Arbitration :
Contract for building construction – Dispute – Arbitrator appointed – Arbitrator allowed the claims of the contractor/claimants, while rejected the counter-claim for liquidated damages/compensation – Single Judge of High Court upheld the Award – Division Bench of High Court set aside the Award holding that question of levy of liquidated damages was not arbitrable – Appeal to Supreme Court – Held : The relevant clause of the contract shows that the parties had agreed that levy of liquidated damages by the Superintending Engineer of the respondent-Company was final – Therefore the issue was not arbitrable being an “excepted matter” – Division Bench of High Court rightly set aside the Award. Contract :
Interpretation of contractual clause – Held : The entire contract between the parties and the terms thereon have to be read as a whole to decide the rights and liabilities of the parties, arising out of the contract.
Dismissing the appeals, the Court
HELD : 1. Upholding the award of the Arbitrator, the Single Judge of High Court held that the delay in completion of the work was on account of both parties and by applying the equitable principles, the Single Judge held that the damages were payable by either of the parties. The Single Judge failed to note the implication of Clause 2 of the contract and also various correspondences between the parties, while affirming the award passed by the Arbitrator. In terms of Clause 2 of the agreement dated 05.02.1996 between the parties, the contractor is to proceed NATURAL GAS CORPORATION LTD.
with the work with due diligence throughout the contract period. By the terms of the agreement, the parties have consciously agreed that in case the contractor fails to comply with the conditions and complete the work with due diligence, the Superintending Engineer may decide the compensation in terms of Clause 2 of the agreement. [Para 13 and 14][378-C-D]
2. A reading of Clause 2 of the Contract makes it clear that the Superintending Engineer has been conferred with not only a right to levy compensation, but it also provides a mechanism for determination of the liability/quantum of compensation. The very Clause 2 would show that such a decision taken by the Superintending Engineer shall be final. The finality clause in the contract in terms of Clause 2 makes the intention of the parties very clear that there cannot be any further dispute on the said issue between the parties; much less before the arbitrator. The intention of the parties to exclude some of the decisions of the Superintending Engineer from the purview of arbitration is clearly seen from clause 25 of the Contract. The very prayer to declare the amount levied by the Superintending Engineer as illegal is against the tenor of the terms of the contract (Clause 2) between the parties. By virtue of the finality clause in the contract, any decision taken by the Superintending Engineer in levying compensation cannot be referred to an arbitrator. The parties have consciously agreed to have finality to the decision of the Superintending Engineer and the same cannot be frustrated by challenging the same as illegal. Any other meaning to the finality clause in the contract and allowing further adjudication by another authority would make the agreed Clause 2 and Clause 25 of the agreement meaningless and redundant. [Paras 15 and 16][379E-F; 381-A-C]
3. According to the respondent, the completion time was extended without prejudice to its right to recover compensation in accordance with Clause 2 of the agreement. The contention of the respondent is that by the letter dated 15.05.2001, the contractor was put on notice that in exercise of the power conferred on the Superintending Engineer under Clause 2, the contractor is liable to pay 10% of the contract value by way of compensation. The contractor was informed by the said letter dated 15.05.2001 that the compensation is levied on him for the period of 39 weeks at half per cent per week subject to maximum of 10% of the contract value and that the actual amount of compensation shall be worked out on checking the final bill and the same shall be recovered by the respondent from the final bill. By the subsequent letter dated 25.05.2001, the claimant was informed that the final bill is ready and the claimant was required to reconcile the final bill after adjusting the compensation. [Para 17][381-EG]
4. A reading of the other terms of the contract would further indicate that under Clauses 13 and 14 of the agreement, the parties have agreed for payment of compensation and nonpayment of compensation in certain situations. Significantly, Clauses 13 and 14 of the agreement do not have any finality clause which indicates that any dispute arising out of such clauses may be a dispute referable to arbitration. However, in respect of levy of compensation for the delay, Clause 2 of the agreement specifically makes the decision of the Superintending Engineer, final. The entire contract between the parties and the terms thereon have to be read as a whole to decide the rights and liabilities of the parties arising out of the contract. In claim No.6, the contractor has sought for declaration “that the penalty under Clause 2 imposed by the respondent was illegal and unwarranted and the amount withheld by the respondent was payable to the contractor with interest @ 24%”. Claim No.6 sought for by the contractor is clearly in violation of Clause 2 of the agreement between the parties, in and by which, the parties have agreed that the decision taken by the Superintending Engineer levying compensation shall be final. The finality clause in the contract cannot therefore be frustrated by calling upon the arbitrator to decide on the correctness of levy of compensation by the Superintending Engineer. [Para 18][381-H; 382-A-D]
5. In the present case, the parties themselves have agreed that the decision of the Superintending Engineer in levying compensation is final and the same is an “excepted matter” and the determination shall be only by the Superintending Engineer and the correctness of his decision cannot be called in question NATURAL GAS CORPORATION LTD.
in the arbitration proceedings and the remedy if any, will arise in the ordinary course of law. [Para 21][385-D]
6. The Single Judge of the High Court erred in proceeding under the presumptive footing that the compensation levied by the Superintending Engineer was in the nature of penalty. It was actually levy of liquidated damages/compensation in terms of Clause 2 of the agreement. Levy of compensation of Rs. 32,79,828/- in Arbitration Case No.297A of 2002 and Rs.42,08,940/- in Arbitration Case No.297 of 2002 in terms of Clause 2 of the agreement is final and the same could not have been the subject matter of arbitration. The Division Bench of the High Court rightly set aside the order of the Arbitrator with regard to claim No. 6 by holding that levy of liquidated damages/compensation is adjustable against the final bill payable to the appellant. The impugned judgment does not therefore, suffer from any infirmity warranting interference. [Para 25][387-E-F] Vishwanath Sood v. Union of India and Another (1989)
1 SCC 657 : 1989 (1) SCR 288; Food Corporation of India v. Sreekanth Transport (1999) 4 SCC 491 : 1999
(3) SCR 699; Bharat Sanchar Nigam Limited and another v. Motorola India (P) Ltd. (2009) 2 SCC 337 : 2008 (13 ) SCR 445 - relied on.
As published in the Supreme Court Reports, Supreme Court of India. Text from the Indian Supreme Court Judgments open data set (Dattam Labs), CC BY 4.0.
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