AI Drafter - (New and Powerful) 
Generate professional replies, appeals, opinions to Show Cause Notices, assessment orders, audit objections, and other legal communications using TaxTMI's AI Drafter. 
TaxTMI 
TaxTMI 
2011 (4) TMI 1467
X X X X Extracts X X X X
X X X X Extracts X X X X
....ppellant (also referred to as the `contractor') did not complete the first phase of the work within the stipulated time, the Respondents terminated the contract by order dated 29.8.1994. The termination was challenged by the Appellant in a writ petition filed before the Gawahati High Court. By judgment dated 27.9.1994, the High Court set aside the termination and directed the Respondents to grant time to the Appellant till the end of January 1995 for completion of the first phase reserving liberty to the Appellant to apply for further extension of time. As the work was not completed, the Respondents granted an extension up to 31.7.1995 by letter dated 24.8.1995, without levying any liquidated damages. The contractor proceeded with the work even thereafter. However, as the progress was slow, the Respondents terminated the contract on 14.3.1996 on the ground of non-completion even after 35 months. The Appellant filed a writ petition, challenging the cancellation. The High Court by order dated 25.6.1996, noticed the existence of the arbitration agreement and referred the parties to arbitration. In pursuance of it, on a request by the Appellant, the Respondents appointed Mr. C. Vas....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... Rs. 2,06,70,495 Rs. 104,58,298 Counter Claims by Respondents Counter Claim No Particulars of Counter Claim Amount claimed by Respondents Amount awarded by Arbitrator 1. Excess cost of getting the work executed through an alternative agency - recoverable as per clause (3) of the agreement Rs. 1,46,69,227 Nil 2. Liquidated damages levied under clause (2) of the agreement Rs. 56,84,998 Nil 3. Escalation that would be payable to the alternative agency in regard to execution of remaining work (tentative). Rs. 75,00,000 Nil 4. Cost of Arbitration Rs. 1,00,000 Nil Total Rs. 2,79,54,225 Nil The Arbitrator awarded to the contractor, simple interest @ 9% per annum on Rs. 38,21,298 for the period 14.9.1996 to 31.3.1997 and simple interest @ 15% per annum on Rs. 1,04,58,298 for the period 1.4.1997 to date of payment (under Claim No. 12). The Arbitrator also awarded Rs. 39,610/-towards costs (under Claim No. 13). All the counter claims of Respondents were rejected. 5. On 12.12.2001, the Respondents filed an application (Misc. Arbn. Case No. 590/2001) under Section 34 of the Arbitra....
X X X X Extracts X X X X
X X X X Extracts X X X X
....y rejected, have found favor with the High Court. The Appellant contends that the award does not violate Clauses (2) and (3) of the agreement making certain decisions of Superintending Engineer/Engineer-in-Charge final, nor Clause 10(cc) of the agreement relating to escalations. It is also contended that Respondents committed breach and the counter-claims were rightly rejected. The Appellant contends the award is legal and not open to challenge under any of the grounds under Section 34 of the Act. Questions for consideration 7. A Civil Court examining the validity of an arbitral award under Section 34 of the Act exercises supervisory and not appellate jurisdiction over the awards of an arbitral tribunal. A court can set aside an arbitral award, only if any of the grounds mentioned in Sections 34(2)(a)(i) to (v) or Section 34(2)(b)(i) and (ii), or Section 28(1)(a) or 28(3) read with Section 34(2)(b)(ii) of the Act, are made out. An award adjudicating claims which are `excepted matters' excluded from the scope of arbitration, would violate Section 34(2)(a)(iv) and 34(2)(b) of the Act. Making an award allowing or granting a claim, contrary to any provision of the contract, w....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ach and the termination was therefore illegal. He held that the value of the work which could not be executed by the contractor due to wrongful termination, was Rs. 3,91,21,589 and 10; thereof would be the standard estimate of the loss of profits and consequently awarded Rs. 39,12,000/- towards the loss of profits, which the contractor would have earned but for the wrongful termination of the contract by the Respondents. 11. As per the arbitration agreement (contained in Clause 25 of the contract) all questions and disputes relating to the contract, execution or failure to execute the work, whether arising during the progress of the work or after the completion or abandonment thereof, "except where otherwise provided in the contract", had to be referred to and settled by arbitration. The High Court held that claims 1, 3 and 11 of the contractor were not arbitrable as they related to excepted matters in regard to which the decisions of the Superintending Engineer or the Engineer-in-Charge had been made final and binding under Clauses (2) and (3) of the agreement. 12. We may refer to the relevant provisions of the said contract document, that is, clauses 2, 3(Part) and 25 (Part....
X X X X Extracts X X X X
X X X X Extracts X X X X
....whether the date of completion has or has not elapsed by notice in writing absolutely determine the contract in any of the following cases: (i) If the contractor having been given by the Engineer-in-charge a notice in writing to rectify, reconstruct or replace any defective work or that the work is being performed in any inefficient or other improper or unworkmanlike manner, shall omit to comply with the requirements of such notice for a period of seven days thereafter or if the contractor shall delay or suspend the execution of the work so that either in the judgment of the Engineer-in-charge (whose decision shall be final and binding) he will be unable to secure completion of the work by the date of completionor he has already failed to complete the work by that date.... (ii) x x x x (not relevant) (iii) If the contractor commits breach of any of the terms and conditions of this contract. (iv) If the contractor commits any acts mentioned in Clause 21 hereof. When the contractor has made himself liable for action under any of the cases aforesaid, the Engineer-in-Charge on behalf of the President of India shall have powers: (a) To det....
X X X X Extracts X X X X
X X X X Extracts X X X X
....r otherwise concerning the works or the execution of 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 arbitration of the person appointed by the Chief Engineer, C.P.W.D. in charge of the work at the time of dispute or if there be no Chief Engineer the administrative head of the said C.P.W.D. at the time of such appointment. It will be no objection to any such appointment that the arbitrator so appointed is a Government servant, that he had to deal with the matters to which the contract relates and that in the course of his duties as Government servant he has expressed views on all or any of the matters in dispute or difference. (emphasis supplied) 13. Clauses (2) and (3) of the contract relied upon by the Respondents, no doubt make certain decisions by the Superintending Engineer and Engineer-in-Charge final/final and binding/final and conclusive, in regard to certain matters. But the question is whether Clauses (2) and (3) of the agreement stipulate that the decision of any authority is final in regard to the responsibility for the delay in execution and consequential brea....
X X X X Extracts X X X X
X X X X Extracts X X X X
....tractor will be able to secure the completion of the work by the due date of completion, which could lead to the termination of the contract or other consequences. The question whether such failure to complete the work was due to reasons for which the contractor was responsible or the department was responsible, or the question whether the contractor was justified in suspending the execution of the work, are not matters in regard to which the decision of Engineer-in-Charge is made final. (iv) The second part of Clause (3) of the agreement provides that where the contractor had made himself liable for action as stated in the first part of that clause, the Engineer-in-Charge shall have powers to determine or rescind the contract and the notice in writing to the contractor under the hand of the Engineer-in-Charge shall be conclusive evidence of such termination or rescission. This does not make the decision of the Engineer-in-Charge as to the validity of determination or rescission, valid or final. In fact it does not make any decision of Engineer-in-Charge final at all. It only provides that if a notice of termination or rescission is issued by the Engineer-in-Charge under his sig....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ed from arbitration under any provision of the contract. 15. In fact the question whether the other party committed breach cannot be decided by the party alleging breach. A contract cannot provide that one party will be the arbiter to decide whether he committed breach or the other party committed breach. That question can only be decided by only an adjudicatory forum, that is, a court or an Arbitral Tribunal. In State of Karnataka v. Shree Rameshwara Rice Mills MANU/SC/0177/1987MANU/SC/0177/1987 : 1987 (2) SCC 160 this Court held that adjudication upon the issue relating to a breach of condition of contract and adjudication of assessing damages arising out of the breach are two different and distinct concepts and the right to assess damages arising out of a breach would not include a right to adjudicate upon as to whether there was any breach at all. This Court held that one of the parties to an agreement cannot reserve to himself the power to adjudicate whether the other party has committed breach. This Court held: Even assuming for argument's sake that the terms of Clause 12 afford scope for being construed as empowering the officer of the State to decide upon the ques....
X X X X Extracts X X X X
X X X X Extracts X X X X
....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 on the 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 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 Dmages are entirely different. Fixing of liability is primary, while the quantification, which is provided for under Clause 16.2, is secondary t....
X X X X Extracts X X X X
X X X X Extracts X X X X
....elay occurred only on account of the omissions and commissions on the part of the Respondents, it follows that provisions which make the decision of the Superintending Engineer or the Engineer-in-Charge final and conclusive, will be irrelevant. Therefore, the Arbitrator would have jurisdiction to try and decide all the claims of the contractor as also the claims of the Respondents. Consequently, the award of the Arbitrator on items 1, 3 and 11 has to be upheld and the conclusion of the High Court that award in respect of those claims had to be set aside as they related to excepted matters, cannot be sustained. Re: Question (ii) 18. The arbitrator had considered and dealt with claims (1), (2, 4 and 5), (6), (7 and 8), (9) and (11) separately and distinctly. The High Court found that the award in regard to items 1, 3, 5 and 11 were liable to be set aside. The High Court did not find any error in regard to the awards on claims 2, 4, 6, 7, 8 and 9, but nevertheless chose to set aside the award in regard to these six items, only on the ground that in the event of counter claims 1 to 4 were to be allowed by the arbitrator on reconsideration, the Respondents would have been entitled....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... or prohibits a particular claim, any award made in violation of the terms of the contract would violate Section 28(3) of the Act, and would be considered to be patently illegal and therefore, liable to be set aside under Section 34(2)(b) of the Act. Claim No. (5) is for payment of escalation under Clause 10(cc) of the contract for work done beyond July, 1995 till the date of termination. Clause 10(cc) of the agreement reads thus: Clause 10(cc) subject to the condition that such compensation for the escalation in prices shall be available only for work done during the stipulated period of the contract including such period for which the contract is validly extended under the provisions of Clause 5 of the contract without any action under Clause 2 and also subject to the condition that no such compensation shall be payable for a work for which the stipulated period of completion is 6 months or less Thus, escalation in price shall be available only for the work done during the stipulated period of contract including such period for which the contract was validly extended under the provisions of Clause (5) of the contract, without any action under Clause (2) of the contract. ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ing the compensation/penalty under Clause 2 by the Respondent is incorrect and the claimant was not responsible for the delay, the escalation for the total work done, automatically becomes payable. The High Court therefore committed an error in setting aside the award in regard to claim No. 5 on the ground that it violates Clause 10(cc) of the contract. Re: Question (iv) 23. Once the Arbitrator recorded the finding on consideration of the evidence/material, that the contractor was not responsible for the delay and that the termination was wrongful and that the Respondents were liable for the consequences arising out of the wrongful termination of contract, the question of Respondents claiming any of the following from the contractor does not arise: (i) Extra expenditure incurred in getting the balance of work completed through another contractor under Clause 3 of the agreement (counter claim (1) for Rs. 1,46,69,277). (ii) Levy of liquidated damages under Clause 2 of the agreement at 10% of estimated cost of work for the delay between 10.1.1995 to 14.3.1996 [counter claim No. (2) for Rs. 56,84,998]. (iii) Claim on account of expected demand for escalation in rates ....