2019 (11) TMI 417 - SC - Indian Laws

Reference of matter to arbitrator - Levy of Liquidated damages - Interpretation of terms of contract - Clause 2 of the contract regarding liquidated damages/compensation levied by the Superintending Engineer - price escalation clause - Whether the levy of pre-estimated liquidated damages and reasonable compensation by the Superintending Engineer in terms of Clause 2 of the contract between the parties is arbitrable ? - Whether the respondent-ONGC is right in contending that the levy of liquidated damages in terms of Clause 2 of the contract is final and an excepted matter not falling within the jurisdiction of the Arbitrator and whether the learned Arbitrator has travelled beyond the terms of the contract? HELD THAT - A reading of Clause 2 makes it clear that the Superintending Engineer has been conferred with not only a right to levy compensation; but it also provides a mechanism for determination of the liability/quantum of compensation. The very Clause 2 itself would show that such a decision taken by the Superintending Engineer shall be final. The finality clause in the contract in terms of Clause 2 makes the intention of the parties very clear that there cannot be any further dispute on the said issue between the parties; much less before the arbitrator. The intention of the parties to exclude some of the decisions of the Superintending Engineer from the purview of arbitration is clearly seen from the abovesaid clause. Claim No.6 made by the appellant is to declare that the penalty imposed by ONGC under Clause 2 was illegal and unwarranted and the amount withheld by ONGC was payable to the appellant. The very prayer to declare the amount levied by the Superintending Engineer as illegal is against the tenor of the terms of the contract (Clause 2) between the parties. By virtue of the finality clause in the contract, any decision taken by the Superintending Engineer in levying compensation cannot be referred to an arbitrator. A reading of the other terms of the contract would further indicate that under Clauses 13 and 14 of the agreement, the parties have agreed for payment of compensation and non-payment of compensation in certain situations. Significantly, Clauses 13 and 14 of the agreement do not have any finality clause which indicates that any dispute arising out of such clauses may be a dispute referable to arbitration. However, in respect of levy of compensation for the delay, Clause 2 of the agreement specifically makes the decision of the Superintending Engineer, final. The entire contract between the parties and the terms thereon have to be read as a whole to decide the rights and liabilities of the parties arising out of the contract - The finality clause in the contract cannot therefore be frustrated by calling upon the arbitrator to decide on the correctness of levy of compensation by the Superintending Engineer. Reference can be made to decision in the case of VISHWANATH SOOD VERSUS UNION OF INDIA ANR. 1989 (1) TMI 314 - SUPREME COURT where it was held Once the parties have decided that certain matters are to be decided by the Superintending Engineer and his decision would be final, the same cannot be the subject matter of arbitration. In the present case, the parties themselves have agreed that the decision of the Superintending Engineer in levying compensation is final and the same is an excepted matter and the determination shall be only by the Superintending Engineer and the correctness of his decision cannot be called in question in the arbitration proceedings and the remedy if any, will arise in the ordinary course of law. The total amount awarded by learned Arbitrator in favour of the appellant is ₹ 1,24,47,416/- (₹ 66,36,252/- ₹ 58,11,164/-). Total amount of compensation/liquidated damages withheld by ONGC is ₹ 66,99,117/- (₹ 36,80,142/- ₹ 30,18,975/-). Towards satisfaction of the arbitral award, ONGC has deposited an amount of ₹ 2,10,41,965/- - In compliance of the order of the Supreme Court dated 09.04.2009, the appellant has deposited ₹ 75,00,000/- before the Supreme Court and the same has been invested in a nationalised bank. The amount of ₹ 74,88,768/- along with accrued interest is ordered to be paid to the respondent-ONGC. The balance of ₹ 11,232/- (₹ 75,00,000 ₹ 74,88,768/-) along with accrued interest be refunded to the appellant. Appeal dismissed.

Summary

Issues Involved:
1. Arbitrability of levy of pre-estimated liquidated damages and reasonable compensation by the Superintending Engineer.
2. Whether the levy of liquidated damages under Clause 2 of the contract is final and an "excepted matter" not falling within the jurisdiction of the Arbitrator.

Detailed Analysis:

1. Arbitrability of Levy of Liquidated Damages:
The primary issue was whether the levy of pre-estimated liquidated damages by the Superintending Engineer under Clause 2 of the contract was arbitrable. The Arbitrator initially allowed the claimant's claims and disallowed the liquidated damages imposed by the respondent, ONGC, considering them as a penalty. The Arbitrator awarded significant amounts to the claimant in both arbitration cases. However, the High Court's Division Bench later set aside these findings, emphasizing that Clause 2 of the contract made the Superintending Engineer's decision on liquidated damages final and non-arbitrable. This was upheld by the Supreme Court, which noted that Clause 2 provided a complete mechanism for determining liability and compensation for delays, making the Superintending Engineer's decision final and binding, thus excluding it from arbitration.

2. Finality and "Excepted Matter" under Clause 2:
The Division Bench of the High Court and subsequently the Supreme Court held that the decision of the Superintending Engineer regarding the levy of liquidated damages was final and constituted an "excepted matter" under Clause 2, read with Clause 25 of the contract. This meant that such decisions were excluded from arbitration. The Supreme Court referred to the contractual terms which clearly indicated the parties' intention to exclude certain matters from arbitration, particularly those where the Superintending Engineer's decision was deemed final. The Court also referenced previous judgments, such as Vishwanath Sood v. Union of India, to support the view that the determination of compensation under such clauses is outside the purview of arbitration. The Supreme Court concluded that the Arbitrator had overstepped his jurisdiction by adjudicating on the liquidated damages, which were explicitly excluded from arbitration by the contract's terms.

Conclusion:
The Supreme Court dismissed the appeals, affirming the Division Bench's interpretation that the levy of liquidated damages by the Superintending Engineer under Clause 2 of the contract was final and not subject to arbitration. The Court ordered the appellant to refund the amount withheld by ONGC along with accrued interest, reflecting the finality of the Superintending Engineer's decision as per the contract.