REPORTABLE

IN THE SUPREME COURT OF INDIA

CIVIL APPELLATE JURISDICTION

CIVIL APPEAL NO.5511 OF 2012

M/S. MITRA GUHA BUILDERS

(INDIA) COMPANY ...Appellant

VERSUS

OIL AND NATURAL GAS

CORPORATION LIMITED …Respondent

WITH

CIVIL APPEAL NO.5512 OF 2012

J U D G M E N T

R. BANUMATHI, J.

These two appeals arise out of the judgment dated

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

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

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

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

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

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

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

1

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

respondent-Oil and Natural Gas Corporation Limited (ONGC)

entered into a contract on 05.01.1996 bearing

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

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

service block underground water tank etc. and other work for

ONGC. The appellant-claimant raised certain claims which were

refuted by the respondent and thus, the claimant invoked the

arbitration Clause 25 of the General Conditions of the contract vide

letter dated 07.09.2001. The appellant-claimant had also entered

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

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

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

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

arbitration Clause 25 of the General Conditions of the contract vide

letter dated 07.09.2001.

3.The designated authority vide its order dated 03.01.2002

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

adjudicate upon the claims of the parties. The learned Arbitrator

vide award dated 01.07.2005 allowed the claim of the claimant and

disallowed the liquidated damages/compensation and rejected the

2

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

contractor and the amount awarded by the learned Arbitrator in both

the arbitration cases are as under:-

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

Claim

No.

Particulars of claim of the

Petitioner before the Ld.

Arbitral Tribunal

Amount

claimed by the

Petitioner

Amount

awarded by Ld.

Arbitrator

1.Balance payment claimed

by the Petitioner towards

Final Bill

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

2.Amount allegedly withheld

by ONGC

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

3.Escalation claimed by the

Petitioner as per provisions

of the contract

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

4.Losses and damages

incurred by the Petitioner in

the shape of overheads due

to prolongation of contract

Rs.21,60,375/-Claim rejected

by the Ld.

Arbitrator

5.Loss of turnover suffered by

the Petitioner due to

prolongation of contract

Rs.55,58,428/-Claim rejected

by the Ld.

Arbitrator

6.Declaration sought by the

Petitioner that the penalty

under Clause 2 imposed by

ONGC was illegal and

unwarranted and the

amount withheld by ONGC

was payable to the

Petitioner with interest @

24%

Rs.30,18,975/-

[amount that

was withheld by

ONGC towards

liquidated

damages]

Amount of

Rs.30,18,975/-

withheld by

ONGC as

liquidated

damages was to

be refunded and

adjusted

towards

payment of

Claim No.1 and

2

7.Interest payable on final bill - -

8.Interest payable on withheld

amount

- -

9.Interest payable on

escalation amount

- -

10.Interest payable on looses

and damages

- -

11.Interest pre-suit pendente

lite and future interest @

24%

- 10% interest

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

Total amount awarded by Ld. Arbitrator

(Claim 1 + 2 + 3)

Rs.58,11,164/-

3

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

Claim

No.

Particulars of claim of the

Petitioner before the Ld.

Arbitral Tribunal

Amount

claimed by the

Petitioner

Amount

awarded by Ld.

Arbitrator

1.Balance payment claimed

by the Petitioner towards

Final Bill

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

2.Amount allegedly withheld

by ONGC

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

3.Escalation claimed by the

Petitioner as per provisions

of the contract

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

4.Losses and damages

incurred by the Petitioner in

the shape of overheads due

to prolongation of contract

Rs.18,23,613/-Claim rejected

by the Ld.

Arbitrator

5.Loss of turnover suffered by

the Petitioner due to

prolongation of contract

Rs.46,91,973/-Claim rejected

by the Ld.

Arbitrator

6.Declaration sought by the

Petitioner that the penalty

under Clause 2 imposed by

ONGC was illegal and

unwarranted and the

amount withheld by ONGC

was payable to the

Petitioner with interest @

24%

Rs.36,80,142/-

[amount that

was withheld by

ONGC towards

liquidated

damages]

Amount of

Rs.36,80,142/-

withheld by

ONGC as

liquidated

damages was to

be refunded and

adjusted

towards

payment of

Claim No.1 and

2

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

8.Interest payable on withheld

amount

Rs.6,36,000/- -

9.Interest payable on

escalation amount

Rs.18,91,910/- -

10.Interest payable on looses

and damages

Rs.40,39,666/- -

11.Interest pre-suit pendente

lite and future interest @

24%

- 10% interest

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

Total amount awarded by Ld. Arbitrator

(Claim 1 + 2 + 3)

Rs.66,36,252/-

4

The learned Arbitrator allowed the claim of the claimant and

disallowed the liquidated damages/compensation of Rs.32,79,828/-

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

Arbitration Case No.297 of 2002 presuming the same to be a

penalty.

4.Challenging the award, the respondent filed petitions bearing

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

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

same were dismissed by the Single Judge vide order dated

02.11.2007. The learned Single Judge held that the Arbitrator has

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

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

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

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

learned Single Judge held that when the respondent-ONGC

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

hardly be said that respondent is entitled to recovery of liquidated

damages or penalty. While upholding the award passed by the

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

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

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

5

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

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

respondent contended that the pre-estimated liquidated damages of

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

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

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

parties was wrongly disallowed by the Arbitrator presuming the

same to be a penalty.

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

Court was interpretation of Clause 2 of the contract regarding

liquidated damages/compensation levied by the Superintending

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

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

Superintending Engineer to levy liquidated damages under Clause

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

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

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

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

decision of the Superintending Engineer on the question of levy of

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

agitated in the arbitration proceeding. The Division Bench held that

6

when the parties have consciously provided that the decision of the

Superintending Engineer shall be final only to exclude the issue of

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

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

Division Bench has also pointed out that when the respondent-

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

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

15.05.2001 followed by the letter dated 25.05.2001 to the appellant-

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

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

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

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

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

learned Single Judge and set aside the award.

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

Prabhat, learned counsel for the appellant contended that the High

Court failed to appreciate that Clause 25 of the contract which

authorises the quantum of reduction as well as the reduction of

rates for substantive works cannot be construed to empower the

Superintending Engineer to determine the issue of levy of liquidated

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

7

that the dispute relating to levy of compensation for delay provided

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

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

by the learned Arbitrator. The learned counsel further contended

that the Division Bench, in exercising its power under appellate

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

evidence and in upsetting the findings of the learned Arbitrator and

the learned Single Judge.

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

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

submitted that the learned Arbitrator wrongly disallowed the

estimated liquidated damages and reasonable compensation of

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

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

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

learned Arbitrator travelled beyond the terms of the contract and

disallowed the liquidated damages to the respondent even though it

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

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

that the imposition of liquidated damages by the respondent was

8

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

the appeals.

10.We have carefully considered the contentions of both sides

and perused the impugned judgment and materials on record. The

following points arise for consideration in these appeals:-

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

and reasonable compensation by the Superintending

Engineer in terms of Clause 2 of the contract between

the parties is “arbitrable”?

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

that the levy of liquidated damages in terms of Clause 2

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

falling within the jurisdiction of the Arbitrator and whether

the learned Arbitrator has travelled beyond the terms of

the contract?

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

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

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

on 22.02.1996 and was stipulated to be completed by 21.08.1997.

But the work was completed only on 24.05.1999. Insofar as

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

21.02.1996 and was stipulated to be completed by 21.08.1997. But

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

9

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

any significant delay caused by the respondent-ONGC which could

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

respondent-ONGC mentioned that total delay which has occurred

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

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

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

which stipulate compensation payable @ ½% per week subject to

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

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

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

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

recoverable from the claimant as compensation for the delay

caused by the claimant in completing the work.

12.After reference to various correspondences between the

respondent-ONGC and the appellant and after a detailed

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

respondent-ONGC was responsible to an extent for the prolongation

of the contract and the claimant was also to some extent

responsible which resulted in slow progress of the work.

Considering the delay alleged by the respondent-ONGC, the

10

learned Arbitrator has observed that there was delay of 640 days

and both the respondent-ONGC and the appellant were responsible

for the delay and observed as under:-

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

was the 22

nd

February 1996 and the work was to be completed on the

22

nd

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

commencement of the work was the 13

th

March 1996 and the work was

completed on the 24

th

May 1999. Thus, there took place delay of 640

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

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

understood how the respondent has quantified the delay imputed to

either of the parties.”

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

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

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

learned Single Judge held that the damages were payable by either

of the parties.

14.The learned Single Judge, in our view, failed to note the

implication of Clause 2 of the contract and also various

correspondences between the parties, while affirming the award

passed by the learned Arbitrator. In terms of Clause 2 of the

agreement dated 05.02.1996 between the parties, the contractor is

to proceed with the work with due diligence throughout the contract

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

11

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

determination/quantification of compensation for delay or certain

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

agreement, the Superintending Engineer shall assess and quantify

the compensation. By the terms of the agreement, the parties have

consciously agreed that in case the contractor fails to comply with

the conditions and complete the work with due diligence, the

Superintending Engineer may decide the compensation in terms of

Clause 2 of the agreement.

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

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

the agreement which reads as under:-

“Clause 2: Compensation for Delay

The time allowed for carrying out the work as entered in the tender shall

be strictly observed by the contractor and shall be deemed to be the

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

reckoned from the 15

th

day after the date on which the order to

commence the work is issued to the contractor. The work shall

throughout the stipulated period of the contract be proceeded with all

due diligence and the contractor shall pay compensation on amount

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

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

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

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

further to ensure good progress during the execution of the work, the

contractor shall be bound in all cases in which the time allowed for any

12

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

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

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

such time has elapsed, and three-fourth of such time has elapsed.

However, for special jobs if a time schedule has been submitted by the

contractor and the same has been accepted by the Engineer-in-Charge,

the Contractor shall comply with the said time schedule. In the event of

the contractor failing to comply with this condition, he shall be

liable to pay as compensation an amount equal to ½ % per week as

the Superintending Engineer (whose decision in writing shall be

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

every week that the due quantity of works remains incomplete

provided always that the entire amount of compensation to be paid

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

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

[Emphasis added]

A reading of Clause 2 makes it clear that the Superintending

Engineer has been conferred with not only a right to levy

compensation; but it also provides a mechanism for determination

of the liability/quantum of compensation. The very Clause 2 itself

would show that such a decision taken by the Superintending

Engineer shall be final. The finality clause in the contract in terms of

Clause 2 makes the intention of the parties very clear that there

cannot be any further dispute on the said issue between the parties;

much less before the arbitrator.

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

Arbitration, reads as under:-

13

“Clause 25 – Settlement of disputes by Arbitration

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

hereafter arises between the parties hereto or the respective

representatives or assigns in connection with or arising out of the

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

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

interpretation of this agreement, application of provisions thereof or

anything hereunder containing or arising hereunder or as to rights,

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

matter whatsoever incidental to this contract or otherwise concerning the

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

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

completion or abandonment thereof shall be referred to the sole

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

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

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

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

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

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

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

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

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

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

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

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

arbitrator will be entitled to proceed de-novo.

………..

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

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

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

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

waived and absolutely barred and the Corporation shall be discharged

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

claims.

14

The decision of the Superintending Engineer regarding the

quantum of reduction as well as his justification in respect of

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

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

………..”. [Emphasis added]

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

Superintending Engineer from the purview of arbitration is clearly

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

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

was illegal and unwarranted and the amount withheld by ONGC

was payable to the appellant. The very prayer to declare the

amount levied by the Superintending Engineer as illegal is against

the tenor of the terms of the contract (Clause 2) between the

parties. By virtue of the finality clause in the contract, any decision

taken by the Superintending Engineer in levying compensation

cannot be referred to an arbitrator. The parties have consciously

agreed to have finality to the decision of the Superintending

Engineer and the same cannot be frustrated by challenging the

same as illegal. Any other meaning to the finality clause in the

contract and allowing further adjudication by another authority would

make the agreed Clause 2 and Clause 25 of the agreement

meaningless and redundant.

15

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

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

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

letters dated 08.12.1999, 09.12.1999, 17.12.1999, 11.02.2000 and

17.04.2000, ONGC called upon the respondent/contractor to

remove the defects failing which it would get the defects remedied

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

without prejudice to the right of ONGC to recover compensation in

accordance with Clause 2 of the agreement. The contention of

ONGC is that by the letter dated 15.05.2001, the contractor was put

on notice that in exercise of the power conferred on the

Superintending Engineer under Clause 2, the contractor is liable to

pay 10% of the contract value by way of compensation. The

contractor was informed by the said letter dated 15.05.2001 that the

compensation is levied on him for the period of 39 weeks at half per

cent per week subject to maximum of 10% of the contract value and

that the actual amount of compensation shall be worked out on

checking the final bill and the same shall be recovered by ONGC

from the final bill. By the subsequent letter dated 25.05.2001, the

claimant was informed that the final bill is ready and the claimant

was required to reconcile the final bill after adjusting the

compensation.

16

18.A reading of the other terms of the contract would further

indicate that under Clauses 13 and 14 of the agreement, the parties

have agreed for payment of compensation and non-payment of

compensation in certain situations. Significantly, Clauses 13 and 14

of the agreement do not have any finality clause which indicates

that any dispute arising out of such clauses may be a dispute

referable to arbitration. However, in respect of levy of compensation

for the delay, Clause 2 of the agreement specifically makes the

decision of the Superintending Engineer, final. The entire contract

between the parties and the terms thereon have to be read as a

whole to decide the rights and liabilities of the parties arising out of

the contract. In claim No.6, the contractor has sought for declaration

“that the penalty under Clause 2 imposed by ONGC was illegal and

unwarranted and the amount withheld by ONGC was payable to the

contractor with interest @ 24%”. Claim No.6 sought for by the

contractor is clearly in violation of Clause 2 of the agreement

between the parties, in and by which, the parties have agreed that

the decision taken by the Superintending Engineer levying

compensation shall be final. The finality clause in the contract

cannot therefore be frustrated by calling upon the arbitrator to

decide on the correctness of levy of compensation by the

Superintending Engineer.

17

19.While considering similar contractual provisions viz. Clause 2

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

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

held as under:-

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

determination of the compensation which can be claimed by the

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

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

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

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

considering the various mitigating circumstances that may be pleaded by

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

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

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

Superintending Engineer and no one else.

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

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

the finality cannot be construed as excluding the jurisdiction of the

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

which is the arbitration clause starts with an opening phrase excluding

certain matters and disputes from arbitration and these are matters or

disputes in respect of which provision has been made elsewhere or

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

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

certain types of determinations are left to the administrative authorities

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

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

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

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

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

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

18

the purview of the arbitrator and that the compensation, determined

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

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

question before the arbitrator.

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

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

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

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

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

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

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

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

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

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

Superintending Engineer, who might not only reduce the percentage but

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

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

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

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

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

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

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

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

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

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

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

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

adjudicated in accordance with that clause and which cannot be referred

to arbitration under clause 25”. [Underlining added]

The ratio of the above decision squarely applies to the present

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

19

decided by the Superintending Engineer and his decision would be

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

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

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

wherein, the Supreme Court interpreted Clause 12 of the agreement

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

reads as under:-

“The decisions of the Senior Regional Manager regarding such

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

suffered by the Corporation shall be final and binding on the

contractors….”.

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

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

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

any further adjudication since the agreement itself provides a named

adjudicator — concurrence to the same obviously is presumed by

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

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

jurisdiction to entertain an application for reference to arbitration as

regards the disputes arising therefrom and it has been the consistent

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

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

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

themselves have decided to have the same adjudicated by a particular

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

are questions of fact and usually mentioned in the contract documents

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

20

matter of adjudication of these specialised matters and being termed in

the agreement as the excepted matters.

……..

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

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

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

than relying on the adjudicatory process available in the contract itself

through their own Senior Regional Manager. The agreement as noticed

above expressly provides that the adjudication shall be effected by the

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

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

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

In the present case, the parties themselves have agreed that the

decision of the Superintending Engineer in levying compensation is

final and the same is an “excepted matter” and the determination

shall be only by the Superintending Engineer and the correctness of

his decision cannot be called in question in the arbitration

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

of law.

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

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

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

agreement submitted that for quantification of liquidated damages,

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

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

21

jurisdiction of the arbitrator. The learned ASG however, submitted

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

mechanism for quantification of liquidated damages, but Clause 2

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

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

Superintending Engineer is final and the present case is therefore,

distinguishable from BSNL’s case.

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

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

to pay liquidated damages; but only provides for entitlement of

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

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

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

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

under:-

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

respondent to pay liquidated damages and the entitlement of the

appellants, to collect the same from the respondent is an excepted

matter for the purpose of Clause 20.1 of the general conditions of

contract. The High Court has pointed out correctly that the authority of

the purchaser (BSNL) to quantify the liquidated damages payable by the

supplier Motorola arises once it is found that the supplier is liable to pay

the damages claimed. The decision contemplated under Clause 16.2 of

the agreement is the decision regarding the quantification of the

liquidated damages and not any decision regarding the fixing of the

22

liability of the supplier. It is necessary as a condition precedent to find

that there has been a delay on the part of the supplier in discharging his

obligation for delivery under the agreement.

………..

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

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

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

present case, there is a clear dispute as to the fact that whether there

was any delay on the part of the respondent. For this reason, it cannot

be accepted that the appointment of the arbitrator by the High Court was

unwarranted in this case. Even if the quantification was excepted as

argued by the appellants under Clause 16.2, this will only have effect

when the dispute as to the delay is ascertained. Clause 16.2 cannot be

treated as an excepted matter because of the fact that it does not

provide for any adjudicatory process for decision on a question, dispute

or difference, which is the condition precedent to lead to the stage of

quantification of damages.”

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

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

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

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

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

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

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

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

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

exclusively conferred upon the Superintending Engineer and Clause

23

2 of the present agreement is a complete mechanism for

determination of liability and when such compensation is levied by

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

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

Superintending Engineer shall levy the compensation of the amount

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

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

Superintending Engineer is final and cannot be the subject matter of

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

declare the compensation levied by the Superintending Engineer as

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

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

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

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

that the decision of the Superintending Engineer shall be final.

25.Learned Single Judge erred in proceeding under the

presumptive footing that the compensation levied by the

Superintending Engineer was in the nature of penalty. It was

actually levy of liquidated damages/compensation in terms of

Clause 2 of the agreement. Levy of compensation of

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

24

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

Clause 2 of the agreement is final and the same could not have

been the subject matter of arbitration. Applying the ratio of

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

aside the order of the learned Arbitrator with regard to claim No.6 by

holding that levy of liquidated damages/compensation is adjustable

against the final bill payable to the appellant. The impugned

judgment does not therefore, suffer from any infirmity warranting

interference.

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

awarded by learned Arbitrator in favour of the appellant is

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

of compensation/liquidated damages withheld by ONGC is

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

satisfaction of the arbitral award, ONGC has deposited an amount

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

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

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

compliance of the order of the Supreme Court dated 09.04.2009,

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

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

25

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

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

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

refunded to the appellant.

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

………………………..J.

[R. BANUMATHI]

………………………..J.

[A.S. BOPANNA]

….………………………..J.

[HRISHIKESH ROY]

New Delhi;

November 08, 2019

26