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2006 Supreme(SC) 1274
Supreme Court Of India
H.K.SEMA,R.V.RAVEENDRAN
Ramnath International Construction - Appellant
Versus
Union of India - Respondent
Civil Appeal Nos. 3167-3168 of 2005
Decided On : 12/11/2006
Yashank Adhyaru, Sr. Advocate, D. P. Sharma, Abhishek Singh and Sanjay Kapur, Advocates with him, for Appellant; Amarendra Saran, A. S. G., B. B. Singh, Kumar Rajesh Singh, Ms. Sushma Suri and Mrs. Anil Katiyar, Advocates with him, for Respondents.
An arbitrator, as a creature of the contract, cannot award compensation prohibited by express contractual terms. Where a contract bars claims for compensation following the grant of time extensions, such a clause is binding, and ignoring it constitutes a jurisdictional error.
Headnote:(A) General Conditions of Contract - Clause 11(C) - Compensation for delays - Extension of time - Where a contract provides that no claim for compensation shall be admitted as a result of extensions granted for delays beyond the control of the contractor or attributable to the employer, such a clause acts as a complete bar to any claim for compensation arising from such extensions (Para 11).
(B) Arbitration - Jurisdiction of Arbitrator - Arbitrator as a creature of the contract - The sole function of an arbitrator is to arbitrate in terms of the contract; they have no power beyond what the parties have agreed upon - If an arbitrator ignores specific terms of the contract or awards amounts prohibited by the agreement, it constitutes a jurisdictional error and legal misconduct (Para 13).
Facts of the case:
A contractor was awarded two contracts for the construction of aircraft hangars and roads. The work was delayed, and the employer granted multiple extensions of time. The contractor subsequently claimed compensation for loss of profit and escalation in materials and labour. The Arbitrator awarded these claims, reasoning that the grant of an extension does not release the employer from liability for damages unless the contractor consented to the extension alone in satisfaction of claims. The High Court set aside these awards, citing a contract clause that prohibited any claim for compensation arising as a result of granted extensions.
Findings of Court:
The court found that the clause prohibiting compensation for extensions encompasses all delays beyond the contractor's control, including those attributable to the employer. Seeking and obtaining an extension of time precludes the contractor from claiming further compensation for that delay. The Arbitrator's decision to award damages despite the clear contractual bar was an act in excess of jurisdiction.
Issues: (i) Whether claims for compensation arising from delays are unsustainable if the contract prohibits compensation as a result of extensions granted? (ii) Whether the Arbitrator committed legal misconduct by ignoring the specific contractual bar in the agreement?
Ratio Decidendi: A contractual provision that bars compensation in exchange for an extension of time is binding. An arbitrator is bound by the contract and cannot widen their jurisdiction by deciding a question contrary to the agreement. Acting in derogation of express contractual terms amounts to an error going to the root of the arbitrator's jurisdiction.
Result: Appeals dismissed.
H. K. SEMA, J. :- The validity and legality of the judgment dated 31.10.2002 of the Division Bench of the High Court of Madras in OSA. No. 27/1995 and 25/1996 is assailed in these appeals.
2. The appellant was awarded two contracts - the first for construction of LRMR Aircraft Hangar and Airtech Hangar and connected works; and the second for construction of roads and allied works at NAS Arakonam. In respect of the two contracts, hereinafter referred to as the Hangar Contract and Road Contract, the tenders submitted by appellant were accepted on 10.10.1988 and 3/5.1.1989 respectively. The necessary agreements were executed between the parties. Disputes arose between the parties in respect of those contracts and the matter was referred to Arbitration. The Arbitrator after examining the oral and documentary evidence made his Awards dated 20.7.1993 and 5.3.1994. Applications were filed before the learned Single Judge by the respondent herein for setting aside the Awards. The learned Single Judge by orders dated 24.8.1994 and 22.9.1995 rejected the applications and in each case made a rule of the court in terms of the award. Being aggrieved the respondent filed OSA Nos. 27/1995 and 25/1996, which were partly allowed by the Division Bench of the High Court. Hence, the present appeals by the claimant contractor.
3. It may not be necessary for us to refer to the entire facts leading to the filing of the present appeals as the substantial question of law posed requires reference to limited facts. Suffice it to say that awards of the learned Arbitrator related to claims under several heads. The controversy in these appeals relate to award in respect of item No. 24 in the Hangar contract and items 13 to 16 in respect of the road contract. The particulars thereof are extracted below :
Item No. Description of work Amount claimed Amount awarded 24
Rs.2,77,41,692 Rs.51,36,015/98
Hanger Contract Amount due on account of escalation in materials and labour Road Contract
13 Loss of profit due to turnover loss for staying beyond contract period Rs.2,34,78,404
14. Additional compensation for work done beyond original contract period Rs. 22,89,200 Rs.41,51,847/50
15. Loss of profit on balance work due to termination of contract Rs. 26,00,000
16. Escalation payable for the period 5.3.1992 to date of termination Rs. 3,50,000
4. In regard to Hangar Contract, undisputedly, the contract work had to be completed in two phases, the first phase by 31.10.1989 and the second phase by 30.4.1990. However, the contract work could not be completed within the stipulated time, partly due to the default on the part of respondent. It is also undisputed that on the request of the contractor, the employer gave several extensions - by a letter dated 28.2.1990 the period of completion of work was extended up to 30.6.1990; by a letter dated 10.5.1991 it was extended up to 31.5.1991; by a letter dated 27.8.1991 it was extended up to 30.9.1991; by a letter dated 23.1.1992 the time was extended up to 15.4.1992; by a letter dated 15.5.1992 it was extended up to 28.5.1992 and by a letter dated 4.6.1992, it was further extended up to 22.6.1992. The contract was subsequently terminated by the employer on 1.7.1992.
5. In respect of the road contract, the date of commencement of work was 3.1.1989. The due date of completion was 2.11.1990 (21 months). The employer granted extensions from time to time on the request of the contractor up to 31.5.1992. Subsequently, the contract was terminated by the employer on 14.7.1992.
6. The basis of the disputed claims is that the execution of work was delayed on account of breaches on the part of the employer and the employer is liable to compensate the contractor for all losses and extra cost on account of such delay and extended execution.
7. These claims were resisted by the employer on the ground that the contractor himself was liable for delays; that the employer had granted extension for the delays; and that the contract prohibits the cont
