Siddhardha Constructions Pvt. Ltd. vs Union of India (UOI) and Others

Nooty Ramamohana Rao, J.—This Application has been moved under Sub-section (6) of Section 11 of the Arbitration and Conciliation Act, 1996, (henceforth referred to as ''the Act''), seeking intervention for appointment and constitution of the Arbitral Tribunal for resolving the disputes that are, said to have, arisen between the parties.

The Applicant Company responded to the tender notification floated by the respondent Railways on 29-07-2002 for the work relating to "supply and stacking of 50 mm gauge hard durable stone ballast". The tenders were opened on 04-09-2002 and the Applicant Company was awarded the work through a communication of acceptance of its tender on 31-10-2002, by the respondents. The Applicant Company was required to supply and stack 9900 cum of the hard ballast @ Rs. 492 per cubic metre and thus, the total value of the contract has been worked out to be Rs. 48,70,800/-. According to the Applicant Company it started undertaking the execution of the work of collecting the specified gauge of hard ballast stone, but however, could not unload or stack it for want of spaces to be allocated by the Railways. It is the case of the Applicant Company that the entire hard ballast material of 9900 cum is not required to be dumped or stacked at one place, but is required to be stacked at various locations, where the project work was going on. It was the case of the Applicant Company that the site, which has been required to be made available for such dumping has either not been physically available or even, if available, the said site is all filled with permanent way materials belonging to the Railways and thus, there was an actual constraint that has been brought about for the Applicant Company to stack the ballast procured by it. The Applicant Company has pointed out that in terms of the powers available under the "General Conditions of the Contract", subsidiary agreements have been executed extending the time for completion of the work on various dates; extending right up to 31-08-2006. During this process, the Applicant Company has been soliciting the revision of the rate, for, the costs of the procurement of the ballast have gone up, but however, the Railways have not agreed for the same. It is stated in Paragraph No. 5 of the present Application that the Applicant Company had executed the work for a value of Rs. 36,55,504/- and thus, supplied a quantity of 7429.88 7 cum. Hence, the Applicant solicited payment of the money for the work executed and when the final bill was prepared on 03-07-2007, the same was signed under protest. He has clearly recorded the expression "under protest" on the "no claim certificate in final bill" prepared by the Railway administration. According to the Applicant it has made a request on 21-01-2008 seeking the General Manager, South Central Railway, Secunderabad, in terms of Sub-sections (5) and (6) of Section 11 of the Act, to refer the claims/disputes for resolution to the Arbitral Tribunal. The Office of the General Manager, had acknowledged the receipt of the said notice on 22-01-2008, but since, there was no response from him by constituting the Arbitral Tribunal, it has moved the present Application on 17-06-2008 after serving an advance copy thereof on one of the Standing Counsel for the Indian Railways.

The Applicant has crystallized its disputes/claims numbering 10, as follows:

Claim No. 1: ___________ Refund of Security Deposit Rs. 2,51,100-00 Claim No. 2: ___________

Loss of productivity and under utilization of the organization due to non-provision of the site for collection of ballast by the Railways, 10% of agreement value Rs. 4,87,080-00 Claim NQ-3: __________

Loss due to delay in receiving the payments due to delay in dumping, waiting for linking of track to be done by another agency Rs. 3,00,000-00 Claim No. 4: __________

Expenditure for making path ways repeatedly for collection of ballast Rs. 1,20,000-00 Claim No. 5: Idling of vehicles due to delay in showing the site for collection by Railways, for 24 months @ Rs. 1,20,000/month (2 tippers, 20 tons capacity @ Rs.60,000/- per month) Rs. 28,80,000-00 Claim No. 6: ____________

Idling of dumping labour due to delay in the linking of track by another contractor. 20 labour for a total period of 300 days @ Rs. 100/- per head per day. Rs. 6,00,000-00 Claim No. 7: ___________

Additional rate for the supplies made beyond the original currency of the contract for a quantity of 5811.8 cum @ Rs. 150/- per cum. Rs. 8,71,770-00 Claim No. 8: ___________

Loss due to continuation of overheads beyond the initial completion period (28-02-2003) from March 2003 up to 31 -08-2006 for site office and Head Office, as per Hudson''s formula up to the date of termination.Rs.48,70,800 x 42/2 x 10% Rs. 51,14,340-00 Claim No. 9: ___________

Interest on all the above from September 2006 to the date of payment at 24% compounded. ...To be worked out. Claim No. 10: ____________

Cost of arbitration. ...To be worked out. In fact, these are the very claims, which the Applicant has listed out in its representation dated 15-09-2007, which was addressed to the General Manager, South Central Railway, Secunderabad, as well as the Chief Administrative Officer/Con/SCR/Secunderabad and the Chief Engineer/C-V/South Central Railway, Secunderabad, seeking settlement of the same. This communication of the Applicant Company was received by the General Manager, South Central Railway, on 20-09-2007.

Thus, it is clear that there is a contract entered into by and between the parties on 22-01-2003 with regard to the supplying, stacking and leading on to the track and dumping 50 mm gauge hard angular durable stone ballast, and the total value of the work was noted as Rs.48,70,800/-. The agreement entered into by and between the parties had specifically noted the date of issuance of the ''acceptance'' letter by the respondents on 01-10-2002, and hence, the date of completion of the contract was slated as 28-02-2003 and that a security deposit of Rs.2,51,100/- has also been collected from the Applicant Company. This agreement has specifically pointed out the "General Conditions Of Contract" governing the performance of the works covered by the said agreement or the "General Conditions of Contract of the Engineering Department of the South Central Railway" as amended from time to time, will form part of the agreement. Clauses 63 & 64 of the General Conditions of Contract of the Engineering Department of the Ministry of Railways, specifically dealt with the issue of settlement of disputes that might crop up between the parties. In particular, Clause-64, has clearly spelt out the detailed procedure for constituting the Arbitral Tribunal comprising of Railway Officers upon a demand in that regard being made. Thus, the disputes that have arisen between the parties are solicited to be resolved, through the communication dated 15-09-2007 and more specifically for being referred for resolution through the mechanism of arbitration through the notice dated 22-01-2008, which was received and acknowledged by the competent authority, namely, the General Manager, South Central Railways, Secunderabad, on 22-01-2008.

When notice was issued in the above matter on 07-08-2008, the respondents entered appearance and the Deputy Chief Engineer of the South Central Railway, filed a very brief counter affidavit in the matter. While denying the various averments made by the Applicant in the present Application, it is specifically asserted in Paragraph No. 3 of the counter affidavit that no breach of contract has been committed by the Railways. It is, further, pointed out that pursuant to the letter dated 15-09-2007 of the Applicant, the respondent Railways have taken action and the claims/disputes are being referred for arbitration and, in that process, the General Manager, South Central Railway, vide their proceedings dated 20-06-2008, informed the Applicant to indicate two names of his choice, of the four names suggested, for constituting the Arbitral Tribunal. The communication dated 20-06-2008 has been enclosed to the counter affidavit. It reads as follows:

Sub: In the Matter of Arbitration of Claims/Disputes arising out of Supplying and stacking of ballast in MLY Yard Agt.12/CAO/C/SC/2003 dt.22-1-03.

Ref: Your letter No. SIDCONS/Moula Ali/200209/32 Dated 15-09-07.

** ** **

The Claims preferred by you in the above agreement are being referred for Arbitration. In this connection, General Manager, S.C.Rly, has indicated a panel of the following officers for appointment as Arbitrators :

(1) Sri S.K.Sharma CEE

(2) SriH.J.Joshi CCM

(3) Sri Anand Kumar CSTE

(4) Sri Pradeep Kumar PCE

Please indicate names of any two officers of your choice from the above indicated list to enable this office to process further in appointing the Arbitral Tribunal.

Therefore, the respondents have asserted that necessary steps are being taken for constituting the Arbitral Tribunal and hence, the intervention of this Court is not warranted.

Alternatively, it was sought to be pleaded that all disputes and differences that arise in pursuance of the contracts are liable to be determined by the Railways in terms of Clauses 63 & 64 of the General Conditions of Contract of the Engineering Department of the Ministry of Railways and, therefore, only Railway Officers can be appointed as Arbitrators to adjudicate the disputes of the parties.

I have heard Sri T. Ravi Kumar for the Applicant and Sri Rajeev Reddy for the respondent Railways.

The learned Counsel for the Applicant submits that the General Manager, South Central Railway, is the competent authority and the said competent authority has been approached seeking resolution of the disputes by way of reference to Arbitral Tribunal and, since, he had failed to constitute the Tribunal within thirty days after receipt of the notice, and, in fact, had failed to take any steps as on 17-06-2008, the date on which the present Application has been moved, the General Manager, has forfeited his right to constitute the Arbitral Tribunal any time later on and the same is, therefore, got to be constituted by the Designate of the Chief Justice. He placed strong reliance upon the judgments rendered by the Supreme Court in Datar Switchgears Ltd. Vs. Tata Finance Ltd. and Another, and contended that the General Manager, has forfeited his right to constitute the Tribunal. He has also placed reliance upon the judgment rendered by the Supreme Court in Union of India v. Bharat Battery Manufacturing Company (P) Ltd. 2007 (3) A.L.R. 282 (SC). and the judgment of this Court in Madhava Hytech Engineers Private Limited Vs. Union of India (UOI), South Central Railways and Another, , another judgment of this Court in Galada Power and Telecommunication Limited Vs. Transmission Corporation of A.P. Ltd. (A.P. TRANSCO), and another unreported judgment of a learned single Judge of this Court in N. Sri Hari Engineers and Contractors v. Bharath Sanchar Nigam Limited and Ors. (A.A. No. 4 of 2006, dated 18-01-2008). He further contended that there are no specific qualifications that are needed, for one, to be appointed as an Arbitrator and the disputes raised in the instant case are all those, which are capable of being resolved by any independent and impartial agency and there is no specific or special knowledge of the Railways workings or the procedures and practices adopted by them, needed for resolving the disputes.

Per contra, Sri Rajeev Reddy submits that when the contract has specifically provided for appointment of the Railway Officers for constituting the Arbitral Tribunal, it is only appropriate that they should be appointed. The learned Standing Counsel for the Railways has also submitted that some of the claims made by the Applicant are clearly outside the limits of the contract and Courts have already held that such claims are untenable and unjust, therefore, such claims are not liable to be referred at all. The learned Standing Counsel would further submit that the process of resolution of disputes through the mechanism of arbitration should not be reduced to a mechanical process and that entertainment of inflated claims by any Arbitral Tribunal exposes the entire exercise to criticism about lack of seriousness on the part of the Arbitral Tribunal itself. He pressed into service judgments rendered by a Division Bench of this Court in Government of A.P. rep. by The S.E. Construction Circle S.R.S.P. Huzurabad and Anr. v. V.Satyam Rao 1996 (1) ALT 279 (D.B.) The Superintending Engineer, P.W.D. (R and B) and Another and The State of Andhra Pradesh, R and B Dept. and Others Vs. Patibandla Radhkrishna Murthy and Others, ; State of Jammu & Kashmir and Another Vs. Dev Dutt Pandit, ; L. Nagi Reddy Vs. Union of India (UOI) and Others, ; Chief Signal and Telecommunication Engineer (Projects), South Central Railway Vs. Hytronics Enterprises and Others, and Union of India v. Chandalavada Gopalakrishna Murthy and Ors. 2008 (4)SCJ 849.

In view of the rival contentions, the first and foremost question, which requires to be determined is whether the respondent Railways have lost their right to constitute the Arbitral Tribunal or not?

As was noticed supra, two specific demands have been made by the Applicant Company one on 17-09-2007 followed up by another on 21-01-2008, seeking for resolution of the disputes by way of reference to the Arbitral Tribunal. Both the notices have been acknowledged by the General Manager, South Central Railway, along with others. In the counter affidavit, it is made clear that steps are taken for constituting the Arbitral Tribunal by suggesting four names, from whom, two officers may be chosen by the Applicant. The Proceeding dated 20-06-2008 of the General Manager in that regard is enclosed to the counter affidavit, which unmistakably refers to the communication of the Applicant dated 17-09-2007. Thus, more than nine months after the demand for resolution of the disputes, the General Manager, has started taking steps for constituting the Tribunal. It is now settled principle that an Arbitral Tribunal can be constituted even after expiry of thirty days time period, but however, such measures and steps should be taken by the competent authority before one of the parties to the disputes, approaches the High Court. As was noticed supra, the present Application has been moved in this Court on 17-06-2008, duly serving an advance copy on one of the panel of Advocates of the Indian Railways. It will be appropriate, therefore, in this context to notice what the Supreme Court has pointed out in Datar Switchgears Ltd. Vs. Tata Finance Ltd. and Another, at paragraph No. 19, which reads as follows:

So far as cases falling u/s 11(6) are concerned-such as the one before us-no time limit has been prescribed under the Act, whereas a period of 30 days has been prescribed u/s 11(4) and Section 11(5) of the Act. In our view, therefore, so far as Section 11(6) is concerned, if one party demands the opposite party to appoint an arbitrator and the opposite party does not make an appointment within 30 days of the demand, the right to appointment does not get automatically forfeited after expiry of 30 days. If the opposite party makes an appointment even after 30 days of the demand, but before the first party has moved the Court u/s 11. that would be sufficient. In other words, in cases arising u/s 11(6), if the opposite party has not made an appointment within 30 days of demand, the right to make appointment is not forfeited but continues but an appointment has to be made before the former files application u/s 11 seeking appointment of an arbitrator. Only then the right of the opposite party ceases.

(emphasis is supplied)

The principle enunciated in Datar Switchgears Ltd. Vs. Tata Finance Ltd. and Another, has been followed and reiterated by a three Judge Bench of the Supreme Court in Pun] Lloyd Limited v. Petronet Mhb Limited ( 2206) 2 SCC 638. It has been held that when once the notice period of thirty days had expired and one of the parties to the agreement had already moved the Chief Justice or his Designate u/s 11(6) of the Act, the opposite party, having right to appoint the Arbitrator under the arbitral agreement, loses the right to do so. Therefore, in the instant case, the General Manager, who is the competent authority, under Clause 64 of the General Conditions of Contract of the Engineering Department of the Railways, to constitute the Arbitral Tribunal, has lost out his power to take any steps for constituting the Arbitral Tribunal after 17-06-2008, the date on which the Applicant herein has moved the Designate of the Chief Justice under Sub-section (6) of Section 11 of the Act. Hence, the objection raised by the Railways in this regard is liable to be rejected.

It is appropriate at this stage to notice what the Chief Justice or his Designate is needed to examine while entertaining applications under Sub-sections (5) or (6) of Section 11 of the Act, as was set out in SBP and Co. v. Patel Engineering (2005) 8 SCC 613 at Paragraph No. 37 and the same reads as follows:

It is fundamental to our procedural jurisprudence, that the right of no person shall be affected without being heard. This necessarily imposes an obligation on the Chief Justice to issue notice to the opposite party when he is moved u/s 11 of the Act. The notice to the opposite party cannot be considered to be merely an intimation to that party of the filing of the arbitration application and the passing of an administrative order appointing an arbitrator or an Arbitral Tribunal. It is really the giving of an opportunity of being heard. There havebeen cases where claims for appointment of an arbitrator based on an arbitration agreement are made ten or twenty years after the period of the contract has come to an end. There have been cases where the appointment of an arbitrator has been sought, after the parties had settled the account and the party concerned had certified that he had no further claims against the other contracting party. In other words, there have been occasions when dead claims are sought to be resurrected. There have been cases where assertions are made of the existence of arbitration agreements when, in fact, such existence is strongly disputed by the other side who appears on issuance of notice. Controversies are also raised as to whether the claim that is sought to be put forward comes within the purview of the arbitration clause concerned at all. The Chief Justice has necessarily to apply his mind to these aspects before coming to a conclusion one way or the other and before proceeding to appoint an arbitrator or declining to appoint an arbitrator. Obviously, this is an adjudicatory process. An opportunity of hearing to both parties is a must. Even in administrative functions if rights are affected, rules of natural justice step in. The principles settled by Ridge v. Baldwin ((1963) 2 All ER 66 : 1964 AC 40 : (1963) 2 WLR 935 (HL)) are well known. Therefore, to the extent, Konkan Rly. ( Konkan Railway Corporation Ltd. and Another Vs. Rani Construction Pvt. Ltd., ) states that no notice need be issued to the opposite party to give him an opportunity of being heard before appointing an arbitrator, with respect, the same has to be held to be not sustainable.

However, the contention of the learned Standing Counsel for the respondent Railways that some of the claims made by the Applicant cannot be referred for adjudication needs to be considered. He has placed reliance upon a judgment of the Supreme Court in Ch. Ramalinga Reddy v. Superintending Engg and Anr. 1994 (5) SCALE 67, wherein it was held that the respondent State Government could not be liable to pay compensation on account of delay in execution of work for any cause when extension of time was granted to the Appellant to complete the work, as the contract has specifically provided a clause in that regard for no payment of any compensation. The same principle was reiterated by the Supreme Court in Chandalavada Gopalakrishna Murthy''s case cited 2008 (4) SCJ 849. The learned Counsel for the Railways has drawn my attention to Clause 17-A(ii) and (iii), wherein the Railways are specifically exempted from any obligation to pay compensation or damages for the delay in execution of works and hence, he pointed out that Claim No. 2 made by the Applicant is, therefore, not liable to be adjudicated upon. In view of the principle settled by the Supreme Court that where the contract has been extended in terms of the contract, compensation cannot be awarded by the Arbitrator, Claim No. 2 made by the Applicant does not require or warrant to be referred for adjudication.

Similarly, the learned Standing Counsel has pointed out that the Division Benches of this Court in Government of A.P. rep. by The S.E. Construction Circle, S.R.S.P., Huzurabad case cited 1996 (1) ALT 279 (D.B.) and in The Superintending Engineer, P.W.D. (R and B) and Another and The State of Andhra Pradesh, R and B Dept. and Others Vs. Patibandla Radhkrishna Murthy and Others, , have clearly held that payment for idling labour or machinery is also not referable, being outside the jurisdiction of the Arbitral Tribunal. The legal principles which require the Arbitrators, not to entertain similar claims have been crisply set out in the following manner by the Division Bench in The Superintending Engineer, P.W.D. (R and B) and Another and The State of Andhra Pradesh, R and B Dept. and Others Vs. Patibandla Radhkrishna Murthy and Others, :

....It is well settled that the arbitrator is bound by the contract between the parties and to decide the claims referred to him in the light of the contractual provision. If the award is found to be contract to the plain terms of the contract, it is liable to be set aside, vice Ch. Ramalinga reddy v. superintending Engineer 1995 (3) SCALE 67. Rejecting the argument that the Court should be circumspect in interfering with an award reached by an arbitrator, it was observed in the same case:

we agree, but circumspection does not mean that the Court will not intervene when the arbitrator has made an award in respect of a claim which is, by the terms of contract between the parties, plainly barred.

It is a different matter if there is some doubt about the construction or interpretation of a clause in the Agreement and the arbitrator chooses to take one of the possible views-whether it be right or wrong, vide M/s. Hind Builders Vs. Union of India, , Food Corporation of India Vs. M/s. Veshno Rice Millers, etc. But that is not the situation here. A crucial term of the contract which bars the claim for compensation in like circumstances had been totally disregarded by the learned arbitrators and the award passed in respect of claim No. 1 flies in the face of the prohibition contained in Clause 59. Clause 59 of APDSS enjoins that no claim for compensation on account of delays or hindrances to the work from any cause whatever shall lie. The only remedy in case of such delays as per Clause 59 is to ask for reasonable extension of time....

And in Government of A.P. rep. by The S.E. Construction Circle S.R.S.P., Huzurabad and Anr. v. V. Satyam Rao cited 1996 (1) ALT 279 (D.B.) as under:

...It was observed by the arbitrator that "in the resulting suspense, the petitioner was forced to keep his machinery and establishment idle for two months hoping that the respondent (Department) would close the flow at any time. Though some loss cannot be ruled out, none of the reasons given by the arbitrator are relevant for accepting the tall claim of the contractor that he lost heavy amount on advances to labour and throughout the period of two months, he paid hire charges for the equipment, lorry and tractor as claimed in Ex. C-1. The minimum which the arbitrator was expected to do was to look into the accounts, but, this fundamental duty cast on the arbitrator was not discharged. It must therefore, be held that the arbitrator misconducted himself within the meaning of Section 30 of the Arbitration Act. We do not want to rest out conclusion on this ground alone. There is yet another inseparable hurdle which the respondent has to fact. That hurdle is to be found in Clause 59 of the A.P. Standard Specifications, forming part of the agreement. Clause 59, as already noticed, enjoins that "no claim for compensation on account of delays or hindrances to the work from any cause whatever shall lie except as hereinafter defined. Reasonable extension of time will be allowed by the Executive Engineer or by the Officer competent to sanction the extension for unavoidable delays ...." We have already referred to the decision in A.A.O. No. 677 of 1981 wherein it was held by the Division Bench that the words ''from any cause whatever'' occurring in Clause 59 are wide enough to take in any delays and hindrances caused by the Department or arising from other reasons.

In view of these principles, in the light of Clause 17-A of the General Conditions of the Contract, only extension of time can be solicited and obtained, but not any compensation or damages on the count of idle labour or machinery. Thus, Claims 5 and 6 made by the Applicant herein are also not sustainable and are, therefore, not liable to be referred to at all.

The learned Standing Counsel would then submit that only Railway Officials should be chosen as Arbitrators. But however, in all fairness he has pointed out that it is only a desirable measure as was noticed by the Supreme Court in Northern Railway Administration Ministry of Railways v. Patel Engineering Co. Limited 2008 (3) Arb. L.R. 349 (SC). In this context it will be appropriate to notice what the Supreme Court has pointed out in Northern Railway Administration case cited 2008 (3) Arb. L.R. 349 (SC) at Paragraphs No. 10 to 12, which is as follows:

The crucial expression in Sub-section (6) is "a party may request the Chief Justice or any person or institution designated by him to take the necessary measure (underlined for emphasis). This expression has to be read along with requirement in Sub-section (8) that the Chief Justice or the person or an institution designated by him in appointing an arbitrator shall have "due regard" to the two cumulative conditions relating to qualifications and other considerations as are likely to secure the appointment of an independent and impartial arbitrator.

A bare reading of the scheme of Section 11 shows that the emphasis is on the terms of the agreement being adhered to and/or given effect as closely as possible. In other words, the court may ask to do what has not been done. The court must first ensure that the remedies provided for are exhausted. It is true, as contended by Mr. Desai, that it is not mandatory for the Chief Justice or any person or institution designated by him to appoint the named arbitrator or arbitrators. But t at the same time, due regard has to be given to the qualifications required by the agreement and other considerations.

The expression ''due regard'' means that proper attention to several circumstances has been focused. The expression ''necessary'' as a general rule can be broadly stated to be those things which are reasonably required to be done or legally ancillary to the accomplishment of the intended act. Necessary measures can be stated to be the reasonable steps required to be taken.

The contract in question is a simple and pure contract for supplying of a specified gauge hard ballast material to be used by the Railways in their projects. There is no dispute raised by the parties with regard to the material supplied by the Applicant Company not meeting the specifications. The disputes that have cropped up between the parties are all relatable to the factors and reasons that contributed for the delay in execution of the work and the resultant escalation of costs/damages. The Applicant claims that the Railways did not provide the sites, where the material has got to be deposited and even where sites are being provided, they are unfit and useless, for, the site was full of permanent way material of the Railways themselves. Therefore, the entire issue centers around the fact whether the Railways have provided freehold site in question for the Applicant Company to supply and stack the ballast material or not?

The Railways have disputed that they have not committed any breach of the contract and the breach was committed by the Applicant. Admittedly, there are series of extensions granted by the Railways, the last of the extensions to put the contract an end is on 31-08-2006. Hence, the questions that fall for consideration for the purpose of resolving the disputes are not requiring any special knowledge of engineering or technical skill, for, the Arbitral Tribunal to comprise only with the experts of the Railway officials, nor the disputes center around any practices or procedures exclusively or specifically followed by the Indian Railways.

It is, therefore, appropriate that any independent agency, which is familiar with the principles for determination of damages or compensation can easily comprehend the rival viewpoints with regard to the claims made by the claimants. As was already held supra, barring Claims 2, 5 and 6, the rest of the claims are liable to be referred and adjudicated upon by any independent and impartial Arbitral Tribunal. Hence, I consider it appropriate and accordingly, appoint Hon''ble Sri Justice R. Bayapu Reddy, a former Judge of this Court, to be the sole Arbitrator in the matter.

With this, the Application stands allowed. No costs.

Registry is directed to communicate a copy of this Order to Hon''ble Sri Justice R. Bayapu Reddy, former Judge of this Court, forthwith, to enable him to enter upon the reference.