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Judgment
V.V.S. Rao, J.
Introduction
These two miscellaneous appeals are against common order, dated 24.01.2000 in O.P. No. 1031 of 1998 (hereafter called, the first O.P.,) and
O.P. No. 1052 of 1998 (hereafter called, the second O.P.,) filed by M/s. Dhirubhai D Thumer & Company, Engineers and Contractors (hereafter
called, DDC). C.M.A. No. 585 of 2001 against first O.P., was heard and reserved by us on 18.11.2009. C.M.A. No. 1601 of 2000 against
second O.P., was heard and reserved by us on 30.11.2009. It is, therefore, appropriate to dispose of both the appeals by common Judgment.
Facts in brief
Nizam Sugar Factory Limited (NSF) called for tenders for construction of machine foundations at Madhunagar, Zaheerabad in Medak District.
DDC submitted their tender, which was accepted vide letter, dated 05.04.1991 of NSF. The parties entered into agreement on 26.04.1991 after
negotiations in the presence of NSF''s consultant M/s. C.R. Narayanan Private Limited, Bangalore. The contractor gave lumpsum rebate of Rs.
3,00,000/- (Rupees three lakhs only) reducing the contract value from Rs. 45,94,020/- to Rs. 42,94,020/-. Time was agreed to be the essence of
contract, and work was to be completed by 14.10.1991 i.e., within a period of six months from the date of agreement. Nevertheless, clause 48 of
General Conditions of Contract (GCC) provided for extension of time for completion of work by NSF on condition that no compensation would
be payable. Clause 77 of GCC forming part of contract provides for resolution of dispute by arbitration.
DDC completed the work by 30.11.1992. Disputes arose with regard to payment of final bills and related matters. DDC invoked clause 77 of
GCC and by letter dated 20.06.1995 appointed Sri Akela Sitaramam, Retired Superintending Engineer as arbitrator requesting to enter reference
as soon as arbitrator is nominated by NSF. A copy thereof was sent to NSF. In response thereto, NSF informed that their arbitrator would be
appointed within twenty days. They did not do so in twenty days. Long thereafter, vide their letter, dated 21.02.1997, NSF appointed Sri K.
Yagnanarayana, Retired Chief Engineer as their arbitrator and both the arbitrators chose Sri K.C.S. Rao, Retired Additional Director General of
Works as Umpire.
DDC raised eight claims. The arbitral tribunal partly allowed claim Nos. l, 2, 3, 4 and 8 (payment of interest) while rejecting claim Nos. 5, 6 and
7, which have had been accepted by DDC. They filed first O.P., on the file of the Court of the Additional Chief Judge for SPE & ACB Cases-
cum-V Additional Chief Judge, City Civil Court, Hyderabad, u/s 17 of the Arbitration Act, 1940 (hereafter called, 1940 Act). NSF filed second
O.P., seeking to set aside the award. By impugned order, dated 24.01.2000, the Court below dismissed case of DDC and allowed NSF''s case.
While doing so, learned Additional Chief Judge considered the question whether 1940 Act applies or the Arbitration and Conciliation Act, 1996
(hereafter called, 1996 Act) applies for resolution of dispute. On this, it was held that 1996 Act applies and the award passed by arbitral tribunal
under 1940 Act is null and void. The Court below then considered claim Nos. l, 2, 3, 4 and 8, which were allowed by arbitral tribunal, and held
that the contractor is not entitled for any extra amounts towards escalation charges or towards compensation. Arbitral award was accordingly set
aside.
The particulars of claims, award of the arbitral tribunal and the findings of the Court below are as below.
-----------------------------------------------------------------------
Claim No. Amount claimed Amount awarded Amount awarded
by arbitrator by civil Court
Rs. Rs. Rs.
-----------------------------------------------------------------------
Claim No. 1 11,10,782 2,14,700 Rejected
-----------------------------------------------------------------------
Claim No. 2 10,01,000 6,06,000 Rejected
-----------------------------------------------------------------------
Claim No. 3 5,03,000 3,76,000/- Rejected
-----------------------------------------------------------------------
Claim No. 4 5,89,500 1,86,000 Rejected
-----------------------------------------------------------------------
Claim No. 5 1,75,000 Rejected -
-----------------------------------------------------------------------
Claim No. 6 1,03,563 Rejected -
-----------------------------------------------------------------------
Claim No. 7 Not specified Parties to bear -
their own costs
-----------------------------------------------------------------------
Claim No. 8 Interest claimed a)Awarded interest 18% Rejected
at 18% p.a., p.a., from 30.04.1994 to
From 12/1991 26.8.1998 Rs. 10,75,000
to 12/1994 b) Awarded at 18% from
date of award to date or
decree or actual payment
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Submissions of counsel
Learned Counsel for DDC submits that notice of arbitration was issued on 20.06.1995 before coming into force of Ordinance which preceded
1996 Act and therefore, 1940 Act alone is applicable. He placed reliance on Milkfood Ltd. Vs. GMC Ice Cream (P) Ltd., and M/s. Fuerst Day
Lawson Ltd. Vs. Jindal Exports Ltd., . In an effort to sustain the arbitration award insofar as the claims that were allowed, counsel made the
following submissions. The arbitral tribunal found that the delay in completion of the contract work was due to breach of contract and default on
the part of NSF in handing over possession, in supplying steel and in furnishing designs and drawings. It was also found that the work of
construction of machine foundations was stopped during the crushing season in 1991-1992 as the deposit of bagasse on the foundations would
have weakened the structures. In view of these, learned Counsel would submit that clause 48 does not disentitle DDC from claiming escalation
charges. According to learned Counsel, entire agreement has to be read and clause 48 cannot be read in isolation. He relies on correspondence
between the parties to support his contention that the delay was only due to NSF, and therefore, it would be improper and illogical to deny
compensation by way of escalation of costs. Counsel relied on P.M. Paul Vs. Union of India (UOI), , Ramachandra Reddy and Company v.
Superintending Engineer (4) 2002 (1) ALT 14 (SC), K.N. Sathyapalan v. State of Kerala (5) 2007 (3) SCJ 573 : 2007 (1) R.A.J. 211 (SC) :
2007 (5) ALT 17.1 (DN SC), Food Corporation of India v. A.M. Ahmed & Company (6) 2007 (1) SCJ 333 : (2006) 13 SCC 779 : 2007 (3)
ALT 17.2 (DN SC) and Ambica Construction v. Union of India (7) 2007 (1) ALT 29 (SC) : (2006) 13 SCC 475.
Learned standing counsel for NSF submits that arbitral award is null and void as it was passed under 1940 Act which had no application. He
would rely on the reasoning of the Court below in support of the contention. Secondly, he submits that DDC having received the final bill without
protest is estopped from raising any claim before the arbitral tribunal. In the absence of any arbitral dispute, the constitution of the arbitral tribunal
itself is illegal. He relies on clause 77 of GCC and the letters written by NSF rejecting the request of the DDC for enhancement of rates. He placed
reliance on Union of India (UOI) and Others Vs. Onkar Nath Bhalla and Sons, . Thirdly, he contends that in view of the specific bar created by
clause 48 of GCC, the contractor is not entitled to claim any compensation except extension of time. He relies on State of Andhra Pradesh Vs.
M/s. Associated Engineering Enterprises, Hyderabad, , New India Civil Erectors (P.) Ltd. Vs. Oil and Natural Gas Corporation, , Ch. Ramalinga
Rddy v. Superintending Engineer and Ramachandra Reddy and Co. Vs. State of Andhra Pradesh and Others, . Lastly, relying on State of
Rajasthan v. Ferro Concrete Construction Private Limited (13) 2009 (7) SCJ 380 : 2009 (3) Arb.L.R. 140 (SC) and Rajasthan State Road
Transport Corpn. Vs. Indag Rubber Ltd., , learned standing counsel submits that in view of the bar under clause 7 of Special Conditions of
Contract (SCC), interest cannot be allowed.
Which law applies?
At the outset, we need to consider this question. As noticed supra, the Court below declared arbitral award, dated 26.08.1998 null and void
only on the ground that the proceedings were conducted by arbitral tribunal as per 1940 Act. If this Court agrees with the Court below, there may
not be any necessity for further consideration of the appeals.
Arbitration and Conciliation Ordinance was promulgated by President of India on 16.01.1994. It came into force with effect from 25.01.1996.
This was replaced by second Ordinance on 26.03.1996 and yet again by third Ordinance on 26.06.1996 to continue the operation of new law.
The Central Act No. 26 of 1996 received the assent of the President on 16.08.1996. In exercise of their powers u/s 1(3), Central Government
issued Gazette Notification on 22.08.1996 appointing the said date as the date on which 1996 Act came into force. 1996 Act thus repealed (by
reason of Section 85 thereof), Arbitration Act, 1940 with effect from 22.08.1996. The repeal Section reads as under.
Repeal and saving:
(1) The Arbitration (Protocol and Convention) Act, 1937 (6 of 1937), the Arbitration Act, 1940 (10 of 1940) and the Foreign Awards
(Recognition and Enforcement) Act, 1961 (45 of 1961) are hereby repealed.
(2) Notwithstanding such repeal,-
(a) the provisions of the said enactments shall apply in relation to arbitral proceedings which commenced before this Act came into force unless
otherwise agreed by the parties but this Act shall apply in relation to arbitral proceedings which commenced on or after this Act comes into force;
(b) all rules made and notifications published, under the said enactment shall, to the extent to which they are not repugnant to this Act, be deemed
respectively to have been made or issued under this Act.
(emphasis supplied)
Sub-section (2) of Section 85 with non-obstante clause saves arbitral proceedings under 1940 Act which ""commenced before"" 1996 Act
came into force unless the parties agree to be governed by the new Act. There cannot be any dispute that NSF appointed Sri Y. Yagnanarayana
as their arbitrator vide their letter, dated 21.02.1997. By which date, 1996 Act is in force. This is strongly emphasised by NSF''s counsel to
buttress the argument that the constitution of arbitral tribunal having been effected after coming into force of 1996 Act, the award passed under
1940 Act is null and void. This submission, however, cannot be accepted, in view of Section 21 of 1996 Act and three decisions of Supreme
Court on the point. As per Section 21, arbitral proceedings shall commence on the date on which a request for referring the dispute to arbitration is
received by other party unless the party specifically agree to stipulate a date with regard to the commencement of arbitration.
In Shetty''s Constructions Co. Pvt. Ltd. Vs. Konkan Railway Construction and Another, , Konkan Railway entrusted works to Shetty
Constructions. Disputes arose and the contractor sought a reference to arbitration on 06.03.1995, followed by yet another such request on
29.05.1995, in vain. They, therefore, filed suit in High Court of Bombay on 24.08.1995 u/s 8 read with Section 20 of 1940 Act. There were three
other similar suits. But, in all the matters, request for reference to arbitration was made prior to coming into force of 1996 Act. The High Court
held that the demands were premature. Before the Supreme Court, however, this was not pressed and the question was whether old Act applies?
Having regard to the factual background and also Section 21 of 1996 Act, Supreme Court held as under:
Therefore, it must be found out whether the requests by the petitioner for referring the disputes for arbitration were moved for consideration of the
respondents on and after 26-1-1996 or prior thereto. If such requests were made prior to that date, then on a conjoint reading of Section 21 and
Section 85(2)(a) of the new Act, it must be held that these proceedings will be governed by the old Act. As seen from the aforenoted factual
matrix, it at once becomes obvious that the demand for referring the disputes for arbitration was made by the petitioners in all these cases months
before 26-1-1996, in March and April 1995 and in fact thereafter all the four arbitration suits were filed on 24-8-1995. These suits were
obviously filed prior to 26-1-1996 and hence they had to be decided under the old Act of 1940. This preliminary objection, therefore, is answered
by holding that these four suits will be governed by the Arbitration Act, 1940 and that is how the High Court in the impugned judgments has
impliedly treated them.
(emphasis supplied)
In Fuerst Day Lawson Limited (2 supra), disputes arose with regard to the date of commencement of new Act. While holding that despite the
date of coming into force of the Act, for all practical and legal purposes, the Act shall be deemed to come into force from the date of Ordinance,
Supreme Court held that a foreign award can be enforced under the new Act even it is not made rule of the Court in accordance with the new Act,
if such foreign award is passed after coming into force of the Ordinance. This decision supports the contention that even though the Central
Government notified 22.08.1996 as the date when 1996 Act came into force, for all practical purposes, the Act shall be deemed to have come
into force on 25.01.1996 when the First Ordinance came into force. For all practical purposes, therefore, it shall have to be considered that 1996
Act came into force on 25.01.1996 and all arbitrations commenced after 25.01.1996 shall be governed by the new Act. If the arbitration is
commenced by issuing a notice of request or a notice seeking a reference to arbitration prior to 25.01.1996, it shall be governed by 1940 Act.
In Milk Food Limited (1 supra), a three Judge Bench of Supreme Court considered the question again and held that service of notice for
appointment of arbitrator would be relevant for the purpose of commencement of arbitral proceedings and that by reason of Section 85(2)(a) of
1996 Act, if request for appointment of arbitrator is made prior to coming into force of new Act, arbitration shall be held in accordance with 1940
Act. The relevant observations are as follows.
Sub-section (1) of Section 85 of the 1996 Act repealed the 1940 Act (10 of 1940). Sub-section (2), however, notwithstanding such repeal makes
the 1940 Act applicable in relation to arbitral proceedings which commenced before the said Act came into force.... Section 21 of the 1996 Act,
as noticed hereinbefore, provides as to when the arbitral proceedings would be deemed to have commenced. Section 21 although may be
construed to be laying down a provision for the purpose of the said Act but the same must be given its full effect having regard to the fact that the
repeal and saving clause is also contained therein. Section 21 of the Act must, therefore, be construed having regard to Section 85(2)(a) of the
1996 Act. Once it is so construed, indisputably the service of notice and/or issuance of request for appointment of an arbitrator in terms of the
arbitration agreement must be held to be determinative of the commencement of the arbitral proceeding....Keeping in view the fact that in all the
decisions, referred to hereinbefore, this Court has applied the meaning given to the expression ""commencement of the arbitral proceeding"" as
contained in Section 21 of the 1996 Act for the purpose of applicability of the 1940 Act having regard to Section 85(2)(a) thereof, we have no
hesitation in holding that in this case also, service of a notice for appointment of an arbitrator would be the relevant date for the purpose of
commencement of the arbitration proceeding.
As already noticed, in view of the admitted position that invoking clause 77 of GCC, DDC appointed Sri Sitaramam as their arbitrator and
marked copy of the said communication, dated 20.06.1995 to NSF. In response thereto, latter addressed a communication on 07.07.1995
informing that they would appoint arbitrator within twenty (20) days. Though the arbitrator was appointed by them in 1997, as the arbitration
proceedings are deemed to have been commenced on 20.06.1995 long prior to coming into force of the Ordinance, we hold this point in favour of
DDC to the effect that the dispute between the parties has to be resolved in accordance with the provisions of 1940 Act.
Whether DDC is estopped from raising claims before the arbitrators?
In their letter, dated 21.02.1997, while appointing their arbitrator, NSF stated that the claim is time barred and that arbitrable dispute does not
exist between the parties. Before the arbitral tribunal, NSF alleged that DDC received the final payment without any protest, and that the claims
are to be rejected. In their O.P., as well as in their counter in first O.P., NSF raised objection to the effect that DDC having accepted the final bill
on 26.05.1994 without any protest, is estopped from raising the dispute before the arbitration. NSF reiterates the same before this Court.
Clause 77 of GCC forming part of the contract to the extent necessary reads as under.
In the event of any question or dispute arising under these conditions or any special conditions of contract or in connection with this contract
(except as to any ---------------- decision of which is specially provided for by these conditions), whether during the progress of the works or
after their completion and whether before or after the determination, abandonment or breach of contract, the same shall be referred to the award
of an arbitrator to be nominated by the Employer and an arbitrator to be nominated by the contractor, or in case of the said arbitrators not
agreeing than to the award of an Umpire to be appointed by the arbitrators in writing before proceeding on the reference and the decision of the
Arbitrators, or in the event of their not agreeing or the Umpire appointed by them shall be final and conclusive and the provisions of the Indian
Arbitration Act, 1940, and or the Rules thereunder and any statutory modification thereof shall be deemed to apply to and be incorporated in this
contract. The venue of the arbitration proceedings, unless otherwise mutually agreed upon shall be the Registered Office of the Employer.
(emphasis supplied)
A plain reading of above covenant would show that any dispute arising under GCC, SCC or in connection with the contract, during or after
completion of the contract, or before or after determination, abandonment or breach of contract is arbitrable. Therefore, having regard to the
broad and enlarged scope of clause 77, unless and until it is shown that DDC explicitly waived the claims, the submission of NSF cannot be
accepted. In this connection, counsel for NSF invited the attention of this Court to three documents. The first is letter, dated 28.05.1993,
addressed by DDC to General Manager of NSF. While referring to as many as six of their earlier communications between November, 1991 and
October, 1992, DDC requested NSF to settle the claims already submitted while stating that it has no claims other than the claims already
submitted to NSF. The said letter reads as under.
DHIRUBHAI D. THUMER & Co.
Engineers & Contractors
On approved list of State & Central P.W.D Regd. Office: KAZIPET
''Patel chambers''
10-3-152/8, 1st floor,
Entrenchment Road,
Secunderabad-500 026.
Date: 28-05-1993
Ref:
The General Manager,
N.S.F., Madhunagar,
ZAHEERABAD.
Sub: Agreement No. Nil dated 26-4-91 for the construction of Machine Foundations.
Ref: Our letters dated 10-11-91.
Our letters dated 21-01-92.
Our letters dated 28-02-92.
Our letters dated 18-01-92.
Our letters dated 20-09-92.
Our letters dated 03-10-92.
Your Engineers Completion
Certificate dated 30-11-92.
Sir,
The work under the above agreement which was awarded to us vide letter of intent dated 05-04-91 has been duly completed on 30-11-92 as
per the Completion Certificate issued by your Engineer.
From time to time, we brought to your notice the delays/hindrances (not attributable to us) which caused a set back to the progress of work,
and highlighted the same for redressal from your end as per correspondence mentioned above.
We have not so far been issued an extension of time for completion of the work.
As you are aware, due to delay in issue of drawings/clearances which occurred during the original contact period, many sites and drawings
were issued subsequently after the expiry of the contract period. These delays are attributable to you.
Inspite of the above delays (not attributable to us) we endeavoured to complete the work in terms of Clause (4) of the contract and
specifications duly confirmed in your Engineers Completion Certificate.
We have ""no claims"" other than those already submitted to you in various letters mentioned above (copy enclosed) and request you to settle
the same and arrange to pay us the final bill.
Yours sincerely,
XXX.
Enclosures:
Copy of letters
mentioned in the
reference.
In response to the above letter, NSF sent a letter dated 10.08.1993, rejecting the claims made by DDC and the same reads as under.
THE NIZAM SUGAR FACTORY
LIMITED
(GOVERNMENT COMPANY)
Registered Office: Unit III,
B-l-174, Shakar Bhavan, Madhunagar,
Fateh Maiden Road, Tq. Zaheerabad,
Hyderabad-500 004 Dist. Medak,
(ANDHRA PRADESH) (ANDHRA PRADESH)
Telex No. NSF, HD-278 P.C-502 228
Our Ref. No. NSL/MDNR/GM/52
Date: 10.08.1993
M/s. Dhirubai D. Thumer,
Patel Chambers,
East Marredpaly,
Secunderabad-26.
Dear Sir,
Sub: Your Representation for payment of escalation bills - reg.
Ref: Your Letter dated 28.5.1993.
We have examined your representation and in reply, we wish to inform you that as no escalation clause is provided in the agreement, the question
of considering your request does not arise. Further, it may not be out of place to mention that company had supplied steel and cement mostly on
time and work had never suffered on account of these.
Thanking You,
Yours faithfully,
For the NIZAM SUGARS LIMITED
XXXX
GENERAL MANAGER.
On 26.05.1994, NSF with the letter bearing the said date sent a demand draft for Rs. 11,871.28/- towards full and final bill in connection with
the contract work. The same reads as under.
THE NIZAM SUGAR FACTORY LTD
(GOVERNMENT COMPANY)
Registered Office: Unit III,
B-l-174, Shakar Bhavan, Madhunagar,
Fateh Maiden Road, Tq. Zaheerabad,
Hyderabad-500 004 Dist. Medak,
(ANDHRA PRADESH) (ANDHRA PRADESH)
Telex No. NSF, HD-278 P.C-502 228
Ref. No. ZAH/ACT/Proj./8096
Date: 26-05-1994
M/s. Dhirubai D.Thumer & Co.,
10-3-152/B, ""Patel Chambers"",
East Marredpaly,
Secunderabad-500 026.
Dear Sirs,
Sub: Construction of Machine Foundations - final bill.
Ref: Contract Agreement Lr. No. NSF/MDNR/Exp./CW/22/91/101 dt. 5/6-4-1991.
-x-
With reference to the above, we are enclosing herewith DD. No. 707402 dtd. 24-5-94 for Rs. 11,871.28 (A/c payee) drawn in your favour on
Syndicate Bank, payable at Hyderabad, towards full and final bill of the above contract work. In this connection we furnish below the details:
I. Total Gross bill .. Rs. 77,16,191.75
(final) including
extra items.
Less:- Rebate @ 6.53% .. Rs. 5,03,867.25
----------------
Net .. Rs. 72,12,324.50
----------------
II. Total Gross bill .. Rs. 72,12,324.50
Less:- Prefinal bill .. Rs. 71,90,640.80
settled
----------------
21,683.70
Less:- Recoveries such Rs. 17,150.42
as IT & SD etc
----------------
Net .. Rs. 4,533.28
----------------
III. Total Security Deposit
recovered including
final bill. .. Rs. 2,22,767.00
Less:- Already paid .. Rs. 2,18,000.00
----------------
Net .. Rs. 7,368.00
----------------
Grand Total (Item No. II & III)
Rs. 4,533.28 + 7,368.00) = Rs. 11,901.28
Less:- Bank Charges
for Pur DD. Rs. 30.00
----------------
Rs. 11,871.28
----------------
Further, we have to inform you that in the Pre-final bill you have claimed the rate for Item No. 3(b)(i) i.e., RCC 1.1.1/2 X 3"" above ground level
was claimed @ 1800/- per Sq.mtr. instead of Rs. 1700/- per Sq.mtr. Hence, we have adjusted the excess amount as paid in the final bill.
Please acknowledge receipt of the same.
Thanking you,
Yours faithfully,
For The Nizam Sugars Ltd.
XXX
GENERAL MANAGER.
End: DD-1.
NB. The DD is handed over to
Mr. M.A. Majid today
the 26/05/94.
It is no doubt true that DDC sent their final bill claiming enhanced rates like maintenance and establishment charges for extended period of
contract, escalation charges for materials, labour, fuel after original period, refund of rebate amounts, claim for delay in settlement of rates and
payment of interest. In their communication, they also stated that they had no other claims. These are rejected by NSF and final bill was paid. It is
only thereafter that on 20.06.1995, DDC invoking clause 77 appointed their arbitrator. In this background, whether DDC can be said to have
waived its right to claim extra amounts and whether they are estopped from doing so?
In Ambica Construction (supra), the contractor who could not complete the work within the stipulated time raised dispute making claims
towards idle labour and surplus staff, establishment expenses etc. The arbitrator appointed by Calcutta High Court passed award, which was
confirmed by learned single Judge. The Division Bench, however, reversed on the holding that having furnished ''no claim certificate'', the
contractor was no longer entitled to raise any claim in view of specific clause in GCC. In the Supreme Court, relying on three Judge Bench
decision in Chairman and M.D., N.T.P.C. Ltd. Vs. Reshmi Constructions, Builders and Contractors, , it was contended that when out of necessity
''no claim certificate'' is submitted by the contractor, the same does not bar it from seeking arbitration and raising claims. The plea was accepted
and the appeal was allowed by Supreme Court observing as under (paras 17 and 18 of SCC)
A glance at the said clause will immediately indicate that a no-claim certificate is required to be submitted by a contractor once the works are
finally measured up. In the instant case the work was yet to be completed and there is nothing to indicate that the works, as undertaken by the
contractor, had been finally measured and on the basis of the same a no-claim certificate had been issued by the appellant. On the other hand, even
the first arbitrator, who had been appointed, had come to a finding that no-claim certificate had been given under coercion and duress. It is the
Division Bench of the Calcutta High Court which, for the first time, came to a conclusion that such no-claim certificate had not been submitted
under coercion and duress.... From the submissions made on behalf of the respective parties and in particular from the submissions made on behalf
of the appellant, it is apparent that unless a discharge certificate is given in advance, payment of bills are generally delayed. Although, Clause 43(2)
has been included in the General Conditions of Contract, the same is meant to be a safeguard as against frivolous claims after final measurement.
Having regard to the decision in Reshmi Constructions (supra) it can no longer be said that such a clause in the contract would be an absolute bar
to a contractor raising claims which are genuine, even after the submission of such no-claim certificate.
(emphasis supplied)
NSF, however, relies on Omkarnath Bhalla (supra) to buttress their plea of estoppel. In the said case, after completion of the work, the
contractor submitted the bill. It was finally settled and accepted by contractor without any protest and reservation on 27.03.2001. Two years
thereafter, they submitted a list of twenty (20) claims. In that case, Supreme Court allowed the appeal of Union of India while holding thus:
In the present case, the appellants made the full and final payment of the final bill and to which the respondent certified by signing the bill without
any protest or reservation. The respondent with the intention of receiving further payments, after two years, raised yet another claim and tried to
bring up a dispute. And when the claim was denied by the appellants, the respondent requested to appoint an arbitrator. ... It is the specific case of
the appellants that the respondent could not have raised yet another claim, as the respondent after signing on the final bill without any protest or
reservation has waived its right as per the conditions of the contract. The Court without considering that whether any dispute exists between the
parties, could not have appointed an arbitrator.
In the case on hand, as seen from the very communication dated 28.05.1993, DDC has been requesting enhanced rates from 10.11.1991
even before completing the work. By the time, a pre final bill was prepared and the request of DDC for enhanced rates under different heads
referred to hereinabove, was not rejected and was under consideration. Ultimately, it was only after about two years, NSF rejected the claims and
a small amount of about Rs. 11,000/- (Rupees eleven thousand only) was paid as the balance towards final bill. In this background, we are
convinced that by accepting the final bill, DDC is not estopped by raising any claims. On this point, we, therefore, hold against NSF.
Whether DDC is entitled for compensation?
DDC argues that NSF committed breach of contract and, therefore, clause 48 of GCC is not a bar from claiming compensation. They point
out delayed delivery of possession to commence the work, non furnishing of designs and drawings and stopping construction work during
sugarcane crushing season. In support of the contention that clause 48 does not bar such claim, the attention of this Court has been invited to the
correspondence between DDC and NSF. In one such letter dated 10.11.1991, DDC pointed out that in view of late supply of drawings they
require six to eight months by continuing establishment and requested to compensate the loss sustained by them during initial period of loss of work
at 10% of project cost. DDC requested NSF to consider the following.
Refund of earnest money and security deposit on the strength of our furnishing matching bank guarantee for the same which will give us some
financial relief, at the same time, your interest is safeguarded by bank guarantee;
At the time of negotiations we were assured that the variation in the quantities and value of work would be 5 to 10% plus or minus and not
more. (We were assured on your behalf by Mr. Srinivasa Rao of M/s. C. Narayana Rao & Co., that the quantities mentioned may not be more
than plus or minus 5 to 10%) and in the event of such variation was more we would be compensated suitably. We request therefore to keep this
consideration in view as gentlemen''s agreement.
The rebate what we have given during the time of negotiations with good faith that the project will be completed as per your time schedule which
is not there. Hence for the balance work carried out after 15th October ''91 the rebate may be waived.
Whatever the extra items we have carried out same may be verified and passed for payment. We are prepared to assist and sit with your
technical people or your consultants, if any explanation is required.
New supplementary agreement is to be prepared for the balance work with an escalation as per R.B.I. price index for escalation or say 15%
extra over our agreed rates.
In the said letter, DDC pointed out reasons which hindered progress of the work. These reasons are: (i) required drawings were not supplied
in time and incomplete drawings were received; (ii) from April to August 1991, work worth Rs. 5,00,000/- could only be completed though they
mobilised resources, (iii) that required quantity of steel was not made available on time, and (iv) that excavation of proposed injection channel was
delayed as there were electrical panels, heavy pipelines, and that the NSF did not complete dismantling of the site and other obstructions which
were removed by NSF only in September 1991. It was also alleged that the slow work progress is attributable to NSF. DDC also pointed out
number of letters addressed by them. There was no serious contest on this by NSF. Though off and on, NSF sent replies, there was no denial of
the fact that the drawings were not supplied within the stipulated period and that the work could not commence for about four months even though
site was handed over to DDC in April, 1991.
With the assistance of both the counsel, we have perused correspondence and we have no manner of doubt to say that there was delay on the
part of NSF by reason of which work was delayed. As per the agreement, work is to be completed within six months but it was extended from
time to time and ultimately the work of constructing machine foundations was completed by DDC on 30.11.1992. As and when extension was
sought, it was duly granted by NSF presumably for the reason that they were at fault in fulfilling their obligations. Dealing with the question of
breach or default, arbitral tribunal having noticed that employer did not respond to several representations by DDC, held that NSF is responsible
for the delay and defaults. The relevant observations in the award are as follows.
31.2.6 There is no indication that the respondents have reacted to the several representations from the claimants pointing out the delay in the
supply of steel. In the counter, however, they have stated that the drawings and steel were supplied on 09.8.1991, as per the programme given by
the claimants and even if there was delay in the supply of steel it was no hindrance to the progress of the work (Para 9 of R1) and that the
claimants cannot claim any damages on this account.
31.2.7 From a perusal of the above facts, we have no hesitation in holding that the progress of the work was affected by the delay in supply of
steel - especially of 16 m.m. size and that the respondents were responsible for the delay.
Due to the delay in the supply of drawings and materials like steel, the work had to be carried out during the crushing season, which
contingency the claimants were trying to avoid from the beginning because of the fear of bagasse falling all over the factory area, which besides
being deleterious to the quality of concrete interfered with the progress of work.
From the foregoing, we hold the respondents responsible for the delay, and defaults and consequent breach of contract.
The findings recorded by arbitral tribunal are supported by documentary evidence placed before the tribunal by both the parties. The learned
Additional Chief Judge adverting to this aspect also came to the conclusion that the delay in execution of the work occurred because of non supply
of drawings, dismantling old machinery and there were laches on the part of NSF. Both the parties do not deny before us that the time was
extended as contemplated in clause 48 of GCC. Whether there was a breach of contract on the part of NSF and whether such default resulted in
delaying in the project are questions of fact. After perusing the award as well as order of the Civil Court we are convinced that the findings
recorded by arbitrator being a question of fact does not warrant interference. Indeed, no serious point is urged before us by NSF on this aspect. It
is then the question of clause 48 of GCC barring claim for compensation due to extension of time for completion of contract. The said clause reads
as under.
Possession of site:
Save insofar as the contract may prescribe the extent of portion of the site of which the Contractor is to be given possession from time to time and
the order in which such portions shall be made, available to him and subject to any requirement in the contract, as to the order in which the works
shall executed, the employer will, with the Engineer''s written order to commence the works, give to the Contractor possession of so much of the
site as may be required to enable the contractor to commence and proceed with the construction of the works in accordance with the programme
referred to in clause 12 hereof (if any) and otherwise in accordance with such reasonable proposals of the Contractor as he shall, by notice in
writing to the Engineer make and will from time to time as the works proceed, give to the contractor possession of such further portion of the site
as may be required to enable the contractor to proceed with the construction of the work with due dispatch in accordance with the said
programme or proposals (as the case may be). If the contractor suffers delay from failure on the part of the employer to give possession in
accordance with the terms of this Clause the Engineer shall grant an extension of time for the completion of the works. No compensation in any
mode, would be payable.
(emphasis supplied)
The highlighted portion in the clause admit only one interpretation: even if the contractor suffers delay from failure on the part of employer, the
contractor shall not be entitled to compensation in any mode, but the Engineer can grant extension of time. In most of the building contracts, it is oft
repeated question whether contractor is entitled to claim enhanced rates, escalation charges, damages or (compendiously referred to as
''compensation''). There cannot be any denial that the rates agreed upon and other costs of materials used at the time of awarding of contract and
at the time of completion of the contract, do not always remain the same. The contractor is expected to take this into consideration before
submitting tender. The escalation in building contracts is normal and routine incident due to lapse of time especially when the contractor is unable to
complete the contract within the stipulated time. The building contracts therefore more often than not visualize such a situation and the parties are
never in doubt. Despite, the contract itself bars any claim for compensation whenever time is extended. Clause 48 of GCC is one such clause
which in absolute terms bars contractor from claiming compensation during the extended period. It is well settled that the arbitral tribunal would be
acting without jurisdiction if it awards any compensation ignoring such exclusion clause. The same however will not be true if a contractor claims
certain amount towards loss of profit if there is breach of contract by the employer or mid-way abandonment of the contract by the employer. We
may refer to relevant decided cases/though principle is well settled.
In Associated Engineering Enterprises (9 supra), a Division Bench of this Court consisting of Hon''ble Jeevan Reddy and Hon''ble Neeladri
Rao, JJ, (as their Lordships then were) considered clause 59 of APDSS and its binding nature on arbitrator. Referring to Section 55 of Indian
Contract Act, 1872, the Bench held that in view of the bar created by clause 59, arbitrator had no power to award compensation for the delay in
handing over of site to contractor. Reliance was placed on an unreported judgment dated 19.4.1992 in AAO No. 677 of 1991 and CRP No. 385
of 1992 wherein it was laid down as under.
We find it difficult therefore, to say that clause 59 has no application to the present case. The words ""from any cause whatever"", occurring in clause
59, are wide enough to take in delays and hindrances of all types, caused by the department, or arising from other reasons, as the case may be.
Thus, by virtue of clause 59, the contractor is precluded from claiming any compensation on account of delays or hindrances arising from any
cause whatever, including those arising on account of the acts or omissions of the departmental authorities....
(emphasis supplied)
The Division Bench then referred to decision of Privy Council in Champsey Bhara & Co. v. Jivraj Balloo Spinning & Weaving Co. Ltd. (17)
AIR 1923 PC 66 and laid down as below.
Applying the principle of the above decision to the facts of the case before us, it must be held that clause 59 bars a claim for compensation on
account of any delays or hindrances caused by the department. In such a case, the contractor is entitled only to extension of the period of contract.
Indeed, such an extension was asked for, and granted on more than one occasion. (The penalty levied for completing the work beyond the
extended period of contract has been waived in this case). The contract was not avoided by the contractor, but he chose to complete the work
within the extended time. In such a case, the claim for compensation is clearly barred by clause 59 -of the APDSS which is admittedly, a term of
the agreement between the parties.
In Associated Engineering Co. Vs. Government of Andhra Pradesh and another, in the execution of contract for cement concrete lining in
connection with Nagarjuna Sagar dam disputes arose between the contractor and company. Fifteen claims were raised including escalation, extra
expenditure and extra lead for water. The arbitrator passed award in respect of claim No. 3 dealing with escalation of cost of material, payment of
extra lead for water and extra expenditure for flattening canal slopes. The award was made rule of the Court. This Court however set aside decree
in respect of claim Nos. 3, 6 and 9. A contention was raised before the Supreme Court that the arbitrator ignored terms of the contract and
travelled beyond it. There was no clause in the contract for payment of any amount towards escalation. In this background, Supreme Court came
to the conclusion that the arbitrator travelled beyond the terms of contract and thereby acted arbitrarily, irrationally and capriciously. The relevant
observations in the judgment are as follows.
The arbitrator cannot act arbitrarily, irrationally, capriciously or independently of the contract. His sole function is to arbitrate in terms of the
contract. He has no power apart from what the parties have given him under the contract. If he has travelled outside the bounds of the contract, he
has acted without jurisdiction. But if he has remained inside the parameters of the contract and has construed the provisions of the contract; his
award cannot be interfered with unless he has given reasons for the award disclosing an error apparent on the face of it.... An arbitrator who acts
in manifest disregard of the contract acts without jurisdiction. His authority is derived from the contract and is governed by the Arbitration Act
which embodies principles derived from a specialised branch of the law of agency (see Mustill & Boyd''s Commercial Arbitration, Second Edition,
p.641). He commits misconduct if by his award he decides matters excluded by the agreement (see Halsbury''s Laws of England, Volume II,
Fourth Edition, Para 622). A deliberate departure from contract amounts to not only manifest disregard of his authority or a misconduct on his
part, but it may tantamount to a mala fide action. A conscious disregard of the law or the provisions of the contract from which he has derived his
authority vitiates the award.
(emphasis supplied)
In New India Civil Erectors (Private) Limited (10 supra), ONGC employed contractor for construction of 304 pre fabricated houses. The
work was not completed within the extended period. The contract was terminated, which was disputed before joint arbitrators. They passed
award for Rs. 1,00,00,000/- in favour of contractor and for Rs. 41,00,000/- for ONGC. The award was made rule of the Court, ONGC partly
succeeding. Claim No. 6 was with regard to measurement of the constructed area. ONGC pleaded to exclude balconies area. This was rejected
by the arbitrator but upheld by the High Court. Before the Supreme Court, the question was whether the arbitrators correctly construed the
relevant stipulation in the tender notice with regard to exclusion of balconies. While observing that, ""it is axiomatic that the arbitrator being a
creature of the agreement, must operate within the four corners of the agreement and cannot travel beyond it. More particularly, he cannot award
any amount which is ruled out or prohibited by the terms of the agreement"", the Supreme Court rejected contractor''s contention as under.
The above stipulation clearly says that total built-up area of a floor shall include the staircase and the common corridor but shall exclude balconies.
It expressly provides that ""work should be measured on the built-up area excluding balcony area"". It is undisputed that in the plan of flats attached
to the Tender Notice, balconies are provided.... The appellant could not have constructed flats except in accordance with the plans attached to the
TeiNotice, unless of course there was a mutually agreed modified plan later - and there is none in this case. We cannot, therefore, entertain the
contention at this stage that there are no balconies at all in the flats constructed and that, therefore, the aforesaid stipulation has no relevance. We
must proceed on the assumption that the plans attached to the Tender Notice are the agreed plans and that construction has been made according
to them and that in the light of the agreed stipulation referred to above, the areas covered by balconies should be excluded. In this view of the
matter we agree with the Division Bench that the arbitrators overstepped their authority by including the area of the balconies in the measurement
of the built-up area.
In Rajasthan State Mines and Minerals Limited Vs. Eastern Engineering Enterprises and Another, , appellant was awarded turn-key project
for excavation, removal, transportation of over-burden in the mining of rock phosphate ore, for a period of three years at a fixed rate of Rs. 35.80
ps for cubic meter. In September 1983, Eastern Engineering raised dispute for additional payment and/or compensation on account of escalation
of cost of work and breach of contract by RSMML. The claim was denied. The CMD of Bihar State Mineral Development Corporation Limited
was appointed as sole arbitrator, ""to decide all claims raised by the contractor"". The final award was passed in February 1986 awarding Rs. 1.07
crore to contractor, which included increase in excavation rates, use of high explosives, loss due to non-availability of explosives, additional costs
for mining etc. In the challenge of award before the District Judge, the core question was whether arbitrator correctly construed clauses 17 and 18
of the agreement, dealing with blasting operations and remuneration for contract works. According to the said contract, the rates fixed shall remain
firm, fixed and binding during the period of agreement till the issue of final certificate irrespective of any fall or rise in the cost. The learned District
Judge made the award rule of the Court, and was confirmed by the High Court of Rajasthan. The Supreme Court came to the conclusion that
there is no question of interpretation of clauses 17 and 18 as they are clearly unambiguous and that the contractor is not entitled or justified in''
raising any claim because of increase of costs and expenses and that the arbitrator traveled beyond the jurisdiction in allowing the increased rates.
The relevant observations are as follows.
It is both, in positive and negative terms by providing that the contractor shall be paid rates as fixed and that he shall not be entitled to extra
payment or further payment for any ground whatsoever except as mentioned therein. The rates agreed were firm, fixed and binding irrespective of
any fall or rise in the cost of the work covered by the contract or for any other reason or any ground whatsoever. It is specifically agreed that the
contractor will not be entitled or justified in raising any claim or dispute because of increase in cost of expenses on any ground whatsoever. By
ignoring the said terms, the arbitrator has travelled beyond his jurisdiction as his existence depends upon the agreement and his function is to act
within the limits of the said agreement. This deliberate departure from the contract amounts not only to manifest disregard of the authority or
misconduct on his part but it may tantamount to mala fide action.... It is settled law that the arbitrator is the creature of the contract between the
parties and hence if he ignores the specific terms of the contract, it would be a question of jurisdictional error which could be corrected by the
court and for that limited purpose agreement is required to be considered.
(emphasis supplied)
In Ch. Ramalinga Reddy (11 supra), clause 59 of APDSS fell for consideration. In that case, in respect of the contract for excavation of Darsi
branch canal disputes arose. The matter was referred to arbitration before whom the contractor raised 14 claims. An award was passed for an
amount of Rs. 50,89,342/-. The same was made rule of the Court. This Court however set aside the award in respect of claim Nos. 2, 3, 7, 8 and
12 and modified award in respect of claim Nos. 5,6,13 and 14. Before the Supreme Court, it was contended that the award was vitiated with
regard to certain claims, in that arbitrator did not allow extra rate for excavation of rocks, did not allow claim for payment of idle labour charges
and also did not allow claim for loss sustained due to arranging of wagons. The contractor relied on P.M. Paul (3 supra) in respect of the
contention that contractor would be entitled for compensation and extra costs during the extended period of the contract. Distinguishing the same,
Supreme Court, while confirming the judgment of High Court held.
Clause 59 of the 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 falls 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. On both counts, therefore, Claim 8 was impermissible and the High Court was right in so holding. Learned Counsel for the appellant drew our
attention to the judgment of this Court in P.M. Paul (supra). The disputes that were there referred to the arbitrator were: who was responsible for
the delay in completion of the building contracted for, what were the repercussions of such delay and how the consequences of the responsibility
were to be apportioned. After discussing the evidence and the submissions of the parties, the arbitrator found that there was escalation and that it
was, therefore, reasonable to allow compensation on account of losses under the first claim, which was ""on account of losses caused due to
increase in prices of materials and cost of labour and transport during the extended period of contract..."". In this context, this Court said that once
it was found that the arbitrator had jurisdiction to hold that there was delay in the execution of the contract due to the conduct of the respondent,
the respondent was liable for the consequences of the delay, namely, increase in prices. There was in P.M. Paul (supra) no clause in the contract,
which provided that the respondent would not be liable to pay compensation on account of delay in the work from any cause nor was it stipulated,
when extension of time was granted to the appellant to complete the work, that no claim for compensation would lie.
In Steel Authority of India Limited Vs. J.C. Budharaja, Government and Mining Contractor, , respondent obtainea a contract for construction
of tailing-cum-storage reservoir at iron ore project of the appellant. The work was to be completed within a period of two years. Clause 5 (iv) of
General Conditions of Contract provided as follows: ""Failure or delay by the Corporation to hand over to the Contractor possession of the lands
necessary for the execution of the work, or to give the necessary drawings, instructions or any other delay by the Corporation which due to any
other cause whatsoever shall in no way affect or vitiate the contract or alter the character thereof or entitle the Contractor to damage or
compensation therefore provided that the Corporation may extend the time for completion of the work by such period as it may consider
necessary and proper.
Clause 32 was to the following effect: ""Site for execution of work will be available as soon as the work is awarded. In case it is not possible
for the Corporation to make the entire site available on the award of work the Contractor will have to arrange his working programme accordingly.
No claim whatsoever for not giving the entire site on award of work and for giving the site gradually will be tenable."" The contractor after contract
period, raised a claim of about Rs. 18,00,000/- as damages for delay in handing over work sites. On reference, the arbitrators gave award with
modification with regard to interest. SAIL was unsuccessful before High Court. Before the Supreme Court, it was contended that the award is
without jurisdiction. Accepting the plea of SAIL, the apex Court held.
Clause 32 of the agreement specifically stipulates that no claim whatsoever for not giving the entire site on award of work and for giving the site
gradually will be tenable and the Contractor is required to arrange his working programme accordingly. Clause 39 further stipulates that no failure
or omission to carry out the provisions of the contract shall give rise to any claim by the Corporation and the Contractor, one against the other, if
such failure or omission arises from compliance with any statute or regulation of the Government or other reasons beyond the control of either the
Corporation or the Contractor. Obtaining permission from the Forest Department to carry out the work in the wildlife sanctuary depends on
statutory regulations. Clause (vi) of the general conditions of the contract also provides that failure or delay by the Corporation to hand over to the
Contractor possession of the lands necessary for the execution of the work or any other delay by the Corporation due to any other cause
whatsoever would not entitle the Contractor to damage or compensation thereof; in such cases, the only duty of the Corporation was to extend the
time for completion of the work by such period as it may think necessary and proper. These conditions specifically prohibit granting claim for
damages for the breaches mentioned therein. It was not open to the arbitrator to ignore the said conditions which are binding on the contracting
parties. By ignoring the same, he has acted beyond the jurisdiction conferred upon him. It is settled law that the arbitrator derives the authority from
the contract and if he acts in manifest disregard of the contract, the award given by him would be an arbitrary one. This deliberate departure from
the contract amounts not only to manifest disregard of the authority or misconduct on his part, but it may tantamount to mala fide action.
(emphasis supplied)
In Ramachandra Reddy & Company (4 supra), the Supreme Court reiterated that grant of extension of time for completion of the contract will
not in any way make the contractor eligible for any extra claim due to escalation in rates and materials or due to any other reasons under any
circumstances. In the said case, the contractor claimed separate rate for extra excavation of hardrock in the excavation work of approach canal of
Srisailam Project, in spite of the fact that the Government made payment in terms of Clause 25 of Schedule-C of Section 2 of the agreement. The
arbitrator did not allow the claim but the civil Court allowed such claim, which was set aside by this Court referring to Clause 59 of APDSS. The
Supreme Court affirmed this Court observing as follows.
Then again the question of granting a higher rate for any extra quantity of work executed by'' the contractor would at all arise only when the
contract provides for such escalated rate either expressly or by implication as in the case of S. Harcharan Singh Vs. Union of India, , where the
competent authority had agreed for the same by correspondence. But in the case in hand, when there is no such acceptance by the competent
authority, and there is no provision in the contract, permitting such escalated rate for the additional quantity of excavation made and in view of our
rejecting the contention raised on the basis of clause 63, the conclusion is irresistible that the contractor will not be entitled to a higher rate for the
additional excavation work and as such the High Court was fully justified in setting aside the direction of the trial Judge, remitting Claim Item 1 for
reconsideration and we see no infirmity with the said direction of the High Court to be interfered with. We also find sufficient force in the
submission of Ms Amareswari, relying upon the letters of the competent authority, specifically intimating that the grant of extension of time will not
in any way make the contractor eligible for any extra claim due to escalation in rates of labour and materials or due to any other reasons under any
circumstances and the decision of this Court in Ch. Ramalinga Rddy v. Superintending Engineer , supports the aforesaid contention.
In General Manager Northern Railways and Another Vs. Sarvesh Chopra, , work of construction and widening of a railway bridge was
entrusted to respondent. The disputes, which arose in relation thereto with reference to six claims of contractor, were sought to be referred to
arbitrator. A single Judge of Delhi High Court referred two claims to arbitration holding that four claims being ""excepted matters"" within the
meaning of clause 63 of Contract were not arbitrable. The Division Bench however disagreed and referred the matters to arbitrator. The Supreme
Court elucidated the scope of contract clause disentitling the contractor for any compensation, as follows.
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 be entertained by the Railways"", 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 be determined by an authority of the 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 Clauses 2A.2(b) and 12.1.2. The
first category is an ""excepted matter"" because the claim as per the 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 Supreme Court also approved the decision of Division Bench of this Court in Associated Engineering Enterprises (9 supra) and observed
as under.
In Ch. Ramalinga Rddy v. Superintending Engineer , claim was allowed by the 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 the 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 the High Court of Andhra
Pradesh in Associated Engineering Co. Vs. Government of Andhra Pradesh and another, , 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 conditions of the contract provided that neither party to
the contract shall claim compensation ""on account of delays or hindrances to the 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 Ramnath International Construction Pvt. Ltd. Vs. Union of India (UOI) and Another, , the Government of India awarded the contract of
construction of aircraft hangar, airtech hangar and connected works as well as road works to the appellant. Disputes in the execution of contract
were referred to arbitrator, who passed awards. On appropriate applications, learned single Judge rejected the cases to set aside and made
awards rule of the Court. Division Bench partly allowed appeals of Government, aggrieved by which, the contractor filed appeals before Supreme
Court. Clause 11(c) of the contract provided that no claim in respect of compensation or otherwise, howsoever arisen, as a result of extensions
granted shall be admitted. One of the questions before Supreme Court was whether arbitrator committed legal misconduct in excluding Clause
11(c). Answering the question in the affirmation, apex Court dismissed appeals placing reliance on Ramalinga Reddy (11 supra) and Associated
Engineering Enterprises (9 supra) observing as under.
Clause (C) provides that where extensions have been granted by reason of the delays enumerated in Clause (A) which were beyond the control of
the contractor, or on account of the delays on the part of the employer specified in Clause (B), the contractor is not entitled to make any claim
either for compensation or otherwise, arising in whatsoever manner, as a result of such extensions. After enumerating certain delays, Sub-clause
(viii) of Clause (A) specifically mentions delay on account of any other cause beyond the control of the contractor. The causes for delays specified
in clause A, thus, encompass all delays over which the contractor has no control. This will necessarily include any delays attributable to the
employer or any delay for which both the employer and the contractor are responsible. The contract thus provides that if there is any delay,
attributable either to the contractor or the employer or to both, and the contractor seeks and obtains extension of time for execution on that
account, he will not be entitled to claim compensation of any nature, on the ground of such delay, in addition to the extension of time obtained by
him. Therefore, the claims for compensation as a consequence of delays, that is claim 24 of Hangar Contract and claims 13 to 16 of Road
Contract are barred by clause 11(C).
In all these cases, Supreme Court disallowed the claim of contractor for compensation on the ground that arbitrator ignored exclusionary
clause and awarded compensation or escalation charges during the extension period. It is well settled that when the contract prohibits any claim for
compensation on account of delay in completion of the work, the arbitrator would be acting illegally and without jurisdiction if such claim for
compensation is allowed. We may also point out that when once the contract contains time extension clause as well as no compensation clause, no
contractor can be allowed to claim compensation after seeking extension of time for completion of the work. In a given case, if the contractor fails
to complete the work within the stipulated time, the employer can even terminate the contract duly forfeiting security deposit. Instead of doing so,
time was extended for completion of the work. Having accepted to complete the work during extended period, as permitted by clause in the
contract, the contractor cannot be allowed to raise claim compensation, under the same clause in which he sought extension of time. As already
noticed, out of eight claims made by the contractor, claim Nos. 1 to 4 and 8 were partly allowed and claim Nos. 5, 6 and 7 were rejected about
which the contractor did not make any grievance before the civil Court. Therefore, applying the law as discussed hereinabove, we need to
consider four claims, which have been rejected by learned Additional Chief Judge. If any of these claims are independent of clause 48, the
consideration would be different. But we are afraid that all the five claims allowed by the arbitral tribunal are with reference to the work which was
completed during extended period.
Claim No. 1 relates to prolongation of contract due to breaches of contract and charges for maintenance of establishment for extended period
of two years. DDC claimed Rs. 11,10,782/- under this account. It was contended that DDC took possession of the site on 15.04.1991 and made
arrangements to proceed with the work. But the drawings were not ready and dismantling of site was not done which was to be completed by
another agency. The necessary drawings were made available on 01.07.1991 due to which progress of work suffered. Steel was not made
available in time and due to non-availability of 6 mm of steel, DDC could not complete the work. There was delay due to sugarcane crushing
season and the actual work commenced in respect of certain items of work only after 15.05.1992. DDC by November 1992, when the work was
completed, carried out work valued at Rs. 77.16 lakhs. Due to delay, DDC had to maintain work-force and incurred additional expenditure. The
arbitral tribunal awarded Rs. 2,14,700/- at 7.5% of agreed value for 4 1/2 months. We have perused the documents placed before us. NSF paid
amounts for extra work done and having rejected claim for compensation vide their letter dated 10.08.1993, allowed the old rates. From a perusal
of the claim and the stand taken by NSF, it is very clear that whatever amount claimed was only towards maintaining their organisation for a period
of four (4) months from 15.04.1991 to 09.08.1991, allegedly due to delay in supplying drawings and material by NSF. In view of clause 48 of
GCC, DDC is not entitled for any compensation.
In their original claim statement, DDC prayed for an amount of Rs. 8,65,000/- towards escalation in materials, labour and fuel for the work
done after original period. The amount was again upwardly modified to Rs. 10,01,000/-. As noticed supra, under the agreement, dated
26.04.1991, the work was to be completed by 14.10.1991, but actually DDC completed the work on 30.11.1992. Therefore, they prayed for
escalation at 15% over the volume of the work done after the agreement period. NSF opposed the claim inter alia on the ground that there is no
such escalation clause and that agreement prohibits any compensation for the work done during the extended period. Arbitral tribunal agreed that
there is no escalation clause in agreement. But, relying on Continental Construction Co. Ltd. Vs. State of Madhya Pradesh, and State of A.P. and
Another Vs. K. Bapiraju and Another, , the arbitral tribunal opined that when there is delay in completion of work due to hindrance to work,
compensation to non-utilisation of men and material can be permitted. Accordingly, claim No. 2 was allowed for an amount of Rs. 6,06,000/-.
While doing so, the arbitral tribunal followed cost index method observing that as on 11.02.1991, CPW cost index was 564 but escalated to 664
as on 31.12.1991, and therefore, escalation of 15% would be reasonable. After perusing the arbitral award and applying the law laid down by
Supreme Court in regard to ''exclusionary clauses in the agreement'' or ''no compensation clauses'', we are convinced that the arbitral tribunal acted
outside the binding covenants in the agreement and such an award is unsustainable.
Claim No. 3 for an amount of Rs. 5,03,000/- was made under the heading ''due to incorrect deduction and the refund of the deduction due to
failure of the factory authorities due to delay in supply of drawings and due to large variations made in the work against the original promise''.
Under this claim, what exactly was asked for is the rebate. As noticed supra, when DDC entered into contract, they have voluntarily agreed to give
lumpsum deduction of Rs. 3,00,000/- (Rupees three lakhs only). There is no dispute that this Rs. 3,00,000/- (Rupees three lakhs only) lumpsum
deduction offered by DDC was converted into percentage and was made applicable to entire work. DDC contended that as there was inordinate
delay in supplying drawings, making available the site after dismantling and store materials, there is no obligation to allow deduction on the value of
the work. NSF opposed the plea that the lumpsum deduction granted at the time of negotiations was converted into percentage points (6.53%)
and DDC themselves effected such deduction in the pre-final bill. The arbitral tribunal did not agree with NSF and allowed Rs. 3,76,000/- under
claim No. 3. While doing so, they came to conclusion that it was not the intention of the parties at the time of acceptance of the tender, to allow
deduction on the entire work and therefore, deduction of 6.53% from the entire work. The plea of NSF that DDC voluntarily agreed while sending
pre-final bill was also rejected.
At or about entering into contract, DDC addressed a letter on 01.04.1991 agreeing to give lumpsum discount of Rs. 3,00,000/- (Rupees three
lakhs only) as a result of which their offer of Rs. 45,94,020/- got reduced to Rs. 42,94,020/-. This was accepted by NSF on 05.04.1991. The
offer of deduction according to DDC was one time offer as seen from the letter of DDC, dated 10.11.1991 in which while reiterating that the offer
is one time, they requested to waive the rebate as the work is not proceeding on schedule. Curiously, they did not stick to their stand, while
submitting the pre-final bill on 29.05.1993. In the said bill, DDC themselves deducted 6.53% towards rebate from the gross value of the work.
Further, when the final bill was processed and NSF sent final bill amount vide letter, dated 26.05.1994 for Rs. 11,871.28 taking into consideration
the pre-final bill which is already settled, there was no demur. Even in the communication of NSF, rebate of 6.53% was shown. Therefore, the
inference drawn by arbitral tribunal that offer made by DDC is not voluntary cannot be accepted. Reading the relevant documents and after
perusing the pre-final bill and final bill, and ascribing the ordinary meaning to the language used therein, we are convinced that the offer made by
DDC is voluntary and therefore, they are bound by the obligation to provide rebate. The claim No. 3 therefore is unsustainable.
An amount of Rs. 5,69,500/- was claimed ''due to delay in settlement of rates, final bill and payments''. DDC pleaded that there was
considerable delay in finalizing supplementary rates as well as payments and that they could get the payment of Rs. 11,30,000/- after delay of
about two years. They also claimed interest on the said amount at 18% per annum from December, 1992 to December, 1994 on Rs. 4,06,800/-.
An amount of Rs. 1,82,790/- being interest at 18% on non-utilisation of profits was also claimed. The arbitral tribunal having come to conclusion
that the said amount was paid in instalments for a period of 22 months allowed Rs. 1,86,000/- being interest at 18% for 11 months. The attention
of this Court is invited to clause 7 of SCC to deny such claim. The said clause is to the effect that ""no interest shall be allowed to the contractor on
the sum retained with the employer irrespective of the amount and time involved"". The arbitral tribunal appears to have ignored the said condition.
In the absence of any clause in the agreement, entitling either of the parties to claim interest on delayed payments, award of such interest would be
certainly beyond the scope of the agreement. Therefore, this claim cannot be sustained.
Thus, claim Nos. 1 and 2 related to compensation by way of escalation/enhanced rates are prohibited by clause 48 of GCC and claim No. 4 is
prohibited by clause 7 of SCC. Insofar as claim No. 3 is concerned, the arbitral tribunal was in error in drawing an inference that DDC did not
voluntarily agree to give rebate. Therefore, we are convinced that arbitral tribunal acted without jurisdiction beyond the terms of contract and
ignored relevant evidence, and therefore, the Judgment of the Court below does not warrant any interference.
Whether interest is payable
In many eventualities like delay in completion of pre-agreement formalities, delay during execution of work, delay in payment of the bills for the
work done and the like, the question often crops up as to whether the contractor is entitled for interest. The incidental question is related to the rate
of interest. A Constitution Bench of Supreme Court in Secretary, Irrigation Department, Government of Orissa and others Vs. G.C. Roy, ,
considered jurisdiction of arbitral tribunal to award pendente lite interest, when (i) agreement is silent as to award of interest; (ii) agreement does
not specifically provide for grant of such interest; and (iii) agreement does not prohibit grant of interest. On consideration of various precedents, the
conspectus and the principles were summarized which are as below.
(i) 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 called interest, compensation or damages. This basic consideration is as 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. This is the principle of Section 34, CPC and there is no reason or principle
to hold otherwise in the case of arbitrator.
(ii) An arbitrator is an alternative form (sic forum) for resolution of disputes arising between the parties. If so, he must have the power to decide all
the disputes or differences arising between the parties. If the arbitrator has no power to award interest pendente lite, the party claiming it would
have to approach the court for that purpose, even though he may have obtained satisfaction in respect of other claims from the arbitrator. This
would lead to multiplicity of proceedings.
(iii) An arbitrator is the creature of an agreement. It is open to the parties to confer upon him such powers and prescribe such procedure for him to
follow, as they think fit, so long as they are not opposed to law. (The proviso to Section 41 and Section 3 of Arbitration Act illustrate this point).
All the same, the agreement must be in conformity with law. The arbitrator must also act and make his award in accordance with the general law of
the land and the agreement.
(iv) Over the years, the English and Indian courts have acted on the assumption that where the agreement does not prohibit and a party to the
reference makes a claim for interest, the arbitrator must have the power to award interest pendente lite. Seth Thawardas Pherumal Vs. The Union
of India (UOI), has not been followed in the later decisions of this Court. It has been explained and distinguished on the basis that in that case there
was no claim for interest but only a claim for unliquidated damages. It has been said repeatedly that observations in the said judgment were not
intended to lay down any such absolute or universal rule as they appear to, on first impression. Until Executive Engineer (Irrigation), Balimela and
Others Vs. Abhaduta Jena and Others, almost all the courts in the country had upheld the power of the arbitrator to award interest pendente lite.
Continuity and certainty is a highly desirable feature of law.
(v) Interest pendente lite is not a matter of substantive law, like interest for the period anterior to reference (pre-reference period). For doing
complete justice between the parties, such power has always been inferred.
(emphasis supplied)
Supreme Court further held
Where the agreement between the parties does not prohibit grant of interest and where a party claims interest and that dispute (along with the claim
for principal amount or independently) is referred to the arbitrator, he shall have the power to award interest pendente lite. This is for the reason
that in such a case it must be presumed that interest was an implied term of the agreement between the parties and therefore when the parties refer
all their disputes - or refer the dispute as to interest as such - to the arbitrator, he shall have the power to award interest. This does not mean that in
every case the arbitrator should necessarily award interest pendente lite. It is a matter within his discretion to be exercised in the light of all the facts
and circumstances of the case, keeping the ends of justice in view.
(emphasis supplied)
In Bhagawati Oxygen Ltd. Vs. Hindustan Copper Ltd., , Supreme Court considered the question as to whether arbitral tribunal has had power
to award interest at 18% per annum for pre-reference period, pendente lite and post-award period i.e., future interest from the date of award till
the date of payment. Insofar as interest pendente lite is concerned, the apex Court followed G.C.Roy (25 supra) and reiterated the principles
(extracted hereinabove). Making reference to G.C.Roy (25 supra) and other cases, the law laid down by their Lordships with regard to interest for
pre-reference period and post award period is as follows (paras 38 and 40).
So far as interest for pre-reference period is concerned, in view of the conflicting decisions of this Court, the matter was referred to a larger Bench
in Executive Engineer, Dhenkanal Minor Irrigation Division v. N.C. Budharaj (2001) 2 SCC 721. The Court, by majority, held that an arbitrator
has power to grant interest for pre-reference period provided there is no prohibition in the arbitration agreement excluding his jurisdiction to grant
interest. The forum of arbitration is created by the consent of parties and is a substitute for conventional civil court. It is, therefore, of unavoidable
necessity that the parties be deemed to have agreed by implication that the arbitrator would have power to award interest in the same way and
same manner as a court ...As to post-award interest, the point is covered by the decision of this Court in Hindustan Construction Co. Ltd. Vs.
State of Jammu and Kashmir, . It was held there that an arbitrator is competent to award interest for the period from the date of the award to the
date of decree or date of realisation, whichever is earlier.
(emphasis supplied)
In G.C. Roy (25 supra) and Bhagawati Oxygen Limited (26 supra), the Supreme Court considered the right of a building contractor to claim
interest on the amounts due for pre-reference, pendente lite and post arbitration periods. The two cases applied the principle that even if there is no
agreed term between the parties regarding payment of interest, in the absence of specific prohibition, the arbitrator has got power to award
interest. If the agreement specifically prohibits and bars claim for interest, the arbitrator has no power to award interest. This aspect of the matter
has again been considered by Supreme Court in a recent judgment dealt with hereunder.
In Ferro Concrete Construction (13 supra), the question was related to awarding pre-reference interest, interest pendente lite and post
arbitration interest. Observing that in the absence of express bar in the contract in regard to interest, the arbitral tribunal can award interest, the
Supreme Court laid down as follows.
The appellants contended that there was no provision in the contract for payment of interest on any of the amounts payable to the contractor and,
therefore, no interest ought to be awarded. But this Court has held that in the absence of an express bar, the arbitrator has the jurisdiction and
authority to award interest for all the three periods - pre-reference, pendente lite and future [vide decisions of Constitution Bench in Secretary,
Irrigation Department, Government of Orissa and others Vs. G.C. Roy, ; Executive Engineer, Dhenkanal Minor Irrigation Division v. N.C.
Budharaj (2001) 2 SCC 721 : 2001(1) Arb. LR 346 (SC) and the subsequent decision in Bhagawati Oxygen Ltd. Vs. Hindustan Copper Ltd., .
In this case as there was no express bar in the contract in regard to interest, the arbitrator could award interest.
Therefore arbitral tribunal while dealing with question of grant of interest either pre-reference, pendente lite and post award, cannot ignore any
clause prohibiting grant of interest. In the contract between NSF and DDC, clause 7 of SCC, as already noticed, bars the award of interest. As
per the said clause, the contractor is not entitled to claim any interest on the amount retained by NSF irrespective of time involved. Therefore, the
award of interest by the arbitral tribunal is unsustainable as it is beyond the jurisdiction in ignorance of clause 7 of SCC.
In the result, for the above reasons, we do not find any reason to interfere with the order of the Court of V Additional Chief Judge, City Civil
Court, Hyderabad, in setting aside the arbitral award dated 26.8.1998. The civil miscellaneous appeals are accordingly dismissed. We direct the
parties to bear their own costs.