Indian Railways Construction Company Limited vs M/S National Buildings Construction Corporation Limited

REPORTABLE

IN THE SUPREME COURT OF INDIA CIVIL APPELLATE JURISDICTION

CIVIL APPEAL NO. 8460 / 2022 (@SLP (C) No.32002 OF 2018)

Indian Railway …Appellant(s) Construction Company Limited

Versus

M/s National Buildings …Respondent(s) Construction Corporation Limited

JUDGMENT

M. R. Shah, J.

1. Feeling aggrieved and dissatisfied with the impugned

judgment and order dated 14.08.2018 passed by the

High Court of Delhi at New Delhi in FAO(OS) No.112 Signature Not Verified Digitally signed by R Natarajan of 2018 by which the High Court has partly allowed Date: 2023.03.17 14:30:32 IST Reason:

the said appeal, the Indian Railway Construction // 2 //

Company Limited (hereinafter referred to as

“IRCON”) has preferred the present appeal.

2. The brief facts leading to filing of the present appeal

in nut­shell are as under:

2.1 That, an Agreement was entered into between IRCON

and the respondent – M/s. National Buildings

Construction Corporation Limited (hereinafter

referred to as “NBCC”), whereby the respondent was

awarded the work of construction of Railway Station

cum Commercial Complex at Vashi, Navi Mumbai at

a cost of Rs.3042.91 lakh, to be constructed within a

period of 30 months from 05.04.1990. NBCC failed

to complete the work in time. Thereafter, the

supplementary agreements were entered into

between the parties. As the provision for grant of

advances had exhausted, NBCC approached IRCON

with modified programme for completion of works

and sought for additional financial aid on certain

terms and conditions. IRCON in consultation with // 3 //

CIDCO, agreed to grant advance as a special case

against Bank Guarantee. Accordingly, a

supplementary Agreement dated 17.12.1991 was

entered into between the parties providing for special

advance of an amount of Rs. 68 lakhs bearing

interest at the rate of 18% per annum on furnishing

of Bank Guarantee. In terms of the supplementary

Agreement dated 17.12.1991, a special advance of

Rs.68 lakhs was also given to NBCC. As there was

delay in the work of NBCC and the work was

practically abandoned and came to a standstill,

IRCON served on NBCC a notice dated 21.02.1994

terminating the contract relying upon Clause 60.1 of

the Agreement.

2.2 That, thereafter, after some litigation before the

Delhi High Court, the NBCC invoked the arbitration

clause. The Arbitral Tribunal was constituted. The

Arbitral Tribunal passed the award dated

04.11.2011. That the Arbitral Tribunal rejected the // 4 //

NBCC’s claim for refund of two security deposits i.e.

Claim Nos.33 and 34. While holding so, the Arbitral

Tribunal held that though termination with reference

to Clause 60.1 was bad in law, but justified the

termination with reference to Clause 17.4 of the

Contract and consequently rejected the NBCC’s

claim for refund of two security deposits i.e. claim

Nos.33 and 34. The Arbitral Tribunal also partly

allowed Counter Claim No.3 in favour of IRCON.

Counter Claim No.3 was relatable to the counter

claim of IRCON for a total of Rs.3,65,38,806/­

towards interest on various advances given to NBCC,

more particularly, with regard to two specific

advances being (1) Special Advance and (2) Advance

against hypothecation of equipment.

2.3 Feeling aggrieved and dissatisfied with the award

passed by the learned Arbitral Tribunal and insofar

as relating to Claim Nos.33 and 34 and the Counter

Claim No.3 which were in favor of IRCON, the NBCC // 5 //

approached the High Court by filing an application

under Section 34 of the Arbitration and Conciliation

Act, 1996 (hereinafter referred to as “Arbitration

Act”). The application under Section 34 of the

Arbitration Act was confined to the aforesaid three

claims / counter claims respectively viz. Claim

Nos.33 and 34 and Counter Claim No.3 only.

2.4 By the judgment and order dated 03.03.2017, the

learned Single Judge of the High Court set aside the

rejection by the learned Arbitral Tribunal of Claim

Nos.33 and 34 of NBCC to the extent it concerned

the return of security deposit amounts i.e.

Rs.5,57,486/­ + Rs.60,85,840/­ by observing and

concluding that once the Arbitral Tribunal found

that the termination with regard to Clause 60.1 was

not justified, it was not open for the Arbitral

Tribunal thereafter to consider the termination

under Clause 17.4 justifying forfeiture of the security

deposits. The learned Single Judge of the High Court // 6 //

also set aside the award passed by the learned

Arbitral Tribunal on Counter Claim No.3 by

observing that there is no clause in the contract in

particular awarding 18% interest per annum on

special advance.

2.5 The judgment and order passed by the learned

Single Judge was the subject matter of appeal under

Section 37 of the Arbitration Act before the Division

Bench of the High Court.

2.6 By the impugned judgment and order, the Division

Bench of the High Court has partly allowed the said

appeal under Section 37 of the Arbitration Act to the

extent upholding the award passed by the learned

Arbitral Tribunal insofar as awarding the interest on

special advance is concerned. The rest of the

judgment and order passed by the learned Single

Judge has been affirmed / confirmed by the Division

Bench of the High Court.

// 7 //

2.7 Feeling aggrieved and dissatisfied with the impugned

judgment and order passed by the Division Bench of

the High Court, IRCON has preferred the present

appeal.

3. Shri R.S. Hegde, learned counsel has appeared on

behalf of the appellant – IRCON and Shri Arvind

Minocha, learned Senior Advocate has appeared on

behalf of the respondent – NBCC.

4. Shri R.S. Hegde, learned counsel appearing on

behalf of the appellant has vehemently submitted

that on appreciation of entire evidence and the

material on record as the learned Tribunal has

observed and held that the IRCON was justified in

rescinding the contract due to abandonment of work

by NBCC and when the said finding attained the

finality, the IRCON was justified in forfeiting the

security deposits. It is submitted that as such the

High Court has taken too technical view. It is // 8 //

submitted that as such both, Clause 17.4 and

Clause 60.1 are required to be read together. It is

submitted that the main aspect which is required to

be considered is whether the NBCC failed to

complete the work as per the contract and whether

the NBCC abandoned the work and thereafter,

having satisfied that even during the extended

period, the NBCC was not able to complete the work,

the contract was rightly rescinded and therefore, the

security deposits were liable to be forfeited.

4.1 It is submitted that therefore both, the learned

Single Judge (in application under Section 34 of the

Arbitration Act) and the Division Bench of the High

Court have materially erred in upsetting / quashing

and setting aside the award passed by the learned

Arbitral Tribunal rejecting the Claim Nos.33 and 34.

4.2 It is submitted that both, the learned Single Judge

as well as the Division Bench of the High Court have // 9 //

materially erred in not appreciating the fact that

once the termination is justifiable with reference to

the terms of the contract and even if a wrong clause

is mentioned in the letter terminating the contract,

the power to terminate the contract cannot be said

to be illegal, more particularly, when the power is

traceable to the specific terms of the contract, i.e.,

Clause 17.4.

4.3 Now, so far as the Counter Claim No.3 is concerned,

it is submitted that as such the Division Bench of

the High Court has set aside the award of interest on

the amount advanced against hypothecation of

equipments, on the ground that there is no such

provision of award of interest in the contract /

supplementary Agreements. It is submitted that

however, the Division Bench of the High Court has

not properly appreciated the fact that there is no bar

to award interest on the amount advanced. It is

submitted that the Arbitrator has power to award // 10 //

interest pendente lite unless specifically barred from

awarding it. Reliance is placed on the decision of this

Court in the case of Raveechee and Company Vs.

Union of India reported in (2018) 7 SCC 664.

Making above submissions, it is prayed to allow

the present appeal and restore the award passed by

the Arbitral Tribunal.

5. Learned senior counsel, Mr. Minocha appearing on

behalf of the respondent – NBCC while supporting

the impugned judgment and order passed by the

High Court has vehemently submitted that in the

present case admittedly the IRCON invoked Clause

60.1 and rescinded the contract. It is submitted that

even the learned Arbitral Tribunal also observed and

held that the IRCON was not justified in rescinding

the contract under Clause 60.1. It is submitted that

however, thereafter the Arbitral Tribunal justified the

termination of the contract under Clause 17.4, // 11 //

which as rightly held by the learned Single Judge /

Division Bench was not permissible.

5.1 It is submitted that the finding recorded by the

learned Arbitral Tribunal that the contract could not

have been rescinded under Clause 60.1 had attained

the finality. It is submitted that therefore the learned

Arbitral Tribunal was not justified in rejecting the

claim Nos.33 and 34 which has rightly been set

aside by the learned Single Judge and the Division

Bench, which are not required to be interfered with

by this Court in exercise of limited jurisdiction under

Article 136 of the Constitution of India.

5.2 It is further submitted by learned Counsel appearing

on behalf of the respondent – NBCC that in absence

of any specific provision in the contract /

supplementary Agreements on interest on the

amount advanced against hypothecation of

equipments, the Division Bench of the High Court // 12 //

has rightly set aside the same.

Making above submissions, it is prayed to

dismiss the present appeal.

6. We have heard learned Counsel appearing for the

respective parties at length.

7. As observed hereinabove, challenge to the award by

the learned Arbitral Tribunal before the learned

Single Judge and now before this Court is with

respect to Claim Nos.33 and 34 and Counter Claim

No.3 (Partly).

7.1 The learned Arbitral Tribunal rejected the Claim

Nos.33 and 34 which were with respect to forfeiture

of the security deposits on termination / rescind of

the contract. The Counter Claim No.3 of the IRCON

was for a total sum of Rs.3,65,38,806/­ towards

interest on various advances given to NBCC, more

particularly, with regard to two specific advances

being (1) Special Advance and (2) Advance against // 13 //

hypothecation of equipment. The learned Arbitral

Tribunal allowed the Counter Claim No.3 and

awarded interest at the rate of 18% per annum in

favour of the IRCON being interest on special

advance and advances against hypothecation of

equipments. The Division Bench of the High Court

has partly allowed the appeal and allowed the

interest in favour of IRCON at the rate of 18% so far

as special advance is concerned.

7.2 While considering the findings recorded by the

learned Arbitral Tribunal and while appreciating the

submissions made by the learned counsel appearing

on behalf of the respective parties, relevant clauses

of the Agreement, more particularly, Clause

Nos.17.4, 59.1, 60.1 are required to be referred to,

which are as under:

“TIME TO BE OR THE ESSENCE OF THE CONTRACT:

17.4 The time for completion of the works by the date or extended date fixed for // 14 //

completion shall be deemed to be the essence of the contract and if the contractor shall fail to complete the works within the time prescribe the Company IRCON shall, if satisfied that the works can be completed by the contractor within a reasonably short time thereafter be entitled without prejudice to any other right or remedy available on that behalf to recover by way of ascertained liquidated damages a sum equivalent to one per cent of the contract value of the works for each week or part of week the contractor is in default and allow the contractor such further extension of time as the Project Manager may decide. If the Company (IRCON) is not satisfied that the works can be completed by the contractor and in the event of failure on the part of the contractor to complete the works within the further extension of time allowed as aforesaid the Company (IRCON) shall be entitled, without prejudice to any other right or remedy available in that behalf, to appropriate the contractor’s security deposit and rescind the contract, whether or not actual damage is caused by such default.

RIGHT OF COMPANY (IRCON) TO DETERMINE CONTRACT:

59.1 The Company (IRCON) shall be entitled to determine and terminate the contract at any time should in the Company’s (IRCON) opinion, the cessation of work become necessary // 15 //

owing to paucity of funds or from any cause whatsoever, in which case the value of approved materials at site and of work done to date by the contractor will be paid for in full at the rates specified in the contract. Notice in writing from the Company (IRCON) of such determination and the reason therefore shall be conclusive evidence thereof.

DETERMINATION OF CONTRACT OWING TO DEFAULT OF CONTRACTOR:

60.1 If the contractor should:­

i. become bankrupt or insolvent or

ii. make an arrangement with or assignment in favour of his creditors, or agree to carry out the contract under committee of Inspection of his creditors, or

iii. Being a company or corporation, go into liquidation (other than a voluntary liquidation for the purpose of amalgamation or reconstruction), or

iv. have an execution levied on his good or property on the works, or

v. assign the contract or any part thereof otherwise than as provided in Clause 7 of these conditions, or

vi. abandon the contract, or

vii. persistently disregard the // 16 //

instructions of the Project Manager, or contravene any provision of the contract, or

viii. fail to adhere to the agreed programme of work by a margin of 10% of the stipulated period, or

ix. fail to remove materials from the site or to pull down and replace work after receiving from the Project Manager notice to the effect that the said materials or works have been condemned or rejected under conditions, or

x. fail to take steps to employ competent or additional staff and labour as required under these conditions, or

xi. fail to afford the Project Manager or Project Manager’s representative proper facilities for inspecting the works or any part thereof as required under these conditions, or

xii. promise, offer or give any bribe, commission, gift or advantages either himself or through his partner, agent or servant to any officer of employee of IRCON or to any person on his or on the behalf in relation to the execution of this or any other contract with IRCON.

Then and in any of the said cases, the Project Manager on behalf of the Company (IRCON) may serve the contractor with a notice in writing to that effect and if the contractor does not // 17 //

within 7 days after the delivery to him of such notice proceed to make good his default in so far as the same is capable of being made and carry on the work or comply with such directions as aforesaid to the entire satisfaction of the Project Manager the Company (IRCON) shall be entitled after giving 48 hours notice in writing under the hand of the Project Manager (to remove the contractor from the whole or any portion or portions as may be specified in such notice) of the works without thereby avoiding the contract or releasing the contractor from any of his obligations or liabilities under the contract and adopt any or several of the following courses.

a) to rescind the contract, of which rescission notice in writing to the contractor under the hand of the Project Manager shall be conclusive evidence, in which case the security deposit of the contractor shall stand forfeited to the Company IRCON without prejudice to the Company’s (IRCON) right to recover from the contractor any amount by which the cost of competing the works by any other agency shall exceed the value of the contractor.

b) to carry out the works or any part thereof, by the employment of the required labour and materials, the costs of which // 18 //

shall include lead, lift, freight, supervision and all incidental charges and to debit the contractor with such costs, the amount of which as certified by the Project Manager shall be final and binding upon the contractor, and to credit the contractor with the value of the works done as if the works had been carried out by the contractor under the terms of the contract. And the certificate of Project Manager in respect of the amount to be credited to the contractor shall be final and binding upon the contractor;

c) to measure up the work executed by the contractor and to get the remaining work completed by another contractor at the risk and expense of the contractor in all respects in which case any expenses that may be incurred in excess of the sum which would have been paid to the contractor if the works had been carried out by him under the terms of the contract, the amount of which excess as certified by the Project Manager shall be final and binding upon contractor shall be borne and paid by the contractor and may be deducted from any moneys due to him by the Company (IRCON) under the // 19 //

contractor or otherwise or from his security deposit. Provided always that in any case in which any of the powers conferred upon the Company (IRCON) hereof shall have become exercisable and the same shall not be exercised, the non­ exercise thereof shall not constitute a waiver of any of the conditions hereof and such powers shall notwithstanding be exercisable in the event of any future case of default by the contractor for which his liability for past and future shall remain unaffected.”

Considering the material on record and on

appreciation of evidence, the learned Arbitral

Tribunal though observed that the IRCON was not

justified in rescinding the contract under Clause

60.1, rescinding of the contract / termination of the

contract was justified under Clause 17.4, and

thereby has rejected the Claim Nos.33 and 34 of the

NBCC which were with respect to forfeiture of the

security deposits. The learned Single Judge as well

as the Division Bench of the High Court have set // 20 //

aside the award passed by the learned Arbitral

Tribunal rejecting Claim Nos.33 and 34 inter alia on

the ground that once the Arbitral Tribunal gave the

finding that the IRCON was not justified in invoking

Clause 60.1, thereafter it was not open for the

Arbitral Tribunal to take the help of Clause 17.4 and

therefore, the learned Arbitral Tribunal was not

justified in rejecting Claim Nos.33 and 34 which

were with respect to forfeiture of security deposits,

which could have been under Clause 17.4.

However, it is required to be noted that as such

the finding recorded by the Arbitral Tribunal on

applicability of Clause 17.4 and/or rescinding of the

contract under Clause 17.4 has not been set aside

either by the learned Single Judge or by the Division

Bench of the High Court and therefore, the findings

recorded by the learned Arbitral Tribunal on

applicability of Clause 17.4 has attained the finality.

The learned Arbitral Tribunal as such was absolutely // 21 //

justified in considering whether IRCON was justified

in rescinding the contract, may be either under

Clause 60.1 or under Clause 17.4. Even otherwise,

from the material on record and even the notice

dated 21.02.1994 and the subsequent notice dated

07.03.1994, we are satisfied that the IRCON was

satisfied that the work could not be completed by the

contractor even within further extension of time.

Clause 17.4 provides that if the company (IRCON) is

not satisfied that the works can be completed by the

contractor and in the event of failure on the part of

the contractor to complete the works within further

extension of time allowed, the IRCON shall be

entitled, without prejudice to any other right or

remedy available in that behalf, to appropriate the

contractor’s security deposits and rescind the

contract, whether or not actual damage is caused by

such default. Even Clause 60.1 also provides for

determination of contract owing to default of // 22 //

contractor. It provides that if the contractor should

abandon the contract, or persistently disregard the

instructions of the Project Manager or contravene

any provisions of the contract…. then the Project

Manager on behalf of the Company may serve the

contractor with a notice in writing to that effect and

if the contractor does not within 7 days after the

delivery to him of such notice proceed to make good

his default in so far as the same is capable of being

made good and carry on the work or comply with

such directions as aforesaid to the entire satisfaction

of the Project Manager, the Company (IRCON) shall

be entitled after giving 48 hours notice in writing

under the hand of the Project Manager (to remove

the contractor from the whole or any portion or

portions as may be specified in such notice) of the

works without thereby avoiding the contract or

releasing the contractor from any of his obligations

or liabilities. It further provides that in such a case // 23 //

the Project Manager on behalf of the IRCON shall be

entitled to rescind the contract, in which case the

security deposit shall stand forfeited to IRCON

without prejudice to IRCON’s right to recover from

the contractor any amount by which the cost of

completing the works by any other agency shall

exceed the value of the contractor.

7.3 Thus, both, under Clause 17.4 and 60.1, on failure

of the contractor to complete the work, the IRCON is

justified in rescinding the contract and forfeit the

security deposit. At the cost of repetition it is

observed that the learned Arbitral Tribunal on

appreciation of entire evidence on record, had

specifically observed that the contractor failed to

complete the work even within the stipulated

extended period of time and even abandoned the

work and therefore, the IRCON was justified in

rescinding the contract. The said finding as observed

hereinabove has attained finality. Therefore, the // 24 //

IRCON was absolutely justified in forfeiting the

security deposits and therefore, the learned Arbitral

Tribunal was absolutely justified in rejecting Claim

Nos.33 and 34, which were with respect to forfeiture

of security deposits by the IRCON. Both, the learned

Single Judge as well as Division Bench of the High

Court have seriously erred in setting aside the award

passed by the learned Arbitral Tribunal rejecting

Claim Nos.33 and 34. We are of the opinion that the

learned Single Judge, therefore, exceeded in its

jurisdiction under Section 34 of the Arbitration Act

quashing and setting aside the well­reasoned award

passed by the learned Arbitral Tribunal on rejecting

Claim Nos.33 and 34, which the Division Bench of

the High Court has wrongly affirmed.

7.4 Under the circumstances, the impugned judgment

and order passed by the learned Single Judge as well

as the Division Bench of the High Court quashing

and setting aside the award passed by the learned // 25 //

Arbitral Tribunal rejecting Claim Nos.33 and 34

deserve to be quashed and set aside and the award

passed by the learned Arbitral Tribunal rejecting

Claim Nos.33 and 34 is required to be restored and

upheld.

7.5 Now, so far as the quashing and setting aside the

award passed by the Arbitral Tribunal awarding

interest @ 18% on advance for the hypothecation of

equipment, by the learned Single Judge confirmed

by the Division Bench is concerned, at the outset, it

is required to be noted that the Division Bench of the

High Court has upheld the order passed by the

learned Single Judge quashing and setting aside the

interest awarded by the learned Arbitral Tribunal on

advance for the hypothecation of equipment on the

ground that there is no such stipulation in the

agreement / contract. However, the High Court has

not at all considered Section 31(7)(a) of the

Arbitration Act, which permits the arbitrator that // 26 //

unless otherwise agreed by the parties, where and in

so far as an arbitral award is for the payment of

money, the Arbitral Tribunal may include in the sum

for which the award is made interest, at such rate as

it deems reasonable, for the whole or any part of the

period between the date on which the cause of action

arose and the date on which the award is made.

Thus, unless there is a specific bar under the

contract, it is always open for the arbitrator /

Arbitral Tribunal to award pendente lite interest.

Identical question came to be considered by this

Court in the case of Raveechee and Company

(supra). In the said decision, it is observed and

held by this Court that an arbitrator has the power

to award interest unless specifically barred from

awarding it and the bar must be clear and specific.

In the said decision, it is observed and held that the

liability to pay interest pendente lite arises because

the claimant has been found entitled to the same // 27 //

and had been kept out from those dues due to the

pendency of the arbitration, i.e., pendente lite.

Applying the law laid down by this Court in the

aforesaid decision to the facts of the case on hand,

once it was found that the advance amount was paid

for hypothecation of equipment and thereafter when

the Arbitral Tribunal awarded the interest on

advance for hypothecation of equipment, the same

was not required to be interfered with by the learned

Single Judge in exercise of the powers under Section

34 of the Arbitration Act and even by the Division

Bench of the High Court while exercising the powers

under Section 37 of the Arbitration Act. However, at

the same time to award the interest @ 18% can be

said to be on a higher side. In the facts and

circumstances of the case, if the interest is awarded

@ 12% on advance for the hypothecation of

equipment, the same can be said to be reasonable

interest.

// 28 //

8. In view of the above and for the reasons stated

above, present appeal succeeds. The impugned

judgment and order passed by the learned Single

Judge as well as the Division Bench of the High

Court quashing and setting aside the award passed

by the Arbitral Tribunal rejecting Claim Nos. 33 and

34 are hereby quashed and set aside and the award

passed by the Arbitral Tribunal rejecting the claim

Nos. 33 and 34 is hereby restored. The impugned

judgment and order passed by the Division Bench of

the High Court in confirming the judgment and order

passed by the learned Single Judge insofar as

quashing and setting aside the award passed by the

Arbitral Tribunal awarding the interest @ 18% on the

advance for hypothecation of equipment is

concerned, the same is hereby quashed and set

aside and the award passed by the Arbitral Tribunal

awarding the interest on advance for hypothecation

of equipment is hereby restored, however, with a // 29 //

modification that there shall be paid an interest @

12% pendente lite on advance for hypothecation of

equipment instead of 18% as awarded by the Arbitral

Tribunal.

Present appeal is accordingly allowed to the

aforesaid extent. However, in the facts and

circumstances of the case, there shall be no order as

to costs.

…………………………………J. (M. R. SHAH)

…………………………………J. (M.M. SUNDRESH) New Delhi, March 17, 2023.