Delhi High Court
Gail (India) Ltd. vs Paramount Ltd. on 30 April, 2010
Author: Gita Mittal
IN THE HIGH COURT OF DELHI
OMP No. 66/2004 & OMP No. 80/2004
Reserved on : 23rd December, 2009
Date of decision: 30th April, 2010
GAIL (India)Ltd. ....Petitioner
through: Mr. Jagjit Singh, Adv.
VERSUS
Paramount Ltd. ....Respondent
through: Ms. Meenakshi Arora, Adv.
CORAM:
HON'BLE MS. JUSTICE GITA MITTAL
1. Whether reporters of local papers may be
allowed to see the Judgment? Yes
2. To be referred to the Reporter or not? Yes
3. Whether the judgment should be reported in the
Digest? Yes
GITA MITTAL, J
1. GAIL (India) Ltd. (referred to as the petitioner/GAIL
hereafter) entered into two contracts with the Paramount Limited
('Contractor'/respondent hereafter), one in respect of a Waste
Water Treatment Plant at UPCC, Pata, and the second with regard
to the Condensate Polishing Unit (Part-B) for a Gas Cracker Unit
for U.P. Petrochemical Complex of M/s GAIL at Pata, Uttar
Pradesh.
2. Identical disputes arose in respect of completion of the
two contracts resulting in initiation of the arbitration in both
matters. The disputes in both contracts were referred to the
arbitration of Shri T.S. Vijayaraghavan as sole arbitrator.
Separate proceedings were held by the learned arbitrator which
OMP No. 66/2004 & OMP No. 88/2004 page 1 of 145
culminated in the making and pronouncement of two awards both
dated 20th November, 2003 in favour of the contractor. GAIL has
assailed the said awards by way of the separate objections under
Section 34 of the Arbitration & Conciliation Act, 1996 which have
been registered as OMP No. 66/2004 and OMP 80/2004. The
awards are similar and identical questions of law and fact have
been raised for consideration in both these matters. For this
reason, these two petitions are hereby taken up together for
consideration.
OMP No. 66/2004
3. For the purposes of convenience, OMP No. 66/2004 is
taken up first.
4. Factual Matrix
4.1 GAIL invited bids on 27th June, 1994 for setting up of a
Waste Water Treatment Plant ('WWTP' hereafter for brevity) on
turn key basis for its U.P. Petro Chemical Complex at Pata ('UPPC'
hereafter for brevity). As per the bid document, the brief
description of work was as follows :-
"Turnkey execution of Waste Water
Treatment Plant (WWTP) including process design,
basic, engg., detail engg., procurement, supply,
fabrication, erection with all civil, electrical,
instrumentation works, testing, commissioning &
guaranteeing the performance of the WWTP
meeting the guidelines as specified in bid
document. The process design & basic engg.
should preferably be based on latest proven
technology systems and practices."
OMP No. 66/2004 & OMP No. 88/2004 page 2 of 145
4.2 On 10th September, 1994, Paramount Limited (hereafter
referred to as the 'contractor') submitted its tender for the same.
GAIL accepted the contractor's tender on 14th July,
1995, vide a fax of intent. Clause 1.1 reiterated testing and
commissioning of the plant as part of the scope of work. As per
the said communication, the scope of work was further specified in
clause 4 as comprising :-
"The contractor's scope of work shall
comprise process design basic Engg. And detail
Engg. Based on the Indicative flow diagram
(Drg. No. 3346-00-17-41-3-001 Rev. (B), where
the essential requirements and proposed
requirements for the effluent treatment Plant
have been marked, manufactured, supply,
erection, painting, testing commissioning &
guaranteeing the entire effluent treatment plant
complete on turnkey basis to meet the treated
effluent quality as specified in the design basis,
as mentioned in Indicative flow diagram,
technical specifications, data sheets, drawings
etc. else where given in the bid document."
(Emphasis supplied)
4.3 In clause 6.0, GAIL had given details of the sources of
waste water generation in the complex which included the
effluents from several other units including inter alia :-
"a) L.L.D.P.E.
b) H.D.P.E.
c) Gas Cracker Unit
d) Gas Sweetening unit
e) Flare Area
f) Hydro carbon storage tanks area"
OMP No. 66/2004 & OMP No. 88/2004 page 3 of 145
Subsequent to the fax of intent dated 14th July, 1995, a
formal letter of acceptance dated 27th September, 1995 was also
issued by GAIL, again referring to all the above components of the
contract including design, erection, testing and commissioning of
the waste water treatment plant for UPPC at Pata. The lump sum
contract value for the works under the contract was stated as
Rs.12,39,39,690/-.
4.4 So far as the time schedule was concerned, in clause
3.0 of this communication, it was mentioned as follows :-
"The Time Schedule for completion of
works covered under this contract shall be 18
(eighteen) months reckoned from the date of
issue of the Fax of Intent i.e. 14.7.1995 and is
inclusive of mobilisation period."
Thus, work was to be completed within 18 months from
the date of fax of intent (FOI) i.e. from 14th July, 1995 to 13th
January, 1997.
4.5 The relevant extract of the General Conditions of the
Contract ('GCC' hereafter for brevity) which also governed the
contract relied on by the parties and necessary for the present
adjudication are briefly summarised as follows :-
" Section-1
GENERAL CONDITIONS OF CONTRACT
1. DEFINITION OF TERMS :
1) The OWNER/COMPANY/GAIL means GAS
AUTHORITY OF INDIA LIMITED. A Government of
India Undertaking having its Registered office at
Hotel Samrat, Chanakyapuri, New Delhi and
includes its successors and assigns.
2) The CONTRACTOR means the person or the
OMP No. 66/2004 & OMP No. 88/2004 page 4 of 145
persons, firm or Company or Corporation whose
tender has been accepted by the OWNER and
includes the CONTRACTOR's legal Representatives
his successors and permitted assigns.
xxx
4) The WORK shall mean and include all items
and things to be supplied/done and services and
activities to be performed by the CONTRACTOR in
pursuance to and in accordance with the
CONTRACT or part thereof as the case may be and
shall include all extra additional, altered or
substituted works as required for purpose of the
CONTRACT.
xxx
8) EIL means Engineers India Limited, who are
the Consulting Engineers to the OWNER for this
project and having registered office at El House, 1-
Bhikaji Cama Place, R.K. Puram, New Delhi.
xxx
25.0 TIME OF PERFORMANCE
xxx
25.2 TIME SCHEDULE OF CONSTRUCTION :
25.2.1 The General Time Schedule of
construction is given in the TENDER DOCUMENT
CONTRACTOR should prepare a detailed monthly
or weekly construction programme jointly with the
ENGINEER IN-CHARGE within one month of
receipt of LETTER OF INTENT or ACCEPTANCE
OF TENDER. The WORK shall be executed strictly
as per the Time Schedule given in the CONTRACT
DOCUMENT. The period of construction given
includes the time required for mobilisation testing
rectifications, if any, retesting and completion in all
respects in accordance with CONTRACT
DOCUMENT to the entire satisfaction of the
ENGINEER-IN-CHARGE.
xxx
26.0 FORCE MAJEURE
26.1 CONDITIONS FOR FORCE MAJEURES
OMP No. 66/2004 & OMP No. 88/2004 page 5 of 145
In the event of either party being rendered
unable by Force Majeure to perform any
obligations required to be performed by them
under the CONTRACT the relative obligation of the
party affected by such Force Majeure shall upon
notification to the other party be suspended for the
period during which Force Majeure event lasts.
The cost and loss sustained by the either party
shall be borne by respective parties.
The term "Force Majeure" as employed herein shall
mean acts of God, earthquake, war (declared or
undeclared), revolts, riots, fires, floods, rebellions,
explosions, hurricane, sabotage civil commotions
and acts and regulations of respective Government
of the two parties, namely the OWNER and the
CONTRACTOR.
Upon the occurrence of such cause(s) and upon its
termination, the party alleging that it has been
rendered unable as aforesaid thereby, shall notify
the other party in writing immediately but not later
than 72 (Seventy-two) hours of the alleged
beginning and ending thereof, giving full
particulars and satisfactory evidence in support of
its claim.
Time for performance of the negative obligations
suspended by the Force Majeure shall be extended
by the period cause lasts.
If deliveries of bought out and of works to be
executed by the CONCTRACTOR are suspended by
Force Majeure conditions lasting for more than 2
(two) months the OWNER shall have the option to
terminate the CONTRCT.
27.0 COMPENSATION FOR DELAY (LIQUIDATED
DAMAGES):
27.1 Time is the essence of the CONTRACT. In
case the CONTRACTOR fails to complete the
WORK within the stipulated period, then, unless
such failure is due to Force Majeure as defined in
Clause 26 here above or due to OWNER's defaults,
the CONTRACTOR shall pay to the OWNER, by way
of compensation for delay and not as penalty, a
sum @ ½% (Half Percent) of the VALUE OF
CONTRACT for delay per week on pro-rata for
part thereof subject to a maximum of 10% (Ten
percent) of the VALUE OF CONTRACT. The
OMP No. 66/2004 & OMP No. 88/2004 page 6 of 145
parties agree that this is a genuine pre-estimate of
the loss/damage which will be suffered on account
of delay/breach on the part of the CONTRACTOR
and the said amount will be payable on demand
without there being any proof of the actual loss or
damages caused by such delay/breach.
The decision of the ENGINEER-IN-CHARGE
in regard to applicability of Compensation for Delay
shall be final and binding on the CONTRACTOR.
27.2 All sums payable by way of compensation
under any of the conditions shall be considered as
reasonable compensation without reference to the
actual loss or damage which shall have been
sustained.
28.0 RIGHTS OF THE OWNER TO FORFEIT
SECURITY DEPOSIT :
Whenever any claim against the
CONTRACTOR for the payment of a sum of money
arises out of under the CONTRACT, the OWNER
shall be entitled to recover such sum by
appropriation in part or whole the Security Deposit
of the CONTRACTOR. In the event of the security
being defficient or if no security has been taken
from the CONTRACTOR, then the balance or the
total sum recoverable, as the case may be shall be
deducted from any sum then due or which at any
time thereafter may become due to the
CONTRACTOR. The CONTRACTOR shall pay to the
OWNER on demand any balance remaining due.
xxx
44.0 LIENS:
xxx
44.3 The final payment shall not become due until
the CONTRACTOR delivers to the ENGINEER-IN-
CHARGE complete release or waiver of all liens
arising or which may arise out of his agreement or
receipt in full or certification by the CONTRACTOR
in a form approved by ENGINEER-IN-CHARGE that
all invoices for labour, materials, services have
been paid in lien thereof and if required by the
ENGINEER-IN-CHARGE in any case an affidavit
that so far as the CONTRACTOR has knowledge or
information the releases and receipts include all
the labour and material for which a lien could be
filled.
OMP No. 66/2004 & OMP No. 88/2004 page 7 of 145
xxx
53.0 COMPLETION OF CONTRACT :
Unless otherwise terminated under the
provisions of any other relevant clause, this
CONTRACT shall be deemed to have been
completed at the expiration of the PERIOD OF
LIABILITY as provided for under the CONTRACT.
xxx
76.0 ACTION AND COMPENSATION IN CASE OF
BAD WORK
If it shall appear to the ENGINEER-IN-CHARGE
that any work has been executed with unsound,
imperfect or unskilled workmanship, or with
materials of any inferior description, or that any
materials or articles provided by the
CONTRACTOR for the execution of the WORK are
unsound, or of a quality inferior to that contracted
for, or otherwise not in accordance with the
CONTRACT, the CONTRACTOR shall on demand in
writing from the ENGINEER-IN-CHARGE or his
authorised representative specifying the WORK,
materials or articles complained of notwithstanding
that the same may have been inadvertently passed,
certified and paid for, forthwith rectify or remove
and reconstruct the WORK so specified and provide
other proper and suitable materials or articles at
his own cost and in the event of failure to do so
within the period specified by the ENGINEER-IN-
CHARGE in his demand aforesaid, the
CONTRACTOR shall be liable to pay compensation
at the rate of 1% (one percent) of the estimated
cost of the whole WORK, while his failure to do so
shall continue and in the case of any such failure
the ENGINEER-IN-CHARGE may on expiry of
notice period rectify or remove and re-execute the
WORK or remove and replace with others, the
materials or articles complained of to as the case
may be at the risk and expense in all respects of
the CONTRACTOR. The decision of the
ENGINEER-IN-CHARGE as to any question arising
under this clause shall be final and conclusive.
xxx
OMP No. 66/2004 & OMP No. 88/2004 page 8 of 145
107.0 ARBITRATION"
107.1 All disputes of difference whatsoever
which shall at any time arise between the parties
hereto touching or concerning the WORKS or the
execution effect thereof or to the rights or liabilities
or the construction meaning operation or effect
thereof or to the rights or liabilities of the parties or
arising out or in relation thereto whether during or
after completion of the CONTRACT or whether
before or after determination, foreclosure or breach
of the CONTRACT (other than those in respect of
which the decision of any person is by the
CONTRACT expressed to be final and binding) shall
after written notice by either party to the
CONTRACT to the other of them and to the
Appointing Authority hereinafter mentioned be
referred for adjudication to a sole arbitrator to be
appointed as herein after provided.
107.2 For the purposes of appointing the sole
Arbitrator referred to above, the Appointing
Authority will send within thirty days of receipt of
the notice, to the CONTRACTOR a panel of three
name persons who shall all the presently
unconnected with the organisation for which the
WORK is executed.
The CONTRACTOR shall on receipt of the names as
aforesaid, select any one of the persons named to
be appointed as a sole Arbitrator and communicate
his name to the Appointing Authority within thirty
days of receipt of names. The Appointing Authority
shall thereupon without any delay appoint the said
person as the sole Arbitrator. If the CONTRACTOR
fails to communicate such selection as provided
above within the period specified, the Appointing
Authority shall make the selection and appoint the
selected person as the Sole Arbitrator.
xxx xxx
The venue of arbitration shall be New Delhi.
The fees, if any, of the Arbitrator shall, if required
to be paid before the award is made and published,
be paid half AND half by each of the parties. The
costs of the reference and of the award including
the fees, if any, of the Arbitrator shall be in the
OMP No. 66/2004 & OMP No. 88/2004 page 9 of 145
discretion of the Arbitrator who may direct to and
by whom and in what manner, such costs or any
part thereof shall be paid and may fix or settle the
amount of costs to be so paid.
The award of the Arbitrator shall be final and
binding on both the parties.
Subject to aforesaid the provisions of the
Arbitration Act, 1940 or any statutory modification
or re-enactment thereof and the rules made
thereunder, and for the time being in force, shall
apply to the arbitration proceeding under this
clause."
4.6 My attention has also been drawn to the agreed
variation between the parties relating to the release of the last
10% of payment to the contractor as enclosed with the letter dated
27th September, 1995 which reads as follows :-
"RELEASE OF LAST 10% PAYMENT
In case GAIL/EIL are not in a position to
release commissioning front after completion of
precommissioning activities/Mech. Completion,
final 10% of the contract value shall be released in
the following manner :
a) 5% of the contract value shall be released to
contractor upon:
i) Issue of Mech. Completion certificate and :
ii) Extension/submission of performance BG of
10% of contract value to be kept valid till 21 months
from the date of Mech. Completion certificate.
b) Balance 5% of contract value shall be released
after 18 months of issue of Mech. Completion
certificate or after the commissioning and
acceptance of the system, whichever is earlier.
The owner shall give 15 days notice to the
contractor during the period of 18 months where
upon the contractor shall be obliged to depute his
commissioning."
4.7 So far as delay in completion of the work resulting on
account of reasons attributable to GAIL are concerned, the
OMP No. 66/2004 & OMP No. 88/2004 page 10 of 145
contract between the parties provided the following
compensation:-
"A.28.0 COMPENSATION FOR EXTENDED
STAY
The clause no. 87(vi) of GCC is
modified to the following extent :-
In case the time of completion of work
is delayed beyond the time schedule indicated in
the tender document plus a grace period
equivalent to 1/5th of the time schedule of 2
months whichever is more, due to reasons solely
attributable to owner, the contractor shall be paid
extended stay compensation in order to maintain
necessary organisational set up and construction
tools, tackles, eqpts. etc. at site of work. The
bidder shall mention the rate for such extended
stay compensation per month in the 'UPRICE
PART' which will be considered for evaluation for
1/5th of the time schedule or 3(three) months
whichever is less. In case bidder does not
indicate the rate for extended stay compensation
in UPRICE PART, it will be presumed that no
extended stay compensation is required to be paid
to the contractor.
In case the completion of work is
delayed beyond a period of 3 months after the
grace period, then both the owner and the
Contractor shall mutually decide the future course
of action including payment of further extended
stay compensation."
4.8 According to the contractor, it mobilised its resources
for commencement of the work but was prevented in the
completion till 15th September, 1997. The reasons for the delay
which occurred have also been detailed on record by the arbitrator
as follows :-
(a) The entire plant site was flooded with water because the
plant site was located at the lowest place of the entire project
(UPPC). The roads were inundated and site was rendered
unaccessible. GAIL had failed to provide any form of flood
protection or drainage measure. As per GCC 1.31 mobilisation
OMP No. 66/2004 & OMP No. 88/2004 page 11 of 145
was defined as simultaneous action at all locations. Piece meal
handing over of the site was therefore not to be acceptable. GAIL
was required to provide a site in workable condition. Even though
fax of intent was issued on 14th July, 1995, but the site being
located at the lowest level and completely flooded, workable site
was not made available till 15th September, 1995. Again in July,
1996 there was heavy monsoon hampering transportation of man
power and material.
(b) Between November to December, 1995 there was an
unforeseen law and order problem which occurred at the site. The
resident construction manager of the company was beaten up by
miscreants and there was resultant demoralisation of the work
force, it took five weeks to disentangle and resume work.
(c) Drawings of the DG sizing (set) were submitted on 21st
December, 1995 and were finally approved by GAIL only in
February, 1997. This set was inspected, dispatched and received
at the site only on 19th August, 1997.
(d) Between April to June, 1996, on account of elections to the
U.P. State Assembly, all vehicles of the respondent company were
requisitioned and impounded by the state authorities for
electioneering. The site was located at a distance of 15 kms from
the residential area rendering commutation without the (vehicles)
impossible.
(e) Details of the slop oil tanks were provided to GAIL on 16 th
April, 1996 for obtaining the approval from the Chief Controller of
Explosives at Nagpur. These were approved only by 21st April,
1997.
(f) In February, 1997, work at site suffered on account of non-
availability of the cement which was to be supplied by GAIL as per
the contract.
4.9 The contractor relies on a mechanical completion
certificate dated 20th August, 1997 issued by the Engineers India
Limited (referred to as 'EIL' hereafter) certifying that "all work
have been mechanically completed in the above plant as per
specification, drawings and instruction of engineer in charge."
The certificate was issued without prejudice to the contractor's
OMP No. 66/2004 & OMP No. 88/2004 page 12 of 145
liability and GAIL's rights as per the provisions of the contract.
4.10 After the mechanical completion, pre-commissioning
activities were commenced. Final commissioning of the plant
could take place only after the oily water effluent and the sanitary
waste was made available by GAIL which was to be treated in the
plant.
4.11 Extension of time
In the above circumstances, the contractor made the
following requests for extension of time which were considered
and granted :-
Request by the Contractor Approval
(i) On 9th January 2007 By a communication dated 14th
On 14th January, 2007 the January, 1997 EIL had
contractor sought extension of recommended extension of time
time. for completion of the contract
up to 28th February, 1997.
(ii) On 31st March, 1997 a
request for extension of time
from 9th March to 31st March,
(iii) 23rd April to 31st May, 1997 GAIL wrote a letter dated 8th
May, 1997 granting provisional
extension of time up to 31st May,
1997 without prejudice to
contractual provisions and right
to impose liquidated damages.
(iv) On 23rd June, 1997 the
contractor revised the date to
30th June and shifted it to 30th
July, 1997.
(v) 6th September, 1997 till 31st GAIL agreed to provisionally
October, 1997 extend the time without
prejudice to its rights.
OMP No. 66/2004 & OMP No. 88/2004 page 13 of 145
4.12 The contractor wrote a detailed communication to GAIL
dated 30th September, 1997 informing it about the reasons for the
delays which had occurred and seeking regularisation of the
delays and extension of time till the extended period. Apart from
the aforenoticed details, it was pointed out, that the contractor
was waiting for the necessary sanitary waste which was to be
provided by GAIL so that the biomass could be developed in the
aeration tank to achieve the required results for treatment to
complete the testing and commissioning. It was urged that the
delay at the worst was for a period of 32 weeks in the
circumstances noted hereinabove. Again on 7th October, 1997, the
contractor wrote to GAIL requesting for the supply of service
water to complete the commissioning.
4.13 The contract envisaged the Guarantee Test Run ('GTR'
hereafter) within eighteen months from the date of the award of
the work. Admittedly mechanical completion of the plant stood
completed on 20th August, 1997. Commissioning of the plant by
way of individual systems commenced on 7th July, 1997 and stood
completed by 24th of October, 1997. Despite repeated requests
including the one made on 30th September, 1997 since the
mechanical completion, GAIL was unable to provide the sanitary
waste that is the service water for testing and commissioning of
the plant. As late as on 21st of January, 1998 the contractor was
therefore compelled to seek extension of time for testing and
OMP No. 66/2004 & OMP No. 88/2004 page 14 of 145
commissioning of the plant till such time as the sanitary waste was
made available. A reminder in this behalf on 6th February, 1998
and telegram dated 7th of March, 1998 were of no avail.
4.14 In this background, by a communication of 7th March,
1998, the contractor confirmed completion of the individual
commissioning of the plant; and further requested GAIL to take
over the plant; relieve its staff and issue a mechanical completion
certificate with effect from 20th August, 1997.
4.15 In a meeting held on 31st March, 1998, GAIL confirmed
the date of completion of the various systems and pump operations
and informed the contractor that the necessary oily water effluents
and sanitary waste were not available for the GTR/commissioning.
GAIL required the contractor to provide the GTR/commissioning
on fifteen days notice.
4.16 On 10th August, 1998, GAIL again certified that the
plant was mechanically completed on 20th August, 1997; that pre-
commissioning activities were started subsequently and
milestones for the systems stipulated between 27th August, 1997
and 24th October, 1997 stood completed. It was further noted that
the commissioning activities of the plant by way of individual
systems and water run of various sections also stood completed on
the 24th of October, 1997; that the performance GTR was awaiting
inputs of all the effluents and sanitary waste to the plant, supply
of which was to be made available by GAIL and that the plant was
OMP No. 66/2004 & OMP No. 88/2004 page 15 of 145
being operated by GAIL since the 29th of June, 1998.
In this meeting, it is noteworthy, that the contractor
agreed for the performance run of the plant on a 15 day notice
without any additional financial implications.
4.17 So far as availability of the sanitary waste and effluent
for testing is concerned, the contractor has complained that it was
unnecessarily compelled to maintain staff at the site.
4.18 GAIL's inability to provide the effluent so far for the
GTR was confirmed by it on 21st November, 1998 when it wrote
that ethylene production was expected only in the first half of
December and the contractor should keep its commissioning team
ready for mobilizing at the site by mid-December, 1998.
4.19 The contractor had responded by a letter dated 1st
December, 1998 reminding GAIL that the plant stood taken over
and duly commissioned, except the biological section where the
biomass was to be developed subject to the sanitary waste and
effluent being made available by GAIL. Amongst other grievances,
the contractor reminded GAIL that availability of the pollutant was
dependent on commissioning of their other plants including the
LLDPE, HDPE, gas crackers and gas sweetening plants sets.
4.20 Contradictorily, on 3rd December, 1998, GAIL addressed
a letter to the contractor stating that the "waste water treatment
OMP No. 66/2004 & OMP No. 88/2004 page 16 of 145
plant is not commissioned and it had merely taken the custody of
the plant till it is commissioned by the contractor as the required
effluents were not available at that time". It was stated that the
contractor was yet to establish the performance parameters of
each unit of the WWTP before the plant can be called "duly
commissioned". At the same time GAIL wrote that the sanitary
waste, though "desirable", is not "essential" for commissioning of
WWTP/development of biomass. GAIL was insisting that the team
of the contractor should have been present even when the
effluents started coming from any single unit, irrespective of
whether sufficient effluent for testing the plant was generated or
not.
4.21 My attention is drawn to further communications dated
7th December, 1998, 7th April, 1999 and 10th April, 1999 wherein
the contractor had categorically informed that sanitary waste was
required to carry out the performance test runs; that a sample of
composite effluents from various plants was required to be
analysed prior to the guarantee test run; and that, despite the
mechanical completion of the plant on 20th August, 1997, sanitary
waste and biomass for the testing of the plant was not available till
date. As a result, release of the 5% payment in terms of the
agreement between the parties as well as release of the bank
guarantees which had been submitted by the contractor was
sought.
OMP No. 66/2004 & OMP No. 88/2004 page 17 of 145
4.22 In view of the aforenoticed statement of agreed
variation in the payment terms with regard to the release of the
last 10% payment, even the very last 5% payment was required to
be released on expiry of 18 months of issue of the mechanical
completion certificate or after commissioning and acceptance of
the system by GAIL, whichever being earlier. There was not even
a whisper of a suggestion by GAIL that any loss or damage had
enured to it by any act of omission or commission by the
contractor.
4.23 The contractor consequently submitted its final bill to
EIL. The same was verified and processed by the communication
dated 7th April, 1999. EIL had confirmed the inability to undertake
the GTR and performance of the plant due to non-availability of
sufficient input even though the contractor had reported at the
site for commissioning/performance guarantee test as per GAIL's
intimation. EIL further informed GAIL that it had processed the
final bill in order to close the contract as required by GAIL and
directed release of payment after taking the performance
guarantee run. It did not recommend imposition of liquidated
damages. This letter also mentioned that "time extension for
mechanical completion had been granted by the competent
authority."
The letter of the Engineers India Limited dated 7th April,
1999 also categorically recorded that the contractor was being
OMP No. 66/2004 & OMP No. 88/2004 page 18 of 145
asked to provide a no claim certificate.
4.24 GAIL has stated that the contract was treated as having
concluded on 25th of February, 1999. However, GAIL did not act
upon the recommendation of the EIL and did not make any
payment to the contractor. In this background, a no claim
certificate dated 13th October, 1999 was also submitted by the
contractor. GAIL still did not process the final bill and failed to
release the payment.
4.25 After waiting for the payment for a considerable period
of almost three and a half years since the mechanical completion,
the contractor issued its detailed statement of claims to GAIL on
30th June, 2001. No response was sent by GAIL to the contractor
disputing the liability to pay or raising any kind of claim against it.
5. Commencement of the arbitration
5.1 Finally, the contractor invoked clause 107 of the
contract by a communication dated 28th September, 2001 pointing
out that despite its communication dated 30th June, 2001
requesting for settlement and payment, no payment had been
made manifesting that disputes and differences had arisen
between the parties. As such, the respondent called upon the
chairman and managing director of GAIL, who was the appointing
authority under clause 107, to refer the matter for adjudication to
the sole arbitrator and requesting for a panel of three persons
OMP No. 66/2004 & OMP No. 88/2004 page 19 of 145
from whom the arbitrator would be chosen. GAIL suggested a
panel of three names by the letter dated 20th November, 2001 from
whom the contractor proposed the name of Sh. T.S.
Vijayaraghavan, former Secretary in the Ministry of Petroleum &
Natural Gas to be appointed as the sole arbitrator. As a result, by
a letter dated 16th January, 2002, Sh. T.S. Vijayaraghavan was
appointed as the sole arbitrator in the present (WWTP) project as
well as the arbitration of the disputes in the CPU project.
5.2 The arbitrator entered upon the reference and
commenced proceedings in the matter on 31st January, 2002.
GAIL contested the claims of the contractor. The arbitration
proceedings culminated in the passing of the award on 20th
November, 2003.
5.3 In the arbitration proceedings, the contractor filed
claims dated 25th February, 2002. In para 8 of the claims, it was
stated as follows :-
"8) The claimant says that, under the terms
and conditions of the contract, the claimant were to
complete the work and GTR within the period of 18
months from the date of award of work, but on
account of the respondent's reasons, though the
work in question was mechanically completed on
20/8/1997, the claimant were unable to give GTR on
account of inputs not made available. The claimant
says that, after Mechanical completion, the time
required for GTR is maximum 1 month including
precommissioning and commissioning, but due to
the respondent's reasons, the GTR could not be
conducted till date. Also, after Mechanical
Completion the claimant were required to give GTR
within the period of 18 months on providing the
entire inputs for the said test, but, as the said entire
OMP No. 66/2004 & OMP No. 88/2004 page 20 of 145
inputs have not been made available, till date no any
GTR could be conducted upto 19/7/1999, and this
term of 18 months as provided in the contract was
only on account of the reasons that, the inputs could
not be made available immediately after Mechanical
Completion. Hence, under the terms and conditions
of the contract, now, after 19/2/1999, the claimant
are in no way liable for any consequences arising
out of the contract, and the contract in question in
any circumstances is to be considered as concluded
on 19/2/1999."
5.4 GAIL filed a reply dated 21st June, 2002 wherein it
replied as follows :-
"8. Contents of para 8 are wrong and
denied. In fact, even after the mechanical
completion certificate was given to the claimant on
20.8.1997, it had not rectified the various lapses in
design and constructions as mentioned in the
various check lists given by the EIL/GAIL and it
would be relevant to mention that even after the
contract was considered as concluded on 19.2.1999
the claimant had not completely rectified all the
lapses, some of which had been pointed out in the
fax message of EIL dated 25.2.1999 as well as
earlier. Therefore, the claimant cannot validly
blame the respondent for its own lapses and non-
rectification of the same despite the lapses being
specifically pointed out to the claimant by both EIL
and GAIL from time to time."
5.5 In addition thereto, placing reliance on the no claim
certificate dated 13th October, 1999 submitted by the contractor,
GAIL raised preliminary submissions stating as follows :-
"1. That the claimant having itself
submitted a "no-claim certificate" dated 13.10.1999
to the respondent categorically stating therein that
it did not have any other claim in respect of the
contract other than its payment due in final bill, it
is estopped by its own acts and conduct from filing
the present claim for seeking payments beyond its
OMP No. 66/2004 & OMP No. 88/2004 page 21 of 145
final bill of Rs.63,63,123/- The claim in excess of
the amounts mentioned in the final bill is,
therefore, not legally maintainable and is liable to
be rejected."
5.6 In the reply filed by GAIL, it for the first time, set up a
plea of entitlement to and raised a claim for liquidated damages in
the following terms :-
"5. Contents of Para 5 are wrong and
denied besides being absolutely vague, hence
undeserving of any consideration. The claimant,
before signing the contract, was required to have
thoroughly inspected the site from all angles and
the reasons mentioned by the claimant for delay in
the execution of the work are not condonable as
per the terms and conditions of the agreement
between the parties and no claim for any
compensation for the such delay can be made by
the claimant against the respondent and in fact,
since the delay was not on account of force
majeure, the claimant was liable to compensate the
respondent for the delay at the rate of ½% of the
value of contract for delay per week subject to a
maximum of 10% of the value of contract.
Therefore, in view of the great delay on the part of
the claimant in executing the work, 10% of the
value of contract amounting to Rs.3,00,00,000/-
was liable to be paid by the claimant to the
respondent or to be adjusted from the payments
due from the respondent to the claimant. This
amount of compensation for delay is liable to be
taken into consideration, while deciding the
present claim of the claimant."
(Underlining supplied)
5.7 Long after the petitioner raised its claims and sought
appointment of the arbitrator in 2001; appointment of the
arbitrator on 16th January, 2002 and commencement of the
arbitration proceedings on 31st January, 2002, GAIL also for the
OMP No. 66/2004 & OMP No. 88/2004 page 22 of 145
first time addressed a letter to the Engineers India Limited dated
16th March, 2002 recording that it had erred in recommending
final time extension of the contract up to 20th February, 1999
without levy of liquidated damages presumably because of delay in
providing necessary inputs for commissioning of the plant and
sought imposition of liquidated damages on the delay of 233 days
in the mechanical completion. The letter recorded that the matter
had been reviewed in detail by its author (being the Director
(Planning) & CVO of GAIL) and a considered view was given.
This letter from GAIL was addressed to GM&OIC, UPCC, Pata and
its copy was endorsed to the CVO, GAIL, New Delhi.
A further letter dated 30th March, 2002 was written by
GAIL again informing EIL that it ought not to have forwarded
recommendation of final time extension without levy of liquidated
damages.
5.8 After a detailed consideration, the sole arbitrator
pronounced the award dated 20th of November, 2003.
5.9 Perusal of the award would show that the arbitrator has
considered the contentions of the parties under the following
heads:-
(i) whether the time was the essence of the contract;
(ii) whether the claimant was solely responsible for the delay;
(iii) whether the liquidated damages could be justly levied;
(iv) whether the issuance of the no claim certificate by the
contractor amounts to an estoppel against its claim.
The arbitrator has concluded that time was not of the
OMP No. 66/2004 & OMP No. 88/2004 page 23 of 145
essence of the contract, that the contract was a composite
contract and commissioning of the plant was an integral part
thereof; found delay in completion of the contract attributable to
GAIL and held that GAIL was disentitled to adjustment of any
amount as liquidated damages.
5.10 Coming to the specific claims which were considered
and decided. The main headings under which the contractor was
claiming against GAIL and the amount awarded can be summed up
as follows :-
Sr.No Claim Claim detail Claimed Principal Int.upto Int. After Total
. No. amount 30.06.01 30.06.01
up to
award
1 1(a) Work done but 63,63,123 58,49,586
not paid (final
bill)
2 1(b) Interest up to 37,82,310 26,07,528 16,78,911 101,36,02
3 2(a) Release of 61,96,985 Order to
Security Deposit release
in form of B.G. Bank
Guarantee
4 2(b) Bank 72,42,701 10,08,709 10,08,709
commission/secu
rity
5 3 Due to delay in 11,13,000 3,00,000
supply of inputs
Interest up to 4,00,680 81,852 86,104 4,67,956
30.06.2001
6 4 Extra items 5,45,524 3,09,524
Interest up to 5,05,768 2,15,225 88,838 6,13,587
30.06.2001
OMP No. 66/2004 & OMP No. 88/2004 page 24 of 145
Sr.No Claim Claim detail Claimed Principal Int.upto Int. After Total
. No. amount 30.06.01 30.06.01
up to
award
7 5(a) Overheads and 99,83,975 20,65,659
profit
8 5(b) overstay 73,00,750 Nil
9 5(c) Rise in 33,31,370 Nil
Price/labour/&
material
Interest up to
30.6.2001 2,20,82,3 14,36,340 5,92,872/- 40,94,871
10 6 Non providing of 21,00,206 Nil
inputs for
commissioning
11 7(a) Recovery against 49,37,360 27,07,280
cement
12 7(b) Interest @ 18% 42,78,081 17,24,910 7,77,026 52,09,216
up to 30.06.2001
interest @ 12%
beyond upto
award
13 8 Interest @ 24% ------
on all above
claims till
payment
14 9 Arbitration cost 5,00,000/- Nil
Total claim awarded 2,15,30,364
5.11 Aggrieved by the rejection of its pleas and the award in
favour of the contractor, GAIL has filed the present objections
under section 34 of the Arbitration & Conciliation Act, 1996.
OMP No. 66/2004 & OMP No. 88/2004 page 25 of 145
5.12 In the present proceedings, GAIL has not assailed the
quantification of the contractor's entitlement by the arbitrator.
The objection on behalf of GAIL is that time was of the essence of
the contract, that on account of the delay in execution of the work
by the contractor, under clause 27 of the contract, GAIL is entitled
to 10% of the value of the contract, being an amount of
Rs.3,00,00,000/- as liquidated damages which was to be paid by
the contractor to it or to be adjusted from the payments due from
GAIL to the contractor. The challenge to the award is premised on
the contention, that the amount of the compensation has not been
taken into consideration while deciding the claims of the claimant.
It has further been contended that the award of interest at the rate
of 12% is exorbitant, unwarranted and without any basis at all.
Mr. Jagjit Singh, learned counsel appearing for GAIL has
vehemently urged that the conclusions of the arbitrator on these
aspects are contrary to the contract, without jurisdiction and
hence opposed to public policy of the country. The submission is
that for this reason the award is liable to be set aside under
section 34 of the Arbitration & Conciliation Act, 1996.
The objections are opposed by the contractor on merits
as well as on grounds of maintainability.
5.13 The objections taken by GAIL can usefully be
considered issue-wise for facilitating clarity.
OMP No. 66/2004 & OMP No. 88/2004 page 26 of 145
6. Whether Time was the essence of the contract
6.1 The arbitrator has concluded that the question as to
whether time was the essence of the contract, is essentially a
question of the intention of the parties which is to be gathered
from the terms of the contract. After analysing the material on
record and judicial precedents, the arbitrator concluded that time
was not of the essence of the contract in the instant case.
6.2 Before an examination of the factual matrix in the
present case, the applicable legal principles on which the facts are
to be tested require to be considered.
6.3 The issue as to when time is of the essence of the
contract arose for consideration before the Supreme Court in
(1979) 2 SCC 70 Hind Construction Contractors vs. State of
Maharashtra. The court relied on the enunciation of the law in
the Halsbury's Laws of England. The principles relied on by the
court and laid down in this judgment deserve to be considered in
extenso and read as follows :-
"7..... In the latest 4th Edn. Of Halsbury's Laws
of England in regard to building and engineering
contracts the statement of law is to be found in
Vol.4, para 1179, which runs thus :
"1179. Where time is of the essence of the
contract.- The expression time is of the essence
means that a breach of the condition as to the time
for performance will entitle the innocent party to
consider the breach as a repudiation of the contract.
Exceptionally, the completion of the work by a
specified date may be a condition precedent to the
contractor's right to claim payment. The parties may
expressly provide that time is of the essence of the
contract and where there is power to determine the
OMP No. 66/2004 & OMP No. 88/2004 page 27 of 145
contract on a failure to complete by the specified
date, the stipulation as to time will be fundamental.
Other provisions of the contract may, on the
construction of the contract, exclude an inference
that the completion of the works by a particular date
is fundamental; time is not of the essence where a
sum is payable for each week that the work remains
incomplete after the date fixed, nor where the
parties contemplate a postponement of completion.
Where time has not been made of the essence
of the contract or, by reason of waiver, the time
fixed has ceased to be applicable, the employer may
by notice fix a reasonable time for the completion of
the work and dismiss the contractor on a failure to
complete by the date so fixed."
8. It will be clear from the aforesaid
statement of law that even where the parties have
expressly provided that time is the essence of the
contract such a stipulation will have to be read
alongwith other provisions of the contract and such
other provisions may, on construction of the
contract, exclude the inference that the completion
of the work by a particular date was intended to be
fundamental; for instance, if the contract were to
include clauses providing for extension of time in
certain contingencies or for payment of fine or
penalty for every day or week the work undertaken
remains unfinished on the expiry of the time
provided in the contract such clauses would be
construed as rendering ineffective the express
provision relating to the time being of the essence of
contract. The emphasised portion of the aforesiad
statement of law is based on Lamprell v. Billericay
Union (1849) 3 Exch 283, 308, Webb v. Hughes
(1870) LR 10 Eq 281 and Charles Rickards Ltd. v.
Oppenheim (1950) 1 KB 616 : (1950) 1 All ER 420
(CA)"
Therefore, a mere stipulation in the contract that time
is of the essence of the contract by itself does not make it so. The
other contractual terms require to be construed before such
conclusion could be reached.
OMP No. 66/2004 & OMP No. 88/2004 page 28 of 145
6.4 Pollock & Mulla in their celebrated text "Indian
Contract and Specific Relief Acts" have culled out the following
three instances as to when time would be the essence of the
contract from a reading of the judicial pronouncements on the
subject :-
"(1) Where the parties have expressly stipulated in
their contract that the time fixed for performance
must be exactly complied with;
(2) Where the circumstances of the contract or
the nature of the subject-matter indicate that the
fixed date must be exactly complied with; and
(3) Where time was not originally of the essence
of the contract, but one party has been guilty of
undue delay, the other party may give notice
requiring contract to be performed within
reasonable time and what is reasonable time is
dependent on the nature of the transaction and on
proper reading of the contract in its entirety."
6.5 In M/s Arosan Enterprises Ltd. vs. Union of India &
Anr. reported at (1999) 9 SCC 449, the Supreme Court had held
that merely because a schedule is contractually prescribed or a
provision for liquidated damages is contained in a contract, it does
not mean that ipso facto time is necessarily of the essence of the
contract. The court held that :-
"27. Mere fixation of a period of delivery or a time in
regard thereto does not by itself make the time as
the essence of the contract, but the agreement shall
have to be considered in its entirety and on proper
appreciation of the intent and purport of the clauses
incorporated therein. The state of facts and the
relevant terms of the Agreement ought to be noticed
in its proper perspective so as to assess the
intent of the parties. The Agreement must be read
as a whole with corresponding obligations of the
parties so as to ascertain the true intent of the
parties. In the instant case, the Port of Discharge
OMP No. 66/2004 & OMP No. 88/2004 page 29 of 145
has not been named neither the Surveyor is
appointed - without whose certificate, question of
any payment would not arise - can it still be said that
time was the essence of the contract, in our view the
answer cannot but be a positive 'No'."
Thus, it is well settled that whether time is the essence
would be essentially a question of the intention of the parties to be
gathered from the terms of the contract. This intention can be
inferred also from the responses, actions and state of readiness of
the parties in the fulfilment of the contract.
6.6 In a judgment reported at AIR 1940 NULL 1
Shambhulal Panalal Vaish vs. Secretary of State, the court
placed reliance on an earlier pronouncement of the Privy Council
in Burn & Co. vs. Lukhdhirji Morvai State
MANU/PR/0025/1925. The Privy Council had held that inclusion
of clauses in a contract providing for extension of time in certain
contingencies and providing for payment of fine or penalty for
every day or week for the work undertaken on the contract
remains unfinished on the expiry of the time provided in the
contract is inconsistent with time being of the essence of a
contract and would be calculated to render ineffective an express
provision in a contract to that effect. In this behalf, in para 13 and
17 of Shambhulal Panalal Vaish (supra), the court held as
follows :-
"13 ............... In Halsbury's Laws of England, Vol.
3, paras. 378, 379, the law on this question is thus
stated:
OMP No. 66/2004 & OMP No. 88/2004 page 30 of 145
"378. In building contracts time is not of the
essence of the contract in the absence of express
words making it so, as the subject of the contract
is not such as to, make the completion of time
essential. And the mere insertion of words making
time of the essence of the contract will be
ineffective if they are inconsistent with other
terms of the contract."
xxx
17. xxxxx And this certainly accords with
commonsense. To say in one breath that time is of
the essence of a contract but that the period
provided in the contract may be extended is a
contradiction in terms; to say that time is of the
essence of a contract and at the same time to
provide the levy of a daily or weekly fine or penalty
for non-completion on due date is no less a
contradiction in terms. Confronted with this
difficulty the learned Advocate-General has
referred us to a passage in Vol. 3 of Halsbury's
Laws of England which appears at p. 280 in
paragraph 511 which reads thus:
"511. * * * * In many cases the time fixed by the
contract ceases to be applicable on account of
some act or default of the employer or his
architect. A provision therefore is generally
inserted, in order to avoid such acts or defaults
destroying the right to liquidated damages, by
which the architect is empowered to grant an
extension of time in certain specified events, and
the contractor is bound, in case such an extension
has been properly granted, to complete within the
extended time. This has the effect of substituting
for the time fixed by the contract a new time from
which the liquidated damages are to run. * * * *"
But such a new time can only be substituted for
the original time, under such a power, where the
extension is given under the circumstances and in
the events expressly stipulated by the contract.
Thus, a power to extend the time in: the event only
of strikes or other causes beyond the contractor's
control would not authorize an extension of time
for delay in giving to the contractor possession of
the site....."
6.7 It is settled law that in construction contracts, generally
time is not of the essence of the contract unless special features
OMP No. 66/2004 & OMP No. 88/2004 page 31 of 145
exist therefore. It was so held in (2006) 11 SCC 181
McDermott International Inc. vs. Burn Standard Co. Ltd. &
Ors. Mere incorporation of the term that time is of essence of the
contract would not ipso facto render it so if the same is the matter
of construction keeping in view the facts and circumstances which
are brought out on record.
6.8 In (1977) 2 SCR 877 : MANU/SC/0010/1997 Govind
Prasad Chaturvede vs. Hari Dutt Shastri & Anr., the Supreme
Court held that it is settled law that merely fixation of the period
within which the contract has to be performed does not make the
stipulation as to time being the essence of the contract. It was
further held that the intention to treat time as the essence of the
contract may be evidenced by circumstances which are sufficiently
strong to displace the normal presumption that in a contract of
sale, stipulation as to time is not the essence of the contract.
6.9 The arbitrator has referred to the following terms in the
contract in the present case which militate against time being the
essence of the contract :-
(i) SCC A 28 stipulating compensation for extended stay;
(ii) General Conditions of Contract ('GCC') - 27 which permitted
a levy of liquidated damages for delay;
(iii) GCC 45 allowing extension of time for the owner's default ;
(iv) GCC 60.2 providing for extension by the EIC where just and
reasonable;
(v) SCC.B.9.1.3 (a) for payment of the final 10% in case the
owner is not able 'to supply water and power immediately after
OMP No. 66/2004 & OMP No. 88/2004 page 32 of 145
issue of the partial completion certificate (for completing the
whole work in all respects except trial run and commissioning) for
testing, trial run and commissioning';
(vi) agreed variation to SCC.B.13.33 that specifies the course of
events 'in case GAIL/EIL are not able to release the commissioning
front after the completion of pre-commissioning
activities/mechanical completion; then contractor would be
entitled to payment of the final 5% after eighteen months of
mechanical completion.'
6.10 The arbitrator has noted, that GAIL did not deny the
fact that the contractor could do nothing on account of the
flooding and the unworkable site handed over in July, 1995 which
so remained till 15th September, 1995. In the light of the
explanations given with regard to the attack on the manager and
the demoralisation of the work force; requisitioning of the vehicles
of the contractor on account of elections and the non-availability of
the site, the arbitrator has arrived at a conclusion, that on the
whole, the contractor should not be held to be at fault.
6.11 GAIL has accepted inaccessibility of the site for two
months and also a grace period of one month was granted on
account of cement shortage and monsoons. The arbitrator was
conscious of the legal requirements to arrive at a conclusion and
has carefully extracted the relevant passage from Pollock &
Mulla's legal text and on a construction of the available record, the
arbitrator concluded that time was not the essence of the contract.
6.12 I find that there is no dispute to the factual narration
noted by the arbitrator. Even the provisions of the contract stand
OMP No. 66/2004 & OMP No. 88/2004 page 33 of 145
accepted. It has been held by the Apex Court in Hind
Construction (supra) that whether time is the essence of the
contract would be essentially an issue of the intention of the
parties to be gathered from the terms of the contract and that
such intention can be inferred, besides from the responses, actions
and state of readiness of the parties in the fulfilment of the
contract. The facts of the present case show that the actions of
the parties seem to militate against time being of the essence of
the contract. There were various terms in the contract that
envisaged a situation of delay and time extension. "Site" was
defined in GCC 1.21 of the bid document as a place on, under, in,
or through which permanent works are to be carried out. To begin
with a flooded and unworkable site was handed over in July, 1995
that remained so till September, 1995. Therefore, the contractor
could have done nothing for two months till 15th September, 1995.
There was the inaccessibility of the site for two months and a
grace of one month granted on account of cement shortage and
monsoon. GAIL has not denied these facts but urges the excuse as
invalid. Other factors like the site being located at the lowest
grade, the disruption on account of the attack on the manager, the
law and order situation causing demoralisation of the work force;
the government requisitioning private vehicles during elections
have been considered by the arbitrator concluding that the delay
could not be solely attributable to the contractor. GAIL
OMP No. 66/2004 & OMP No. 88/2004 page 34 of 145
concededly extended the time for performance on more than one
occasion. On the last occasion, it merely reserved its right to
claim liquidated damages.
6.13 Admittedly the GTR commissioning of the plant which
was part of the work order has not been possible even till date on
account of GAIL's inability to supply the waste water. The
contractor has completed all components of the contracted work
which did not require any intervention by GAIL. The only
component which could not be completed is the commissioning of
the plant and the GTR which is solely for the fault of GAIL.
6.14 Even EIL had proposed final time extension of the
contract without levy of liquidated damages. The arbitrator has
enlisted that the contract provided for compensation for extended
stay; extension of time for the owners (GAIL's) default; extension
by the Engineers India Limited where the same was just and
reasonable and liquidated damages for delay. The contract
provisions noted above show that the 'work' included extra
additional works required for the purposes of the contract.
6.15 The parties had agreed to variation in the release of the
last 10% of the payment which terms were enclosed with the letter
dated 27th September, 1995. This agreed variation envisaged and
provided for the situation where GAIL/EIL was not in a position to
release commissioning front after completion of pre-
commissioning activities/mechanical completion.
OMP No. 66/2004 & OMP No. 88/2004 page 35 of 145
In fact the factual narration aforenoticed would show
that this is what actually transpired after the plant had been
erected by the contractor and manifests that GAIL did not treat
time as of essence of the contract.
6.16 Testing and commissioning of the plant was an integral
and composite part of the contract. The parties envisaged a delay
in this component of the contract and had provided for an agreed
variation in the payment terms. The grant of extension on several
occasions coupled with the above terms of the contract and the
very fact that GAIL was not in a position to provide the requisite
effluents for testing and commissioning of the plant, would itself
lead to the inevitable conclusion that time was not the essence of
the contract.
Keeping all these factors in mind, the inference of law
and fact arrived at by the arbitrator to the effect that time was not
the essence of the contract is founded on the contract, established
factual matrix and the applicable law.
6.17 The conclusion arrived at by the learned arbitrator is a
pure question of fact premised on a detailed consideration after
marshalling the established facts and consideration of the
applicable law. Issues on merits relating to whether time is of the
essence of the contract or not falls squarely within the domain and
jurisdiction of the arbitrators to decide as is deemed fit. In view of
the clearly delineated parameters of the scope of consideration by
OMP No. 66/2004 & OMP No. 88/2004 page 36 of 145
this court would, in exercise of jurisdiction under section 34 of the
Arbitration Act, have no right or authority to interdict an award on
such a factual issue.
6.18 In any case, in the light of the above discussion, there is
nothing on record which would enable this court to conclude that
the conclusion arrived at by the arbitrator is contrary to the terms
of the contract or the law on the subject or opposed to public
policy for any reason.
7. Liquidated Damages
The arbitrator has examined this issue from the aspect
of delay of whether the contractor was solely responsible for the
delay and whether GAIL was entitled to liquidated damages as a
result. The consequential issue examined was whether GAIL
entitled to adjustment of amounts found due and payable by it to
the contractor.
7.1 Mr Jagjit Singh, learned counsel for GAIL, has
contended that delay per se in the mechanical completion of the
plant irrespective of whether any loss or damage has been
suffered would entitle GAIL to liquidated damages.
7.2 This submission has been found by the learned
arbitrator as being contrary to law. The fundamental principle
relied upon by the arbitrator was the fact that loss or damage has
to be real. In other words, the persons who are claiming
liquidated damages should have actually been put to a loss. A
OMP No. 66/2004 & OMP No. 88/2004 page 37 of 145
clause for liquidated damages merely dispenses with the proof of
"actual loss or damage". However it does not justify an award of
compensation when in consequence of a breach, no legal injury
has resulted at all.
7.3 So far as the levy of liquidated damages is concerned,
the arbitrator observed as follows :-
(a) the contract was a composite contract which commenced
from design, engineering, supply, fabrication to commissioning of
performance testing of the waste water treatment plant;
(b) the mechanical completion of the plant was achieved on 20th
August, 1997;
(c) the water run of the various sections of the plant was
completed on 24th October, 1997 as admitted by GAIL in the
certificate dated 10th August, 1998;
(d) as per the terms of the contract, the time required for the
GTR was a maximum of one month after the mechanical
completion. The guarantee test run is even on date awaiting
supply of waste water and effluent the availability of which was
the responsibility of GAIL.
Vide letter dated 10th August, 1998, GAIL stated that the plant was
mechanically completed to its satisfaction on 20th August, 1997.
By the 24th of October, 1997, water run of various sections was
over. GTR was awaiting the supply of inputs.
OMP No. 66/2004 & OMP No. 88/2004 page 38 of 145
(e) the plant was being operated since 29th June, 1998 as was
admitted by GAIL in the certificate dated 10th August, 1998.
(f) the final bill was submitted by the contractor on 9th January,
1999 and recommended by the EIL on 7th April, 1999. The same
was forwarded by EIL to GAIL for payment.
(g) Clause 76 of the GCC provided for the action and
compensation in case of bad work. At no point of time, GAIL
invoked this clause against the contractor. On the contrary in the
letter dated 20th August, 1997 and 7th April, 1999, GAIL confirmed
that the work was in order. No complaint in running of the plant
since 29th June, 1998 has been pointed out. GAIL has given no
notice of any claim or demand to the contractor with regard to any
sub-standard work.
(h) By a letter dated 27th January, 1999, GAIL demanded that
"your final bill shall be processed from GAIL's side only after the
balance jobs and problems are attended to satisfactorily" (award
para 17).
7.4 The arbitrator has held that so far as the issue of
quantum of compensation is concerned, as per the contract it
could be decided only by the designated authority/engineer. It is
an admitted position that the Engineer India Limited
recommended the payment of the final bill without levy of any
liquidated damages.
OMP No. 66/2004 & OMP No. 88/2004 page 39 of 145
7.5 The arbitrator has concluded that mere invocation of
the GCC 27 would not entitle GAIL to claim liquidated damages
and that GAIL had not adduced any proof of loss. The additional
reason for concluding that GAIL had not suffered loss was the fact
that GAIL had contributed to the delay in the conclusion of the
contract. Detailed reference has been made to the fact that
despite accepting mechanical completion of the contract on 20th
August, 1997, which stood confirmed by the minutes dated 31st
March, 1998 and the certificate of 10th August, 1998, GAIL had
failed to provide the sufficient sanitary waste and effluents
necessary for generation of the biomass and even undertaking of
the guarantee test runs. GAIL raised no objection at all with the
Engineers India Limited recommending the payment of the final
bill to it, till such time as its vigilance office reacted in the matter.
This arbitrator concluded that GAIL was not entitled to claim
liquidated damages.
7.6 The question which is required to be answered is as to
whether a mere stipulation in the contract would ipso facto entitle
a party to the stated amount as damages upon breach of contract.
7.7 In this behalf the arbitrator has placed reliance on the
Constitution Bench pronouncement of the Supreme Court reported
at 1964 (1) SCR 515 : AIR 1963 SC 1405 Fateh Chand vs.
Balkrishan Das wherein the court had held as follows :-
"15. xxxx
OMP No. 66/2004 & OMP No. 88/2004 page 40 of 145
Jurisdiction of the Court to award compensation in
case of breach of contract is unqualified except as to
the maximum stipulated; but compensation has to
be reasonable, and that imposes upon the Court
duty to award compensation according to settled
principles. The section undoubtedly says that the
aggrieved party is entitled to receive compensation
from the party who has broken the contract,
whether or not actual damage or loss is proved to
have been caused by the breach. Thereby it merely
dispenses with proof of "actual loss or damages"; it
does not justify the award of compensation when in
consequence of the breach no legal injury at all has
resulted, because compensation for breach of
contract can be awarded to make good loss or
damage which naturally arose in the usual course of
things, or which the parties knew when they made
the contract, to be likely to result from the breach."
(Emphasis supplied)
7.8 These principles were reiterated in the three Bench
pronouncement of the Apex Court reported at AIR 1970 SC 1953
: (1969) 2 SCC 554 Maula Bux vs UOI which have also been
relied upon by the arbitrator. In para 88 of the SCC report, the
court has held that the expression 'whether or not actual damage
or loss is proved to have been caused thereby' is intended to cover
the class of contracts in which it may be impossible for the Courts
to assess compensation arising from breach and the sum named by
the parties may be taken as a measure of reasonable
compensation. However, whether a loss in terms of money can be
determined or not, a party claiming compensation must prove the
loss suffered by it.'
7.9 In Maula Bux (supra), the Supreme Court further held
that where loss in terms of money can be determined, the party
OMP No. 66/2004 & OMP No. 88/2004 page 41 of 145
claiming the compensation must prove the loss suffered by him.
7.10 In (1973) 2 SCC 515 M.L. Devendra Singh vs. Syed
Khaja, which was affirmed in (2004) 6 SCC 649 P.D'Souza vs.
Shondrilo Naidu, the court accepted the same approach and
further emphasised that mere stipulation of some amount would
only be a piece of evidence, but inconclusive by its very nature.
7.11 The arbitrator has additionally placed reliance on AIR
1971 Raj. 229 State of Rajasthan vs. Chander Mohan Chopra
and AIR 1959 Bom. 454 S.R. Bhut vs. V.N. Jamdar wherein
the above principles have been relied upon.
7.12 Section 73 and 74 of the Contract Act deal with claims
of damages. Section 73 provides for unliquidated damages,
Section 74 of the Contract Act provides that a party complaining of
the breach is entitled, whether or not actual damage or losses are
proved to have been caused thereby, to receive from the party who
has broken the contract reasonable compensation. The statute
therefore permits a person effected by the breach of contract not
to be required to prove the actual loss or damage suffered by him
before he claims a breach, and the court would be competent to
award reasonable compensation in case of breach, even if no
actual damage is proved to have been suffered in consequence of
the breach. In a case where a court is unable to assess the
compensation, a sum named by the parties, if it be regarded as a
OMP No. 66/2004 & OMP No. 88/2004 page 42 of 145
genuine pre-estimate, may be taken into consideration as the
measure of reasonable compensation, but not if the sum named is
in the nature of a penalty.
7.13 It is well settled, that whether the claim is for any
damages under section 73 or liquidated damages under section 74
there is no difference in this position. The difference lies with
regard to ascertainment of the loss or the quantum of damages
awardable. However the basic requirement for both is a finding
by a competent court or authority or any named/agreed forum,
including an arbitrator, that the person against whom the claim is
made has committed breach and has incurred a pecuniary liability.
7.14 The entire submission on behalf of GAIL before this
court rests on a basic contention that delay in completion of the
contract automatically entitled it to liquidated damages without
anything more. The question as to when a claim of such damages
crystallises into an entitlement or becomes an actionable or
enforceable claim is well settled by a host of judicial precedents.
An argument similar to the submission by GAIL before
this court was raised by the Coffee Board who filed a petition
seeking winding up of the Greenhills Exports (Pvt.) Ltd. before the
company court in the Karnataka High Court on a claim for losses
based on a plea of breach of contract by the other side. The
matter was carried in appeal to the Division Bench. An issue was
OMP No. 66/2004 & OMP No. 88/2004 page 43 of 145
raised in the appeal before the Division Bench as to whether such
claim for damages by a party would be covered within the
meaning of the expression 'debt' under the Companies Act, 1956
so as to entitle a person to base a petition for winding up thereon.
In its judgment reported at 2001 (106) CompCas 391
Greenhills Exports (Pvt.) Ltd. vs. Coffee Board, the court
considered the entire law on the subject including the aforenoticed
pronouncements of the Supreme Court. On a consideration of
several judicial precedents, the court culled out the following
propositions of law :-
"14. We will now cull out the principles for ready reference:
(i) A 'debt' is a sum of money which is now payable or will
become payable in future by reason of a present
obligation. The existing obligation to pay a sum of money
is the sine qua nan of a debt.
"Damages" is money claimed by, or ordered to be paid to,
a person as compensation for loss or injury. It merely
remains as a claim till adjudication by a Court and
becomes a 'debt' when a Court awards it.
(ii) In regard to a claim for damages (whether liquidated
or unliquidated), there is no 'existing obligation' to pay
any amount. No pecuniary liability in regard to a claim for
damages, arises till a Court adjudicates upon the claim for
damages and holds that the defendant has committed
breach and has incurred a liability to compensate the
plaintiff for the loss and then assesses the quantum of
such liability. An alleged default or breach gives rise only
to a right to sue for damages and not to claim any 'debt'.
A claim for damages becomes a 'debt due', not when the
loss is quantified by the party complaining of breach, but
when a competent Court holds on enquiry, that the person
against whom the claim for damages is made, has
committed breach and incurred a pecuniary liability
towards the party complaining of breach and assesses the
quantum of loss and awards damages. Damages are
OMP No. 66/2004 & OMP No. 88/2004 page 44 of 145
payable on account of a fiat of the Court and not on
account of quantification by the person alleging breach.
(iii) When the contract does not stipulate the quantum of
damages, the Court will assess and award compensation
in accordance with the principles laid down in Section 73.
Where the contract stipulates the quantum of damages or
amounts to be recovered as damages, then the party
complaining of breach can recover reasonable
compensation, the stipulated amount being merely the
outside limit.
(iv) When a contract provides that on default by a buyer to
pay for and take delivery of goods, the seller is entitled to
recover the loss incurred on resale, interest on delayed
recovery of the price, godown charges, insurance charges
and other expenses incurred by the seller till resale, it
cannot be said the buyer incurs the liability to pay those
amounts automatically, when he fails to take delivery.
Failure to take delivery may be due to several valid or
lawful reasons which may show that the failure to take
delivery is not a 'default' or 'breach' in which event, no
pecuniary liability may fasten on him.
(v) Even if the loss is ascertainable and the amount
claimed as damages has been calculated and ascertained
in the manner stipulated in the contract, by the party
claiming damages, that will not convert a claim for
damages into a claim for an ascertained sum due. Liability
to pay damages arises only when a party is found to have
committed breach. Ascertainment of the amount
awardable as damages is only consequential."
(Emphasis supplied)
7.15 On an application of these principles, the Division
Bench of the Karnataka High Court had found that there was no
adjudication of either a civil court or by any arbitrator that the
appellant company had committed breach and incurred a
pecuniary liability.
OMP No. 66/2004 & OMP No. 88/2004 page 45 of 145
7.16 This very issue also fell for consideration before the
Bombay High Court. In a decision rendered on 20th November,
2009 in C.P. No. 367/2009 entitled E-City Media Pvt. Ltd. vs.
Sadhrta Retail Ltd., on the issue as to whether a mere
stipulation of the payment of a sum by way of liquidated damages
in a clause in the contract would constitute a firm debt, the court
laid down the principles thus :-
"11. If the clause in the present case is
regarded as being a clause which stipulates the
payment of a named sum by way of liquidated
damages a debt will become crystallized only
upon an adjudication of damages in a suit. Prior
to an adjudication, it still constitutes a claim for
damages. The decree of the Court is what
transforms the claim into a stated sum due and
payable by way of damages. Whether the amount
is reasonable or by way of a penalty are
evidential matters which cannot be decided in a
petition for winding up. For, as the judgment in
Saw Pipes holds, even if the sum stipulated by
way of liquidated damages is clear, the
jurisdiction of the Civil Court extends to
determining whether it is unreasonable or by
way of penalty. All these issues have to be
decided in a suit. Whether or not evidential proof
will be required to sustain such a claim is again a
matter for the trial Court or, as the case may be,
an arbitral forum to decide. The Petition for
winding up would manifestly not be
maintainable. Until an adjudication results in
duly constituted proceedings, it cannot be held
that there is a debt due and payable."
7.17 A claim for damages and compensation requires
adjudication by an authority which the parties may name or by a
court. Adjudication upon such a claim for compensation or
OMP No. 66/2004 & OMP No. 88/2004 page 46 of 145
damages rests on a finding that the other side has committed a
breach and has incurred a liability to compensate for the loss. It
also requires an assessment of the quantum of such a liability. Till
such determination or adjudication, an alleged default or breach
only gives rise to a right to sue or claim damages. Quantification
of the loss by a party complaining of the breach of a contract is
merely in the realm of a claim. Such claim would become payable
only on account of a fiat of the court or a named authority (as EIL
in the present case) holding an enquiry that the person against
whom the claim for damages is made, has committed breach and
incurred a pecuniary liability towards the party complaining of a
breach; assessing the quantum of loss and awarding damages.
7.18 The legal position is that a claim for damages becomes
an ascertained sum due as damages only when calculated by the
aggrieved party, in the manner provided in the contract.
The clear enunciation of law on this aspect is to be
found in the statement of the applicable principles by Chagla, C.J.
in Iron & Hardware India Co. vs. Firm Shamlal & Bros AIR
1954 Bom 423 wherein a distinction between the expression
'debt' and 'damages' was explained thus :-
"6. xxx
Now, in order that there should be a debt
there must be an existing obligation. The
payment may be due immediately or it may be
OMP No. 66/2004 & OMP No. 88/2004 page 47 of 145
due in future, but the obligation must arise in
order that the debt should be due. It may even
be that the actual payment due in respect of
the debt may require ascertainment by some
mechanical process or by the taking of
accounts. But even when the actual amount is
to be ascertained the obligation must exist. It
is well-settled that when there is a breach of
contract the only right that accrues to the
person who complains of the breach is the
right to file a suit for recovering damages. The
breach of contract does not give rise to any
debt and therefore it has been held that a right
to recover damages is not assignable because
it is not a chose in action. An actionable claim
can be assigned, but in order that there should
be an actionable claim there must be a debt in
the sense of an existing obligation. But
inasmuch as a breach of contract does not
result in any existing obligation on the part of
the person who commits the breach, the right
to recover damages is not an actionable claim
and cannot be assigned.
7. Now, this principle has been accepted by
the learned Judge below, but the reason why
he has taken a different view is that the
definition of "debt" given in this Act is an
artificial definition and is not the definition
which has been accepted for the purpose of
the Transfer of Property Act, and what is
emphasised is that debt is not merely a liability
which is ascertained, but it is also a liability
which is to be ascertained, and therefore the
view is taken that unliquidated damages would
constitute a debt within the meaning of this
Act. In my opinion, with respect to the learned
Judge, greater emphasis should be placed on
the expression "any pecuniary liability" rather
than on the expression "whether ascertained
or to be ascertained". Before it could be said of
a claim that it is a debt, the Court must be
satisfied that there is a pecuniary liability upon
the person against whom the claim is made,
and the question is whether in law a person
OMP No. 66/2004 & OMP No. 88/2004 page 48 of 145
who commits a breach of contract becomes
pecuniary liable to the other party to the
contract. In my opinion it would not be true to
say that a person who commits a breach of the
contract incurs any pecuniary liability, nor
would it be true to say that the other party to
the contract who complains of the breach has
any amount due to him from the other party.
As already stated, the only right which he has
is the right to go to a Court of law and recover
damages. Now, damages are the compensation
which a Court of law gives to a party for the
injury which he has sustained. But, and this is
most important to note, he does not get
damages or compensation by reason of any
existing obligation on the part of the person
who has committed the breach. He gets
compensation as a result of the fiat of the
Court. Therefore, no pecuniary liability arises
till the Court has determined that the party
complaining of the breach is entitled to
damages. Therefore, when damages are
assessed, it would not be true to say that what
the Court is doing is ascertaining a pecuniary
liability which already existed. The Court in
the first place must decide that the defendant
is liable and then it proceeds to assess what
that liability is. But, till that determination
there is no liability at all upon the defendant.
The expression "to be ascertained" may well
apply to a case which I have indicated earlier
where the pecuniary liability cannot be
ascertained without accounts being taken or
some other process being gone through. But
the whole basis of suit for damages is that at
the date of the suit there is no pecuniary
liability upon the defendant and the plaintiff
has come to Court in order to establish a
pecuniary liability".
(Underlining supplied)
OMP No. 66/2004 & OMP No. 88/2004 page 49 of 145
7.19 In this regard, reference can also be made to the
pronouncement of the Apex Court reported at AIR 1962 SC 1314
Sir Chunilal V. Mehta and Sons Ltd. vs. The Century
Spinning and Manufacturing Co. Ltd. wherein the court laid
down the principles thus :-
"16. xxx
When parties name a sum of money to be paid as
liquidated damages they must be deemed to
exclude the right to claim an unascertained sum
of money as damages. ............ Again, the right to
claim liquidated damages is enforceable under
Section 74 of the Contract Act and where such a
right is found to exist no question of ascertaining
damages really arises. Where the parties have
deliberately specified the amount of liquidated
damages there can be no presumption that they,
at the same time, intended to allow the party who
has suffered by the breach to give a go by to the
sum specified and claim instead a sum of money
which was not ascertained or ascertainable at
the date of the breach".
7.20 In AIR 1974 SC 1265 Union of India vs. Raman
Iron Foundry, the Apex Court reiterated the above principles
thus :-
"9. xxxx
It therefore makes no difference in the present
case that the claim of the appellant is for
liquidated damages. It stands on the same
footing as a claim for unliquidated damages. Now
the law is well-settled that a claim for
unliquidated damages does not give rise to a debt
until the liability is adjudicated and damages
assessed by a decree or order of a Court or other
adjudicatory authority. When there is a breach of
contract, the party who commits the breach does
not eo instant incur any pecuniary obligation, nor
does the party complaining of the breach
becomes entitled to a debt due from the other
party. The only right which the party aggrieved
OMP No. 66/2004 & OMP No. 88/2004 page 50 of 145
by the breach of the contract has is the right to
sue for damages".
(Emphasis supplied)
7.21 Reliance has been placed by Mr. Jagjit Singh, Advocate
for GAIL on the pronouncement of the Apex Court in ONGC vs.
Saw Pipes JT (2003) 4 SC 171. This pronouncement of the
Supreme Court reiterates the well settled position that where the
terms of a contract make an unambiguous implication for payment
of liquidated damages, in the event of a breach, a party guilty of
the same is required to pay compensation named in the contract
unless it is held that the estimate of damages is unreasonable or
by way of penalty. The legal position was laid down by the court in
para 68 in the following terms :-
"68. From the aforesaid discussions, it can be held that:
(1) Terms of the contract are required to be taken
into consideration before arriving at the
conclusion whether the party claiming damages
is entitled to the same.
(2) If the terms are clear and unambiguous
stipulating the liquidated damages in case of the
breach of the contract unless it is held that such
estimate of damages / compensation is
unreasonable or is by way of penalty, party who
has committed the breach is required to pay such
compensation and that is what is provided in
Section 73 of the Contract Act.
(3) Section 74 is to be read along with Section 73
and, therefore, in every case of breach of
contract, the person aggrieved by the breach is
not required to prove actual loss or damage
suffered by him before he can claim a decree.
The court is competent to award reasonable
OMP No. 66/2004 & OMP No. 88/2004 page 51 of 145
compensation in case of breach even if no actual
damage is proved to have been suffered in
consequence of the breach of a contract.
(4) In some contracts, it would be impossible for
the court to assess the compensation arising from
breach and if the compensation contemplated is
not by way of penalty or unreasonable, the Court
can award the same if it is genuine preestimate
by the parties as the measure of reasonable
compensation.
7.22 It is noteworthy that this case related to a contract for
supply of pipes by M/s Saw Pipes unlike the present case which
relates to an engineering and construction project. The matter
went to arbitration. The arbitrator had concluded that time was
the essence of the contract and that delay was attributable to M/s
Saw Pipes. However for the reason that no reasonable loss was
proved, the arbitrator had rejected the claim of liquidated
damages. In para 67, the Supreme Court returned a finding that
ONGC had suffered a loss on account of shortage of casing pipes
due to breach of contract but it was difficult to prove the exact
loss and hence the parties had pre-estimated the loss.
7.23 In ONGC vs. Sawpipes (supra), the Supreme Court
held that if parties when they make a contract, know that a
particular loss is likely to result from a breach, it is open to them
to agree upon the payment of a named sum as compensation in the
event of breach. In such a case, it may not be necessary to lead
OMP No. 66/2004 & OMP No. 88/2004 page 52 of 145
evidence to prove damages unless the court arrives at a conclusion
that no loss is likely to occur by the breach. Where the court
comes to the conclusion that a term contemplating damages is by
way of a penalty, it would be open to the court to grant reasonable
compensation not exceeding the amount named in the contract on
proof of damages.
In the Saw Pipes case, the proceedings before the
Supreme Court arose from an arbitral award which had been
challenged before the High Court under section 34 of the
Arbitration & Conciliation Act. Unlike the present case, the issue
before the Supreme Court thus was a challenge to the
adjudication on the question of damages.
7.24 It is apparent that a claim on account of damages for
the breach of contract by its very nature first requires adjudication
on the issue as to whether there is a breach or not.
7.25 An examination of clause 27 of the contract shows the
award of liquidated damages thereunder requires : (i) that
time is to be the essence of the contract; (ii) that the contractor
has failed to complete the work within the stipulated period and
such delay is not on account of force majeure or due to owner's
defaults; (iii) the contractor was required to compensate the
owner for the delay and not as a penalty (iv) the compensation for
the same would be equivalent to half per cent of the value of the
OMP No. 66/2004 & OMP No. 88/2004 page 53 of 145
contract for delay per week on pro rata or part thereof subject to a
maximum of 10% (v) such amount was considered a genuine pre-
estimate of the loss/damage which would be suffered on account of
the delay/breach (vi) the amount would be payable on demand
without any proof of the actual loss or damages caused by such
delay/breach (vii) the decision of the Engineers India
Limited/engineer in charge in this regard is final and binding on
the parties.
7.26 There is no doubt that EIL was the agreed forum under
clause 27 to determine whether there was a breach by the
contractor entitling GAIL to liquidated damages. This final
authority for imposition of liquidated damages has failed to
attribute any unwarranted delay to the contractor or to find GAIL
entitled to any amount as liquidated damages.
GAIL could assert a right so far as its claim of liquidated
damages is concerned only if the same stood assessed and
quantified by EIL. As per clause 27 of the GCC, the decision of EIL
on this was final and binding. Even under the contract between
the parties, GAIL had no unilateral right to determine, assess and
quantify the liquidated damages and appropriate any amount
which it deemed fit against the sums payable to the contractor.
GAIL thus had no right to any amount towards
liquidated damages till there was a decision by EIL on the issue
OMP No. 66/2004 & OMP No. 88/2004 page 54 of 145
affirming the same and therefore no right to appropriate or adjust
any amount from those found due and payable by it to the
contractor.
7.27 I find that there was no decision by EIL holding that the
contractor had delayed the project; of the period by which the
project was delayed. More importantly EIL was not of the opinion
that GAIL had suffered any loss or damage on account of any of
the delays. The plea of delay or breach of contract on the part of
the contractor has been rejected by the arbitrator. In addition
thereto, it has been found that no loss had been occasioned by the
owner.
7.28 From the aforenoticed narration, the contract provided
various stages of the setting up of the plant. It is also evident that
the contract was required to be completed as one whole. Under
clause 1 of the GCC, "work" is defined to mean and includes all
items and things to be supplied/done and activities to be
performed by the contractor. As per clause 25.2 which sets out
the time schedule of construction, the period of construction
includes the time required for "mobilisation testing rectifications,
if any, retesting and completion in all respects".
7.29 It is undisputed that availability of the liquid waste for
treatment in the plant was essential for its testing and running and
that GAIL was not in a position to provide the same even when the
present objections are being heard.
OMP No. 66/2004 & OMP No. 88/2004 page 55 of 145
7.30 The contention on behalf of GAIL that the contractor
had delayed the mechanical completion of the project by 233 days
has to be examined against the above facts. The contractor
disputes responsibility for the delay. Even if GAIL's contention
was to be accepted, the same has to be tested against the inability
of GAIL to provide the requisite inputs for the GTR for a period of
more than eighteen months after the certification of the
mechanical completion of the plant, in fact for almost ten years
thereafter when hearing in the present objections commenced.
7.31 The contract envisages the GTR to be completed within
one month of the mechanical completion. GAIL was contractually
enabled to withhold payment of the last 10% of the contract value.
In case GAIL/EIL were not in a position to release commissioning
front after completion of pre-commissioning activities/mechanical
completion as noticed above, in terms of the variation effected by
the letter dated 27th September, 1995, 5% of the contract value
was agreed to be released upon issuance of the mechanical
completion certification and the extension of the performance
bank guarantee of 10% of the contract value was required to be
kept valid till twenty one months from the date of the mechanical
completion certificate. The balance 5% was also agreed to be
released after eighteen months of issue of the mechanical
completion certificate or after the commissioning and the
acceptance of the system, whichever is earlier.
OMP No. 66/2004 & OMP No. 88/2004 page 56 of 145
7.32 Thus, the payment terms noticed above clearly
envisaged commissioning of the plant as an essential part of the
contract. They also recognise the possible inability of the owner to
facilitate the commissioning when it stipulates that the last 5% of
the contract value which GAIL was retaining would in any case be
released after eighteen months of issue of the mechanical
completion.
7.33 It needs no elaboration that completion of a contract
has to be as a whole. Mere erection of a plant without its
commissioning or testing as per the terms agreed between the
parties would not result in the completion of the work as noticed
above. GAIL recognised this fact when it wrote the letters dated
21st November, 1998 as well as 3rd December, 1998.
7.34 Clause 27 does not stipulate levy of liquidated damages
for delay in completing any particular stage of the contract.
Therefore, the delay which is to be considered is to be
construed in completion of the contract as a whole. The result of
the acceptance of the delay is the claim of damages. Such
damages would be occasioned and assessed only if the contract as
a whole stood completed. In the instant case, it is an admitted
position that the GTR has not been possible on account of the
inability of GAIL.
7.35 The arbitrator has arrived at a factual finding in para 16
OMP No. 66/2004 & OMP No. 88/2004 page 57 of 145
of the award that the facts brought on record showed that even
the main plants, wherefrom GAIL was to provide the liquid effluent
for treatment, were not ready when the waste water treatment
plant was mechanically completed.
The arbitrator has also concluded that there is no
justification at all for the engineer in charge to levy compensation.
The factual finding of the arbitrator is based on a correct reading
of the contractual terms and careful evaluation of the material
placed before him.
7.36 From the above narration of facts, it is also evident that
for the first time, a plea of entitlement to liquidated damages was
set up by GAIL when it filed its reply dated 21st June, 2002 filed
before the arbitrator. It is noteworthy that in this reply, as noted
above, GAIL had also admitted that the mechanical completion
certificate stood given on 20th August, 1997. An effort was made
now to attribute lapses in design and construction; use of sub-
standard material and bad work to the contractor. Other than a
bald claim based on a plea that there was "great delay" on the part
of the contractor in execution of the work, a blanket claim of 10%
of the value of the contract towards liquidated damages was made.
On these contentions, GAIL claimed an amount of
Rs.1,23,23,939.69 as liquidated damages. Pertinently these kind
of issues appear to have been raised on account of intervention of
some proceedings of the vigilance authorities into the matters.
OMP No. 66/2004 & OMP No. 88/2004 page 58 of 145
It is noteworthy that a complaint made, after the
issuance of the satisfactory mechanical completion certificate; its
reiteration on 10th August, 1998 and commissioning of individual
components, would be of little consequence and would support the
contractors contention that the same were baseless after thoughts.
7.37 There was no dispute before the arbitrator that GAIL
was not in a position to provide the necessary sanitary waste and
effluent for conducting the Guarantee Test Run ('GTR') and
commissioning of the plant despite expiry of more than 18 months
of the mechanical completion of the plant effected on 20th August,
1997. So far as the factual position is concerned, it is an admitted
position, that the requisite sanitary waste for the testing has not
been provided even till date.
7.38 Even if it were to be held that there was a default by the
contractor, no evidence at all was placed before the arbitrator or
pointed out before this court that any loss was suffered by GAIL.
Nothing has been pointed out which could even remotely suggest
that any loss at all has been occasioned by GAIL.
7.39 Clause 27 provides a range of liquidated damages
commencing from half per cent of the contract value to a
maximum of 10% of the contract value. The damages are to be
calculated based on a computation of the period for which the
OMP No. 66/2004 & OMP No. 88/2004 page 59 of 145
contract has been delayed.
7.40 The entitlement to liquidated damages is premised
solely on the requests made from time to time by the contractor
for extension of time and the contractual provisions by way of
clause 27 which the parties had agreed to. The parties had agreed
that within the prescripted range, EIL would decide the period of
delay, period for which the liquidated damages would be payable.
The outer limit of the extent of pecuniary liability to compensate
GAIL for losses, if any, from the contractor's delay was stipulated.
EIL did not recommend so. GAIL cannot therefore rely upon the
presumptive condition and claim the maximum compensation
leviable under clause 27. No material at all has been placed as to
why and how GAIL is entitled to the maximum limit of the
compensation.
7.41 Even if it were to be held that such extensions could
be construed as a breach of the contract by the contractor, I am
unable to find any legal principle at all on which compensation
equivalent to the maximum of the stipulation in clause 27 could be
awarded to GAIL on the sole ground that this clause permitted
levy of liquidated damages.
7.42 This objection requires to be tested from yet another
angle.
7.43 There is yet another aspect to this matter. Even
assuming that the contractors pecuniary liability towards
OMP No. 66/2004 & OMP No. 88/2004 page 60 of 145
liquidated damages under clause 27 stood quantified, GAIL has
not initiated any legal proceedings to press any claim against the
contractor.
Arbitration was not the option available to GAIL to
recover the amount towards liquidated damages.
The agreed agency i.e. the EIL had failed to award
liquidated damages to the objector. The only option available to
the objector was to raise a claim and seek adjudication thereof by
way of a suit.
Such suit would be required to be filed within the
stipulated period of limitation. As per the Limitation Act, a suit for
recovery of damages has to be brought about within three years of
the breach of contract. GAIL premises its claim on delay in
mechanical completion which it certified as having been
completed in 1997.
7.44 My attention has been drawn to the letter dated 30th of
March, 2002 written by GAIL to the EIL. It refers to EIL's letter
four years prior, dated 9th of May, 1998 recommending final time
extension of the contract upto 20th of February, 1999 without levy
of liquidated damages and without financial implication on either
side. GAIL wrote that the matter had been reviewed and it has
been noticed that EIL has erred in so recommending for the
following reason :
"As per the contract schedule bar chart, the
Waste Water Treatment Plant was to be mechanically
OMP No. 66/2004 & OMP No. 88/2004 page 61 of 145
completed or ready for commissioning by 30.11.1995.
However, the actual mechanical completion date as
per the mechanical completion certificate issued by
EIL is 20/08/1997. Thus, there was a delay of 253 days
in mechanical completion of the plant. Out of 263 days
of delay, 30 days delay is attributed to GAIL and a
delay of 233 days is attributed to the contractor as per
above referred letter of EIL.
Since the contractor had failed in meeting the
mechanical completion schedule as per contract, EIL
should not have forwarded recommendation for the
final time extension without levy of LD.
The issue of delay of inputs from GAIL's side for
commissioning of the plant should not have been
linked up by EIL as contract does have provisions in
case owner's inputs are delayed with regard to testing,
trial run, commissioning and final acceptance of the
plant. EIL should have considered this aspect while
forwarding their recommendation.
The above has been viewed seriously and you are
advised to avoid such lapses in your recommendations
in future.
You are also advised to levy Liquidated Damages
for the delay of 233 days in mechanical completion by
M/s Paramount Pollution Control Ltd."
7.45 The letter dated 9th of May, 1998 written by EIL
referred to in the above communication has not been produced by
GAIL on record either before the arbitrator or before this court.
Vehement objection in this behalf was raised by Ms. Arora, learned
counsel for the contractor.
7.46 The above communication also shows that GAIL was
even on 30th March, 2002, only seeking levy of liquidated damage
by EIL and that there was no quantified or determined levy by any
agreed authority.
7.47 Assuming that GAIL was entitled to its propounded
claim of liquidated damages, GAIL did not raise the issue of
OMP No. 66/2004 & OMP No. 88/2004 page 62 of 145
liquidated damages till 30th March, 2002 when arbitration was in
progress which was more than 5 years after the mechanical
completion; more than three years after the submission of the final
bill; and four years after Engineers India Limited's
recommendation on the 9th of May, 1998 for payment of the said
bill to the contractor. The claim has been made long after the
arbitrator entered upon the reference apparently on account of
some vigilance issues. It is important to note, that GAIL was
aware that the approved final bill was in its hands and the
contractor was raising a claim before it. It has not addressed a
single communication till the plea set up in 2002 before the
arbitrator, that it was entitled to adjustment of the amounts
claimed by the contractor against GAIL's entitlement to liquidated
damages.
7.48 There can be no manner of doubt that the period of
three years was also over long before the letter dated 30th March,
2002 was written or the reply dated 21st June, 2002 filed before
the arbitrator. The instant case shows that other than reserving a
right to claim liquidated damages, the objector has till date failed
to seek adjudication or recovery in this behalf.
Therefore, so far as the claim of liquidated damages is
concerned, even if GAIL was to be held entitled thereto, its remedy
for adjudication and recovery thereof stands extinguished.
OMP No. 66/2004 & OMP No. 88/2004 page 63 of 145
7.49 No ground at all for setting aside the findings returned
by the learned arbitrator, so far as the plea of adjustment of
amounts found due from GAIL to the contractor, are made out.
7.50 Though, it has not been argued before me but a
question does arise as to whether such an enforcement of clause
27 would amount to effectuating a penalty clause.
7.51 The finding by the arbitrator that no loss was suffered
by GAIL is based on a correct appreciation of the law, admitted
facts and careful conclusions derived therefrom. The challenge
thereto is clearly not premised on any legally tenable grounds and
is hereby rejected.
8. Issue of liquidated damages was an excepted matter
and therefore beyond the arbitrator's jurisdiction
8.1 An objection has been raised by Mr. Jagjit Singh,
learned counsel on behalf of GAIL that in view of clause 27, the
issue of liquidated damages was an excepted matter and could not
have been gone into by the arbitrator.
8.2 Learned counsel for GAIL has placed reliance on the
pronouncements of the Apex Court reported at 2008 (12) SCALE
720 Bharat Sanchar Nigam Ltd. & Anr. vs. Motorola India
Pvt. Ltd. and of this court reported at 158 (2009) DLT 265
ONGC vs. Mittra Guha Builder (India) Co.; 1999 (2) SCC 166
Bharat Bhushan Bansal vs. U.P. Small Industries
Corporation Ltd. Kanpur; 158(2009) DLT 409 Centre for
OMP No. 66/2004 & OMP No. 88/2004 page 64 of 145
Development of Telematics (C-DOT) vs. Ansal Properties
and Infrastructure Ltd.(APIL) in support of the contention that
the arbitrator had no jurisdiction over an excepted matter.
8.3 Ms. Meenakshi Arora, learned counsel for the
contractor on the other hand has submitted that so far as Clause
27 of the contract in hand is concerned, it is only the question of
quantification of damages resulting therefrom which is excepted
from the purview of arbitration. It is urged that the primary
questions which arise and have to be decided prior thereto as to
whether there was delay or breach of contract by the contractor or
whether loss was occasioned by GAIL were not excepted matters
and were within the jurisdiction of the arbitrator. Learned counsel
has placed reliance on the pronouncements in (1989) 1 SCC 657
Vishwanath Sood vs Union of India (followed in (1999) 4
SCC 491 Food Corporation of India vs. Sreekanth Transport
; 2004 (2) Raj 63 (Del) Wee Aar Construction Builder vs.
Delhi Jal Board ; 2002 (3) Raj 292 (Del.) Airport Authority of
India vs. S.N. Malhotra and 2001 (supl.) Arb.L.R. (Delhi) 375
(DB) Bhagat Construction Co. vs. DDA) in support of this
contention.
8.4 In this regard, reference can also usefully be made to
the observations of the Supreme Court in (1989) 1 SCC 657
Vishwanath Sood vs Union of India relied upon by the learned
counsel for the contractor, wherein the court had occasion to
OMP No. 66/2004 & OMP No. 88/2004 page 65 of 145
consider a similar clause in a contract whereby the parties had left
the decision of determination of the amount of compensation for
the delay in the execution of work to the superintending engineer,
whose decision was to be final. A similar issue with regard to non-
arbitrability of the compensation was raised in this case. In para
10 of the pronouncement, the Apex Court held as follows :-
"10. ......But we should like to make it clear
that our decision regarding non arbitrability is
only on the question of any compensation which
the Government might claim in terms of Clause 2
of the contract. We have already pointed out that
this is a penalty clause introduced under the
contract to ensure that the time schedule is
strictly adhered to. It is something which the
Engineer-in-charge enforces from time to time
when he finds that the contractor is being
recalcitrant, in order to ensure speedy and proper
observance of the terms of the contract. This is
not an undefined power. The amount of
compensation is strictly limited to a maximum of
10% and with a wide margin of discretion to the
Superintending Engineer, who might not only
reduce the percentage but who, we think, can
even reduce it to nil, if the circumstances so
warrant. It is this power that is kept outside the
scope of arbitration."
8.5 So far as the agreement between the parties providing
for a clause setting out the manner and authority by whom
compensation for delay in execution of the contract by the
contractor is to be assessed is concerned, in the pronouncement of
the Supreme Court in Food Corporation of India vs. Sreekanth
Transport (1999) 4 SCC 491 and this court in 2004 (2) Raj 63
OMP No. 66/2004 & OMP No. 88/2004 page 66 of 145
(Del) Wee Aar Construction Builder vs. Delhi Jal Board
(supra), it was held that such an agreement would bind the parties
and compensation under the contract cannot be the subject matter
of arbitration. This is for the reason that the parties have agreed
that no further adjudication on the compensation is required as
the agreement has provided the named adjudicator whose decision
is required to be final. The pronouncement of the court in 2001
(Supp.)Arb.L.R. 375 (Delhi (DB) Bhagat Construction Co. vs.
DDA is also to the same effect. It has been held that an issue
expressly excluded from the purview of the arbitration clause is
beyond the jurisdiction of the arbitrator.
There can be no dispute on these well settled principles.
8.6 Mr. Jagjit Singh, learned counsel has placed reliance on
the pronouncement of the Apex Court reported at 1999 (2) SCC
166 Bharat Bhushan Bansal vs. U.P. Small Industries
Corporation Ltd. Kanpur. In this case also the Supreme Court
has only held that the clause in the agreement laid down that the
decision of the executive engineer was to be final, conclusive and
binding on the parties and questions relating to specification,
design and on questions of quality of workmanship etc. and the
decision of the managing director would be final in relation to any
claim. The issue which arose before the court was as to whether
such a clause amounted to an arbitration agreement. No such
OMP No. 66/2004 & OMP No. 88/2004 page 67 of 145
issue arises before this court.
8.7 So far as the Division Bench decision reported at 158
(2009) DLT 265 ONGC vs. Mittra Guha Builder (India) Co. is
concerned, it was held by the court that the validity of levy of
liquidated damages and the decision of the Superintending
Engineer in accordance with clause 2 of the agreement in
question, was not arbitrable in arbitration as parties has agreed to
treat the same as final. However in para 13 of the decision of the
Division Bench, placing reliance on the aforenoticed decision of
the Apex Court in Bharat Bhushan Bansal (supra), the Division
Bench of this court held that even if such decision was not
arbitrable, the determination by the Superintending Engineer was
not a judicial or quasi judicial adjudication and that the same
would be open to challenge in a civil suit. Thus, if liquidated
damages are levied by the SE, his decision could be challenged in
an appropriate civil proceedings but not in arbitration
proceedings.
8.8 A further question had arisen in this case as to whether
the arbitrator could determine whether there was delay in levy of
the liquidated damages or not by the Superintending Engineer. It
was held that this question was also an excepted matter and that
the arbitrator had no jurisdiction to rule on aspects of legality or
justification for the levy of liquidated damages.
OMP No. 66/2004 & OMP No. 88/2004 page 68 of 145
8.9 The issue before the Apex Court in 1999 (2) SCC 166
Bharat Bhushan Bansal vs. U.P. Small Industries
Corporation Ltd. Kanpur and 158(2009) DLT 409 Centre for
Development of Tally Matics (C-DOT) vs. Ansal Properties
and Infrastructure Ltd. was the same.
8.10 It is noteworthy that in each of these pronouncements,
a substantive claim had been made by one party claiming
entitlement to certain amounts which were found to be covered
under matters which had been excepted out of the purview of
arbitration. In none of the cases a counter claim for adjustment of
an amount of liquidated damages to which a defendant claimed
entitlement was set up against the claimants. For this reason, the
principles laid down in these pronouncements are neither
attracted nor applicable to the instant case.
8.11 Even if the submission of Mr. Singh, on behalf of GAIL
that the issue of liquidated damages was an excepted matter and
the arbitrator could not have gone into the issue of delay and
losses is accepted, it would follow that the arbitrator would be
required to stop after examination of the claims of the contractor.
Having ascertained the amounts due to it, the arbitrator would be
required to pass an award in terms of such determination.
Only the findings of the arbitrator to the effect that
GAIL was not entitled to adjustment of the amount due against
OMP No. 66/2004 & OMP No. 88/2004 page 69 of 145
GAIL's claim of liquidated damages would be required to be
quashed. For this reason as well, the objection is misconceived.
8.12 In the present case, it deserves to be borne in mind that
there is no levy of liquidated damages by the authority which was
authorised under clause 27 of the contract to do so. The
consideration by the arbitrator therefore does not relate to
examination of legality or justification of a levy of liquidated
damages. The cases cited by learned counsel for the petitioner
therefore have no application to the instant case.
8.13 In 57 (1995) DLT 474 DDA vs. M/s Sudhir Bros.
also relied upon by learned counsel for GAIL, an entitlement to
recovery of Rs.5,69,473/- was laid by the DDA before the
arbitrator. Even the contractor called upon the arbitrator to give a
finding on the merits of the claim. However for the reason that
the same was an excepted matter, the award of the arbitrator to
the extent that it examined the validity of the levy of compensation
by the Superintending Engineer was taken out from the award.
It is noteworthy that in Sudhir Bros.(supra) as well,
the court had clearly held that DDA could recover the amount of
Rs.5,69,473/- in "whatever manner it is open to it and in case any
such proceedings are taken, it will be open to the contractor to
raise all differences that may be open to him in law to contend that
the levy is bad. In case the DDA seeks to recover the said amount
of compensation from the contractor, it will be open to the
OMP No. 66/2004 & OMP No. 88/2004 page 70 of 145
contractor to file a suit and raise all such contentions as he may
deem fit." In view of the conduct of the parties in calling upon the
arbitrator to go into this issue, the court directed that the question
of limitation would not be raised by either of the parties.
From the above pronouncement as well, it is apparent
that it is the levy of compensation by the final authority agreed by
both parties in the contract which is not justiciable by the
arbitrator and excepted out of the purview of the arbitration
agreement alone.
8.14 Perusal of the pronouncement in 2008 (12) SCALE
270 Bharat Sanchar Nigam Ltd. & Anr. vs. Motorola India
Pvt. Ltd. would show that an issue was raised therein as to
whether the levy of damages under clause 16.2 of the tender
document is an excepted matter in terms of clause 20.1 containing
the arbitration clause. The Supreme Court held that the decision
with regard to only the quantification of the liquidated damages
was excepted from arbitration which was contemplated under
clause 16.2. The relevant portion of the decision of the court may
usefully be adverted to in extenso and reads as follows :-
"10. ......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 was any
delay on the part of the respondent. For this reason,
OMP No. 66/2004 & OMP No. 88/2004 page 71 of 145
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 v. 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. 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 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
there-with (except as to the matters, the decision to
which is specifically provided under this
agreement)...". Therefore it is clear from this
provision, 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.
12. The learned senior counsel for the appellant
relied on the decisions of this Court in Vishwanath
Sood v. UOI MANU/SC/0646/1989 :
OMP No. 66/2004 & OMP No. 88/2004 page 72 of 145
[1989]1SCR288, and General Manager, Northern
Railway v. Sarvesh Chopra MANU/SC/0145/2002
: [2002]2SCR156 . These cases, we are afraid, will
not be of any help to the appellants being
distinguishable on facts and having different
contractual clauses. We may note that Clause 16.2
cannot be treated as an excepted matter. This is
because admittedly, 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 nor is it a no claim or no liability clause.
In Vishwanath Sood's case (supra), it was held by
this Court that a particular claim of the government
was excluded because the Superintendent Engineer
acted as the revisional authority to decide disputes
between the two parties by an adjudicatory process,
there being a complete machinery for settlement of
the disputes in the relevant clause and most
importantly, the Superintendent Engineer had the
discretion on consideration of the facts and
circumstances including mitigating facts, held no
damages was payable. Again in the case of Sarvesh
Chopra, this Court had held that the claims
covered by the no claims clause, i.e., where the
contractor had given up the right to make a claim
for breach on the part of the government was not
arbitrable in terms of the arbitration clause
contained therein and Clause 63 of the general
conditions of the contract which provided for
exclusion because no claim clause was excepted as
such claims were simply not entertainable. In view
of the discussions made hereinabove, we hold that
the disputes raised by the respondents are
arbitrable and not excepted from scope of
arbitration."
The Court agreed with the finding of the lower court on
the question as to whether the respondent had at all acted in
breach of any terms and conditions of the tender document, it was
held that the decision regarding the fixing of the liability of the
supplier was not outside the ambit and purview of the arbitrator.
OMP No. 66/2004 & OMP No. 88/2004 page 73 of 145
8.15 The instant case raises similar questions. A dispute has
been raised as to whether time is of essence of the contract and as
to whether the contractor was liable for breach at all.
8.16 The above facts also show that in order to adjudicate on
the plea raised by the contractor, the learned arbitrator had to
arrive at a finding as to whether the contractor had completed its
part of the contract entitling it to the payment of the final 5% (as
per the agreed variation). Adjudication upon the issue as to
whether time was of essence of the contract and whether the
contractor was in breach of the terms was inherent in adjudication
of the claims raised by the contractor.
So far as the counter claim by way of adjustment is
concerned, the same postulates a pre-determined amount owed by
the claimant which was to be adjusted. No such amount was
claimed by GAIL nor was it determined in GAIL's favour by EIL,
the stipulated authority.
8.17 Section 74 of the Contract Act declares the law as to the
liability upon breach of contract where compensation is pre-
determined by an agreement of the parties. A party to a contract
who is in default of the terms thereof may itself lay a claim of some
kind against the other party. In such circumstance, the other
party claiming compensation by virtue of section 74 of the
OMP No. 66/2004 & OMP No. 88/2004 page 74 of 145
Contract Act, may very well be a defendant. Law envisages
counter claims by the defendant/respondent which may include a
plea of payment or adjustment against amounts which may be
found due and payable by the defendant to the plaintiff.
8.18 So far as adjustment is concerned, though the same has
not been explained in any statutory provision, however it been a
subject matter of several judicial precedents. In 1978 RLR 289
Shakuntala Devi vs. N.D. Khullar, it was held that the essence
of a claim for adjustment by a defendant, like a plea of payment,
tantamounts to a finding that the plaintiff's claim has already been
discharged by the defendant or satisfied by it to the extent of the
claim and so no longer subsists.
8.19 Further light is thrown on the effect of such a plea in
MANU/MP/0052/1964 : AIR 1964 MP 231 State of Madhya
Pradesh v. Raja Balbadhra Singh. It was pointed out in this
case that when two persons have certain accounts and monies are
payable by each to the other, they are both entitled to mutual
adjustments of the monies provided they are really due and
recoverable.
8.20 The judicial pronouncements have made it clear that a
claim of adjustment cannot be treated as a counter claim or as a
claim for set off. A plea of adjustment is really akin to a plea of
payment. The pronouncement in State of M.P. vs. Raja
OMP No. 66/2004 & OMP No. 88/2004 page 75 of 145
Balbadhra (supra) points out that 'payment' is made to the
creditor while the 'adjustment' is made by the debtor himself.
Thus, if a claim for recovery of money is set up by a
party which is in breach or default of a contract, the other side is
not precluded from making a prayer to adjust an amount which it
claims as compensation against amounts to which the defaulting
party is found entitled to. However the same presupposes the
determination of the amount.
8.21 As noted above, there was no quantification of the
amount in the instant case. There would therefore be no question
of adjustment of any such against the amount awarded to the
contractor.
8.22 The plea of GAIL for adjustment of the amounts found
due against compensation that it was entitled to, could follow only
if the arbitrator adjudicated and concluded that time was of the
essence of the contract and also held that the contractor was in
breach thereof. In view of the agreement between the parties
contained in clause 27, it is only after arriving at such a conclusion
that EIL would quantify the damages. It is evident that it is only
the issue of quantification of the damages which was the excepted
matter.
8.23 The above legal position would show that the
parties had agreed to the decision of the engineer in-charge
OMP No. 66/2004 & OMP No. 88/2004 page 76 of 145
only on the question of fixation of compensation as liquidated
damages in terms of clause 27 being final. Adjudication on the
issue as to whether time is of the essence of the contract and the
fault of the contractor in completing the work as well as on the
reasonableness of the claim for compensation of the owner are not
matters excepted out of the purview of arbitration. In terms of
clause 27, the decision of the engineer in-charge with regard to
the amount of compensation is final and binding. However it
cannot be contended or held that it was not open to the arbitrator
to examine the issue with regard to delay in completion of the
contract or the reasonableness of the claim by the contractor.
8.24 It was not open to the arbitrator only to arrive at any
quantification of liquidated damages which was an excepted
matter.
8.25 In para 46 of (2006) 11 SCC 245 Santograde
Mineral & Metal Inc. vs. Hindustan Copper Limited it was
held that such an objection was required to be raised during the
arbitration proceedings or soon after initiation thereof as a
preliminary issue. No such plea was raised by making an
application under section 16 of the Arbitration & Conciliation Act,
1996. The arbitrator has held that the plea taken by GAIL was an
after thought and not supported by any evidence at all.
OMP No. 66/2004 & OMP No. 88/2004 page 77 of 145
8.26 It was the objector who had raised a plea of entitlement
to adjustment of the amount awarded to the contractor against the
liquidated damages which it was claiming to be entitled. In these
circumstances, the objector cannot be permitted to now turn
around and say that the arbitration findings were without
jurisdiction.
8.27 The objection to the jurisdiction of the arbitrator taken
during the oral submissions before this court is required to be
rejected for yet another reason. I have been carefully taken
through the entire objections which are under consideration.
There is not even a whisper of a challenge to the jurisdiction of the
learned arbitrator on any of the questions which have been
answered by him.
For all these reasons, the challenge to the award raised
for the first time in the oral submissions before this court on the
ground that it deals with excepted material is misplaced and
hereby rejected.
9. Whether issuance of the no claim certificate constitutes
estoppel
9.1 The third issue raised before the arbitrator was that the
issuance of the no claim certificate operates as an estoppel against
claiming anything beyond the amount of the final bill.
OMP No. 66/2004 & OMP No. 88/2004 page 78 of 145
9.2 The arbitrator has found that the final bill represents
the work done and not paid. It does not require the claims of the
contractor to be mentioned therein.
9.3 The arbitrator has also found substance in the plea of
the contractor that the contractor had no option and was
compelled to issue the no claim certificate in view of the huge
amounts which were lying blocked with the respondent and the
amount it was incurring towards maintenance of the bank
guarantees.
9.4 Placing reliance on the pronouncement of the Calcutta
High Court in AIR 1981 Cal. 101 Jeevni Engineering Works
vs. UOI it was observed by the arbitrator, that it was a well
known and notorious fact that unless a no claim certificate is
furnished by a contractor, payment of the final bill is not made.
Therefore, issuance of such certificate would not prevent a
contractor from raising his claims before the arbitrator. In this
regard reference has also been made to AIR 1984 NOC 132
(Delhi) Mehta & Co. vs. UOI. As a result the arbitrator has held
that the issuance of the no claim certificate would be
inconsequential in the given facts.
9.5 As noticed hereinabove, the mechanical completion was
completed on 20th August, 1997. The contractor sent a final bill on
9th January, 1999. GAIL demanded the no claim certificate by its
OMP No. 66/2004 & OMP No. 88/2004 page 79 of 145
letter dated 27th January, 1999. EIL recommended the payment of
the final bill on 7th April, 1999, more than 19 months after the
mechanical completion mentioning that the contractor was being
asked to provide the no claim certificate.
9.6 The contractor has rendered an explanation for the
issuance of the no claim certificate contending that it was
informed that unless the certificate was given, the final bill in
question could not be processed, leaving no option to it but to
issue the same. The contractor contended that the certificate was
without free consent and thus had been issued under compulsion.
It was pointed out that GAIL had not acted on the same and had
not made the payments to it. Hence issuance of the certificate
was without any legally binding consequences and would not bar it
from raising the claims before the arbitrator.
9.7 Clause 44.3 of the GCC noted above mandated that to
procure payment of the amounts, such certification by the
contractor was essential. EIL demanded the same as per its letter
dated 7th April, 1999.
9.8 Clause 53 states that the contract shall be deemed to
have been completed at the expiration of the period of liability.
This clearly includes the period for testing and commissioning of
the plant. The parties had agreed that 5% of the contract value
out of the last 10% payment was agreed to be released to the
OMP No. 66/2004 & OMP No. 88/2004 page 80 of 145
contractor upon issuance of the mechanical completion certificate.
However, in terms of the letter dated 27th September, 1995, the
contractor was required to keep the bank guarantee of 10% of the
contract value valid till 21 months from the date of issuance of the
mechanical completion certificate. The last 5% of the contract
value was required to be released after eighteen months of
issuance of mechanical completion certificate or after the
commissioning and acceptance of the system whichever being
earlier.
9.9 The amount towards the execution of the work which
was withheld by GAIL to the tune of 5% of the contract value was
certainly not a small amount. The final bill was raised more than
nineteen months after the mechanical completion. Its payment
stood recommended by EIL on 7th April, 1999 when it demanded
the no claim certificate towards the payments. It is an admitted
position, that GAIL took no steps to process the payment. The
contractor has also admittedly been required to keep a huge bank
guarantee equivalent in value to the extent of 10% of the contract
value alive for which it was incurring recurring expenses. The
contractor has explained that in this background, in order to
secure its blocked payments, it was compelled to submit a no
claim certificate on 13th October, 1999 after a considerable wait
for its payment. The above facts would show that clearly the
OMP No. 66/2004 & OMP No. 88/2004 page 81 of 145
contractor had no option but to give the no claim certificate.
9.10 An important fact is that GAIL did not take any action
based on the no claim certificate. The bill of the contractor was
not processed and no payment was released despite the certificate
and the recommendation of the Engineers India Limited.
The contractor has admittedly not accepted any
payment based thereon. It raised its claims upon GAIL and upon
non-payment/settlement thereof, sought arbitration.
9.11 Learned counsel for the respondent has relied on 1994
Supp.(3) SCC 126 P.K. Ramaiya & Co. vs. CMD, NTPC in
support of the contention that in the wake of the no claim
certificate, the claims of the contractor are barred by estoppel.
Perusal of the judgment shows that the contractor in this case not
only issued the certificate but received the amount unconditionally
in full and final settlement. It is not so in the instant case.
In view of the above, the claim of the contractor cannot
be confined to the final bill amount.
9.12 In the judgment reported at (2004) 2 SCC 663 75 MD
NTPC Ltd. vs. Reshmi Constructions, Builders & Contractors
the court held as follows :-
"Necessities nonhabet legem is an old age
maxim which means necessity knows no law. A
person may sometimes have to succumb to the
pressure of other party to the bargain who is on a
stronger position.Although it may not be strictly in
place but we cannot shut our eyes to the ground
OMP No. 66/2004 & OMP No. 88/2004 page 82 of 145
reality that in the cases where a contractor has
made huge investment, he cannot afford not to take
from the employer the amount under the bills, for
various reasons which may include discharge of his
liability towards the banks, financial institutions
and other persons. In such a situation, the public
sector undertakings would have an upper hand.
They would not ordinarily release the money unless
a 'No Demand Certificate' is signed. Each case,
therefore, is required to be considered on its own
facts."
The observations of the Supreme Court apply squarely
to the instant case.
9.13 The findings of the arbitrator are based on the evidence
which was placed before the arbitral tribunal and cannot be
examined by this court. The issuance of the no claim certificate in
such circumstances would not constitute a bar on the claims of the
contractor on grounds of estoppel.
10. Claims and award thereon
10.1 It now becomes necessary to examine the actual claims
awarded by the arbitrator. The sums which have been awarded
have been carefully calculated upon a meticulous consideration of
the material. I find that the arbitrator has computed the same as
follows :-
10.2 This claim was based on entitlement to the payment of
the final bill of Rs.63,63,123/- presented on 8th January, 1999.
GAIL denied liability on the basis that it was entitled to adjustment
of liquidated damages to the tune of Rs.1,23,23,939.69 and alleged
OMP No. 66/2004 & OMP No. 88/2004 page 83 of 145
that the work and material used were sub-standard. It was stated
that its vigilance department had directed stoppage of payment
pending certification that "other work done by the claimant was
also not sub-standard".
10.3 The arbitrator discussed the contentions and observed
that no notice in this regard had been served on the claimant and
further held that the recommendations of the vigilance department
were the claimant's internal matter. Placing reliance on the
satisfactory mechanical completion of the work effected on 20th
August, 1997 certified by GAIL on 10th August, 1998, the arbitrator
carefully calculated the amounts towards work not done to the
tune of Rs.1,49,646/-; towards sales tax of Rs.2,48,539/- and an
amount of Rs.1,15,352/- against electrical charges. The amount of
Rs.58,49,586/- only was therefore allowed by the arbitrator against
the final bill.
Claim no.2
10.4 The second claim had two components. The first was
release of the bank guarantee. Under the condition no. 24 of the
GCC, the contractor was required to deposit a security equivalent
to 10% of the contract value which was to the tune of
Rs.1,23,93,969/- An amount of Rs.30,98,493/- being 2.5% of the
contract value had to be estimated within 10 days of acceptance to
the tender as "Initial Security Deposit" (ISD) and retained till
OMP No. 66/2004 & OMP No. 88/2004 page 84 of 145
completion. These deposits could be made by way of a demand
draft or a bank guarantee. Half of the security deposit could be
refunded midway in the defect liability period while the balance
after the full period was over. The contractor made the initial
security deposit by way of bank guarantee no. 105/59/95-96 of 16th
October, 1995 so as to avail the mobilisation advance which was
required to constitute not only the ISD but also to provide a
Composite Bank Guarantee (CBG) equivalent to the security
deposit, duly validated till three months beyond the defect liability
period. The contractor consequently arranged the CBG no.
105/58/95-96 of 16th October, 1995. The contractor has sought
release of the bank guarantees and claimed loss inflicted by GAIL
in not releasing the bank guarantees after completion date of 13th
January, 1997.
10.5 The arbitrator has noticed the terms of the bank
guarantee which were obtained by the contractor from the Indian
Overseas Bank. The terms required a deposit of margin money
equivalent to 10%; personal guarantee of all directors and a
collateral security of plant and machinery, US 64 in the form of a
reinvestment deposit plan. The bank guarantee was akin to an
overdraft which was counterpoised by the reinvestment deposit.
It was found that the contractor was entitled to
compensation equivalent to the commission paid in extending the
OMP No. 66/2004 & OMP No. 88/2004 page 85 of 145
bank guarantees beyond the due dates and the interest differential
between the overdraft and reinvestment deposit for the period.
The arbitrator held that the ISD of Rs.30,98,493/- was to be
released on 20th August, 1997 but was kept valid till 31st
December, 1997. For this reason, commission from 20th August,
1997 till 31st December, 1997 being Rs.56,000/- and interest
differential for the period being Rs.16,140/- was quantified by the
arbitrator. The total loss on this bank guarantee payable to the
contractor was therefore quantified at Rs.72,140/-
10.6 So far as CBG no. 105/58/95-96 for Rs.1,23,93,969/- is
concerned, it was found that this bank guarantee ought to have
been released on 19th May, 1999 being 21 months after the
mechanical completion as per clause B 9.1.3 (i and iii) of the SCC.
The commission paid after 19th May, 1999 on this bank guarantee
was found to be to the tune of Rs.3,38,350/- and the differential
interest was to the tune of Rs.51,860/-. The total loss which
enured to the contractor on this bank guarantee was assessed at
Rs.3,90,210/-.
10.7 For the same reasons, so far as the third composite
bank guarantee being BG No. 0105/04/2000 of Rs.61,96,985/-
provided on 1st February, 2000 is concerned, the arbitrator has
found the contractor entitled to release of the bank guarantee. The
commission paid on this was to the tune of Rs.3,81,110/- and
OMP No. 66/2004 & OMP No. 88/2004 page 86 of 145
interest differential thereon was of Rs.1,65,249.01, being the total
to Rs.5,46,359/-
10.8 GAIL does not explain when the bank guarantees were
eligible for release but it has been contended that heavy
recoveries for default and defective work have to be made from
them. The arbitrator has concluded that the composite bank
guarantees should be released forthwith. The arbitrator also
found the contractor was entitled to compensation on account of
extending the bank guarantees being equivalent to the amount of
commission paid thereon and the interest differential.
10.9 The arbitrator held that the claimant was eligible for
compensation on the three bank guarantees being a total of the
aforesaid losses of them of Rs.72,140/-, Rs.3,90,210/- and
Rs.5,46,359/- bringing the total to Rs.10,08,709/- on account of
extending the bank guarantees. The arbitrator also concluded that
interest was not reckoned as the bank guarantees could have been
invoked. It was also observed that so far as the issue as to what
the commission and differential interest might have yielded was in
the realm of hypothesis.
Claim no.3
10.10 Claim 3 for the sum of Rs.15,13,680/- relates to
the cost for keeping the resources at the site from 20th August,
1997 to December, 1999 and the prolongation in the testing which
OMP No. 66/2004 & OMP No. 88/2004 page 87 of 145
had to be conducted item wise due to the lack of inputs to carry
out the GTR at one stroke. The arbitrator has considered the
conduct of GAIL which included requiring the contractor to depute
its team to PATA, UP on two occasions on false alarms. The
arbitrator considered the material placed by the contractor on
record and observed that while GAIL had not explained why such
resources had to be kept on the site for 18 months after the
mechanical completion, however the contractor had also not given
a basis for the costs which were claimed. In this background, the
arbitrator has allowed only an ad-hoc amount toward the cost of
security which had to be provided at the plant after it stood taken
over by GAIL which was to the extent of Rs.3 lakhs.
Claim no. 4
10.11 The contractor had claimed an amount of
Rs.5,45,524/- towards extra works done on the directions of
GAIL/EIL which included provision of a sluice gate, extra piping at
battery limits, repair of the surge pond.
The arbitrator placed reliance on the confirmation fax
by the Engineers India Limited to the contractor in this regard
while allowing the cost of some of the extra items to the tune of
Rs.3,09,524/- only.
Claim no. 5
10.12 Claim no. 5 was divided into three heads
OMP No. 66/2004 & OMP No. 88/2004 page 88 of 145
numbered serially as claim nos. 5A, 5B & 5C. The contractor had
contended that GAIL was responsible for the delay from 13th
January, 1997 to 20th August, 1997 and claimed that it wrongfully
deprived the contractor of Rs.4,26,98,474/- up to 30th June, 2001.
In claim 5A, placing reliance on assessment of monthly
loss on account of overheads based on the law relating to
engineering and building contracts in India, the arbitrator has
concluded that a monthly loss of Rs.6,88,533/- may be derived on
account of overheads. The arbitrator has also placed reliance on
the judicial pronouncements reported at AIR 1985 Kerala 49
State of Kerala vs. K. Bhaskaran; AIR 1977 SC 1481
Mohamed Salamanatullah vs. Govt. of India and the directive
of the Ministry of Irrigation and Power laid down in 1956, that
10% is a fair provision towards profits and overheads by a
contractor. The factual matrix as also the applicable law has been
carefully considered. An amount of only Rs.20,65,659/- as on 20th
August, 1997 towards overheads for three months has been
awarded.
It is noteworthy that on a careful consideration of the
material placed before him, the arbitrator has rejected claim nos.
5B and 5C.
Claim no. 6
10.13 The arbitrator has also rejected claim 6 towards
OMP No. 66/2004 & OMP No. 88/2004 page 89 of 145
non-provision of inputs to the contractor up to August, 1997 by
GAIL recording detailed reasons for his award. The contractor has
laid no challenge to the award in respect of such of its claims as
were rejected.
Claim no.7
10.14 By way of claim 7, the contractor sought refund of
Rs.49,37,360/- expended on excess cement used above the free
issue limit with interest of Rs.42,78,081/-. Again after careful
calculation and consideration of the correspondence on record, the
arbitrator concluded that so far as excess cement was concerned,
GAIL could recover only the normal cost of the excess cement and
nothing more. It was concluded that an amount of Rs.27,07,280/-
was to be refunded to the contractor who was also held entitled to
interest of Rs.17,24,910/- up to 30th June, 01 ; and Rs.7,77,026/-
after 30th June, 01 up to the date of the award. Thus under claim
no. 7, the arbitrator awarded a total amount of Rs.52,09,216/-.
Claim no.8
As claim no. 8, the contractor claimed interest
compounded yearly at the rate of 24% per annum on its claims and
entitlements from the due dates till the date of the award.
The arbitrator was of the view that the contractor would
be entitled to interest on the amounts awarded. Reliance was
placed by the arbitrator on the principles laid down in AIR 1992
OMP No. 66/2004 & OMP No. 88/2004 page 90 of 145
SC 732 entitled Secretary, Irrigation Department,
Government of Orissa & Ors. vs. G.C. Roy "that a person
deprived of the use of money to which he is legitimately entitled
has a right to be compensated for the deprivation, call it by any
name. It may be interest, compensation or damages. This basic
consideration is valid for the period the dispute is pending before
the arbitrator as it is for the period prior to the arbitrator entering
upon the reference" and "where the agreement between the
parties does not prohibit grant of interest and where the party
claim interest and that dispute is referred to the arbitrator, he
shall have the power to award interest pendente lite", the
arbitrator held that interest be awarded on all the claims which
were allowed, having regard to the commercial lending rates and
practice which was relevant and prevalent at the time. It is,
however, noteworthy that the arbitrator has not granted the
claimed interest. Keeping in view the market variations, interest
was granted at the rate of 18% up to 30th June, 2001 which is the
date on which the claims were made by contractor upon GAIL and
that 12% beyond till the date of the award.
Claim no. 9
In claim 9, the contractor pointed out that it had
incurred a cost to the tune of Rs.5 lakhs as against cost of
arbitration and the same was being claimed. The arbitrator held
OMP No. 66/2004 & OMP No. 88/2004 page 91 of 145
that each party will bear its own arbitration cost. It was also
directed that the cost incurred towards the stamp duty in passing
the award would be shared equally by the two parties.
11 Scope of challenge to an arbitral award
11.1 The objector is challenging the conclusions returned by
the arbitrator on the basis of evidence led before him. Not only
has evidence been led before the arbitrator, but the award shows a
considered and detailed analysis thereof. The arbitrator has
stated the applicable legal principles and then analysed the factual
matrix applying these principles.
11.2 The objections which have been pressed before this
court do not relate to the determination affected by the arbitrator
on the respective claims but are premised on the objection that the
objector was entitled to adjust the entire amount which was
claimed by the contractor, the respondent herein, against
liquidated damages.
11.3 So far as amount of the bills are concerned, the objector
does not dispute that the bills have been verified and amounts
ascertained by the EIL after due verification of the work, which
was the competent authority.
11.4 It is noteworthy that in the present proceedings also,
GAIL does not dispute the quantification of the amounts which the
arbitrator has found the contractor entitled to. The only plea
OMP No. 66/2004 & OMP No. 88/2004 page 92 of 145
which is set up is that it is entitled to adjust the same against
liquidated damages.
11.5 The statement of objects and reasons for the enactment
of the Arbitration & Conciliation Act, 1996 shows that it has been
enacted to ensure that the arbitral tribunal remains within the
limits of its jurisdiction. Sub-section 3 of Section 28 of this Act
requires that the Arbitral Tribunal has to decide in accordance
with the terms of the contract and has to take into account the
usages of the trade applicable to the transaction. The mandate of
an arbitrator is thus to be reasonable and not perverse.
11.6 While considering objections to an arbitral award under
section 34, the court has to be conscious of the nature of the
challenge and has to bring out the same with clarity. It is the duty
of the court to see whether the arbitrator has acted within the
limits of his mandate. The limits of the courts power to interfere
with the arbitral award, while seized of objections thereto, are not
only statutorily prescribed but also guided by judicial precedents.
The principles in this behalf are well settled.
11.7 A challenge to the reasonableness of reasons given by
the arbitrator is not permissible. In this regard, in (1989) 2 SCC
38 Sudarshan Trading Co. vs. Govt. of Kerala & Anr., in para
25, 29, 32 and 35 it was held as follows :-
"25. While dealing with that part of the award which
OMP No. 66/2004 & OMP No. 88/2004 page 93 of 145
exonerated the contractor from the risk after holding
that the termination of the contract by the
respondent was valid, it was held that the same was
opposed to the provisions of the agreement. The
direction to release the amount and release of
security deposit without taking into account the
liability to account for the loss on rearrangement of
work amounted to errors apparent on its face. In the
aforesaid light, the High Court held that the award
under claims Nos. l(b), 2, 5, 6 & 7 and also the
award of an additional sum of Rs. 50,000/-under
claim No. 14 over and above the claim allowed was
against the terms of the contract and, therefore,
liable to be set aside.
xxx xxxx
29. ........Furthermore, in any event, reasonableness
of the reasons given by the arbitrator cannot be
challenged. Appraisement of evidence by the
arbitrator is never a matter which the court
questions and considers. If the parties have selected
their own forum, the deciding forum must be
conceded the power of appraisement of the
evidence. The arbitrator is the sole judge of the
quality as well as the quantity of evidence and it will
not be for the Court to take upon itself the task of
being a judge on the evidence before the arbitrator.
xxx xxx
32. The High Court in the judgment under appeal
referred to the decision of the Division Bench of the
Kerala High Court in State of Kerala v. Poulose 1987
1 Ker LT 781 (supra). Our attention was also drawn
to the said decision by the counsel for the
respondents that if an arbitrator or the umpire
travels beyond his jurisdiction and arrogates
jurisdiction that does not vest in him, that would be
a ground to impeach the award. If an arbitrator,
even in a non-speaking award decides contrary to
the basic features of the contract, that would vitiate
the award, it was held. It may be mentioned that in
so far as the decision given that it was possible for
the court to construe the terms of the contract to
come to a conclusion whether an award made by the
arbitrator was possible to be made or not, in our
opinion, this is not a correct proposition in law and
the several decisions relied by the learned Judge in
support of that proposition do not support this
proposition. Once there is no dispute as to the
OMP No. 66/2004 & OMP No. 88/2004 page 94 of 145
contract, what is the interpretation of that contract
is a matter for the arbitrator and on which court
cannot substitute its own decision.
xxx
35. .....It may be stated that if on a view taken of a
contract, the decision of the arbitrator on certain
amounts awarded is a possible view though perhaps
not the only correct view, the award cannot be
examined by the court in the manner done by the
High Court in the instant case."
(Emphasis supplied)
11.8 In (1999) 4 SCC 214 Himachal State Electricity
Board vs. R.J. Shah & Co., the court again held as follows :-
"25. . From the aforesaid decision of this
Court and the last one in particular it is clear that
when the arbitrator is required to construe a
contract then merely because another view may be
possible the court would not be justified in
construing the contract in a different manner and
then to set aside the award by observing that the
arbitrator has exceeded the jurisdiction in making
the award. "
11.9 On the same issue, in (2006) 11 SCC 181 Mcdormott
International Inc. vs. Burn Standard Co. Limited & Ors., the
court held as follows :-
"112. It is also trite that correspondence
exchanges by the parties are required to be taken
into consideration for the purpose of construction
of a contract. Interpretation of a contract is a
matter for the arbitrator to determine, even if it
gives rise to the determination of a question of
law.
120. Once, thus it is held that the arbitrator had
the jurisdiction, no further question shall be raised
and the Court will not exercise its jurisdiction
unless it is found that there exist any bar on the
face of the award.
xxx xxx
OMP No. 66/2004 & OMP No. 88/2004 page 95 of 145
169. As regards certain other contentions, in view
of the fact that the same relates to pure question
of fact and appreciation of evidence, we do not
think it necessary to advert to the said contention
in the present case."
11.10 Each of the questions raised by GAIL is squarely
an issue of fact and the conclusion arrived at by the learned
arbitrator on the facts is based on an interpretation of the
contractual terms and construction of the documents placed and
the evidence led before the arbitrator. It is not open to this court
to interdict the award on these issues.
11.11 Reference in this behalf also requires to be made
to the pronouncement of the Apex Court reported at (1999) 9
SCC 449 Arosan Enterprises vs UOI wherein in para 39, the
Supreme Court held as follows :-
"39. In any event, the issues raised in the matter
on merits relate to default, time being the essence,
quantum of damages--These are all issues of fact,
and the Arbitrators are within their jurisdiction to
decide the issue as they deem it fit--The Courts
have no right or authority to interdict an award on
a factual issue and it is on this score the Appellate
Court has gone totally wrong and thus exercised
jurisdiction which it did not have. The exercise of
jurisdiction is thus wholly unwarranted and the
High Court has thus exceeded its jurisdiction
warranting interference by this Court. As regards
issues of fact as noticed above and the observations
made herein above obtains support from a
judgment of this Court in the case of Olympus
Superstructures Pvt. Ltd. v. Meena Vijay Khetan
and Ors.AIR 1999 SC 2102"
OMP No. 66/2004 & OMP No. 88/2004 page 96 of 145
11.12 The parties have taken this court through the
evidence and the documents which were placed before the
arbitrator and have been considered by him. It needs no
elaboration that while considering objections under section 34 of
the Arbitration & Conciliation Act, 1996, the court cannot look into
the evidence which was laid before the arbitrator and re-
appreciate the same. The arbitrator was the chosen forum of the
parties who has conclusively decided rival issues of fact between
the parties. There is nothing at all suggested that the arbitrator
did not decide on the basis of relevant facts which were placed
before him or that he has ignored any material evidence.
11.13 The objections to the award are premised on the
plea that a clause for liquidated damages having been
incorporated into the contract, as a consequence, it ipso facto
follows that liquidated damages are the inevitable result of any
delay at any stage of the contract by the contractor.
I have held hereinabove that the same is legally
impermissible. Even if it were not so, no case for entitlement to
liquidated damages by GAIL has been made out. In any case
recovery of the same is hopelessly barred by limitation.
11.14 Ms. Arora has painstakingly taken me through the
reply dated 27th of September, 2002 filed by GAIL pointing out the
admissions by GAIL towards non-payment for work done and
inability to conduct the GTR. It is pointed out, that other than
OMP No. 66/2004 & OMP No. 88/2004 page 97 of 145
setting up a plea of entitlement to 10% of the contract value as
damages, the reply to the claims filed before the arbitrator
contained no counter claim for liquidated damages nor any prayer
for the same.
11.15 Reliance is placed on behalf of GAIL on the
pronouncement reported at (2007) 13 SCC 236 Security
Printing & Minting Corporation of India Ltd. & Anr. vs.
Gandhi Industrial Corpn. is also misconceived. In this case, the
arbitrator had given an overriding effect to the terms and
conditions of a tender rather than the terms contained in the
subsequent supply order placed by the appellant corporation
accepted by the respondent corporation. In this background, it
was held that it is the completed contract which is binding and not
the terms of the offer of the advertisement. It was observed that
even though courts are still not interfering with the findings and
interpretation of the terms of the contract given by the arbitrator,
however, if any perverse order is passed, then the courts are not
powerless to interfere with the matter. Therefore, the view taken
by the arbitrator as affirmed by the High Court to the effect that
the terms in the offer of the advertisement would bind the parties
even though a concluded contract had come into existence could
not be sustained and was held to be exfacie illegal. No such issue
has been raised before me in the instant case.
OMP No. 66/2004 & OMP No. 88/2004 page 98 of 145
11.16 Mr. Jagjit Singh, learned counsel for the
respondent has placed reliance on para 15 of the judgment
reported at (2002) 4 SCC 45 General Manager, Northern
Railway & Anr. vs. Sarvesh Chopra. This pronouncement
however also does not support the submissions on behalf of GAIL
inasmuch as it refers to a claim for compensation of a contractor
for non-performance of reciprocal promises by the employer.
11.17 In JT 2003 (4) SC 171 : 2003 2 RAJ 1 ONGC
vs. Saw Pipes Limited, the Supreme Court held that only if an
award is contrary to a fundamental policy of Indian law or is
against justice or morality or is patently illegal, the same has to be
set aside.
11.18 In the decision of the Supreme Court reported at
AIR 2008 SC : 2008 1 RAJ 164 ONGC Ltd. vs. Garvare
Shipping Corporation, the court held that there is no proposition
that the courts would be slow to interfere with an award even if
the conclusions are perverse.
11.19 An issue would arise as to whether compensation
not levied within a reasonable time from the date of completion
of the work would tantamount to waiver of the right to levy such
compensation (Ref : (1997) 2 Arb.L.R. 369 Bhartiya
Construction Co. vs. DDA).
11.20 In the present case, the arbitrator has carefully
OMP No. 66/2004 & OMP No. 88/2004 page 99 of 145
examined the rival versions laid before him. The above discussion
would show that his conclusions are based not merely on an
analysis of the material and documents placed before him,
meticulous calculations, as well as on a consideration of the
pronouncements of the Supreme Court on the issues.
11.21 The findings returned by the arbitrator are
therefore unexceptional and certainly not opposed to the
fundamental policy of Indian law. Nothing arbitrary, unreasonable
or illegal has been also pointed out. No fundamental infirmity in
holding that the contractor was entitled to the refund of the
security deposit or the amounts which had been determined by the
EIL has been pointed out.
11.22 Before me, the challenge by GAIL, even if legally
permissible, is not supported either by the terms of the contract or
the evidence led before the learned arbitrator. In these
circumstances, I am not able to discern any infirmity or illegality
in the award.
12. Challenge to award of interest
12.1 Mr. Jagjit Singh, learned counsel has lastly urged that
in any case, the award of interest at the rate of 18% for the pre-
arbitration stage and pendente lite at 12% was not warranted in
the current economic scenario. Reliance has been placed on the
pronouncement of the Supreme Court reported at (2007) 2 SCC
OMP No. 66/2004 & OMP No. 88/2004 page 100 of 145
720 Krishna Bhagya Jala Nigam Ltd. vs. G. Harischandra
Reddy & Anr. to contend that on account of change of regime,
rates have substantially been reduced.
12.2 Perusal of the objections raised by the respondent
before this court shows that in the petition under Section 34,
the only plea taken, is that awarding of interest is beyond the
contract and therefore the award of interest by the arbitrator is
not sustainable. The plea for setting aside the award of interest is
premised on this objection alone.
12.3 It is noteworthy, that the Supreme Court has on more
than one occasion held the finding by the court that a direction to
pay interest on the awarded amount is not mandatory, is
erroneous. It has been held that if a person is deprived of use of
money, he is legitimately entitled, as of right, to be compensated
for such deprivation by granting monies by whatever name it may
be called whether interest or compensation or damages. (Ref :
(2001) 2 SCC 721 Executive Engineer vs. N.C. Budhiraja;
(2009) 10 SCC 187 Indian Humepipe Company Ltd. vs. State
of Rajasthan).
In the judgment reported at 2009 (14) SCALE 399
Madnani Construction Corporation Pvt. Ltd. vs. UOI , the
Supreme Court has reiterated the power of the arbitrators to grant
pendente lite and future interest till realization.
The principles laid down by the Apex Court find a
OMP No. 66/2004 & OMP No. 88/2004 page 101 of 145
statutory recognition by the legislature while enacting section 31
of the Arbitration & Conciliation Act. The statute has clearly
empowered the arbitrator under Section 31(1)(a) to award pre-
refernece and pendente lite interest.
12.4 So far as award of interest is concerned, it becomes
necessary to make a reference to Section 31(7) of the Arbitration
& Conciliation Act which provides as follows :-
31. Form and contents of arbitral award
(7)(a)Unless otherwise agreed by the parties, where
and in so far as an arbitral award is for the payment of
money, the arbitral tribunal may include in the sum
for which the award is made interest, at such rate as it
deems reasonable, on the whole or any part of the
money, for the whole or any part of the period
between the date on which the cause of action arose
and the date on which the award is made.
(b) A sum directed to be paid by an arbitral award
shall, unless the award otherwise directs, carry
interest at the rate of eighteen per cent per annum
from the date of the award to the date of payment.
12.5 In view of the clear statutory provision as well as the
settled principles laid down by the Apex Court in the several
judgments noticed heretofore, the entire submissions with regard
to the jurisdiction of the arbitrator to award interest on which the
objections have been premised are devoid of any legal merit.
12.6 Before me, other than a reference to the above
directions of the court, the objector has placed no reasons to
justify reduction of the rate of interest.
12.7 In (2007) 2 SCC 720 Krishna Bhagya Jala Nigam
Ltd. vs. G. Harischandra Reddy & Anr., the court was of the
OMP No. 66/2004 & OMP No. 88/2004 page 102 of 145
view that the award was fair and equitable. However, keeping in
mind the long standing dispute between the parties, the court
observed that after economic reforms, the interest regime had
changed and rates substantially reduced.
For this reason, the court suggested reduction in the
awarded figure which was accepted by the parties.
12.8 In (2006) 11 SCC 181 McDermott International
Inc. vs. Burn Standard Co. Ltd. & Ors., the court observed that
in some cases, to do complete justice between the parties given
the long lapse of time, the Supreme Court resorted to exercise of
jurisdiction under Article 142, therefore, the court held it to be in
the interest of justice to reduce the rate of interest. No such
submission contending a long lapse of time or changed economic
scenario or liberalised interest regime has been placed before this
court other than the bald reference to these judgments.
12.9 In a case reported at AIR 2005 SC 3701 : (2005) 6
SCC 678 Rajendra Construction Company vs. Maharashtra
Housing and Area Development Authority & Ors., the court
referred to an earlier pronouncement (AIR 2005 SC 2071
Bhagwati Oxygen Ltd. vs. Hindustan Copper Ltd.) observing
that having regard to the period since 1987 when the contract was
entered into, work completed and 1995 when the award passed, it
would be proper equitable and in the interest of justice if the court
reduced the rate of interest to 10%.
OMP No. 66/2004 & OMP No. 88/2004 page 103 of 145
From the above discussion, it is evident that on account
of the liberalised interest regime and the changed economic
scenario, there has been a fall in the rates of interest. Further, the
long passage of time since the contract was entered into and
completed as well as the duration of the arbitration proceedings
has also been a consideration while bringing down interest
awarded by arbitrators.
12.10 The arbitrator has awarded interest for the period upto
30th of June, 2001 at 18%. For the period thereafter till the
making of the award, interest at the rate of 12% has been
awarded.
12.11 Having regard to observations of the Supreme Court to
the falling interest rates and the current economic scenario, as
noticed above, I direct that interest for the period upto 30th June,
2001 awarded at 18% shall stand reduced to 12%. The interest for
the period beyond till making the award which has been awarded
at 12% is reduced to 9%. The objector shall be liable to make
payment of interest on these rates. The award shall stand
modified to this limited extent.
13. Post-award interest
13.1 It has further been contended by Mr. Singh, learned
counsel, that the arbitrator has not granted post-award interest
and that the contractor has not filed objections assailing the same.
The submission is that the failure to specifically award post-award
OMP No. 66/2004 & OMP No. 88/2004 page 104 of 145
interest tantamounts to its rejection.
13.2 Clause (b) of sub-section (7) of Section 31 contains an
express provision that unless an award has otherwise directed, a
sum directed to be paid by an arbitral award shall carry interest at
the rate of 18% per annum from the date of award to the date of
payment. Thus, unless there is a direction to the contrary in the
arbitral award, the clear statutory stipulation requires mandatory
payment of interest from the date of the award to the date of
payment. In the absence of any specific stipulation in the arbitral
award with regard to future interest, the statutory prescription in
clause (b) of sub-section 7 of section 31 has to apply. (Ref: 2009
(6) BomCR 176 Eskay Engineers vs. Bharat Sanchar Nigam
Limited, Raigad Telecom Division).
13.3 On this issue, it would be useful to advert to the
observations of the Bombay High Court in another pronouncement
on the same issue which is reported at 2001 (3) BomCR 652
Vijaya Bank vs. Maker Development Services Pvt. Ltd.
wherein the court held as follows :-
"In any event, we see that sub-section (7) of Section
31 provides that any sum directed to paid by the
Arbitrator shall, unless there is a contrary direction
in the award, carry interest at the rate of eighteen
per cent per annum from the date of the award to
the date of payment. We think that this is a salutary
provision in the statute which is intended to deter
parties from raising frivolous disputes by putting
them on notice that interest calculated at the rate of
18 per cent per annum on the amount directed to be
paid is payable. Beyond making this observation,
we do not feel called upon to make out any
OMP No. 66/2004 & OMP No. 88/2004 page 105 of 145
clarificatory exercise for we think that the salutary
provision operates per proprio vigore (by its own
force or vigor)."
13.4 In view of the prevalent statutory regime, bare
examination of the statutory provision would show that it is not
necessary for a party to claim post award interest. It is also not
necessary for an arbitration award to contain a specific direction
for payment of the same. In view of Section 31(7), if the award is
silent about interest from the date of award of payment, then the
person in whose favour the award is made will be entitled to
interest at the rate of 18% per annum on the principal amount
awarded from the date of award till the payment.
13.5 The Supreme Court had occasion to examine the further
issue as to whether a person would be entitled to payment of
interest on interest i.e. to say as to what would be the amount on
which future interest would be payable. In the judgment reported
at MANU/SC/0131/2010 State of Haryana & Ors. Vs. S.L.
Arora, the court also examined the question as to whether there
was any discretion available with the arbitral tribunal in this
regard. In this judgment, the court in detail examined Section
31(7) and what is authorised under it, thus setting out the legal
position regarding the award of interest by the arbitral tribunal.
The observations of the Supreme Court in paras 17 and 18 have a
bearing on the issue raised in the present case. The relevant
extract thereof may be usefully adverted to in extenso and reads
OMP No. 66/2004 & OMP No. 88/2004 page 106 of 145
as follows :-
"17. The difference between Clauses (a) and (b) of
Section 31(7) of the Act may conveniently be noted
at this stage. They are:
(i) Clause (a) relates to pre-award period and Clause
(b) relates to post-award period. The contract binds
and prevails in regard to interest during the pre-
award period. The contract has no application in
regard to interest during the post-award period.
(ii) Clause (a) gives discretion to the Arbitral
Tribunal in regard to the rate, the period, the
quantum (principal which is to be subjected to
interest) when awarding interest. But such
discretion is always subject to the contract between
the parties. Clause (b) also gives discretion to the
Arbitral Tribunal to award interest for the post-
award period but that discretion is not subject to
any contract; and if that discretion is not exercised
by the arbitral Tribunal, then the statute steps in
and mandates payment of interest, at the specified
rate of 18% per annum for the post-award period.
(iii) While Clause (a) gives the parties an option to
contract out of interest, no such option is available
in regard to the post-award period.
In a nutshell, in regard to pre-award period, interest
has to be awarded as specified in the contract and in
the absence of contract as per discretion of the
Arbitral Tribunal. On the other hand, in regard to
the post-award period, interest is payable as per the
discretion of the Arbitral Tribunal and in the
absence of exercise of such discretion, at a
mandatory statutory rate of 18% per annum.
18. As there is some confusion as to what Section
31(7) authorizes and what it does not authorize, we
will attempt to set out the legal position regarding
award of interest by the arbitral tribunals, as
emerging from Section 31(7) of the Act.
OMP No. 66/2004 & OMP No. 88/2004 page 107 of 145
18.1) The provision for interest in the Act is
contained in Section 31 dealing with the form and
contents of arbitral award. It employs two
significant expressions "where the arbitral award is
for payment of money" and "the arbitral tribunal
may include in the sum for which the award is made,
interest.... on the whole or any part of the money".
The legislature has thus made it clear that award of
interest under Sub-section (7) of Section 31 (and
award of costs under Sub-section (8) of Section 31
of the Act) are ancillary matters to be provided for
by the award, when the arbitral tribunal decides the
substantive disputes between the parties. The words
'sum for which the award is made' and 'a sum
directed to be paid by an arbitral award'
contextually refer to award on the substantive
claims and not ancillary or consequential directions
relating to interest and costs.
18.2) The authority of the arbitral tribunals to award
interest under Section 31(7)(a) is subject to the
contract between the parties and the contract will
prevail over the provisions of Section 31(7)(a) of the
Act. Where the contract between the parties
contains a provision relating to, or regulating or
prohibiting interest, the entitlement of a party to the
contract to interest for the period between the date
on which the cause of action arose and the date on
which the award is made, will be governed by the
provisions of the contract, and the arbitral tribunal
will have to grant or refuse interest, strictly in
accordance with the contract. The arbitral tribunals
cannot ignore the contract between the parties,
while dealing with or awarding pre-award interest.
Where the contract does not prohibit award of
interest, and where the arbitral award is for
payment of money, the arbitral tribunal can award
interest in accordance with Section 31(7)(a) of the
Act, subject to any term regarding interest in the
contract.
18.3) If the contract provides for compounding of
interest, or provides for payment of interest upon
interest, or provides for interest payable on the
principal upto any specified stage/s being treated as
part of principal for the purpose of charging of
OMP No. 66/2004 & OMP No. 88/2004 page 108 of 145
interest during any subsequent period, the arbitral
tribunal will have to give effect to it. But when the
award is challenged under Section 34 of the Act, if
the court finds that the interest awarded is in
conflict with, or violating the public policy of India,
it may set aside that part of the award.
18.4) Where an arbitral tribunal awards interest
under Section 31(7)(a) of the Act, it is given
discretion in three areas to do justice between the
parties. First is in regard to rate of interest. The
Tribunal can award interest at such rate as it deems
reasonable. The second is with reference to the
amount on which the interest is to be awarded.
Interest may be awarded on the whole or any part of
the amount awarded. The third is with reference to
the period for which the interest is to be awarded.
Interest may be awarded for the whole or any part
of the period between the date on which cause of
action arose and the date on which the award is
made.
18.5) The Act does away with the distinction and
differentiation among the four interest bearing
periods, that is, pre-reference period, pendente lite
period, post-award period and post-decree period.
Though a dividing line has been maintained between
pre-award and post-award periods, the interest
bearing period can now be a single continuous
period the outer limits being the date on which the
cause of action arose and the date of payment,
subject however to the discretion of the arbitral
tribunal to restrict the interest to such period as it
deems fit.
18.6) Clause (b) of Section 31(7) is intended to
ensure prompt payment by the award-debtor once
the award is made. The said clause provides that the
"sum directed to be paid by an arbitral award" shall
carry interest at the rate of 18% per annum from the
date of award to the date of payment if the award
does not provide otherwise in regard to. the interest
from the date of the award. This makes it clear that
if the award grants interest at a specified rate up to
the date of payment, or specifies the rate of interest
payable from the date of award till date of payment,
OMP No. 66/2004 & OMP No. 88/2004 page 109 of 145
or if the award specifically refused interest, Clause
(b) of Section 31 will not come into play. But if the
award is silent in regard to the interest from the
date of award, or does not specify the rate of
interest from the date of award, then the party in
whose favour an award for money has been made,
will be entitled to interest at 18% per annum from
the date of award. He may claim the said amount in
execution even though there is no reference to any
post award interest in the award. Even if the pre-
award interest is at much lower rate, if the award is
silent in regard to post-award interest, the claimant
will be entitled to post- award interest at the higher
rate of 18% per annum. The higher rate of interest
is provided in Clause (b) with the deliberate intent
of discouraging award-debtors from adopting
dilatory tactics and to persuade them to comply with
the award."
13.6 In view of sub-section (7)(b) of Section 31 of the
Arbitration and Conciliation Act and the clear enunciation of the
applicable principles by the Supreme Court in State of Haryana
& Ors. vs. S.L. Arora (supra), the contention of the learned
counsel for GAIL is wholly devoid of any merit. Silence in the
award about future interest is inconsequential upon the
entitlement of a party to post award interest on the principal sum
awarded. Such silence does not tantamount to rejection of the
same. The same would flow from legislative mandate of Section
31(7)(b) of the Arbitration & Conciliation Act of 1996. No order to
this effect is also necessary and no objections were required to be
filed.
13.7 It is noteworthy that the Supreme Court has clearly
held that even if pre-award interest is at a much lower rate, if the
award is silent with regard to the post award interest, the claimant
OMP No. 66/2004 & OMP No. 88/2004 page 110 of 145
will be entitled to post-award interest at the higher rate of 18%
per annum. It has been observed that the higher rate of interest is
provided in clause (b) of Section 31 with the deliberate intent of
discouraging award debtors from adopting dilatory tactics and to
persuade them to comply with the award.
The scheme of the Arbitration & Conciliation Act, 1996
as noticed by the Supreme Court in State of Haryana & Ors. vs.
S.L. Arora & Co. (supra) also clearly shows that the spirit, object
and purpose of the statute is to bring about expeditious disposal of
arbitral proceedings and attach a finality to the arbitral award.
The legislature has incorporated the provisions of Section 31(7)(b),
stipulating interest at the rate of 18% per annum at the post-
award stage to discourage non-compliance of the arbitral awards.
The grounds on which the arbitral awards can be assailed have
been restricted and statutorily prescripted in Section 34 of the
Arbitration & Conciliation Act. In view of the well settled legal
position noticed above, a considered decision could have been
taken at least to comply with such portion of the award which was
completely unassailable.
13.8 In view of the above discussion, it is held that the
respondent would be entitled to interest on the principal sum
awarded in the arbitration award at the rate of 18% per annum
from the date of the award till date of payment.
14. Costs of the present proceedings
OMP No. 66/2004 & OMP No. 88/2004 page 111 of 145
14.1 The arbitrator did not award costs of the proceedings in
favour of the claimant. However, the claimant has seriously
pressed its claim for costs of the present objections.
14.2 Nothing has been pointed out which could disentitle the
respondent to costs of the present proceedings.
14.3 The above discussion would show, that the legal
principles on which the present objections have been premised,
stand authoritatively decided against the objector long ago. The
narration of facts by the arbitrator noticed hereinabove also shows
how baseless and misconceived are the contentions on which these
objections have been based. The objector was conscious of its
liability towards the respondent and consequently had raised no
issue at all of liquidated damages.
14.4 The present litigation is wholly unwarranted. The facts
of the present case speak volumes of the functioning of GAIL and
its inability to maintain any technical or financial discipline. It is
astonishing that GAIL was unable to synchronise timely
completion of the various components of its project to completion
and ensure generation of the liquid wastes. As a result, crores of
public money have been spent in building a waste water treatment
plant which could not even be tested for a period of over ten years
till hearing in these objections. Commercial investments of a
contractor running into lakhs of rupees are lying blocked. There is
certainly no accountability for the public money expended and the
OMP No. 66/2004 & OMP No. 88/2004 page 112 of 145
contractor having blocked crores of rupees, has no voice to even
object, let alone ask any questions. GAIL's conduct in the matter
is inexplicable and unpardonable, to say the least. Instead of
efficient discharge of its contractual obligations, even though GAIL
was aware of its inability to ensure the GTR or commissioning
dispute completion of the plant, it refused to get its act together to
even permit discharge of the contractor's staff at the plant or
release the large payments due from it. In March, 2002 when the
matter reached GAIL's vigilance authorities, it would appear that
it adopted the policy of attack as the best defence. The facts
brought out establish that the letter to EIL seeking the
recommendation for imposition of liquidated damages were all
issued thereafter as a shield for culpability for probable vigilance
action.
14.5 Protracted arguments have been laid before this court
on totally misplaced objections as noticed above. A stand has been
taken which was not even the stand before the arbitrator. As such
valuable time of the court has been expended in the hearing and
adjudication of these objections. I have been compelled to go
through the voluminous record of the case as well.
14.6 So far as frivolous litigation is concerned, in the
judgment reported at (2006) 4 SCC 683 State of Karnataka vs.
All India Manufacturers Organisation (supra), the Supreme
Court had stated that in addition to paying costs to the adversary
OMP No. 66/2004 & OMP No. 88/2004 page 113 of 145
party, the appellant should be directed to pay costs to the
Supreme Court Legal Services Authority. It was observed that
such frivolous litigation has to be deprecated.
14.7 I had occasion to consider a similar issue earlier and in
the judgment dated 19th October, 2006 in CCP No. 130/2005 in
OMP No. 361/2004 entitled Goyal MG Gases Pvt. Ltd. vs. Air
Liquide Deutschland GMBH & Ors., had observed as follows :-
"67. Imposition of costs normally follows the
indemnity principle which is simply described as "If
you lose, you will be responsible not merely for your
own legal costs but you must pay he other side's
too".
68. In this background, there is yet another more
imperative reason which necessitates imposition of
costs. The resources of the court which includes
precious judicial time are scarce and already badly
stretched. Valuable court time which is required to
be engaged in adjudication of serious judicial
action, is extended on frivolous and vexatious
litigation which is misconceived and is an abuse of
the process of law. A judicial system has barely
sufficient resources to afford justice without
unreasonable delay to those having genuine
grievances. Thereforee, increasingly, the courts
have held that such totally unjustified use of judicial
time has to be curbed and the party so wasting
precious judicial resources, must be required to
compensate not only the adversary but also the
judicial system........"
14.8 The following observations of Lord Phillips MR in a
judgment rendered in the court of appeal in (2004) 1 WLR 88
(CA) entitled Bhamjee v. Forsdick and Ors. were relied upon
by the court :-
"(8) In recent years the courts have become more
conscious of the extent to which vexatious litigation
OMP No. 66/2004 & OMP No. 88/2004 page 114 of 145
represents a drain on the resources of the court
itself, which of necessity are not infinite. There is a
trace of this in the judgment of Stoughton LJ in
Attorney-General v. Jones (1990) 1 WLR 859, when
he explained why there must come a time when it is
right for a court to exercise its power to make a civil
proceedings order against a vexatious litigant. He
said that there were at least two reasons:
First, the opponents who are harassed by the
worry and expense of vexatious litigation are
entitled to protection; secondly the resources of
the judicial system are barely sufficient to afford
justice without unreasonable delay in those who
do have genuine grievances and should not be
squandered on those who do not.
14.9 Placing reliance on other judicial precedents, in Goyal
MG Gases Pvt. Ltd. (supra), it was further observed as follows :-
"69. The same concerns were articulated in
Attorney-General v. Ebert (2004) EWHC 1838
(Admn.) thus:
Mr. Ebert's vexatious proceedings
have...been very damaging to the public
interest; quite aside from the oppression
they have inflicted on his adversaries....
The real vice here, apart from the vexing
of Mr. Ebert's opponents, is that scarce
and valuable judicial resources have been
extravagantly wasted on barren and
misconceived litigation, to the detriment
of other litigants with real cases to try."
Silber J, concurring, referred (at para 61)
to "a totally unjustified use of judicial
time.
70. The Division Bench of this Court has
further considered yet another impact of
frivolous and vexatious litigation. In
MANU/DE/0865/1995 : 59(1995)DLT604
Jagmal Singh v. Delhi Transport Corporation,
the court was called upon to consider a
challenge to the disciplinary proceedings at the
hands of an employee of the Delhi Transport
Corporation. While noticing the various
reasons as to the self-imposed limitations on
OMP No. 66/2004 & OMP No. 88/2004 page 115 of 145
the courts in interfering with interlocutory
stages of departmental proceedings, the court
arrived at a finding that the writ petition by the
petitioner was not only misconceived but an
abuse of the process of the court. After so
holding, the court observed thus:
"We are firmly of the view that
petitioner has resorted to the dilatory
tactics hereby crippling the progress of
the departmental enquiry pending
against him for the last about eight long
years. It is not only unfortunate but
matter of concern to all of us being the
members of the society, that the
petitioner by indulging in this type of
frivolous litigation has not only wasted
his time and money but has also wasted
the time of the court and other public
functionaries thereby causing
unnecessary drain on the resources of
public exchequer whose coffers are
filled in by poor people's money. In such
a case with a view to discourage
frivolous litigation, it becomes our duty
not only to see that the petitioner is
saddled with exemplary costs but also to
ensure that he gets no benefit on
account of the delay caused by him in
the departmental enquiry pending
against him."
The above observations squarely apply to the instant
case.
14.10 The contractor is consequently held entitled to the costs
of defending the present proceedings from GAIL which, obviously
has to include not only the litigation costs but also counsel's fee
and are quantified at rupees one lakh fifty thousand only.
15. Amount spent on maintenance of bank guarantee
15.1 The matter does not end with payment of the costs. In
the instant case, GAIL has not only filed objections under Section
OMP No. 66/2004 & OMP No. 88/2004 page 116 of 145
34 of the statute but alongwith filed IA No. 1351/2004 making a
prayer to the arbitrator to keep the bank guarantee no. 105/04/00
alive. On a consideration of this application, an order dated 3rd
March, 2004 was passed directing the contractor to keep this bank
guarantee alive.
The contractor has submitted that it has been
compelled to deposit margin money with the bank for the bank
guarantee and also has been required to pay commission for
keeping the same alive. The contractual liability of the contractor
to maintain the bank guarantee was long over.
15.2 The contractor has placed before this court the
statements of the amount of commission which has been paid to
the bank upto 31st of December, 2009 on keeping this bank
guarantee alive. It is contended that equity demands that GAIL be
directed to compensate the contractor for keeping the bank
guarantee alive forms part of costs of the present proceedings.
The contractor also presses that it must be awarded
interest on the margin money which has remained deposited with
the bank for issuing the bank guarantee.
15.3 The levy of interest on the awarded amount ensures
that the objector gets no benefit on account of the delay caused by
him in effecting the payment to the contractor/respondent.
However, equities require to be balanced and interests of justice
demand that the contractor be compensated for the amounts paid
OMP No. 66/2004 & OMP No. 88/2004 page 117 of 145
towards commission for keeping the bank guarantee alive under
the orders passed by this court at the instance of the objector.
These are part of the expense which has enured to the contractor
as a result of the present litigation.
In view of the above factual position as well as the well
settled legal position, nothing precluded GAIL from restricting its
challenge to the award to only seek reduction in the interest rates.
As noticed above, no objection in these terms has been laid before
this court. GAIL also did not take recourse to any alternate
dispute redressal mechanism in the nature of conciliation or
mediation, all of which are statutorily recognised, to seek amicable
resolution of any issue. Financial and commercial imperatives
ought to have diverted GAIL to take recourse to the shortest
possible method of dispute resolution. There is no rationale or
reasonableness nor any sense of commercial fair dealing in the
manner in which GAIL has proceeded in the instant case. GAIL
cannot, therefore, take the shelter of it being a public sector
undertaking as a justification for either filing the objections or the
inefficiency and commercial indiscipline which has been displayed.
15.4 It may be noted that the contractor would have incurred
the expense on the commission which it has paid to the banker
between 31st December, 2009 till date as well. The contractor
shall inform GAIL of the amount of the up to date commission
enclosing a banker's certificate in this behalf. GAIL shall be liable
OMP No. 66/2004 & OMP No. 88/2004 page 118 of 145
to pay the amount of the commission paid by the contractor to its
banker for keeping the bank guarantee alive till the date of the
present pronouncement.
15.5 The contractor has also placed the statement of the
amounts which it was required to maintain as margin money for
keeping the bank guarantee alive. This amount could have been
very well utilised by the contractor for commercial purposes. In
order to balance equities the contractor should be held entitled to
simple interest from GAIL on the amount which it was required to
maintain/deposit as margin money with the bank for issuance of
the bank guarantee. However, for the reason that the contractor
has been granted interest at the rate as specified in Section 31(7)
for the post-award period, an order for payment of interest on the
margin money is not being made.
15.6 Before parting, I may point out that the figures relied
upon have been extracted from the award. In case of any
discrepancy or error, it is made clear that the dates, amounts and
figures stated in the award dated 20th November, 2003 shall
prevail over any contradictory date or figure which may appear
herein on account of a bonafide typing error.
The petition is, accordingly, disposed of in the above
terms.
OMP No. 80/2004
16. Factual matrix in OMP No. 80/2004
OMP No. 66/2004 & OMP No. 88/2004 page 119 of 145
16.1 It is necessary to briefly examine the facts giving rise to
OMP 80/2004 which are breifly set out hereafter. Both parties
submitted that the factual narration are similar and the issues are
identical to the objections registered as OMP No. 80/2004. So
much so both parties opted to file only written submissions in the
present matter.
16.2 The scope of the work as defined in the bid document
included the general requirements for design, engineering,
supply, fabrication, erection, testing, commissioning and
performance testing of the DM water plant and the Condensate
Polishing Unit. The time schedule for completion of works was
fixed for twelve months.
16.3 The contractor's tender was accepted by GAIL after
various discussions and negotiations vide a fax of intent issued in
favour of Paramount on 15th February, 1995 whereby it was
intimated that the tender has been accepted and consequently the
contract was to be executed and performed within stipulated time
being twelve months from date of fax of intent. The contract was
required to be executed and completed on or before 14th February,
1996. Just as in the other contract, the fax of intent recorded
that M/s Engineers India Ltd. ('EIL' hereafter) were to be the
consultants for the said project. It was also stipulated that EIL's
Resident Construction Manager at the project site would be the
engineer in charge for the work. On 4th of June, 1995, the
OMP No. 66/2004 & OMP No. 88/2004 page 120 of 145
petitioner issued a letter of acceptance stipulating that the work
as per the bid document was to be completed within twelve
months from 15th of February, 1995 when the fax of intent was
issued. On 21st June 1995, the respondent confirmed to the
petitioner its acceptance of the agreement.
Therafter, there was a chain of events which led to a
delay in the completion of the contract.
16.4 The contractor has pointed out the following
circumstances evidencing and attributing delays to GAIL in
execution of the work :-
(i) The contractor was scheduled to commence site
construction activities in April, 1995. However, the site in
question was not provided by the petitioner because of other
contractor's material lying on the site and other contractors
refactory work was going on. The contractor claims that it had
effected mobilisation and also conveyed its intent to start work in
April, 1995 anticipating approvals as well as possession of the site.
Upon receipt of approved lay out plans and drawings,
the contractor had requested EIL by a communication of 27th
September, 1995 to instruct the agency occupying the area
earmarked for contractor's construction to vacate and shift the
same. The contractor claims that it had mobilised the site on 29th
September, 1995 and dismantled 85% of the pavement by 15th
October, 1995. However, they were unable to proceed as GAIL as
OMP No. 66/2004 & OMP No. 88/2004 page 121 of 145
well as EIL failed to get the site cleared by the other contractor or
removal of the structural items including heating coil and other
heavy materials of other agencies lying at site. However the site
was not made available till 30th October, 1995. As a result, the
work could actually commence only on 1st November, 1995. This
was also conveyed to GAIL by a communication of 9th November,
1995. GAIL was also informed that due to the heavy structures
and other materials lying in the area, line out marking was not
possible and further civil work could not be started.
The contractor relies on a General Condition of the
Contract 1.31 which infers mobilisation as simultaneous action at
all locations. It has been contended that having regard to the
nature of the work, piecemeal handing over of the site was not
permitted. The civil work envisaged erecting the foundation
plinth, roof, etc. and for this reason GAIL's contention that the
portions of the site were unoccupied is inconsequential. GAIL
admits that the entire site was not unoccupied; that the layout was
revised thrice and that the BEP was cleared only in September,
1995.
(ii) As per the contract, the contractor submitted the basic
engineering package (BEP), lay out and P&I diagram to EIL on 1st
May, 1995 immediately after work awarded, these were to be
finalised and approved by GAIL at the earliest, within twenty days.
GAIL however failed to do so. The first reaction of EIL to these
OMP No. 66/2004 & OMP No. 88/2004 page 122 of 145
drawings was given only on 9th June, 1995. Communications dated
20th and 30th June; 3rd and 30th August and 2nd, 9th and 18th
September, 1995 from the contractor were of no avail. As a result,
the contractor also held discussions on 22nd/23rd June and 10th July,
1995 with GAIL pressing for early approvals. It is stated that
comments were only received piecemeal; the lay out revised
thrice; despite consent having been given on 3rd August, 1995, lay
out was revised even thereafter on 12th September, 1995. On 12th
September, 1995 by a detailed letter, the respondent brought to
the notice of EIL that after repeated discussions, comments of EIL
had been fully addressed in the basic engineering and plant layout
drawings and revised drawings of 3rd August, 1995 were treated as
final. However, EIL had made further changes which would cause
re-drafting of almost all drawings and the same would delay the
engineering schedule as well as construction schedule as unless
the layout plan was frozen, no site activity could be comenced. It
has been pointed out that under the contract, the clearance which
was envisaged within three weeks as per clause 62.3, came in the
end of September, 1995 thus inducing a chain reaction in delays.
(iii) As per SCC 6.10, contractor was required to purchase
equipment only from the EIL approved vendors. Supply of the
heat exchangers (HE) and the condensate pump (CP) were critical
to the execution of the work. The contractor placed orders for the
condensate feed pumps on the approved vendor on 18th
OMP No. 66/2004 & OMP No. 88/2004 page 123 of 145
September, 1995 scheduling the delivery for January, 1996. On
10th and 16th October, 1995, since the approved vendors had sent
regret letters, the contractor informed EIL that its approved
vendors could not supply the product of the requisite
specifications. Two alternatives which could be procured from
them were suggested. The contractor had pointed out that in
meetings held on 14th and 15th September, 1995 with such
vendors, EIL had itself asked them to quote for the alternatives
specifications. In October, 1995 since the approved vendors sent
regret letters for supply of heat exchangers, they unable to supply
the material of construction, the contractor requested EIL to
accept alternative material. On 2nd November, 1995, the
contractor reminded EIL to send approval for various items
submitted and pending. Again on 14th November, 1995, drawings
and documents for condensate feeder pumps were submitted for
approval to EIL. Again on 21st November, 1995, the contractor
sent an urgent request and reminder on the letter of 2 nd
November, 1995 to EIL for comments and approval of drawings
and documents. On 17th January, 1996, in reply to EIL's fax of 12th
January, 1996 as to status of pumps and motors, respondent
informed that condensate feed pumps had been ordered on Akay
Industries on 18th September, 1995, motors on Bharat Bijli on 5th
October, 1995.
The specified material of construction (MOC) for HE
OMP No. 66/2004 & OMP No. 88/2004 page 124 of 145
was Cu-Ni cladding for shell and cover, and Cu-Ni for the tube
sheet, channel, channel cover and baffle. The contractor wrote to
EIL on 10th and 16th October, 1995 that none of its approved
vendors could supply the products specified. It suggested to
alternatives instead - (i) a HE of SS 304L for the main coller and
Cu-Ni for the trim coolder or (ii) a Plate Type HE of SS 316L
construction. The letter of 16th October, states that at meetings
held on 14th and 15th September, 1995 with vendors, EIL itself
asked them to quote for plate type HE. On 27th November, 1995,
the contractor proposed a BEM Tupe HE. EIL accepted the same
on 25th January, 1996 at a meeting held in Baroda two months
later, but expressed concern at one the pace of procurement. On
25th January, 1996 in a meeting between EIL and the contractor,
the final decision for ordering heat exchangers and material of
construction was taken. It was decided New Field Baroda would
fabricate the HE using Cu-Ni tubes procured for Alcobex, Jodhpur
and IDL, Hyderabad would supply the tube sheet and do the Cu-Ni
clading on the bonnet, flange, nozzle neck, nozzle flange and other
wsetted parts. It was decided that orders would be placed before
31st January, 1995. The contractor's letter to EIL dated 3 rd April,
1996, suggests that the HE design was modified on 25th and 26th
March, 1996 in regard to baffle spacing, flow and temperature
parameters. The EIL appears to have modified the heat
exchanger design as late as on 25th and 26th March, 1996 due to
OMP No. 66/2004 & OMP No. 88/2004 page 125 of 145
EIL's additional requirements resulting in placement of orders for
the condensate equipment at Ankhaleshwar on 7th February, 1996
and with IDL, Hyderabad on 27th April, 1996.
This order had to be revised again in April, 1996 due to
EIL's additional requirements. Also, as per EIL requirement
cladding of two metals, namely copper and nickel of heat
exchangers were now required to be done at IDL, Hyderabad. This
order could be finalised only on 27th April, 1996. The contractor
has contended that the design was modified again in April, 1996,
close follow up was maintained with IDL and EIL was informed on
6th August, 1996 that alcobex had supplied the tubes and IDL has
dispatched cladded plate and sheet material. After fabrication the
HE had to be moved to IDL for cladding on whom the order was
placed on 27th April, 1996. Because of delay in finalisation of
order, the subject heat exchanger was ready and inspected only on
18th October, 1996 and dispatched to site immediately.
(iv) The approval of drawings for various items was also
delayed and amongst others, the contractor issued reminders
dated 2nd November, 1995 and 14th November, 1995 to GAIL.
(v). The drawings and documents for the condensate feeder
pumps were submitted for approval to EIL. A letter dated 1st of
December, 1995 emphasing the urgency for the drawings as
vendors could commence manufacture of pumps and heat
exchangers only thereafter. The data sheet approval for pumps
OMP No. 66/2004 & OMP No. 88/2004 page 126 of 145
was received by the contractor only on 6th December, 1996. The
data sheet and specifications were finally confirmed by EIL only on
28th June, 1996 by which time Akay Pumps, the approved vendor
had labour problems and could not adhere to the revised delivery
date of 5th July, 1996. In this background, the order on this vendor
was cancelled on 30th July, 1996 and fresh offers were invited from
other vendors whose delivery schedule was more than six months.
Only Process Pumps give delivery of eight weeks and orders were
placed after discussions with GAIL. EIL expressed reservations on
14th September, 1996 against the substitute vendor as well whose
order was cancelled. The matter was re-negotiated with Akay
Pumps, the original vendor. As a result, there was delay in the
readiness of the machines till 7th February, 1997; inspection could
be carried out only on 26th March, 1997 and the items were
discharged only on 22nd April, 1997. The pumps were received on
27th May, 1997. All these decisions were taken with the
intervention and final decision by EIL.
(vi). On 10th February, 1996, EIL rephased the completion of
the contract till 30th June, 1996.
(vii). By a letter dated 8th of April, 1996, the contractor
requested for time extension up to end August, 1996. In the letter
for time extension, Paramount recorded that they had dispatched
all open tanks, MS pipes and fittings, cable trays, earthing
materials, valves, etc. And civil works were almost complete at site
OMP No. 66/2004 & OMP No. 88/2004 page 127 of 145
and detailed inter alia the following reasons for seeking time
extension :-
(a) after LOI dated 15th February, 1995, kick off meeting ws held
on 22nd February, 1995, submission of basic design package on 7th
April, 1995; layout underwent changes three times and finally
approved by end September, 1995; all GA Drgs, Civil Drgs. Etc.
Already prepared had to be revised and reworked.
(b) Site clearance : Opened site on 29th September, 1995 and
dismantled RCC structure. The civil work could not be comenced
due to heavy material lying on site from other agencies. The
material of other agencies was removed finally on 30th October,
1995 and only thereafter and therefore considerable time was lost
in the process.
(c) The approved vendors regretted and claimed inability to
supply because of which 4-5 months were lost.
(d) So far as execution of its works were concerned, the
contractor confirmed that civil works and various other works
were almost complete at the site. However, pointing out the above
reasons, extension of time was requsted up to the end of August,
1996.
(viii) EIL however extended the time only till June, 1996.
(ix). A communication dated 19th June, 1996 was addressed
by EIL requiring additional testing to be carried out with heat
exchangers. The contractor informed EIL that if this was insisted
OMP No. 66/2004 & OMP No. 88/2004 page 128 of 145
upon, additional time would be required by the vendor delaying
the work by twelve to fourteen weeks.
(x). In the above background, by a letter of 26th June, 1996,
the contractor reported that all major engineerng work and civil
construction had been completed. Most of the tankages stood
received on site and installed on their foundation. The contractor
was constrained to request time extension up to 15 th October,
1996 as supply/erection of three pumps; filter heat exchangers;
rubber lined piping work and instrumentation was under
completion. The contractor had not received the heat exchangers
from the vendors which supply was expected by end of August,
1996 and commissioning could be done in about 1½ months
thereafter.
(xi). In the meantime, despite the order for the condensate
pumps having been placed as back as on 18th September, 1995,
the same had also not been received. On 10th June, 1996, Akay
Industries on whom order for supply of pumps had been placed
informed delay in supply due to labour problems. The supplier
Akay Pumps was facing labour problems and delivery was
uncertain. An alternative was suggested by the respondent, M/s
Process Pumps Ltd., Bangalore who offered delivery of six weeks.
After much deliberations and EIL's instructions, an order was
placed on it. On 17th September, 1996, after much deliberations
and EIL's instructions, the order was cancelled and reordered with
OMP No. 66/2004 & OMP No. 88/2004 page 129 of 145
Akay Pumps.
In this background, by a letter of 7th October, 1996, the
contractor requested for time extension up to 31st January, 1997.
(xii). The condensate pumps were finally received only on
27th May, 1997 and their erection was completed by 15th June,
1997. Mechanical completion of the pumps was attained on 20th
June, 1997. As on 30th August, 1997, erection of all pumps was
completed. Inspection and hydrotesting was also completed.
The contractor-respondent was ready for commissioning
of the plant on availability of the DM water, processed condensate,
turbine condensate and cooling water from GAIL which was
however not available till August, 1999.
(xiii). GAIL accepted mechanical completion only on 15th
September, 1997. This was also confirmed in a meeting held on
31st March, 1998 between GAIL, EIL and the contractor. EIL also
issued a mechanical completion certificate in this regard.
(xiv). By the letters dated 7th October, 1997 and 31st October,
1997, it was confirmed that the essential condensate and the DM
water had not been made available for the final performance test
run. In this background, by a letter dated 12th November, 1997,
the respondent requested time extension.
(xv). It is noteworthy that even in the minutes dated 31st
March, 1998, it was recorded that pre-commissioning activities
stood concluded but the final performance test run was not
OMP No. 66/2004 & OMP No. 88/2004 page 130 of 145
possible for the reason that the condensate was not available.
(xvi). The contractor places strong reliance on a letter dated
19th September, 1998 from Shri V.N. Prasad the engineer in chief
of EIL addressed to GAIL recommending grant of final extension of
time to the contractor till completion without levy of liquidated
damages and financial implication to either party (award para 17).
The arbitrator has noted that the engineer in chief had inferred
that the delay attributable to the owner (GAIL) outways the
contractor's lapse of twelve months and recommended grant of
final extension of time to the contractor till completion without
levy of liquidated damages and financial implications to either
party.
(xvii). On 7th December, 1998, the contractor informed EIL
that according to GAIL, the plant was still not ready for the
Guarantee Test Run (GTR). The contractor offered to remain in
contract with GAIL periodically to find out when the plant was
ready for the guarantee test run. It was noted that as per the
contract, inputs were required to be made available within
eighteen months from the date of the mechanical completion.
Just as in OMP No. 66/2004, in terms of the contract in
the instant case, the contractor submitted its final bill for balance
5% payment of the contract on 9th January, 1999 pointing out that
the guarantee test run could not be conducted for the reason that
GAIL was not in a position to make available the inputs.
OMP No. 66/2004 & OMP No. 88/2004 page 131 of 145
(xviii). EIL informed GAIL by a letter dated 19th July, 1999
that for the reason that inputs were not available for the
performance guarantee test run despite mechanical completion on
15th September, 1997, the bank guarantee in terms of the contract
stood extended up to 14th June, 1999. As per the contract inputs
were required to be made available within 18 months from the
date of mechanical completion. Inasmuch as more than 21 months
had expired since without availability of the inputs, it was decided
to carry out the performance test run at available parameters.
(xix) On 20th May, 1999 and 28th June, 1999 the contractor
requested for return of the bank guarantee since more than 18
months had expired from 15th September, 1997, the date of
mechanical completion, and inputs were not available for GTR.
(xx). Since more than 18 months had expired from 15th
September, 1997 (date of the mechanical completion) without
availability of the inputs for the guarantee test run, the contractor
addressed a letter dated 21st July, 1999 seeking approval of the
final time extension for settlement of the final bill and release of
bank guarantee.
(xxi). No dispute to these dates was raised by GAIL. By its
communication of 21st July, 1999, GAIL advised the contractor to
carry out the guarantee test run in the first week of August, 1999.
(xxii). The contractor places strong reliance on the letter of
29th July, 1999 from the EIL at which advised GAIL to close the
OMP No. 66/2004 & OMP No. 88/2004 page 132 of 145
contract and to release the final payment as 21 months had
elapsed since the mechanical completion.
(xxiii). A seperate recommendation of the same date (29th July,
1999) was also issued whereby the engineer in charge of EIL
recommended final time extension of contract to the contractor
without imposition of liquidated damages.
(xxiv). It is pointed out that on 27th August, 1999, this
recommendation of the EIL for grant of final time extension till
completion of performance guarantee test run was put up to
GAIL's committee for approval which granted final time extension
up to 18th October, 1999 with imposition of liquidated damages for
twelve months.
(xxv). The final certificate of completion was issued on 13th
September, 1999 EIL noting that the mechanical completion stood
attained on 15th September, 1997 and performance guarantee test
run could be completed with available parameters only on 13th
September, 1999 due to non-availability of inputs from the
petitioner's side.
(xxvi). The guarantee test run was started on 13th September,
1999 and the service cycle was completed on 25th September,
1999. On supply of required inputs by the petitioner, the GTR was
again carried out on 22nd October, 1999. The minutes of the
meeting held on 22nd October, 1999 recorded successful
completion of the GTR which was confirmed in the minutes
OMP No. 66/2004 & OMP No. 88/2004 page 133 of 145
regarding the same. It is noteworthy that the GTR could thus be
conducted only twenty four months after mechanical completion.
(xxvii). In the above circumstances, vide its letter dated 23rd
October, 1999 the contractor sought relase of the bank guarantee
of Rs.30,30,865/- and final completion certificate. The contractor
enclosed copy of minutes of meeting dated 22nd October, 1999
recording successful completion of the GTR. It also reminded EIL
by its letter dated 5th January, 2000 to return the bank guarantee
and sought payment of the final bill for the completed work of
condensate polishing unit.
(xxviii). The Engineer in charge EIL addressed a letter dated
12th January, 2000 to GAIL calling upon it to condone the delay
and grant extension of time without liquidated damages pointing
out the aforenoticed reasons.
EIL pointed out that it had already forwarded the final
time extention recommendation for the works by its letter dated
20th September, 1998. The engineer in charge noted that the
major delays on account attributable to the contractor were due to
delay in delivery of the heat exchangers and the condensate pump
which were received on the site only in the month of May, 1997.
The delay in supply of the material was basically due to the delay
by the sub-vendors.
It was also pointed out that even though the unit was
mechanically completed on 15th September, 1997 due to non-
OMP No. 66/2004 & OMP No. 88/2004 page 134 of 145
availability of the condendate from GAIL, the Guarantee Test Run
could be conducted only in September, 1999 after a wait of twenty
four months.
In this background, EIL recommended that final time
extension be granted to the contractor without any financial
implication on either side and without levy of any liquidated
damages which already stood recommended in the final time
extension recommendation letter dated 20th September, 1998.
(xxix). It is noteworthy that the committee of GAIL which
examined the recommendation made by the Engineers India
Limited found that there was delay of eight months in handing
over of the site to the contractor which was not attributable to the
contractor. There was also no objection to EIL's finding of the
delay from 15th September, 1997 attributable to GAIL on account
of constraints of availability of DM water for testing. It was,
however, observed that the delay between 15th September, 1997 to
18th October, 1999 due to non-availability of the condensate for the
performance guarantee test did not effect the contractor for which
reason he was demobilised and directed to report with a notice of
fifteen days for the GTR and that the delay analysis should stop on
the date of the mechanical completion. Based on this, a view was
taken that LD was requuired to be imposed for a period of twelve
months and final time extension being granted subject to the
same by 18th October, 1999. The Committee also reviewed the
OMP No. 66/2004 & OMP No. 88/2004 page 135 of 145
matter in the light of EIL's letter of 12th January, 2000. It,
however, reiterated its earlier decision.
(xxx). In this background, the contractor raised claims by its
communication of 30th June, 2001 on account of non-payment of
the amounts to it; release of bank guarantee; loss and damages etc
and invoked the arbitration clause contained in the contract. As
there was no dispute resolution, the matter was referred to the
sole arbitration of Sh. T.S. Vijayaraghavan, the sole arbitrator.
The contractor filed its claims which were dated 25th February,
2002 to which GAIL responded on 21st June, 2002. The issues
raised before the arbitrator were identical to those raised before
the arbitrator to the award is the subject matter of challenge in
OMP No. 66/2004.
17. GAIL's contentions
17.1 The arbitrator has considered GAIL's counter that the
heat exchanger could have easily been sourced from other
approved vendors of EIL of ISI and discounts that contractor
approached all of them. GAIL allege that contractor submitted
diffective plans which delayed to amend, which is no ground to
alter the completion schedule and the plans were duly approved
on rectifications. GAIL termed all the reasons for delay given by
the contractor as irrelevant and immaterial. The arbitrator has
noted that GAIL did not deny that the layout was revised thrice or
that BEP was cleared only in September, 1995.
OMP No. 66/2004 & OMP No. 88/2004 page 136 of 145
17.2 GAIL has placed its stand in the reply which was filed
before the arbitrator to the claims raised by the contractor. In
reply to the claim no. 1, GAIL has raised the following plea :-
"The respondent is entitled to recover
compensation to the tune of 10% of total value of
the contract amounting to Rs.3,03,08,65.00 on
account of delay on the part of the claimant along
with sales tax of Rs.62,562/- income tax of
Rs.31,329/- recovery of non-supply of spare
amounting to Rs.1,50,800/- and recovery for issue
of material on chargeable basis amounting to
Rs.37,457/- Thus in all a sum of Rs.33,30,103/-
was recoverable by the respondent from the
claimant and as such even assuming that an
amount of Rs.15,86,310/- as per the final bill of
claimant was payable to claimant, after adjusting
the same, an amount of Rs.17,46,793/- was to be
received by the respondent from the claimant
which it failed to pay on account of which it is also
liable to pay interest thereon at such rate as may
be considered appropriate by the learned
arbitrator. The claimant is therefore not entitled
to recover any amount from the respondent."
18. Award
18.1 The arbitrator carefully considered the pleadings of the
parties and the several documents placed before him. The award
dated 20th November, 2003 was thereafter passed accepting some
of the claims in favour of the contractor. The claims included the
following :-
(i) Claim No. 1- for work done and not paid the claimed amount
to the extent of Rs. 15,63,310/-
(ii) Claim No. 2 - On account of release of security deposit.
(iii) Claim No. 3 - On account of delay in supply of inputs.
(iv) Claim No. 4 - On account of any lossess and damages for
OMP No. 66/2004 & OMP No. 88/2004 page 137 of 145
the reason that work could not be completed on stipulated date
and was mechanically completed on 15th September, 1997
(v) Claim No. 5 - On account of non-providing of inputs.
(vi) Claim No. 6 - On account of excess consumption of cement
(vii) Claim No. 7 - On account of interest
(viii) Claim No. 8 - On account of arbitration costs.
It is noteworthy that Sh. T.S. Vijayaraghavan the sole
arbitrator considered the rival claims arising out of this contract
as well. After detailed consideration, the arbitrator passed an
award dated 30th November, 2003 after a careful consideration of
the factual matrix and the contentions on the rival claims. The
claimant had set up seven claims before the arbitrator. However,
the arbitrator did not allow claim no. 4B, 4C and 5 at all. So far as
the other claims were concerned, partial amounts were awarded
by the arbitrator who has considered the contentions of GAIL and
the plea set up of its entitlement to liquidated damages. The
arbitrator found an amount of Rs.80,13,716/- payable to the
claimant inclusive of interest @ 18% up to 30th June, 2001 and at
12% pendente lite interest thereafter up to the date of the award.
18.2 Aggrieved thereby, the present objections have been
filed by GAIL on the very issues urged in support of OMP No.
66/2004. It is primarily urged that GAIL was entitled to liquidated
damages.
18.3 The parties have urged identical contentions before this
OMP No. 66/2004 & OMP No. 88/2004 page 138 of 145
court challenging the award on behalf of GAIL and supporting the
same on behalf of the contractor. Detailed reasoning on these
issues has been given while consideration of the identical
objections filed as OMP 66/2004 which apply on all fours to the
challenge riased by GAIL to the award dated 20th November, 2003
passed in this case as well.
18.4 It is an admitted position that this contract also
contained GCC A25 relating to compensation for extended stay;
GCC 45 allowing extension for time for owners default; GCC 60.2
providing for extension by the engineer in charge when found just
and reasonable.
18.5 From the above, it is evident that the parties had
agreed that the decision of the Engineer in charge with regard to
the applicability of compensation of delay was to be final and
binding on the contractor.
18.6 In the instant case, by the letter dated 29th July, 1999,
EIL had recommended closure of the contract and release of final
payment to the contractor. This was re-affirmed in the letter
dated 12th January, 2000. It was apparent that the person named
under the contract had rejected the GAIL's claim for entitlement to
liquidated damages in this case as well.
18.7 It is also apparent from the above that the GAIL has
asserted entitlement to adjustment of the amounts claimed by the
contractor from its claim of compensation equivalent to 10% of the
OMP No. 66/2004 & OMP No. 88/2004 page 139 of 145
total contract value amounting to Rs. 3,03,08,65.00 and other
amounts being a total of Rs.30,33,103/-
The engineer in chief of the Engineers India Ltd. who
was a competent authority under GCC 27 did not recommend or
levy liquidated damages upon the contractor. The reasoning
contained in paras 7.1 to 7.51 above squarely applies to the
objections of GAIL premised on its claim of entitlement to
liquidated damages.
18.8 The only difference between the facts which were
before this court while considering OMP 66/2004 and the present
case is the fact that the recommendations of EIL in the instant
case were placed before a committee of GAIL which recommended
imposition of liquidated damages. However it is to be borne in
mind that neither under the contract nor under any provision of
law was GAIL or any in house committee appointed by it the
competent authority to adjudicate upon the entitlement or
quantification of the liquidated damages. In the light of the
observations of the commitee which held its proceedings on 27th
August, 1999, GAIL was required to take legal steps for asserting
its claim and seeking adjudication thereof. Certainly, there was no
adjudication on the claim of liquidated damages by any court or
competent authority. There was no quantification of the amounts
claimed by GAIL. In this background, there can certainly not have
been any adjustment of the amount claimed by GAIL as liquidated
OMP No. 66/2004 & OMP No. 88/2004 page 140 of 145
damages.
18.9 The submission of non-arbitrability of the claim of
liquidated damages is also misconceived in view of the discussion
contained in paras 8.1 to 8.27 above.
18.10 In the instant case also, the contract was a composite
one and completion of the contract was to be achieved only after
the performance guarantee test of the plant was conducted. So
far as entitlement to damages for delay is concerned, it is apparent
that the same could not be consider stage wise and the matter has
to be considered as a composite whole. The testing,
commissioning and guarantee test run was an integral and
essential part of the contract. GAIL was certainly not ready with
its main project and could not supply the necessary inputs and
effluents for the performance of the test runs even after the
mechanical completion was over. This position stands admitted in
a host of communications placed on record.
Deteailed reasoning has been recorded in OMP No.
66/2004 holding that delay at any intermediate stage would not
entitle a party to a claim of liquidated damages. The same
reasoning squarely applies to GAIL's claim for liquidated damages
in the present case as well.
18.11 As noticed above, several terms of the contract and the
manner in which GAIL has proceeded in the matter show that the
parties never considered time as of the essence of the contract.
OMP No. 66/2004 & OMP No. 88/2004 page 141 of 145
The committee in its proceedings held on 27th August, 1999 also
notices that there was delay of eight months in handing over to the
site to the contractor which was not attributable to the contractor.
It is clearly evident that the time was not the essence of the
contract and never so treated by the parties. GAIL does not even
attempt to suggest any explanation for the delays in approval of
the designs etc as noticed above.
In any case, even if it were to be held that delay in
completion of the contract was attributable to the contractor, for
the detailed reasons recorded hereinabove, GAIL was bound to
show that some loss or damage had enured to it. As noticed
above, no such plea even has been set up let alone any material to
establish loss or damage having been suffered by GAIL has been
placed either before the arbitrator or in the present proceedings.
18.12 For the detailed reasons recorded while disposing of
OMP 66/2004 and in the facts and circumstances noticed
hereinabove, objections to the award dated 20th November, 2003
passed by the arbitrator to claim nos. 1 to 8 are wholly
misconceived and devoid of any merit.
19. Interest
19.1 So far as the award of interest is concerned, it is
noteworthy that the learned arbitrator has awarded interest at
18% up to 30th June, 2001 and 12% for the pendente lite period.
The issue of appropriate rate of interest has been considered by
OMP No. 66/2004 & OMP No. 88/2004 page 142 of 145
the Apex Court in a catena of judgments noticed above. The court
has held that having regard to the melt down and the prevalent
marked rates of the interest as well as a fact that a long period is
involved, it would not be fair to award interest at such rates.
Detailed reasons have been recorded in paras 12.1 to 12.11 above
on this issue.
Accordingly, I direct that the amounts found due and
payable by the arbitrator shall carry interest @ 12% up to 30th
June, 2001 and thereafter till the date of the award at the rate of
9%.
19.2 In view of the reasons recorded in paras 13.1 to 13.8, it
is held that post award, the contractor is entitled to interest at the
rate of 18% in terms of Section 31(7) from the date of the award
till payment.
19.3 In this case as well as the contractor has been
compelled to keep the bank guarantee alive at the instance of
GAIL. The contractor has placed the statement of the commission
paid to the bank upto 31st December, 2009 as well as the margin
money deposited. For the detailed reasons recorded in OMP No.
66/2004, it is held that the contractor shall be entitled to amount
expended on it as commission on the bank guarantee from the
date of filing of the present objection till the date of the present
judgment. The contractor shall inform GAIL of the amount of the
up to date commission enclosing a banker's certificate in this
OMP No. 66/2004 & OMP No. 88/2004 page 143 of 145
behalf. GAIL shall be liable to pay the amount of the commission
paid by the contractor to its banker for keeping the bank
guarantee alive.
19.4 So far as the margin money deposited with the bank for
issuance of the bank guarantee is concerned, this amount could
have been very well utilised by the contractor for commercial
purposes.
19.5 The contractor should be held entitled to simple interest
from GAIL on the amount which it was required to
maintain/deposit as margin money with the bank for issuance of
the bank guarantee. However, for the reason that the contractor
has been gratned interest at the rate as specified in Section 31(7)
for the post-award period, an order for payment of interest on the
margin money is not being made.
19.6 The contractor has pressed for the same costs as in
OMP No. 80/2004.
The contractor shall be entitled to litigation costs which
are quantified at Rs.75,000/-.
19.7 Before parting, I may point out that the figures relied
upon have been extracted from the award. In case of any
discrepancy or error, it is made clear that the dates, amounts and
figures stated in the award dated 20th November, 2003 shall
prevail over any contradictory date or figure which may appear
herein on account of a bonafide typing error.
OMP No. 66/2004 & OMP No. 88/2004 page 144 of 145
These petitions are disposed of in the above terms.
GITA MITTAL
(JUDGE)
April 30, 2010
kr
OMP No. 66/2004 & OMP No. 88/2004 page 145 of 145
