A contractual clause prohibiting compensation for delay does not bar an arbitral tribunal from awarding damages when the delay is attributable to the employer, as such clause is unconscionable and violates public policy.

Headnote:(A) Arbitration and Conciliation Act, 1996 - Section 34 - Challenge to arbitral award - General Conditions of Contract - Clause 17A(ii) - Prohibition on compensation for extended period - Constitution of India - Article 14 - Unconscionable clauses - Contract Act, 1872 - Sections 55 and 73 - Right to damages for breach.

(B) Even where a contract clause provides only for extension of time and no compensation for delay caused by the employer, the arbitrator is not precluded from awarding damages for the contractor’s losses. Such a clause, if it allows the defaulting party to take advantage of its own wrong, is unconscionable and violative of Article 14 of the Constitution. The arbitrator’s power to award damages under Section 73 of the Contract Act cannot be waived by a prohibitory clause.

Facts of the case:
The petitioner, a contractor, was awarded a contract by the respondent (Railways) for construction of bridges. The contract period was 11 months but was extended for nearly 67 months due to delays attributable to the respondent, including failure to acquire land and provide drawings. The contract was eventually foreclosed. The petitioner claimed various heads of compensation. The Arbitral Tribunal, by award dated 14.10.2020, rejected claims 9 to 12 (overhead charges, escalation, loss of profit) solely relying on Clause 17A(ii) of the GCC which states that no compensation is payable for works carried forward to the extended period. The petitioner challenged this under Section 34 of the Act.

Findings of Court:
The court found that the delay was solely attributable to the respondent. It held that Clause 17A(ii) cannot prevent the Arbitral Tribunal from awarding compensation for damages suffered due to the respondent’s own delay. The court referred to the judgments in Asian Techs Ltd. v. Union of India, K.S. Baburaj v. Union of India (confirmed by the Supreme Court), and MBL Infrastructures Ltd. v. Delhi Metro Rail Corporation, which establish that such prohibitory clauses are unconscionable and do not tie the hands of the arbitrator. The award rejecting claims 9 to 12 was set aside, and the petitioner was permitted to initiate fresh proceedings for those claims. The rejection of interest (Claim 14) and cost (Claim 15) was upheld as not perverse or illegal.

Issues: (i) Whether Clause 17A(ii) of the GCC, which prohibits payment of compensation for the extended period of contract, bars the Arbitral Tribunal from awarding damages to the contractor when the delay is attributable to the Railways? (ii) Whether such a clause is unconscionable and violative of public policy?

Ratio Decidendi: A clause in a contract that denies compensation to a contractor for delay caused by the employer is unconscionable, unfair, and violates Article 14 of the Constitution (Balmer Lawrie & Co. Ltd. v. Partha Sarathi Sen Roy). The arbitrator has the jurisdiction to award damages under Section 73 of the Contract Act despite a contractual prohibition, as the defaulting party cannot take advantage of its own wrong. The award was therefore set aside on the ground of patent illegality and conflict with public policy. Result : Petition allowed in part. The award dated 14.10.2020 is set aside to the extent of rejection of Claims 9 to 12. The petitioner may initiate fresh proceedings for those claims. The rest of the award is confirmed.

ORDER

The petitioner is the claimant and the petitioner has filed this petition under Section 34 of the Arbitration and Conciliation Act, 1996 [for brevity ‘the Act’] challenging the award passed by the Arbitral Tribunal dated 14.10.2020 insofar as the rejection of claim Nos.9 to 12, 14 and 15 made by the petitioner.

2. The case of the petitioner is that the Southern Railway called for bids for the proposed new BG Track between Tindivanam and Nagari (via) Walajah Road – Proposed Construction of Major Bridges, Foundations, Substructures & Superstructures to the following spans:

a) Clear span of 3x18.30m PSC ‘U’ TYPE Girder at CH:34590 (SUKA RIVER)

b) Clear span of 4x12.20m PSC ‘U’ TYPE Girder at CH:35981

c) Clear span of 2x12.20m PSC ‘I’ TYPE Girder at CH:35169.62 between TELLAR and VANDAVASI

d) Clear span of 2x12.20m PSC ‘I’ girder at CH:60000.41 between CHEYYAR and IRUNGUR

e) Clear span of 3x12.20m PSC ‘I’ girder at CH:85548.78

f) Clear span of 2x12.20m PSC ‘I’ girder at CH:105614.08 between THIMIRI and ARCOT in TINDIVANAM-NAGARI Section.

3. The petitioner participated in the bid and was declared as a successful bidder and Letter of Acceptance [for brevity ‘LOA’] dated 22.03.2012 was issued by the respondent and the contract was awarded to the petitioner for a contract value of Rs.6,85,37,773/-. Thereafter, an agreement was entered into between the parties on 12.07.2012. Subsequently, the contract value was also revised to Rs.7,32,87,528/- by way of a rider agreement dated 17.11.2016.

4. The scheduled period of contract was for 11 months from the date of issuance of LOA i.e. by 21.02.2013, but it was extended for nearly 67 months until it was foreclosed on 30.08.2018.

5. The specific case of the petitioner is that there were major impediments/ hindrances faced by them, which prolonged the project due to

(a)Delay in approving designs & drawings

(b)Delay due to variations in original work

(c)Delay in furnishing centre line and temporary bench mark

(d)Delay in clearing hindrances

(e)Delay in handing over work site

(f)Delay due to entrustment of new work.

6. The further case of the petitioner that delay in execution of the project was solely attributable to the Southern Railway and the petitioner has to face extreme hindrance and bottlenecks at various stages. Hence, the petitioner requested the Railways to foreclose the contract owing to indefinite extension of period and finally, on 03.09.2018, the contract was foreclosed. The work experience certificate was issued on 19.09.2018. However, no payment was made towards final bill and the monies retained towards Bank Guarantee, security deposit etc. was also not released. In view of the same, the petitioner, vide its letter dated 25.10.2019 invoked the arbitration clause and an Arbitral Tribunal was also constituted.

7. The petitioner made various claims before the Arbitral Tribunal and the same was resisted by the Southern Railway. Ultimately, after considering the facts and circumstances of the case and the various clauses in the agreement and on appreciation of evidence, the following award came to be passed by the Arbitral Tribunal on 14.10.2020:

8. Insofar claim Nos.1,2,4 & 5 are concerned, these claims were awarded in favour of the petitioner through an interim award dated 20.07.2020. All the other claims were considered and a final award was passed on 14.10.2020 and this petition has been filed insofar as the rejection of claims made towards claim Nos.9 to 12, 14 and 15.

9. This Court carefully considered the submissions made on either side and the materials available on record. This Court carefully went through the award passed by the Arbitral Tribunal.

10. Claim No.9 pertains to compensation towards overhead charges during the extended period of contract. Claim No.10 pertains to escalation cost at the rate of 10% p.a. for the work done beyond the original currency period. Claim No.11 pertains to loss of profit viz., loss sustained during the contract period due to prolongation of contract and

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2025 Supreme(Online)(Mad) 71454

IN THE HIGH COURT OF JUDICATURE AT MADRASHonourable Mr Justice N. ANAND VENKATESHM/s.Chendur Associates – AppellantVersusThe Union of India Rep by the General Manager So – Respondent

A contractual clause prohibiting compensation for delay does not bar an arbitral tribunal from awarding damages when the delay is attributable to the employer, as such clause is unconscionable and violates public policy.

IN THE HIGH COURT OF JUDICATURE AT MADRAS
Honourable Mr Justice N. ANAND VENKATESH
M/s.Chendur Associates – Appellant
Versus
The Union of India Rep by the General Manager So – Respondent