UNION OF INDIA vs. NAGARJUNA CONSTRUCTION CO. LTD.

* IN THE HIGH COURT OF DELHI AT NEW DELHI

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% Judgment reserved on: 26 July, 2016
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Judgment pronounced on: 29 July, 2016

+ O.M.P. 218/2015 & I.A. No.13089/2015
UNION OF INDIA ..... Petitioner
Through Mr.Anirudh Mehrotra, Adv. for
Mr.Jagdeep Sharma, Adv.

versus

NAGARJUNA CONSTRUCTION CO. LTD. ..... Respondent
Through Ms.Priya Kumar, Adv. with
Mr.Adhish Srivastava and
Ms.Tanya Tiwari, Advs.

CORAM:
HON'BLE MR.JUSTICE MANMOHAN SINGH

MANMOHAN SINGH, J.

1. The petitioner, Union of India has filed the petition under
Section 34 of the Arbitration and Conciliation Act, 1996 (hereinafter
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referred to as the “Act”) for setting aside award dated 8
September, 2014 passed by sole Arbitrator.
2. The brief facts of the case as per the petition are as under:
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i) On 26 March, 2003, an Agreement bearing No: 41/EE/PWD-
27/2002-2003 (hereinafter referred to as the ‘agreement’) with
respect to the construction of District Court Complex at Sector
16, Dwarka, New Delhi (hereinafter referred to as the 'work')
was entered between the petitioner and the respondent. As per
the agreement, the date of commencement of work was decided
OMP No.218/2015 Page 1 of 22



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by the parties to be 5 April, 2003 and the stipulated date of
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completion of work was 4 October, 2005.
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ii) On 26 March, 2003 an award letter No.54(834)/PWD-27/A-
II/831 was issued by the petitioner wherein the respondent was
awarded the work. In the said letter, the petitioner had made it
clear that the time for completion of the work is 30 months.
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iii) On 26 July, 2003 a letter was issued by the petitioner stating
that it is evident from the progress of work that the respondent
are not able to achieve the required progress as per the
agreement and hence, they were requested to accelerate the
progress of work.
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iv) On 23 August, 2004, another letter was issued by the
petitioner stating that the progress of work was very slow due
to the insufficient resources, specifically shortage of shuttering
material and labour. The petitioner again requested the
respondent to take effective steps to increase the resources so
that the work could be completed as per the agreement. It was
further informed by the petitioner to the respondent that any
delay in completing the work will be dealt as per the relevant
clause of the agreement at the appropriate time.
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v) On 28 July, 2004, the petitioner issued another letter stating
that the progress of work was slow and that the structural work
could not be completed by the stipulated 18 months period for
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completion of structural work i.e. 4 October, 2005. For this
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reason, vide letter dated 28 July, 2004 the petitioner issued a
show cause notice to the respondent under Clause 2 of the
agreement which empowered the Superintending Engineer to
levy penalty on the respondent.
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vi) On 6 February, 2006, the petitioner issued another letter
inviting the attention of the respondent to the slow progress of
the work and constant slippage of the targets given by the
petitioner from time to time.
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vii) On 22 March, 2006 the above-mentioned show cause notice
was issued by the petitioner to the respondent with respect to
levy of compensation vide Clause 2 of the agreement. The
petitioner issued this show cause notice because it appeared
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that the respondent would not complete the work by 31 March,
2006 [which is the provisional extension time granted to the
respondent] due to non-deployment of adequate resources at
the site of work.
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viii) On 13 June, 2006, the respondent submitted analysis of rates
with regard to ‘coffer shuttering’ to the petitioner.
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ix) On 9 March, 2007 the petitioner informed the respondent by
issuing a letter that work was delayed due to non-deployment
of resources and manpower by the respondent from time to
time. The petitioner had mentioned it to the respondent that
work awarded to other agencies was also delayed because of
non-completion of related work by the respondent.
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x) On 11 September, 2007 the petitioner issued another letter
informing the respondent that the work with respect to the
strengthening of staircase railing and treatment of coffer
surface was abysmally slow and that progress of other works
was not satisfactory.
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xi) On 21 April, 2008 the petitioner issued another letter informing
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the respondent that the petitioner had inspected the site on 21
April, 2008 and no improvement was found in the deployment
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of adequate resources to complete the work as per the targets.
In the said letter, the petitioner had also stated that they
contacted the respondent on telephone from site and informed
that the matter of deployment of sufficient manpower and
resources to complete the work as per target was not given the
desired seriousness and only assurances were given to the
various senior officers of the petitioner but were not
implemented at the site.
xii) In September 2008, the respondent had claimed that the work
awarded i.e. Construction of District Court Complex at Sector
16, Dwarka, New Delhi has been completed. However, the work
awarded was not complete and the respondent had in fact
abandoned the work.
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xiii) On 13 April, 2009 the respondent invoked the provisions of
clause 25 of the agreement for appointment of Arbitrator in
order to settle the disputes arising out of the work.
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xiv) On 17 March, 2010 the petitioner had issued a show cause
notice to the respondent under Clause 2 of the agreement
levying the compensation for delay in execution of the work
because the respondent had not completed and abandoned the
work although the petitioner had extended the time for
completion of the work. The same was replied by the
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respondent on 30 March, 2010.
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xv) On 19 May, 2010 the Arbitrator entered upon reference in the
dispute between the petitioner and the respondent in order to
adjudicate the disputes between the parties.
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3. On 21 April, 2011, the respondent had filed the statement of
claims before the Arbitral Tribunal with respect to claim Nos.1 to 10.
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4. On 8 September, 2014, the arbitral award was published by
the Arbitral Tribunal. The claims and counter claims that were
decided and the amount that was awarded by the said award is as
follows :

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5. The petitioner has challenged the award dated 8 September,
2014 passed by the sole Arbitrator under two heads namely, that the
decision of the Arbitrator in allowing the claim No.2 as well as in
deciding the claim No. 11, counter claim No. 1 and additional claim
against the petitioner on the ground that the levy of compensation
as per clause 2 of the agreement by the petitioner was not justified.
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However, the counsel has restricted his argument on claim No.11
only.
6. The arguments were addressed by the counsel for the
petitioner on claim No.11 by stating that clause 2 of the agreement
specifies that in case the respondent fails to maintain the required
progress or to complete the progress or there is a delay, the
petitioner would be entitled, to recover the amount as per the rates
stipulated under clause 2, which specifies that the amount of
compensation is to be adjusted or set off against any sum payable to
the contractor under this or any other contract with the government.
It is submitted that firstly, the term "adjusted or set off" against any
sum payable permits the petitioner to adjust the amount of
compensation by invoking the "performance guarantee" and
"guarantee bond". Therefore, the Arbitrator has erred in deciding the
claim No.11 against the petitioner.
7. Secondly, it is submitted that clause 2 provides that the
decision of Superintending Engineer would be final and binding as
per the arbitration clause i.e.clause 25 which states that the matters
where the decision of the Superintending Engineer would be final and
binding would be outside the purview of the arbitration clause.
Therefore, the decision of the Superintending Engineer under clause
2 was a considered decision and an excepted matter which could not
have been arbitrated upon.
8. It is also argued on behalf of the petitioner that the Arbitrator
also erred and did not appreciate that the respondent in the present
case had abandoned the work and was put to the notice by way of
letters and show cause notices to explain the reasons for not
completing the work in time and without deficiencies. The letter
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dated 26 July, 2003, letter dated 28 July, 2004, show cause notice
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dated 22 March, 2006, letter dated 9 March, 2007, letter dated
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11 September 2007 and show cause notice dated 17 March, 2010
would show that the decision of the Superintending Engineer was
taken on the basis of material placed on record and also that the
respondent had been negligent in executing the work. Therefore, the
Arbitrator had erred in deciding the issue against the petitioner on
the ground that the petitioner did not raise the issue of invoking
clause 2 for 2½ years. The letters on record would show that the
petitioner did not waive off the right under clause 2 at any point of
time.
9. It is also submitted that the petitioner had specifically pleaded
along with the documents that the respondent had abandoned the
work and the competent authority as per the agreement had taken a
considered view to levy the compensation as per clause 2, but the
said documents were not considered by the Arbitrator. Therefore,
non-consideration of the documents on record amounted to violation
of the principles of natural justice against the public policy and
therefore, the award ought to be set aside under Section 34 of the
Act.
10. Notice in the objection petition was not issued, as both parties
agreed that the objections be decided at the admission stage itself.
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11. Admittedly at the time of hearing, the petitioner on 19 July,
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2016 has restricted its challenge to the Award dated 8 September,
2014 only in respect to Claim No.11.
12. The sole Arbitrator in the award in respect of Claim No. 11,
awarded the amount appropriated by the petitioner by encashment
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of the Performance Bank Guarantee of the respondent holding the
encashment by the petitioner to be untenable as per law.
13. The Bank Guarantees had been encashed by the petitioner in
order to recover the compensation levied by the Superintending
Engineer under Clause 2 of the Agreement.
14. The contention of the petitioner is that the Clause 2 of the
Agreement which deals with the compensation for delay if the
contractor fails to maintain the required progress read along with
Clause 25 makes the determination of the Superintending Engineer
final and binding and therefore, the Arbitral Tribunal could not have
examined this issue.
15. The learned Counsel for the petitioner has pressed the
challenge only on the ground that Claim No.11 was not arbitrable on
account of Clause 2 read with Clause 25 of the Agreement.
16. In view of the submissions made by the parties, it is to be
examined as whether the award in question is sustainable or not.
The Arbitral Tribunal after recording the facts and having gone
through the statement of claim has arrived at the finding in favour of
the respondent, the reasons for which are given in para 11 of the
award, the same are read as under:

“11.0 Claim
No.11:
On account of bank
guarantee encashment
Rs.2,78,57,480
& Rs.15,00,000.

11.1 The claimant in the statement of claim dated
11.08.2011 has contended that the encashment of bank
guarantees has not been done as per the terms of the
guarantees and that it was a mechanical exercise with
the sole aim of unjust enrichment. By citing a number of
reasons, the claimant has considered the action of the
respondent to invoke bank guarantees as unwarranted,
illegal and arbitrary.

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11.2 In the statement of defence filed vide letter dated
11.08.2011, the respondent has argued that the work
was abandoned by the claimant on 15.07.2009 and that
the respondent was left with no alternative but to take
action under clause 2 of the agreement and the bank
guarantees were encashed to recover the amount of
compensation of Rs.5,57,14,960 levied as per clause 2
of the agreement.

11.3 In accordance with the provisions of Special
Condition No. 2 at page 119 of the agreement, the
claimant submitted 'Performance Guarantee' of
Rs.2,78,57,480 of Andhra Bank . The claimant also
furnished a 'Guarantee Bond' of Rs.15,00,000 of
Allahabad bank which was required as per the provisions
of SI. No. 1.9 at page 150 of the agreement relating to
the 'Specifications for Anodized Aluminum Works'.

11.4 It is as undisputed fact that the 'Performance
Guarantee' and 'Guarantee Bond' referred in para above
were encashed by the respondent and the amounts
received from the banks have been shown as adjusted in
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57 R/A Bill and 58 & Final bill prepared by the
respondent.

11.5 It is on record as per the documents filed by the
parties vide letters dated 11.08.2014 and 13.08.2014
that the banks were requested by the respondent vide
letters dated 30.04.2010 to encash the bank guarantees
since an amount of Rs.5,57,14,961 had allegedly
become recoverable from the claimant on account of
compensation levied by the competent authority under
clause 2 of the agreement. Thus it is not the case of the
respondent that 'Performance Guarantee' of
Rs.2,78,57,480 was encashed due to 'non-performance'
of the claimant and 'Guarantee Bond' of Rs.15,00,000
was encashed by the respondent on account of any
deficiency observed in the 'Aluminum Work'.

11.6 The action of the respondent to levy compensation
amounting to Rs.5,57,14,961 under clause 2 of the
agreement has not been upheld as per para 13.10 infra.
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Therefore, the respondent is not entitled to retain the
encashed amounts of the 'Performance Guarantee' and'
Guarantee Bond' on account of the reasons stated in
para above. Thus an amount of Rs.2,93,57,480
[=27857480 +1500000] is payable to the claimant.
Accordingly, a sum of Rs.2,93,57,480 is awarded”.

17. The scope of Section 34 of the Act provides for limited
jurisdiction restricted to the grounds mentioned therein. It is not an
appeal proceeding against the award. Neither is it an examination of
the correctness of the award but rather it checks whether there exist
circumstances which would justify annulment of proceedings.
18. The Supreme Court has further expounded the said scope in
the case of Markfed Vanaspati and Allied Industries v. Union of
India, (2007) 7 SCC 679, wherein it was observed as under:
“17. Arbitration is a mechanism or a method of resolution of
disputes that unlike court takes place in private, pursuant to
agreement between the parties. The parties agree to be
bound by the decision rendered by a chosen arbitrator after
giving hearing. The endeavor of the court should be to
honour and support the award as far as possible”.

The limited scope of interference under Section 34 of the Act
has also been succinctly elucidated by a Single Judge of this Court in
the case of Bhagwati Contractors v. Union of India (UOI) and
Anr. 2009 Indlaw Del 3647 wherein it was held as under:
“7. Arbitration is intended to be a faster and less
expensive alternative to the courts. If this is one's
motivation and expectation, then the finality of the
arbitral award is very important. The remedy provided in
Section 34 against an award is in no sense an appeal.
The legislative intent in Section 34 was to make the
result of the annulment procedure prescribed therein
potentially different from that in an appeal. In appeal,
the decision under review not only may be confirmed,
but may also be modified. In annulment, on the other
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hand the decision under review only may be invalidated
in whole or in part or be left to stand if the plea for
annulment is rejected. Annulment operates to negate a
decision, in whole or in part, thereby depriving the
portion negated of legal force and returning the parties,
as to that portion, to their original litigating positions.
Annulment can void, while appeal can modify. Section 34
is found to provide for annulment only on the grounds
affecting legitimacy of the process of decision as distinct
from substantive correctness of the contents of the
decision. A remedy of appeal focuses upon both
legitimacy of the process of decision and the substantive
correctness of the decision. Annulment, in the case of
arbitration focuses not on the correctness of decision but
rather more narrowly considers whether, regardless of
errors in application of law or determination of facts, the
decision resulted from a legitimate process.”
19. It is settled law that re-appreciation of evidence considered
and accepted by the Arbitrator is not a course open to the High
Court while examining objection to the award. The Arbitrator is the
sole judge of the quality and quantity of the evidence and even
where the courts feel that it could have arrived at a different
conclusion on the basis of the evidence on the record, that would not
by itself be a ground for setting aside the award. Based on the
experience and qualification of a Technical Arbitrator, some
estimation was also bound to be there in the grant of the award.
20. Issues involving in the present matter are the mixed question
of law and facts and cannot be pleaded for the first time in Section
34 proceedings. Thus, facts not pleaded before the Arbitrator cannot
be raised for the first time at the stage of Section 34 proceedings as
there are allegations and counter allegations of the parties.
21. The sole Arbitrator has held that the dispute raised by the
respondent is arbitrable, as a party cannot be a judge in its own
cause, therefore, the Superintendent Engineer cannot determine the
OMP No.218/2015 Page 11 of 22



party responsible for the delay, therefore, there is no force in the
submission of the petitioner that the dispute would not fall for
consideration and adjudication before the Arbitrator. If there is a
concluded and undisputed fact regarding the contractor being
responsible for the delay, no doubt under those circumstances the
compensation determined by the Authority may not be arbitrable.
However, the plea raised by the petitioner was not raised when the
performance bank guarantees were invoked. The stand at that time
was that the small part of the work was not completed by the
contractor. Even then, what is made final and binding under the said
clause is only the calculation of damages found payable by the
contractor at a rate lower than those prescribed in the contract. No
doubt, it is true that the clause 2 of the contract deals with the
compensation for delay if the contractor fails to maintain the
required progress. This compensation can be maintainable only if
there is no dispute regarding the responsibility of the contractor for
the failure to maintain the progress.
22. The said provision of Clause 2 of the GCC does not prohibit the
claims raised. What is made final and binding under the said Clause
is only the calculation of damages if found payable by the Contractor
at a rate lower than those prescribed in the contract. This decision
can be made by the Superintending Engineer only if there was no
dispute in respect of the Contractor being in breach of the contract
or responsible for the delays/prolongation. Such disputes cannot be
adjudicated by the authority mentioned in the Contract, and this
would necessarily fall in the jurisdiction of the Arbitrator or the
Court, as the case may be. It is based on the principle that no party
can be a judge in its own cause.
OMP No.218/2015 Page 12 of 22



23. Clause-2 has been discussed by the Supreme Court in the case
of J.G. Engineers Pvt. Ltd. v. Union of India and Anr. , (2011) 5
SCC 758, the Court held as under :
“13. Claim 3 was for refund of security deposit of
Rs.1,00,000. The respondents had encashed the bank
guarantee for Rs. 1 lakh which had been issued in lieu of
security deposit and forfeited the same on the ground that
the contractor was in breach. The arbitrator held that the
contractor was not in breach and the forfeiture was illegal
and directed that the said sum of rupees one lakh should be
refunded to the contractor.
14. Claim 11 was for Rs. 54,03,669 being the loss of
anticipated profit in regard to the value of the unexecuted
work which would have been executed by the contractor if
the contract had not been rescinded by the respondents.
The contractor contended that the termination was in breach
of the contract and but for such termination the contractor
would have legitimately completed the work and earned a
profit of 15%. The arbitrator held that the respondents were
responsible for the delay, that the contractor was not in
breach and the termination was therefore illegal. He held
that the value of the work which could not be executed by
the contractor due to wrongful termination, was Rs.
3,91,21,589 and 10% thereof would be the standard
estimate of the loss of profits and consequently awarded Rs.
39,12,000 towards the loss of profits, which the contractor
would have earned but for the wrongful termination of the
contract by the respondents.
15. As per the arbitration agreement [contained in Clause
(25) of the contract] all questions and disputes relating to
the contract, execution or failure to execute the work,
whether arising during the progress of the work or after the
completion or abandonment thereof, “except where
otherwise provided in the contract”, had to be referred to
and settled by arbitration. The High Court held that Claims
1, 3 and 11 of the contractor were not arbitrable as they
related to excepted matters in regard to which the decisions
of the Superintending Engineer or the Engineer-in-charge
OMP No.218/2015 Page 13 of 22



had been made final and binding under Clauses (2) and (3)
of the agreement.
16. We may refer to the relevant provisions of the said
contract document, that is, Clauses (2), (3)(Part) and
(25)(Part) to decide whether Claims 1, 3 and 11 were
excepted matters, excluded from arbitration:
Clause (2)
“The time allowed for carrying out the work as entered
in the tender shall be strictly observed by the
contractor and shall be deemed to be essence of the
contract and shall be reckoned from the tenth day after
the date on which the order to commence the work is
issued to the contractor. The work shall throughout the
stipulated period of the contract be proceeded with all
due diligence and the contractor shall pay
as compensation an amount equal to one per cent or
such smaller amount as the Superintending Engineer
(whose decision in writing shall be final) may decide on
the amount of the estimated cost of the whole work as
shown in the tender, for every day that the work
remains uncommenced or unfinished after the proper
dates. And further to ensure good progress during the
execution of the work, the contractor shall be bound in
all cases in which the time allowed for any work
exceeds one month (save for special jobs) to complete
one-eighth of the whole of the work before one-fourth
of the whole time allowed under the contract has
elapsed, three-eighths of the works before one-half of
such time has elapsed and three-fourths of the work
before three-fourths of such time has elapsed. However
for special jobs if a time schedule has been submitted
by the contractor and the same has been accepted by
the Engineer-in-charge. The contractor shall comply
with the said time schedule. In the event of the
contractor failing to comply with this condition, he shall
be liable to pay as compensation an amount equal to
one per cent or such small amount as the
Superintending Engineer (whose decision in writing
shall be final) may decide on the said estimated cost of
the whole work for every day that the due quantity of
OMP No.218/2015 Page 14 of 22



work remains incomplete. Provided always that the
entire amount of compensation to be paid under the
provisions of this clause shall not exceed ten per cent,
on the estimated cost of the work as shown in the
tender.”
Clause (3)
“The Engineer-in-charge may without prejudice to his
right against the contractor in respect of any delay or
inferior workmanship or otherwise or to any claims for
damage in respect of any breaches of the contract and
without prejudice to any rights or remedies under any
of the provisions of this contract or otherwise and
whether the date of completion has or has not elapsed
by notice in writing absolutely determine the contract in
any of the following cases:
(i) If the contractor having been given by the Engineer-
in-charge a notice in writing to rectify, reconstruct or
replace any defective work or that the work is being
performed in any inefficient or other improper or
unworkmanlike manner, shall omit to comply with the
requirements of such notice for a period of seven days
thereafter or if the contractor shall delay or suspend
the execution of the work so that either in the
judgment of the Engineer-in-charge (whose decision
shall be final and binding) he will be unable to secure
completion of the work by the date of completion or he
has already failed to complete the work by that date….
(ii) (not relevant)
(iii) If the contractor commits breach of any of the
terms and conditions of this contract.
(iv) If the contractor commits any acts mentioned in
Clause (21) hereof.
When the contractor has made himself liable for action
under any of the cases aforesaid, the Engineer-in-
charge on behalf of the President of India shall have
powers:
OMP No.218/2015 Page 15 of 22



(a) To determine or rescind the contract as aforesaid
(of which termination or rescission notice in writing to
the contractor under the hand of the Engineer-in-
charge shall be conclusive evidence) upon such
determination or rescission the security deposit of the
contractor shall be liable to be forfeited and shall be
absolutely at the disposal of the Government.
(b) (not relevant)
(c) After giving notice to the contractor to measure up
the work of the contractor and to take such part thereof
as shall be unexecuted out of his hands and to give it to
another contractor to complete in which case any
expenses which may be incurred in excess of the sum
which would have been paid to the original contractor if
the whole work had been executed by him (of the
amount of which excess the certificate in writing of the
Engineer-in-charge shall be final and conclusive) shall
be borne and paid by the original contractor and may
be deducted from any money due to him by the
Government under this contract or on any other
account whatsoever or from his security deposit or the
proceeds of sales thereof or a sufficient part thereof as
the case may be.
In the event of any one or more of the above courses
being adopted by the Engineer-in-charge the contractor
shall have no claim to compensation for any loss
sustained by him by reason of his having purchased or
procured any materials or entered into any
engagements or made any advances on account of or
with a view to the execution of the work or the
performance of contract. And in case action is taken
under any of provisions aforesaid, the contractor shall
not be entitled to recover or be paid any sum for any
work thereof or actually performed under this contract
unless and until the Engineer-in-charge has certified in
writing the performance of such work and the value
payable in respect thereof and he shall only be entitled
to be paid the value so certified.”
Clause (25)
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“Except where otherwise provided in the contract all
questions and disputes relating to the meaning of the
specifications, designs, drawings and instructions
hereinbefore mentioned and as to the quality of
workmanship or materials used on the work or as to
any other question, claim, right, matter or thing
whatsoever in any way arising out of or relating to the
contract designs, drawings, specifications, estimates,
instructions, orders or these conditions or otherwise
concerning the works or the execution of failure to
execute the same whether arising during the progress
of the work or after the completion or abandonment
thereof shall be referred to the sole arbitration of the
person appointed by the Chief Engineer, CPWD in
charge of the work at the time of dispute or if there be
no Chief Engineer the administrative head of the said
CPWD at the time of such appointment. It will be no
objection to any such appointment that the arbitrator
so appointed is a government servant, that he had to
deal with the matters to which the contract relates and
that in the course of his duties as government servant
he has expressed views on all or any of the matters in
dispute or difference.”
17. Clauses (2) and (3) of the contract relied upon by the
respondents no doubt make certain decisions by the
Superintending Engineer and Engineer-in-charge final/final
and binding/final and conclusive, in regard to certain
matters. But the question is whether Clauses (2) and (3) of
the agreement stipulate that the decision of any authority is
final in regard to the responsibility for the delay in execution
and consequential breach and therefore exclude those
issues from being the subject-matter of arbitration. We will
refer to and analyse each of the “excepted matters” in
Clauses (2) and (3) of the agreement to find their true
scope and ambit:
(i) Clause (2) provides that if the work remains
uncommenced or unfinished after proper dates, the
contractor shall pay as compensation for every day's
delay an amount equal to 1% or such small amount as
the Superintending Engineer (whose decision in writing
OMP No.218/2015 Page 17 of 22



shall be final) may decide on the estimated cost of the
whole work as shown in the tender. What is made final
is only the decision of the Superintending Engineer in
regard to the percentage of compensation payable by
the contractor for every day's delay, that is, whether it
should be 1% or lesser. His decision is not made final in
regard to the question as to why the work was not
commenced on the due date or remained unfinished by
the due date of completion and who was responsible for
such delay.
(ii) Clause (2) also provides that if the contractor fails
to ensure progress as per the time schedule submitted
by the contractor, he shall be liable to pay as
compensation an amount equal to 1% or such smaller
amount as the Superintending Engineer (whose
decision in writing shall be final) may decide on the
estimated cost of the whole work for every day the due
quantity of the work remains incomplete, subject to a
ceiling of ten per cent. This provision makes the
decision of the Superintending Engineer final only in
regard to the percentage of compensation (that is, the
quantum) to be levied and not on the question as to
whether the contractor had failed to complete the work
or the portion of the work within the agreed time
schedule, whether the contractor was prevented by any
reasons beyond its control or by the acts or omissions
of the respondents, and who is responsible for the
delay.
(iii) The first part of Clause (3) provides that if the
contractor delays or suspends the execution of the work
so that either in the judgment of the Engineer-in-
charge (which shall be final and binding), he will be
unable to secure the completion of the work by the
date of completion or he has already failed to complete
the work by that date, certain consequences as stated
therein, will follow. What is made final by this provision
is the decision of the Engineer-in-charge as to whether
the contractor will be able to secure the completion of
the work by the due date of completion, which could
lead to the termination of the contract or other
OMP No.218/2015 Page 18 of 22



consequences. The question whether such failure to
complete the work was due to reasons for which the
contractor was responsible or the Department was
responsible, or the question whether the contractor was
justified in suspending the execution of the work, are
not matters in regard to which the decision of the
Engineer-in-charge is made final.
(iv) The second part of Clause (3) of the agreement
provides that where the contractor had made himself
liable for action as stated in the first part of that clause,
the Engineer-in-charge shall have powers to determine
or rescind the contract and the notice in writing to the
contractor under the hand of the Engineer-in-charge
shall be conclusive evidence of such termination or
rescission. This does not make the decision of the
Engineer-in-charge as to the validity of determination
or rescission, valid or final. In fact it does not make any
decision of the Engineer-in-charge final at all. It only
provides that if a notice of termination or rescission is
issued by the Engineer-in-charge under his signature, it
shall be conclusive evidence of the fact that the
contract has been rescinded or determined.
(v) After determination or rescission of the contract, if
the Engineer-in-charge entrusts the unexecuted part of
the work to another contractor, for completion, and any
expense is incurred in excess of the sum which would
have been paid to the original contractor if the whole
work had been executed by him, the decision in writing
of the Engineer-in-charge in regard to such excess shall
be final and conclusive, shall be borne and paid by the
original contractor. What is made final is the actual
calculation of the difference or the excess, that is, if the
value of the unexecuted work as per the contract with
the original contractor was Rs. 1 lakh and the cost of
getting it executed by an alternative contractor was Rs.
1,50,000 what is made final is the certificate in writing
issued by the Engineer-in-charge that Rs. 50,000 is the
excess cost. The question whether the determination or
rescission of the contractor by the Engineer-in-charge is
valid and legal and whether it was due to any breach on
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the part of the contractor, or whether the contractor
could be made liable to pay such excess, are not issues
on which the decision of Engineer-in-charge is made
final.

18. Thus what is made final and conclusive by Clauses (2)
and (3) of the agreement, is not the decision of any
authority on the issue whether the contractor was
responsible for the delay or the Department was
responsible for the delay or on the question whether
termination/rescission is valid or illegal. What is made
final, is the decisions on consequential issues relating to
quantification, if there is no dispute as to who committed
breach. That is, if the contractor admits that he is in
breach, or if the arbitrator finds that the contractor is in
breach by being responsible for the delay, the decision of
the Superintending Engineer will be final in regard to two
issues. The first is the percentage (whether it should be
1% or less) of the value of the work that is to be levied as
liquidated damages per day. The second is the
determination of the actual excess cost in getting the
work completed through an alternative agency. The
decision as to who is responsible for the delay in
execution and who committed breach is not made subject
to any decision of the respondents or its officers, nor
accepted from arbitration under any provision of the
contract.

19. In fact the question whether the other party
committed breach cannot be decided by the party alleging
breach. A contract cannot provide that one party will be
the arbiter to decide whether he committed breach or the
other party committed breach. That question can only be
decided by only an adjudicatory forum, that is, a court or
an Arbitral Tribunal.”

24. The Supreme Court in BSNL v. Motorola India (P) Ltd. ,
(2009) 2 SCC 337 in para 23, 24 and 26 has held as under:
“23. The question to be decided in this case is whether
the liability of the respondent to pay liquidated damages
and the entitlement of the appellants, to collect the
OMP No.218/2015 Page 20 of 22



same from the respondent is an excepted matter for the
purpose of Clause 20.1 of the general conditions of
contract. The High Court has pointed out correctly that
the authority of the purchaser (BSNL) to quantify the
liquidated damages payable by the supplier Motorola
arises once it is found that the supplier is liable to pay
the damages claimed. The decision contemplated under
Clause 16.2 of the agreement is the decision regarding
the quantification of the liquidated damages and not any
decision regarding the fixing of the liability of the
supplier [Ed.: Matter between two asterixes emphasied
in original as well.] . It is necessary as a condition
precedent to find that there has been a delay on the part
of the supplier in discharging his obligation for delivery
under the agreement[Ed.: Matter between two asterixes
emphasied in original as well.] .

24. It is clear from the reading of Clause 15.2 that the
supplier is to be held liable for payment of liquidated
damages to the purchaser under the said clause and not
under Clause 16.2. The High Court in this regard
correctly observed that it was not stated anywhere in
Clause 15 that the question as to whether the supplier
had caused any delay in the matter of delivery will be
decided either by the appellants BSNL or by anybody
who has been authorised on the terms of the agreement.
Reading Clauses 15 and 16 together, it is apparent that
Clause 16.2 will come into operation only after a finding
is entered in terms of Clause 15 that the supplier is
liable for payment of liquidated damages on account of
delay on his part in the matter of making delivery.
Therefore, Clause 16.2 is attracted only after the
supplier's liability is fixed under Clause 15.2. It has been
correctly pointed out by the High Court that the question
of holding a person liable for liquidated damages and the
question of quantifying the amount to be paid by way of
liquidated damages are entirely different. Fixing of
liability is primary, while the quantification, which is
provided for under Clause 16.2, is secondary to it.

26. Quantification of liquidated damages may be an
excepted matter as argued by the appellants, under
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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, 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 appellants 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”

25. If the present interpretation is accepted, then the rationale
behind making the decision of the Superintending Engineer being
final and binding would be understandable and as per law it would be
a decision by the department in favour of the contractor.
26. In view of the aforesaid reasons, I am of the view that there is
no infirmity in the award published by the Arbitral Tribunal. No
interference is called for in view of the scope of interference while
deciding the objections, as it is evident from the award that the
Arbitral Tribunal has not acted arbitrarily, irrationally or
independently of the contract nor had travelled outside the bounds of
the contract or the award passed is without jurisdiction. Therefore,
the objections are dismissed. Pending applications also stands
disposed of.
27. No costs.

(MANMOHAN SINGH)
JUDGE
JULY 29, 2016
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