REPORTABLE IN THE SUPREME COURT OF INDIA CIVIL APPELLATE JURISDICTION

CIVIL APPEAL NO.5511 OF 2012

M/S. MITRA GUHA BUILDERS  (INDIA) COMPANY             ...Appellant

VERSUS

OIL AND NATURAL GAS CORPORATION LIMITED        …Respondent

WITH

CIVIL APPEAL NO.5512 OF 2012

J U D G M E N T

R. BANUMATHI, J.

These  two  appeals  arise  out  of  the  judgment  dated

16.02.2009 passed by the High Court of Delhi in FAO(OS) No.6 of

2008  and  FAO(OS)  No.7  of  2008  in  and  by  which  the  Division

Bench of  the High Court  has set  aside the order  of  the learned

Single Judge and also of the learned Arbitrator by holding that the

levy of liquidated damages is an “excepted matter” under Clause 2

read with Clause 25 of the contract and the same is not arbitrable.   

2. Brief facts which led to filing of these appeals are as follows:-

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Appellant-M/s. Mitra Guha Builders (India) Company and the

respondent-Oil  and  Natural  Gas  Corporation  Limited  (ONGC)

entered  into  a  contract  on  05.01.1996  bearing

No.DHL/Civil/NOIDA/6/94  for  construction  of  Multi-storeyed

Residential  flats  28  Nos.  ‘C’ type  guest  house  multipurpose  hall

service  block  underground  water  tank  etc.  and  other  work  for

ONGC.  The appellant-claimant raised certain claims which were

refuted  by  the  respondent  and  thus,  the  claimant  invoked  the

arbitration Clause 25 of the General Conditions of the contract vide

letter dated 07.09.2001.  The appellant-claimant had also entered

into a contract dated 05.01.1996 bearing No.DHL/Civil/NOIDA/5/94

for construction of Multi-storeyed Residential flats 20 Nos. ‘B’ type

for ONGC. The appellant-claimant raised certain claims which were

refuted by the respondent and here again, the claimant invoked the

arbitration Clause 25 of the General Conditions of the contract vide

letter dated 07.09.2001.

3. The  designated  authority  vide  its  order  dated  03.01.2002

appointed  Justice  P.K.  Bahri  (Retd.)  as  the  sole  Arbitrator  to

adjudicate upon the claims of the parties.  The learned Arbitrator

vide award dated 01.07.2005 allowed the claim of the claimant and

disallowed the liquidated damages/compensation and rejected the

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counter claim of respondent-ONGC.  Various claims made by the

contractor and the amount awarded by the learned Arbitrator in both

the arbitration cases are as under:-

Arbitral Award in Arbitration Case No.297/2002 dated 01.07.2005

Claim No.

Particulars of claim of the Petitioner  before  the  Ld. Arbitral Tribunal

Amount claimed  by  the Petitioner

Amount awarded by Ld. Arbitrator

1. Balance  payment  claimed by  the  Petitioner  towards Final Bill

Rs.21,22,249/- Rs.21,18,975/-

2. Amount  allegedly  withheld by ONGC

Rs.9,00,000/- Rs.9,00,000/-

3. Escalation  claimed  by  the Petitioner as per provisions of the contract

Rs.27,92,189/- Rs.27,92,189/-

4. Losses  and  damages incurred by the Petitioner in the shape of overheads due to prolongation of contract

Rs.21,60,375/- Claim  rejected by  the  Ld. Arbitrator

5. Loss of turnover suffered by the  Petitioner  due  to prolongation of contract

Rs.55,58,428/- Claim  rejected by  the  Ld. Arbitrator

6. Declaration  sought  by  the Petitioner  that  the  penalty under Clause 2 imposed by ONGC  was  illegal  and unwarranted  and  the amount  withheld  by  ONGC was  payable  to  the Petitioner  with  interest  @ 24%

Rs.30,18,975/- [amount  that was  withheld  by ONGC  towards liquidated damages]

Amount  of Rs.30,18,975/- withheld  by ONGC  as liquidated damages was to be refunded and adjusted towards payment  of Claim  No.1  and 2

7. Interest payable on final bill - -

8. Interest payable on withheld amount  

- -

9. Interest  payable  on escalation amount

- -

10. Interest  payable  on  looses and damages

- -

11. Interest  pre-suit  pendente lite  and  future  interest  @ 24%

- 10% interest

12. Cost of Arbitration Rs.1,00,000/- Rs.2,00,000/-

Total amount awarded by Ld. Arbitrator (Claim 1 + 2 + 3)

Rs.58,11,164/-

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Arbitral Award in Arbitration Case No.297A/2002 dated 01.07.2005

Claim No.

Particulars of claim of the Petitioner  before  the  Ld. Arbitral Tribunal

Amount claimed by the Petitioner

Amount awarded by Ld. Arbitrator

1. Balance  payment  claimed by  the  Petitioner  towards Final Bill

Rs.25,91,225/- Rs.24,80,142/-

2. Amount  allegedly  withheld by ONGC

Rs.12,00,000/- Rs.12,00,000/-

3. Escalation  claimed  by  the Petitioner as per  provisions of the contract

Rs.29,56,110/- Rs.29,56,110/-

4. Losses  and  damages incurred by the Petitioner in the shape of overheads due to prolongation of contract

Rs.18,23,613/- Claim  rejected by  the  Ld. Arbitrator

5. Loss of turnover suffered by the  Petitioner  due  to prolongation of contract

Rs.46,91,973/- Claim  rejected by  the  Ld. Arbitrator

6. Declaration  sought  by  the Petitioner  that  the  penalty under Clause 2 imposed by ONGC  was  illegal  and unwarranted  and  the amount  withheld  by  ONGC was  payable  to  the Petitioner  with  interest  @ 24%

Rs.36,80,142/- [amount  that was withheld by ONGC  towards liquidated damages]

Amount  of Rs.36,80,142/- withheld  by ONGC  as liquidated damages was to be refunded and adjusted towards payment  of Claim No.1  and 2

7. Interest payable on final bill Rs.9,84,680/- -

8. Interest payable on withheld amount  

Rs.6,36,000/- -

9. Interest  payable  on escalation amount

Rs.18,91,910/- -

10. Interest  payable  on  looses and damages

Rs.40,39,666/- -

11. Interest  pre-suit  pendente lite  and  future  interest  @ 24%

- 10% interest

12. Cost of Arbitration Rs.1,00,000/- Rs.2,00,000/-

Total amount awarded by Ld. Arbitrator (Claim 1 + 2 + 3)

Rs.66,36,252/-

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The  learned  Arbitrator  allowed  the  claim  of  the  claimant  and

disallowed the liquidated damages/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  presuming  the  same  to  be  a

penalty.

4. Challenging the award, the respondent filed petitions bearing

OMP Nos.358 and 359 of 2005 under Section 34 of the Arbitration

and Conciliation Act, 1996 before the High Court of Delhi and the

same  were  dismissed  by  the  Single  Judge  vide  order  dated

02.11.2007.  The learned Single Judge held that the Arbitrator has

found that under the garb of liquidated damages, what was sought

to be imposed was penalty.  The learned Single Judge found that

almost 60% of the delay was attributable to the respondent-ONGC

while 273 days - 40% delay was attributable to the appellant. The

learned  Single  Judge  held  that  when  the  respondent-ONGC

themselves are responsible for substantive part of the delay, it can

hardly be said that respondent is entitled to recovery of liquidated

damages or  penalty.   While  upholding the  award  passed by  the

Arbitrator, the learned Single Judge in Arbitration Case No.297A of

2002  corrected  the  award  amount  as  Rs.66,36,252/-  from

Rs.69,36,252/- which was on account of clerical mistake.   

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5. The respondent-ONGC filed appeals under Section 37 of the

Arbitration  Act,  1996  before  the  High  Court  of  Delhi.   The

respondent contended that the pre-estimated liquidated damages of

Rs.32,79,828/-  in  Arbitration  Case  No.297A  of  2002  and

Rs.42,08,940/- in Arbitration Case No.297 of 2002 claimed by the

respondent-ONGC in terms of Clause 2 of the contract between the

parties  was  wrongly  disallowed  by  the  Arbitrator  presuming  the

same to be a penalty.  

6. The  issue  involved  before  the  Division  Bench  of  the  High

Court  was  interpretation  of  Clause  2  of  the  contract  regarding

liquidated  damages/compensation  levied  by  the  Superintending

Engineer and the finality attached to it.  Before the Division Bench, it

was contended by the respondent-ONGC that the decision of the

Superintending Engineer to levy liquidated damages under Clause

2 being final, the same was an “excepted matter” and not arbitrable.

7. The  Division  Bench  set  aside  the  findings  of  the  award

passed by the learned Arbitrator and the order of the learned Single

Judge by holding that Clause 2 of the agreement provided that the

decision of the Superintending Engineer on the question of levy of

liquidated damages is final and that the same could not have been

agitated in the arbitration proceeding.  The Division Bench held that

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when the parties have consciously provided that the decision of the

Superintending Engineer shall be final only to exclude the issue of

“excepted matter” from the scope of the arbitration, the Arbitrator

ought not to have dealt with the same and passed the award.  The

Division  Bench  has  also  pointed  out  that  when  the  respondent-

ONGC first gave notices to the appellant-contractor to rectify the

defects and thereafter, gave a notice to levy liquidated damages on

15.05.2001 followed by the letter dated 25.05.2001 to the appellant-

contractor that the final bill was ready and that the appellant was

required to reconcile the final bill  to ensure the settlement of the

account, it cannot in such circumstances be said that the liquidated

damages were imposed as a counter blast to the appellant’s claim.

With those findings, the Division Bench reversed the findings of the

learned Single Judge and set aside the award.

8. Assailing the above judgment of the Division Bench, Mr. Bipin

Prabhat, learned counsel for the appellant contended that the High

Court  failed  to  appreciate  that  Clause  25  of  the  contract  which

authorises the quantum of  reduction as well  as  the reduction of

rates for substantive works cannot be construed to empower the

Superintending Engineer to determine the issue of levy of liquidated

damages.  It was submitted that the High Court failed to appreciate

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that the dispute relating to levy of compensation for delay provided

under  Clause  2  read  with  Clause  25  of  the  contract  is  not  an

“excepted matter” and the same has been rightly adjudicated upon

by the learned Arbitrator.  The learned counsel further contended

that  the  Division  Bench,  in  exercising  its  power  under  appellate

jurisdiction under Section 37 of the Act, erred in reappreciating the

evidence and in upsetting the findings of the learned Arbitrator and

the learned Single Judge.

9. Per  contra,  Mr.  K.M.  Natraj,  learned  Additional  Solicitor

General (ASG) assisted by Mr. Akshay Amritanshu, learned counsel

submitted  that  the  learned  Arbitrator  wrongly  disallowed  the

estimated  liquidated  damages  and  reasonable  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 presuming the

same to be a penalty.  The learned ASG further contended that the

learned Arbitrator  travelled beyond the terms of the contract  and

disallowed the liquidated damages to the respondent even though it

was an “excepted matter”, not falling within his jurisdiction.  It was

submitted that the Division Bench of the High Court has rightly held

that the imposition of liquidated damages by the respondent was

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not a counter-blast or an afterthought and prayed for dismissal of

the appeals.

10. We have carefully considered the contentions of both sides

and perused the impugned judgment and materials on record.  The

following points arise for consideration in these appeals:-

(i) Whether the levy of pre-estimated liquidated damages

and  reasonable  compensation  by  the  Superintending

Engineer in terms of Clause 2 of the contract between

the parties is “arbitrable”?

(ii) Whether  the  respondent-ONGC is  right  in  contending

that the levy of liquidated damages in terms of Clause 2

of  the  contract  is  final  and  an  “excepted  matter”  not

falling within the jurisdiction of the Arbitrator and whether

the learned Arbitrator has travelled beyond the terms of

the contract?

11. ONGC’s claim of liquidated damages in terms of Clause 2

of  the  agreement:-   The  salient  features  of  the  contract  in

Arbitration Case No.297A/2002 are that the work was to commence

on 22.02.1996 and was stipulated to be completed by 21.08.1997.

But  the  work  was  completed  only  on  24.05.1999.   Insofar  as

Arbitration  Case  No.297/2002,  the  work  was  to  commence  on

21.02.1996 and was stipulated to be completed by 21.08.1997.  But

the work was completed only on 24.05.1999.  In its statement of

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defence, the respondent-ONGC asserted that there has not been

any significant delay caused by the respondent-ONGC which could

delay the work of  the claimant.   In its statement of  defence, the

respondent-ONGC mentioned that total delay which has occurred

was 640 days out of which claimant is responsible for the delay of

39 weeks (39 × 7 = 273 days) and on this account, the claimant is

liable  to  pay compensation in  terms of  Clause 2  of  the contract

which stipulate compensation payable @ ½% per week subject to

maximum 10% of the cost of the executed work and the decision of

the Superintending Engineer in this regard is final.  The respondent-

ONGC has thus claimed Rs.32,79,828/- in Arbitration Case No.297A

of  2002  and  Rs.42,08,940/-  in  Arbitration  Case  No.297  of  2002

recoverable  from  the  claimant  as  compensation  for  the  delay

caused by the claimant in completing the work.   

12. After  reference  to  various  correspondences  between  the

respondent-ONGC  and  the  appellant  and  after  a  detailed

discussion, the learned Arbitrator recorded a finding of fact that the

respondent-ONGC was responsible to an extent for the prolongation

of  the  contract  and  the  claimant  was  also  to  some  extent

responsible  which  resulted  in  slow  progress  of  the  work.

Considering  the  delay  alleged  by  the  respondent-ONGC,  the

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learned Arbitrator has observed that there was delay of 640 days

and both the respondent-ONGC and the appellant were responsible

for the delay and observed as under:-

“….The date of commencement of the work stipulated in the contract

was the 22nd February 1996 and the work was to be completed on the

22nd August  1997.   According  to  the  respondent,  the  actual  date  of

commencement of the work was the 13th March 1996 and the work was

completed on the 24th May 1999.  Thus, there took place delay of 640

days.   The  respondent  was  responsible  for  only  160  days  of  delay

whereas the claimant was responsible for delay of 371 days.  It is not

understood  how the  respondent  has  quantified  the  delay  imputed  to

either of the parties.”

13. By upholding the award of the learned Arbitrator, the learned

Single Judge held that the delay in completion of the work was on

account of both parties and by applying the equitable principles, the

learned Single Judge held that the damages were payable by either

of the parties.

14. The  learned  Single  Judge,  in  our  view,  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  learned  Arbitrator.   In  terms  of  Clause  2  of  the

agreement dated 05.02.1996 between the parties, the contractor is

to proceed with the work with due diligence throughout the contract

period. In case of delay or failure to ensure good progress during

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execution  of  the  work,  Clause  2  of  the  agreement  provides  for

determination/quantification  of  compensation  for  delay  or  certain

inactions, on the part of the contractor. In terms of Clause 2 of the

agreement, the Superintending Engineer shall assess and quantify

the compensation. 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.  

15. In  order  to  appreciate  the  claim  of  ONGC  in  levying  the

damages in terms of Clause 2, it is necessary to refer to Clause 2 of

the agreement which reads as under:-

“Clause 2:  Compensation for Delay

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 the

essence  of  the  contract  on  the  part  of  the  contractor  and  shall  be

reckoned  from  the  15th 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  compensation  on  amount

equal to ½ % per week as the Superintending Engineer (whose decision

in writing shall be final) may decide on the amount of the contract, value

of the whole work as shown in the agreement, for every week that the

work remains uncommenced, or unfinished, after the proper dates.  After

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

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work exceeds, one month (save the special jobs) to complete one-eighth

of  the  work,  before  one-fourth  of  the  whole  time  allowed  under  the

contract has elapsed and three-eights of the work, before one-half of

such  time  has  elapsed,  and  three-fourth  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 ½ % per week as

the Superintending Engineer (whose decision in  writing shall  be

final)  may decide on the said contract value if the whole work for

every  week  that  the  due  quantity  of  works  remains  incomplete

provided always that the entire amount of compensation to be paid

under the provisions of the clause shall not exceed ten per cent

(10%) of the tendered cost of  the work as shown in the tender.”

[Emphasis added]

A reading  of  Clause  2  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 itself

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.  

16. Clause  25  of  the  agreement  –  Settlement  of  disputes  by

Arbitration, reads as under:-

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“Clause 25 – Settlement of disputes by Arbitration

If any dispute, difference, question or disagreement shall, at any time,

hereafter  arises  between  the  parties  hereto  or  the  respective

representatives  or  assigns  in  connection  with  or  arising  out  of  the

contract,  or in respect of meaning of specifications, design, drawings,

estimates, scheduled, annexures, orders, instructions, the construction,

interpretation  of  this  agreement,  application  of  provisions  thereof  or

anything  hereunder  containing  or  arising  hereunder  or  as  to  rights,

liabilities or duties of the said parties hereunder or arising hereunder any

matter whatsoever incidental to this contract or otherwise concerning the

works of execution or failure to execute the same whether during the

progress of  work  or  stipulated/extended period or  before or  after  the

completion  or  abandonment  thereof  shall  be  referred  to  the  sole

arbitration of the person appointed by a Director of ONGC Ltd. at the

time of dispute.  There will be no objection to any such appointment that

the arbitrator so appointed is an employee of ONGC Ltd. or that he had

to deal  with the matters to which the contract relates and that in the

course of this duties as ONGC Ltd. employees, lie had expressed views

on all or any of the matters in dispute or difference.

If the arbitrator to whom the matter is originally referred dies or refuses

to act or resigns for any reason from the position of arbitrator, it shall be

lawful for the Director of ONGC Ltd. to appoint another person to act as

arbitrator  in  the  manner  aforesaid.   Such  person shall  be  entitled  to

proceed with the reference from the stage at which it  was left  by his

predecessor if both the parties consent to this effect, failing which the

arbitrator will be entitled to proceed de-novo.

………..

It is also a term of the contract that if the contractor(s) do/does not make

any demand for arbitration in respect of any claim(s) in writing within 90

days of receiving the intimation from the corporation that the bill is ready

for payment, the claim of the contractor(s) will be deemed to have been

waived and absolutely barred and the Corporation shall be discharged

and  released  of  all  liabilities  under  the  contract  in  respect  of  these

claims.

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The  decision  of  the  Superintending  Engineer  regarding  the

quantum  of  reduction  as  well  as  his  justification  in  respect  of

reduced rates for sub-standard work, which may be decided to be

accepted, will be final and would not be open to arbitration.

………..”.  [Emphasis added]

The intention of the parties to exclude some of the decisions of the

Superintending Engineer from the purview of  arbitration is clearly

seen from the abovesaid clause. Claim No.6 made by the appellant

is to declare that the penalty imposed by ONGC under Clause 2

was illegal  and unwarranted and the amount  withheld by ONGC

was  payable  to  the  appellant.   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.  

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17. As  held  by  the  Division  Bench of  the  High  Court,  whether

there  was  delay  in  completion  of  work  and  the  levy  of  liquated

damages, could not have been determined by the arbitrator. Vide

letters dated 08.12.1999, 09.12.1999, 17.12.1999, 11.02.2000 and

17.04.2000,  ONGC  called  upon  the  respondent/contractor  to

remove the defects failing which it would get the defects remedied

at his cost. According to ONGC, the completion time was extended

without prejudice to the right of ONGC to recover compensation in

accordance  with  Clause  2  of  the  agreement.  The  contention  of

ONGC 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 ONGC

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.

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18. 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  non-payment  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 ONGC was illegal and

unwarranted and the amount withheld by ONGC 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.

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19. While considering similar contractual provisions viz. Clause 2

of the agreement as in the present case, in  Vishwanath Sood v.

Union of India and Another (1989) 1 SCC 657, the Supreme Court

held as under:-

“8.  ……… As we see it, clause 2 contains a complete machinery for

determination  of  the  compensation  which  can  be  claimed  by  the

Government  on  the  ground of  delay  on  the  part  of  the  contractor  in

completing the contract as per the time schedule agreed to between the

parties. The decision of the Superintending Engineer, it seems to us, is

in the nature of a considered decision which he has to arrive at after

considering the various mitigating circumstances that may be pleaded by

the contractor or his plea that he is not liable to pay compensation at all

under this clause. In our opinion the question regarding the amount of

compensation leviable under clause 2 has to be decided only by the

Superintending Engineer and no one else.

9. ……..After referring to certain judicial decisions regarding the meaning

of the word “final” in various statutes, the Division Bench concluded that

the  finality  cannot  be  construed  as  excluding  the  jurisdiction  of  the

arbitrator under Clause 25. We are unable to accept this view. Clause 25

which is the arbitration clause starts with an opening phrase excluding

certain matters and disputes from arbitration and these are matters or

disputes  in  respect  of  which  provision  has  been  made elsewhere  or

otherwise in the contract. These words in our opinion can have reference

only to provisions such as the one in parenthesis in clause 2 by which

certain types of determinations are left to the administrative authorities

concerned. If that be not so, the words “except where otherwise provided

in the contract” would become meaningless. We are therefore inclined to

hold that  the opening part  of  clause 25 clearly  excludes matters  like

those mentioned in clause 2 in respect of which any dispute is left to be

decided by a higher official of the Department. Our conclusion, therefore,

is that the question of awarding compensation under clause 2 is outside

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the  purview  of  the  arbitrator  and  that  the  compensation,  determined

under clause 2 either by the Engineer-in-charge or on further reference

by the Superintending Engineer will  not be capable of being called in

question before the arbitrator.

10. ……. But we should like to make it clear that our decision regarding

non-arbitrability is only on the question of any compensation which the

Government might claim in terms of Clause 2 of the contract. We have

already pointed out that this is a penalty clause introduced under the

contract  to  ensure  that  the  time schedule  is  strictly  adhered to.  It  is

something  which  the  Engineer-in-charge  enforces  from  time  to  time

when he finds that the contractor is being recalcitrant, in order to ensure

speedy and proper observance of the terms of the contract. This is not

an undefined power. The amount of compensation is strictly limited to a

maximum of 10 per cent and with a wide margin of discretion to the

Superintending Engineer, who might not only reduce the percentage but

who, we think, can even reduce it to   nil  , if the circumstances so warrant.

It is this power that is kept outside the scope of arbitration. We would like

to clarify that this decision of ours will not have any application to the

claims,  if  any,  for  loss  or  damage  which  it  may  be  open  to  the

Government to lay against the contractor, not in terms of clause 2 but

under the general law or under the Contract Act. As we have pointed out

at  the  very outset  so far  as  this  case is  concerned the claim of  the

Government has obviously proceeded in terms of clause 2 and that is

the way in which both the learned Single Judge as well as the Division

Bench have also approached the question.  Reading clauses 2 and 25

together we think that the conclusion is irresistible that the amount of

compensation chargeable under clause 2 is a matter which has to be

adjudicated in accordance with that clause and which cannot be referred

to arbitration under clause 25”. [Underlining added]

The  ratio  of  the  above  decision  squarely  applies  to  the  present

case. Once the parties have decided that certain matters are to be

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decided by the Superintending Engineer and his decision would be

final, the same cannot be the subject matter of arbitration.

20. In  this  regard,  reliance  was  also  placed  upon  Food

Corporation  of  India  v.  Sreekanth  Transport  (1999)  4  SCC  491

wherein, the Supreme Court interpreted Clause 12 of the agreement

thereon. Clause 12 of the agreement in  Food Corporation of India

reads as under:-

“The  decisions  of  the  Senior  Regional  Manager  regarding  such

failure  of  the  contractors  and  their  liability  for  the  losses  etc.

suffered  by  the  Corporation  shall  be  final  and  binding  on  the

contractors….”.

21. While interpreting the clause on ‘excepted matters’, in Food

Corporation of India, the Supreme Court held as under:-

“3. “Excepted matters” obviously, as the parties agreed, do not require

any further  adjudication since the agreement  itself  provides a named

adjudicator  —  concurrence  to  the  same  obviously  is  presumed  by

reason of the unequivocal acceptance of the terms of the contract by the

parties and this is where the courts have been found out lacking in their

jurisdiction  to  entertain  an  application  for  reference  to  arbitration  as

regards the disputes arising therefrom and it  has been the consistent

view that in the event of the claims arising within the ambit of excepted

matters, the question of assumption of jurisdiction of any arbitrator either

with or without the intervention of the court would not arise. The parties

themselves have decided to have the same adjudicated by a particular

officer in regard to these matters; what these exceptions are however

are questions of fact and usually mentioned in the contract documents

and form part of the agreement and as such there is no ambiguity in the

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matter of adjudication of these specialised matters and being termed in

the agreement as the excepted matters.

……..

9. ……... The Food Corporation, therefore, as a matter of fact desired an

adjudication of  their  claim to  the extent  of  Rs 1,89,775 together  with

interest at the rate of 18 per cent per annum from the civil court rather

than relying on the adjudicatory process available in the contract itself

through their own Senior Regional Manager. The agreement as noticed

above expressly provides that the adjudication shall be effected by the

Senior Regional Manager and by no other authority and the decision, it

has been recorded in the agreement, of the Senior Regional Manager

would be final and binding on the parties…..”.

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  in  the  arbitration

proceedings and the remedy if any, will arise in the ordinary course

of law.

22. The learned counsel for the appellant has relied upon Bharat

Sanchar  Nigam  Limited  and  another  v.  Motorola  India  (P)  Ltd.

(2009) 2 SCC 337 and by referring to Clause 16(2) in the concerned

agreement submitted that for quantification of liquidated damages,

first of all, there has to be a delay and for ascertaining as to who

was  responsible  for  the  delay,  such  an  issue  will  be  within  the

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jurisdiction of the arbitrator.  The learned ASG however, submitted

that in the present case, Clause 2 of the agreement is not only a

mechanism for quantification of liquidated damages, but Clause 2

also makes the contractor liable for payment of the same and in

terms  of  Clause  2  of  the  agreement,  the  decision  of  the

Superintending Engineer is final and the present case is therefore,

distinguishable from BSNL’s case.

23. As  rightly  contended by the learned ASG,  in  BSNL’s  case,

Clause 16(2) of the agreement does not create any kind of liability

to  pay  liquidated  damages;  but  only  provides  for  entitlement  of

BSNL to collect the damages in case of any delay in supply on the

part of the supplier under Clause 16(2).  While interpreting Clause

16(2) and Clause 21 of the contract which was under consideration

in BSNL’s case, in paras (23) and (26), the Supreme Court held as

under:-

“23. The question to be decided in this case is whether the liability of the

respondent  to  pay  liquidated  damages  and  the  entitlement  of  the

appellants,  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 Motorola 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

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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.

     ……….. 26. Quantification of liquidated damages may be an excepted matter as

argued  by  the  appellants,  under  Clause  16.2,  but  for  the  levy  of

liquidated damages, there has to be a delay in the first  place. In the

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 appellants 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.”

24. In  BSNL’s  case,  Clause  16  provided  for  entitlement  of  the

party to recover liquidated damages.  In Clause 16(2), the phrases

used  “value  of  delayed  quantity”  and  “for  each  week  of  delay”

clearly show that it is necessary to find out whether there has been

delay on the part of the supplier in discharging his obligation. Thus,

in  BSNL’s  case,  in  determining  whether  there  is  delay  or  not,  a

process of adjudication is envisaged.   Per contra, in the present

case,  Clause  2  of  the  agreement  is  a  complete  mechanism for

determination of  liability.   The right  to  levy damages for  delay is

exclusively conferred upon the Superintending Engineer and Clause

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2  of  the  present  agreement  is  a  complete  mechanism  for

determination of liability and when such compensation is levied by

the Superintending Engineer, the same is final and binding.  The

parties have also consciously agreed that for the delay caused, the

Superintending Engineer shall levy the compensation of the amount

equal to half per cent and the said amount shall not exceed from

10%  of  the  cost  of  the  work  and  the  determination  by  the

Superintending Engineer is final and cannot be the subject matter of

arbitration.  In claim No.6, the prayer sought for by the contractor to

declare the compensation levied by the Superintending Engineer as

illegal is contradictory to the agreed terms between the parties.  So

far as the liquidated damages determined and levied, by virtue of

Clause 2, is out of the purview of the arbitration especially in view of

the fact that under the very same clause, the parties have agreed

that the decision of the Superintending Engineer shall be final.  

25. Learned  Single  Judge  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

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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.   Applying  the  ratio  of

Vishwanath Sood, the Division Bench of the High Court rightly set

aside the order of the learned 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.

26. As per the chart filed by the respondent-ONGC, total amount

awarded  by  learned  Arbitrator  in  favour  of  the  appellant  is

Rs.1,24,47,416/- (Rs.66,36,252/- + Rs.58,11,164/-).  Total amount

of  compensation/liquidated  damages  withheld  by  ONGC  is

Rs.66,99,117/-  (Rs.36,80,142/-  +  Rs.30,18,975/-).  Towards

satisfaction of the arbitral award, ONGC has deposited an amount

of Rs.2,10,41,965/-.  As per the order of the Division Bench of the

Delhi High Court, the appellant was directed to refund an amount of

Rs.74,88,768/- (amount withheld by ONGC + accrued interest).  In

compliance of the order of the Supreme Court dated 09.04.2009,

the  appellant  has  deposited  Rs.75,00,000/-  before  the  Supreme

Court and the same has been invested in a nationalised bank. The

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amount of Rs.74,88,768/- along with accrued interest is ordered to

be  paid  to  the  respondent-ONGC.   The  balance  of  Rs.11,232/-

(Rs.75,00,000  –  Rs.74,88,768/-)  along  with  accrued  interest  be

refunded to the appellant.   

27. In the result, the appeals are dismissed. No order as to cost.  

………………………..J.                                                                           [R. BANUMATHI]

………………………..J.                                                                    [A.S. BOPANNA]

….………………………..J.                                                                [HRISHIKESH ROY]

New Delhi; November 08, 2019

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