M/S.J.G.Engineers Pvt.Ltd vs Union Of India & Anr

M/s. J.G.Engineers Pvt. Ltd. ... Appellant

Vs.

Union of India & Anr. ... Respondents

J U D G M E N T

R.V.RAVEENDRAN, J.

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

2 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

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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:

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Clai ms by appellant

Claim 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

3 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 steel

7 & 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

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Counter Claims by respondents

Counter Particulars of Counter Claim Amount claimed Amount awarded

Claim No by Respondents by Arbitrator

1. 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

2. Liquidated damages levied under Rs.56,84,998 Nil

clause (2) of the agreement

3. Escalation that would be payable to Rs.75,00,000 Nil

the alternative agency in regard to

execution of remaining work

(tentative).

4. Cost of Arbitration Rs.1,00,000 Nil

Total Rs.2,79,54,225 Nil

The 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

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additional 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

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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)

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or 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

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regard 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

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contractor 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. We may refer to the relevant provisions of the said contract

document, that is, clauses 2, 3(Part) and 25 (Part) to decide

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whether 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:

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(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

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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

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to 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

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quantity 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.

(iii) 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.

(iv) 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

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rescind 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.

(v) 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.

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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

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party 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."

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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

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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

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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

22

that 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.

23

Re : 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.

24

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

25

to 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,

26

having 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

27

that 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

28

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)

29

New Delhi; ..............................J.

April 28, 2011. (Markandey Katju)