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Recently the supreme court in the case of Mitra Guha builders vs ONGC upheld the judgement of High that levy of liquidated damages was an excepted matter under clause 2 read with clause 25 of the contract and the same is not arbitable

The gist of the case is this , the firm Mitra Guha builders entered into 2 different agreements on 5/1/96 with ONGC for construction of multistorey flats. As happens in most government contracts the works could not be completed within the scheduled date of completion 21/8/97 and were completed on 24/5/99. In a series of letters starting 8/12/99 to 17/4/2000 ONGC asked the contractor to rectify some defects , failing which it would rectify on its own and debit cost to  contractor. On 15/5/2001 ONGC writes to contractor that it’s going to levy liquidated damages on the contractor for delay in completion ,followed by a letter stating that the final bill was ready and the contractor was requested to reconcile the final bill to ensure settlement of accounts. The contractor invoked the arbitration clause 25of the general conditions vide letter dated 7/9/2001. The arbitrator was appointed as per terms of agreement and the arbitrator allowed the claims of contractor along with interest . ONGC appealed against the award under section 34 of arbitration act . The single judge dismissed the objections of ONGC. ONGC appealed against this judgement in the high court which set aside the order of the single judge and the arbitrator. The contractor Mitra Guha builders appealed in the supreme court which upheld the judgement of the high court that levy of liquidated damages was an excepted matter.

After going through the judgements of both high court and the supreme court I have made certain observations 

  • The decision to levy LD was taken by ONGC on 15/5/2001 . The work was completed on 24/5/99 and as per similar contracts the defect liability period starts from 25/5/99 and ends on 25/5/2000 ,a period of one year , during the defect liability period ONGC has written a series of letters asking the contractor to rectify certain defects which the contractor is bound to. The decision to levy LD is taken on 15/5/2001 , nearly one year after the defect liability period is over ,is this legally valid ? Why was not any LD levied in the bills of the contractor during the extended period ? When the original time limit got over 21/8/97 was a new date for completion set ? Was this new date 24/5/99  or the work was eventually completed on that date and that date was taken as date of completion? If no new date of completion was agreed upon would it not set time at large ? As per clause 2 of the contract the contractor is bound to complete a certain amount of work within a certain time ,he should complete one eighth of whole work before one fourth of whole time under the contract has elapsed, three eighths before one half of such time has elapsed and three fourths of work before three fourths of such time has elapsed . The contractor shall comply with the said time schedule . In the event of the contractor failing to comply with this condition he shall be liable to pay as compensation an amount equal to half percent per week as decided by the superintending engineer (who’s decision in writing shall be final) may decide on the contract value of the whole work for every week that the due quantity of work remains incomplete provided always that the entire amount of compensation to be paid under the provisions of the clause shall not exceed 10% of the tendered cost as shown in the tender . A clear reading of the clause shows that there is provision in the contract for progress of work in different periods and completion and in case if contractor doesn’t achieve the progress the employer can deduct certain amounts as liquidated damages at that time. For the employer or his agents to prepare a debtor or creditor account of delay after the completion of works at the time of preparation of the final bill and make deductions of the amounts as liquidated damages claimed from the contractor is not valid . It is further suggested that such a claim would be barred by waiver. In this case the superintending Engineer has waived his rights by not deducting amounts at the time when the work slipped according to the program of work . So the arbitrator was right on deciding on this issue . Also when the original time limit expired ,failure to extend the time will render the competent authority to grant extension of time without any remedy for operating the LD clause . If a new date for completion is not set it is implied that the parties themselves have given a go by to the original terms of the contract as to time being the essence of the contract
  • The arbitrator and the single judge have agreed that ONGC was majorly responsible for the work not being completed on time. Would this not give rise to the”principal of prevention” ?. The prevention principle is a legal doctrine that protects a contractor from liquidated damages for delay caused by the owner . The basic  Idea is that the party to a contract should not be permitted to profit from its own default 

The judge’s have relied on clause 2 and clause 25 which is the arbitration clause of the contract in interpreting the contract in favour of ONGC. The judgement says” a reading of clause makes it clear that the superintending Engineer has not only been conferred the right to levy compensation but it also provides a mechanism for determination of the compensation , the finality clause in the contract in terms of clause 2 makes the intention of the parties very clear that there can not be further disputes between the parties much less before the arbitrator. Any other meaning to the finality clause in the contract and allowing further adjudication by another authority would make the agreed clause 2 and clause 25 of the agreement meaningless and redundant “

  • The judge’s also refer to the vishwanath Sood vs union of India which has a similar clause 2 in the agreement . but the vishwanath Sood case has a different clause 25 which is the arbitration agreement.now let’s look at the clause 25 of the vishwanath Sood case .it begins with  “except where otherwise provided in the contract all questions and disputes relating to the meaning of specifications design’s, drawings and instructions herein before mentioned and as to the quality of workmanship or material used in the work or to any other question, claims or matter or thing whatsoever in anyway arising or relating to the contract ,designs, drawings , specifications, estimates, instructions orders or these conditions or otherwise the works or the execution or the failure to execute the same whether during the progress of the work or after the completion of the work or abandonment thereof shall be referred to the sole arbitration of the person appointed by the chief engineer of the PWD” 

Now look at clause25 of Mitra Guha case (this case)

If any dispute, difference , questions or agreement at any time hereafter arises the parties hereto or their respective representatives or assigns in connection with or arising out of the contract in respect of meaning of specifications , design’s, drawings,estimates, schedules,annexures , orders or instructions , the construction interpretation of this agreement application of the provisions thereof or anything hereunder containing or arising hereunder or as to the rights , liabilities or duties of the said parties hereunder or arising hereunder any matter whatsoever incidental to this contract or otherwise concerning the work or execution or failure to to execute the same during the progress of work or stipulated/extended or before or after the completion abandonment thereof shall be referred to the sole arbitration of the person appointed by the the director of the ONGC “

On comparing the clause 25 of both the agreements it is very clear that the clause 25 in the Vishwanath Sood case is different from the Mitra Guha case. The difference being the clause 25 of the Vishwanath Sood case starts with -” except where otherwise provided” . This opening sentence is missing in the Mitra Guha case. In the Vishwanath Sood judgement the judge’s said about clause 25 . “Clause 25 which is the arbitration clause starts with an opening phrase excluding certain matters and disputes from arbitration and these are the matters or disputes in respect of which provision has been made elsewhere or otherwise in the contract . These words in our opinion can have reference only to provisions in clause 2 by which certain types of determination are left to the administrative authorities concerned.if that be not so the words” except where otherwise provided in the contract ” would become meaningless .we are therefore inclined to hold that the opening part of the clause 25 clearly excludes matters like those mentioned in clause 2. Any other meaning to the finality claim in the contract and further adjudication by another authority would make the agreed clause 2 & clause 25 of the agreement meaningless and redundant” .

As can be seen the Mitra Guha arbitration clause doesn’t start with “except where otherwise provided”. The arbitration clause provides for all disputes to be referred to arbitration. Therefore the compensation clause being non arbitrable doesn’t apply in this case. The decision of the superintending Engineer regarding sub standard work and reduction of rates for these works is the only non arbitrable decision in the contract .

One more point of contention in this judgement is that the judge’s while deciding the case have referred to the vishwanath Sood vs union of India case which had a similar clause 2 and arbitration clause 25 , but their has been one more judgement in the supreme court on a similar case with same clauses for compensation and arbitration. This is the JG engineer’s V’s union of India decided in 2011. This case as mentioned earlier has similar clause 2 for compensation and clause 25 for arbitration . The only differences is that while in the JG engineer’s case time was reckoned from the 10th day and compensation per week of delay is 1 percent not exceeding 10%of estimated cost of the work,in the case of Mitra Guha time is reckoned 15 day’s after the date of work order and compensation for delay is ½ % per week not exceeding 10% of the estimated cost of work. The supreme court while passing the order has decided in the JG engineer’s case that clause 2 provides for the contractor fails to ensure progress as per time schedule he shall be liable to pay as compensation an amount equal to 1% or such smaller amounts as decided by the superintending engineer (who’s decision in writing shall be final) . this provision makes the decision of the superintending Engineer final only in regards to the percentage of compensation (that is quantum) to be levied and not on the question of as to whether the the contractor has failed to complete the work or the portion of work within the agreed time schedule , whether the contractor was prevented by any beyond its control or by the acts or omissions of of the respondents and who is responsible for the delay .

It further goes on to say that as per clause 2 and 3 of the agreement what is made final and conclusive is not the decision of any authority on the issue of whether the contractor was responsible for the delay or the department was responsible for the delay or on the question whether termination is legal or valid . What is made final is the decision on consequential issues relating to quantification if there is no dispute as to who committed the delay . In the Mitra Guha case there is a clear dispute regarding who’s responsible for the delay . Therefore the question is why the court didn’t consider the JG engineer’s case where it was decided that clause 2 was arbitrable and only the quantum of compensation was not arbitrable  .why didn’t the court consider the judgement in the JG engineer’s case which came after the vishwanath Sood case . Did Mitra Guha legal team miss out on this case ? The Mitra Guha case and the JG engineer’s case have contradictory judgements on similar compensation and arbitration clauses in both agreements. In the JG engineer’s judgement reference is made of the BSNL vs motorola case to justify the decision that clause 2 was arbitrable but in the Mitra Guha case the BSNL case is referred to and stated that the compensation clause of the BSNL case is different from the Mitra Guha agreement so clause 2 is non arbitrable. In the JG engineer’s case the Shree rameshwar rice mills vs state of Karnataka which held that adjudicating upon issues relating to a breach of condition of contract and adjudication of assessing damages arising out of the breach would not include a right to adjudicate upon as to whether there was any breach at all . The court held that one of the parties to an agreement cannot reserve to himself the power to adjudicate whether the other party has committed the breach . The supreme court further held that the power’s of the state under an agreement entered into into by it with a private person providing for assessment of damages for breach of conditions and recovery of damages will stand confined only to those cases where the breach of conditions is admitted or it is not disputed

To summarise 

When ONGC (employer) is responsible for the delay can he discount the period of his delay and claim loss loss from the contractor 

Whether the superintending Engineer by not deducting compensation when the alleged delay occurred but in the defect liability period ,has waived his rights of deduction.

Two contradictory judgments on two agreements having similar clause 2 for compensation and clause 25 for arbitration 

Whether the Shree rameshwar rice mills vs state of Karnataka judgement (that on issues of breach of contract one of the parties to the agreement cannot reserve to himself the the power to adjudicate whether the other party has committed breach)holds good after this judgement 

The clause to which the judge’s referred to in the Mitra Guha case to support their judgment that the finality power’s of the superintending Engineer was non arbitrable, is not a compensation clause but a clause dealing with defects and rectification issues 

Due to the contradictions in the two judgments in contracts which have exclusive or finality clauses  it’s better to file a civil suit then go in for arbitration, also with the commercial court’s act in place a faster resolution of these types of disputes is expected 

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