M/S MITRA GUHA BUILDERS (INDIA) COMPANY versus OIL AND NATURAL GAS CORPORATION LIMITED

[2019] 14 S.C.R.

M/S. MITRA GUHA BUILDERS (INDIA) COMPANY

OIL AND NATURAL GAS CORPORATION LIMITED

(Civil Appeal No. 5511 of 2012)

NOVEMBER 08, 2019

[R. BANUMATHI, A. S. BOPANNA ANDHRISHIKESH ROY, JJ.]

Arbitration :

CContract for building construction – Dispute – Arbitratorappointed – 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 thatquestion of levy of liquidated damages was not arbitrable – AppealDto Supreme Court – Held : The relevant clause of the contract showsthat the parties had agreed that levy of liquidated damages by theSuperintending 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 entirecontract between the parties and the terms thereon have to be readas whole to decide the rights and liabilities of the parties, arisingout of the contract.

Dismissing the appeals, the Court

HELD : 1. Upholding the award of the Arbitrator, the SingleJudge of High Court held that the delay in completion of thework was on account of both parties and by applying the equitableGprinciples, the Single Judge held that the damages were payableby either of the parties. The Single Judge failed to note theimplication of Clause 2 of the contract and also variouscorrespondences between the parties, while affirming the awardpassed by the Arbitrator. In terms of Clause 2 of the agreementdated 05.02.1996 between the parties, the contractor is to proceedH

with the work with due diligence throughout the contract period.By the terms of the agreement, the parties have consciouslyagreed that in case the contractor fails to comply with theconditions and complete the work with due diligence, theSuperintending Engineer may decide the compensation in termsof Clause 2 of the agreement. [Para 13 and 14][378-C-D]

2. reading of Clause 2 of the Contract makes it clear thatthe Superintending Engineer has been conferred with not only aright to levy compensation, but it also provides mechanism fordetermination of the liability/quantum of compensation. The veryClause 2 would show that such decision taken by theSuperintending Engineer shall be final. The finality clause in thecontract in terms of Clause 2 makes the intention of the partiesvery clear that there cannot be any further dispute on the saidissue between the parties; much less before the arbitrator. Theintention of the parties to exclude some of the decisions of theSuperintending Engineer from the purview of arbitration is clearlyseen from clause 25 of the Contract. The very prayer to declarethe amount levied by the Superintending Engineer as illegal isagainst the tenor of the terms of the contract (Clause 2) betweenthe parties. By virtue of the finality clause in the contract, anydecision taken by the Superintending Engineer in levyingcompensation cannot be referred to an arbitrator. The partieshave consciously agreed to have finality to the decision of theSuperintending Engineer and the same cannot be frustrated bychallenging the same as illegal. Any other meaning to the finalityclause in the contract and allowing further adjudication by anotherauthority would make the agreed Clause 2 and Clause 25 of theagreement meaningless and redundant. [Paras 15 and 16][379-E-F; 381-A-C]3. According to the respondent, the completion time wasextended without prejudice to its right to recover compensationin accordance with Clause 2 of the agreement. The contention ofthe respondent is that by the letter dated 15.05.2001, thecontractor was put on notice that in exercise of the power conferredon the Superintending Engineer under Clause 2, the contractoris liable to pay 10% of the contract value by way of compensation.The contractor was informed by the said letter dated 15.05.2001

Athat the compensation is levied on him for the period of 39 weeksat half per cent per week subject to maximum of 10% of thecontract value and that the actual amount of compensation shallbe worked out on checking the final bill and the same shall berecovered by the respondent from the final bill. By thesubsequent letter dated 25.05.2001, the claimant was informedBthat the final bill is ready and the claimant was required to reconcilethe final bill after adjusting the compensation. [Para 17][381-E-G]

4. reading of the other terms of the contract would furtherindicate that under Clauses 13 and 14 of the agreement, theCparties 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 clausewhich indicates that any dispute arising out of such clauses maybe dispute referable to arbitration. However, in respect of levyDof compensation for the delay, Clause 2 of the agreementspecifically makes the decision of the Superintending Engineer,final. The entire contract between the parties and the termsthereon have to be read as whole to decide the rights andliabilities of the parties arising out of the contract. In claim No.6,the contractor has sought for declaration “that the penalty underEClause 2 imposed by the respondent was illegal and unwarrantedand the amount withheld by the respondent was payable to thecontractor with interest @ 24%”. Claim No.6 sought for by thecontractor is clearly in violation of Clause 2 of the agreementbetween the parties, in and by which, the parties have agreedFthat the decision taken by the Superintending Engineer levyingcompensation shall be final. The finality clause in the contractcannot therefore be frustrated by calling upon the arbitrator todecide on the correctness of levy of compensation by theSuperintending Engineer. [Para 18][381-H; 382-A-D]G5. In the present case, the parties themselves have agreedthat the decision of the Superintending Engineer in levyingcompensation is final and the same is an “excepted matter” andthe determination shall be only by the Superintending Engineerand the correctness of his decision cannot be called in question

in the arbitration proceedings and the remedy if any, will arise inthe ordinary course of law. [Para 21][385-D]

6. The Single Judge of the High Court erred in proceedingunder the presumptive footing that the compensation levied bythe Superintending Engineer was in the nature of penalty. It wasactually levy of liquidated damages/compensation in terms ofClause 2 of the agreement. Levy of compensation ofRs. 32,79,828/- in Arbitration Case No.297A of 2002 andRs.42,08,940/- in Arbitration Case No.297 of 2002 in terms ofClause 2 of the agreement is final and the same could not havebeen the subject matter of arbitration. The Division Bench of theHigh Court rightly set aside the order of the Arbitrator with regardto claim No. 6 by holding that levy of liquidated damages/compensation is adjustable against the final bill payable to theappellant. The impugned judgment does not therefore, suffer fromany 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 ofIndia v. Sreekanth Transport (1999) 4 SCC 491 : 1999

(3) SCR 699; Bharat Sanchar Nigam Limited andanother v. Motorola India (P) Ltd. (2009) 2 SCC 337 :2008 (13 ) SCR 445 - relied on.

CIVIL APPELLATE JURISDICTION: Civil Appeal No. 5511 of2012.

From the Judgment and Order dated 16.02.2009 of the HighCourt of Delhi at New Delhi in FAO (OS) No. 6 of 2008.

With

Civil Appeal No. 5512 of 2012.

Bipin Prabhat, Aditya Shukla, Ms. Sharmila Upadhyay, Advs. forthe Appellant.

AK. M. Nataraj, ASG, Akshay Amritanshu, Balraj Dewan, Advs.for the Respondent.

The Judgment of the Court was delivered by

R. BANUMATHI, J.

1. These two appeals arise out of the judgment dated 16.02.2009passed by the High Court of Delhi in FAO(OS) No.6 of 2008 andFAO(OS) No.7 of 2008 in and by which the Division Bench of the HighCourt has set aside the order of the learned Single Judge and also of thelearned Arbitrator by holding that the levy of liquidated damages is anC“excepted matter” under Clause 2 read with Clause 25 of the contractand the same is not arbitrable.

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

DAppellant-M/s. Mitra Guha Builders (India) Company and therespondent-Oil and Natural Gas Corporation Limited (ONGC) enteredinto contract on 05.01.1996 bearing No.DHL/Civil/NOIDA/6/94 forconstruction of Multi-storeyed Residential flats 28 Nos. ‘C’ type guesthouse multipurpose hall service block underground water tank etc. andother work for ONGC. The appellant-claimant raised certain claims whichEwere refuted by the respondent and thus, the claimant invoked thearbitration Clause 25 of the General Conditions of the contract vide letterdated 07.09.2001. The appellant-claimant had also entered into contractdated 05.01.1996 bearing No.DHL/Civil/NOIDA/5/94 for constructionof Multi-storeyed Residential flats 20 Nos. ‘B’ type for ONGC. TheFappellant-claimant raised certain claims which were refuted by therespondent and here again, the claimant invoked the arbitration Clause25 of the General Conditions of the contract vide letter dated 07.09.2001.

3. The designated authority vide its order dated 03.01.2002appointed Justice P.K. Bahri (Retd.) as the sole Arbitrator to adjudicateGupon the claims of the parties. The learned Arbitrator vide award dated01.07.2005 allowed the claim of the claimant and disallowed the liquidateddamages/compensation and rejected the counter claim of respondent-ONGC. Various claims made by the contractor and the amount awardedby the learned Arbitrator in both the arbitration cases are as under:-

Arbitral Award in Arbitration Case No.297/2002 datedA01.07.2005

Arbitral Award in Arbitration Case No.297A/2002 dated01.07.2005

The learned Arbitrator allowed the claim of the claimant anddisallowed the liquidated damages/compensation of Rs.32,79,828/- inArbitration Case No.297A of 2002 and Rs.42,08,940/- in Arbitration CaseNo.297 of 2002 presuming the same to be penalty.

F4. Challenging the award, the respondent filed petitions bearingOMP Nos.358 and 359 of 2005 under Section 34 of the Arbitration andConciliation Act, 1996 before the High Court of Delhi and the samewere dismissed by the Single Judge vide order dated 02.11.2007. Thelearned Single Judge held that the Arbitrator has found that under thegarb of liquidated damages, what was sought to be imposed was penalty.GThe learned Single Judge found that almost 60% of the delay wasattributable to the respondent-ONGC while 273 days - 40% delay wasattributable to the appellant. The learned Single Judge held that whenthe respondent-ONGC themselves are responsible for substantive partof the delay, it can hardly be said that respondent is entitled to recoveryHof liquidated damages or penalty. While upholding the award passed bythe Arbitrator, the learned Single Judge in Arbitration Case No.297A of2002 corrected the award amount as Rs.66,36,252/- from Rs.69,36,252/- which was on account of clerical mistake.

5. The respondent-ONGC filed appeals under Section 37 of theArbitration Act, 1996 before the High Court of Delhi. The respondentcontended that the pre-estimated liquidated damages of Rs.32,79,828/-in Arbitration Case No.297A of 2002 and Rs.42,08,940/- in ArbitrationCase No.297 of 2002 claimed by the respondent-ONGC in terms ofClause 2 of the contract between the parties was wrongly disallowed bythe Arbitrator presuming the same to be penalty.

6. The issue involved before the Division Bench of the High Courtwas interpretation of Clause 2 of the contract regarding liquidateddamages/compensation levied by the Superintending Engineer and thefinality attached to it. Before the Division Bench, it was contended bythe respondent-ONGC that the decision of the Superintending Engineerto 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 passedby the learned Arbitrator and the order of the learned Single Judge byholding that Clause 2 of the agreement provided that the decision of theSuperintending Engineer on the question of levy of liquidated damages isfinal and that the same could not have been agitated in the arbitrationproceeding. The Division Bench held that when the parties haveconsciously provided that the decision of the Superintending Engineershall be final only to exclude the issue of “excepted matter” from thescope of the arbitration, the Arbitrator ought not to have dealt with thesame and passed the award. The Division Bench has also pointed outthat when the respondent-ONGC first gave notices to the appellant-contractor to rectify the defects and thereafter, gave notice to levyliquidated damages on 15.05.2001 followed by the letter dated 25.05.2001to the appellant-contractor that the final bill was ready and that theappellant was required to reconcile the final bill to ensure the settlementof the account, it cannot in such circumstances be said that the liquidateddamages were imposed as counter blast to the appellant’s claim. Withthose findings, the Division Bench reversed the findings of the learnedSingle Judge and set aside the award.

8. Assailing the above judgment of the Division Bench, Mr. BipinPrabhat, learned counsel for the appellant contended that the High Court

Afailed to appreciate that Clause 25 of the contract which authorises thequantum of reduction as well as the reduction of rates for substantiveworks cannot be construed to empower the Superintending Engineer todetermine the issue of levy of liquidated damages. It was submitted thatthe High Court failed to appreciate that the dispute relating to levy ofBcompensation for delay provided under Clause 2 read with Clause 25 ofthe contract is not an “excepted matter” and the same has been rightlyadjudicated upon by the learned Arbitrator. The learned counsel furthercontended that the Division Bench, in exercising its power under appellatejurisdiction under Section 37 of the Act, erred in reappreciating theevidence and in upsetting the findings of the learned Arbitrator and theClearned Single Judge.9. Per contra, Mr. K.M. Natraj, learned Additional Solicitor General(ASG) assisted by Mr. Akshay Amritanshu, learned counsel submittedthat the learned Arbitrator wrongly disallowed the estimated liquidateddamages and reasonable compensation of Rs.32,79,828/- in ArbitrationDCase No.297A of 2002 and Rs.42,08,940/- in Arbitration Case No.297of 2002 presuming the same to be penalty. The learned ASG furthercontended that the learned Arbitrator travelled beyond the terms of thecontract and disallowed the liquidated damages to the respondent eventhough it was an “excepted matter”, not falling within his jurisdiction. ItEwas submitted that the Division Bench of the High Court has rightly heldthat the imposition of liquidated damages by the respondent was not acounter-blast or an afterthought and prayed for dismissal of the appeals.

10. We have carefully considered the contentions of both sidesand perused the impugned judgment and materials on record. TheFfollowing points arise for consideration in these appeals:-

(i)Whether the levy of pre-estimated liquidated damages andreasonable compensation by the Superintending Engineer interms of Clause 2 of the contract between the parties is“arbitrable”?

(ii) Whether the respondent-ONGC is right in contending thatthe levy of liquidated damages in terms of Clause 2 of thecontract is final and an “excepted matter” not falling withinthe jurisdiction of the Arbitrator and whether the learnedArbitrator has travelled beyond the terms of the contract?

11. ONGC’s claim of liquidated damages in terms of Clause2 of the agreement:- The salient features of the contract in ArbitrationCase No.297A/2002 are that the work was to commence on 22.02.1996and was stipulated to be completed by 21.08.1997. But the work wascompleted 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 becompleted by 21.08.1997. But the work was completed only on24.05.1999. In its statement of defence, the respondent-ONGC assertedthat there has not been any significant delay caused by the respondent-ONGC which could delay the work of the claimant. In its statement ofdefence, the respondent-ONGC mentioned that total delay which hasoccurred was 640 days out of which claimant is responsible for thedelay of 39 weeks (39 × 7 = 273 days) and on this account, the claimantis liable to pay compensation in terms of Clause 2 of the contract whichstipulate compensation payable @ ½% per week subject to maximum10% of the cost of the executed work and the decision of theSuperintending Engineer in this regard is final. The respondent-ONGChas thus claimed Rs.32,79,828/- in Arbitration Case No.297A of 2002and Rs.42,08,940/- in Arbitration Case No.297 of 2002 recoverable fromthe claimant as compensation for the delay caused by the claimant incompleting the work.

12. After reference to various correspondences between therespondent-ONGC and the appellant and after detailed discussion, thelearned Arbitrator recorded finding of fact that the respondent-ONGCwas responsible to an extent for the prolongation of the contract and theclaimant was also to some extent responsible which resulted in slowprogress of the work. Considering the delay alleged by the respondent-ONGC, the learned Arbitrator has observed that there was delay of 640days and both the respondent-ONGC and the appellant were responsiblefor the delay and observed as under:-

“….The date of commencement of the work stipulated in thecontract was the 22[nd] February 1996 and the work was to becompleted on the 22[nd] August 1997. According to the respondent,the actual date of commencement of the work was the 13[th] March1996 and the work was completed on the 24[th] May 1999. Thus,there took place delay of 640 days. The respondent wasresponsible for only 160 days of delay whereas the claimant was

Aresponsible for delay of 371 days. It is not understood how therespondent has quantified the delay imputed to either of the parties.”

13. By upholding the award of the learned Arbitrator, the learnedSingle Judge held that the delay in completion of the work was on accountof both parties and by applying the equitable principles, the learned SingleBJudge held that the damages were payable by either of the parties.

14. The learned Single Judge, in our view, failed to note theimplication of Clause 2 of the contract and also various correspondencesbetween the parties, while affirming the award passed by the learnedArbitrator. In terms of Clause 2 of the agreement dated 05.02.1996between the parties, the contractor is to proceed with the work with duediligence throughout the contract period. In case of delay or failure toensure good progress during execution of the work, Clause 2 of theagreement provides for determination/quantification of compensation fordelay or certain inactions, on the part of the contractor. In terms ofClause 2 of the agreement, the Superintending Engineer shall assessand quantify the compensation. By the terms of the agreement, the partieshave consciously agreed that in case the contractor fails to comply withthe conditions and complete the work with due diligence, theSuperintending Engineer may decide the compensation in terms of Clause2 of the agreement.

15. In order to appreciate the claim of ONGC in levying thedamages in terms of Clause 2, it is necessary to refer to Clause 2 of theagreement which reads as under:-

“Clause 2: Compensation for Delay

The time allowed for carrying out the work as entered in thetender shall be strictly observed by the contractor and shall bedeemed to be the essence of the contract on the part of thecontractor and shall be reckoned from the 15[th] day after the dateon which the order to commence the work is issued to thecontractor. The work shall throughout the stipulated period of thecontract be proceeded with all due diligence and the contractorshall pay compensation on amount equal to ½ % per week as theSuperintending Engineer (whose decision in writing shall be final)may decide on the amount of the contract, value of the wholework as shown in the agreement, for every week that the workremains 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 allowedfor any work exceeds, one month (save the special jobs) tocomplete one-eighth of the work, before one-fourth of the wholetime allowed under the contract has elapsed and three-eights ofthe work, before one-half of such time has elapsed, and three-fourth of such time has elapsed. However, for special jobs if atime schedule has been submitted by the contractor and the samehas been accepted by the Engineer-in-Charge, the Contractor shallcomply with the said time schedule. In the event of thecontractor failing to comply with this condition, he shall beliable to pay as compensation an amount equal to ½ % perweek as the Superintending Engineer (whose decision inwriting shall be final) may decide on the said contract valueif the whole work for every week that the due quantity ofworks remains incomplete provided always that the entireamount of compensation to be paid under the provisions ofthe clause shall not exceed ten per cent (10%) of thetendered cost of the work as shown in the tender.”[Emphasis added] reading of Clause 2 makes it clear that the SuperintendingEngineer has been conferred with not only right to levy compensation;but it also provides mechanism for determination of the liability/quantumof compensation. The very Clause 2 itself would show that such adecision taken by the Superintending Engineer shall be final. The finalityclause in the contract in terms of Clause 2 makes the intention of theparties very clear that there cannot be any further dispute on the saidissue between the parties; much less before the arbitrator.

16. Clause 25 of the agreement – Settlement of disputes byArbitration, reads as under:-

“Clause 25 – Settlement of disputes by Arbitration

If any dispute, difference, question or disagreement shall, at anytime, hereafter arises between the parties hereto or the respectiverepresentatives or assigns in connection with or arising out of thecontract, 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 arisinghereunder or as to rights, liabilities or duties of the said partieshereunder or arising hereunder any matter whatsoever incidentalto this contract or otherwise concerning the works of executionor failure to execute the same whether during the progress ofwork or stipulated/extended period or before or after thecompletion or abandonment thereof shall be referred to the solearbitration of the person appointed by Director of ONGC Ltd.at the time of dispute. There will be no objection to any suchappointment that the arbitrator so appointed is an employee ofONGC Ltd. or that he had to deal with the matters to which thecontract relates and that in the course of this duties as ONGCLtd. employees, lie had expressed views on all or any of the mattersin dispute or difference.

If the arbitrator to whom the matter is originally referred dies orrefuses to act or resigns for any reason from the position ofarbitrator, it shall be lawful for the Director of ONGC Ltd. toappoint another person to act as arbitrator in the manner aforesaid.Such person shall be entitled to proceed with the reference fromthe stage at which it was left by his predecessor if both the partiesconsent to this effect, failing which the arbitrator will be entitledto proceed de-novo.

It is also term of the contract that if the contractor(s) do/doesnot make any demand for arbitration in respect of any claim(s) inwriting within 90 days of receiving the intimation from thecorporation that the bill is ready for payment, the claim of thecontractor(s) will be deemed to have been waived and absolutelybarred and the Corporation shall be discharged and released of allliabilities under the contract in respect of these claims.

The decision of the Superintending Engineer regarding thequantum of reduction as well as his justification in respectof reduced rates for sub-standard work, which may bedecided to be accepted, will be final and would not be opento arbitration.

………..”. [Emphasis added]

The intention of the parties to exclude some of the decisions ofthe Superintending Engineer from the purview of arbitration is clearlyseen from the abovesaid clause. Claim No.6 made by the appellant is todeclare that the penalty imposed by ONGC under Clause 2 was illegaland unwarranted and the amount withheld by ONGC was payable tothe appellant. The very prayer to declare the amount levied by theSuperintending Engineer as illegal is against the tenor of the terms of thecontract (Clause 2) between the parties. By virtue of the finality clausein the contract, any decision taken by the Superintending Engineer inlevying compensation cannot be referred to an arbitrator. The partieshave consciously agreed to have finality to the decision of theSuperintending Engineer and the same cannot be frustrated by challengingthe same as illegal. Any other meaning to the finality clause in the contractand allowing further adjudication by another authority would make theagreed Clause 2 and Clause 25 of the agreement meaningless andredundant.

17. As held by the Division Bench of the High Court, whetherthere was delay in completion of work and the levy of liquated damages,could not have been determined by the arbitrator. Vide letters dated08.12.1999, 09.12.1999, 17.12.1999, 11.02.2000 and 17.04.2000, ONGCcalled upon the respondent/contractor to remove the defects failing whichit would get the defects remedied at his cost. According to ONGC, thecompletion time was extended without prejudice to the right of ONGCto recover compensation in accordance with Clause 2 of the agreement.The contention of ONGC is that by the letter dated 15.05.2001, thecontractor was put on notice that in exercise of the power conferred onthe Superintending Engineer under Clause 2, the contractor is liable topay 10% of the contract value by way of compensation. The contractorwas informed by the said letter dated 15.05.2001 that the compensationis levied on him for the period of 39 weeks at half per cent per weeksubject to maximum of 10% of the contract value and that the actualamount of compensation shall be worked out on checking the final billand the same shall be recovered by ONGC from the final bill. By thesubsequent letter dated 25.05.2001, the claimant was informed that thefinal bill is ready and the claimant was required to reconcile the final billafter adjusting the compensation.

18. reading of the other terms of the contract would furtherindicate that under Clauses 13 and 14 of the agreement, the parties have

Aagreed for payment of compensation and non-payment of compensationin certain situations. Significantly, Clauses 13 and 14 of the agreementdo not have any finality clause which indicates that any dispute arisingout of such clauses may be dispute referable to arbitration. However,in respect of levy of compensation for the delay, Clause 2 of the agreementspecifically makes the decision of the Superintending Engineer, final.BThe entire contract between the parties and the terms thereon have tobe read as whole to decide the rights and liabilities of the parties arisingout of the contract. In claim No.6, the contractor has sought for declaration“that the penalty under Clause 2 imposed by ONGC was illegal andunwarranted and the amount withheld by ONGC was payable to theCcontractor with interest @ 24%”. Claim No.6 sought for by the contractoris 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 theSuperintending Engineer levying compensation shall be final. The finalityclause in the contract cannot therefore be frustrated by calling upon the

arbitrator to decide on the correctness of levy of compensation by theDSuperintending Engineer.

19. While considering similar contractual provisions viz. Clause 2of the agreement as in the present case, in Vishwanath Sood v. Unionof India and Another (1989) 1 SCC 657, the Supreme Court held asunder:-

“8. ……… As we see it, clause 2 contains complete machineryfor determination of the compensation which can be claimed bythe Government on the ground of delay on the part of the contractorin completing the contract as per the time schedule agreed tobetween the parties. The decision of the Superintending Engineer,Fit seems to us, is in the nature of considered decision which hehas to arrive at after considering the various mitigatingcircumstances that may be pleaded by the contractor or his pleathat he is not liable to pay compensation at all under this clause. Inour opinion the question regarding the amount of compensationGleviable under clause 2 has to be decided only by the SuperintendingEngineer and no one else.

9. ……..After referring to certain judicial decisions regarding themeaning of the word “final” in various statutes, the Division Benchconcluded that the finality cannot be construed as excluding thejurisdiction of the arbitrator under Clause 25. We are unable to

accept this view. Clause 25 which is the arbitration clause startswith an opening phrase excluding certain matters and disputesfrom arbitration and these are matters or disputes in respect ofwhich provision has been made elsewhere or otherwise in thecontract. These words in our opinion can have reference only toprovisions such as the one in parenthesis in clause 2 by whichcertain types of determinations are left to the administrativeauthorities concerned. If that be not so, the words “except whereotherwise provided in the contract” would become meaningless.We are therefore inclined to hold that the opening part of clause25 clearly excludes matters like those mentioned in clause 2 inrespect of which any dispute is left to be decided by higherofficial of the Department. Our conclusion, therefore, is that thequestion of awarding compensation under clause 2 is outside thepurview of the arbitrator and that the compensation, determinedunder clause 2 either by the Engineer-in-charge or on furtherreference by the Superintending Engineer will not be capable ofbeing called in question before the arbitrator.

10. ……. But we should like to make it clear that our decisionregarding non-arbitrability is only on the question of anycompensation which the Government might claim in terms ofClause 2 of the contract. We have already pointed out that this isa penalty clause introduced under the contract to ensure that thetime schedule is strictly adhered to. It is something which theEngineer-in-charge enforces from time to time when he finds thatthe contractor is being recalcitrant, in order to ensure speedy andproper observance of the terms of the contract. This is not anundefined power. The amount of compensation is strictly limitedto maximum of 10 per cent and with wide margin of discretionto the Superintending Engineer, who might not only reduce thepercentage but who, we think, can even reduce it to nil, if thecircumstances so warrant.It is this power that is kept outside thescope of arbitration. We would like to clarify that this decision ofours will not have any application to the claims, if any, for loss ordamage which it may be open to the Government to lay againstthe contractor, not in terms of clause 2 but under the general lawor under the Contract Act. As we have pointed out at the veryoutset so far as this case is concerned the claim of the Governmenthas obviously proceeded in terms of clause 2 and that is the way

Ain which both the learned Single Judge as well as the DivisionBench have also approached the question. Reading clauses 2 and25 together we think that the conclusion is irresistible that theamount of compensation chargeable under clause 2 is matterwhich has to be adjudicated in accordance with that clause andBwhich cannot be referred to arbitration under clause 25".[Underlining added]

The ratio of the above decision squarely applies to the presentcase. Once the parties have decided that certain matters are to be decidedby the Superintending Engineer and his decision would be final, the samecannot be the subject matter of arbitration.

20. In this regard, reliance was also placed upon FoodCorporation of India v. Sreekanth Transport (1999) 4 SCC 491wherein, the Supreme Court interpreted Clause 12 of the agreementthereon. Clause 12 of the agreement in Food Corporation of Indiareads as under:-

“The decisions of the Senior Regional Manager regarding suchfailure of the contractors and their liability for the losses etc.suffered by the Corporation shall be final and binding on thecontractors….”.

21. While interpreting the clause on ‘excepted matters’, in FoodCorporation of India, the Supreme Court held as under:-

“3. “Excepted matters” obviously, as the parties agreed, do notrequire any further adjudication since the agreement itself providesa named adjudicator — concurrence to the same obviously ispresumed by reason of the unequivocal acceptance of the termsof the contract by the parties and this is where the courts havebeen found out lacking in their jurisdiction to entertain anapplication for reference to arbitration as regards the disputesarising therefrom and it has been the consistent view that in theevent of the claims arising within the ambit of excepted matters,the question of assumption of jurisdiction of any arbitrator eitherwith or without the intervention of the court would not arise. Theparties themselves have decided to have the same adjudicated bya particular officer in regard to these matters; what these exceptionsare however are questions of fact and usually mentioned in thecontract documents and form part of the agreement and as such

there is no ambiguity in the matter of adjudication of thesespecialised matters and being termed in the agreement as theexcepted matters.

9. ……... The Food Corporation, therefore, as matter of factdesired an adjudication of their claim to the extent of Rs 1,89,775together with interest at the rate of 18 per cent per annum fromthe civil court rather than relying on the adjudicatory processavailable in the contract itself through their own Senior RegionalManager. The agreement as noticed above expressly providesthat the adjudication shall be effected by the Senior RegionalManager and by no other authority and the decision, it has beenrecorded in the agreement, of the Senior Regional Manager wouldbe final and binding on the parties…..”.

In the present case, the parties themselves have agreed that thedecision of the Superintending Engineer in levying compensation is finaland the same is an “excepted matter” and the determination shall beonly by the Superintending Engineer and the correctness of his decisioncannot be called in question in the arbitration proceedings and the remedyif any, will arise in the ordinary course of law.

22. The learned counsel for the appellant has relied upon BharatSanchar Nigam Limited and another v. Motorola India (P) Ltd.(2009) 2 SCC 337 and by referring to Clause 16(2) in the concernedagreement submitted that for quantification of liquidated damages, firstof all, there has to be delay and for ascertaining as to who wasresponsible for the delay, such an issue will be within the jurisdiction ofthe arbitrator. The learned ASG however, submitted that in the presentcase, Clause 2 of the agreement is not only mechanism for quantificationof liquidated damages, but Clause 2 also makes the contractor liable forpayment of the same and in terms of Clause 2 of the agreement, thedecision of the Superintending Engineer is final and the present case istherefore, 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 topay liquidated damages; but only provides for entitlement of BSNL tocollect the damages in case of any delay in supply on the part of thesupplier under Clause 16(2). While interpreting Clause 16(2) and Clause

A21 of the contract which was under consideration in BSNL’s case, inparas (23) and (26), the Supreme Court held as under:-

“23. The question to be decided in this case is whether the liabilityof the respondent to pay liquidated damages and the entitlementof the appellants, to collect the same from the respondent is anexcepted matter for the purpose of Clause 20.1 of the generalconditions of contract. The High Court has pointed out correctlythat the authority of the purchaser (BSNL) to quantify the liquidateddamages payable by the supplier Motorola arises once it is foundthat the supplier is liable to pay the damages claimed. The decisioncontemplated under Clause 16.2 of the agreement is the decisionregarding the quantification of the liquidated damages and notany decision regarding the fixing of the liability of the supplier. Itis necessary as condition precedent to find that there hasbeen delay on the part of the supplier in discharging hisobligation for delivery under the agreement.

26. Quantification of liquidated damages may be an exceptedmatter as argued by the appellants, under Clause 16.2, but for thelevy of liquidated damages, there has to be delay in the firstplace. In the present case, there is clear dispute as to the factthat whether there was any delay on the part of the respondent.For this reason, it cannot be accepted that the appointment of thearbitrator by the High Court was unwarranted in this case. Evenif the quantification was excepted as argued by the appellantsunder Clause 16.2, this will only have effect when the dispute asto the delay is ascertained. Clause 16.2 cannot be treated as anexcepted matter because of the fact that it does not provide forany adjudicatory process for decision on question, dispute ordifference, which is the condition precedent to lead to the stageof quantification of damages.”

24. In BSNL’s case, Clause 16 provided for entitlement of theparty to recover liquidated damages. In Clause 16(2), the phrases used“value of delayed quantity” and “for each week of delay” clearly showthat it is necessary to find out whether there has been delay on the partof the supplier in discharging his obligation. Thus, in BSNL’s case, indetermining whether there is delay or not, process of adjudication is

envisaged. Per contra, in the present case, Clause 2 of the agreementis complete mechanism for determination of liability. The right to levydamages for delay is exclusively conferred upon the SuperintendingEngineer and Clause 2 of the present agreement is complete mechanismfor determination of liability and when such compensation is levied bythe Superintending Engineer, the same is final and binding. The partieshave also consciously agreed that for the delay caused, the SuperintendingEngineer shall levy the compensation of the amount equal to half percent and the said amount shall not exceed from 10% of the cost of thework and the determination by the Superintending Engineer is final andcannot be the subject matter of arbitration. In claim No.6, the prayersought for by the contractor to declare the compensation levied by theSuperintending Engineer as illegal is contradictory to the agreed termsbetween the parties. So far as the liquidated damages determined andlevied, by virtue of Clause 2, is out of the purview of the arbitrationespecially in view of the fact that under the very same clause, the partieshave agreed that the decision of the Superintending Engineer shall befinal.

25. Learned Single Judge erred in proceeding under the presumptivefooting that the compensation levied by the Superintending Engineer wasin the nature of penalty. It was actually levy of liquidated damages/compensation in terms of Clause 2 of the agreement. Levy ofcompensation of Rs.32,79,828/- in Arbitration Case No.297A of 2002and Rs.42,08,940/- in Arbitration Case No.297 of 2002 in terms of Clause2 of the agreement is final and the same could not have been the subjectmatter of arbitration. Applying the ratio of Vishwanath Sood, the DivisionBench of the High Court rightly set aside the order of the learnedArbitrator with regard to claim No.6 by holding that levy of liquidateddamages/compensation is adjustable against the final bill payable to theappellant. The impugned judgment does not therefore, suffer from anyinfirmity warranting interference.

26. As per the chart filed by the respondent-ONGC, total amountawarded 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, ONGChas deposited an amount of Rs.2,10,41,965/-. As per the order of theDivision Bench of the Delhi High Court, the appellant was directed to

Arefund an amount of Rs.74,88,768/- (amount withheld by ONGC +accrued interest). In compliance of the order of the Supreme Courtdated 09.04.2009, the appellant has deposited Rs.75,00,000/- before theSupreme Court and the same has been invested in nationalised bank.The amount of Rs.74,88,768/- along with accrued interest is ordered tobe paid to the respondent-ONGC. The balance of Rs.11,232/-B(Rs.75,00,000 – Rs.74,88,768/-) along with accrued interest be refundedto the appellant.

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

CKalpana K. Tripathy

Appeals dismissed.