Union Of India (Uoi) vs J.N. Constructions
2003 Latest Caselaw 1111 Del

JUDGMENT

B.N. Chaturvedi, J.

1. The respondent was awarded a work contract by the appellant for construction of an office building at Chandigarh. The work was to be carried out in accordance with terms and conditions set out in an agreement executed between the parties. The work could not be completed within the stipulated time schedule and there was some delay in this respect. The work was eventually completed on 31st March, 1995. Disputes arose between the parties which necessitated invocation of arbitration clause by the respondent seeking adjudication of the disputes/claims raised by it, by a reference to arbitration. Failure on the part of the concerned department of the appellant to refer the disputes for arbitration, made the respondent to approach this Court by filing a petition under Section 20 of the for appointment of an arbitrator and reference of disputes, as raised by it, to such arbitrator for adjudication thereon. It appears that barring Claim No. 13.13 (h) all other claims raised by the respondent were referred to arbitration. The controversy is limited to Claim No. 13.13 (h) which was referred to arbitration by an order dated 22.11.2001 of the learned Single Judge, the legality whereof is being impugned by way of appeal on hand.

2. Claim No. 13.13 (h), reads in the following terms:-

CLAIM NO. 13.13 (h):

"That the work was completed on 31st March 1995 and the contractor was entitled to the grant of required extension as claimed in his letter dated 31.8.1994 due to various delays and breaches committed by the department."

3. The impugned order is being assailed on the ground that as the claim set out in 13.13 (h) falls in the category of 'excepted matters' as contemplated under Clause 25 of the agreement, it is beyond the purview of the arbitration clause and the same was thus not referable to arbitration. The plea of the respondent on the other hand is that the claim in question does not answer the requirement of being an 'excepted matter' as provided in the arbitration clause and that the learned Single Judge was justified in not treating it so and ordering a reference to arbitration in relation thereto.

4. To clear the stalemate in the face of rival contentions, reproduction of relevant part of arbitration clause, in the present context, is rendered necessary. It runs to the following effect :

CLAUSE 25:

Except where otherwise provided in the contract all questions and disputes relating to the meaning of the specifications, designs, drawings and instructions herein before mentioned and as to the quality or workmanship or materials used on the work or as to any other question, claim right matter or thing whatsoever in any way arising out of or relating to the contract, designs, drawings, specifications, estimates, instructions, orders or these conditions or otherwise concerning the works, or the execution or 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, Central Public Works Department, in charge of the work at the time of dispute or if there be no Chief Engineer, the administrative head of the said Central Public Works Department, 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 had expressed views on all or any of the matters in dispute or difference. The arbitration to whom the matter is originally referred being transferred or vacating his office or being unable to act for any reason, such Chief Engineer or administrative head as aforesaid at the time of such transfer, vacation office or inability to act shall appoint another person to act as arbitrator in accordance with the terms of the contract. Such person shall be entitled to proceed with the reference from the stage at which it was left by his predecessor. It is also a term of this contract that no person other than a person appointed by such Chief Engineer or administrate head of the CPWD as aforesaid should act as arbitrator and if for any reason, that it is not possible, the matter is not to be referred to arbitration at all. In all cases where the amount of the claim in dispute is Rs. 75, 000/- (Rupees Seventy Five Thousand) and above, the arbitrator shall give reason for the award.........

The decision of Superintendent Engineer regarding the quantum of reduction as well as justification thereof in respect of rates for substandard work which may be decided to be accepted will be final and would not be open to arbitration."

5. For a complete understanding of the aforesaid arbitration clause, a reference to clause 2, would be an exercise in a right direction. Clause 2 reads thus:

Clause 2:

"The time allowed for carrying out the work as entered in the tender shall be deemed to be of the essence of the contract on the part of the contract and shall be reckoned from the tenth day after the date of 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 percent 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 the tender, for every day that the work remains uncommenced or unfinished after the proper dates.

And further to ensure good progress during the execution of 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-eight of the whole of the work before one-fourth of the whole time allowed under the contract has elapsed; three-eights of the work, before one-half of such time has elapsed, and three fourth, of the work, before three-fourths 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 work as shown in the tender."

6. Clauses 2 & 25, as extracted above, would indicate that all disputes/claims relating to the matters specified in Clause 25, arising during the progress of the work or after completion or abandonment thereof were referable to arbitration. However, disputes/claims on certain counts as specifically provided in the concluding para of Clause 25 and also elsewhere in the contract, were excluded from the purview of arbitration clause.

7. In terms of Clause 2 time was essence of the contract, and the respondent was required to complete the allotted work within a given time frame. Failure on its part to abide by the time schedule was to attract application of Clause 2 making the respondent liable to pay compensation 'of an amount equal to one per cent or such smaller amount as the Superintending Engineer may decide on the amount of the estimated cost of the whole work as shown in the tender, for everyday, the work remained uncommenced/unfinished and his decision in this respect was to be final.' Evidently, thus, the amount of compensation, if any, on account of delay in carrying out and completing the work, would be determinable by the Superintending Engineer only with finality attached to his decision in that respect. By naming the Superintending Engineer as the authority to determine the amount of compensation, if any, a provision for an in-house remedy was provided under Clause 2 of the agreement. Clearly, thus, the question of determination of amount of compensation, if any, for failure on the part of the respondent to carry out and complete the work by or within the stipulated date(s) was excluded from the purview of arbitration clause and was in the circumstances not referable to arbitration being an 'excepted matter'. The claim No. 13.13(h) seeks a declaratory adjudication by arbitral tribunal to the effect that the respondent was entitled to grant of extension due to certain lapses attributable to the department. The claim so raised is manifestly co-related to the question of compensation, if any, which could eventually be payable by the respondent in the event of the Superintending Engineer making a decision in that respect. Raising of such a claim and seeking reference thereof to arbitration for adjudication thereon is simply in the nature of a pre-emptive action on the part of the respondent to circumvent the determination of its liability on compensation count by the Superintending Engineer for delayed execution of the work. Claim No. 13.13(h) is essentially in the nature of defense which the respondent could seek to raise to contest the claim for compensation, if any, against it for delayed completion of the construction work, as and when taken up for determination by the Superintending Engineer. In the given situation Claim No. 13.13 (h) cannot be allowed to be raised as a dispute independent of a claim for compensation, if any, to be raised on behalf of the appellants.

8. While dealing with a petition under Section 20 of the Arbitration Act 1940 the Court has to examine:

i) Existence of an arbitration agreement between the parties;

ii) Applicability of the arbitration agreement to the difference which has arisen; and

iii) Sufficiency of the cause shown to decline an order of reference to the arbitrator.

9. In a recent decision in General Manager Northern Railways v. Sarvesh Chopra , the Supreme Court laid down that on a petition under Section 20 reference to arbitrator is not a function to be discharged mechanically or ministerially rather the Court has to apply its mind to form an opinion for judicial determination that the difference sought to be referred to arbitral adjudication is one to which the arbitration agreement applies. It was also a case where a question arose if the claims specified therein were covered under 'excepted matters' within the meaning of general conditions of contract. One of the clauses (clause 63) forming part of general conditions of the contract provided for reference of the disputes and differences of any kind whatsoever arising out of or in connection with the contract, by the contractor to the railways and the railways was to notify in writing its decision on such disputes and differences within a reasonable time. This clause specified certain clauses of the general conditions of the contract which were to be treated as 'excepted matters' and decision of Railways thereon was to be final and binding on the contractor. The clause also carried a stipulation that the 'excepted matters' would stand specifically excluded from the purview of the arbitration clause and would not be referred to arbitration. Unlike in General Manager, Northern Railways, in the present case though there is no specific mention in the arbitration clause or Clause 2 that the issue pertaining to levy of compensation, if any, for delay in completion of work would fall in the category of 'excepted matters' and shall stand excluded from the purview of the arbitration clause such, a stipulation is clearly inferable from the arbitration clause(clause 25) which provides for reference of only those disputes and differences for arbitral adjudication, for determination whereof no provision has been made elsewhere in the agreement. Clause 2 was incorporated in the agreement with a view to exclude the issue of determination of amount of compensation, if any, for delay in completion of work, from the scope of the arbitration clause. In Vishwanath Sood v. Union of India and another and Food Corporation of India v. Sreekanth Transport wherein also the agreements executed between the parties contained a similar clause, like Clause 2 in the present case, for determination of the amount of compensation for delay in execution of work and stipulated that the decision of the officer concerned would be final, it was held that the issue of determination of compensation for delay in execution of work fell in the category of 'excepted matters'. A contention was raised in the General Manager, Northern Railways (supra) that the interpretation of the arbitration clause in the agreement to find if a particular dispute fell within the category of 'excepted matters' should be left to be determined by the arbitrator but that argument was negatived by the Supreme Court in the following terms:

"... ...it has been held as the consistent view of this Court that in the event of the claims arising within the ambit of the 'excepted matters', the question of assumption of jurisdiction by any arbitrator either with or without the intervention of the Court would not arise. Union of India v. Popular Builders, Calcutta (2000)8 SCC 1 and Steel Authority of India Ltd. v. J.C. Budhiraja Govt. and Mining Contractor , Ch. Ramlinga Reddy v. Superintending Engineer and Another (1994) 5 Scale 12 (pr 18), M/s . Alopi Parshad v. UOI: this Court has unequivocally expressed that an award by an arbitrator over a claim which was not arbitrable as per the terms of the contract entered into between the parties would be liable to be set aside. In M/s . Prabartak Commercial Corporation Ltd. v. The Chief Administrator, Dandakaranya Project and another , a claim covered by 'excepted matter' was referred to arbitrator in spite of such reference having been objected to and the arbitrator gave an award. This court held that the arbitrator had no jurisdiction in the matter and that the reference of the dispute to the arbitrator was invalid and the entire proceedings before the arbitrator including the awards made by him were null and void."

10. In the case on hand, even the learned Single Judge noted:

"From the bare reading of clause 2, it is manifestly clear that the time allowed to the contractor for carrying out the work if deemed to be the essence of the work and if there is any delay on the part of the contractor in carrying out the work within the stipulated time for the delay caused, the decision of the Superintending Engineer of the respondent is final and any claim in that respect cannot be arbitrated as that would be covered under excepted matteRs. "

However, the learned Single Judge then proceeded to add that Claim No. 13.13(h) seeking to justify the delay in executing the work on account of various factors attributable to the Department did not fall within the category of 'excepted matters' . As noticed herein above, Claim No. 13.13 (h) being in the nature of defense, which would be available to the respondent in the event of the appellant resorting to Clause 2 of the agreement for determination of amount of compensation, if any, payable by it for delay in execution of the allotted work, the issue sought to be raised there under being a co-related issue cannot be dealt with in isolation independent of claim for compensation, if any, by the Department concerned. It would thus be difficult to subscribe to the view taken by the learned Single Judge in holding that Claim No. 13.13(h) is not covered in the category of 'excepted matters' as contemplated under Clause 25 of the agreement. Being an 'excepted matter' it is for the Superintending Engineer to take into account the plea of the respondent regarding delays and breaches allegedly committed by the Department, while determining the amount of compensation, if any, leviable against the respondent. The claim in question was in the circumstances not referable to arbitration as the arbitrator would have no jurisdiction to adjudicate upon the same being an 'excepted matter'. The impugned order referring the claim No. 13.13(h) to arbitration is thus liable to be set aside.

11. In the result, the appeal is allowed and the impugned order dated 22.11.2001 directing reference of claim No. 13.13.(h) to arbitration is set aside and the petition under Section 20 of the Arbitration Act is accordingly dismissed. It is left to the Superintending Engineer concerned to take into account the respondent's plea in Claim No. 13.13.(h), if so raised, as and when taking up the matter for determination of amount of compensation, if any, payable by the respondent on account of delay in execution of the work awarded to it.