IN THE HIGH COURT OF JUDICATURE AT MADRAS DATED : 5-9-2008 CORAM THE HONOURABLE MR.JUSTICE M.CHOCKALINGAM AND THE HONOURABLE MR.JUSTICE M.VENUGOPAL O.S.A.No.97 of 2008 and MP Nos.1 and 2 of 2008 M/s.Madras Fertilizers Limited Manali Chennai 600 068, Rep. By its General Manager (Personnel and Administration) .. Appellant vs 1.M/s.Thermax Babcock & Wilcox Limited D-1 Block, Plot 7/2, R.D. Agra Road MIDC Chinchwad Pune 411 019. 2.P.Sridharan 3.G.Krishna Bhagavan Bhat 4.A.V.Rangaraju Fellow of Institute o Engineer (India) No.6 Sakthi Flats Kamarajar Salai Virugambakkam, Chennai 92. .. Respondents Original side appeal preferred under Order XXXVI Rule 1 of O.S. Rules read with Clause 15 of Letters Patent against the judgment of this Court dated 17.4.2007 in O.P.No.589 of 2004. For Appellant : Mr.Jayesh Dolia for M/s.Aiyar & Dolia For Respondents : Mr.R.Murari https://hcservices.ecourts.gov.in/hcservices/ JUDGMENT (THE ORDER OF THE COURT WAS MADE BY M.CHOCKALINGAM,J.) This appeal challenges an order of dismissal made by the learned Single Judge of this Court in O.P.No.589 of 2004 seeking to set aside an arbitral award dated 30.11.2003, on the reasons set out therein. 2.The appellant/petitioner filed the original petition under Sec.34 of the Arbitration and Conciliation Act, 1996, seeking to set aside the award dated 30.11.2003, directing them to pay a sum of Rs.90,23,650/- withheld by them towards liquidated damages with interest of Rs.43,76,608/-. 3.The case of the appellant is as follows: The petitioner, a Public Sector Undertaking, invited tender on 20.5.1993. The first respondent was awarded a contract for supply of 110 ATA boiler package including fuel oil handling system, RCC chimney with state monitoring system, continuous polishing unit and all relevant spares at a cost of Rs.18,05,53,000/-. Thereafter, two more awards of work were granted to the first respondent under order dated 13.12.1994 as stated in the petition. The completion period for the boiler package was 18 months. The first respondent completed commissioning of boiler on 27.5.1997 with a delay of 14 months. The contract includes the general and special conditions. As per the contract and the letter of award of work dated 13.12.1994, the work jobs have to be completed within 18 months from 28.9.1994 i.e., on or before 27.5.1996. But, the work was completed only on 27.5.1997. Despite the same, the appellant allowed the first respondent to continue to complete the work and also made timely payment for the amount of work done in a phased manner. The appellant reminded the first respondent to complete the job to the satisfaction of the appellant i.e., to make the boiler more reliable and fully operational. As the first respondent failed in its duty to make the boiler operational within the stipulated time or the extended period of time, the appellant exercised the right to levy liquidated damages on the first respondent. 4.The first respondent invoked the arbitration clause and raised a dispute in respect of the levy of liquidated damages and other related issues, and the same was referred to the respondents 2 to 4. The appellant filed a detailed counter. Apart from that, the appellant also made a counter claim to the extent of Rs.14.36 lakhs together with interest. 5.A common arbitral award came to be made by the Arbitral Tribunal directing the refund of Rs.90,23,650/- which was withheld by the petitioner/appellant along with interest of Rs.43,76,608/- and also ordering the claim made by the petitioner/appellant for a sum of Rs.14,36,000/- without any interest. https://hcservices.ecourts.gov.in/hcservices/ 6.Challenging the award directing the appellant to make refund of the said sum, the appellant brought forth a petition stating that the delay in the completion of the project was purely due to various reasons attributable to the first respondent; that the clause 9.01 in the letter of award substituted sub-clause 51 of the General conditions of contract; that the letter of acceptance dated 13.12.1994 clearly states that the award of work is subject to the terms and conditions and superseded any contradictory provision that may exist in any other contract documents; that there are no contradictory provisions between sub-clause 51 and sub-para 9.01; that it is pertinent to note that there was total consensus ad idem between the parties under the letter dated 13.12.1994; that the first respondent could have opted to refuse to accept the terms contained in the letter of acceptance if the same were allegedly contrary to the general conditions of the contract; that the issue regarding the liquidated damages was an excepted matter, and hence the Arbitral Tribunal had no jurisdiction to decide the same; that in the instant case, the terms of the contract clearly stipulate that the appellant can levy liquidated damages if there was delay in completion of the project by the first respondent; that the contract did not stipulate that the appellant should put the first respondent on notice before imposing liquidated damages; that apart from that, the claim of the first respondent was totally barred by limitation, and hence the award was liable to be set aside. 7.The first respondent resisted the OP by filing a counter stating that the conclusion of the arbitrators on the basis of their interpretation of the provisions of the contract is final and binding on the parties and cannot be challenged in the present proceedings; that the letter of award of work dated 13.12.1994, clearly specified the documents which are to form part of the contract and also the order of precedence in case of contradictory provisions therein; that it also specifies that other than the terms and conditions set out therein, all other conditions shall be as contained in the General and Special Conditions; that the documents and records would go to show that it was the appellant who delayed the completion of the work; that the reference to the letter dated 19.5.1997, made by the appellant, is totally misconceived and baseless; that despite the best efforts of the first respondent, the work was delayed on account of various factors primarily attributable to the appellant; that it is pertinent to note that the floating of internal safety valve constituted the commissioning of the boiler, and hence the contention that the boiler was not made operational within the stipulated time or the extended time is baseless; that the clause relating to liquidated damages referred to by the appellant has been replaced by clause 9 of the letter of award of the work; that the learned arbitrators found that the delays are independent and not overlapping but in linearity account for the 14 months delay, and therefore the causes of delay could not be attributed to the first respondent; that this is a factual finding based on the records before the arbitrators which cannot be re-agitated in the present proceedings; that the learned arbitrators were justified in holding that the liquidated damages was not an excepted matter; that the interpretation by the arbitrators of the conditions of the contract cannot be challenged in a petition under Sec.34 of the Act; that the right to levy of https://hcservices.ecourts.gov.in/hcservices/ liquidated damages per se would not be an excepted matter; that the arbitrators have considered the submissions made by both parties on the question of liquidated damages and have held that they have jurisdiction to entertain the same; that merely because the contract contains a clause for liquidated damages, it does not mean that such liquidated damages would automatically follow; that Section 55(3) does not make a distinction between un-liquidated and liquidated damages and mandates that if performance is being accepted at a time other than that agreed, a notice as contemplated in the Section is required to be given; that under the circumstances, the appellant has neither a legal nor a factual entitlement in the matter of levy of liquidated damages; that under the circumstances, there is no infirmity found in the finding of the arbitrators, and hence the petition was to be dismissed. 8.The learned Single Judge, on enquiry, dismissed the petition which is the subject matter of challenge before this Court. 9.The only question that would arise for consideration in this appeal is whether the arbitral award is liable to be set aside since the Tribunal had no jurisdiction to decide the question as to the liquidated damages referred to. 10.Advancing arguments on behalf of the appellant, the learned Counsel Mr.Jayesh Dolia would submit that the arbitral award in question should have been set aside since the appellant/petitioner was able to show that the Tribunal had no jurisdiction to decide the question either as to delay or as to the liquidated damages; that the levy of liquidated damages was not something within the purview of the arbitral clause; that a reading of the clauses would clearly indicate that the decision of the Engineer was final and binding on the parties; that it is also made clear that there could not be any reference to the claim of the same in the arbitral proceedings; that Clause 47 clearly stipulates that time was the essence of the contract and hence the finding recorded either by the arbitrators or by the learned Single Judge that time was not the essence of the contract was not correct; that Clause 103 specifically excludes clause 51 falling within the exclusive jurisdiction of the Engineer concerned and his decision was to be accepted as final and binding; that the very reading of Clause 51 would make it clear that it was beyond the scope of jurisdiction of arbitration and hence the contention of the first respondent that it has to be read as regards the quantification of the liquidated damages and not as regards to the question as to whether there had been a breach or not should have been rejected; that it is pertinent to point out that the parties had signed an agreement after understanding the terms of the contract, and hence it would be binding on the parties; that the contention that Clause 102 was limiting the rights of the parties and also it was against the public policy should have been rejected; and that the first respondent should not be allowed to take such a contention after signing such an agreement and making a breach of the same thereafter. https://hcservices.ecourts.gov.in/hcservices/ 11.Added further the learned Counsel that it is not correct to state that the Engineer could pass a decision for liquidated damages between 0.5% and 5%, and if there was any violation of terms of the contract, it could be decided by the arbitrator; that it was a jurisdictional issue; that the parties have understood the contract, signed the same and acted upon it also, and hence the first respondent being a party to the contract should not be allowed to give a go-by to the terms of the contract; that when the arbitrators themselves do not have a jurisdiction to embark upon an enquiry as to whether the claim for liquidated damages once decided by the Engineer is final and binding on the parties, the claim for refund of the liquidated damages should not have been allowed; but, in the instant case, it was not only allowed, but also interest at 12% per annum has been awarded; that the petitioner/appellant is able to show that the award was liable to be set aside in view of Sec.34(2)(ii)(c) of the Arbitration and Conciliation Act; that the learned Single Judge should not have rejected the petition following the decision reported in 2006(11) SCC 181; that in the instant case, the consistent stand of the appellant was that the arbitrators had no jurisdiction at all; that under the circumstances, the Court has to necessarily interfere under Sec.34 of the Act; that the appellant was able to show that the award was patently illegal, and hence it called for an interference under Sec.34(3)(d) of the Act. 12.It is further submitted by the learned Counsel that the contention put forth by the first respondent's side is that time was not the essence of the contract and therefore, if there was delay, the time could be extended; that if such an interpretation was to be accepted, the clause stipulating the power to levy liquidated damages and that the decision by the Engineer shall be final and binding on the parties would become totally redundant; that it is pertinent to point out that the extension of time was sought for by the first respondent only after the normal time agreed upon by the parties under the agreement; that if really there was delay on the part of the appellant, the first respondent would not have asked for extension of time; that the fact that the appellant did not answer the request of the first respondent seeking time would not amount to tacit approval for the request of the extension of time; that when there was a breach committed by the first respondent, the clause to levy liquidated damages was available to the appellant, and hence there was no need either to deny or to refuse extension of time; that since the award was in respect of an issue which was outside the scope of jurisdiction, the arbitrators have misconducted themselves which would suffice to set aside the award; that it was agreed explicitly that the decision of the Engineer regarding the levy of liquidated damages was outside the purview of the jurisdiction of the arbitrators, and under the circumstances, the Arbitral Tribunal had no jurisdiction to entertain the claim for refund of liquidated damages; that the decision reported in AIR 1987 SC 1359 which was placed by the first respondent and relied on by the learned Single Judge has no application to the present facts of the case; that the finding recorded by the learned Single Judge that the Engineer had authority only in respect of quantification and manner of recovery alone and the quantum of very leviability was not one of those excepted matters under Clause 103 was totally incorrect; and that https://hcservices.ecourts.gov.in/hcservices/ under such circumstances, the order of the learned Single Judge upholding the award has got to be set aside. 13.In support of his contentions, the learned Counsel relied on the decisions reported in AIR 1975 MADHYA PRADESH 152 (THE CHIEF ADMINISTRATOR, DANDAKARANYA PROJECT, MORAPUT, ORISSA AND ANOTHER V. M/S.PRABARTAK COMMERCIAL CORPORATION LTD., CALCUTTA) and in AIR 1991 SUPREME COURT 957 (M/S.PRABARTAK COMMERCIAL CORPORATION LTD. V. THE CHIEF ADMINISTRATOR, DANDAKARANYA PROJECT AND ANOTHER). 14.Contrary to the above contentions, the learned Counsel for the first respondent Mr.R.Murari would submit that there was no delay on the part of the first respondent; that it is true that the work should have been completed within 18 months; but, it could not be completed within time for the reasons beyond the control of the first respondent; that while clause 51 speaks about the general conditions of the contract, clause 47 would state that the time was the essence of the contract; that Clause 48 was introduced only for the purpose of extension of time which itself would indicate that even at the time of entering into the contract, the parties knew that it could not be completed in time and if not done so, the time could be extended and hence clause 51 has to be read along with clauses 47 and 48; and that under the circumstances, the contention put forth by the appellant that time was the essence of the contract was not correct. 15.Added further the learned Counsel that in the instant case, when there was a delay in completion, it was the first respondent who sent its communications seeking extension of time; that it is pertinent to point out that the appellant neither replied nor denied to extend time and thus the appellant has kept itself silent and took delivery of the machinery found to be satisfactory, and the same is functioning; that the arbitrators have thoroughly taken into appraisement all circumstances attendant and have clearly found that the appellant was responsible for the delay caused and not the first respondent; that the authority of the Engineer was only limited with regard to the quantification of the liquidated damages; but, he could not decide the question as to whether there has been a delay caused or a breach of the contract; that only if a question whether there was any breach of the contract by reasons including the delay caused is decided, the question thereafter would arise as to the quantification of the liquidated damages itself; that it would be quite clear from Clauses 51, 103 and 104 that the Arbitral Tribunal has got jurisdiction to decide the question whether there was any delay and if so, on whose part and whether there was any breach of the agreement; that the appellant cannot be allowed to interpret the above clauses to its advantage; and that a reading of Clause 102 which limits the rights of the parties, would indicate that it was totally against the public policy. In support of that contention, the learned Counsel relied on a decision reported in 2003(5) SCC 705. 16.The learned Counsel would further submit that the Engineer can decide whether liquidated damages could be charged from 0.5% to 5%; but, he could not take a decision whether there was any violation of the terms of the contract which could be decided only by the arbitral proceedings; that in the instant case, there was a delay of 14 months in completion; but, despite the request made for extension https://hcservices.ecourts.gov.in/hcservices/ of time, the appellant had neither replied nor denied the same and hence silence on the part of the appellant would be taken as acceptance for the request of extension of time; that the appellant has also allowed the first respondent to complete the work and has also taken delivery of the products; and that there was no complaint in respect of the work commissioned, but the appellant has unlawfully withheld Rs.90,23,650/- as if it was towards liquidated damages. 17.Added further the learned Counsel that the contentions put forth by the appellant's side that the question as to the liquidated damages was beyond the scope of jurisdiction of the arbitral proceedings has got to be rejected since only the arbitral proceedings can decide the question whether there were circumstances for levy of liquidated damages; that a perusal of the award would clearly indicate that the arbitrators have gone through the entire materials and have delivered the reasoned award stating the reasons for the delay; that once the arbitrators who are competent to decide the question as to the delay, have pointed out the reasons for the delay and have also recorded a finding that the first respondent was in no way responsible for such a delay and while they have taken a correct decision that there was no reason for levying any liquidated damages on the first respondent, the appellant should not have filed the OP seeking to set aside the award; that the Tribunal has taken the correct view as to the question of jurisdiction to adjudicate upon the matter and as well as on the quantum; that before taking the decision, the Tribunal has taken into consideration the entire terms of the contract and has made a thorough appreciation of the facts and circumstances, and hence the learned Single Judge was perfectly correct in dismissing the OP and that order has got to be sustained. 18.The learned Counsel in support of his contentions relied on the decisions reported in AIR 1987 SUPREME COURT 1359 (STATE OF KARNATAKA V. RAMESHWARA RICE MILLS, THIRTHAHALLI) and in (2006) 11 SUPREME COURT CASES 181 (McDERMOTT INTERNATIONAL INC. V. BURN STANDARD CO. LTD. AND OTHERS). 19.The following would emerge as facts admitted: The petitioner company a Central Government Public Sector Undertaking, flouted tenders on 20.5.1993. Following the same, the first respondent was awarded a contract for supply of 110 ATA boiler package including fuel oil handling system, RCC Chimney, etc., at a total cost of Rs.18,05,53,000/-. As per the agreement, the period of completion was 18 months ending with 27.3.1996. There was a delay of 14 months since the first respondent completed the commissioning of the boiler only on 27.5.1997. In view of the said delay, the company withheld a sum of Rs.90,23,650/- towards liquidated damages which, according to the company, they are entitled to retain as per the terms and conditions of the contract entered into between the parties. The first respondent raised a dispute. The Arbitral Tribunal constituted by the respondents 2 to 4, on enquiry, made an award to the effect that the first respondent was entitled for the refund of Rs.90,23,650/- which was withheld by the petitioner along with interest of Rs.43,76,608/- totalling to Rs.1,34,00,268/- and also allowed the entire claim of the petitioner for a sum of Rs.14,36,000/- but without interest. Seeking to set aside the said https://hcservices.ecourts.gov.in/hcservices/ award, the petitioner company filed the O.P. The learned Single Judge on enquiry of the said OP, took the view that no ground for interfering with the award as contemplated under Sec.34 of the Arbitration and Conciliation Act, 1996, was noticed, and hence dismissed the petition. Hence this appeal. 20.As could be seen above, under the contract awarded for supply of boiler package dated 28.9.1994, a period of 18 months was stipulated for completion from the date of letter of indent. Admittedly, it was not completed within the stipulated date namely 27.3.1996. A delay of 14 months had occasioned in commissioning of the boiler. Out of the total cost of Rs.18,05,53,000/-, Rs.90,23,650/- which would represent 5% of the total cost, was retained by the appellant company alleging that it was representing the levy of liquidated damages for the delay caused. Under such circumstances, the matter was referred to arbitration by the first respondent putting forth two claims, firstly the refund of the said sum of Rs.90,23,650/- which was withheld by the appellant, and secondly the interest of Rs.43,76,608/- on that sum. The appellant also made a claim of Rs.14.36 lakhs. The main question in controversy is whether the subject matter referred to arbitration by the first respondent was beyond the jurisdiction of the arbitrators. Both the parties relied upon the following Clauses under the general conditions of the contract (GCC): "51.Liquidated damages for delay The time of completion as stated in the contract shall be deemed to be the essence of the contract. If the Contractor shall fail to complete the works within the time prescribed by the Clause 47 hereof or extended time as sanctioned according to Clause 48, the Contractor shall pay to the Company a sum equal to one per cent of the amount of the contract price of the whole work as shown by the tender or such smaller amount as the Company (whose decision in writing shall be final conclusive and binding) may decide as liquidated damages for such default and not as a penalty for every week or part of a week which shall elapse between the time prescribed by Clause 47 hereof or extended time as the case may be and then the date of completion of the works. The Company may without prejudice to any other method of recovery deduct the amount of such damages from any money in his hands due or which may become due to the Contractor. The payment or deduction of such damages shall not relieve the Contractor from his obligations to complete the works or from any other of his obligations and liabilities under the Contract. ..... 103.Settlement of Disputes. Disputes to be finally determined by the Engineer The decision, opinion, direction, certificate on valuation of the Engineer with respect to all or any of matters under clauses 4(a), 4(b), 8, 9(b), 12, 14, 15, 36, 38, 39, 40, 41, 42, 43, 44, 48, 49, 50, 51, 52, 53, 55, 56, 57, 58, 59, 62, 69, 70, 78, 81 (which matters are herein referred to as excepted) shall be final conclusive and binding on the parties hereto and shall be without Appeal, Any other https://hcservices.ecourts.gov.in/hcservices/ decision opinion direction certificate or valuation of the Engineer or any refusal of the Engineer to give any of the same shall be subject to the right