Holding

Compensation for delay under Clause 2 is non‑arbitrable and must be decided by the Superintending Engineer, rendering the arbitrator’s award beyond his jurisdiction.

Summary

Vishwanath Sood contracted with the Union of India and the State of Himachal Pradesh to construct a Farmers' Community Centre. The contract contained Clause 2, which imposed a penalty compensation for delay to be determined solely by the Superintending Engineer, and Clause 25, which provided for arbitration of disputes except where otherwise provided in the contract. A dispute arose over the Government's claim for a 10% delay compensation, and the arbitrator awarded Rs 20,000 to the Government, which the single judge set aside but the High Court Division Bench restored. On appeal, the Supreme Court examined whether the compensation under Clause 2 fell within the scope of arbitration under Clause 25. The Court held that Clause 2 creates a complete machinery for determining the penalty and expressly excludes such matters from arbitration, making the arbitrator’s award ultra vires. Consequently, the Court deleted the Rs 20,000 award and restored the single judge’s decision, allowing the appeal.

Issues considered

Whether compensation for delay under Clause 2 of the contract is arbitrable under Clause 25 arbitration clause.
Whether the arbitrator exceeded his jurisdiction by awarding compensation to the Government under Clause 2.
Interpretation of the term ‘final’ in the context of the Superintending Engineer’s decision and its effect on arbitrability.

Legislation cited

Arbitration Act, 1940s. 13, s. 14, s. 17, s. 30, s. 31

Subjects

ArbitrationNon‑arbitrabilityPenalty clauseCompensation for delayContract interpretationSuperintending EngineerClause 2Clause 25Supreme Court of India

Judgment

VISHWANATII SOOD
A
v.
UNION OF INDIA & ANR.

JANUARY 24, 1989

B [SABYASACHI MUKHARJI AND S. RANGANATHAN, JJ.]

Arbitration Act, 1940: Section $, 14, 17, 30, 31 and '13-Arbi-
tration agreement-Clause providing penalty as compensation to
Department for default on part of contractor in adhering to time
schedule-Compensation to be determined by Superintending Engi-
neering and none else-Award of compensation-Whether liable to be
c questioned before Arbitrator.

The appellant undertook the construction of a Farmers' Com-
munity Centre Building hy an agreement entered into with the Union of
India and the State ofHimachal Pradesh, the respondents in the appeal.
D
The agreement dated June 20, 1968 provided, by Clause 2, for the
payment of compensation for delay, if the contractor should have been
guilty of delay in commencing the work or in completing it, the
quantum of compensation to he determined hy the Superintending
Engineer and that his decision was final. Clause 25 provided for settle-
E ment of disputes hy arbitration. It excluded from arbitration matters or
disputes in respect of which provision had been made elsewhere or
otherwise in the contract.

Certain disputes arose between the parties, and in terms of clause
25 of the agreement they were referred to a sole arbitrator.
F
The Contractor submitted a claim in respect of 9 items, and the
department filed a counter claim to the effect that they were entitled to
receive from the Contractor a sum of Rs.24,000 on account of payment
of 10 per cent compensation for not executing the work in accordance
with the terms and conditions of the agreement. The arbitrator gave his
G award, and the same was filed in the Court.

The Contractor filed objections for modification in respect of
items 1, 8 and 9 of his claim and item no. 1 of the respondents' counter
claim. The department also filed its objections.

H The Single Judge dismissed the objections of the respondents and
288
VISHWANATH SOOD v. U.O.J. 289

~ allowed the appellants' claim only in respect of item no. I of the respon-
A
dents' counter claim. The single Judge took the view that a reading of
clause 2 with clause 25 made it clear that any compensation under clause
2 could be adjudicated upon only by the Superintending Engineer or
the Development Commissioner and that it was not open to the
arbitrator to have entered upon a reference in regard to this claim at
~- all. B
'
Both parties filed appeals to the Division Bench. The Bench
reversed the order of the Single Judge and restored the award to its

~ original terms. It held that inasmuch as a bonafide dispute can he raised
by the contractor in regard to his liability to compensation under clause
2 and as no machinery was provided in clause 2 for the resolution of
c
,._ such dispute, there is ample justification for holding that resort can he
bad to arbitration under clause 25. On this view of the matter, the
Bench did not agree with the Single Judge that the arbitrator had
travelled outside his jurisdiction in awarding compensation to the
Government against the contractor for the delay in executing the work.
D
In the appeal to this Court it was contended on behalf of the
appellants that the terms of Clause 2 clearly envisage the determination
of the amount of compensation for the delay in the execution of the work
A. only by the Superintending Engineer and specifically mentions that the
decision of the Superintending Engineer in writing shall be final. The
opening words of Clause 25, "Except otherwise provided in the con- E
tract" clearly take out of the purview of Clause 25 any dispute in
respect of a claim under Clause 2. Even if Clause 25 be held applicable,
the question of submitting a dispute in this regard to the arbitrator
could only arise if there bad been a determination and a dispute under
~ Clause 2. It was further submitted that there was no dispute at all
between the parties on the question of compensation and that a dispute F
cannot be said to arise merely because a counter-claim was for the first
time pot forward by the Department before the arbitrator.

On behalf of the respondent-Department the appeal was contested
by contending that Clause 2 was in the nature of a penal clause which
automatically takes effect irrespective of any default. The clause made G
the contractor liable for the penalty prescribed therein whenever there

" was a delay in the completion of the contract, whatsoever might have
been the reason therefore, the question as to whether the contractor was
at default or not being totally immaterial. The Department was, there-
fore, entitled to automatically deduct from the bills payable to the con-
tractor, the compensation or penalty at the rate mentioned in Clause 2 H
290 SUPREME COURT REPORTS [19891 1 S.C.R.

or such reduced amount as may be determined in a particular case by ~
A
the Superintending Engineer and that if the contractor objected to the
deduction that would give rise to a dispute which can be the subject
matter of arbitration under Clause 25.

AUowing the appeal,
B
HELD: 1. Clause 2 of the contract makes the time specified for
the performance of the contract a matter of essence and emphasises the
need on the part of the contractor to scrupulously adhere to the time
schedule approved by the Engineer-in-charge. With a view to compel
the contractor to adhere to this time schedule, this clause provides a
kind of penalty in the form of a compensation to the Department for
c default in adhering to the time schedule. [297E-FI

2. Clause 2 ~ntains a complete machinery for determination of
the compensation which can be claimed by the Government on the
iir~~ncfof delay on the part of contractor in completing the contract as
D per the time schedule agreed to between the' parties. The decision of the
S!'perintending Engineer is in the nature of a considered decision which
·~~ has to arrive at after considering the various mitigating circums-
tances that may be pleaded by the contractor or bis plea that he is not
liable to pay compensation at all under this clause. [298E-FI

E 3. The question regarding the amount of compensation leviable
un!ler Clause 2 has to be decided only by the Superintending Engineer
~nd no one else. [298G I

4. 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
F decided ·by a higher official of the Department. [299CJ

5. The question of awarding compensation under Clause 2 is out-
side the purview of the arbitrator and the compensation, determined
under Clause i either by the Engineer-in-Charge or on further re-
ference by the Superintending Engineer will not be capable of being
G ca 1l~d in questio~ ltefore lite arbitrator. [299D I
0

6. Cla!'se f5 which is Ille arbitratio11 clause starts with !I!! open-
ing p~r~s~ ~xflu!ling cert;ii11 matters and disputes from arbitration a11d
(hesf are matters Of disputes in respect of which provision has been
;;;~de .elsewhere or (llherwise in the contract. These words can have
H refere~ce o.nly to pro~is.ions sucti as the one in paranthesis in Clause 2
VISHWANATH SOOD v. U.0.1. [RANGANATHi\N, J.] 291

by which certain types of dete;·mination are left to the administrative
A
authorities concerned. l299B-C I .

7. The qnest;on of any negligence or default on the part of the
contractor has many facets and to say that such an important aspect of
the contract cannot be settled by arbitration hut should be left to one of
the contracting parties might appear to have far reaching effects. In the B
instant case, it is made clear that the decision regarding non arhi-
trability is only on the question of any compensation which tho govern·
ment might claim in terms of Clause 2 of the contract. This is not an
undefined power, The amount of compensation is strictly limited to a
miximum of 10 percent and with a wide margin of discretion to the
Superintending Engineer. It is this power that is kept outside the scope C
of arbitration. l299E, F, H; 300A]

CIVIL APPELLATE JURISDICTION: Civil Appeal No. 1524
of 1982.

From the Judgment and Order dated 5.9.1977 of the Himachal D
Pradesh High Court in F.A.O. No. Sof 1975.

A.B. Rohtagi, Mrs. Urmila Kapoor, Miss S. Janani and Naresh
K. Sharma for the Appellant.

Miss A Subhashini for the Respondents. E

The Judgment of the Court was delivered by
•
RANGANATHAN, J. The appellant Vishwanath Sood under-
took the construction of a Farmers' CoiDmunity Centre Building at
Thanedhar by an agreement entered into with the Union of India and F
the State of Himachal Pradesh dated 20.6.1968. Certain disputes arose
between the parties to the agreement and in terms of clause 25 of the
agreement, they were referred to a sole arbitrator. The contractor
submitted a claim of Rs.1,28,000 while the respondents also submitted
a counter-claim. By an award dated 20.3.1972, the abritrator awarded
an amount of Rs.31,932 to the contractor and a sum of Rs.21,504 to G
the respondents. The award was filed in the court. The contractor filed
an application in the court for modification or correction of the award
in respect of three items of his claim (1, 8 and 9) and item no. 1 of the
respondent's counter claim. The Department also filed its objections
to the award and prayed that a sum of Rs.8,080.29 should be awarded
in favour of the Department or the award re~itted to arbitrator. The H
292 SUPREME COURT REPORTS [1989] 1 S.C.R.
-
learned single Judge dismissed the objections of the respondents. So
A far as the appellant's prayers were concerned, he allowed the same
only in respect of item 1 of the respondent's counter claim. He held
that the arbitrator was not justified in granting to the Government a
sum of Rs.20,000 against the contractor. Both the contractor and the
respondents preferred appeals to the Division Bench. The Bench
B reversed the order uf the learned single Judge. It set aside the order of
the learned single Judge in so far as the sum of Rs.20,000 was deleted
thereby from the award of the arbitrator. The award was restored to its
original terms and the contractor was held entitled to interest at 6 per
cent on the amount found due to him after adjusting the sum awarded
by the arbitrator in favour of the Government against the sum awarded
in favour of the contractor.
c
The contractor has preferred this appeal by special leave from
the order of the Division Bench of the High Court. ;>(-

Learned counsel for the appellant pressed the contentions in
D respect of the four items to which he had objected before the learned
single Judge and the Division Bench. Three of these items pertain to
the claims put forward by the contractor which were rejected by the
arbitrator and held by the courts to have been rightly rejected. The
first claim (item no. 1) made by the contractor was of a sum of
Rs.12, 720 which, according to him, was the loss incurred by him by
E reason of the Department's delay in handing over the site to him for
executing the contract. The learned single Judge discussed this aspect
of the matter at length. He observed that, on this point, there was, on
the one hand, oral evidence adduced on behalf of the Department •
while there was only the bare denial of the contractor on the other. He
pointed out that the arbitrator had fully considered the matter and that
F it was not open to the court to re-assess the evidence and that there
was no error apparent on the face of the record. The second claim
(item no. 8) was for a sum of Rs.6, 172 being the amount kept as
security with the respondent. In respect of this item also the learned
single Judge discussed the evidence which showed that the security
amount had been properly adjusted by the Department which had
G been constrained to take up the work departmentally at the cost and
risk of the contractor. He held that this was an aspect which had been
considered by the arbitrator and a proper conclusion arrived at. The
third claim put forward by the petitioner (item no. 9) was for a sum of
Rs.30,000, claimed as compensation for an amount spent by the con-
tractor for the purchase of a truck for this work. The learned single
H '•1dge here again pointed out that no material had been placed before
VISHWANATH SOOD v. U.O.l. [RANGANATHAN, J.[ 293

the arbitrator by the contractor to show that he was entitled to the A
amount and that, in any event, having regard to the fact that the work
was executed by the Department at the cost and risk of the contractor,
there was no question of the contractor preferring any claim in respect
of this item. The above three claims of the petitioner were also
rejected by t!ie Division Bench which pointed out that the award made
by the arbitrator was not a speaking award and that the face of the B
award did not show any error. We do not think that so far as these
claims are concerned, that the appellant has any arguable case at all.
As pointed out by the Division Bench of the High Court, the award
·was a non-speaking award. The arbitrator had considered the
materials placed before him and had arrived at his conclusions. The
award does not on the face of it disclose any error, much less any error
of law, which needs to be set right. We therefore, hold that the High c
Court was justified in affirming the award so far as the rejection of
these three claims is concerned.

The position in regard to the counter claim of the respondents
which was allowed by the arbitrator and the Division Bench stands on D
a different footing. The respondents' claim before the arbitrator was
that they were entitled to receive from the contractor "Rs.24,000 on
account of payment of 10 per cent compensation on the tendered
amount for not executing the work in accordance with the terms and
conditions of the agreement". As against this claim the arbitrator
awarded the respondents a sum of Rs.20,000. The learned single Judge E
took the view that having regard to clause 2 of the contract (pertaining
to the claim by the respondent) read with clause 25 it was clear that any
compensation under clause 2 could be adjudicated upon only by the
superintending Engineer or the Development Commissioner and that
it was not open to the arbitrator to have entered upon a reference in
regard to this claim at all. In order to appreciate the finding of the F
learned single Judge it will be useful to set out clauses 2 and 25 of the
conditions of contract on which his decision was based:

"Clause 2: Compensation for delay: The time allowed for
carrying out the work as entered in the tender shall be
strictly observed by the contractor and shall be deemed to G
be the essence of the contract on the part of the contractor
and shall be reckoned from the fifteenth 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 contract be proceeded with all due diligence
and the contractor shall pay as compensation an amount H
294 SUPREME COURT REPORTS [1989] 1 S.C.R.

A equal to one per cent, or such smaller amount as the
Superintending Engineer (whose decision in writing shall
be final) may decide on the amount of the estimated cost of
the whole work as shown in the tender for every day that
the work remains uncommenced, or unfinished, after
proper dates. And further, to ensure good progress during
B the execution of the work, the contractor shall be bound in
all cases in which the time allowed for any work exceeds,
one month (save for special jobs to complete one-eighth of
the whole of the work before on,e-fourth of the whole time
allowed under the contract has elapsed; three-eighth of the
work, before one-half of such time has elapsed, and three-
fourth of the work, before three-fourth of such time has
c 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
D liable to pay as compensation an amount equal to one per
cent or such smaller amount as the Superintending
Engineer (whose decision in writing shall be final) may
decide on the said estimated cost of the whole work for
every day that the due quantity of work remains incomp-
lete; provided always that the entire amount of compensa-
E tion to be paid under the provisions of. this clause shall not
exceed ten per cent, on the estimated cost of the work as
shown in the tender."

"Clause 25: Settlement of disputes by Arbitration: Except
where otherwise provided in the contract, all questions and
F disputes relating to· the meaning of the specifications,
designs drawings and instructions hereinbefore mentioned
and as to the quality of workmanship or materials used on
the work or as to any other question, claim, matter or thing
whatsoever, in any way arising out of or relating to ihe
contract, designs, drawings, specifications, estimates, ins-
G truction, order, or these conditions or otherwise concern-
ing the works or the execution or failure to execute the
same whether arising during the progress of the work or
after the completion or abandonment thereof shall be re-
ferred to the sole arbitration of the person appointed by the
Chief Engineer, Himachal Pradesh Public Works Depart-
H ment ........ "
VISHWANATH SOOD v. U.0.L [RANGANATHAN, J.[ 295

The Division Bench did not agree with the view of the learned single A
Judge. It pointed out that, while in the ordinary course, the rate of
compensation payable by the contractor is one per cent of the amount
of the estimated cost of the whole work, under clause 2, the
Superintending Engineer is authorised to depart from this figure and
determine the compensation at a smaller amount if there are any
extenuating circumstances in favour of the contractor. The question B
however was whether the compensation determined under clause 2 is
excluded from the scope of arbitration under clause 25. The Division
Bench answered this question in the negative. It pointed out that the
sine qua non of clause 2 was that the contractor should have been
guilty of delay in commencing the work or in completing it but the
clause did not specify either the authority or the procedure for
determining whether the contractor is responsible for the default. C
Observing that there can be a serious dispute in a particular case as to
the person who is responsible for the delay, the Bench took the view
that the determination of this dispute cannot be excluded from the
scope of clause 25. The Bench observed that inasmuch as a bona fide
dispute can be raised by the contractor in regard to his liability to D
compensation under clause 2 and no machinery is provided in clause 2
for the resolution of that dispute, there is ample justification for hold-
ing that resort can be had to arbitration under clause 25. The state-
ment in clause 2 that the decision of the Superintending Engineer is
final, according to the Bench, merely constituted a declaration that no
officer in the Department could disturb his quantification. But this E
finality cannot be construed as extending to exclude the jurisdiction of
the arbitrator under clause 25. On this view of the matter, the Division
Bench found itself unable to agree with the learned single Judge that
the arbitrator had travelled outside his jurisdiction in awarding a sum
of Rs.20,000 as compensation to the Government against the con-
tractor for the delay in executing the work. F

It will be seen from the narration above that so far as this item
was concerned, both parties proceeded on the footing that the claim of
the Government was a claim under clause 2 and that the arbitrator had
awarded the sum only in terms of clause 2. This is also borne out by the
fact that the claim of the Department was based on a percentage of the G
total cost of the work and the restriction of the claim to 10% also
appears to .have been the result of the proviso to clause 2. The award,
therefore, on a fair reading of it, contains a grant by the arbitrator of
compensation to the Government in terms of clause 2. It is therefore
open to the parties to urge before this Court, as they did before the
High Court also, that, on a proper construction of clauses 2 and 25, H
296 SUPREME COURT REPORTS 1198911 S.C.R.

this award was not justified. It is in this respect that this counter claim
A
of the Department stands on a different footing from the earlier claims
of the contractor which have been rejected and which, we have held
above, have been rightly rejected.

Learned counsel for the appellants contends that the terms of
B clause 2 clearly envisage the determination of the amount of compen-
sation for the delay in the execution of the work only by the
)t
Superintending Engineer and specifically mentions that the decision of
the Superintending Engineer in writing shall be final. The opening
I
words of clause 25: "Except where otherwise provided in the contract"
clearly take out of the purview of clause 25 any dispute in respect of a -~
claim under clause 2. He submitted that the clause authorised only the
c Superintending Engineer to go into the question whether there is any
delay or not and the reasons therefor and to determine the rate at
which compensation should be charged from the contractor. If the
Engineer-in-charge levies a compensation under clause 2, the con-
tractor can apply to the Superintending Engineer. If the Superintend-
0 ing Engineer finds that there was no fault on the part of the contractor
at all he could waive the compensation under clause 2 and that cannot
be challenged by the Department before the arbitrator. Per contra,
where the Superintending Engineer confirms that there has been a
delay for which compensation should be charged, it will not be open to
the contractor to challenge the conclusion before the arbitrator.
E Learned counsel also submitted that even if clause 25 were to be held
applicable, the question of submitting a dispute in this regard to the
arbitrator could only arise if there had been a dertermination and a
dispute under clause 2. Clause 2 envisages that the Engineer-in-charge
should, in appropriate cases, ievy a compensation at the rate specified

F
in that clause. If he did, it was open to the contractor to dispute the
same and approach the Superintending Engineer to reduce or waive
the compensation for any reason whatsoever. Or, it may be that, even
A- (

where the Engineer-in-charge levied no compensation, the Superin-
tending Engineer could, either on his own motion or on being moved
by the department, after considering the facts charge a compensation
with the quantum of which the department may not be satisfied in
G which event a dispute could arise. But in the present case neither the
Engineer-in-charge nor the Superintending Engineer had determined
any liability at all under clause 2. There was no compensation levied
against which there was any protest by the contractor, and there was
no matter submitted to the Superintending Engineer for determina-
tion. In these circumstances, the submission of the learned counsel for
H the appellant is that there was no dispute at all between the parties on
q.

VISHWANATH SOOD v. U.0.1. IRANGANATHAN, J.) 297.

the question of compensation and that a dispute cannot be said to arise
---
-. merely because a counter claim is for the first time put forward by the
A
Department before the arbitrator.

On the other hand, the learned counsel for the Department con-
tended that clause 2 is in the nature of a penal clause which automati-
"">i. cally takes effect irrespective of any default. He described it as an B
"agreed penalty" clause. He stated that.the clause made the contractor
liable for the penalty prescribed therein whenever there was a delay in

~
the completion of the contract, whatsoever might have been the reason
therefor, the question as to whether the contractor was at default or
not being totally immaterial. The Dapartment was, therefore, entitled
to automatically deduct from the bills payable to the petitioner the
~ c
compensation or penalty at the rate mentioned in clause 2 or such
-}c reduced amount as may be determined in a particular case by the
Superintending Engineer and that if the contractor objected to this
deduction that would give rise to a dispute which can be the subject
matter of arbitration under clause 25. He therefore submitted that the
Division Bench has rightly construed the terms of the contract and D
confirmed the award made by the arbitrator.

- ).__ We have gone through the judgment of the Division Bench of the
High Court and we have also considered the arguments advanced on
both sides. With great respect, we find ourselves unable to agree with
the interpretation placed by the Division Bench on the terms of the E
contract. Clause 2 of the contract makes the time specified for the
• performance of the contract a matter of essence and emphasises the
need on the part of the contractor to scrupulously adhere to the time
schedule approved by the Engineer-in charge. With a view to compel
~; the contractor to adhere to this. time schedule, this clause provides a
• kind of penalty in the form of a compensation to the Department for F
default in adhering to the time schedule. The clause envisages an
amount of compensation calculated as a percentage of the ·estimated
cost of the whole work on the basis of the number of days for which the
work remains uncommenced or unfinished to the prescribed extent on
the relevant dates. We do not agree with the counsel for the respon-
dent that this is in the nature of an automatic levy to be made by the G
...Ji Engineer-in charge based on the number of days of delay and the
estimated amount of work. Firstly, the reference in the clause to the
requirement that the work shall throughout the stipulated period of
the contract be proceeded with due diligence and the reference in the
latter part of the clause that the compensation has to be paid "in the
event of the contractor failing to comply with" the prescribed time H
"

298 SUPREME COURT REPORTS [1989] 1 S.C.R.

schedule make it clear that the levy of compensation is conditioned on
A
some default or negligence on the part of the contractor. Secondly,
while the clause fixes the rate of compensation at I per cent for every
day of default it takes care to prescribe the maximum compensation of
JO per cent on this ground and it also provides for a discretion to the
Superintending Engineer to reduce the rate ~f penalty from 1 per cent.
B Though the clause does not specifically say so, it is clear that any
moderation that may be done by the Superintending Engineer would
depend upon the circumstances, the nature and period of default and
the degree of negligence or default that could be attributed to the
contractor. This means that the Superintending Engineer, in determin-
ing the rate of compensation chargeable, will have to go into all the
c aspects and determine whether there is any negligence on the part of
the contractor or not. Where there has been no negligence on the part
of the contractor or where on account of various extraneous circum-
stances referred to by the Division Bench such as vis major or default
on the part of the Government or some other unexpected circumstance
which does not justify penalising the contractor, the Superintending
D Engineer will be entitled and bound to reduce or even waive the com-
pensation. It is true that the clause does not in terms provide for any
notice to the contractor by the Superintending Engineer. But it will be
appreciated that in practice the amount of compensation will be
initially levied by the Engineer-in-charge and the Superintending
Engineer comes into the picture only as some sort of revisional or
E appellate authority to whom the contractor appeals for redress. 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, it seems to us, is in the nature of a con-
F sidered 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
leviable under clause 2 has to be decided only by the Superintending
Engineer and no one else.
G
The Division Bench has construed the expression in clause 2 in 'f....
paranthesis that "the Superintending Engineer's decision shall be
final" as referring only to a finality qua the department; in other
words, that it only constitutes a declaration that no officer in the
department can determine the quantification and that the quantum of
H compensation levied by the Superintending Engineer shall not be
~.

VISHWANATH SOOD v. U.0.1. [RANGANATHAN, J.] 299

~ changed without the approval of the Government. After referring to
A
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 jurisdiction of the arbitrator under
clause 25. We are unable to accept this view. Clause 25 which is the
arbitration clause starts with an opening phrase excluding certain
matters and disputes from arbitration and these are matters or disputes B
?I 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 paranthesis in clause 2 by which certain
~· types of determinations are left to the administrative authorities con-
cerned. 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 c
.-)<- tho~e mentioned in clause 2 in respect of which any dispute is
left to be decided by a higher official of the Department. Our conclu-
sion, therefore; is that the question of awarding compensation under
clause 2 is outside the purview of the arbitrator and that the compensa-
tion;determined under clause 2 either by the Engineer-in-charge or on D
further reference by the Superintending Engineer will not be capable
of being called in question before the arbitrator.
'
-)..._ We may confess that we had some hesitation in coming to this
conclusion, As pointed out by the Division Bench, the question of any
negligence or default on the part of the contractor has many facets and E
to say that such an important aspect of the contract'cannot be settled
by arbitration but should be left to one of the contracting parties might
appear to have far reaching effects. In fact, although the contractor in
this case might object to the process of arbitration because it has gone
~· against him, contractors generally might very well prefer to have the
I question of such compensation decided by the arbitrator rather than F
by the Superintending Engineer. 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 time
schedule is strictly adhered to. It is something which the Engineer-in- G
charge enforces from time to time when he finds that the contractor is
~ being recalcitrant, in order to ensure speedy and proper obse.rvance of
the terms of the contract. This is not an undefined power. The amount
of compensation is strictly limited to a maximum of 10% 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 H
300 SUPREME COURT REPORTS [1989] 1 S.C.R.

A 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 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
B
far as this case is concerned the claim of the Government has obviously
proceeded in terms of clause 2 and that is the way 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
c accordance with that clause and which cannot be referred to arbitra-
tion under clause 25. ·

As stated earlier, an alternative ground was urged by the learned
counsel for the.appellant that, no penalty under clause 2 having been
imposed by the respondents in the first instance, no dispute had at all
D
arisen which could have been referred to arbitration. This point was
not taken before the High Court and the relevant facts are not on
record. That apart, in the view we have taken, it is unnecessary to
express any opinion on this argument and we refrain from doing so.

For the reasons above mentioned, we restore the judgment of
E
the learned single Judge. In the result, the amount of compensation of
Rs.20,000 awarded by the arbitrator in favour of the Government will
stand deleted. The amount of interest payable to the contractor, if
any, will be worked out on the basis of the award as modified by us
above.
F
··~
The appeal is allowed. We however make no order as to costs in
the circumstances of the case.

N.V.K. Appeal allowed.