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Case Number

Suit No. 1012A/95

Attorney(S)

Mr. D. Moitra, Advocate for the Petitioner.
Ms. Anusuya Salwan, Advocate for the Respondents.

Judges

J.D Kapoor, J.

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Smart Summary

Judicial Opinion Summary — J.D. Kapoor, J.

Factual and Procedural Background

The opinion concerns an award dated 31.3.1995 which the claimant sought to be made rule of the court. The award was challenged by the respondent (Delhi Development Authority — DDA) on multiple grounds. The claimant pursued various heads of claim arising out of a construction contract, including (a) balance payment of the final bill (Claim No. 1), (b) escalation/delay-related claims for work performed during an extended contract period (Claims No. 2, 4 and 5 were identified in the award discussion), and (c) claims for refund of bank guarantees and interest. The Arbitrator had allowed several claims; the respondent filed objections to the award. The court reviewed the award, the contractual clauses cited by the parties, and relevant precedents, and then upheld some parts of the award while setting aside others.

Legal Issues Presented

Whether the Arbitrator exceeded his jurisdiction and acted contrary to the contract by allowing Claim No. 1 (balance payment of the final bill) when reductions/deductions were said to have been approved by the Superintending Engineer and thereby excluded from arbitration under clause 25-B of the contract.
Whether the claimant’s acceptance of interim or final payments without protest precluded the claimant from raising the disputed items later.
Whether claims for escalation, idleness of staff and idleness of tools and plants (Claims No. 2, 4 and 5 as discussed) were permissible under the contract terms, in particular special condition No. 1 and clause 22 which limited compensation for delays and provided that sums payable by way of compensation are to be considered reasonable compensation for the Authority.
Whether the Arbitrator improperly awarded overlapping or duplicative heads of compensation (i.e., overlapping awards for escalation and idleness) such that some awards should be set aside.
Whether the Arbitrator failed to address substantial objections of the respondent in a reasoned manner, amounting to jurisdictional or legal error sufficient to set aside parts of the award.

Arguments of the Parties

Respondent's Arguments (Ms. Anusuya Salwan)

The Arbitrator exceeded the terms of the agreement by allowing Claim No. 1 despite reductions in the final bill having been approved by the Superintending Engineer under clause 25‑B, which excludes such matters from arbitration. Clause 25‑B states: “The decision of SE regarding the quantum of reduction as well as justification thereof in respect of rates for sub-standard work which may be decided to be accepted will be final and would not be open to arbitration.”
The claimant had accepted payments (including the final bill) without protest during the currency of the contract and therefore cannot now raise the dispute.
Claims for escalation and related damages are contrary to the contract: special condition No. 1 and clause 22 exclude entitlement to compensation for delay in supply of stipulated material and provide that compensation clauses are to be considered reasonable compensation without reference to actual loss. Consequently, awards for escalation or damages for delayed handing over were contrary to the contract and beyond the Arbitrator's jurisdiction.
Counsel relied on case law (including Associated Engineering Company v. Government of Andhra Pradesh and Steel Authority of India Limited v. J.C. Budharaja) for the proposition that an Arbitrator who ignores contractual conditions acts beyond jurisdiction and that such awards are liable to be set aside.

Claimant's Arguments (Mr. D. Moitra)

Unless the respondent served the written notice required by clause 14 specifying particulars of sub-standard work within six months of completion, the Superintending Engineer's decision regarding reductions/deductions would not fall within the excepted matters of clause 25‑B. Clause 14 (as quoted in the opinion) prescribes the procedure and timelines for rectification demands by the Engineer‑in‑Charge.
The disputes referred to the Arbitrator were not about items "not initially paid" or about matters excepted from arbitration; hence the Arbitrator had jurisdiction.
Delay and extension of time were caused by respondent actions or events beyond the claimant's control (late supply of materials, delayed drawings and designs, delayed payments); therefore the claimant was entitled to escalation and related compensation for the extended period.
Relied on authority (Bengal Traders v. West Bengal State Electricity Board) holding that contractual stipulations excluding certain claims do not necessarily apply to claims for loss of expenditure, overheads, idleness of labour, increase of execution cost during prolonged periods, and compensation for loss of profit.

Table of Precedents Cited

Precedent	Rule or Principle Cited For	Application by the Court in this Opinion
Associated Engineering Company v. Government of Andhra Pradesh and another, 1991 ALR 180 (SC)	Relied upon by respondent's counsel for the general proposition that an award is liable to be set aside if the Arbitrator traverses beyond his jurisdiction by ignoring contractual terms.	The case was cited by respondent's counsel to support the argument that the Arbitrator erred by ignoring contract terms; the court considered this line of authority in assessing whether the Arbitrator acted beyond jurisdiction with respect to contract‑based exclusions from arbitration.
Steel Authority of India Ltd. v. J.C. Budharaja (SAIL), 1999 (3) Arb. LR 335 (S.C.)	Held that an Arbitrator cannot ignore binding contract conditions; doing so is acting beyond jurisdiction and may render the award arbitrary or mala fide. Specifically, where contract conditions preclude compensation, an award granting such compensation is against the contract.	The court relied on SAIL to underscore that arbitrators derive authority from the contract and must not disregard contractual stipulations (clause 22 in the instant contract was compared to clause 32 in SAIL). The decision was used to test whether the Arbitrator in the present case acted beyond jurisdiction when awarding certain delay/compensation claims.
Rajasthan State Mines and Minerals Ltd. v. Eastern Engineering Enterprises and another, 1999 (3) ALR 350 (S.C.)	Reiterated that an Arbitrator cannot ignore specific contractual terms that exclude certain claims; doing so is a jurisdictional error correctable by the court.	The court invoked this authority to support the proposition that the Arbitrator should not have ignored explicit contractual terms. The precedent was considered when evaluating awards for items that the contract purportedly excluded from claim.
Bengal Traders v. West Bengal State Electricity Board, 2001 (2) RAJ 315 (SC)	Held (as relied on by claimant's counsel) that a contractual stipulation excluding certain claims does not necessarily preclude claims for loss of expenditure, overhead charges, idleness of labour, increased cost of execution during prolonged period, and compensation for loss of profit.	Claimant's counsel relied on this authority in support of awards for escalation and related losses. The court considered this authority but ultimately evaluated the Arbitrator's factual findings (that delays were due to general hindrances beyond claimant's control) and upheld certain awards on that factual basis.

Court's Reasoning and Analysis

The court proceeded claim by claim, assessing whether the Arbitrator's findings were within jurisdiction, adequately reasoned, and consistent with the contract terms.

Claim No. 1 (balance payment of final bill)

The respondent argued that reductions in the final bill were approved by the Superintending Engineer under clause 25‑B, which explicitly makes such decisions final and not open to arbitration (“The decision of SE regarding the quantum of reduction ... will be final and would not be open to arbitration.”).
The claimant argued that clause 14's notice requirement had not been complied with by the respondent, and thus the reduction decision could not be treated as an excepted matter; the claimant also relied on the Arbitrator's finding that certain items were never agreed by the respondent to be paid.
The court found two decisive defects in the claimant's position: (a) the claimant had accepted the final bill without protest; and (b) the Arbitrator failed to address the respondent's specific objection that Claim No. 1 concerned an excepted matter under clause 25‑B. The Arbitrator proceeded to decide the merits without first determining whether the items were agreed to be paid or fell within clause 25‑B.
The court emphasized that a reasoned award must address substantial objections. By omitting consideration of the respondent's clause 25‑B objection, the Arbitrator committed legal and factual misconduct with respect to this claim.
Conclusion on Claim No. 1: the award in respect of this claim was found unsustainable and was set aside.

Claims relating to extended period, escalation and idleness (Claims No. 2, 4 and 5 as discussed)

The claimant's case: the contract work, originally to be completed in six months, extended to about three years through no fault of the claimant; claimant sought Rs. 7,34,808 as escalation for the extended period.
The respondent's case: delays were attributable to the claimant's slow preliminary work (construction of godown, labour huts, site office), late arrangement of materials, and the contract's special condition No. 1 and clause 22 precluding compensation in certain delay scenarios. Clause 22 provided that sums payable by way of compensation are considered reasonable compensation for the Authority without reference to actual loss.
The court analyzed overlapping and duplicative awards: it found that the Arbitrator treated the various heads (escalation, idleness of staff, idleness of tools/plants) as arising from the same default (non‑availability of cement, designs, etc.) and that the awards were not meaningfully segregated.
The court observed that the Arbitrator's finding that the claimant kept supervisory staff on full pay for long periods (two years and eight months) strained credulity; awarding loss and damages for supervisory staff in that context was unsustainable. The court also held that idleness of tools and plants due to the overrun period had been compensated through the escalation award, so separate awards for idleness led to double recovery.
Applying the principles from SAIL and Rajasthan State Mines, the court considered whether the Arbitrator had ignored contractual exclusions; it examined the factual finding that delays were caused by general hindrances beyond claimant's control (a factual basis for an escalation award) and distinguished properly recoverable escalation from duplicative head(s) of compensation.
Result on these claims as expressed in the opinion: the court upheld only Claim No. 2 of the award; awards with regard to claims 4 & 6 were set aside (the opinion states that claims 4 & 6 were set aside). The court noted that the Arbitrator had failed to segregate overlapping heads of claim and that some awards constituted impermissible or duplicative compensation.

Other claims (refund of bank guarantee and interest)

The court found no merit in the respondent's objection to the awards for refund of bank guarantee and interest; it concluded these matters were within the Arbitrator's competence and were awarded on reasoned grounds.

Holding and Implications

Core Rulings:

Claim No. 1: The award in respect of Claim No. 1 (balance payment of the final bill) was set aside because the Arbitrator failed to address the respondent's clause 25‑B objection and the claimant had accepted the final bill without protest.
Claims relating to escalation/idleness: Only Claim No. 2 was upheld. The awards in respect of certain other claims for idleness/damages were set aside (the opinion states awards with regard to claims 4 & 6 were set aside).
Refund of bank guarantee and interest: The Arbitrator's awards on these heads were sustained.
Final decree: The court allowed claims 2, 7 & 9 (the opinion states: "In the result claims 2, 7 & 9 are allowed. The suit is decreed for the amount awarded against these claims.")
Interest: Interest at 15% per annum shall be calculated on the proportionate amount of the award that has been upheld from the date of the award until its realization.

Implications: The direct consequences of this decision are (a) partial enforcement of the Arbitrator's award (certain claims upheld and decreed), (b) set‑aside of parts of the award where the Arbitrator failed to address contractual exclusions or where awards were duplicative, and (c) an order for interest at 15% on the proportionate upheld award. The opinion applies established authority on the limits of an Arbitrator's jurisdiction in relation to explicit contractual terms; the court did not proclaim a new legal principle but applied existing precedents to the facts before it.

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Pt. Munshi Ram & Associates (P) Ltd v. Delhi Development Authority & Anr

J.D Kapoor, J.— The award dated 31.3.1995 is sought to be made rule of the court. It has been assailed and challenged by the respondent-DDA on multifarious grounds.

2. Until and unless, award suffers from the vices of perversity or unsound legal or factual finding or is beyond the terms of the agreement, it should ordinarily be not disturbed as the court does not sit in appeal nor is it required to re-appreciate or re-assess the evidence or material on record. Even if erroneous view has been taken by the Arbitrator, the award is not liable to be set aside.

3. Proceeding on the aforesaid premise, I set to discuss the objections filed by the respondent.

4. Claim No. 1 is towards balance payment of final bill. According to the claimant, although the work was completed on 5.4.1989, the final bill was not prepared. Ultimately, claimant prepared their own final bill on 3.1.1992 claiming sum of Rs. 6,67,254.43. The final bill included the substituted and extra items.

5. The main objection raised by Ms. Anusuya Salwan, learned counsel for respondent No. 1 is that the Arbitrator has gone beyond the terms of the agreement and has therefore erred in law in allowing this claim particularly in view of the fact that there was reduction in the final bill approved by the Superintending Engineer and was therefore an excepted matter under clause 25-B of the agreement. Clause 25-B provides as under:—

“The decision of SE regarding the quantum of reduction as well as justification thereof in respect of rates for sub-standard work which may be decided to be accepted will be final and would not be open to arbitration.”

6. Apart from this, Ms. Salwan has also contended that since the claimant had accepted all the payments without any protest during the currency of the contract, the dispute raised by the petitioner-claimant did not come under the purview of the contract.

7. However, this contention of the respondent was repelled by the Arbitrator in view of the settlement of respondent No. 1 that under the sub-head “items not initially paid though agreed to be paid” were never agreed by the respondent. Further observations of the Arbitrator in this regard are as under:—

“In respect of the Final Bill including substituted and Extra items, the Respondents have prepared on 23.9.1994, a minus bill for an amount of (-) 10,289/-. In respect of items not initially paid, though agreed to be paid, the wording of the items has been examined and their costs determined. In respect of item No.: 6.1 “Tee Iron frames for doors, windows and ventilators, the scattered nature of concrete for the hold fasts is to be measured under concrete and the scattered nature of shuttering is to be measured under shuttering. In respect of “Sand filling in plinth with J. Sand and supply of bitumen in Agtt. items 2.4 and 8.4”, the arguments of the Execute Engineer are accepted. In respect of “Cutting and straightening of steel bars and bottom tie in Agtt item No.”6.1” the argument of the claimant is accepted with slight reduction in rate. The total works out to Rs. 1,40,105.15 only against Rs. 2,51,018.67 worked out by the Claimant in page C-61/20 of Folder No:3.”

8. Perusal of the record shows that the respondent raised specific objection that the reduction and deduction has been approved by the Superintending Engineer under clause 25-B of the agreement and therefore is not within the purview of the Arbitrator. Still the Arbitrator conveniently did not deal with this objection and proceeded with the merits of the matter.

9. While defending findings of the Arbitrator, Mr. D. Moitra, learned counsel for the petitioner-claimant has contended that unless and until respondent serves notice upon the claimant bringing out the particulars of sub-standard work done by the claimant as required by clause 14 of the contract, the decision of the Supdt. Engineer with regard to reduction and deduction does not come within the ambit of excepted matter. Clause 14 reads as under:—

“If it shall appear to the Engineer-in-charge or his authorised subor-dinate-in-charge of the work or by the Chief Engineer/Additional Chief Engineer, Superintending Engineer/Chief Technical Examiner/Technical Examiner of Central Vigilance Commission and Chief Engineer Quality Control DDA or his authorised subordinate or by an officer of the vigilance Cell of the Authority that any work has been executed to the unsound, imperfect or unskilful workmanship or with materials of any inferior scription, or that any materials or articles provided by him for the execution of the work are unsound or of quality inferior to that contracted for or otherwise or not in accordance with the contract, the contractor shall on demand in writing which shall, be made within six months of the completion of the work from the Engineer-in-Charge specifying the work, materials or articles complained or notwithstanding that the same may have been passed, certified and paid for, forthwith rectify or remove and reconstruct the work so specified in whole or in part, as the case may require or as the case may be, remove the materials or articles, so specified and provide other proper and suitable materials or articles at his own proper charge and cost, and in the event of his failing to do so within a period to be specified by the Engineer-in-Charge in his demand aforesaid then the contractor shall be liable to pay compensation at the rate of one percent on the estimated amount put to tender for everyday not exceeding ten days while his failure to do so shall continue and in the case of any such failure, the Engineer-in-Charge may rectify or remove and re-execute the work or remove and replace with others, the materials or articles complained of as the case may be at the risk & expenses in all respects of the contractor.”

10. It is contended by Mr. Moitra that the disputes referred to the Arbitrator were never with regard to items not initially paid nor with regard to excepted matters.

11. I am afraid the aforesaid contention does not hold water firstly for the reason that claimant had accepted the final bill without any protest; secondly the Arbitrator has made grave error by not dealing with the objection of respondent that claim No. 1 was an excepted matter.

12. Clause 25-B specifically lays down that reduction and deduction approved by the Supdt. Engineer shall not be brought in question and be binding and final.

13. If the contention of Mr. Moitra is accepted, the question of refuting the claim of the petitioner-claimant that the items referred by the petitioner as not initially paid though agreed to be paid would not have arisen. The respondent took the specific plea that respondent had never agreed for these items to be paid.

14. In a reasoned award, the Arbitrator is expected to deal with substantial objections raised by the parties and not to conveniently avoid or omit reference to those objections. At first instance, the Arbitrator was required to see whether the items in question were agreed to be paid or not or whether those items come within the ambit of clause 25-B or not. Until and unless, the Arbitrator had first given the finding that the items not initially paid were agreed to be paid by the respondent, the stage of allowing the claim in respect of items in question could not have reached.

15. The aforesaid facts show that the Arbitrator has not only misconduct himself legally but on factual matrix also and therefore the award in respect of this claim is not sustainable and is set aside.

16. Claims No. 2, 4 & 5 are on account of work done during the extended period of contract. According to the claimant the work which was to be completed within 6 months time was prolonged to three years time for no fault of theirs and, therefore, on account of delay they should be paid Rs. 7,34,808/- as escalation charges during the extended period of the contract as per Annexure-1. On the other hand the stand of the learned counsel for the DDA was that the site free from encroachment was handed over to the petitioner and the claimants took a lot of time in the preliminaries such as construction of cement godown, labour huts, site office and in arranging of materials. The main cause for delay, according to the petitioner, was that the material, drawings and designs were supplied very late and payments were also delayed by the respondents.

17. Claim No. 2 was on account of work done during the extended period of the contract. Claim No. 4 was on account of loss and damages due to the idleness of the staff. Claim No. 5 was on account of the loss suffered due to the idleness of tools and plants during over run period of the contract: The learned Arbitrator awarded claims under all the aforesaid Heads. The finding of the Arbitrator has been assailed mainly on two grounds; firstly that all the three claims are overlapping and secondly the petitioners as per the term of the agreement were not entitled for damages in case there was delay in supply of materials and delay in handing over part site. Relevant term of the agreement is special condition No. 1 stipulates that if there is a delay in supply of stipulated material, then the claimant is not entitled to any compensation.

18. Clause 22 is also the relevant clause which reads as under:

“All sums payable by way of compensations under any of these conditions shall be considered as reasonable compensation to be applied to this use of Delhi Development Authority without reference to the actual loss or damage sustained, and whether or not any damage shall have been sustained.”

19. Thus in nutshell the contention of Ms. Salwan, learned counsel for the respondent is that the award is bad in law and facts and without jurisdiction and is contrary to the stipulation in the contract. Further since the claimant could not have been paid over and above what was payable under the clause of the agreement award towards escalation in cost of material and labour is also bad in law. Moreover, contract also does not provide any escalation during the extended period of contract and therefore escalation charges are de hors the clear stipulations of the contract. While canvassing the proposition that the award is liable to be set aside if the Arbitrator traverses beyond his jurisdiction. Ms. Salwan has placed reliance on (i) Associated Engineering Company v. Government of Andhra Pradesh and another, 1991 ALR 180 (SC) and (ii) Steel Authority of India Limited v. J.C Budharaja, Government and Mining Contractor, 1999 (3) Arb. LR 335 (S.C).

20. In SAIL's case clause 32 was almost identical to clause 22 of the instant contract. Observations of Supreme Court are noteworthy and are as under:—

“……. 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 arbitrator derives the authority from the contract and if he acts in manifest disregard of the contract the award given by him would be arbitrary one. The deliberate departure in the contract amounts not only to manifest disregard of the authority or misconduct on his part, but it may tantamount to mala fide action. In the present case, it is apparent that awarding of damages of Rs. 11 lakhs and more for the alleged lapses or delay in haning over work is, on the fact of it, against the terms of the contract.”

21. In another similar case titled Rajasthan State Mines and Minerals Ltd. v. Eastern Engineering Enterprises and another, 1999 (3) ALR 350 (S.C) a clause that the remuneration payable would be inclusive of the element which includes cost of explosives etc. accessories, transportation, salary and wages. It was also provided that the contractor shall not be entitled to raise any such claim. Still the Arbitrator awarded the claim for cost of explosives, transportation. It was held that the Arbitrator being the creature of the contract between the parties cannot ignore the specific terms of the contract as it would be a question of jurisdictional error which could be corrected by the Court.

22. However Mr. Moitra has relied upon a recently decided case titled Bengal Traders v. West Bengal State Electricity Board, 2001 (2) RAJ 315 (SC) wherein it was held that such a stipulation of the term of the agreement does not apply to a claim in respect of loss of expenditure, overhead charges, establishment, idleness of labour, increase of cost of execution during prolonged period and compensation of loss and profit.

23. Perusal of the award shows that the Arbitrator has found that the work was held up for general hinderances which were beyond control and, therefore, claimant was entitled for escalation. Merely, because the title of the claim No. 2 was that the award was not on account of work done during the extended period of contract did not mean that the award was given with regard to the work not done, the Arbitrator has rightly observed that claimant is entitled for escalation in costs because the work was held up for general hinderances and for no fault of his.

24. As regards claim No. 4 the Arbitrator has observed that the claimant had kept the supervisory staff for the shutters and other drawings and designs for two years and 8 months. It is difficult to accept and imagine that a contractor would keep paying salary to the staff without getting any work from them for such a long period. The loss and damages on account of this problem as compensated by the Arbitrator are not awardable. Similarly the loss suffered by the plaintiff by way of claim No. 5 due to idleness of tools and plants due to over run period of the contract was well compensated through the escalation because of the extended period of contract i.e for about 2 years 8 months. In every claim the basis for award was the default on the part of the respondent due to the non-availability of the cement, designs etc. As is apparent from the reasons given by the Arbitrator while awarding claim No. 2, 4 & 5 these were common and could not have been segregated from the each other.

25. In view of this only claim No. 2 of the award is upheld whereas award with regard to claims 4 & 6 is set aside.

26. As regards the remaining claims which are on account of refund of the bank guarantee and interest, I do not find any merit in the objection of the respondent as these were well within the competence of the Arbitrator and have been awarded on reasoned grounds.

27. In the result claims 2, 7 & 9 are allowed. The suit is decreed for the amount awarded against these claims.

28. However the interest @ 15% shall be calculated at the proportionate amount of award which has been upheld in this order from the date of the award till its realization.

Pt. Munshi Ram & Associates (P) Ltd v. Delhi Development Authority & Anr

Judicial Opinion Summary — J.D. Kapoor, J.

Factual and Procedural Background

Legal Issues Presented

Arguments of the Parties

Respondent's Arguments (Ms. Anusuya Salwan)

Claimant's Arguments (Mr. D. Moitra)

Table of Precedents Cited

Court's Reasoning and Analysis

Holding and Implications

Pt. Munshi Ram & Associates (P) Ltd v. Delhi Development Authority & Anr

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