ivil Appeal No 1524 of 1982
From the Judgment and Order dated 591977 of the Hima chal Pradesh High Court in FAO No 8 of 1975
AB Rohtagi Mrs Urmila Kapoor Miss section Janani and Naresh K Sharma for the Appellant
Miss A Subhashini for the Respondents
The Judgment of the Court was delivered by RANGANATHAN J
The appellant Vishwanath Sood undertook the construction of a Farmers  Community Centre Building at Thanedhar by an agreement entered into with the Union of India and the State of Himachal Pradesh dated 2061968
Certain disputes arose between the parties to the agreement and in terms of clause 25 of the agreement they were re ferred to a sole arbitrator
The contractor submitted a claim of Rs 128000 while the respondents also submitted a counter claim
By an award dated 2031972 the abritrator awarded an amount of Rs31932 to the contractor and a sum of Rs21504 to the respondents
The award was filed in the court
The contractor filed an application in the court for modification or correction of the award in respect of three items of his claim  1 8 and 9 and item No 1 of the respondent s counter claim
The Department also filed its objections to the award and prayed that a sum of Rs808029 should be awarded in favour of the Department or the award remitted to arbitrator
The 292 learned single Judge dismissed the objections of the re spondents
So far as the appellant s prayers were concerned he allowed the same only in respect of item 1 of the re spondent s counter claim
He held that the arbitrator was not justified in granting to the Government a sum of Rs20000 against the contractor
Both the contractor and the respondents preferred appeals to the Division Bench
The Bench reversed the order of the learned single Judge
It set aside the order of the learned single Judge in so far as the sum of Rs20000 was deleted thereby from the award of the arbitrator
The award was restored to its original terms and the contractor was held entitled to interest at 6 per cent on the amount found due to him after adjusting the sum awarded by the arbitrator in favour of the Government against the sum awarded in favour of the contractor
The contractor has preferred this appeal by special leave from the order of the Division Bench of the High Court
Learned counsel for the appellant pressed the conten tions in respect of the four items to which he had objected before the learned single Judge and the Division Bench
Three of these items pertain to the claims put forward by the contractor which were rejected by the arbitrator and held by the courts to have been rightly rejected
The first claim item No 1 made by the contractor was of a sum of Rs 12720 which according to him was the loss incurred by him by reason of the Department s delay in handing over the site to him for executing the contract
The learned single Judge discussed this aspect of the matter at length
He observed that on this point there was on the one hand oral evidence adduced on behalf of the Department while there was only the bare denial of the contractor on the other
He pointed out that the arbitrator had fully consid ered the matter and that it was not open to the court to re assess the evidence and that there was no error apparent on the face of the record
The second claim item No 8 was for a sum of Rs6172 being the amount kept as security with the respondent
In respect of this item also the learned single Judge discussed the evidence which showed that the security amount had been properly adjusted by the Department which had been constrained to take up the work departmental ly at the cost and risk of the contractor
He held that this was an aspect which had been considered by the arbitrator and a proper conclusion arrived at
The third claim put forward by the petitioner item No 9 was for a sum of Rs30000 claimed as compensation for an amount spent by the contractor for the purchase of a truck for this work
The learned single Judge here again pointed out that no material had been placed before 293 the arbitrator by the contractor to show that he was enti tled to the amount and that in any event having regard to the fact that the work was executed by the Department at the cost and risk of the contractor there was no question of the contractor preferring any claim in respect of this item
The above three claims of the petitioner were also rejected by the Division Bench which pointed out that the award made by the arbitrator was not a speaking award and that the face of the award did not show any error
We do not think that so far as these claims are concerned that the appellant has any arguable case at all
As pointed out by the Division Bench of the High Court the award was a non speaking award
The arbitrator had considered the materials placed before him and had arrived at his conclusions
The award does not on the face of it disclose any error much less any error of law which needs to be set fight
We therefore hold that the High Court was justified in affirming the award so far as the rejection of these three claims is concerned
The position in regard to the counter claim of the respondents which was allowed by the arbitrator and the Division Bench stands on a different footing
The respond ents  claim before the arbitrator was that they were enti tled to receive from the contractor Rs24000 on account of payment of 10 per cent compensation on the tendered amount for not executing the work in accordance with the terms and conditions of the agreement
As against this claim the arbitrator awarded the respondents a sum of Rs20000
The learned single Judge took the view that having regard to clause 2 of the contract pertaining to the claim by the respondent read with clause 25 it was clear that any com pensation under clause 2 could be adjudicated upon only by the superintending Engineer or the Development Commissioner and that it was not open to the arbitrator to have entered upon a reference in regard to this claim at all
In order to appreciate the finding of the learned single Judge it will be useful to set out clauses 2 and 25 of the conditions of contract on which his decision was based 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 fifteenth day after the date on which the order to commence the work is issued to the contractor
The work shah throughout the stipulated period of the contract be proceeded with all due diligence and the contractor shall pay as compensation an amount 294 equal to one per cent or such smaller amount as the Superintending Engineer whose decision in writing shall be final may decide on the amount of the estimated cost of the whole work as shown in the tender for every day that the work remains uncommenced or unfinished after proper dates
And 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 work exceeds one month save for special jobs to complete one eighth of the whole of the work before one fourth of the whole time allowed under the contract has elapsed three eighth of the work before one half of such time has elapsed and threefourth of the work before 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 con tractor failing to comply with this condition he shall be liable to pay as compensation an amount equal to one per cent or such smaller amount as the Superintending Engineer whose decision in writing shall be final may decide on the said estimated cost of the whole work for every day that the due quantity of work remains incomplete provided always that the entire amount of compensation to be paid under the provisions of this clause shall not exceed ten per cent on the estimated cost of the work as shown in the tender Clause 25 Settlement of disputes by Arbitra tion Except where otherwise provided in the contract all questions and disputes relating to the meaning of the specifications designs drawings and instructions hereinbefore men tioned and as to the quality of workmanship or materials used on the work or as to any other question claim matter or thing whatsoever in any way arising out of or relating to the contract designs drawings specifications estimates instruction order or these condi tions or otherwise concerning the works or the execution or failure to execute the same whether arising during the progress of the work or after the completion or abandonment thereof shall be referred to the sole arbitra tion of the person appointed by the Chief Engineer Himachal Pradesh Public Works De partment    295 The Division Bench did not agree with the view of the learned single Judge
It pointed out that while in the ordinary course the rate of compensation payable by the contractor is one per cent of the amount of the estimated cost of the whole work under clause 2 the Superintending Engineer is authorised to depart from this figure and deter mine the compensation at a smaller amount if there are any extenuating circumstances in favour of the contractor
The question however was whether the compensation determined under clause 2 is excluded from the scope of arbitration under clause 25
The Division Bench answered this question in the negative
It pointed out that the sine qua non of clause 2 was that the contractor should have been guilty of delay in commencing the work or in completing it but the clause did not specify either the authority or the procedure for determining whether the contractor is responsible for the default
Observing that there can be a serious dispute in a particular case as to the person who is responsible for the delay the Bench took the view that the determination of this dispute cannot be excluded from the scope of clause 25
The Bench observed that inasmuch as a bona fide dispute can be raised by the contractor in regard to his liability to compensation under clause 2 and no machinery is provided in clause 2 for the resolution of that dispute there is ample justification for holding that resort can be had to arbitra tion under clause 25
The statement in clause 2 that the decision of the Superintending Engineer is final according to the Bench merely constituted a declaration that no officer in the Department could disturb his quantification
But this finality cannot be construed as extending to ex clude the jurisdiction of the arbitrator under clause 25
On this view of the matter the Division Bench found itself unable to agree with the learned single Judge that the arbitrator had traveled outside his jurisdiction in awarding a sum of Rs20000 as compensation to the Government against the contractor for the delay in executing the work
It will be seen from the narration above that so far as this item was concerned both parties proceeded on the footing that the claim of the Government was a claim under clause 2 and that the arbitrator had awarded the sum only in terms of clause 2
This is also borne out by the fact that the claim of the Department was based on a percentage of the total cost of the work and the restriction of the claim to 10 also appears to have been the result of the proviso to clause 2
The award therefore on a fair reading of it contains a grant by the arbitrator of compensation to the Government in terms of clause 2
It is therefore open to the parties to urge before this Court as they did before the High Court also that on a proper construction of clauses 2 and 25 296 this award was not justified
It is in this respect that this counter claim of the Department stands on a different footing from the earlier claims of the contractor which have been rejected and which we have held above have been rightly rejected
Learned counsel for the appellants contends that the terms of clause 2 clearly envisage the determination of the amount of compensation for the delay in the execution of the work only by the Superintending Engineer and specifically mentions that the decision of the Superintending Engineer in writing shah be final
The opening words of clause 25 Except where otherwise provided in the contract clearly take out of the purview of clause 25 any dispute in respect of a claim under clause 2
He submitted that the clause authorised only the Superintending Engineer to go into the question whether there is any delay or not and the reasons therefore and to determine the rate at which compensation should be charged from the contractor
If the Engineer in charge levies a compensation under clause 2 the contractor can apply to the Superintending Engineer
If the Superin tending Engineer finds that there was no fault on the part of the contractor at all he could waive the compensation under clause 2 and that cannot be challenged by the Depart ment before the arbitrator
Per contra where the Superin tending Engineer confirms that there has been a delay for which compensation should be charged it will not be open to the contractor to challenge the conclusion before the arbi trator
Learned counsel also submitted that even if clause 25 were to be held applicable the question of submitting a dispute in this regard to the arbitrator could only arise if there had been a determination and a dispute under clause 2
Clause 2 envisages that the Engineer in charge should in appropriate cases levy a compensation at the rate specified in that clause
If he did it was open to the contractor to dispute the same and approach the Superintending Engineer to reduce or waive the compensation for any reason whatsoever
Or it may be that even where the Engineer in charge levied no compensation the Superintending Engineer could either on his own motion or on being moved by the department after considering the facts charge a compensation with the quantum of which the department may not be satisfied in which event a dispute could arise
But in the present case neither the Engineer in charge nor the Superintending Engineer had determined any liability at all under clause 2
There was no compensation levied against which there was any protest by the contractor and there was no matter submitted to the Superintending Engineer for determination
In these circum stances the submission of the learned counsel for the appellant is that there was no dispute at all between the parties on 297 the question of compensation and that a dispute cannot be said to arise merely because a counter claim is for the first time put forward by the Department before the arbitra tor
On the other hand the learned counsel for the Depart ment contended that clause 2 is in the nature of a penal clause which automatically takes effect irrespective of any default
He described it as an agreed penalty clause
He stated that the clause made the contractor liable for the penalty prescribed therein whenever there was a delay in the completion of the contract whatsoever might have been the reason therefore the question as to whether the contractor was at default or not being totally immaterial
The Depart ment was therefore entitled to automatically deduct from the bills payable to the petitioner the compensation or penalty at the rate mentioned in clause 2 or such reduced amount as may be determined in a particular case by the Superintending Engineer and that if the contractor objected to this deduction that would give rise to a dispute which can be the subject matter of arbitration under clause 25
He therefore submitted that the Division Bench has rightly construed the terms of the contract and confirmed the award made by the arbitrator
We have gone through the judgment of the Division Bench of the High Court and we have also considered the arguments advanced on both sides
With great respect we find our selves unable to agree with the interpretation placed by the Division Bench on the terms of the contract
Clause 2 of the contract makes the time specified for the performance of the contract a matter of essence and emphasises the need on the part of the contractor to scrupulously adhere to the time schedule approved by the Engineer in charge
With a view to compel the contractor to adhere to this time schedule this clause provides a kind of penalty in the form of a compensa tion to the Department for default in adhering to the time schedule
The clause envisages an amount of compensation calculated as a percentage of the estimated cost of the whole work on the basis of the number of days for which the work remains uncommenced or unfinished to the prescribed extent on the relevant dates
We do not agree with the counsel for the respondent that this is in the nature of an automatic levy to be made by the Engineer in charge based on the number of days of delay and the estimated amount of work
Firstly the reference in the clause to the require ment that the work shall throughout the stipulated period of the contract be proceeded with due diligence and the refer ence in the latter part of the clause that the compensation has to be paid in the event of the contractor failing to comply with the prescribed time 298 schedule make it clear that the levy of compensation is conditioned on some default or negligence on the part of the contractor
Secondly while the clause fixes the rate of compensation at 1 per cent for every day of default it takes care to prescribe the maximum compensation of 10 per cent on this ground and it also provides for a discretion to the Superintending Engineer to reduce the rate of penalty from 1 per cent
Though the clause does not specifically say so it is clear that any moderation that may be done by the Super intending Engineer would depend upon the circumstances the nature and period of default and the degree of negligence or default that could be attributed to the contractor
This means that the Superintending Engineer in determining the rate of compensation chargeable will have to go into all the aspects and determine whether there is any negligence on the part of the contractor or not
Where there has been no negligence on the part of the contractor or where on account of various extraneous circumstances referred to by the Division Bench such as vis major or default on the part of the Government or some other unexpected circumstance which does not justify penalising the contractor the Superintend ing Engineer will be entitled and bound to reduce or even waive the compensation
It is true that the clause does not in terms provide for any notice to the contractor by the Superintending Engineer
But it will be appreciated that in practice the amount of compensation will be initially levied by the Engineer in charge and the Superintending Engineer comes into the picture only as some sort of revisional or appellate authority to whom the contractor appeals for redress
As we see it clause 2 contains a complete machin ery 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 con sidering 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
The Division Bench has construed the expression in clause 2 in parenthesis that the Superintending Engineer s decision shall be final as referring only to a finality qua the department in other words that it only constitutes a declaration that no officer in the department can determine the quantification and that the quantum of compensation levied by the Superintending Engineer shall not be 299 changed without the approval of the Government
After refer ring 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 arbitra tion 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 other wise 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 conclu sion therefore is that the question of awarding compensa tion under clause 2 is outside 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
We may confess that we had some hesitation in coming to this conclusion
As pointed out by the Division Bench the question of any negligence or default on the part of the contractor has many facets and to say that such an important aspect of the contract cannot be settled by arbitration but should be left to one of the contracting parties might appear to have far reaching effects
In fact although the contractor in this case might object to the process of arbitration because it has gone against him contractors generally might very well prefer to have the question of such compensation decided by the arbitrator rather than by the Superintending Engineer
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 incharge 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 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 300 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 contrac tor 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 ques tion
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 adju dicated in accordance with that clause and which cannot be referred to arbitration under clause 25
As stated earlier an alternative ground was urged by the learned counsel for the appellant that no penalty under clause 2 having been imposed by the respondents in the first instance no dispute had at all arisen which could have been referred to arbitration
This point was not taken before the High Court and the relevant facts are not on record
That apart in the view we have taken it is unnecessary to express any opinion on this argument and we refrain from doing so
For the reasons above mentioned we restore the judgment of the learned single Judge
In the result the amount of compensation of Rs20000 awarded by the arbitrator in favour of the Government will stand deleted
The amount of interest payable to the contractor if any will be worked out on the basis of the award as modified by us above
The appeal is allowed
We however make no order as to costs in the circumstances of the case
NVK Appeal allowed


Summary:
The State Government in pursuance of Section 4A of the Act formulated and published a scheme for grant of exemption from Sales Tax to encourage capital investment and estab lishment of new industrial units which were established during the period from 1101982 to 3131985 and producing certain categories of goods
Though the scheme referred to units established it actually referred to the date of commencement of production
The appellant a concern engaged in the business of electric motors pump sets and their parts applied for the exemption
The appellant claimed that the date of actual commencement of use of electricity for production was 4th December 1982 and that was the actual date of commencement of production
The same was endorsed by the General Manag ers District Industrial Centers and the Assistant Engineer concerned while recommending the application
But the difficulty had arisen on account of a certificate attached to the application for exemption
It was given by a firm which had entered into an agreement with the appellant for supply of machines and installation
According to the cer tificate trial production commenced on 4121981
The Division Level Committee before which the application was filed rejected it saying that the date of trial production was really the date of commencement of production and it fell prior to 1101982
The appellant preferred a review claiming that trial production could not be treated as commencement of actual production
The review application was also dismissed and it was held that the unit was estab lished before 1101982 and therefore was not entitled to the exemption
Thereafter the appellant filed a writ peti tion before the High Court
It was rejected
274 Claiming that it is entitled to the exemption the appellant has preferred this appeal by special leave
Allowing the appeal HELD 11 The appellant is entitled to the exemption in terms of the notification dated 3091982
The rejection of the application for exemption proceeds on a total misconcep tion of facts
The conclusion that production was commenced on 4121981 is not based on any evidence
It does not affect the appellant s claim even if there was any doubt about the trial production having taken place at all
Wheth er trial was conducted by the other firm or the appellant itself the fact remains that only trial production took place on 4121981
The mere fact that the certificate is disbelieved cannot lead to the conclusion that the appellant had produced the goods on 4121981
279A D 12 To go by Section 4A of the Act to determine the date of commencement of production the date of purchase of raw material or the date on which electricity was brought into use would be relevant
The appellant s claim that it had manufactured goods by 3091984 is not denied
Production had therefore commenced before 3131985
There is no suggestion by the Department or the Committee and there is no material to show that the appellant had purchased raw materials sufficient to carry out normal commercial produc tion at any time prior to 1101982
It is an admitted fact that the assessee was able to obtain electricity for use for commercial production only in November 1982
This lends support to the appellant s contention that the production could not have been effected by the assessee prior to that date
In fact this is a point on which emphasis is laid
That being so there is no iota of evidence or material on the basis of which the appellant s claim that it had started production in December 1982 could have been rejected
On the other hand the recommendation and endorsement of the Gener al Manager District Industries Centre also supports the appellant s contention that it had started production on 4121982 and this report was given after verifying the actual position on the spot
279D G 2
As regards the amount of exemption available to the appellant it is a matter for consideration of the authori ties in respect of each of the years concerned in respect of which the claim is made for exemption
280B