1. Construction contracts — Dispute over levy of liquidated damages for delay — Arbitration award challenging the levy — Appeal under Section 37, Arbitration and Conciliation Act. (Para 1 , 2 , 3 , 4 , 5 )
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2019 Supreme(SC) 1250
SUPREME COURT OF INDIA
R. BANUMATHI, A.S. BOPANNA, HRISHIKESH ROY, JJ.
M/s. Mitra Guha Builders (India) Company – Appellant
Versus
Oil And Natural Gas Corporation Limited – Respondent
Civil Appeal No.5511, 5512 of 2012
Decided on : 08-11-2019
Important Points
IMPORTANT POINTS
(1) Entire contract between parties and terms thereon have to be read as a whole to decide rights and liabilities of parties arising out of contract.
(2) Once parties have decided that certain matters are to be decided by Superintending Engineer and his decision would be final, same cannot be subject matter of arbitration.
(1) Entire contract between parties and terms thereon have to be read as a whole to decide rights and liabilities of parties arising out of contract.
(2) Once parties have decided that certain matters are to be decided by Superintending Engineer and his decision would be final, same cannot be subject matter of arbitration.
Subject
Arbitration Law - EXCEPTED MATTERS
Act Referred
Headnote
Arbitration and Conciliation Act, 1996 – Section 34 – Arbitration – Scope and ambit – Levy of liquidated damages – Excepted matter – Entire contract between parties and terms thereon have to be read as a whole to decide rights and liabilities of parties arising out of contract – By upholding award of Arbitrator, Single Judge held that delay in completion of work was on account of both parties and by applying equitable principles, Single Judge held that damages were payable by either of parties – By virtue of finality clause in contract, any decision taken by Superintending Engineer in levying compensation cannot be referred to an arbitrator – Parties have consciously agreed to have finality to decision of Superintending Engineer and same cannot be frustrated by challenging same as illegal – Whether there was delay in completion of work and levy of liquated damages, could not have been determined by Arbitrator – Finality clause in contract cannot be frustrated by calling upon Arbitrator to decide on correctness of levy of compensation by Superintending Engineer – Once parties have decided that certain matters are to be decided by Superintending Engineer and his decision would be final, same cannot be subject matter of arbitration – Impugned judgment does not suffer from any infirmity warranting interference – Appeals dismissed. (Paras 13, 16, 17, 18, 19, 21, 25 and 27)
Facts of the case:
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 Division Bench of High Court has set aside the order of Single Judge and also of the learned Arbitrator by holding that levy of liquidated damages is an “excepted matter” under Clause 2 read with Clause 25 of the contract and same is not arbitrable.
Findings of Court:
Levy of 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 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, Division Bench of the High Court rightly set aside order of Arbitrator with regard to claim No.6 by holding that levy of liquidated damages/compensation is adjustable against final bill payable to appellant.
Result : Appeals dismissed.
Legal Category Hierarchy
Advocates Appeared:
For the Appellants :B.N. Patel, Romila, Sweta, Sharmila Upadhyay, Advocates
For the Respondent(s):K.M. Natraj, Akshay Amritanshu, Balraj Dewan, Advocates
For the Appellants :B.N. Patel, Romila, Sweta, Sharmila Upadhyay, Advocates
For the Respondent(s):K.M. Natraj, Akshay Amritanshu, Balraj Dewan, Advocates
Table of Contents
2. Whether the levy of liquidated damages under a finality clause constitutes an excepted matter non-arbitrable under the arbitration agreement. (Para 6 , 8 , 9 )
3. The court found that the contract's finality clause regarding compensation for delay created a complete mechanism for determining liability, excluding it from the arbitrator's jurisdiction. (Para 10 , 11 , 12 , 13 , 14 , 15 , 16 , 17 , 18 , 22 , 23 , 24 , 25 )
4. When a contract provides a complete mechanism for determining liability with a finality clause, such matters are excepted from the purview of arbitration. (Para 15 , 16 , 19 , 20 , 21 , 24 )
5. Appeals dismissed — Division Bench judgment upheld — Liquidated damages held as adjustable against the final bill. (Para 26 , 27 )
6. Is the levy of liquidated damages arbitrable if the contract stipulates that the decision of a designated officer is final?
No. If the contract provides a complete mechanism for determining both liability and quantification, and explicitly states that the designated officer's decision is final, such matters are considered excepted matters and are outside the purview of the arbitrator. (Para 15 , 16 , 19 , 21 , 24 )
7. How does the court distinguish between a clause that merely entitles a party to damages and one that creates an excepted matter?
A clause is an excepted matter if it provides a complete adjudicatory process for deciding liability. If a clause only provides for the quantification of damages once liability is already established, the determination of whether a delay occurred remains arbitrable. (Para 22 , 23 , 24 )
8. What is the legal effect of a matter being classified as an excepted matter in an arbitration agreement?
Excepted matters do not require further adjudication because the agreement provides a named adjudicator. Consequently, an arbitrator lacks jurisdiction to entertain disputes falling within the ambit of such matters, as the parties have consciously agreed to a specific finality. (Para 16 , 20 , 21 )
JUDGMENT :
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:-
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 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/- | ||
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/ | |
