Uttam Singh Duggal And Co. Ltd. vs Union Of India And Ors.
1990 Latest Caselaw 299 Del

JUDGMENT

D.P. Wadhwa, J.

(1) In this suit for declaration and injunction by this order I am to decide two applications. The first application is of the plaintiff and is under Order 39, Rules I and 2 and Section 151 of the Code of Civil procedure and the second is under Section 34 of the Arbitration Act, 1940 and has been filed by the defendant. Both the parties have filed their respective replies to these applications. I will record at tile outset that filing of reply to the application of the plaintiff by the defendants was without prejudice to the rights of 'the defendants under Section 34 of the Arbitration Act. ft was so recorded in an earlier order.

(2) As the name suggests the plaintiff is a public limited company. The defendants are five in number. Second defendant is the Delhi Administration through the Secretary, Public Works Department, Delhi Administration and the other three defendants are respectively the Chief Engineer, the Superintending Engineer and the Executive Engineer in charge of Yamuna Bridge Project, New Delhi.

(3) Plaintiff was awarded a contract by the first defendant for construction of a multilane Western approach of the bridge across river Yamuna opposite Inter-state Bus Terminus, Delhi. The contract was to be completed within a period of thirty months ending on 17th April, 1987. But, for various reasons, it appears, the time for completion of the contract was extended from time to time. Once the extention was for twenty months at a. stretch. The plaint details the circumstances as to why the contract could not be completed within the stipulated period and lays the blame squarely on the defendants. The plaintiff also alleged that hindrance in work was also due to erratic payments or unjust with-holding of payments due to the plaintiff by the defendants.

(4) Disputes and differences having arisen the plaintiff filed a petition under Section 20 of the Arbitration Act (S. No. 2662/89) which is stated to be pending in this court. Immediate cause for filing of the petition under Section 20 of the Arbitration Act was passing of an order on 22nd November, 1988 by the fourth defendant imposing a penalty of Rs. 1,35,96,209.00 on the plaintiff in the purported exercise of power under Clause-2 of the contract which enables the fourth defendant to call upon the plaintiff to pay compensation at a certain rate subject to maximum for delay in execution of the work. The plaintiff also filed an application for interim relief in those proceedings (S. No. 2662/89) and this court restrained the defendants from enforcing their demand as contained in letter dated 22nd November, 1988, as aforesaid. Those proceedings are still pending. In the meantime it appears the authority under the arbitration agreement appointed an arbitrator, the appointment of which was again challenged by the a plaintiff by separate petition (OMP 3/89) wherein an interim order was made restraining the sole arbitrator from acting as such.

(5) PLAINTIFF'S contention in the present suit is that in view of the decision of the Supreme Court in Vishwanath Sood v. Union of India and Am. the dispute regarding levy of compensation under Clause-2 of the contract is not arbitrable and the arbitrator has, therefore, no jurisdiction to go into that question. This, therefore, led to the filing of the present suit. The plaintiff prays for a declaratory decree in its favor that the order dated 22nd November, 1988 made by the Superintending Engineer-defendant No. 4 is without jurisdiction, illegal, malafide and is non est. Further prayer in the suit is a decree for perpetual injunction restraining the defendants from giving effect to the impugned order otherwise relying on the same or making recovery or adjustments on the basis of that order. In that application for interim relief the plaintiff seeks similar restraint on the defendants for enforcing the order dated 22nd November, 1988 during the pendency of the suit. The defendants dispute the claim of the plaintiff and say that compensation by order dated 22nd November, 1988 was validly levied and that under Clause-29 of the contract the Engineer-in-Charge (Executive Engineer) or the Government had a right to with-hold any security deposit of the plaintiff and further direct with-holding of any amount pay able to the plaintiff by any other agency of the Government. The defendants admitted before me that in pursuance of order dated 22nd November, 1988 letters were addressed to various Government Departments as well as to Government companies and statutory corporations requiring them to with-hold payments due to the plaintiff to the extent of compensation levied. In the application under Section 34 of the Arbitration Act the defendants have contended that a valid arbitration agreement subsists between the parties and the subject disputes are covered under the arbitration agreement to an extent. Reference has been made to the claims and counter-claims of the parties. In reply to this application the plaintiff says that in view of the authoritative pronouncement of the Supreme Court in Vishwanath's case (supra) the arbitrator has no jurisdiction to decide the question of compensation leviable under Clause-2 of the contract.

(6) Before, I proceed further to consider the rival contentions of the parties, it would be appropriate to set out Clauses-2 and 29 (1) of the contract : "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 shall throughout the stipulated period of the contract be proceeded with all due diligence and the contractor shall 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 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 or 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 three-fourth 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 contractor 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-29 (1)-Whenever an claim or claims for payment of a sum of money arises out of or under the contract against the contractor the Engineer-in-Charge of the Government shall be entitled withhold and also have lien to retain such sum or sums in whole or in part from the security if any deposited by the contractor and for the purpose aforesaid the Engineer-in-charge or the Government shall be entited to withhold the security deposit if any, furnished as the case may be and also have a lien over the same pending finalisation or adjudication of any such claim. In the event of the security being insufficient to cover the claimed amount or amounts or if no security has been taken from the contractor, the Engineer- in-Charge or the Government shall be entitled to withhold and have a lien to retain to the extent of such claimed amount or amounts referred to above from any such or sums found payable or which at any time thereafter may become payable to the contractor under the same contract or any other contract with the Engineer-in-Charge or the Government or any contracting person through the Engineer- in-Charge pending finalisation or adjudication or any such claims. It is an agreed term of the contract that the sum of money or monies so withheld or retained under the lien referred to above by the Engineer-in-Charge or Government will be kept withheld or retained as such by the Engineer-in-Charge or Government till the claim arising out of or under the contract is determined by the Arbitrator if the contract is governed by the arbitration clause or by the competent court, as the case may be and that the contractor will have no claim for interest or damages whatsoever on any account in respect of such withholding or retention under the lien referred to above and duly notified a

(7) There is no dispute that Clause-25 of the contract constitutes arbitration agreement between the parties. This Clause-25 begins with the statement "except where otherwise provided in the contract, all questions and disputes......" and then says that these "shall be referred to the sole arbitration of the person appointed by the Chief Engineer-in-Charge of the work at the time of dispute or if there be no Chief Engineer the administrative head of the said Pwd, Delhi (DA) at the time of such appointment......" and further that provisions of Arbitration Act, 1940 shall apply. Other terms of this Clause-25 are not quite relevant for my purpose.

(8) Since, the basis of filing of this suit is the decision of the Supreme Court in case Vishwanath'ssupra) and it is on the basis of that suit that cause of action has been based, it will be better to refer to this decision in detail. Though, the Clauses-2 and 25, produced above are the same as in the present case and that before the Supreme Court in Vishwanath's case the difference being that under Clause-25 in Vishwanath's case the arbitrator is to bo appointed by the Chief Engineer, Himachal Pradesh Public Works Department. The question before the Supreme Court was that if the respondent-Union of India and State of Himachal Pradesh were entitled to claim before the arbitrator "a sum of Rs. 24,000.00 on account of payment of ten per cent compensation on the tendered amount for not executing the work in accordance with the terms and conditions of the agreement" being the compensation levied under Clause-2. Against this claim the arbitrator had given an award for a sum of Rs. 20,000.00 . Supreme Court held that reading Clasues-2 and 25 together the conclusion was irresistable that the amount of compensation chargeable under Clause-2 was a matter which had to be adjudicated in accordance with that clause and which could not be referred to arbitration under Clause-25. The award of Rs. 20,000.00 was, therefore deleted. Before coming to this conclusion the Supreme Court examined in detail both the clauses. It said that : "As we see it, clause-2 contains a complete machinery 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 considering 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 caluse, 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 court held that the levy of compensation under Clause-2 was not automatic and further observed that firstly levy of compensation was conditioned on some default or negligence on the part of the contract; secondly discretion was left with the Superintending Engineer to reduce the rate of penalty even from one per cent, though the maximum compensation that could be levied was ten per cent; thirdly though Clause-2 did not specifically say so it was clear that any moderation that may be done by the Superintending 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 would have to go into all the aspects and determine whether there was any negligence on the part of the contract or not and where there had not been any negligence or where on account of various extraneous circumstances such as vix major or default on the part of the Government or some other .unexpected circumstance which did not justify penalising the contractor, the Superintending Engineer would be entitled and may bound to reduce or even waive the compensation. Then, the Supreme Court added: "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 as a sort of revisional or appellate authority to whom the contractor appeals for rederss...".

(9) Relying on these observations of the Supreme Court Mr. Watel learned counsel for the plaintiff, submitted that the order dated 22nd November, 1988 of the Superintending Engineer was without jurisdiction and non est. He said in this case there is nothing on the record to show that the Superintending Engineer acted as a revisional or appellate authority or that the compensation was initially levied by the Engineer-in-Charge.

(10) If, I refer to the letter dated 22nd November, 1988 levying compensation of over Rs. l,35,00,000.00 . there is certainly no indication that the compensation was initially levied by the Engineer-in-Charge and while issuing this letter the Superintending Engineer acted as a revisional or appellate authority. The defendants are silent in this respect. The question before me is "could the order/letter dated 22nd November, 1988 be held to be a nullity." I am not in agreement with the Submissions made that it is so. The Supreme Court, to my mind. has not interpreted Clause-2 with reference to all the contracts containing similar clause that first Engineer-in-Charge should initially levy the compensation and then the Superintending Engineer should act as a sort of revisional or appellate authority. The words of Clause-2 are explicit. That Engineer-in- Charge is to initially levy the amount of compensation and then the Superintending Engineer is to act as revisional or appellate authority, find mention nowhere in Clause-2. To my mind observations of the Supreme Court about practice could well be with reference to similar contracts with Union of India and State of Himachal Pradesh where Chief Engineer Himachal Pradesh Public Works Department is to appoint the arbitrator. It could be that there was a concession on this point before the Supreme Court or there may be something on record for the Supreme Court to make the observations. This, however, is not for me to say anything. I do not consider the observations of the Supreme Court, referred to above, as a law declared by the Supreme Court. These observations of the Supreme Court are not a statement of law where a clause similar to Clause-2 is contained in a contract. The challenge of the plaintiff to the letter dated 22nd November, 1988 on this ground must, therefore, fail.

(11) BUT. then whether the Superintending Engineer has exercised his jurisdiction validly in accordance with terms of Clause-2 is a separate question to be gone into and decided during the course of the trial. Mr. Watel is right in his "submission that arbitrator has no jurisdiction to decide this matter and that suit would be the proper remedy. Arguments of Ms. Khetrapal, counsel for the defendants. Proceeded, however, on the basis that Clause-2 is to be bifurcated into two portions; one if the circumstances existed for levy of compensation under Clause-2; and second the quantum of the levy. She said while the second portion was an excepted matter and could not be the subject matter of arbitration in view of the decision of the Supreme Court in Vishwanath's case, the first portion could nevertheless be subject matter of reference and in fact it was already before the arbitrator According to her if the arbitrator comes to the conclusion that circumstances did not warrant levy of compensation as the contractor was not in default the whole of compensation amounting to over Rs 1 35,00,000.00 could be knocked off automatically. I am not inclined to agree with 'this submission. The Supreme Court in Vishwanath's case clearly held that before levying the compensation the Superintending Engineer has to go into the question if the circumstances for levy of compensation as per Clause-2 existed or not. Whole of the Clause-2 is an excepted matter and the dichotomy of Clause-2, as suggested by the defendants, is impermissible. Before levying the amount of compensation the Superintending Engineer has to consider all the relevant factors if the time allowed under the contract had been strictly observed by the contractor and whether the work has proceeded with all due diligence during the whole of the stipulated period. As noted above, though the maximum amount of compensation is prescribed being ten per cent of the estimated cost of work as shown in the tender, but compensation levied can even be less than one per cent depending upon the circumstances of the case. Clause-2 provides a complete machinery for determination of the compensation and it cannot, therefore, be said that circumstances leading to levy of compensation are arbitrable but not the actual amount of compensation levied. As stated above, whole of the Clause-2 is outside the purview of arbitration agreement as contained in Clause-25 of the contract. Since, the subject disputes as contained in the plaint cannot be referred to arbitration, the application of the defendants (IA 2947/90) filed under Section 34 of the Arbitration Act fails and is dismissed.

(12) It was submitted by the defendants that under Clause-29 they had right to withhold the money, if any due to the plaintiff and could also ask other Government Departments and agencies similarly to withhold the payments dm from them to the plaintiff. Reliance was placed an two decision of the Supreme Court in Union of India v. Roman Iron Foundry and H.M. Kamaluddin Ansari & Co. v. Union of India , the latter decision not wholly agreeing with the statement of law made in the former decision. I need not, however, try to point out to what extent the law laid in the first decision was not followed in the latter decision as both the decisions were rendered under Section 41(b) and Schedule-11, Item Iv of the Arbitration Act dealing with the powers of court to issue interim injunctions pending arbitration proceedings. It is not the case here. I am trying a suit.

(13) To my mind Clause-29 does not come to the help of the defendants as far as their writings to the Government Companies and statutory corporations and even to Government Departments are concerned requiring them to withhold payments due from them to the plaintiff. Under Clause-29 the Engineer-in- Charge or the Government is entitled to withhold payment pending finalisation or adjudication of any of the claims of the department. Further, the amounts so withheld or retained would be for such period till the claim arising out of or under the contract is determined by the arbitrator (if the contract is governed by the arbitration clause) or by the competent court as the case may be. Clause- 29 therefore, cannot be applied where the compensation has been levied under Clause-2 which contains a complete machinery 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. No question of any finalisation or adjudication of any claim therefore arises for the Engineer-in-Charge or the Government to take action under Clause-29. This would be particularly so when during the period the amount due to the contractor is withheld or retained, the contractor would not be entitled to any interest till the claim of the department is finalised or adjudicated upon either before the arbitrator or the court. As far as the department is concerned, its stand is that the compensation has been properly levied having due regard to the conditions contained is Clause-2 for levy of compensation. Acting under Clause-29, therefore, the Engineer-in-Charge or the Government cannot write to other departments of the Government, Government companies or statutory corporations to withhold payment due to the contractor because of levy of compensation by the Superintending Engineer under Clause-2 aforesaid. The letter which was shown to me by Ms. Khetrapal and is dated 26th February, 1990, addressed to various Government Departments and other agencies was issued under the signature of Mr. P.C. Sud, P.O. to D.G. (Works). Even otherwise such a letter under Clause-2 can be issued by the Engineer-in- Charge or the Executive Engineer or the Government and not by any other person.

(14) Relying on the decision of the Supreme Court in Central Inland Water Transport Corporation Ltd. and Anr. vs. Brojo Nath Ganguly and Anr. Mr. Watel submitted that many terms of the contract affecting the present controversy contained terms which were so unfair and unreasonable as to shock the conscious of the court and these were opposed to public policy and should be adjudged as void. This was in particular reference to Clause-2.

(15) Prima facie I do not find challenge to the validity of the Clause-2 as well taken. This clause was subject matter of interpretation by the Supreme Court in Vishwanath's case and validity of this clause would appear to have been upheld. At this stage I am not going into that question as I am of the prima facie view that power is validly given under Clause-2 for the Superintending Engineer to see that public works are executed in accordance with the terms of the contract and it cannot, therefore be said that vesting of power in the Superintending Engineer under Clause-2 is illegal. It is only to be seen if the power has been exercised legally and in accordance with Clause-2.

(16) Reference was also made by Mr. Watel to another decision of the Supreme Court in Mahabir Auto Stores and others vs. Indian Oil Corporation and others to contend that under our system governed by rule of law the reasons for imposing compensation should be clearly discernible. This question again will have to be gone into during the course of the trial.

(17) During the course of hearing. I inquired from Mr. Watel if the plaintiff was prepared to give security for the amount of compensation levied under Clause-2. But the plaintiff was not prepared to furnish any such security.

(18) I would, therefore, direct that the defendants shall withdraw their letter written to the Government Departments Government Companies and statutory corporations requiring them to withhold the money due to the plaintiff to the extent of compensation levied under Clause-2, in purported exercise of power under Clause-29 of the contract between the parties as I have already held that Clause-29 of the contract gives no such power to the defendants. If the defendants have any other right for adopting such a course under any other provision of law, I would not know. None has either been referred before me.

(19) Both these applications, therefore, stand disposed of. There will no order as to costs.