Reportable  

IN THE SUPREME COURT OF INDIA

CIVIL APPELLATE JURISDICTION

CIVIL APPEAL NO.3349 OF 2005

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

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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Claim  s by appellant   

Claim  No.

Particulars of Claim Amount claimed  by appellant  

Amount awarded  by Arbitrator

1 Claim for the balance payment of 34th  Running account  

Rs.11,26,518 Rs.11,26,518

2,4,5 2)  Claim  for  the  payment  due  under  35th Running Account bill

4)  Claim  for  the  payment  for  Extra  items of work executed  

5)  Claim  for  escalation  in  rates  for  works executed after July 1995 till the  date of termination

Rs.65,64,544

Rs.8,70,517

Rs.3,27,335

Rs.14,59,320

3 Claim  for  the  refund  of  Security  Deposit  

Rs.1,00,000 Rs. 1,00,000

6 Claim  for  the  difference  in  scale  weight and sectional weight of steel

Rs.  37,608 Rs.  37,608

7 & 8. 7)  Claim for  “on site’  overheads  and  establishment  expenses  during  the  extended period of 14 months beyond  the stipulated date of completion. 8)  Claim for  ‘off-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

9 Claim  for  loss  of  hire  charges  of  machinery,  shuttering  materials  etc.  engaged for execution of the work for  the period beyond the stipulated date of  completion.

Rs.30,79,160 Rs.8,75,000

10 Claim  for  compensation  for  the  unutilized  proportionate  expenses  incurred  for  establishing  the  site,  and  setting-up of infrastructure required for  performance of full value of work.

Rs.18,01,701 Nil

11 Claim for the loss of anticipatory profit  @ 15%  on the value of balance work  which  could  not  be  executed  due  to  termination of Contract

Rs.54,03,669 Rs.39,12,000

Total Rs.2,06,70,495 Rs.104,58,298

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Counter Claims by respondents

Counter  Claim No

Particulars of Counter  Claim Amount  claimed  by Respondents

Amount awarded by Arbitrator

1. Excess  cost  of  getting  the  work  executed  through  an  alternative  agency - recoverable as per clause  (3) of the agreement   

Rs.1,46,69,227 Nil

2. Liquidated  damages  levied  under  clause (2) of the agreement

Rs.56,84,998 Nil

3. Escalation that would be payable to  the alternative agency in regard to  execution  of  remaining  work  (tentative).

Rs.75,00,000 Nil

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  

15

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  

19

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  

21

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.  

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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.

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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  

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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,  

25

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  

26

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  

27

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)

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New Delhi; …………………………J. April 28, 2011. (Markandey Katju)

29