REPORTABLE

IN THE SUPREME COURT OF INDIA

CIVIL APPELLATE JURISDICTION

CIVIL APPEAL NO.5645 OF 2008

[Arising out of SLP(C) No. 3459 of 2007]

Bharat Sanchar Nigam Ltd. & Anr. …….Appellants

Versus

Motorola India Pvt. Ltd. ….Respondent

J U D G M E N T

TARUN CHATTERJEE, J.

1.Leave granted.

2.This appeal is directed against the judgment and final order

dated 26

th

of October, 2006 of the High Court of Kerala at

Ernakulam in AR No 18 of 2006 whereby, the High Court

had allowed the prayer for appointment of the arbitrator at

the instance of the respondents and directed the parties to

submit their disputes to arbitration.

3.The pivotal questions that need to be decided in this appeal

are:

i)Whether the levy of liquidated damages under

clause 16.2 of the tender document is an

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“excepted matter” in terms of clause 20.1 of the

said document so that the same cannot be

referred to arbitration or looked into by the

arbitrator.

ii)Whether clause 62 of the special conditions of

the tender document will prevail over clause 16.2

of the general conditions of the contract.

4.The relevant facts, which would assist us in appreciating

the controversy involved are narrated in a nutshell, which

are as follows:

The appellant had issued a notice inviting tender

dated 4

th

of January, 2001, calling upon the eligible

bidders for turn key project on planning, engineering,

supply, installation and commissioning of Indian Mobile

Personal Communications System in the telecom circles

of Kerala, Karnataka, Tamil Nadu and Andhra Pradesh.

The respondent submitted its bid in response to the

notice inviting tender and after the technical, commercial

and financial bid evaluation, the respondent was

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awarded the tender and an Advance Purchase Order

(APO) dated 5

th

of September, 2001 for phase I and Phase

II was issued to it by the appellant. The purchase order

provided, inter alia, the terms for payment and the

schedule for delivery of the goods. It also provided for

liquidated damages in the event of failure on the part of

the respondent to meet with the delivery schedule.

Clause 16.2 of the general conditions of the tender

document provided for liquidated damages to the extent

of 0.5% of the value of the delayed quantity of the goods

and services for each week of delay or the part thereof for

a period of upto 10 weeks and thereafter charge 0.7% of

the value of delayed quantity or part thereof, for a period

of upto 10 weeks thereafter. It is the case of the

appellants that the respondent had failed to complete

phase I and phase II of the project within the schedule as

provided in the tender document, and therefore,

liquidated damages were imposed by the Tamil Nadu

Circle of the appellant on 21

st

of May, 2004 under clause

16.2 of the tender document, quantification of which was

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beyond the purview of the arbitration agreement. There

was an exchange of correspondence between the Tamil

Nadu Circle of the appellant alleging the delay in the

purchase of goods and the respondents denying any

such delay and objecting to the levy of liquidated

damages. On 24

th

of March, 2006, the respondent

invoked the arbitration clause by sending a letter

through its counsel to the appellants to which they did

not concede and justified the imposition of liquidated

damages. The respondent filed an arbitration application

before the High Court of Kerala at Ernakulam for the

appointment of arbitrator under section 11 of the

Arbitration and Conciliation Act, 1996 in respect of the

liquidated damages assessed by the appellant. In the

counter affidavit filed in the High Court, the appellant

alleged that the liquidated damages assessed and

quantified by the appellant under clause 16.2 of the

tender document was an excepted matter as per clause

20.1 of the said document and, therefore, not arbitrable.

The High Court, as noted herein earlier, by the impugned

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judgment allowed the arbitration request of the

respondents holding that the imposition of liquidated

damages by the appellant was not an “excepted matter”

and therefore, subject to arbitration. It is this judgment

of the High Court, which is impugned in this appeal, in

respect of which leave has already been granted.

5.Before proceeding further, we deem it appropriate to note

the relevant clauses of the tender document and the

purchase order, which would assist us in determining

whether the matters alleged are an excepted matter.

Clause 16.2 reads as under:-

“16.2. Should the tenderer fail to deliver the

goods and services on turn key basis within the

period prescribed, the purchaser shall be

entitled to recover 0.5% of the value of the

delayed quantity of the goods & services, for

each week of delay or part thereof, for a period

upto 10 weeks and thereafter at the rate of

0.7% of the value of the delayed quantity of the

goods and services for each week of delay or

part thereof for another 10 weeks of delay. In

the present case of turn key solution of supply,

installation and commissioning, where the

delayed portion of the delivery and provisioning

of services materially hampers effective user of

the systems, Liquidated Damages charged shall

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be levied as above on the total value of the

concerned package of the purchase order.

Quantum of liquidated damages assessed and

levied by the purchaser shall be final and not

challengeable by the supplier.”

Clause 20.1 which is the arbitration clause and provides

for excepted matters, i.e., those matters the decision to

which is specifically provided in the agreement itself

reads as under:-

20.1 In the event of any question, dispute or

difference arising under this agreement or in

connection there-with (except as to the matters,

the decision to which is specifically provided

under this agreement), the same shall be

referred to the sole arbitration of the CGM,

Kerala Telecom Circle, BSNL or in case his

designation is changed or his office is

abolished, then in such cases to the sole

arbitration of the officer for the time being

entrusted (whether in addition to his own duties

or otherwise) with the functions of the CGM,

Kerala Telecom Circle, BSNL or by whatever

designation such an officer may be called

(hereinafter referred to as the said officer), and

if the CGM Kerala Telecom Circle or the said

officer is unable or unwilling to act as such,

then to the sole arbitration of some other person

appointed by the CGM, Kerala Telecom Circle or

the said officer. The agreement to appoint an

arbitrator will be in accordance with the

Arbitration and Conciliation Act, 1996.

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There will be no objection to any such

appointment on the ground that the arbitrator is

a Government Servant or that he has to deal

with the matter to which the agreement relates

or that in the course of his duties as a

government servant he has expressed his views

on all or any of the matters in dispute. The

award of the arbitrator shall be final and

binding on both the parties to the agreement. In

the event of such an arbitrator to whom the

matter is originally referred, being transferred

or vacating his office or being unable to act for

any reason whatsoever, the CGM, Kerala

Telecom Circle, BSNL or the said officer shall

appoint another person to act as an arbitrator in

accordance with the terms of the agreement and

the person so appointed shall be entitled to

proceed from the stage at which it was left out

by his predecessors……….”

Clause 15.2 of Section III of the tender document, which

deals with the “delays in the supplier’s performance”

reads as under:

“Delay by the Supplier in the performance of its

delivery obligations shall render the Supplier

liable to any or all of the following sanctions,

forfeiture of its performance security, imposition

of liquidated damages, and/or termination of

the contract for default”.

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Clause 62 of Section IV of the tender document which

deals with liquidated damages and incentive reads as

under:-

“The bidder shall be charged liquidated

damages at the rates as defined in the General

conditions of contract as contained in Section III

for any delay in the turnkey job entrusted to the

bidder. However he shall be provided an

incentive @ 0.5% of the cost of the network of

each service area (Telecom Circle), for each

week of early commissioning of the entire

network in that service area, subject to a

maximum of 3% of the value of the contract of

the circle”.

6.Since this appeal arises out of an order, which appointed

an arbitrator, to decide the dispute referred to by the

respondent, we, in this appeal, need to decide that whether

in view of the arbitration clause in the tender document

provided under clause 20 of the said document, the breach

specified in 16.2 is an “excepted matter”.

7.Mr. Gopal Subramaniam, Additional Solicitor General of

India appearing on behalf of the appellant contended that

in view of the decision of this Court in Vishwa Nath Sood

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vs. UOI [(1989) 1 SCC 657], a conjoint reading of clause

16.2 and clause 20.1 would clearly show that clause 16.2 is

covered under the excepted matters as provided in clause

20.1 of the tender document. He further contended that the

High Court had erred in holding that the quantification of

the liquidated damages was subsequent to the decision of

liability of liquidated damages to be payable to the

appellant. Therefore, he contended that the respondent had

specifically subscribed to each and every clause of the

agreement without any objection at the tender stage and

accordingly, it was not open to them to claim immunity

from the contractual obligations. Thus, the matter in

respect of which the respondent sought reference to

arbitration was “excepted matter” in terms of clause 16.2 of

the tender agreement.

In order to satisfy us in the aforesaid contentions,

the learned Additional Solicitor General, Mr. Gopal

Subramanium placed strong reliance in the case of Food

Corporation of India Vs. Sreekanth Transport 1999

9

(4) SCC 491, which has given the following principles

relating to “Excepting matters” as under :-

“1. These appeals by the grant of Special

Leave pertains to the effect of the usual

‘excepted clause’ vis-à-vis the arbitration

clause in a Government contract. While it

is true and as has been contended, that

the authorization of the arbitrators to

arbitrate, flows from the agreement but the

High Court in the judgment impugned

thought it fit to direct adjudication of

‘excepted matters’ in the agreement itself

by the arbitrators and hence these appeals

before this Court.

2. At the outset, it is pertinent to note that

in the usual Government contracts, the

reference to which would be made

immediately hereafter, there is exclusion of

some matters from the purview of

arbitration and a senior officer of the

Department usually is given the authority

and power to adjudicate the same. The

clause itself records that the decision of

the senior officer, being the adjudicator,

shall be final and binding between the

parties – this is what popularly known as

‘excepted matters’ in a Government or

Governmental agencies’ contract.

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

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the parties and this is where the courts

have found our lacking in its 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 the claims arising

within the ambit of excepted matters,

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 are

these exceptions however are questions of

fact and usually mentioned in the contract

documents and forms part of the

agreement as such there is no ambiguity in

the matter of adjudication of these

specialized matters and termed in the

agreement as the excepted matters…..”

Keeping the aforesaid principles in mind, let us

proceed further.

We may keep on record that the appellants alleged

that respondents had not completed phase I and phase II

of the project within the schedule as provided in the

tender document whereupon the appellants had to

impose liquidated damages and invoke clause 16.2 of the

tender document. But the respondents refuted these

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allegations. The contention of the respondent in this case

was that the delay, if any, was caused due to the

appellant’s delay in supplying necessary inputs to the

respondent. So the respondent contends that it had

performed its part of the contract in time and the blame

for delay lies on the appellant. Thus it is to be noted that

there is a dispute between the parties on the question

whether any breach was committed in this case.

8.The appellant had contended before the High Court of

Kerala that the levy of the liquidated damages on the

respondent was a matter outside the purview of the scope

of arbitration proceedings as it “squarely falls within the

exception provided under Clause 20 of Section III, being the

matters for which mode of decision is provided under the

Agreement itself.”

The respondent on the other hand contended that

the claim of the petitioner that the dispute pertaining to

levy of liquidated damages falls outside the arbitration

agreement being an excepted matter is fallacious.

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The High Court held that there was no reason why

the arbitration request on behalf of the respondent

should not be allowed. It held that clause 16.2 is not an

excepted matter under clause 20 of the tender document.

9.Having heard the learned counsel for the parties and after

examining the judgment of the High Court and the other

materials on record, we are of the view that this appeal

must be dismissed. Clause 20 is the arbitration clause and

provides that any question, dispute or difference arising

under this agreement or in connection therewith would be

referred to arbitration. To this, an exception is also provided

which lays down that the matters, the decision to which is

specifically provided under this agreement, would not be

referred to arbitration. From a bare reading of clause 16.2

of Section III of the tender document, it is clear that if the

tenderer fails to deliver the goods and services on turnkey

basis within the period prescribed, the purchaser shall be

entitled to recover liquidated damages and the quantum of

the liquidated damages assessed and levied by the

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purchaser shall be final and not challengeable by the

supplier.

10. We are in full agreement with the findings of the High

Court that there was a dispute as to whether the

respondent had at all acted in breach of any terms and

conditions of the tender document.

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

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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

15

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.

There is no provision in the agreement, apparent on

the face of it, relating to a decision made by any specified

authority on the issue of levy of Liquidated Damages, as

is contemplated under clause 20.1 of the agreement

which is excepted from the purview of arbitration. No

decision coming within the scope of excepted matters

under clause 20.1 is envisaged by any portion of the

agreement regarding the liability of the supplier to

liquidated damages.

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

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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 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.

The above stated position can be ascertained

through the judgment of this Court in the case of State

of Karnataka vs. Shree Rameshwara Rice Mills,

(1987) 2 SCC 160. This Court in the said case, made a

clear distinction between adjudicating upon an issue

relating to a breach of condition of contract and the right

to assess damages arising from a breach of condition. It

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was held that the right conferred to assess damages

arising from a breach of condition does not include a

right to adjudicate upon a dispute relating to the very

breach of conditions and that the power to assess

damages is a subsidiary and consequential power and

not the primary power.

11.Clause 20.1 regarding excepted matters reads “In the event

of any question, dispute or difference arising under this

agreement or in connection there-with (except as to the

matters, the decision to which is specifically provided

under this agreement)…”. Therefore it is clear from this

provision, matters which will not fall within the arbitration

clause are questions, disputes or differences, the decision

to which is specifically provided under the agreement.

Clause 16.2 is not a clause where in any decision making

power is specifically provided for with regard to any

question, dispute or difference between the parties relating

to the existence of breach or the very lack of liability for

damages, i.e. the levy of Liquidated Damages.

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12.The learned senior counsel for the appellant relied on the

decisions of this court in Vishwanath Sood vs. UOI

[(1989) 1 SCC 657], and General Manager, Northern

Railway vs. Sarvesh Chopra [(2002) 4 SCC 45]. These

cases, we are afraid, will not be of any help to the

appellants being distinguishable on facts and having

different contractual clauses. We may note that clause 16.2

cannot be treated as an excepted matter. This is because

admittedly, 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 nor is it a no claim or no liability

clause.

In Vishwanath Sood’s case (supra), it was held by

this court that a particular claim of the government was

excluded because the Superintendent Engineer acted as

the revisional authority to decide disputes between the

two parties by an adjudicatory process, there being a

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complete machinery for settlement of the disputes in the

relevant clause and most importantly, the

Superintendent Engineer had the discretion on

consideration of the facts and circumstances including

mitigating facts, held no damages was payable. Again in

the case of Sarvesh Chopra, this court had held that the

claims covered by the no claims clause, i.e., where the

contractor had given up the right to make a claim for

breach on the part of the government was not arbitrable

in terms of the arbitration clause contained therein and

clause 63 of the general conditions of the contract which

provided for exclusion because no claim clause was

excepted as such claims were simply not entertainable.

In view of the discussions made hereinabove, we hold

that the disputes raised by the respondents are

arbitrable and not excepted from scope of arbitration.

13.We feel that there are certain other issues that are to be

discussed while disposing of this appeal. The respondent

contended in its written submission filed before this court

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on 14

th

May, 2007 that the quantum of damages calculated

by the appellant in respect of clause 16.2 of the tender

document, simply cannot have the effect of rendering all the

above disputes as not being arbitrable. We find that there is

considerable merit in this argument. The true essence of

any arbitration agreement is to arbitrate the matters in a

cordial way in respect of issues where there is a dispute

between the parties. To construe such limited words in

clause 16.2 as being so all encompassing would destroy the

very foundation of the bargain between the parties. The

appellant in the present case is acting in an unfair way by

seeking to exclude, from arbitration, what it has agreed to

arbitrate in the first place.

14.The appellant contended that it has the unilateral right to

determine the Liquidated damages under clause 16.2 and

that the quantum of Liquidated Damages decided by the

appellant, even if it is exorbitant, would be final and cannot

be challenged. We find the contention of the respondent

that if the said contention of the appellant is supported, it

would mean that a party would be held liable to damages of

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whatever amount the other party demands without

recourse to a remedy, to be relevant and should be given

due importance. Such a contention by the appellant would

be in violation of Section 28 and Section 74 of the Indian

Contract Act.

15.The learned counsel of the appellants had submitted before

this court that it was the appellant, which had the right to

appoint the arbitrator. This submission cannot be accepted.

The respondent had invoked the arbitration clause on the

ground that there was no delay on its part by sending a

letter to this effect to the appellants on 24

th

of March, 2006.

On 25

th

April, 2006, the appellants/BSNL replied stating

that they had rightly recovered the Liquidated Damages and

that the recovery of the damages was not arbitrable. The

appointing authority in this matter, i.e., CGM Kerala, did

not respond to the notice requiring the appointment of

arbitrator and failed to act within the time prescribed under

the Arbitration and Conciliation Act 1996. Since the

appointing authority appointed no arbitrator, the

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respondent/Motorolla, on 25

th

of May, 2006, filed a petition

under Section 11 of the said Act before the High Court at

Kerala. In the case of Datar Switchgear vs. Data Finance

Lt. [(2000) 8 SCC 151], which was affirmed in Punj Llyod

Ltd. vs. Petronet MHB Ltd. [(2006) 2 SCC 638], it was

held that once a minimum of 30 days is expired and a

petition is filed to the court, the appointing authority loses

the right to make the appointment. Therefore, the

appellant/BSNL has now lost its right to appoint any

arbitrator for settling the disputes under the agreement.

16.Further, CGM Kerala Circle has already taken a decision as

is evident from his letter dated 25

th

of April, 2006, that the

appellant was right in imposing the liquidated damages and

therefore, the question of such a person becoming an

arbitrator does not arise as it would not satisfy the test of

impartiality and independence as required under Section

12 of the Arbitration and Conciliation Act, 1996. Moreover

it would also defeat the notions laid down under the

principles of natural justice wherein it has been

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recognized that a party cannot be a judge in his own

cause. The judgment of this Court in State of Karnataka

vs. Shree Rameshwara Rice Mills, (1987) 2 SCC 160, is

significant in this matter. The Court had stated:

“…..Even assuming 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, adjudication by the

officer regarding the breach of the contract can

not be sustained under law because a party to

the agreement cannot be an arbiter in his own

cause. Interest 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”.

17.The provision under clause 16.2 that quantification of the

Liquidated Damages shall be final and cannot be

challenged by the supplier Motorolla is clearly in restraint

of legal proceedings under section 28 of the Indian

Contracts Act. So the provision to this effect has to be held

bad.

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18.Pursuant to section 4 of the Arbitration and Conciliation

Act, 1996, a party who knows that a requirement under the

arbitration agreement has not been complied with and still

proceeds with the arbitration without raising an objection,

as soon as possible, waives their right to object. The High

Court had appointed an arbitrator in response to the

petition filed by the appellant. At this point, the matter was

closed unless further objections were to be raised. If further

objections were to be made after this order, they should

have been made prior to the first arbitration hearing. But

the appellant had not raised any such objections. The

appellant therefore had clearly failed to meet the stated

requirement to object to arbitration without delay. As such

their right to object is deemed to be waived.

19.Finally we are of the opinion that the contention of the

Respondent that Clause 62 referring to special clauses has

an overriding effect on Clause 16.2, cannot be accepted..

There is in fact no conflict between clause 62 and 16.2.

Clause 62 has two parts in it. One part referring to the

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Liquidated damages and the other part refers to incentives

in case the respondent/Motorolla performs its part of the

contract within time. The part dealing with Liquidated

Damages under clause 62 in fact refers it back to clause

16.2 dealing with the quantification of Liquidated Damages.

So it is apparent that there is no dispute between clause 62

and clause 16.2.

20.For the reasons aforesaid, we are of the view that the High

Court was justified in passing the impugned judgment and

there is no infirmity in the impugned order for which we

can interfere with the order of the High Court. The appeal is

therefore dismissed. There will be no order as to costs.

…….…………………….J.

[Tarun Chatterjee]

New Delhi; ……..………………………J.

September 15, 2008. [Lokeshwar Singh

Panta]

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