,23,182/- awarded
by the arbitrator to the respondent and arrived at the net amount recoverable
from the respondent towards extra cost for completion as Rs.3,75,92,646.89. The
appellant by notice dated 22.1.2009 called upon the respondent to pay the said sum
of Rs.3,75,92,646.89 (and interest thereon at 18% per annum if the amount was
not paid within seven days) and informed the respondent that if it disputed 7its
liability, to treat the said letter as appellant's notice invoking arbitration.
The appellant also
suggested a panel of three names (including Justice P.K. Bahri - the arbitrator
who had made the award dated 27.10.2008) with a request to select one of them
as the arbitrator. The respondent by reply dated 18.3.2009 refused to comply, contending
that the counter claim in regard to the risk-execution cost had already been rejected
by the arbitrator, by his award dated 27.10.2008 and that award having attained
finality, there could be no further arbitration. In view of the said stand of the
respondent, the appellant filed a petition under section 11 of the Act praying
for appointment of an arbitrator to decide its claim for the extra cost in getting
the work completed through the alternative agency.
8.
The
learned Designate of the Chief Justice of the Delhi High Court (for short `the
Designate') by the impugned order dated 8.12.2009 dismissed the application
with costs of Rs.50,000/-. He held that the application under section 11 of the
Act by the appellant was misconceived, barred by res judicata, and mala fide. The
Designate held
i.
that
the claim by the appellant in regard to extra cost had already been considered
and rejected by the Arbitrator;
ii.
that
the claim regarding extra cost was barred by limitation (by drawing an
inference from the observation of the Arbitrator that the risk execution tender
was not awarded to Deepak Construction Co. 8within a reasonable period of termination
of respondent's contract); and
iii.
that
as the work was completed by Deepak Construction Co. on 29.12.2007 and the earlier
arbitration proceedings had came to an end much later on 27.10.2008, the claim in
regard to actual extra cost ought to have been crystallized and claimed in the
first round of arbitration.
9.
The
said order is challenged in this appeal by special leave. On the contentions
urged the questions that arise for consideration are as follows :(i) Whether
the Chief Justice or his designate can examine the tenability of a claim, in particular
whether a claim is barred by res judicata, while considering an application
under section 11 of the Act? (ii) Whether the Designate was justified in holding
that the claim was barred by res judicata and that application under section 11
of the Act was misconceived and mala fide? Re : Question (i)
10.
This
Court, in National Insurance Co. Ltd. vs. Boghara Polyfab Private Limited [2009
(1) SCC 267] following the decision in SBP & Co. v. Patel Engineering Ltd. [2005
(8) SCC 618], identified and segregated the issues that may be raised in an
application under section 11 of the Act into three categories, as under : 9 "22.1.
The issues (first category) which the Chief Justice/his designate will have to
decide are : (a) Whether the party making the application has approached the appropriate
High Court? (b) Whether there is an arbitration agreement and whether the party
who has applied under Section 11 of the Act, is a party to such an agreement? 22.2.
The issues (second category) which the Chief Justice/his designate may choose to
decide (or leave them to the decision of the Arbitral Tribunal) are:
a. Whether the claim is
a dead (long-barred) claim or a live claim?
b. Whether the parties have
concluded the contract/transaction by recording satisfaction of their mutual rights
and obligation or by receiving the final payment without objection? 22.3. The issues
(third category) which the Chief Justice/his designate should leave exclusively
to the Arbitral Tribunal are: (i) Whether a claim made falls within the arbitration
clause (as for example, a matter which is reserved for final decision of a departmental
authority and excepted or excluded from arbitration)? (ii) Merits or any claim
involved in the arbitration."
11.
To
find out whether a claim is barred by res judicata, or whether a claim is
"mala fide", it will be necessary to examine the facts and relevant
documents. What is to be decided in an application under section 11 of the Act
is whether there is an arbitration agreement between parties. The Chief Justice
or his designate is not expected to go into the merits of the claim or examine
the tenability of the claim, in an application under section 11 of the Act. The
Chief Justice or his Designate may however choose to decide 10whether the claim
is a dead (long-barred) claim or whether the parties have, by recording satisfaction,
exhausted all rights, obligations and remedies under the contract, so that
neither the contract nor the arbitration agreement survived. When it is said
that the Chief Justice or his Designate may choose to decide whether the claim
is a dead claim, it is implied that he will do so only when the claim is
evidently and patently a long time barred claim and there is no need for any detailed
consideration of evidence. We may elucidate by an illustration :
If the contractor
makes a claim a decade or so after completion of the work without referring to
any acknowledgement of a liability or other factors that kept the claim alive in
law, and the claim is patently long time barred, the Chief Justice or his
Designate will examine whether the claim is a dead claim (that is, a long time
barred claim). On the other hand, if the contractor makes a claim for payment,
beyond three years of completing of the work but say within five years of
completion of work, and alleges that the final bill was drawn up and payments
were made within three years before the claim, the court will not enter into a
disputed question whether the claim was barred by limitation or not. The court
will leave the matter to the decision of the Tribunal. If the distinction between
apparent and obvious dead claims, and claims involving disputed issues of
limitation is not kept in view, the Chief Justice or his designate will end up
deciding the question of limitation in all applications under section 11 of the
Act.
12.
An
application under section 11 of the Act is expected to contain pleadings about
the existence of a dispute and the existence of an arbitration agreement to
decide such dispute. The applicant is not expected to justify the claim or
plead exhaustively in regard to limitation or produce documents to demonstrate
that the claim is within time in a proceedings under section 11 of the Act.
That issue should normally be left to the Arbitral Tribunal. If the Chief
Justice or his designate is of the view that in addition to examining whether there
is an arbitration agreement between the parties, he should consider the issue whether
the claim is a dead one (long time barred) or whether there has been satisfaction
of mutual rights and obligation under the contract, he should record his
intention to do so and give an opportunity to the parties to place their
materials on such issue. Unless parties are put on notice that such an issue
will be examined, they will be under the impression that only questions of jurisdiction
and existence of arbitration agreement between the parties will be considered
in such proceedings.
13.
The
question whether a claim is barred by res judicata, does not arise for
consideration in a proceedings under section 11 of the Act. Such an issue will
have to be examined by the arbitral tribunal. A decision on res judicata requires
consideration of the pleadings as also the claims/issues/points 12and the award
in the first round of arbitration, in juxtaposition with the pleadings and the
issues/points/claims in the second arbitration. The limited scope of section 11
of the Act does not permit such examination of the maintainability or
tenability of a claim either on facts or in law. It is for the arbitral
tribunal to examine and decide whether the claim was barred by res judicata.
There can be no threshold consideration and rejection of a claim on the ground
of res judicata, while considering an application under section 11 of the Act.
Re : Question (ii)
14.
We
extract below the reasoning adopted by the Designate to dismiss the appellant's
application under section 11 of the Act : "5. In my opinion, not only the
aforesaid para 102 in the Award dated 27.10.2008 operates as res judicata against
the present petitioner, I find that the present petition is misconceived and
and mala fide because, if the present petitioner is correct in saying and which
I doubt it is, that its limitation/right would only begin after the work is completed
by M/s Deepak Construction Company when the amount of the higher cost is known,
even then, the work was completed by the M/s Deepak Construction Company admittedly
on 29.12.2007, and thus the present petitioner, could well have proved its counter
claim in the earlier proceedings and could have crystallized the amount in the said
earlier arbitration proceedings.
If necessary it could
have even amended its pleadings as regards the counter claim. On a further
query by the Court to the counsel for the petitioner with respect to the statement
in the notice dated 22.01.2009 sent by the petitioner to the respondent which
states that M/s Deepak Construction Company has completed the work on 29.12.2007
and its final bill has now been settled" that when was the bill of M/s
Deepak Construction Company settled, the counsel for petitioner 13 states that
for the present no such information is at all available whether in the form of any
assertion in the present petition or in any document in support thereof. 6. A
conspectus of the aforesaid facts show that firstly in the earlier arbitration
proceedings, the counter claim of the present petitioner on this very subject
matter was specifically dismissed by holding and observing that the risk purchase
tender awarded to M/s Deepak Construction Company was not given within a reasonable
period of time after termination of the work of the present respondent.
Secondly, it has
further become clear that the work was completed by M/s Deepak Construction Company
admittedly as per the case of the petitioner on 29.12.2007 and the earlier
arbitration proceedings came to an end later by passing of the Award on
27.10.2008 and, therefore, the claim with respect to any cost of the total materials
for the substitute contract for the risk purchase could very well have been crystallized
and claimed in the earlier arbitration proceedings. Thirdly, admittedly there
is no challenge to the award dated 27.10.2008 by the present petition whereby
its counter claim was rejected. Fourthly, I am of the view that once a risk and
cost tender is issued at the risk and cost of a person, then, the amount which
is to be claimed from the person who is guilty of breach of contract and
against whom risk and cost is tendered, becomes crystallized when the risk
purchase tender at a higher cost is awarded. Once a higher cost of work is
known as compared to the cost of the work for the earlier work for which the earlier
contract was there and with respect to which the earlier contractor was in
breach, then not only the amount becomes crystallized but limitation also
commences for filing of the legal proceedings against the person in breach of obligations
under the earlier contract.
It cannot be that limitation
and a right continues indefinitely to be extended till the performance is completed
under a subsequent risk purchase contract. This would give complete uncertainty
to the period of limitation striking at the very root of one of the principles
of the Limitation Act and which is that evidence is lost by passage of time and
which will cause grave prejudice to the person against whom a stale claim is
filed."
15.
The
appellant submitted that having regard to clause 7.0.9.0 of the contract, damages
can be claimed by it (as employer), in regard to the additional amount incurred
for getting the work completed through an alternative agency at the risk and cost
of the contractor along with the 14supervision charges, only when the amount was
actually expended for completion of the entire work; and therefore, unless the
work was completed by the alternative agency and the final bill was settled or
finalized, the actual extra cost could not be determined. It was pointed out
that in the first round of arbitration, the hearing was concluded by the
Arbitrator on 13.3.2008 and matter was reserved for orders and the award was
declared on 27.10.2008; that the work was completed by the alternative agency
on 29.12.2007 and final bill of the alternative agency was drawn and settled
only on 7.5.2008, after the conclusion of the hearing, by the Arbitrator; that
the actual extra cost could be worked out only when the final bill was
prepared, and not on the date of completion of work; that therefore the
appellant could not make the claim for actual extra cost, in the first round arbitration.
It was also submitted
that the appellant was not expected to give details of completion of work and
preparation of the final bill, or produce documents in support of it in a
proceeding under section 11 of the Act; and that the Designate was not
therefore justified in finding fault with the appellant for not stating the
date of settlement of the final bill in the petition under section 11 of the
Act and for not producing the final bill.
16.
The
appellant also contended that when its statement of counter claim was amended before
the Arbitrator, the appellant had only indicated its 15estimation of the probable
extra cost to be Rs.2,10,41,626/-, as advance indication of a claim to be made
in future on the basis of actuals, and that it had not prayed for award of the
said amount in the said proceeding. It was pointed out that even after
mentioning the proposed claim by amending the statement of counter claim, the actual
counter claim before the arbitrator remained as only Rs.92,72,529/- exclusive of
any claim on account of the risk completion cost. It was submitted that having
regard to clause 7.0.9.0, the counter claim for extra cost could not have been made
when the first arbitration was in progress and that the arbitrator had in fact
noticed in his award (at para 102) that only when the cost actually incurred,
the appellant could make the claim for the extra cost. It is contended that the
"rejection" by the arbitrator was not on the ground that the claim
for extra cost was not recoverable, nor on the ground that no extra cost was
involved in completing the work, but on the ground that as on the date of the
award, the appellant had not actually incurred any specific extra cost; and
that as the arbitrator clearly held that any claim for extra cost was premature
and could not be considered at that stage, the observation that `I reject this counter
claim' only meant that the claim relating to extra cost was not being
considered in that award and that appellant should make the claims separately after
the amount was actually expended.
17.
Clause
7.0.9.0 of the contract relied upon by the appellant reads thus : "clause
7.0.9.0 Upon termination of the contract, the owner shall be entitled at the risk
and expenses of the contractor by itself or through any independent contractor(s)
or partly by itself and/or partly through independent contractor(s) to complete
to its entirety the work as contemplated in the scope of work and to recover
from the contractor in addition to any other amounts, compensations or damages
that the owner may in terms hereof or otherwise be entitled to (including
compensation within the provisions of clause 4.4.0.0 and clause 7.0.7.0 hereof)
the difference between the amounts as would have been payable to the contractor
in respect of the work (calculated as provided for in clause 6.2.1.0 hereof read
with the associated provisions thereunder and clause 6.3.1.0 hereof) and the amount
actually expended by the owner for completion of the entire work as aforesaid
together with 15% (fifteen per cent) thereof to cover owner's supervision charges,
and in the event of the latter being in the excess former, the owner shall be
entitled (without prejudice to any other mode of recovery available to the owner)
to recover the excess from security deposit or any monies due to the
contractor." (emphasis supplied)
18.
On
a perusal of the order of the Designate, we find that the Designate has clearly
exceeded his limited jurisdiction under section 11 of the Act, by deciding that
the claim for extra cost, though covered by the arbitration agreement was
barred by limitation and by the principle of res judiata. He was also not
justified in terming the application under section 11 of the Act as
`misconceived and malafide'. Nor could he attribute `mala fides' to the
appellant, a public sector company, in filing an application under section 11
of the Act, without any material to substantiate it. We may refer to some of
the findings of fact recorded by the Designate, which were wholly unwarranted
in a proceeding under section 11 of the Act and the fallacy in such findings :
i.
Finding
: The appellant did not state anywhere in the petition the date which the final
bill was settled and did not produce any document containing such information. The
appellant was not expected or required to give such information in a petition
under section 11 of the Act or produce the documents showing the settlement of final
bill along with the said petition. Therefore, the appellant could not be found
fault for such omission. In fact, the Designate noticed that the work was
completed on 29.12.2007. The claim was in time with reference to the date on which
the work completed (29.12.2007) by the alternative agency.
ii.
Finding
: As the work was completed on 29.12.2007 and as the award was made only on
27.10.2008, the appellant ought to have crystalised the extra cost and claimed it
in the first arbitration proceedings. The assumption that the appellant ought to
have made the claim for extra cost which arose after the commencement of the
arbitration proceedings, in the pending proceedings by way of amendment, has no
basis either in law or in contract. If the cause of action arose after the
completion of pleadings and 18commencement of hearing in the first round of
arbitration, nothing prevented the appellant from making a separate claim by
initiating a second arbitration.
iii.
Finding
: Once a risk and cost tender is issued at the risk and cost of a person, then,
the amount which is to be claimed from the person who is guilty of
breach.......... becomes crystallized when the risk purchase tender at a higher
cost is awarded.. This may be true as a general proposition. But it may not
apply if there is a specific provision in the contract (like clause 7.0.9.0)
which requires that the employer should claim as extra cost, only the
difference between the "amounts as would have been payable to the
contractor in respect of the work" and "the amount actually expended
by the owner for completion of the entire work".
19.
The
Designate should have avoided the risks and dangers involved in deciding an issue
relating to the tenability of the claim without necessary pleadings and documents,
in a proceeding relating to the limited issue of appointing an Arbitrator. It is
clear that the Designate committed a jurisdictional error in dismissing the
application filed by the appellant under section 11 of the Act, on the ground
that the claim for extra cost was barred by res judicata and by limitation. Consideration
of an application under 19section 11 of the Act, does not extend to
consideration of the merits of the claim or the chances of success of the
claim.
20.
We
may at this stage refer to one aspect of the claim for extra cost. The award
amount due to the respondent under the award dated 27.10.2008 is an ascertained
sum due, recoverable by executing the award as a decree. On the other hand the
claim of the appellant for reimbursement of the extra cost for getting the work
completed, is a claim for damages which is yet to be adjudicated by an adjudicating
forum. The appellant cannot therefore adjust the amount due by it under the award,
against a mere claim for damages made by it against the respondent. The
appellant will have to pay the award amount due to the respondent and if
necessary modify its claim for extra cost against the respondent.
21.
In
view of the foregoing, this appeal is allowed and the order of the Designate is
set aside. The application under section 11 of the Act filed by appellant before
the Chief Justice of the Delhi High Court is allowed and Justice P.K.Bahri
(Retd.) who was the earlier Arbitrator is appointed as the sole arbitrator to
decide the appellant's claim in regard to the additional cost for completing
the work. It is open to the respondent to raise all contentions against the claim
of the appellant including the contention of limitation, maintainability and
res judicata, before the arbitrator. Nothing in this order shall be construed
as expression of any opinion on the merits or tenability of the claim of the
appellant regarding extra cost.
..................................J.
(R V Raveendran)
..................................J.
(A K Patnaik)
New
Delhi;
February
3, 2011.
Back
