Karnataka High Court
Union Of India vs M/S Balaji Builders on 13 August, 2024
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NC: 2024:KHC:47371-DB
MFA No.6505/2017
IN THE HIGH COURT OF KARNATAKA AT BENGALURU
DATED THIS THE 13TH DAY OF AUGUST, 2024
PRESENT
THE HON'BLE MRS JUSTICE K.S.MUDAGAL
AND
THE HON'BLE MR JUSTICE VENKATESH NAIK T
MISCELLANEOUS FIRST APPEAL NO.6505/2017 (AA)
BETWEEN:
UNION OF INDIA
REPRESENTED BY:
THE GENERAL MANAGER
1.
SOUTH WESTERN RAILWAY CLUB ROAD
HUBLI - 580 001
2. THE CHIEF ADMINISTRATIVE OFFICER
SOUTH WESTERN RAILWAY
# 18, MILLERS ROAD
BANGALORE - 560 046
3. THE CHIEF ENGINEER / C N EAST
SOUTH WESTERN RAILWAY
# 18, MILLERS ROAD
BANGALORE - 560 046 ... APPELLANTS
Digitally
signed by K S
RENUKAMBA (BY SRI.ABHINAY Y T, ADVOCATE)
Location:
High Court of AND:
Karnataka
1. M/S BALAJI BUILDERS
NO.21, 4TH CROSS,
5TH BLOCK, 3RD PHASE
BSK 3RD STAGE,
BANGALORE - 560 085
REP. BY ITS PARTNER
2. JUSTICE R GURURAJAN (RETD.)
ARBITRATOR,
NO.504, 5TH FLOOR
CHITRAPUR APARTMENTS
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NC: 2024:KHC:47371-DB
MFA No.6505/2017
15TH CROSS, MALLESHWARAM,
BANGALORE - 560 055 ... RESPONDENTS
(BY SRI.SAMPATH BAPAT, ADVOCATE FOR R1;
NOTICE TO R2 IS DISPENSED WITH V/O DATED:07.02.2018)
THIS MISCELLANEOUS FIRST APPEAL IS FILED UNDER
SECTION 37(1)(C) OF THE ARBITRATION AND CONCILIATION ACT,
1996 PRAYING TO SET ASIDE THE JUDGMENT AND DECREE DATED
16.01.2017 PASSED IN A.S.NO.18/2014 ON THE FILE OF THE VI
ADDITIONAL CITY CIVIL & SESSIONS JUDGE, BENGALURU CITY,
DISMISSING THE PETITION FILED UNDER SECTION 34 OF THE
ARBITRATION AND CONCILIATION ACT AND ETC.
THIS APPEAL, COMING ON FOR FURTHER HEARING, THIS DAY,
JUDGMENT WAS DELIVERED THEREIN AS UNDER:
CORAM: HON'BLE MRS JUSTICE K.S.MUDAGAL
AND
HON'BLE MR JUSTICE VENKATESH NAIK T
ORAL JUDGMENT
(PER: HON'BLE MRS JUSTICE K.S.MUDAGAL) Challenging the dismissal of their suit Section 34 of Arbitration and Conciliation Act, 1996 ('Arbitration Act' for short) the plaintiffs in A.S.No.18/2014 on the file of VI Additional City Civil Judge & Sessions Judge (CCH-11), Bengaluru City have preferred the above appeal.
2. Appellant Nos.1 to 3 were plaintiff Nos.1 to 3 and respondent Nos.1 and 2 were defendant Nos.1 and 2 before the trial Court.
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3. The brief facts of the case are as under:
By virtue of a tender notification, appellant and respondent No.1 entered into a contract for performance of Hospet-Guntkal Section-proposed construction of ROH Steel covered shed of size approximately 30m x 50m for 250box-N wagons and other related miscellaneous works including providing of Hubli entry to ROH shed etc., at Hospet yard. The letter of acceptance was issued on 15.02.2008 and formal contract was entered into on 23.06.2008 between the parties.
The contract was governed by General Conditions of Contract ('GCC' for short), Special Conditions of Contract ('SCC' for short). The work to be performed included soil investigation, complete structural design and other allied services; providing foundation with cast in situ bored piles as per design;
supplying, fabrication, erection of MS columns, gantry beams, trusses, purlin, rafters; supplying and fixing of aluminium sheeting, erecting of rails for the gantry, heavy duty flooring in the shed; transportation of required P.way materials, laying and linking of tract, points and crossings and shifting of LC, providing of LC wicket gates, paving; extension of Br.No.128 as 1X1.22 RCC box and earthwork, moorum blanketing. -4-
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4. As per the terms of the contract, work was to be completed on or before 14.08.2008. The time for performance was extended five times as below:
Sl.No. Date of granting Period of extension Extension I extension 15.08.2008 Till 30.10.2008 II extension 01.11.2008 Till 31.12.2008 III extension 01.01.2009 Till 30.04.2009 IV extension 01.05.2009 Till 31.10.2009 V extension 01.11.2009 Till 30.04.2010
5. Appellants deducted certain amounts from bills as penalty for delay in performance, withheld security deposit and performance guarantee. Whereas respondent No.1 contended that appellants were solely responsible for delay and thereby they have caused loss to it, hence they shall pay damages. Disputes arose between the parties regarding performance of the contract. Respondent No.1 filed CMP No.93/2011 seeking appointment of the Arbitrator. This Court by judgment dated 15.06.2012 appointed respondent No.2/former Judge of this Court as Arbitrator. Respondent No.1 filed claim statement before the Arbitrator. Appellant in addition to filing counter to the said claim statement put forth a counter claim for Rs.5,04,00,000/- as damages for delay in completing the work. -5-
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6. The Arbitral Tribunal based on the pleadings of the parties framed in all 17(seventeen) issues for consideration. The parties to the Arbitral proceedings submitted that they would not like to place any oral evidence in the matter. However, Exs.C.1 to C.53 were marked on behalf of respondent No.1/claimant and Exs.R.1 to R.12 were marked on behalf of appellant.
7. After adjudication of the matter, the Arbitral Tribunal passed the award dated 10.12.2013, rejecting the counter claim of the appellant, allowed some claims of respondent No.1 with costs as follows:
Claim No. Description of Claim Amount Claimed in Rs.
2 Payment towards balance 4,95,424.71 quantity of ballast 3 Loss of expected profit on 22,08,000/-
the balance value of work 4 Refund of penalties 6,92,823/-
imposed.
6 Damages on idling of 22,60,801/-
material due to breach of contract committed by the appellant
8. The appellant challenged the said arbitral award before the VI Addl. City Civil Judge, Bengaluru (for short -6- NC: 2024:KHC:47371-DB MFA No.6505/2017 Arbitration Court) in A.S. No.18/2014 under Section 34 of the Arbitration Act. The District Judge on hearing the parties, by the impugned judgment dismissed the suit. Challenging the said judgment and order, the appellant preferred this appeal. Submissions of Sri Abhinay Y. T., learned counsel for the appellant-Union of India:
9. The appellant restricts the appeal only to claim Nos.2, 3 and 6. Claim No.2 regarding payment towards balance quantity of ballast falls under clause 22(5) of the GCC and the same is excepted matter. As per clause 63 of GCC/clause 2(d) of SCC respondent No.1 was required to supply quantity of material in terms of the contract, if any quantity remained unused, respondent No.1 was not entitled to cost of such unused material. Therefore, the award on claim No.2 is unsustainable. Claim No.3 i.e., loss of expected profit on balance value of work comes under clause 22(5) of the contract and falls under excepted matter as per clause 63 of GCC. Further clause 2(d) of the SCC specifically states that, if for any reason quantities to be executed is reduced, contractor shall not be entitled for any compensation but shall be paid the actual quantity of work done at the agreemental rates. On that ground also award on claim No.3 is unsustainable. Claim No.6 -7- NC: 2024:KHC:47371-DB MFA No.6505/2017 i.e., damages on idling of material due to breach of contract was barred in view of clause 17(iii) of GCC. Clause 17(iii) of GCC specifically states that any delay caused by railway due to any other cause does not entitle the contractor to claim damages or compensation and railway can grant extension till date of completion. Therefore, award on claim No.6 is contrary to clause 17(iii) of GCC. The Tribunal has arbitrated the matters which were excepted under the above said clauses of contract. Therefore, the award itself was without jurisdiction as the award is rendered on non-arbitrable disputes, hence void. The award is in conflict with public policy.
10. In support of his submissions, he relied on the following judgments:
1) General Manager, Northern Railway and another vs. 1 Sarvesh Chopra
2) State of Goa vs. Praveen Enterprises2
3) M/s. Harsha Constructions vs. Union of India3
4) Union of India vs. Chadalavada Gopalakrishna Murthy & ors4
5) Ramnath International Construction (P) Ltd. vs. Union of India5
6) Associate Builders v. Delhi Development Authority6 1 (2002)4 SCC 45 2 (2012)12 SCC 581 3 AIR 2015 SC 270 4 (2010)14 SCC 633 5 (2007)2 SCC 453 6 (2015) 3 SCC 49 -8- NC: 2024:KHC:47371-DB MFA No.6505/2017 Submissions of Sri Sampat Bapat, learned counsel for respondent No.1:
11. In an appeal under Section 37 or in a suit under Section 34 of the Arbitration Act, the scope of interference is very limited. Out of the provisions available under Section 34, the appellant sought setting aside of the award on the grounds under Section 34(2)(b)(i) and (ii) of the Arbitration Act viz., the claim Nos.(2) and (3) were not arbitrable as they fall under the excepted clauses of the agreement or contract. So far as claim No.6 as there was option under clause No.17(ii) and (iii) of GCC for extension of time and respondent No.1 was barred claiming any compensation for the delay, the award on the same was contrary to those provisions and thereby in conflict with law. Clause 22(5) of GCC relied on by the appellant relates only to the disputes regarding specifications of the drawings or the quality of the work or material. But claim Nos.2 and 3 were not on that ground. Even with regard to measurement of the work clause 63 of GCC applies only to the arbitration by the General Manager as stated therein and not the Court appointed arbitrator. So far as claim No.6, delay was on account of the appellant. Clause 3(1) of GCC itself states that the contract shall be governed by the law for the time being in force in -9- NC: 2024:KHC:47371-DB MFA No.6505/2017 Republic of India. The Hon'ble Supreme Court relying on Section 55 of the Indian Contract Act, 1872 time and again has held that contractor is entitled to damages if there is improper termination of the contract or preclosure of the work which needs deduction of expected profit for the investment made by the Contractor. Learned Arbitrator on detailed consideration of the material on record and the applicable law has allowed the said claim. Learned District Judge rightly dismissed the suit rejecting the contention that claim Nos.2 and 3 were not arbitrable and award on claim No.6 was opposed to public policy. The judgments relied on by the appellant's counsel are not applicable.
12. In support of his submissions he relies on the following judgments:
1. Mc.Dermott International Inc. v. Burn Standard Co. Ltd. and ors.7
2. Associate Builders v. Delhi Development Authority8
3. M/s A.T.Brij Paul Singh and ors. v. State of Gujarat9
4. S.V.Samudram v. State of Karnataka and anr.10
5. Govindanaik G.Kalaghatigi vs. West Patent Press Co.Ltd11
6. Fiza Developers and Inter-Trade Pvt. Ltd. vs. AMCI (India) Pvt.Ltd and another12 7 (2006) 11 SCC 181 8 (2015) 3 SCC 49 9 (1984) 4 SCC 59 10 (2024) 3 SCC 623 11 AIR 1980 Kar 92 12 (2009)17 SCC 796
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13. On consideration of the submissions of both side and on examination of the material on record, the points that arise for consideration are:
i) Whether claim Nos.2 and 3 were not arbitrable, thereby award on those claims was liable to be set aside ?
ii) Whether the award in respect of claim No.6 was contrary to the terms of the contract and thereby in conflict with public policy as contemplated under Section 34(b)(ii) ?
ANALYSIS Reg. Point No.1
14. Claim Nos.2 and 3 were covered under issue Nos.3 and 4 formulated by the learned arbitrator. Respondent No.1/claimant contended that it had supplied 800 cum ballast and the appellant measured only 211.1126 cum of ballast. For the balance quantity 588.74 cum of ballast, no payment was made. The Arbitral Tribunal on examining item No.20 Volume No.2 of Schedule-C held that as per the said term of the agreement, payment has to be made on actual stock measurements for gross quantity without any deduction for voids. The Arbitral Tribunal rejecting the appellant's contention
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NC: 2024:KHC:47371-DB MFA No.6505/2017 has awarded Rs.4,95,424.71 towards quantity of 588.74. cum ballast to respondent No.1/claimant. The appellant's counsel before this Court submits that for the balance quantity the appellant is not liable to pay and respondent No.1 is not entitled to seek payment towards such balance quantity.
15. So far as claim No.3 i.e., the expected profit for the balance value of the work, respondent No.1 claimed Rs.22,08,000/-. Tribunal on evaluating the material on record held that the value of the work in terms of the contract was Rs.5,02,23,254/- final value of the executed work was Rs.3,55,03,090/-. Respondent No.1 contended that though it was ready to execute the entire work in terms of the tender conditions, it was not permitted to carry out the balance work which amounted to Rs.1,47,20,000/-. Thereby respondent No.1 claimed loss of expected profit on balance work at 25%. Appellants contended that as per clause 2(d) of SCC the contractor is not entitled to any compensation for the unexecuted quantity of work. The Tribunal on evaluating the material on record held that respondent No.1 was not allowed to carry out the balance quantity of work amounting to Rs.1,47,20,000/-. Relying on the judgment of Hon'ble
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NC: 2024:KHC:47371-DB MFA No.6505/2017 Supreme Court in Brij Paul's case the Tribunal awarded damages of Rs.22,08,000/- at the rate of 15% on the balance value of the work.
16. As already noted, so far as the question of fact there is no scope for this Court to interfere with the findings of the Arbitral Tribunal. Even the counsel for the appellant did not challenge the award on those heads. Award on claim No.2 was questioned on the ground that the same was excepted under clause 22(5) and clause 63 of GCC. So far as claim No.3 it was contended that that was also excepted under clause 2(d) of SCC and 44 of GCC.
17. The dispute under claim No.2 related to non- payment of balance quantity of ballast. According to the appellant that is covered under 22(5) of the contract which reads as follows:
"22(5) Meaning and intent of specifications and drawings If any ambiguity arises as to the meaning and intent of any portion of the specifications and drawings or as to execution or quality of any work or material, or as to the measurements of the works, the decision of the Engineer thereon shall be final subject to the appeal (within 7 days of such decision being intimated to the Contractor) to Chief Engineer who shall have the power to correct any errors, omissions, or discrepancies in the specifications, drawings, classifications of work or materials,
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NC: 2024:KHC:47371-DB MFA No.6505/2017 and whose decision in the matter in dispute or doubt shall be final and conclusive."
18. Based on clause 22(5) of GCC it was argued that it is covered under clause 63 of GCC, therefore, it was not arbitrable. Clause 63 of GCC reads as follows:
"63. Matters finally determined by the Railway All disputes and differences of any kind whatsoever arising out of or in connection with the contract, whether during the progress of the work or after its completion and whether before or after the determination of the contract, shall be referred by the Contractor to the General Manager and the General Manager shall within 120 days after receipt of the Contractor's representation make and notify decisions on all matters referred to by the Contractor in writing provided that matters for which provision has been made in Clauses 8, 18, 22(5), 39, 43(2), 45(a), 55, 55-A(5), 57, 57-A, 61(1), 61(2) and 62(1) to (xiii) (B) of the General Conditions of Contract or in any clause of the special conditions of contract shall be deemed as "excepted matters" (matters not arbitrable) and decisions of the Railway authority, thereon shall be final and binding on the Contractor; provided further that "excepted matters" shall stand specifically excluded from the purview of the arbitration clause."
19. Reading of the above clauses show that if any dispute arises, the contractor has to refer the matter to the General Manager. However the matters in clause 22(5) and other clauses stated therein are deemed to be 'excepted' and not arbitrable.
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20. Reading of the above clause more particularly clause 22(5) shows that even in cases of disputes with regard to measurement of work, the matter has to be referred to the engineer and the engineer's decision in the matter is subject to the appeal to the Chief Engineer. So far as claim No.3 though it was contended that the said claim is covered under clause 31(1) of SCC, it stands covered under clause 63 of GCC. The exception provided under clause 63 is in cases where the dispute raised was referred to General Manager. Clause 2(d) of the SCC states that in the event of any reduction in the quantities to be executed, the contractor shall not be entitled to compensation but shall be paid only for the actual quantity of work done at the agreemental rates.
21. The Hon'ble Supreme Court in Asian Techs Ltd. vs. Union of India & ors13 held that the agreement regarding such excepted clauses apply to only the arbitrator appointed by the employer and not the arbitrator appointed under Section 11 of the Arbitration Act.
13
(2009)10 SCC 354
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22. The Hon'ble Supreme Court in Madnani Construction Corporation Pvt.Ltd vs. Union of India and others14 in para 21 of the judgment has held as follows:
"21. It goes without saying that in order to deny the claims of the contractor as covered under excepted matters, the procedure prescribed for bringing those claims under excepted matters must be scrupulously followed. The clear finding of the Arbitrator is that it has not been followed and the High Court has not expressed any disagreement on that. Therefore, the finding of the High Court that those items are non-arbitrable cannot be sustained."
(Emphasis supplied)
23. The Full Bench of this Court in Govind Naik G Kalaghatigi's case referred to supra has held that such clauses do not bind the Arbitrator.
24. In view of the aforesaid judgments of the Hon'ble Supreme Court and this Court, the Arbitral Tribunal was justified in rejecting the contention that claim Nos.2 and 3 were not arbitrable by it as they fall under excepted contract. The same was rightly upheld by the learned District Judge. Therefore, the appeal regarding claim Nos.2 and 3 carries no merit.
14
(2010)1 SCC 549
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NC: 2024:KHC:47371-DB MFA No.6505/2017 Reg. Point No.(ii)
25. Claim No.6 related to damages on idling of the material due to breach of contract committed by the appellant. The same is covered under issue No.5 formulated by Arbitral Tribunal. Respondent No.1/claimant claimed that in expectation of the completion of the work it had deployed huge infrastructure by way of machinery etc., due to the lapses in providing the sites and other infrastructure by the appellant those machineries etc were idle and it suffered damages to the tune of Rs.22,60,801/-. The arbitrator, referring to the communications between the parties under Ex.C5 to C7, C16 & C24, held that the delay occurred due to the appellant's failure in furnishing the approved drawings, designs, foundations and infringement of work sites etc. Such appreciation of evidence cannot be reexamined either under Section 34 or Section 37 of Arbitration Act.
26. The only contention of the appellant is that clause 17(ii) & (iii) of GCC bars claiming/awarding of such damages. Clause 17(ii) & (iii) which were relied on by the learned counsel for the appellant read as follows:
"17(ii). Extension for delay not due to Railway/Contractor If in the opinion of the Engineer the progress of work has any time been delayed by any act or neglect of Railway's employees
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NC: 2024:KHC:47371-DB MFA No.6505/2017 or by other contractor employed by the Railway under Sub- Clause (4) of Clause 20 of these conditions or in executing the work not forming part of the contract but on which Contractor's performance necessarily depends or by reason of proceedings taken or threatened by or dispute with adjoining or to neighbouring owners or public authority arising otherwise through the Contractor's own default, etc or by the delay authorised by the Engineer pending arbitration or in consequences of the Contractor not having received in due time necessary instructions from the Railway for which he shall have specially applied in writing to the Engineer or his authorised representative then upon happening of any such event causing delay, the Contractor shall immediately give notice thereof in writing to the Engineer within 15 days of such happening but shall nevertheless make constantly his best endeavours to bring down or make good the delay and shall do all that may be reasonably required of him to the satisfaction of the Engineer to proceed with the works. The Contractor may also indicate the period for which the work is likely to be delayed and shall be bound to ask for necessary extension of time. The Engineer on receipt of such request from the Contractor shall consider the same and shall grant such extension of time as in his opinion is reasonable having regard to the nature and period of delay and the type and quantum of work affected thereby. No other compensation shall be payable for works so carried forward to the extended period of time, the same rates, terms and conditions of contract being applicable as if such extended period of time was originally provided in the original contract itself.
(iii) Extension of time for delay due to Railway In the event of any failure or delay by the Railway to hand over the Contractor possession of the lands necessary for the execution of the works or to give the necessary notice to commence the works or to provide the necessary drawings or instructions or any other delay caused by the Railway due to any other cause due whatsoever, then such failure or delay shall in
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NC: 2024:KHC:47371-DB MFA No.6505/2017 no way affect or vitiate the contract or alter the character thereof or entitle the Contractor to damages or compensation therefor but in any case, the Railway may grant such extension or extensions of the completion date as may be considered reasonable."
27. It is no doubt true that the appellant has designed the above clauses in such a fashion that even if the performance of contract is delayed on the part of the appellant and respondent No.1/claimant suffers any damages, his right to seek compensation for the same is taken away. But such contracts are subject to the laws of the land including judicial precedents.
28. The larger bench of the Hon'ble Supreme Court in Brij Paul's case referred to supra in para 10 of the judgment held that ordinarily a contractor while submitting his tender in response to an invitation to tender for works contract reasonably expects to make profits. Reasonable expectation of the profit, is implicit in the works contract and its loss has to be compensated by way of damages if the other party to the contract is guilty of breach of contract, cannot be gainsaid. It was further held that awarding 15% of the value of the balance of the works contract would not be unreasonable measure of damages for loss of profit. In view of the aforesaid larger
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NC: 2024:KHC:47371-DB MFA No.6505/2017 bench judgment it cannot be said that awarding of 15% damages by the Arbitral Tribunal is contrary to law and facts of the case and in conflict with public policy. Under the circumstance other judgments relied on by appellants' counsel do not advance appellants' case.
29. Looked from any angle, there is no merit in the appeal. Hence the following:
ORDER The appeal is dismissed with costs.
Sd/-
(K.S.MUDAGAL) JUDGE Sd/-
(VENKATESH NAIK T) JUDGE AKC/-