Holding

A contractual clause giving the Superintending Engineer final authority to levy liquidated damages makes that issue an excepted matter and non‑arbitrable, so the arbitral award cannot determine it.

Summary

M/s. Mitra Guha Builders (India) Co. entered into a construction contract with ONGC that contained Clause 2 allowing the Superintending Engineer to levy liquidated damages for delay, with a finality clause, and Clause 25 mandating arbitration for disputes. The arbitrator allowed the contractor's claims but rejected ONGC's liquidated damages, treating them as a penalty. The Single Judge of the Delhi High Court upheld the award, but a Division Bench set it aside, holding that the levy of liquidated damages under Clause 2 was an "excepted matter" and not arbitrable. ONGC appealed to the Supreme Court, arguing that the contract expressly made the Engineer's decision final and outside the scope of arbitration. The Supreme Court agreed, interpreting the contract as a whole and relying on earlier decisions, and dismissed the appeals, confirming that the issue of liquidated damages could not be decided by the arbitrator.

Issues considered

The levy of liquidated damages/compensation under Clause 2 is arbitrable or an excepted matter.
Whether the finality clause in Clause 2 bars arbitration under Clause 25.
Whether the arbitrator exceeded jurisdiction by deciding on the liquidated damages.

Legislation cited

Arbitration and Conciliation Act, 1996s. 34, s. 37

Subjects

ArbitrationLiquidated damagesExcepted matterFinality clauseContract interpretationConstruction contractSuperintending EngineerSection 34Section 37

Judgment

368 [2019]REPORTS
SUPREME COURT 14 S.C.R. 368 [2019] 14 S.C.R.

A M/S. MITRA GUHA BUILDERS (INDIA) COMPANY
v.
OIL AND NATURAL GAS CORPORATION LIMITED
(Civil Appeal No. 5511 of 2012)
B NOVEMBER 08, 2019
[R. BANUMATHI, A. S. BOPANNA AND
HRISHIKESH ROY, JJ.]
Arbitration :
C Contract for building construction – Dispute – Arbitrator
appointed – Arbitrator allowed the claims of the contractor/
claimants, while rejected the counter-claim for liquidated damages/
compensation – Single Judge of High Court upheld the Award –
Division Bench of High Court set aside the Award holding that
question of levy of liquidated damages was not arbitrable – Appeal
D
to Supreme Court – Held : The relevant clause of the contract shows
that the parties had agreed that levy of liquidated damages by the
Superintending Engineer of the respondent-Company was final –
Therefore the issue was not arbitrable being an “excepted matter”
– Division Bench of High Court rightly set aside the Award.
E Contract :
Interpretation of contractual clause – Held : 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.
F
Dismissing the appeals, the Court
HELD : 1. Upholding the award of the Arbitrator, the Single
Judge of High Court held that the delay in completion of the
work was on account of both parties and by applying the equitable
G principles, the Single Judge held that the damages were payable
by either of the parties. The Single Judge failed to note the
implication of Clause 2 of the contract and also various
correspondences between the parties, while affirming the award
passed by the Arbitrator. In terms of Clause 2 of the agreement
dated 05.02.1996 between the parties, the contractor is to proceed
H
368
M/S. MITRA GUHA BUILDERS (INDIA) COMPANY v. OIL AND 369
NATURAL GAS CORPORATION LTD.

with the work with due diligence throughout the contract period. A
By the terms of the agreement, the parties have consciously
agreed that in case the contractor fails to comply with the
conditions and complete the work with due diligence, the
Superintending Engineer may decide the compensation in terms
of Clause 2 of the agreement. [Para 13 and 14][378-C-D]
B
2. A reading of Clause 2 of the Contract 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 would show that such a decision taken by the
Superintending Engineer shall be final. The finality clause in the C
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 D
seen from clause 25 of the Contract. 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. The parties E
have consciously agreed to have finality to the decision of the
Superintending Engineer and the same cannot be frustrated by
challenging the same as illegal. 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 F
agreement meaningless and redundant. [Paras 15 and 16][379-
E-F; 381-A-C]
3. According to the respondent, the completion time was
extended without prejudice to its right to recover compensation
in accordance with Clause 2 of the agreement. The contention of G
the respondent is that by the letter dated 15.05.2001, the
contractor was put on notice that in exercise of the power conferred
on the Superintending Engineer under Clause 2, the contractor
is liable to pay 10% of the contract value by way of compensation.
The contractor was informed by the said letter dated 15.05.2001
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370 SUPREME COURT REPORTS [2019] 14 S.C.R.

A that the compensation is levied on him for the period of 39 weeks
at half per cent per week subject to maximum of 10% of the
contract value and that the actual amount of compensation shall
be worked out on checking the final bill and the same shall be
recovered by the respondent from the final bill. By the
subsequent letter dated 25.05.2001, the claimant was informed
B
that the final bill is ready and the claimant was required to reconcile
the final bill after adjusting the compensation. [Para 17][381-E-
G]
4. A reading of the other terms of the contract would further
indicate that under Clauses 13 and 14 of the agreement, the
C 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
D 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. In claim No.6,
the contractor has sought for declaration “that the penalty under
E Clause 2 imposed by the respondent was illegal and unwarranted
and the amount withheld by the respondent was payable to the
contractor with interest @ 24%”. Claim No.6 sought for by the
contractor is clearly in violation of Clause 2 of the agreement
between the parties, in and by which, the parties have agreed
F that the decision taken by the Superintending Engineer levying
compensation shall be final. 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. [Para 18][381-H; 382-A-D]
G 5. 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

H
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NATURAL GAS CORPORATION LTD.

in the arbitration proceedings and the remedy if any, will arise in A
the ordinary course of law. [Para 21][385-D]
6. The Single Judge of the High Court erred in proceeding
under the presumptive footing that the compensation levied by
the Superintending Engineer was in the nature of penalty. It was
actually levy of liquidated damages/compensation in terms of B
Clause 2 of the agreement. Levy of compensation of
Rs. 32,79,828/- in Arbitration Case No.297A of 2002 and
Rs.42,08,940/- in Arbitration Case No.297 of 2002 in terms of
Clause 2 of the agreement is final and the same could not have
been the subject matter of arbitration. The Division Bench of the
High Court rightly set aside the order of the Arbitrator with regard C
to claim No. 6 by holding that levy of liquidated damages/
compensation is adjustable against the final bill payable to the
appellant. The impugned judgment does not therefore, suffer from
any infirmity warranting interference. [Para 25][387-E-F]
Vishwanath Sood v. Union of India and Another (1989) D
1 SCC 657 : 1989 (1) SCR 288; Food Corporation of
India v. Sreekanth Transport (1999) 4 SCC 491 : 1999
(3) SCR 699; Bharat Sanchar Nigam Limited and
another v. Motorola India (P) Ltd. (2009) 2 SCC 337 :
2008 (13 ) SCR 445 - relied on. E
Case Law Reference
1989 (1) SCR 288 relied on Para 5
1999 (3) SCR 699 relied on Para 5
2008 (13) SCR 445 relied on Para 6. F
CIVIL APPELLATE JURISDICTION: Civil Appeal No. 5511 of
2012.
From the Judgment and Order dated 16.02.2009 of the High
Court of Delhi at New Delhi in FAO (OS) No. 6 of 2008.
G
With
Civil Appeal No. 5512 of 2012.
Bipin Prabhat, Aditya Shukla, Ms. Sharmila Upadhyay, Advs. for
the Appellant.
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372 SUPREME COURT REPORTS [2019] 14 S.C.R.

A K. M. Nataraj, ASG, Akshay Amritanshu, Balraj Dewan, Advs.
for the Respondent.
The Judgment of the Court was delivered by

R. BANUMATHI, J.
B
1. These two appeals arise out of the judgment dated 16.02.2009
passed by the High Court of Delhi in FAO(OS) No.6 of 2008 and
FAO(OS) No.7 of 2008 in and by which the Division Bench of the High
Court has set aside the order of the learned Single Judge and also of the
learned Arbitrator by holding that the levy of liquidated damages is an
C
“excepted matter” under Clause 2 read with Clause 25 of the contract
and the same is not arbitrable.

2. Brief facts which led to filing of these appeals are as follows:-

D Appellant-M/s. Mitra Guha Builders (India) Company and the
respondent-Oil and Natural Gas Corporation Limited (ONGC) entered
into a contract on 05.01.1996 bearing No.DHL/Civil/NOIDA/6/94 for
construction of Multi-storeyed Residential flats 28 Nos. ‘C’ type guest
house multipurpose hall service block underground water tank etc. and
other work for ONGC. The appellant-claimant raised certain claims which
E
were refuted by the respondent and thus, the claimant invoked the
arbitration Clause 25 of the General Conditions of the contract vide letter
dated 07.09.2001. The appellant-claimant had also entered into a contract
dated 05.01.1996 bearing No.DHL/Civil/NOIDA/5/94 for construction
of Multi-storeyed Residential flats 20 Nos. ‘B’ type for ONGC. The
F appellant-claimant raised certain claims which were refuted by the
respondent and here again, the claimant invoked the arbitration Clause
25 of the General Conditions of the contract vide letter dated 07.09.2001.

3. The designated authority vide its order dated 03.01.2002
appointed Justice P.K. Bahri (Retd.) as the sole Arbitrator to adjudicate
G
upon the claims of the parties. The learned Arbitrator vide award dated
01.07.2005 allowed the claim of the claimant and disallowed the liquidated
damages/compensation and rejected the counter claim of respondent-
ONGC. Various claims made by the contractor and the amount awarded
by the learned Arbitrator in both the arbitration cases are as under:-
H
M/S. MITRA GUHA BUILDERS (INDIA) COMPANY v. OIL AND 373
NATURAL GAS CORPORATION LTD. [R. BANUMATHI, J.]

Arbitral Award in Arbitration Case No.297/2002 dated A
01.07.2005
Clai m Particul ars of clai m of the Amount claime d Amount awar de d
No. Petitioner before the Ld. by the Petiti oner by Ld. Ar bi trator
Ar bitr al Tri bu nal
1. Ba lance payment claimed by the Rs.21,22,249/- Rs .21,18,975/-
Petitioner towa rds Final Bill
2. Amount allegedly withheld by Rs.9,00,000/- Rs .9,00,000/-
B
ON GC
3. Escalation c laimed by the Rs.27,92,189/- Rs .27,92,189/-
Petitioner as per p rovisions of
the contract
4. Los ses and damages incurred by Rs.21,60,375/- Claim rejected by
the Petitioner in the shape of the Ld. Arb itrator
overheads due to prolongation of
contract C
5. Los s of turnover suffered by the Rs.55,58,428/- Claim rejected by
Petitioner due to prolongation of the Ld. Arb itrator
contract
6. Decla ration sought by the Rs.30,18,975/- Amount of
Petitioner that the penalty under [a mount that was Rs .30,18,975/-
Claus e 2 impos ed by ONGC withheld by ON GC withheld by ONGC
was illegal and unwarranted and towards liquidated as liquidated
the amount withheld by ONGC damages ] damages was to be D
was payable to the Petitioner refunded and
with interes t @ 24% adjus ted towards
payment of Claim
No.1 and 2
7. Interes t payable on final bill - -
8. Interes t payable on withheld - -
amount
9. Interes t payable on escalation - - E
amount
10. Interes t payable on looses and - -
damages
11. Interes t pre-s uit pendente lite - 10% interes t
and future interes t @ 24%
12. Cos t of Arbitration Rs.1,00,000/- Rs .2,00,000/-
Total amount awar de d by Ld. Ar bitr ator Rs.58,11,164/-
(Clai m 1 + 2 + 3 ) F
Arbitral Award in Arbitration Case No.297A/2002 dated
01.07.2005
Clai m Particul ars of claim of the Amount claime d Amount awar de d
No. Petitioner before the Ld. by the Petiti oner by Ld. Arbi trator
Ar bitr al Tri bunal G
1. Ba lance payment cla imed by the Rs.25,91,225/- Rs.24,80,142/-
Petitioner towa rds Final Bill
2. Amount allegedly withheld by Rs.12,00,000/- Rs.12,00,000/-
ONGC
3. Escalation cla imed by the Rs.29,56,110/- Rs.29,56,110/-
Petitioner as per provisions of
the contract
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374 SUPREME COURT REPORTS [2019] 14 S.C.R.

A 4. Losses and damages incurred by Rs.18,23,613/- Claim rejected by
the Petitioner in the shape of the Ld. Arbitrator
overheads due to prolongation of
contract
5. Loss of turnover suffered by the Rs.46,91,973/- Claim rejected by
Petitioner due to prolongation of the Ld. Arbitrator
contract
B 6. Declaration sought by the Rs.36,80,142/- Amount of
Petitioner that the penalty under [amount that was Rs.36,80,142/-
Clause 2 imposed by ONGC was withheld by withheld by
illegal and unwarranted and the ONGC towards ONGC as
amount withheld by ONGC was liquidated liquidated damages
payable to the Petitioner with damages] was to be refunded
interest @ 24% and adjusted
C towards payment
of Claim No.1 and
2
7. Interest payable on final bill Rs.9,84,680/- -
8. Interest payable on withheld Rs.6,36,000/- -
amount
9. Interest payable on escalation Rs.18,91,910/- -
amount
D 10. Interest payable on looses and Rs.40,39,666/- -
damages
11. Interest pre-suit pendente lite - 10% interest
and future interest @ 24%
12. Cost of Arbitration Rs.1,00,000/- Rs.2,00,000/-
Total amount awarded by Ld. Arbitrator Rs.66,36,252/-
(Claim 1 + 2 + 3)
E
The learned Arbitrator allowed the claim of the claimant and
disallowed the liquidated damages/compensation of Rs.32,79,828/- in
Arbitration Case No.297A of 2002 and Rs.42,08,940/- in Arbitration Case
No.297 of 2002 presuming the same to be a penalty.
F 4. Challenging the award, the respondent filed petitions bearing
OMP Nos.358 and 359 of 2005 under Section 34 of the Arbitration and
Conciliation Act, 1996 before the High Court of Delhi and the same
were dismissed by the Single Judge vide order dated 02.11.2007. The
learned Single Judge held that the Arbitrator has found that under the
garb of liquidated damages, what was sought to be imposed was penalty.
G The learned Single Judge found that almost 60% of the delay was
attributable to the respondent-ONGC while 273 days - 40% delay was
attributable to the appellant. The learned Single Judge held that when
the respondent-ONGC themselves are responsible for substantive part
of the delay, it can hardly be said that respondent is entitled to recovery
H of liquidated damages or penalty. While upholding the award passed by
M/S. MITRA GUHA BUILDERS (INDIA) COMPANY v. OIL AND 375
NATURAL GAS CORPORATION LTD. [R. BANUMATHI, J.]

the Arbitrator, the learned Single Judge in Arbitration Case No.297A of A
2002 corrected the award amount as Rs.66,36,252/- from Rs.69,36,252/
- which was on account of clerical mistake.
5. The respondent-ONGC filed appeals under Section 37 of the
Arbitration Act, 1996 before the High Court of Delhi. The respondent
contended that the pre-estimated liquidated damages of Rs.32,79,828/- B
in Arbitration Case No.297A of 2002 and Rs.42,08,940/- in Arbitration
Case No.297 of 2002 claimed by the respondent-ONGC in terms of
Clause 2 of the contract between the parties was wrongly disallowed by
the Arbitrator presuming the same to be a penalty.
6. The issue involved before the Division Bench of the High Court C
was interpretation of Clause 2 of the contract regarding liquidated
damages/compensation levied by the Superintending Engineer and the
finality attached to it. Before the Division Bench, it was contended by
the respondent-ONGC that the decision of the Superintending Engineer
to levy liquidated damages under Clause 2 being final, the same was an
“excepted matter” and not arbitrable. D

7. The Division Bench set aside the findings of the award passed
by the learned Arbitrator and the order of the learned Single Judge by
holding that Clause 2 of the agreement provided that the decision of the
Superintending Engineer on the question of levy of liquidated damages is
final and that the same could not have been agitated in the arbitration E
proceeding. The Division Bench held that when the parties have
consciously provided that the decision of the Superintending Engineer
shall be final only to exclude the issue of “excepted matter” from the
scope of the arbitration, the Arbitrator ought not to have dealt with the
same and passed the award. The Division Bench has also pointed out F
that when the respondent-ONGC first gave notices to the appellant-
contractor to rectify the defects and thereafter, gave a notice to levy
liquidated damages on 15.05.2001 followed by the letter dated 25.05.2001
to the appellant-contractor that the final bill was ready and that the
appellant was required to reconcile the final bill to ensure the settlement
of the account, it cannot in such circumstances be said that the liquidated G
damages were imposed as a counter blast to the appellant’s claim. With
those findings, the Division Bench reversed the findings of the learned
Single Judge and set aside the award.
8. Assailing the above judgment of the Division Bench, Mr. Bipin
Prabhat, learned counsel for the appellant contended that the High Court H
376 SUPREME COURT REPORTS [2019] 14 S.C.R.

A failed to appreciate that Clause 25 of the contract which authorises the
quantum of reduction as well as the reduction of rates for substantive
works cannot be construed to empower the Superintending Engineer to
determine the issue of levy of liquidated damages. It was submitted that
the High Court failed to appreciate that the dispute relating to levy of
B compensation for delay provided under Clause 2 read with Clause 25 of
the contract is not an “excepted matter” and the same has been rightly
adjudicated upon by the learned Arbitrator. The learned counsel further
contended that the Division Bench, in exercising its power under appellate
jurisdiction under Section 37 of the Act, erred in reappreciating the
evidence and in upsetting the findings of the learned Arbitrator and the
C learned Single Judge.
9. Per contra, Mr. K.M. Natraj, learned Additional Solicitor General
(ASG) assisted by Mr. Akshay Amritanshu, learned counsel submitted
that the learned Arbitrator wrongly disallowed the estimated liquidated
damages and reasonable compensation of Rs.32,79,828/- in Arbitration
D Case No.297A of 2002 and Rs.42,08,940/- in Arbitration Case No.297
of 2002 presuming the same to be a penalty. The learned ASG further
contended that the learned Arbitrator travelled beyond the terms of the
contract and disallowed the liquidated damages to the respondent even
though it was an “excepted matter”, not falling within his jurisdiction. It
E was submitted that the Division Bench of the High Court has rightly held
that the imposition of liquidated damages by the respondent was not a
counter-blast or an afterthought and prayed for dismissal of the appeals.
10. We have carefully considered the contentions of both sides
and perused the impugned judgment and materials on record. The
F following points arise for consideration in these appeals:-
(i) 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”?
G (ii) 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?
H
M/S. MITRA GUHA BUILDERS (INDIA) COMPANY v. OIL AND 377
NATURAL GAS CORPORATION LTD. [R. BANUMATHI, J.]

11. ONGC’s claim of liquidated damages in terms of Clause A
2 of the agreement:- The salient features of the contract in Arbitration
Case No.297A/2002 are that the work was to commence on 22.02.1996
and was stipulated to be completed by 21.08.1997. But the work was
completed only on 24.05.1999. Insofar as Arbitration Case No.297/2002,
the work was to commence on 21.02.1996 and was stipulated to be B
completed by 21.08.1997. But the work was completed only on
24.05.1999. In its statement of defence, the respondent-ONGC asserted
that there has not been any significant delay caused by the respondent-
ONGC which could delay the work of the claimant. In its statement of
defence, the respondent-ONGC mentioned that total delay which has
occurred was 640 days out of which claimant is responsible for the C
delay of 39 weeks (39 × 7 = 273 days) and on this account, the claimant
is liable to pay compensation in terms of Clause 2 of the contract which
stipulate compensation payable @ ½% per week subject to maximum
10% of the cost of the executed work and the decision of the
Superintending Engineer in this regard is final. The respondent-ONGC D
has thus claimed Rs.32,79,828/- in Arbitration Case No.297A of 2002
and Rs.42,08,940/- in Arbitration Case No.297 of 2002 recoverable from
the claimant as compensation for the delay caused by the claimant in
completing the work.
12. After reference to various correspondences between the E
respondent-ONGC and the appellant and after a detailed discussion, the
learned Arbitrator recorded a finding of fact that the respondent-ONGC
was responsible to an extent for the prolongation of the contract and the
claimant was also to some extent responsible which resulted in slow
progress of the work. Considering the delay alleged by the respondent-
F
ONGC, the learned Arbitrator has observed that there was delay of 640
days and both the respondent-ONGC and the appellant were responsible
for the delay and observed as under:-
“….The date of commencement of the work stipulated in the
contract was the 22nd February 1996 and the work was to be
G
completed on the 22nd August 1997. According to the respondent,
the actual date of commencement of the work was the 13th March
1996 and the work was completed on the 24th May 1999. Thus,
there took place delay of 640 days. The respondent was
responsible for only 160 days of delay whereas the claimant was
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378 SUPREME COURT REPORTS [2019] 14 S.C.R.

A responsible for delay of 371 days. It is not understood how the
respondent has quantified the delay imputed to either of the parties.”
13. By upholding the award of the learned Arbitrator, the learned
Single Judge held that the delay in completion of the work was on account
of both parties and by applying the equitable principles, the learned Single
B Judge held that the damages were payable by either of the parties.
14. The learned Single Judge, in our view, failed to note the
implication of Clause 2 of the contract and also various correspondences
between the parties, while affirming the award passed by the learned
Arbitrator. In terms of Clause 2 of the agreement dated 05.02.1996
C between the parties, the contractor is to proceed with the work with due
diligence throughout the contract period. In case of delay or failure to
ensure good progress during execution of the work, Clause 2 of the
agreement provides for determination/quantification of compensation for
delay or certain inactions, on the part of the contractor. In terms of
Clause 2 of the agreement, the Superintending Engineer shall assess
D and quantify the compensation. By the terms of the agreement, the parties
have consciously agreed that in case the contractor fails to comply with
the conditions and complete the work with due diligence, the
Superintending Engineer may decide the compensation in terms of Clause
2 of the agreement.
E 15. In order to appreciate the claim of ONGC in levying the
damages in terms of Clause 2, it is necessary to refer to Clause 2 of the
agreement which reads as under:-
“Clause 2: Compensation for Delay
The time allowed for carrying out the work as entered in the
F
tender shall be strictly observed by the contractor and shall be
deemed to be the essence of the contract on the part of the
contractor and shall be reckoned from the 15th day after the date
on which the order to commence the work is issued to the
contractor. The work shall throughout the stipulated period of the
G contract be proceeded with all due diligence and the contractor
shall pay compensation on amount equal to ½ % per week as the
Superintending Engineer (whose decision in writing shall be final)
may decide on the amount of the contract, value of the whole
work as shown in the agreement, for every week that the work
remains uncommenced, or unfinished, after the proper dates. After
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NATURAL GAS CORPORATION LTD. [R. BANUMATHI, J.]

further to ensure good progress during the execution of the work, A
the contractor shall be bound in all cases in which the time allowed
for any work exceeds, one month (save the special jobs) to
complete one-eighth of the work, before one-fourth of the whole
time allowed under the contract has elapsed and three-eights of
the work, before one-half of such time has elapsed, and three-
B
fourth of such time has elapsed. However, for special jobs if a
time schedule has been submitted by the contractor and the same
has been accepted by the Engineer-in-Charge, 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 ½ % per C
week as the Superintending Engineer (whose decision in
writing shall be final) may decide on the said contract value
if the whole work for every week that the due quantity of
works remains incomplete provided always that the entire
amount of compensation to be paid under the provisions of
D
the clause shall not exceed ten per cent (10%) of the
tendered cost of the work as shown in the tender.”
[Emphasis added]
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 E
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. F
16. Clause 25 of the agreement – Settlement of disputes by
Arbitration, reads as under:-
“Clause 25 – Settlement of disputes by Arbitration
If any dispute, difference, question or disagreement shall, at any G
time, hereafter arises between the parties hereto or the respective
representatives or assigns in connection with or arising out of the
contract, or in respect of meaning of specifications, design,
drawings, estimates, scheduled, annexures, orders, instructions,
the construction, interpretation of this agreement, application of
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380 SUPREME COURT REPORTS [2019] 14 S.C.R.

A provisions thereof or anything hereunder containing or arising
hereunder or as to rights, liabilities or duties of the said parties
hereunder or arising hereunder any matter whatsoever incidental
to this contract or otherwise concerning the works of execution
or failure to execute the same whether during the progress of
work or stipulated/extended period or before or after the
B
completion or abandonment thereof shall be referred to the sole
arbitration of the person appointed by a Director of ONGC Ltd.
at the time of dispute. There will be no objection to any such
appointment that the arbitrator so appointed is an employee of
ONGC Ltd. or that he had to deal with the matters to which the
C contract relates and that in the course of this duties as ONGC
Ltd. employees, lie had expressed views on all or any of the matters
in dispute or difference.
If the arbitrator to whom the matter is originally referred dies or
refuses to act or resigns for any reason from the position of
D arbitrator, it shall be lawful for the Director of ONGC Ltd. to
appoint another person to act as arbitrator in the manner aforesaid.
Such person shall be entitled to proceed with the reference from
the stage at which it was left by his predecessor if both the parties
consent to this effect, failing which the arbitrator will be entitled
to proceed de-novo.
E
………..
It is also a term of the contract that if the contractor(s) do/does
not make any demand for arbitration in respect of any claim(s) in
writing within 90 days of receiving the intimation from the
F corporation that the bill is ready for payment, the claim of the
contractor(s) will be deemed to have been waived and absolutely
barred and the Corporation shall be discharged and released of all
liabilities under the contract in respect of these claims.
The decision of the Superintending Engineer regarding the
G quantum of reduction as well as his justification in respect
of reduced rates for sub-standard work, which may be
decided to be accepted, will be final and would not be open
to arbitration.
………..”. [Emphasis added]
H
M/S. MITRA GUHA BUILDERS (INDIA) COMPANY v. OIL AND 381
NATURAL GAS CORPORATION LTD. [R. BANUMATHI, J.]

The intention of the parties to exclude some of the decisions of A
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
B
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. The parties
have consciously agreed to have finality to the decision of the
Superintending Engineer and the same cannot be frustrated by challenging C
the same as illegal. 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.
17. As held by the Division Bench of the High Court, whether D
there was delay in completion of work and the levy of liquated damages,
could not have been determined by the arbitrator. Vide letters dated
08.12.1999, 09.12.1999, 17.12.1999, 11.02.2000 and 17.04.2000, ONGC
called upon the respondent/contractor to remove the defects failing which
it would get the defects remedied at his cost. According to ONGC, the
completion time was extended without prejudice to the right of ONGC E
to recover compensation in accordance with Clause 2 of the agreement.
The contention of ONGC is that by the letter dated 15.05.2001, the
contractor was put on notice that in exercise of the power conferred on
the Superintending Engineer under Clause 2, the contractor is liable to
pay 10% of the contract value by way of compensation. The contractor F
was informed by the said letter dated 15.05.2001 that the compensation
is levied on him for the period of 39 weeks at half per cent per week
subject to maximum of 10% of the contract value and that the actual
amount of compensation shall be worked out on checking the final bill
and the same shall be recovered by ONGC from the final bill. By the
subsequent letter dated 25.05.2001, the claimant was informed that the G
final bill is ready and the claimant was required to reconcile the final bill
after adjusting the compensation.
18. A reading of the other terms of the contract would further
indicate that under Clauses 13 and 14 of the agreement, the parties have
H
382 SUPREME COURT REPORTS [2019] 14 S.C.R.

A 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.
B
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. In claim No.6, the contractor has sought for declaration
“that the penalty under Clause 2 imposed by ONGC was illegal and
unwarranted and the amount withheld by ONGC was payable to the
C contractor with interest @ 24%”. Claim No.6 sought for by the contractor
is clearly in violation of Clause 2 of the agreement between the parties,
in and by which, the parties have agreed that the decision taken by the
Superintending Engineer levying compensation shall be final. 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
D
Superintending Engineer.
19. While considering similar contractual provisions viz. Clause 2
of the agreement as in the present case, in Vishwanath Sood v. Union
of India and Another (1989) 1 SCC 657, the Supreme Court held as
under:-
E
“8. ……… As we see it, clause 2 contains a complete machinery
for determination of the compensation which can be claimed by
the Government on the ground of delay on the part of the contractor
in completing the contract as per the time schedule agreed to
between the parties. The decision of the Superintending Engineer,
F it seems to us, is in the nature of a considered decision which he
has to arrive at after considering the various mitigating
circumstances that may be pleaded by the contractor or his plea
that he is not liable to pay compensation at all under this clause. In
our opinion the question regarding the amount of compensation
G leviable under clause 2 has to be decided only by the Superintending
Engineer and no one else.
9. ……..After referring to certain judicial decisions regarding the
meaning of the word “final” in various statutes, the Division Bench
concluded that the finality cannot be construed as excluding the
H jurisdiction of the arbitrator under Clause 25. We are unable to
M/S. MITRA GUHA BUILDERS (INDIA) COMPANY v. OIL AND 383
NATURAL GAS CORPORATION LTD. [R. BANUMATHI, J.]

accept this view. Clause 25 which is the arbitration clause starts A
with an opening phrase excluding certain matters and disputes
from arbitration and these are 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 such as the one in parenthesis in clause 2 by which
B
certain types of determinations 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 clause
25 clearly excludes matters like those mentioned in clause 2 in
respect of which any dispute is left to be decided by a higher C
official of the Department. Our conclusion, therefore, is that the
question of awarding compensation under clause 2 is outside the
purview of the arbitrator and that the compensation, determined
under clause 2 either by the Engineer-in-charge or on further
reference by the Superintending Engineer will not be capable of
D
being called in question before the arbitrator.
10. ……. But we should like to make it clear that our decision
regarding non-arbitrability is only on the question of any
compensation which the Government might claim in terms of
Clause 2 of the contract. We have already pointed out that this is
a penalty clause introduced under the contract to ensure that the E
time schedule is strictly adhered to. It is something which the
Engineer-in-charge enforces from time to time when he finds that
the contractor is being recalcitrant, in order to ensure speedy and
proper observance of the terms of the contract. This is not an
undefined power. The amount of compensation is strictly limited F
to a maximum of 10 per cent and with a wide margin of discretion
to the Superintending Engineer, who might not only reduce the
percentage but who, we think, can even reduce it to nil, if the
circumstances so warrant. It is this power that is kept outside the
scope of arbitration. We would like to clarify that this decision of
ours will not have any application to the claims, if any, for loss or G
damage which it may be open to the Government to lay against
the contractor, not in terms of clause 2 but under the general law
or under the Contract Act. As we have pointed out at the very
outset so far as this case is concerned the claim of the Government
has obviously proceeded in terms of clause 2 and that is the way H
384 SUPREME COURT REPORTS [2019] 14 S.C.R.

A in which both the learned Single Judge as well as the Division
Bench have also approached the question. Reading clauses 2 and
25 together we think that the conclusion is irresistible that the
amount of compensation chargeable under clause 2 is a matter
which has to be adjudicated in accordance with that clause and
which cannot be referred to arbitration under clause 25".
B
[Underlining added]
The ratio of the above decision squarely applies to the present
case. 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.
C
20. In this regard, reliance was also placed upon Food
Corporation of India v. Sreekanth Transport (1999) 4 SCC 491
wherein, the Supreme Court interpreted Clause 12 of the agreement
thereon. Clause 12 of the agreement in Food Corporation of India
reads as under:-
D
“The decisions of the Senior Regional Manager regarding such
failure of the contractors and their liability for the losses etc.
suffered by the Corporation shall be final and binding on the
contractors….”.

E 21. While interpreting the clause on ‘excepted matters’, in Food
Corporation of India, the Supreme Court held as under:-
“3. “Excepted matters” obviously, as the parties agreed, do not
require any further adjudication since the agreement itself provides
a named adjudicator — concurrence to the same obviously is
F presumed by reason of the unequivocal acceptance of the terms
of the contract by the parties and this is where the courts have
been found out lacking in their jurisdiction to entertain an
application for reference to arbitration as regards the disputes
arising therefrom and it has been the consistent view that in the
event of the claims arising within the ambit of excepted matters,
G the question of assumption of jurisdiction of any arbitrator either
with or without the intervention of the court would not arise. The
parties themselves have decided to have the same adjudicated by
a particular officer in regard to these matters; what these exceptions
are however are questions of fact and usually mentioned in the
contract documents and form part of the agreement and as such
H
M/S. MITRA GUHA BUILDERS (INDIA) COMPANY v. OIL AND 385
NATURAL GAS CORPORATION LTD. [R. BANUMATHI, J.]

there is no ambiguity in the matter of adjudication of these A
specialised matters and being termed in the agreement as the
excepted matters.
……..
9. ……... The Food Corporation, therefore, as a matter of fact
desired an adjudication of their claim to the extent of Rs 1,89,775 B
together with interest at the rate of 18 per cent per annum from
the civil court rather than relying on the adjudicatory process
available in the contract itself through their own Senior Regional
Manager. The agreement as noticed above expressly provides
that the adjudication shall be effected by the Senior Regional C
Manager and by no other authority and the decision, it has been
recorded in the agreement, of the Senior Regional Manager would
be final and binding on the parties…..”.
In the present case, the parties themselves have agreed that the
decision of the Superintending Engineer in levying compensation is final D
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.
22. The learned counsel for the appellant has relied upon Bharat E
Sanchar Nigam Limited and another v. Motorola India (P) Ltd.
(2009) 2 SCC 337 and by referring to Clause 16(2) in the concerned
agreement submitted that for quantification of liquidated damages, first
of all, there has to be a delay and for ascertaining as to who was
responsible for the delay, such an issue will be within the jurisdiction of
the arbitrator. The learned ASG however, submitted that in the present F
case, Clause 2 of the agreement is not only a mechanism for quantification
of liquidated damages, but Clause 2 also makes the contractor liable for
payment of the same and in terms of Clause 2 of the agreement, the
decision of the Superintending Engineer is final and the present case is
therefore, distinguishable from BSNL’s case. G
23. As rightly contended by the learned ASG, in BSNL’s case,
Clause 16(2) of the agreement does not create any kind of liability to
pay liquidated damages; but only provides for entitlement of BSNL to
collect the damages in case of any delay in supply on the part of the
supplier under Clause 16(2). While interpreting Clause 16(2) and Clause
H
386 SUPREME COURT REPORTS [2019] 14 S.C.R.

A 21 of the contract which was under consideration in BSNL’s case, in
paras (23) and (26), the Supreme Court held as under:-
“23. The question to be decided in this case is whether the liability
of the respondent to pay liquidated damages and the entitlement
of the appellants, to collect the same from the respondent is an
B excepted matter for the purpose of Clause 20.1 of the general
conditions of contract. The High Court has pointed out correctly
that the authority of the purchaser (BSNL) to quantify the liquidated
damages payable by the supplier Motorola arises once it is found
that the supplier is liable to pay the damages claimed. The decision
contemplated under Clause 16.2 of the agreement is the decision
C regarding the quantification of the liquidated damages and not
any decision regarding the fixing of the liability of the supplier. It
is necessary as a condition precedent to find that there has
been a delay on the part of the supplier in discharging his
obligation for delivery under the agreement.
D ………..
26. Quantification of liquidated damages may be an excepted
matter as argued by the appellants, under Clause 16.2, but for the
levy of liquidated damages, there has to be a delay in the first
place. In the present case, there is a clear dispute as to the fact
E that whether there was any delay on the part of the respondent.
For this reason, it cannot be accepted that the appointment of the
arbitrator by the High Court was unwarranted in this case. Even
if the quantification was excepted as argued by the appellants
under Clause 16.2, this will only have effect when the dispute as
F to the delay is ascertained. Clause 16.2 cannot be treated as an
excepted matter because of the fact that it does not provide for
any adjudicatory process for decision on a question, dispute or
difference, which is the condition precedent to lead to the stage
of quantification of damages.”

G 24. In BSNL’s case, Clause 16 provided for entitlement of the
party to recover liquidated damages. In Clause 16(2), the phrases used
“value of delayed quantity” and “for each week of delay” clearly show
that it is necessary to find out whether there has been delay on the part
of the supplier in discharging his obligation. Thus, in BSNL’s case, in
determining whether there is delay or not, a process of adjudication is
H
M/S. MITRA GUHA BUILDERS (INDIA) COMPANY v. OIL AND 387
NATURAL GAS CORPORATION LTD. [R. BANUMATHI, J.]

envisaged. Per contra, in the present case, Clause 2 of the agreement A
is a complete mechanism for determination of liability. The right to levy
damages for delay is exclusively conferred upon the Superintending
Engineer and Clause 2 of the present agreement is a complete mechanism
for determination of liability and when such compensation is levied by
the Superintending Engineer, the same is final and binding. The parties
B
have also consciously agreed that for the delay caused, the Superintending
Engineer shall levy the compensation of the amount equal to half per
cent and the said amount shall not exceed from 10% of the cost of the
work and the determination by the Superintending Engineer is final and
cannot be the subject matter of arbitration. In claim No.6, the prayer
sought for by the contractor to declare the compensation levied by the C
Superintending Engineer as illegal is contradictory to the agreed terms
between the parties. So far as the liquidated damages determined and
levied, by virtue of Clause 2, is out of the purview of the arbitration
especially in view of the fact that under the very same clause, the parties
have agreed that the decision of the Superintending Engineer shall be
D
final.
25. Learned Single Judge erred in proceeding under the presumptive
footing that the compensation levied by the Superintending Engineer was
in the nature of penalty. It was actually levy of liquidated damages/
compensation in terms of Clause 2 of the agreement. Levy of
compensation of Rs.32,79,828/- in Arbitration Case No.297A of 2002 E
and Rs.42,08,940/- in Arbitration Case No.297 of 2002 in terms of Clause
2 of the agreement is final and the same could not have been the subject
matter of arbitration. Applying the ratio of Vishwanath Sood, the Division
Bench of the High Court rightly set aside the order of the learned
Arbitrator with regard to claim No.6 by holding that levy of liquidated F
damages/compensation is adjustable against the final bill payable to the
appellant. The impugned judgment does not therefore, suffer from any
infirmity warranting interference.
26. As per the chart filed by the respondent-ONGC, total amount
awarded by learned Arbitrator in favour of the appellant is Rs.1,24,47,416/ G
- (Rs.66,36,252/- + Rs.58,11,164/-). Total amount of compensation/
liquidated damages withheld by ONGC is Rs.66,99,117/- (Rs.36,80,142/
- + Rs.30,18,975/-). Towards satisfaction of the arbitral award, ONGC
has deposited an amount of Rs.2,10,41,965/-. As per the order of the
Division Bench of the Delhi High Court, the appellant was directed to
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388 SUPREME COURT REPORTS [2019] 14 S.C.R.

A refund an amount of Rs.74,88,768/- (amount withheld by ONGC +
accrued interest). In compliance of the order of the Supreme Court
dated 09.04.2009, the appellant has deposited Rs.75,00,000/- before the
Supreme Court and the same has been invested in a nationalised bank.
The amount of Rs.74,88,768/- along with accrued interest is ordered to
be paid to the respondent-ONGC. The balance of Rs.11,232/-
B
(Rs.75,00,000 – Rs.74,88,768/-) along with accrued interest be refunded
to the appellant.
27. In the result, the appeals are dismissed. No order as to cost.

C Kalpana K. Tripathy Appeals dismissed.

D

E

F

G

H