Case: M/S. MITRA GUHA BUILDERS (INDIA) COMPANY Vs. OIL AND NATURAL GAS CORPORATION LIMITED

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 07.09.20013. 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 01.07.2005Arbitral Award in Arbitration Case No.297A/2002 dated 01.07.2005The learned Arbitrator allowed the claim of the claimant and disallowed the liquidated damages/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 presuming the same to be a penalty4. Challenging the award, the respondent filed petitions bearing OMP Nos.358 and 359 of 2005 under Section 34 of the Arbitration and Conciliation Act, 1996 before the High Court of Delhi and the same were dismissed by the Single Judge vide order dated 02.11.2007. The learned Single Judge held that the Arbitrator has found that under the garb of liquidated damages, what was sought to be imposed was penalty. The learned Single Judge found that almost 60% of the delay was attributable to the respondent-ONGC while 273 days - 40% delay was attributable to the appellant. The learned Single Judge held that when the respondent-ONGC themselves are responsible for substantive part of the delay, it can hardly be said that respondent is entitled to recovery of liquidated damages or penalty. While upholding the award passed by the Arbitrator, the learned Single Judge in Arbitration Case No.297A of 2002 corrected the award amount as Rs.66,36,252/- from Rs.69,36,252/- which was on account of clerical mistake5. The respondent-ONGC filed appeals under Section 37 of the Arbitration Act, 1996 before the High Court of Delhi. The respondent contended that the pre-estimated liquidated damages of Rs.32,79,828/- in Arbitration Case No.297A of 2002 and Rs.42,08,940/- in Arbitration Case No.297 of 2002 claimed by the respondent-ONGC in terms of Clause 2 of the contract between the parties was wrongly disallowed by the Arbitrator presuming the same to be a penalty6. The issue involved before the Division Bench of the High Court was interpretation of Clause 2 of the contract regarding liquidated damages/compensation levied by the Superintending Engineer and the finality attached to it. Before the Division Bench, it was contended by the respondent-ONGC that the decision of the Superintending Engineer to levy liquidated damages under Clause 2 being final, the same was an excepted matter and not arbitrable7. The Division Bench set aside the findings of the award passed by the learned Arbitrator and the order of the learned Single Judge by holding that Clause 2 of the agreement provided that the decision of the Superintending Engineer on the question of levy of liquidated damages is final and that the same could not have been agitated in the arbitration proceeding. The Division Bench held that when the parties have consciously provided that the decision of the Superintending Engineer shall be final only to exclude the issue of excepted matter from the scope of the arbitration, the Arbitrator ought not to have dealt with the same and passed the award. The Division Bench has also pointed out that when the respondent- ONGC first gave notices to the appellant-contractor to rectify the defects and thereafter, gave a notice to levy liquidated damages on 15.05.2001 followed by the letter dated 25.05.2001 to the appellant- contractor that the final bill was ready and that the appellant was required to reconcile the final bill to ensure the settlement of the account, it cannot in such circumstances be said that the liquidated damages were imposed as a counter blast to the appellants claim. With those findings, the Division Bench reversed the findings of the learned Single Judge and set aside the award.

Court's reasoning:
14. The learned Single Judge, in our view, failed to note the implication of Clause 2 of the contract and also various correspondences between the parties, while affirming the award passed by the learned Arbitrator. In terms of Clause 2 of the agreement dated 05.02.1996 between the parties, the contractor is to proceed with the work with due diligence throughout the contract period. In case of delay or failure to ensure good progress during execution of the work, Clause 2 of the agreement provides for determination/quantification of compensation for delay or certain inactions, on the part of the contractor. In terms of Clause 2 of the agreement, the Superintending Engineer shall assess and quantify the compensation. By the terms of the agreement, the parties have consciously agreed that in case the contractor fails to comply with the conditions and complete the work with due diligence, the Superintending Engineer may decide the compensation in terms of Clause 2 of the agreementA reading of Clause 2 makes it clear that the Superintending Engineer has been conferred with not only a right to levy compensation; but it also provides a mechanism for determination of the liability/quantum of compensation. The very Clause 2 itself would show that such a decision taken by the Superintending Engineer shall be final. The finality clause in the contract in terms of Clause 2 makes the intention of the parties very clear that there cannot be any further dispute on the said issue between the parties; much less before the arbitratorThe intention of the parties to exclude some of the decisions of the Superintending Engineer from the purview of arbitration is clearly seen from the abovesaid clause. Claim No.6 made by the appellant is to declare that the penalty imposed by ONGC under Clause 2 was illegal and unwarranted and the amount withheld by ONGC was payable to the appellant. The very prayer to declare the amount levied by the Superintending Engineer as illegal is against the tenor of the terms of the contract (Clause 2) between the parties. By virtue of the finality clause in the contract, any decision taken by the Superintending Engineer in levying compensation cannot be referred to an arbitrator. The parties have consciously agreed to have finality to the decision of the Superintending Engineer and the same cannot be frustrated by challenging the same as illegal. Any other meaning to the finality clause in the contract and allowing further adjudication by another authority would make the agreed Clause 2 and Clause 25 of the agreement meaningless and redundant17. As held by the Division Bench of the High Court, whether there was delay in completion of work and the levy of liquated damages, could not have been determined by the arbitrator. Vide letters dated 08.12.1999, 09.12.1999, 17.12.1999, 11.02.2000 and 17.04.2000, ONGC called upon the respondent/contractor to remove the defects failing which it would get the defects remedied at his cost. According to ONGC, the completion time was extended without prejudice to the right of ONGC to recover compensation in accordance with Clause 2 of the agreement. The contention of ONGC is that by the letter dated 15.05.2001, the contractor was put on notice that in exercise of the power conferred on the Superintending Engineer under Clause 2, the contractor is liable to pay 10% of the contract value by way of compensation. The contractor was informed by the said letter dated 15.05.2001 that the compensation is levied on him for the period of 39 weeks at half per cent per week subject to maximum of 10% of the contract value and that the actual amount of compensation shall be worked out on checking the final bill and the same shall be recovered by ONGC from the final bill. By the subsequent letter dated 25.05.2001, the claimant was informed that the final bill is ready and the claimant was required to reconcile the final bill after adjusting the compensation18. A reading of the other terms of the contract would further indicate that under Clauses 13 and 14 of the agreement, the parties have agreed for payment of compensation and non-payment of compensation in certain situations. Significantly, Clauses 13 and 14 of the agreement do not have any finality clause which indicates that any dispute arising out of such clauses may be a dispute referable to arbitration. However, in respect of levy of compensation for the delay, Clause 2 of the agreement specifically makes the decision of the Superintending Engineer, final. The entire contract between the parties and the terms thereon have to be read as a whole to decide the rights and liabilities of the parties arising out of the contract. In claim No.6, the contractor has sought for declaration that the penalty under Clause 2 imposed by ONGC was illegal and unwarranted and the amount withheld by ONGC was payable to the contractor with interest @ 24%. Claim No.6 sought for by the contractor is clearly in violation of Clause 2 of the agreement between the parties, in and by which, the parties have agreed that the decision taken by the Superintending Engineer levying compensation shall be final. The finality clause in the contract cannot therefore be frustrated by calling upon the arbitrator to decide on the correctness of levy of compensation by the Superintending EngineerOnce the parties have decided that certain matters are to be decided by the Superintending Engineer and his decision would be final, the same cannot be the subject matter of arbitrationIn the present case, the parties themselves have agreed that the decision of the Superintending Engineer in levying compensation is final and the same is an excepted matter and the determination shall be only by the Superintending Engineer and the correctness of his decision cannot be called in question in the arbitration proceedings and the remedy if any, will arise in the ordinary course of law23. As rightly contended by the learned ASG, in BSNLs case, Clause 16(2) of the agreement does not create any kind of liability to pay liquidated damages; but only provides for entitlement of BSNL to collect the damages in case of any delay in supply on the part of the supplier under Clause 16(2)24. In BSNLs case, Clause 16 provided for entitlement of the party to recover liquidated damages. In Clause 16(2), the phrases used value of delayed quantity and for each week of delay clearly show that it is necessary to find out whether there has been delay on the part of the supplier in discharging his obligation. Thus, in BSNLs case, in determining whether there is delay or not, a process of adjudication is envisaged. Per contra, in the present case, Clause 2 of the agreement is a complete mechanism for determination of liability. The right to levy damages for delay is exclusively conferred upon the Superintending Engineer and Clause 2 of the present agreement is a complete mechanism for determination of liability and when such compensation is levied by the Superintending Engineer, the same is final and binding. The parties have also consciously agreed that for the delay caused, the Superintending Engineer shall levy the compensation of the amount equal to half per cent and the said amount shall not exceed from 10% of the cost of the work and the determination by the Superintending Engineer is final and cannot be the subject matter of arbitration. In claim No.6, the prayer sought for by the contractor to declare the compensation levied by the Superintending Engineer as illegal is contradictory to the agreed terms between the parties. So far as the liquidated damages determined and levied, by virtue of Clause 2, is out of the purview of the arbitration especially in view of the fact that under the very same clause, the parties have agreed that the decision of the Superintending Engineer shall be final25. Learned Single Judge erred in proceeding under the presumptive footing that the compensation levied by the Superintending Engineer was in the nature of penalty. It was actually levy of liquidated damages/compensation in terms of Clause 2 of the agreement. 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, the Division Bench of the High Court rightly set aside the order of the learned Arbitrator with regard to claim No.6 by holding that levy of liquidated damages/compensation is adjustable against the final bill payable to the appellant. The impugned judgment does not therefore, suffer from any infirmity warranting interference.