Full Judgment Text
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CASE NO.:
Appeal (civil) 1791 of 2002
PETITIONER:
GENERAL MANAGER NORTHERN RAILWAYS & ANR.
Vs.
RESPONDENT:
SARVESH CHOPRA
DATE OF JUDGMENT: 01/03/2002
BENCH:
R.C. Lohati & Brijesh Kumar
JUDGMENT:
R.C. Lahoti, J.
The respondent was granted by the appellants work of
construction on bored piles 500 mm dia by cast in Situ method for
widening and raising of Pul Mithai (S). A contract was entered into
between the parties on 27.4.1985. The contract is subject to the
General conditions of the contract of Railways read with Special
Conditions. Disputes arose between the parties and the respondent
moved a petition under Section 20 of the Arbitration Act, 1940
praying for the arbitration agreement being filed in the Court and six
claims set out in the petition being referred to the Arbitrator for
settlement. The learned Single Judge of the High Court of Delhi
(Original Side) directed two claims to be referred but as to claims
numbers 3 to 6 formed an opinion that the claims being ’excepted
matters’ within the meaning of Clause 63 of General Conditions of
Contract were not liable to be referred to arbitration. An intra-Court
Appeal preferred by respondent has been allowed and the four claims
have also been directed to be referred by the Division Bench to
arbitrator on forming an opinion that they were not covered by
’excepted matters’. The appellants have filed this petition seeking
special leave to appeal against the decision of Division Bench.
Leave granted.
Clause 63 of the General Conditions of the Contract provides as
under:-
"Matters finally determined by the Railway All
disputes and differences of any kind whatsoever
arising out of or in connection with the contract,
whether during the progress of the work or after its
completion and whether before or after the
determination of the contract, shall be referred by
the contractor to the Railway and the Railway shall
within a reasonable time after receipt of the
Contractor’s representation make and notify
decisions on all matters referred to by the
contractor in writing provided that matters for
which provision has been made in clauses 18,
22(5), 39, 45(a), 55, 55-A(5), 61(2) and 62(1)
(XII)(B)(e)(b) of the General conditions of
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Contract or in any clauses of the special conditions
of the contract shall be deemed as excepted matters
and decisions thereon shall be final and binding on
the contractor provided further that excepted
matters shall stand specifically excluded from the
purview of the arbitration clause and not be
referred to arbitration."
Clauses 9.2., 11.3 and 21.5 of Special Conditions of contract
are as under:-
"9.2. No material price variation or wages
escalation on any account whatsoever and
compensation for "Force Majaure" etc. shall be
payable under this contract.
11.3. No claim whatsoever will be entertained by
the Railway on a/c of any delay or hold up of the
works arising out of delay in supply of drawings,
changes, modifications, alterations, additions,
omissions, omissions in the site layout plans or
detailed drawings or designs and or late supply of
such materials as are required to be arranged by
the Railway or due to any other factor on Railway
Accounts.
21.5. No claim for idle labour and/or idle
machinery etc. on any account will be entertained.
Similarly no claim shall be entertained for business
loss or any such loss."
Claims numbers 3 to 6 whereon reference is sought for
by the respondent to the Arbitrator are as under:-
3. There occurred tremendous increase in cost of
building materials. 52 Nos. of piles were bored
after the expiry of stipulated completion period
and particularly when the prices were too high.
Additional cost incurred @ Rs.250/- for these 42
Nos. of piles may please be paid. This has also
been verified by your staff at site, Rs.250 x 42
Rs.10500/-.
4. Piling rig with diesel driven wench, mixture,
machine, driving pipe, wheel barrows, hoppers and
other tools and plants remained idle at site for 24
months, i.e. for 75 days. The entire machinery was
procured from the market on hire charges. Rent
was paid @Rs.1070/- per day for this machinery.
Hire charges amounting to Rs.80,250/- (1070x75)
may please be reimbursed.
5. The site was not made available for one month.
Changes took place and decisions were delayed.
The Work which was required to be completed
within 3½ months but dragged on for additional
period of 6 months. Establishment period of 6
months at a cost of Rs.10,000/- per month. These
losses may please be paid. (Rs.10,000/-x6
Rs.60,000).
6. The work of Rs.5,95,000/- was required to be
completed within 3½ months meaning thereby,
monthly progress would not be less than
Rs.1,75,000/-. As against the entire work could be
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completed within a period of 9½ months i.e.
Rs.75,000/- per month. The losses sustained for
less output may be compensated and this comes to
Rs.40,000/-."
According to the appellants, claims numbers 3, 4 and 5 are
covered respectively by Clauses 9.2, 21.5 and 11.3. Claim No.6 is
covered by Clause 11.3 of Special Conditions. On this there does not
appear to be any serious controversy. The core issue is the
interpretation of Clause 63 of the General Conditions and Section 20
of the Arbitration Act, 1940.
A bare reading of Clause 63 shows that it consists of three
parts. Firstly, it is an Arbitration Agreement requiring all disputes and
differences of any kind whatsoever arising out of or in connection
with the contract to be referred for adjudication by arbitration, by the
Railways, on a demand being made by the contractor through a
representation in that regard. Secondly, this agreement is qualified by
a proviso which deals with ’excepted matters’. ’Excepted matters’ are
divided into two categories: (i) matters for which provision has been
made in specified clauses of the General Conditions, and (ii) matters
covered by any clauses of the Special Conditions of the Contract.
Thirdly, the third part of the clause is a further proviso, having an
overriding effect on the earlier parts of the clause, that all ’excepted
matters’ shall stand specifically excluded from the purview of the
Arbitration Clause and hence shall not be referred to arbitration. The
source of controversy is the expression "matters for which provision
has been made..in any clauses of the Special
Conditions of the contract shall be deemed as ’excepted matters’ and
decisions thereon shall be final and binding on the contractor." It is
submitted by the learned counsel for the respondent that to qualify as
’excepted matters’ not only the relevant clause must find mention in
that part of the contract which deals with special conditions but should
also provide for a decision by an authority of the Railways by way of
an ’in-house remedy’ which decision shall be final and binding on the
contractor. In other words, if a matter is covered by any of the clauses
in the Special Conditions of the contract but no remedy is provided by
way of decision by an authority of the Railways then that matter shall
not be an ’excepted matter’. The learned counsel supported his
submission by reading out a few clauses of General Conditions and
Special Conditions. For example, vide Clause 18 of General
Conditions any question or dispute as to the commission of any
offence or compensation payable to the Railway shall be settled by the
General Manager of the Railway in such manner as he shall consider
fit and sufficient and his decision shall be final and conclusive. Vide
Clause 2.4.2.(b) of Special Conditions a claim for compensation
arising on account of dissolution of contractor’s firm is to be decided
by Chief Engineer (Construction) of the Railway and his decision in
the matter shall be final and binding on the contractor. Vide clause
12.1.2. of Special Conditions a dispute whether the cement stored in
the godown of the contractor is fit for the work is to be decided by the
Engineer of Railways and his decision shall be final and binding on
the contractor. The learned counsel submitted that so long as the
remedy of decision by some one though he may be an authority of the
Railways is not provided for, the contractor’s claim cannot be left in
lurch by including the same in ’excepted matters’. We find it difficult
to agree.
In our opinion those claims which are covered by several
clauses of the Special Conditions of the Contract can be categorized
into two. One category is of such claims which are just not leviable or
entertainable. Clauses 9.2., 11.3 and 21.5 of Special Conditions are
illustrative of such claims. Each of these clauses provides for such
claims being not capable of being raised or adjudged by employing
such phraseology as "shall not be payable", "no claim whatsoever will
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be entertained by the Railway", or "no claim will/shall be
entertained". These are ’no claim’, ’no damage’, or ’no liability’
clauses. The other category of claims is where the dispute or
difference has to determined by an authority of Railways as provided
in the relevant clause. In such other category fall such claims as were
read out by the learned counsel for the respondent by way of
illustration from several clauses of the contract such as General
Conditions Clause 18 and Special Conditions Clause 2.4.2.(b) and
12.1.2. The first category is an ’excepted matter’ because the claim as
per terms and conditions of the contract is simply not entertainable;
the second category of claims falls within ’excepted matters’ because
the claim is liable to be adjudicated upon by an authority of the
Railways whose decision the parties have, under the contract, agreed
to treat as final and binding and hence not arbitrable. The expression
"and decision thereon shall be final and binding on the contractor" as
occurring in Clause 63 refers to the second category of ’excepted
matters’.
The learned counsel for the respondent placed reliance on
Vishwanath Sood Vs. Union of India & Anr., (1989) 1 SCC 657, and
Food Corporation of India Vs. Sreekanth Transport, (1999) 4 SCC
491 to strengthen his submission that an ’excepted matter’ should be
one covered by a clause which provides for a departmental remedy
and is not arbitrable for that reason. We have carefully perused both
the decisions. Vishwanath Sood’s case is one wherein Clause 2 of
the contract envisaged determination of the amount of compensation
for the delay in the execution of work only by the Superintending
Engineer whose decision in writing shall be final. In Food
Corporation of India’s case also the relevant clause provided for the
decision of Senior Officer being final and binding between the parties.
Both were considered to be ’excepted matters’. A decision of this
Court is an authority for the proposition which it decides and not for
what it has not decided or had no occasion to express an opinion on.
The two decisions relied on by the learned counsel for the respondent
hold a Clause providing a departmental or in-house remedy and
attaching finality to decision therein to be an ’excepted matter’
because such were the Clauses in the contracts which came up for the
consideration of this Court. Those decisions cannot be read as
holding nor can be relied on as an authority for the proposition by
reading them in a negative way that if a departmental remedy for
settlement of claim was not provided then the claim would cease to be
an ’excepted matter’ and such should be read as the decision of this
Court.
It was next submitted by the learned counsel for the respondent
that if this Court was not inclined to agree with the submission of the
learned counsel for the respondent and the interpretation sought to be
placed by him on the meaning of ’excepted matter’ then whether or
not the claim raised by the contractor is an ’excepted matter’ should
be left to be determined by the arbitrator. It was submitted by him
that while dealing with a petition under Section 20 of the Arbitration
Act, 1940 the Court should order the agreement to be filed and make
an order of reference to the arbitrator appointed by the parties leaving
it open for the arbitrator to adjudicate whether a claim should be held
to be not entertainable or awardable being an ’excepted matter’. With
this submission too we find it difficult to agree. While dealing with a
petition under Section 20, the Court has to examine: (i) whether there
is an arbitration agreement between the parties, (ii) whether the
difference which has arisen is one to which the arbitration agreement
applies, and (iii) whether there is a cause, shown to be sufficient, to
decline an order of reference to the arbitrator. The word ’agreement’
finding place in the expression ’where a difference has arisen to which
an agreement applies’, in sub-section(1) of Section 20 means
’arbitration agreement’. The reference to arbitrator on a petition filed
under Section 20 is not a function to be discharged mechanically or
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ministerially by the Court; it is a consequence of judicial
determination, the Court having applied its mind to the requirements
of Section 20 and formed an opinion, that the difference sought to be
referred to arbitral adjudication is one to which the arbitration
agreement applies. In the case of Food Corporation of India (supra),
relied on by the learned counsel for the respondent, it has been held as
the consistent view of this Court that in the event of the claims arising
within the ambit of ’excepted matters’, the question of assumption of
jurisdiction by any arbitrator either with or without the intervention of
the Court would not arise. In Union of India Vs. Popular Builders,
Calcutta (2000) 8 SCC 1, and Steel Authority of India Ltd. Vs.
J.C. Budharaja, Government and Mining Contractor - (1999) 8
SCC 122, Ch. Ramlinga Reddy Vs. Superintending Engineer & Anr.
(1994) 5 Scale 12 (pr.18), M/s Alopi Parshad Vs. Union of India
(1960) 2 SCR 793 at page 804 this Court has unequivocally expressed
that an award by an arbitrator over a claim which was not arbitrable
as per the terms of contract entered into between the parties would be
liable to be set aside. In M/s. Prabartak Commercial Corporation
Ltd. Vs. The Chief Administrator Dandakaranya Project & Anr.,
(1991) 1 SCC 498, a claim covered by ’excepted matter’ was referred
to arbitrator in spite of such reference having been objected to and the
arbitrator gave an award. This court held that the arbitrator had no
jurisdiction in the matter and that the reference of the dispute to the
arbitrator was invalid and the entire proceedings before the arbitrator
including the awards made by him were null and void.
In Continental Construction Co. Ltd. Vs. State of Madhya
Pradesh, (1988) 3 SCC 82, the contract provided for the work being
completed by the contractor in spite of rise in prices of material and
labour charges at the rates stipulated in the contract. It was held that
on the contractor having completed the work, it was not open to him
to claim extra cost towards rise in prices of material and labour. An
award given by the arbitrator for extra claim given by the contractor
was held to be vitiated on the ground of misconduct of arbitrator.
There were specific clauses in the agreement which barred
consideration of extra claims in the event of price escalation.
In Ch. Ramalinga Reddy Vs. Superintending Engineer &
Anr., 1994 (5) Scale 67, claim was allowed by arbitrator for "payment
of extra rates for work done beyond agreement time at schedule of
rate prevailing at the time of execution". Clause 59 of A.P. Standard
Specifications, which applied to the contract between the parties,
stated that no claim for compensation on account of delays or
hindrances to the work from any cause would lie except as therein
defined. The claim was found to be outside the defined exceptions.
When extensions of time were granted to the appellant to complete the
work the respondents made it clear that no claim for compensation
would lie. For both these reasons, this Court held that it was
impermissible to award such claim because the arbitrator was required
to decide the claims referred to him having regard to the contract
between the parties and, therefore, his jurisdiction was limited by the
terms of the contract.
A Division Bench decision of High Court of Andhra Pradesh in
State of A.P. Vs. M/s. Associated Engineering Enterprises,
Hyderabad, AIR 1990 A.P. 294, is of relevance. Jeevan Reddy, J. (as
His Lordship then was), speaking for the Division Bench, held that
where clause 59 of the standard terms and condition of the contract
provided that neither party to the contract shall claim compensation
"on account of delays or hindrances of work from any cause
whatever", an award given by an arbitrator ignoring such express
terms of the contract was bad. We find ourselves in agreement with
the view so taken.
In Hudson’s Building and Engineering Contracts (11th Edition,
pp.1098-9) there is reference to ’no damage’ clauses, an American
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expression, used for describing a type of clause which classically
grants extensions of time for completion, for variously defined
’delays’ including some for which, as breaches of contract on his part,
the owner would prima facie be contractually responsible, but then
proceeds to provide that the extension of time so granted is to be the
only right or remedy of the contractor and, whether expressly or by
implication, that damages or compensation are not to be recoverable
therefor. These ’no damage’ clauses appear to have been primarily
designed to protect the owner from late start or co-ordination claims
due to other contractor delays which would otherwise arise. Such
clauses originated in Federal Government contracts but are now
adopted by private owners and expanded to cover wider categories of
breaches of contract by the owners in situations which it would be
difficult to regard as other than oppressive and unreasonable.
American jurisprudence developed so as to avoid the effect of such
clauses and permitted the contractor to claim in four situations,
namely, (i) where the delay is of a different kind from that
contemplated by the clause, including extreme delay, (ii) where the
delay amounts to abandonment, (iii) where the delay is a result of
positive acts of interference by the owner, and (iv) bad faith. The first
of the said four exceptions has received considerable support from
judicial pronouncements in England and Commonwealth. Not
dissimilar principles have enabled some commonwealth courts to
avoid the effect of ’no damage’ clauses. [See Hudson, ibid].
In our country question of delay in performance of contract is
governed by Sections 55 and 56 of the Indian Contract Act, 1872. If
there is an abnormal rise in prices of material and labour, it may
frustrate the contract and then the innocent party need not perform the
contract. So also, if time is of the essence of the contract, failure of
the employer to perform a mutual obligation would enable the
contractor to avoid the contract as the contract becomes voidable at
his option. Where time is "of the essence" of an obligation, Chitty on
Contracts (Twenty-Eighth Edition, 1999, at p.1106, para 22-015)
states "a failure to perform by the stipulated time will entitle the
innocent party to (a) terminate performance of the contract and
thereby put an end to all the primary obligations of both parties
remaining unperformed; and (b) claim damages from the contract-
breaker on the basis that he has committed a fundamental breach of
the contract ("a breach going to the root of the contract") depriving
the innocent party of the benefit of the contract ("damages for loss of
the whole transaction")." If, instead of avoiding the contract, the
contractor accepts the belated performance of reciprocal obligation
on the part of the employer, the innocent party, i.e. the contractor,
cannot claim compensation for any loss occasioned by the non-
performance of the reciprocal promise by the employer at the time
agreed, "unless, at the time of such acceptance, he gives notice to the
promisor of his intention to do so". Thus, it appears that under the
Indian law, in spite of there being a contract between the parties
whereunder the contractor has undertaken not to make any claim for
delay in performance of the contract occasioned by an act of the
employer, still a claim would be entertainable in one of the following
situations: (i) if the contractor repudiates the contract exercising his
right to do so under Section 55 of the Contract Act, (ii) the employer
gives an extension of time either by entering into supplemental
agreement or by making it clear that escalation of rates or
compensation for delay would be permissible, (iii) if the contractor
makes it clear that escalation of rates or compensation for delay shall
have to be made by the employer and the employer accepts
performance by the contractor in spite of delay and such notice by the
contractor putting the employer on terms.
Thus, it may be open to prefer a claim touching an apparently
excepted matter subject to a clear case having been made out for
excepting or excluding the claim from within the four corners of
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"excepted matters". While dealing with a petition under Section 20 of
the Arbitration Act, the Court will look at the nature of the claim as
preferred and decide whether it falls within the category of "excepted
matters". If so, the claim preferred would be a difference to which the
arbitration agreement does not apply, and therefore, the Court shall
not refer the same to the arbitrator. On the pleading, the applicant
may succeed in making out a case for reference, still the arbitrator
may, on the material produced before him, arrive at a finding that the
claim was covered by "excepted matters". The claim shall have to be
disallowed. If the arbitrator allows a claim covered by an excepted
matter, the award would not be legal merely because the claim was
referred by the Court to arbitration. The award would be liable to be
set aside on the ground of error apparent on the face of the award or as
vitiated by legal misconduct of the arbitrator. Russell on Arbitration
(Twenty-First Edition, 1997) states vide para 1-027 (at p.15)
"Arbitrability. The issue of arbitrability can arise at three stages in an
arbitration; first, on an application to stay the arbitration, when the
opposing party claims that the tribunal lacks the authority to
determine a dispute because it is not arbitrable, second, in the course
of the arbitral proceedings on the hearing of an objection that the
tribunal lacks substantive jurisdiction and third, on an application to
challenge the award or to oppose its enforcement. The New York
Convention, for example, refers to non-arbitrability as a ground for a
court refusing to recognize and enforce an award."
To sum up, our conclusion are: (i) while deciding a petition
under Section 20 of the Arbitration Act, 1940, the Court is obliged to
examine whether a difference which is sought to be referred to
arbitration is one to which the arbitration agreement applies. If it is a
matter excepted from the arbitration agreement, the Court shall be
justified in withholding the reference, (ii) to be an excepted matter it
is not necessary that a departmental or ’in-house’ remedy for
settlement of claim must be provided by the contract. Merely for the
absence of provision for in-house settlement of the claim, the claim
does not cease to be an excepted matter, (iii) an issue as to
arbitrability of claim is available for determination at all the three
stages - while making reference to arbitration, in the course of arbitral
proceedings and while making the award a rule of the Court.
In the case before us, the claims in question as preferred are
clearly covered by "excepted matters". The statement of claims, as
set out in the petition under Section 20 of the Arbitration Act, does not
even prima facie suggest why such claims are to be taken out of the
category of "excepted matters" and referred to arbitration. It would be
an exercise in futility to refer for adjudication by the arbitrator a claim
though not arbitrable, and thereafter, set aside the award if the
arbitrator chooses to allow such claim. The High Court was, in our
opinion, not right in directing the said four claims to be referred to
arbitration.
After the hearing was concluded the learned counsel for the
respondent cited a few decisions by making a mention, wherein the
view taken is that ’interpretation of contract’ is a matter for arbitrator
to decide and the Court cannot substitute its own decision in place of
the decision of the arbitrator. We do not think that the cited cases
have any relevance for deciding the question arising for consideration
in this appeal. None of the cases is an authority for the proposition
that the question whether a claim is an ’excepted matter’ or not must
be left to be decided by the arbitrator only and not adjudicated upon
by the Court while disposing of a petition under Section 20 of the
Arbitration Act, 1940. We cannot subscribe to the view that
interpretation of arbitration clause itself can be or should be left to be
determined by arbitrator and such determination cannot be done by
Court at any stage.
For the foregoing reasons we are of the opinion that the view of
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the ’excepted matters’ taken by the Division Bench of the High Court
cannot be sustained. The appeal is allowed, the impugned decision of
the Division Bench of the High Court is set aside and that of the
learned Single Judge is restored. No order as to the costs.
J.
( R.C. LAHOTI )
J.
(BRIJESH KUMAR)
March 1, 2002