1 IN THE HIGH COURT OF JUDICATURE AT BOMBAY CIVIL APPELLATE JURISDICTION FIRST APPEAL NO. 820 OF 2005 WITH CIVIL APPLICATION NO. 1706 OF 2008 Ashoka Buildcon Pvt.Ltd. a Private Limited Company registered under the Companies Act, and having their Registered Office at ½, River View, Ashok Stambha, Nasik 422 002 (Represented through its Managing Director - Shri Ashok M. Kataria ... Appellant (org. Plaintiff) Versus Vadilal Dairy International Ltd. a Public Limited Company havig their office at: “Gul Manzil”, 1st floor, 14, D.J. Road, Vile Parle (West), Mumbai – 56. ... Respondent (Org.Defendant) Mr A.A.Garge,Advocate, for the appellant. Mr.R.S.Desai, i/b. Piyush Shah, Advocate, for the respondent CORAM: J.H.BHATIA,J. JUDGMENT RESERVED ON 1.9.2009 JUDGMENT PRONOUNCED: 8.9.2009. JUDGMENT: 2 1. The Appeal is directed against the rejection of the application filed by the present appellant before the Civil Judge, Senior Division, Nahsik, for appointment of an arbitrator to settle certain disputes between the appellant and the respondent arising out of the contract for construction. 2. Admitted facts are that the present respondent-defendant is a Public Limited Company. Previously it was known as “M/s. Super Milk Makers Pvt.Ltd.” M/s. Super Milk Makers Pvt.Ltd. Issued tender on 28.4.1993 for the civil work for the construction of a factory building and other works at Integrated Dairy Project on a plot at MIDC Industrial Area at Sinnar, District Nahsik. The plaintiff/appellant submitted the tender on 28.4.1993 and it was accepted on 9.6.1993. The work order was actually issued on 25.6.1993 and as per the terms of the contract, the work was to be completed within a period of 15 months from the date of work order. The appellant started the work as per the contract. It appears that 21 R.A. Bills were cleared and dispute arose thereafter. Admittedly, the work was not completed within the stipulated period of 15 months and on 15.10.1994, the present respondent, who had succeeded M/s. Super Milk Makers Pvt.Ltd., issued a letter terminating the contract and the appellant was directed to stop the work. After that, R.A. Bill No.23 was also not 3 cleared. On 30.3.1995, the appellant addressed a letter to the respondent with a copy to the architects, requesting the architects to certify the claims of the appellant for payment immediately and also to ensure that the claim amounts were paid to the appellant by the defendant within 15 days from the date of notice. In the said claim, the plaintiff had called upon the defendant and/or their architects to certify, settle and pay all the claims. However, by letter dated 24.4.1995, the respondent rejected/fused to pay the claims of the appellant/plaintiff. According to the appellant, disputes and differences arose between the appellant and the respondent after refusal of the respondent to clear the bills. According to the appellant, when such disputes arose, they could be referred to the sole arbitrator to be nominated by the Architect, namely. Mr. Praveen J. Parekh of M/s. J.P.Parekh & Sons, Architects, as per clause 37 of the General Conditions of the Contract. Therefore, on 2.5.1995, the appellant addressed a letter to the Architect to nominate the sole arbitrator and to refer the disputes to the said arbitrator. Similar notice was issued to the respondent on 15.5.1995. However, the Architects by reply dated 15.5.1995 rejected the request of the appellant to refer the disputes to arbitration. It was contended by the Architects that all the disputes would fall within the “excepted” items as per clause 19 of the Special Conditions of Contract read with clause 36 of the General Conditions of Contract, under which the decision of the Architect would 4 be final and binding on the parties. 3. Therefore, the appellant filed Suit no.288 of 1995 in the Court of Civil Judge, Senior Division, Nashik under Section 20 of the Arbitration Act, 1940 for appointment of the arbitrator and to refer the disputes to the arbitrator. The suit/application filed by the present appellant was contested by the respondent on the same grounds as were given by the Architects in their letter dated 14.6.1995. The Civil Judge, Senior Division, Nashik, passed the impugned order dated 29.8.2002 and dismissed the application holding that the disputes fall within clause 19 of the Special Conditions of the Contract and within exclusive jurisdiction of the Architect. Hence, this Appeal. 4. Heard the learned Counsel for the parties. Perused the relevant documents, correspondence and the impugned order. The disputes between the parties are narrated in the letter dated 30.3.1995 addressed by the appellant to the respondent. From this letter, it is clear that the disputes arose after the termination of contract dated 15.10.1994 by the respondent. Thereafter, 23rd R.A.Bill dated 16.1.1995 was submitted to the Site-in-charge of the respondent at Sinnar. That bill was for an amount of Rs.55,03,807.47 ps. By letter dated 30.3.1995, the appellant had asked the respondent to clear the bill and make 5 payment of the dues to the appellant after deducting all the recoveries to be made under the contract from the appellant. It s revealed that prior to the letter dated 30.3.1995, there was some correspondence between the parties. In this letter, the appellant had contended that the respondent had failed and neglected to fulfill their contractual obligations in several respects and on numerous occasions amounting to substantial breaches of the contract. It was alleged that they had neglected to make arrangements for the required funds and in maintaining the cash flow, due to which the progress of the work by the appellant was restricted for the first eight months. The respondent neglected and failed to provide on time services like water, power, roads, material such as cement,steel, and structural steel at the required time, neglected to provide on time necessary drawings and instructions, neglected and failed to make in time the payments of R.A. Bills and to settle the extra items and claims on time. It was contended that although the progress upto mid-February 1994 was less than 50% of the planned work, there was not a whisper of complaint from the respondent about the slow progress. On the contrary, on 15.3.1994, the respondent had allotted additional work of land development valued at about Rs.26.65 lakhs under a separate work order to the appellant. In the letter, details of the loss and the extra expenses suffered by the appellant were given on account of the defaults on the part of the respondent and it was alleged that the work could not be completed within the 6 stipulated period of 15 months due to the defaults and negligence on the part of the respondent. It was alleged that inspite of that, the respondent by letter dated 15.10.1994 had terminated the contract on frivolous and false pretext, violating all the relevant provisions of the contract, solely with a view evade the payment of sums due and payable to the appellant. It was also mentioned that due to the termination, lot of material like bricks, sand, brick bat, metal were lying on the site. Due to termination, the labour gangs were required to be demobilized due to which extra expenditure was incurred. Heavy advances were paid to the material supplier and labour contractors. On that account, heavy loss was suffered by the appellant. Plant and machinery, which was deployed on the site/field work, was rendered idle for about two months resulting into losses. Staff, including the site in charge, engineers, supervisors, store officers and helpers could not be deployed elsewhere at least for two months. The appellant also suffered loss of profit on the remaining work. 5. Clause 27 of the General Conditions of Contract provides for liquidated damages as per Appendix “A” in case of non-completion of work within the specified period which gives right to the respondent to recover liquidated damages from the appellant. Clause 29 provides for deduction of money from the bills of the contractor due to failure to comply with the 7 Architect’s instructions. Clause 30 provides for the right of the employer to terminate the contract in certain circumstances, including the abandonment of the contract and failure to commence the work or suspension of the progress of work or to proceed with the work with due diligence and to make due progress, etc. Similarly, in certain circumstances, the contractor can also terminate the contract under clause 31. To understand the dispute, clauses 27, 36 and 37 of general Conditions of Contract and clause 19 of the Special Conditions of Contract are relevant. They read as follows :- “27. Damages for non-completion If the Contractor fails to complete the works by the date stated in the Appendix `A’ attached hereto or within any extended time under Clause 28 hereof an the Architect certifies in writing that i his opinion the same ought rasonably so to have been completed the Contractor shall pay or allow to the Employer the sum named in the Appendix `A’ attached hereto as “Liquidated Damages” for the period during which the said works shall so remain incomplete and the Employer may deduct such damages from any moneys due or that may become due to the Contractor.” “36. Matters to be finally determined by the Architect. The decision, opinion, direction, certificate (except for payment) with 8 respect to all or any of the matters under this Contract so specified as excepted matters shall be final and conclusive and binding on the parties hereto and shall be without Appeal. Any other decision, opinion, direction, certificate or valuation of the Architect or any refusal of the Architect to give any of the same shall be subject to the right of Arbitration and review in the same way in all respects (including the provision as to opening the reference) as if it were a decision of the Architect under the following Clause”. “37. Arbitration The Employer and the Contractor agree that should any dispute or difference of opinion arise between them concerning any matters connected with the works, either during the progress of the works or after its completion or the termination or abandonment of the Contract, excepting as to the matters in which the opinion of the Architect is reserved and is taken as final under the conditions of this Contract either party shall give notice to the other of such dispute or difference and the same shall be referred to the sole Arbitration of a person nominated by the Architect and his award shall be taken as final and binding to both the parties to this agreement and without appeal.” 9 “19. The Architect’s decision in all matters relating to the plans, the specifications, the construction work and/or the settlement of the rates for extra items as also the levy of liquidated damages will be final and binding to both the parties.” 6. On perusal of these conditions, it would appear that the matters covered by clause 19 of the Special Conditions are within the jurisdiction of the Architect and his decision in all these matters will be final and binding on both the parties. Therefore, the said subjects relating to the plans, the specifications, the construction work and/or the settlement of rates for the extra items as also the levy of the liquidated damages are the “excepted items” within exclusive jurisdiction of the Architect. Clause 36 of the General Conditions of Contract make it clear that the decision, opinion, direction and certificate (except for payment) with respect to all or any of the “excepted matters” under this Contract shall be final and conclusive. Any other decision, opinion,direction, certificate or valuation of the Architect or refusal of the Architect to give any of the same shall be subject to the right of Arbitration. Clause 37 of the General Conditions also make it clear that only the “excepted matters”, which are reserved for decision of the Architect, are taken out from the matters which can be referred to arbitration and except those “excepted matters”, all other disputes may be referred to 10 arbitration. 7. The learned Counsel for the appellant has submitted the list of the disputes which, according to him, are referable to the arbitration in terms of the contract. That list is marked “X” for identification. He has also given the list showing the disputes which can be referred to the Architect as the “excepted items” under clause 19 of the Special Conditions of the Contract. That list is marked “Y” for identification. The disputes referred to in the lists “X” and “Y” are same, which were sought to be referred to arbitration by filing the suit. The List “Y” refers to five items which were claimed in the notice dated 30.3.1995. They were extra items in respect of use of murrum,extra item for double staging,rate for waterproofing, the decision regarding certificate for 22nd and 23rd R.A. Bills after scrutiny and expenditure incurred by the respondent on departmental work for removal of defects. All these items are squarely covered by clause 19 of the Special Conditions. 8. The learned Counsel for the respondent vehemently contended that most of the items in List “X” are pertaining to damages on one or the other account. According to him, all these items fall within the excepted category and, therefore, in respect of all these matters decision of the Architect would be final 11 and therefore the Architect is justified in rejecting the request of the plaintiff/appellant to refer the disputes to the arbitration. On careful perusal of the List “X”, it would appear that items 1 to 31 do not fall within the “excepted terms” in the said clause 19. Most of these items are pertaining damages on account of delays in payment for supply of material, damages for keeping the labour, staff, plant and machinery and other material idle. The damages on different counts for which the respondent is allegedly responsible are claimed. As none of these items 1 to 31 fall within the “excepted category” under clause 19 the decision of the Architect in respect of all these items cannot be final and binding on the parties. Therefore, each of these items is referable to the arbitration. 9 Item No.32 in the list marked “X” is pertaining the liquidated damages of Rs.25 lakhs, which may be claimed by the respondent against the appellant due to delay in completion of power plant. As pointed out earlier, under clause 30 of the General Conditions of Contract, the employer can terminate the contract in certain circumstances, including the delays on the part of the contractor to complete the work. Under clause 27, if the contractor fails to complete the work by the stipulated date, the employer can claim liquidated damages as per rates mentioned in Appendix “A”. As per clause 19 of the Special 12 Conditions of Contract, the levy of liquidated damages is also one of the “excepted items” in respect of which the decision of the Architect will be final and binding on both the parties. 10. In General manager, Northern Railway and another vs. Sarvesh Chopra (2002) 4 SCC 45, Their Lordships observed as follows in para 17 :- “17. To sum up, our conclusions are: (i) while deciding a petition under Section 20 of the arbitration Act,1940, the court is obliged to examine whether a difference which is sought to be referred to arbitration is one to which the arbitration agreement applies. If it is a matter excepted from the arbitration agreement, the court shall be justified in withholding the reference,(ii) to be an excepted matter it is not necessary that a departmental or an “in-house” remedy for settlement of claim must be provided by the contract. Merely for the absence of provision for in-house settlement of the claim, the claim does not cease to be an excepted matter, and (iii) an issue as to arbitrability of claim is available for determination at all the three stages while making reference to arbitration, in the course of arbitral proceedings and while making the award a rule of the court.” From this, it is clear that while deciding the petition under Section 20 of the 13 Arbitration Act,1940, court has to examine whether the dispute which is sought to be referred to arbitration is one to which the arbitration agreement applies. If it is a “matter excepted” from the arbitration agreement, the Court shall be justified in withholding the reference. Whether the particular dispute is a “matter excepted” from the arbitration agreement has to be decided on the basis of the terms of the contract and the disputes between the parties. 11. The learned Counsel for the appellant vehemently contended that even though the levy of liquidated damages is within the jurisdiction of the Architect, he can levy the liquidated damages only after it is found that the contractor is liable to pay liquidated damages because of delay and defaults on his part. If the contractor can show that the delay was caused in completion of the work because of the delays or negligence or non-cooperation or any other fault on the part of employer he may not be liable to pay any liquidated damages. So the dispute as to whether the contractor is liable to pay liquidated damages is a subject matter which can be referred to arbitration and only after it is found that he is liable to pay liquidated damages, the Architect can levy the same as per the Appendix “A”. He finds support from Bharat Sanchar Nigam Ltd. & nr. vs. Motorola India Pvt.Ltd. 2008 (4) R.A.J. 326 (SC). In that case , the Supreme Court was required to interpret the relevant clauses of the 14 contract between the parties to find out as to whether levy of liquidated damages is an “excepted matter”. Their Lordships posed the questions in para 3 thus :- “3. The pivotal questions that need to be decided in this appeal are: (i) Whether the levy of liquidated damages under clause 16.2 of the tender document is an “excepted matter” in terms of clause 20.1 of the said document so that the same cannot be referred to arbitration or looked into by the arbitrator ? (ii) Whether clause 62 of the special conditions of the tender document will prevail over clause 16.2 of the general conditions of the contract ?” After minutely considering the terms of the contract and several authorities, Their Lordships observed as follows in paras 10 and 11 :- “10. We are in full agreement with the findings of the High Court that there was a dispute as to whether the respondent had at all acted in breach of any terms and conditions of the tender document. The question to be decided in this case is whether the liability of the respondent to pay Liquidated Damages and the entitlement of the appellant, to collect the same from the respondent is an excepted 15 matter for the purpose of clause 20.1 of the General Conditions of contract. The High Court has pointed out correctly that the authority of the purchaser (BSNL) to quantify the Liquidated Damages payable by the supplier (Motorolla) arises once it is found that the supplier is liable to pay the damages claimed. The decision contemplated under clause 16.2 of the agreement is the decision regarding the quantification of the Liquidated Damages and not any decision regarding the fixing of the liability of the supplier. It is necessary as a condition precedent to find that there has been a delay on the part of the supplier in discharging his obligation for delivery under the agreement. It is clear from the reading of clause 15.2 that the supplier is to be held liable for payment of liquidated damages to the purchaser under the said clause and not under clause 16.2. The High Court in this regard correctly observed that it was not stated anywhere in clause 15 that the question as to whether the supplier had caused any delay in the matter of delivery will be decided either by the appellant/BSNL or by anybody who has been authorized in terms of the agreement. Reading clause 15 and 16 together, it is apparent that clause 16.2 will come into operation only after a finding is entered in terms of 16 clause 15 that the supplier is liable for payment of liquidated damages on account of delay on his part in the matter of making delivery. Therefore, clause 16.2 is attracted only after the supplier’s liability is fixed under clause 15.2. It has been correctly pointed out by the high Court that the question of holding a person liable for Liquidated Damages and the question of quantifying the amount to be paid by way of Liquidated Damages are entirely different. Fixing of liability is primary, while the quantification which is provided for under clause 16.2, is secondary to it. There is no provision in the agreement, apparent on the face of it, relating to a decision made by any specified authority on the issue of levy of Liquidated Damages, as is contemplated under clause 20.1 of the agreement which is excepted from the purview of arbitration. No decision coming within the scope of excepted matters under clause 20.1 is envisaged by any portion of the agreement regarding the liability of the supplier to liquidated damages. Quantification of liquidated damages may be an excepted matter as argued by the appellant, under clause 16.2, but for the levy of liquidated damages, there has to be a delay in the first place. In the present case, there is a clear dispute as to the fact that whether there 17 was any delay on the part of the respondent. For this reason, it cannot be accepted that the appointment of the arbitrator by the high Court was unwarranted in this case. Even if the quantification was excepted as argued by the appellant under clause 16.2, this will only have effect when the dispute as to the delay is ascertained. Clause 16.2 cannot be treated as an excepted matter because of the fact that it does not provide for any adjudicatory process for decision on a question, dispute or difference, which is the condition precedent to lead to the stage of quantification of damages. The above stated position can be ascertained through the judgment of this Court in the case of State of Karnataka vs. Shree Rameshwara Rice Mills (1987) 2 SCC 160. This Court in the said case, made a clear distinction between adjudicating upon an issue relating to a breach of condition of contract and the right to assess damages arising from a breach of condition. I as held that the right conferred to asses damages arising from a breach of condition. It was held that the right conferred to assess damages arising from a breach of condition does not include a right to adjudicate upon a dispute relating to the very breach of conditions and that the power to assess damages is a subsidiary and consequential power and not 18 the primary power. 11. Clause 20.1 regarding excepted matters reads “In the event of any question, dispute or difference arising under this agreement or in connection therewith (except as to the matters, the decision to which is specifically provided under this agreement)...” Therefore it is clear from this provision, that matters which will not fall within the arbitration clause are questions,disputes or differences, the decision to which is specifically provided under the agreement. Clause 16.2 is not a clause where in any decision making power is specifically provided for with regard to any question, dispute or difference between the parties relating to the existence of breach or the very lack of liability for damages, i.e. The levy of Liquidated Damages.” On perusal of the relevant clause 15.2, 16.2 and clause 20.1 in the matter of Bharat Sanchar Nigam Ltd. & Anr. vs. Motorola India Pvt.Ltd. and perusal of clause 19 of the Special Conditions of the Contract in the present matter, read with clauses 27 and 36 of the General Conditions, it appears that by and large the terms of the contract in the present matter are similar