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[Arising Out Of Slp(C) No. 3459 Of 2007] Bharat Sanchar ... vs Motorola India Pvt. Ltd on 15 September, 2008
Cites 10 docs - [View All]
The Arbitration And Conciliation Act, 1996
Section 28 in The Arbitration And Conciliation Act, 1996
State Of Karnataka Etc. vs Shri Rameshwara Rice Mills Thirthahalli Etc. on 24 February, 1987
Datar Switchgears Ltd. vs Tata Finance Ltd. & Anr. on 18 October, 2000
Section 4 in The Arbitration Act, 1940 1
Supreme Court of India
REPORTABLE
IN THE SUPREME COURT OF INDIA
CIVIL APPELLATE JURISDICTION
CIVIL APPEAL NO.5645 OF 2008
[Arising out of SLP(C) No. 3459 of 2007]
Bharat Sanchar Nigam Ltd. & Anr. .......Appellants
Versus
Motorola India Pvt. Ltd. ....Respondent
JUDGMENT
TARUN CHATTERJEE, J.
1. Leave granted.
2. This appeal is directed against the judgment and final order
dated 26th of October, 2006 of the High Court of Kerala at
Ernakulam in AR No 18 of 2006 whereby, the High Court
had allowed the prayer for appointment of the arbitrator at
the instance of the respondents and directed the parties to
submit their disputes to arbitration.
3. The pivotal questions that need to be decided in this appeal
are:
i) Whether the levy of liquidated damages under
clause 16.2 of the tender document is an
2
"excepted matter" in terms of clause 20.1 of the
said document so that the same cannot be
referred to arbitration or looked into by the
arbitrator.
ii) Whether clause 62 of the special conditions of
the tender document will prevail over clause 16.2
of the general conditions of the contract.
4. The relevant facts, which would assist us in appreciating
the controversy involved are narrated in a nutshell, which
are as follows:
The appellant had issued a notice inviting tender
dated 4th of January, 2001, calling upon the eligible
bidders for turn key project on planning, engineering,
supply, installation and commissioning of Indian Mobile
Personal Communications System in the telecom circles
of Kerala, Karnataka, Tamil Nadu and Andhra Pradesh.
The respondent submitted its bid in response to the
notice inviting tender and after the technical, commercial
and financial bid evaluation, the respondent was
3
awarded the tender and an Advance Purchase Order
(APO) dated 5th of September, 2001 for phase I and Phase
II was issued to it by the appellant. The purchase order
provided, inter alia, the terms for payment and the
schedule for delivery of the goods. It also provided for
liquidated damages in the event of failure on the part of
the respondent to meet with the delivery schedule.
Clause 16.2 of the general conditions of the tender
document provided for liquidated damages to the extent
of 0.5% of the value of the delayed quantity of the goods
and services for each week of delay or the part thereof for
a period of upto 10 weeks and thereafter charge 0.7% of
the value of delayed quantity or part thereof, for a period
of upto 10 weeks thereafter. It is the case of the
appellants that the respondent had failed to complete
phase I and phase II of the project within the schedule as
provided in the tender document, and therefore,
liquidated damages were imposed by the Tamil Nadu
Circle of the appellant on 21st of May, 2004 under clause
16.2 of the tender document, quantification of which was
4
beyond the purview of the arbitration agreement. There
was an exchange of correspondence between the Tamil
Nadu Circle of the appellant alleging the delay in the
purchase of goods and the respondents denying any
such delay and objecting to the levy of liquidated
damages. On 24th of March, 2006, the respondent
invoked the arbitration clause by sending a letter
through its counsel to the appellants to which they did
not concede and justified the imposition of liquidated
damages. The respondent filed an arbitration application
before the High Court of Kerala at Ernakulam for the
appointment of arbitrator under section 11 of the
Arbitration and Conciliation Act, 1996 in respect of the
liquidated damages assessed by the appellant. In the
counter affidavit filed in the High Court, the appellant
alleged that the liquidated damages assessed and
quantified by the appellant under clause 16.2 of the
tender document was an excepted matter as per clause
20.1 of the said document and, therefore, not arbitrable.
The High Court, as noted herein earlier, by the impugned
5
judgment allowed the arbitration request of the
respondents holding that the imposition of liquidated
damages by the appellant was not an "excepted matter"
and therefore, subject to arbitration. It is this judgment
of the High Court, which is impugned in this appeal, in
respect of which leave has already been granted.
5. Before proceeding further, we deem it appropriate to note
the relevant clauses of the tender document and the
purchase order, which would assist us in determining
whether the matters alleged are an excepted matter.
Clause 16.2 reads as under:-
"16.2. Should the tenderer fail to deliver the
goods and services on turn key basis within the
period prescribed, the purchaser shall be
entitled to recover 0.5% of the value of the
delayed quantity of the goods & services, for
each week of delay or part thereof, for a period
upto 10 weeks and thereafter at the rate of
0.7% of the value of the delayed quantity of the
goods and services for each week of delay or
part thereof for another 10 weeks of delay. In
the present case of turn key solution of supply,
installation and commissioning, where the
delayed portion of the delivery and provisioning
of services materially hampers effective user of
the systems, Liquidated Damages charged shall
6
be levied as above on the total value of the
concerned package of the purchase order.
Quantum of liquidated damages assessed and
levied by the purchaser shall be final and not
challengeable by the supplier."
Clause 20.1 which is the arbitration clause and provides
for excepted matters, i.e., those matters the decision to
which is specifically provided in the agreement itself
reads as under:-
20.1 In the event of any question, dispute or
difference arising under this agreement or in
connection there-with (except as to the matters,
the decision to which is specifically provided
under this agreement), the same shall be
referred to the sole arbitration of the CGM,
Kerala Telecom Circle, BSNL or in case his
designation is changed or his office is
abolished, then in such cases to the sole
arbitration of the officer for the time being
entrusted (whether in addition to his own duties
or otherwise) with the functions of the CGM,
Kerala Telecom Circle, BSNL or by whatever
designation such an officer may be called
(hereinafter referred to as the said officer), and
if the CGM Kerala Telecom Circle or the said
officer is unable or unwilling to act as such,
then to the sole arbitration of some other person
appointed by the CGM, Kerala Telecom Circle or
the said officer. The agreement to appoint an
arbitrator will be in accordance with the
Arbitration and Conciliation Act, 1996.
7
There will be no objection to any such
appointment on the ground that the arbitrator is
a Government Servant or that he has to deal
with the matter to which the agreement relates
or that in the course of his duties as a
government servant he has expressed his views
on all or any of the matters in dispute. The
award of the arbitrator shall be final and
binding on both the parties to the agreement. In
the event of such an arbitrator to whom the
matter is originally referred, being transferred
or vacating his office or being unable to act for
any reason whatsoever, the CGM, Kerala
Telecom Circle, BSNL or the said officer shall
appoint another person to act as an arbitrator in
accordance with the terms of the agreement and
the person so appointed shall be entitled to
proceed from the stage at which it was left out
by his predecessors.........."
Clause 15.2 of Section III of the tender document, which
deals with the "delays in the supplier's performance"
reads as under:
"Delay by the Supplier in the performance of its
delivery obligations shall render the Supplier
liable to any or all of the following sanctions,
forfeiture of its performance security, imposition
of liquidated damages, and/or termination of
the contract for default".
8
Clause 62 of Section IV of the tender document which
deals with liquidated damages and incentive reads as
under:-
"The bidder shall be charged liquidated
damages at the rates as defined in the General
conditions of contract as contained in Section III
for any delay in the turnkey job entrusted to the
bidder. However he shall be provided an
incentive @ 0.5% of the cost of the network of
each service area (Telecom Circle), for each
week of early commissioning of the entire
network in that service area, subject to a
maximum of 3% of the value of the contract of
the circle".
6. Since this appeal arises out of an order, which appointed
an arbitrator, to decide the dispute referred to by the
respondent, we, in this appeal, need to decide that whether
in view of the arbitration clause in the tender document
provided under clause 20 of the said document, the breach
specified in 16.2 is an "excepted matter".
7. Mr. Gopal Subramaniam, Additional Solicitor General of
India appearing on behalf of the appellant contended that
in view of the decision of this Court in Vishwa Nath Sood
9
vs. UOI [(1989) 1 SCC 657], a conjoint reading of clause
16.2 and clause 20.1 would clearly show that clause 16.2 is
covered under the excepted matters as provided in clause
20.1 of the tender document. He further contended that the
High Court had erred in holding that the quantification of
the liquidated damages was subsequent to the decision of
liability of liquidated damages to be payable to the
appellant. Therefore, he contended that the respondent had
specifically subscribed to each and every clause of the
agreement without any objection at the tender stage and
accordingly, it was not open to them to claim immunity
from the contractual obligations. Thus, the matter in
respect of which the respondent sought reference to
arbitration was "excepted matter" in terms of clause 16.2 of
the tender agreement.
In order to satisfy us in the aforesaid contentions,
the learned Additional Solicitor General, Mr. Gopal
Subramanium placed strong reliance in the case of Food
Corporation of India Vs. Sreekanth Transport 1999
10
(4) SCC 491, which has given the following principles
relating to "Excepting matters" as under :-
"1. These appeals by the grant of Special
Leave pertains to the effect of the usual
`excepted clause' vis-`-vis the arbitration
clause in a Government contract. While it
is true and as has been contended, that
the authorization of the arbitrators to
arbitrate, flows from the agreement but the
High Court in the judgment impugned
thought it fit to direct adjudication of
`excepted matters' in the agreement itself
by the arbitrators and hence these appeals
before this Court.
2. At the outset, it is pertinent to note that
in the usual Government contracts, the
reference to which would be made
immediately hereafter, there is exclusion of
some matters from the purview of
arbitration and a senior officer of the
Department usually is given the authority
and power to adjudicate the same. The
clause itself records that the decision of
the senior officer, being the adjudicator,
shall be final and binding between the
parties - this is what popularly known as
`excepted matters' in a Government or
Governmental agencies' contract.
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
presumed by reason of the unequivocal
acceptance of the terms of the contract by
11
the parties and this is where the courts
have found our lacking in its 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 the claims arising
within the ambit of excepted matters,
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 are
these exceptions however are questions of
fact and usually mentioned in the contract
documents and forms part of the
agreement as such there is no ambiguity in
the matter of adjudication of these
specialized matters and termed in the
agreement as the excepted matters....."
Keeping the aforesaid principles in mind, let us
proceed further.
We may keep on record that the appellants alleged
that respondents had not completed phase I and phase II
of the project within the schedule as provided in the
tender document whereupon the appellants had to
impose liquidated damages and invoke clause 16.2 of the
tender document. But the respondents refuted these
12
allegations. The contention of the respondent in this case
was that the delay, if any, was caused due to the
appellant's delay in supplying necessary inputs to the
respondent. So the respondent contends that it had
performed its part of the contract in time and the blame
for delay lies on the appellant. Thus it is to be noted that
there is a dispute between the parties on the question
whether any breach was committed in this case.
8. The appellant had contended before the High Court of
Kerala that the levy of the liquidated damages on the
respondent was a matter outside the purview of the scope
of arbitration proceedings as it "squarely falls within the
exception provided under Clause 20 of Section III, being the
matters for which mode of decision is provided under the
Agreement itself."
The respondent on the other hand contended that
the claim of the petitioner that the dispute pertaining to
levy of liquidated damages falls outside the arbitration
agreement being an excepted matter is fallacious.
13
The High Court held that there was no reason why
the arbitration request on behalf of the respondent
should not be allowed. It held that clause 16.2 is not an
excepted matter under clause 20 of the tender document.
9. Having heard the learned counsel for the parties and after
examining the judgment of the High Court and the other
materials on record, we are of the view that this appeal
must be dismissed. Clause 20 is the arbitration clause and
provides that any question, dispute or difference arising
under this agreement or in connection therewith would be
referred to arbitration. To this, an exception is also provided
which lays down that the matters, the decision to which is
specifically provided under this agreement, would not be
referred to arbitration. From a bare reading of clause 16.2
of Section III of the tender document, it is clear that if the
tenderer fails to deliver the goods and services on turnkey
basis within the period prescribed, the purchaser shall be
entitled to recover liquidated damages and the quantum of
the liquidated damages assessed and levied by the
14
purchaser shall be final and not challengeable by the
supplier.
10. We are in full agreement with the findings of the High
Court that there was a dispute as to whether the
respondent had at all acted in breach of any terms and
conditions of the tender document.
The question to be decided in this case is whether
the liability of the respondent to pay Liquidated Damages
and the entitlement of the appellant, to collect the same
from the respondent is an 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 Motorolla
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 regarding
the quantification of the Liquidated Damages and not
any decision regarding the fixing of the liability of the
15
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.
It is clear from the reading of clause 15.2 that the
supplier is to be held liable for payment of liquidated
damages to the purchaser under the said clause and not
under clause 16.2. The High Court in this regard
correctly observed that it was not stated anywhere in
clause 15 that the question as to whether the supplier
had caused any delay in the matter of delivery will be
decided either by the appellant/BSNL or by anybody who
has been authorized on the terms of the agreement.
Reading clause 15 and 16 together, it is apparent that
clause 16.2 will come into operation only after a finding
is entered in terms of clause 15 that the supplier is liable
for payment of liquidated damages on account of delay
on his part in the matter of making delivery. Therefore,
clause 16.2 is attracted only after the supplier's liability
16
is fixed under clause 15.2. It has been correctly pointed
out by the High Court that the question of holding a
person liable for Liquidated Damages and the question of
quantifying the amount to be paid by way of Liquidated
Dmages are entirely different. Fixing of liability is
primary, while the quantification, which is provided for
under clause 16.2, is secondary to it.
There is no provision in the agreement, apparent on
the face of it, relating to a decision made by any specified
authority on the issue of levy of Liquidated Damages, as
is contemplated under clause 20.1 of the agreement
which is excepted from the purview of arbitration. No
decision coming within the scope of excepted matters
under clause 20.1 is envisaged by any portion of the
agreement regarding the liability of the supplier to
liquidated damages.
Quantification of liquidated damages may be an
excepted matter as argued by the appellant, under
clause 16.2, but for the levy of liquidated damages, there
17
has to be a delay in the first place. In the present case,
there is a clear dispute as to the fact 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 appellant under clause 16.2, this will only have
effect when the dispute as 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.
The above stated position can be ascertained
through the judgment of this Court in the case of State
of Karnataka vs. Shree Rameshwara Rice Mills,
(1987) 2 SCC 160. This Court in the said case, made a
clear distinction between adjudicating upon an issue
relating to a breach of condition of contract and the right
to assess damages arising from a breach of condition. It
18
was held that the right conferred to assess damages
arising from a breach of condition does not include a
right to adjudicate upon a dispute relating to the very
breach of conditions and that the power to assess
damages is a subsidiary and consequential power and
not the primary power.
11.Clause 20.1 regarding excepted matters reads "In the event
of any question, dispute or difference arising under this
agreement or in connection there-with (except as to the
matters, the decision to which is specifically provided
under this agreement)...". Therefore it is clear from this
provision, matters which will not fall within the arbitration
clause are questions, disputes or differences, the decision
to which is specifically provided under the agreement.
Clause 16.2 is not a clause where in any decision making
power is specifically provided for with regard to any
question, dispute or difference between the parties relating
to the existence of breach or the very lack of liability for
damages, i.e. the levy of Liquidated Damages.
19
12.The learned senior counsel for the appellant relied on the
decisions of this court in Vishwanath Sood vs. UOI
[(1989) 1 SCC 657], and General Manager, Northern
Railway vs. Sarvesh Chopra [(2002) 4 SCC 45]. These
cases, we are afraid, will not be of any help to the
appellants being distinguishable on facts and having
different contractual clauses. We may note that clause 16.2
cannot be treated as an excepted matter. This is because
admittedly, 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 nor is it a no claim or no liability
clause.
In Vishwanath Sood's case (supra), it was held by
this court that a particular claim of the government was
excluded because the Superintendent Engineer acted as
the revisional authority to decide disputes between the
two parties by an adjudicatory process, there being a
20
complete machinery for settlement of the disputes in the
relevant clause and most importantly, the
Superintendent Engineer had the discretion on
consideration of the facts and circumstances including
mitigating facts, held no damages was payable. Again in
the case of Sarvesh Chopra, this court had held that the
claims covered by the no claims clause, i.e., where the
contractor had given up the right to make a claim for
breach on the part of the government was not arbitrable
in terms of the arbitration clause contained therein and
clause 63 of the general conditions of the contract which
provided for exclusion because no claim clause was
excepted as such claims were simply not entertainable.
In view of the discussions made hereinabove, we hold
that the disputes raised by the respondents are
arbitrable and not excepted from scope of arbitration.
13.We feel that there are certain other issues that are to be
discussed while disposing of this appeal. The respondent
contended in its written submission filed before this court
21
on 14th May, 2007 that the quantum of damages calculated
by the appellant in respect of clause 16.2 of the tender
document, simply cannot have the effect of rendering all the
above disputes as not being arbitrable. We find that there is
considerable merit in this argument. The true essence of
any arbitration agreement is to arbitrate the matters in a
cordial way in respect of issues where there is a dispute
between the parties. To construe such limited words in
clause 16.2 as being so all encompassing would destroy the
very foundation of the bargain between the parties. The
appellant in the present case is acting in an unfair way by
seeking to exclude, from arbitration, what it has agreed to
arbitrate in the first place.
14.The appellant contended that it has the unilateral right to
determine the Liquidated damages under clause 16.2 and
that the quantum of Liquidated Damages decided by the
appellant, even if it is exorbitant, would be final and cannot
be challenged. We find the contention of the respondent
that if the said contention of the appellant is supported, it
would mean that a party would be held liable to damages of
22
whatever amount the other party demands without
recourse to a remedy, to be relevant and should be given
due importance. Such a contention by the appellant would
be in violation of Section 28 and Section 74 of the Indian
Contract Act.
15.The learned counsel of the appellants had submitted before
this court that it was the appellant, which had the right to
appoint the arbitrator. This submission cannot be accepted.
The respondent had invoked the arbitration clause on the
ground that there was no delay on its part by sending a
letter to this effect to the appellants on 24th of March, 2006.
On 25th April, 2006, the appellants/BSNL replied stating
that they had rightly recovered the Liquidated Damages and
that the recovery of the damages was not arbitrable. The
appointing authority in this matter, i.e., CGM Kerala, did
not respond to the notice requiring the appointment of
arbitrator and failed to act within the time prescribed under
the Arbitration and Conciliation Act 1996. Since the
appointing authority appointed no arbitrator, the
23
respondent/Motorolla, on 25th of May, 2006, filed a petition
under Section 11 of the said Act before the High Court at
Kerala. In the case of Datar Switchgear vs. Data Finance
Lt. [(2000) 8 SCC 151], which was affirmed in Punj Llyod
Ltd. vs. Petronet MHB Ltd. [(2006) 2 SCC 638], it was
held that once a minimum of 30 days is expired and a
petition is filed to the court, the appointing authority loses
the right to make the appointment. Therefore, the
appellant/BSNL has now lost its right to appoint any
arbitrator for settling the disputes under the agreement.
16.Further, CGM Kerala Circle has already taken a decision as
is evident from his letter dated 25th of April, 2006, that the
appellant was right in imposing the liquidated damages and
therefore, the question of such a person becoming an
arbitrator does not arise as it would not satisfy the test of
impartiality and independence as required under Section
12 of the Arbitration and Conciliation Act, 1996. Moreover
it would also defeat the notions laid down under the
principles of natural justice wherein it has been
24
recognized that a party cannot be a judge in his own
cause. The judgment of this Court in State of Karnataka
vs. Shree Rameshwara Rice Mills, (1987) 2 SCC 160, is
significant in this matter. The Court had stated:
".....Even assuming that the terms of Clause 12
afford scope for being construed as empowering
the officer of the State to decide upon the
question of breach as well as assess the
quantum of damages, adjudication by the
officer regarding the breach of the contract can
not be sustained under law because a party to
the agreement cannot be an arbiter in his own
cause. Interest of justice and equity require that
where a party to a contract disputes the
committing of any breach of conditions the
adjudication should be by an independent
person or body and not by the other party to the
contract".
17.The provision under clause 16.2 that quantification of the
Liquidated Damages shall be final and cannot be
challenged by the supplier Motorolla is clearly in restraint
of legal proceedings under section 28 of the Indian
Contracts Act. So the provision to this effect has to be held
bad.
25
18.Pursuant to section 4 of the Arbitration and Conciliation
Act, 1996, a party who knows that a requirement under the
arbitration agreement has not been complied with and still
proceeds with the arbitration without raising an objection,
as soon as possible, waives their right to object. The High
Court had appointed an arbitrator in response to the
petition filed by the appellant. At this point, the matter was
closed unless further objections were to be raised. If further
objections were to be made after this order, they should
have been made prior to the first arbitration hearing. But
the appellant had not raised any such objections. The
appellant therefore had clearly failed to meet the stated
requirement to object to arbitration without delay. As such
their right to object is deemed to be waived.
19.Finally we are of the opinion that the contention of the
Respondent that Clause 62 referring to special clauses has
an overriding effect on Clause 16.2, cannot be accepted..
There is in fact no conflict between clause 62 and 16.2.
Clause 62 has two parts in it. One part referring to the
26
Liquidated damages and the other part refers to incentives
in case the respondent/Motorolla performs its part of the
contract within time. The part dealing with Liquidated
Damages under clause 62 in fact refers it back to clause
16.2 dealing with the quantification of Liquidated Damages.
So it is apparent that there is no dispute between clause 62
and clause 16.2.
20.For the reasons aforesaid, we are of the view that the High
Court was justified in passing the impugned judgment and
there is no infirmity in the impugned order for which we
can interfere with the order of the High Court. The appeal is
therefore dismissed. There will be no order as to costs.
................................J.
[Tarun Chatterjee]
New Delhi; ...................................J.
September 15, 2008. [Lokeshwar Singh
Panta]
27
28
[Arising Out Of Slp(C) No. 3459 Of 2007] Bharat Sanchar ... vs Motorola India Pvt. Ltd on 15 September, 2008
Cites 10 docs - [View All]
The Arbitration And Conciliation Act, 1996
Section 28 in The Arbitration And Conciliation Act, 1996
State Of Karnataka Etc. vs Shri Rameshwara Rice Mills Thirthahalli Etc. on 24 February, 1987
Datar Switchgears Ltd. vs Tata Finance Ltd. & Anr. on 18 October, 2000
Section 4 in The Arbitration Act, 1940 1
Supreme Court of India
REPORTABLE
IN THE SUPREME COURT OF INDIA
CIVIL APPELLATE JURISDICTION
CIVIL APPEAL NO.5645 OF 2008
[Arising out of SLP(C) No. 3459 of 2007]
Bharat Sanchar Nigam Ltd. & Anr. .......Appellants
Versus
Motorola India Pvt. Ltd. ....Respondent
JUDGMENT
TARUN CHATTERJEE, J.
1. Leave granted.
2. This appeal is directed against the judgment and final order
dated 26th of October, 2006 of the High Court of Kerala at
Ernakulam in AR No 18 of 2006 whereby, the High Court
had allowed the prayer for appointment of the arbitrator at
the instance of the respondents and directed the parties to
submit their disputes to arbitration.
3. The pivotal questions that need to be decided in this appeal
are:
i) Whether the levy of liquidated damages under
clause 16.2 of the tender document is an
2
"excepted matter" in terms of clause 20.1 of the
said document so that the same cannot be
referred to arbitration or looked into by the
arbitrator.
ii) Whether clause 62 of the special conditions of
the tender document will prevail over clause 16.2
of the general conditions of the contract.
4. The relevant facts, which would assist us in appreciating
the controversy involved are narrated in a nutshell, which
are as follows:
The appellant had issued a notice inviting tender
dated 4th of January, 2001, calling upon the eligible
bidders for turn key project on planning, engineering,
supply, installation and commissioning of Indian Mobile
Personal Communications System in the telecom circles
of Kerala, Karnataka, Tamil Nadu and Andhra Pradesh.
The respondent submitted its bid in response to the
notice inviting tender and after the technical, commercial
and financial bid evaluation, the respondent was
3
awarded the tender and an Advance Purchase Order
(APO) dated 5th of September, 2001 for phase I and Phase
II was issued to it by the appellant. The purchase order
provided, inter alia, the terms for payment and the
schedule for delivery of the goods. It also provided for
liquidated damages in the event of failure on the part of
the respondent to meet with the delivery schedule.
Clause 16.2 of the general conditions of the tender
document provided for liquidated damages to the extent
of 0.5% of the value of the delayed quantity of the goods
and services for each week of delay or the part thereof for
a period of upto 10 weeks and thereafter charge 0.7% of
the value of delayed quantity or part thereof, for a period
of upto 10 weeks thereafter. It is the case of the
appellants that the respondent had failed to complete
phase I and phase II of the project within the schedule as
provided in the tender document, and therefore,
liquidated damages were imposed by the Tamil Nadu
Circle of the appellant on 21st of May, 2004 under clause
16.2 of the tender document, quantification of which was
4
beyond the purview of the arbitration agreement. There
was an exchange of correspondence between the Tamil
Nadu Circle of the appellant alleging the delay in the
purchase of goods and the respondents denying any
such delay and objecting to the levy of liquidated
damages. On 24th of March, 2006, the respondent
invoked the arbitration clause by sending a letter
through its counsel to the appellants to which they did
not concede and justified the imposition of liquidated
damages. The respondent filed an arbitration application
before the High Court of Kerala at Ernakulam for the
appointment of arbitrator under section 11 of the
Arbitration and Conciliation Act, 1996 in respect of the
liquidated damages assessed by the appellant. In the
counter affidavit filed in the High Court, the appellant
alleged that the liquidated damages assessed and
quantified by the appellant under clause 16.2 of the
tender document was an excepted matter as per clause
20.1 of the said document and, therefore, not arbitrable.
The High Court, as noted herein earlier, by the impugned
5
judgment allowed the arbitration request of the
respondents holding that the imposition of liquidated
damages by the appellant was not an "excepted matter"
and therefore, subject to arbitration. It is this judgment
of the High Court, which is impugned in this appeal, in
respect of which leave has already been granted.
5. Before proceeding further, we deem it appropriate to note
the relevant clauses of the tender document and the
purchase order, which would assist us in determining
whether the matters alleged are an excepted matter.
Clause 16.2 reads as under:-
"16.2. Should the tenderer fail to deliver the
goods and services on turn key basis within the
period prescribed, the purchaser shall be
entitled to recover 0.5% of the value of the
delayed quantity of the goods & services, for
each week of delay or part thereof, for a period
upto 10 weeks and thereafter at the rate of
0.7% of the value of the delayed quantity of the
goods and services for each week of delay or
part thereof for another 10 weeks of delay. In
the present case of turn key solution of supply,
installation and commissioning, where the
delayed portion of the delivery and provisioning
of services materially hampers effective user of
the systems, Liquidated Damages charged shall
6
be levied as above on the total value of the
concerned package of the purchase order.
Quantum of liquidated damages assessed and
levied by the purchaser shall be final and not
challengeable by the supplier."
Clause 20.1 which is the arbitration clause and provides
for excepted matters, i.e., those matters the decision to
which is specifically provided in the agreement itself
reads as under:-
20.1 In the event of any question, dispute or
difference arising under this agreement or in
connection there-with (except as to the matters,
the decision to which is specifically provided
under this agreement), the same shall be
referred to the sole arbitration of the CGM,
Kerala Telecom Circle, BSNL or in case his
designation is changed or his office is
abolished, then in such cases to the sole
arbitration of the officer for the time being
entrusted (whether in addition to his own duties
or otherwise) with the functions of the CGM,
Kerala Telecom Circle, BSNL or by whatever
designation such an officer may be called
(hereinafter referred to as the said officer), and
if the CGM Kerala Telecom Circle or the said
officer is unable or unwilling to act as such,
then to the sole arbitration of some other person
appointed by the CGM, Kerala Telecom Circle or
the said officer. The agreement to appoint an
arbitrator will be in accordance with the
Arbitration and Conciliation Act, 1996.
7
There will be no objection to any such
appointment on the ground that the arbitrator is
a Government Servant or that he has to deal
with the matter to which the agreement relates
or that in the course of his duties as a
government servant he has expressed his views
on all or any of the matters in dispute. The
award of the arbitrator shall be final and
binding on both the parties to the agreement. In
the event of such an arbitrator to whom the
matter is originally referred, being transferred
or vacating his office or being unable to act for
any reason whatsoever, the CGM, Kerala
Telecom Circle, BSNL or the said officer shall
appoint another person to act as an arbitrator in
accordance with the terms of the agreement and
the person so appointed shall be entitled to
proceed from the stage at which it was left out
by his predecessors.........."
Clause 15.2 of Section III of the tender document, which
deals with the "delays in the supplier's performance"
reads as under:
"Delay by the Supplier in the performance of its
delivery obligations shall render the Supplier
liable to any or all of the following sanctions,
forfeiture of its performance security, imposition
of liquidated damages, and/or termination of
the contract for default".
8
Clause 62 of Section IV of the tender document which
deals with liquidated damages and incentive reads as
under:-
"The bidder shall be charged liquidated
damages at the rates as defined in the General
conditions of contract as contained in Section III
for any delay in the turnkey job entrusted to the
bidder. However he shall be provided an
incentive @ 0.5% of the cost of the network of
each service area (Telecom Circle), for each
week of early commissioning of the entire
network in that service area, subject to a
maximum of 3% of the value of the contract of
the circle".
6. Since this appeal arises out of an order, which appointed
an arbitrator, to decide the dispute referred to by the
respondent, we, in this appeal, need to decide that whether
in view of the arbitration clause in the tender document
provided under clause 20 of the said document, the breach
specified in 16.2 is an "excepted matter".
7. Mr. Gopal Subramaniam, Additional Solicitor General of
India appearing on behalf of the appellant contended that
in view of the decision of this Court in Vishwa Nath Sood
9
vs. UOI [(1989) 1 SCC 657], a conjoint reading of clause
16.2 and clause 20.1 would clearly show that clause 16.2 is
covered under the excepted matters as provided in clause
20.1 of the tender document. He further contended that the
High Court had erred in holding that the quantification of
the liquidated damages was subsequent to the decision of
liability of liquidated damages to be payable to the
appellant. Therefore, he contended that the respondent had
specifically subscribed to each and every clause of the
agreement without any objection at the tender stage and
accordingly, it was not open to them to claim immunity
from the contractual obligations. Thus, the matter in
respect of which the respondent sought reference to
arbitration was "excepted matter" in terms of clause 16.2 of
the tender agreement.
In order to satisfy us in the aforesaid contentions,
the learned Additional Solicitor General, Mr. Gopal
Subramanium placed strong reliance in the case of Food
Corporation of India Vs. Sreekanth Transport 1999
10
(4) SCC 491, which has given the following principles
relating to "Excepting matters" as under :-
"1. These appeals by the grant of Special
Leave pertains to the effect of the usual
`excepted clause' vis-`-vis the arbitration
clause in a Government contract. While it
is true and as has been contended, that
the authorization of the arbitrators to
arbitrate, flows from the agreement but the
High Court in the judgment impugned
thought it fit to direct adjudication of
`excepted matters' in the agreement itself
by the arbitrators and hence these appeals
before this Court.
2. At the outset, it is pertinent to note that
in the usual Government contracts, the
reference to which would be made
immediately hereafter, there is exclusion of
some matters from the purview of
arbitration and a senior officer of the
Department usually is given the authority
and power to adjudicate the same. The
clause itself records that the decision of
the senior officer, being the adjudicator,
shall be final and binding between the
parties - this is what popularly known as
`excepted matters' in a Government or
Governmental agencies' contract.
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
presumed by reason of the unequivocal
acceptance of the terms of the contract by
11
the parties and this is where the courts
have found our lacking in its 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 the claims arising
within the ambit of excepted matters,
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 are
these exceptions however are questions of
fact and usually mentioned in the contract
documents and forms part of the
agreement as such there is no ambiguity in
the matter of adjudication of these
specialized matters and termed in the
agreement as the excepted matters....."
Keeping the aforesaid principles in mind, let us
proceed further.
We may keep on record that the appellants alleged
that respondents had not completed phase I and phase II
of the project within the schedule as provided in the
tender document whereupon the appellants had to
impose liquidated damages and invoke clause 16.2 of the
tender document. But the respondents refuted these
12
allegations. The contention of the respondent in this case
was that the delay, if any, was caused due to the
appellant's delay in supplying necessary inputs to the
respondent. So the respondent contends that it had
performed its part of the contract in time and the blame
for delay lies on the appellant. Thus it is to be noted that
there is a dispute between the parties on the question
whether any breach was committed in this case.
8. The appellant had contended before the High Court of
Kerala that the levy of the liquidated damages on the
respondent was a matter outside the purview of the scope
of arbitration proceedings as it "squarely falls within the
exception provided under Clause 20 of Section III, being the
matters for which mode of decision is provided under the
Agreement itself."
The respondent on the other hand contended that
the claim of the petitioner that the dispute pertaining to
levy of liquidated damages falls outside the arbitration
agreement being an excepted matter is fallacious.
13
The High Court held that there was no reason why
the arbitration request on behalf of the respondent
should not be allowed. It held that clause 16.2 is not an
excepted matter under clause 20 of the tender document.
9. Having heard the learned counsel for the parties and after
examining the judgment of the High Court and the other
materials on record, we are of the view that this appeal
must be dismissed. Clause 20 is the arbitration clause and
provides that any question, dispute or difference arising
under this agreement or in connection therewith would be
referred to arbitration. To this, an exception is also provided
which lays down that the matters, the decision to which is
specifically provided under this agreement, would not be
referred to arbitration. From a bare reading of clause 16.2
of Section III of the tender document, it is clear that if the
tenderer fails to deliver the goods and services on turnkey
basis within the period prescribed, the purchaser shall be
entitled to recover liquidated damages and the quantum of
the liquidated damages assessed and levied by the
14
purchaser shall be final and not challengeable by the
supplier.
10. We are in full agreement with the findings of the High
Court that there was a dispute as to whether the
respondent had at all acted in breach of any terms and
conditions of the tender document.
The question to be decided in this case is whether
the liability of the respondent to pay Liquidated Damages
and the entitlement of the appellant, to collect the same
from the respondent is an 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 Motorolla
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 regarding
the quantification of the Liquidated Damages and not
any decision regarding the fixing of the liability of the
15
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.
It is clear from the reading of clause 15.2 that the
supplier is to be held liable for payment of liquidated
damages to the purchaser under the said clause and not
under clause 16.2. The High Court in this regard
correctly observed that it was not stated anywhere in
clause 15 that the question as to whether the supplier
had caused any delay in the matter of delivery will be
decided either by the appellant/BSNL or by anybody who
has been authorized on the terms of the agreement.
Reading clause 15 and 16 together, it is apparent that
clause 16.2 will come into operation only after a finding
is entered in terms of clause 15 that the supplier is liable
for payment of liquidated damages on account of delay
on his part in the matter of making delivery. Therefore,
clause 16.2 is attracted only after the supplier's liability
16
is fixed under clause 15.2. It has been correctly pointed
out by the High Court that the question of holding a
person liable for Liquidated Damages and the question of
quantifying the amount to be paid by way of Liquidated
Dmages are entirely different. Fixing of liability is
primary, while the quantification, which is provided for
under clause 16.2, is secondary to it.
There is no provision in the agreement, apparent on
the face of it, relating to a decision made by any specified
authority on the issue of levy of Liquidated Damages, as
is contemplated under clause 20.1 of the agreement
which is excepted from the purview of arbitration. No
decision coming within the scope of excepted matters
under clause 20.1 is envisaged by any portion of the
agreement regarding the liability of the supplier to
liquidated damages.
Quantification of liquidated damages may be an
excepted matter as argued by the appellant, under
clause 16.2, but for the levy of liquidated damages, there
17
has to be a delay in the first place. In the present case,
there is a clear dispute as to the fact 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 appellant under clause 16.2, this will only have
effect when the dispute as 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.
The above stated position can be ascertained
through the judgment of this Court in the case of State
of Karnataka vs. Shree Rameshwara Rice Mills,
(1987) 2 SCC 160. This Court in the said case, made a
clear distinction between adjudicating upon an issue
relating to a breach of condition of contract and the right
to assess damages arising from a breach of condition. It
18
was held that the right conferred to assess damages
arising from a breach of condition does not include a
right to adjudicate upon a dispute relating to the very
breach of conditions and that the power to assess
damages is a subsidiary and consequential power and
not the primary power.
11.Clause 20.1 regarding excepted matters reads "In the event
of any question, dispute or difference arising under this
agreement or in connection there-with (except as to the
matters, the decision to which is specifically provided
under this agreement)...". Therefore it is clear from this
provision, matters which will not fall within the arbitration
clause are questions, disputes or differences, the decision
to which is specifically provided under the agreement.
Clause 16.2 is not a clause where in any decision making
power is specifically provided for with regard to any
question, dispute or difference between the parties relating
to the existence of breach or the very lack of liability for
damages, i.e. the levy of Liquidated Damages.
19
12.The learned senior counsel for the appellant relied on the
decisions of this court in Vishwanath Sood vs. UOI
[(1989) 1 SCC 657], and General Manager, Northern
Railway vs. Sarvesh Chopra [(2002) 4 SCC 45]. These
cases, we are afraid, will not be of any help to the
appellants being distinguishable on facts and having
different contractual clauses. We may note that clause 16.2
cannot be treated as an excepted matter. This is because
admittedly, 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 nor is it a no claim or no liability
clause.
In Vishwanath Sood's case (supra), it was held by
this court that a particular claim of the government was
excluded because the Superintendent Engineer acted as
the revisional authority to decide disputes between the
two parties by an adjudicatory process, there being a
20
complete machinery for settlement of the disputes in the
relevant clause and most importantly, the
Superintendent Engineer had the discretion on
consideration of the facts and circumstances including
mitigating facts, held no damages was payable. Again in
the case of Sarvesh Chopra, this court had held that the
claims covered by the no claims clause, i.e., where the
contractor had given up the right to make a claim for
breach on the part of the government was not arbitrable
in terms of the arbitration clause contained therein and
clause 63 of the general conditions of the contract which
provided for exclusion because no claim clause was
excepted as such claims were simply not entertainable.
In view of the discussions made hereinabove, we hold
that the disputes raised by the respondents are
arbitrable and not excepted from scope of arbitration.
13.We feel that there are certain other issues that are to be
discussed while disposing of this appeal. The respondent
contended in its written submission filed before this court
21
on 14th May, 2007 that the quantum of damages calculated
by the appellant in respect of clause 16.2 of the tender
document, simply cannot have the effect of rendering all the
above disputes as not being arbitrable. We find that there is
considerable merit in this argument. The true essence of
any arbitration agreement is to arbitrate the matters in a
cordial way in respect of issues where there is a dispute
between the parties. To construe such limited words in
clause 16.2 as being so all encompassing would destroy the
very foundation of the bargain between the parties. The
appellant in the present case is acting in an unfair way by
seeking to exclude, from arbitration, what it has agreed to
arbitrate in the first place.
14.The appellant contended that it has the unilateral right to
determine the Liquidated damages under clause 16.2 and
that the quantum of Liquidated Damages decided by the
appellant, even if it is exorbitant, would be final and cannot
be challenged. We find the contention of the respondent
that if the said contention of the appellant is supported, it
would mean that a party would be held liable to damages of
22
whatever amount the other party demands without
recourse to a remedy, to be relevant and should be given
due importance. Such a contention by the appellant would
be in violation of Section 28 and Section 74 of the Indian
Contract Act.
15.The learned counsel of the appellants had submitted before
this court that it was the appellant, which had the right to
appoint the arbitrator. This submission cannot be accepted.
The respondent had invoked the arbitration clause on the
ground that there was no delay on its part by sending a
letter to this effect to the appellants on 24th of March, 2006.
On 25th April, 2006, the appellants/BSNL replied stating
that they had rightly recovered the Liquidated Damages and
that the recovery of the damages was not arbitrable. The
appointing authority in this matter, i.e., CGM Kerala, did
not respond to the notice requiring the appointment of
arbitrator and failed to act within the time prescribed under
the Arbitration and Conciliation Act 1996. Since the
appointing authority appointed no arbitrator, the
23
respondent/Motorolla, on 25th of May, 2006, filed a petition
under Section 11 of the said Act before the High Court at
Kerala. In the case of Datar Switchgear vs. Data Finance
Lt. [(2000) 8 SCC 151], which was affirmed in Punj Llyod
Ltd. vs. Petronet MHB Ltd. [(2006) 2 SCC 638], it was
held that once a minimum of 30 days is expired and a
petition is filed to the court, the appointing authority loses
the right to make the appointment. Therefore, the
appellant/BSNL has now lost its right to appoint any
arbitrator for settling the disputes under the agreement.
16.Further, CGM Kerala Circle has already taken a decision as
is evident from his letter dated 25th of April, 2006, that the
appellant was right in imposing the liquidated damages and
therefore, the question of such a person becoming an
arbitrator does not arise as it would not satisfy the test of
impartiality and independence as required under Section
12 of the Arbitration and Conciliation Act, 1996. Moreover
it would also defeat the notions laid down under the
principles of natural justice wherein it has been
24
recognized that a party cannot be a judge in his own
cause. The judgment of this Court in State of Karnataka
vs. Shree Rameshwara Rice Mills, (1987) 2 SCC 160, is
significant in this matter. The Court had stated:
".....Even assuming that the terms of Clause 12
afford scope for being construed as empowering
the officer of the State to decide upon the
question of breach as well as assess the
quantum of damages, adjudication by the
officer regarding the breach of the contract can
not be sustained under law because a party to
the agreement cannot be an arbiter in his own
cause. Interest of justice and equity require that
where a party to a contract disputes the
committing of any breach of conditions the
adjudication should be by an independent
person or body and not by the other party to the
contract".
17.The provision under clause 16.2 that quantification of the
Liquidated Damages shall be final and cannot be
challenged by the supplier Motorolla is clearly in restraint
of legal proceedings under section 28 of the Indian
Contracts Act. So the provision to this effect has to be held
bad.
25
18.Pursuant to section 4 of the Arbitration and Conciliation
Act, 1996, a party who knows that a requirement under the
arbitration agreement has not been complied with and still
proceeds with the arbitration without raising an objection,
as soon as possible, waives their right to object. The High
Court had appointed an arbitrator in response to the
petition filed by the appellant. At this point, the matter was
closed unless further objections were to be raised. If further
objections were to be made after this order, they should
have been made prior to the first arbitration hearing. But
the appellant had not raised any such objections. The
appellant therefore had clearly failed to meet the stated
requirement to object to arbitration without delay. As such
their right to object is deemed to be waived.
19.Finally we are of the opinion that the contention of the
Respondent that Clause 62 referring to special clauses has
an overriding effect on Clause 16.2, cannot be accepted..
There is in fact no conflict between clause 62 and 16.2.
Clause 62 has two parts in it. One part referring to the
26
Liquidated damages and the other part refers to incentives
in case the respondent/Motorolla performs its part of the
contract within time. The part dealing with Liquidated
Damages under clause 62 in fact refers it back to clause
16.2 dealing with the quantification of Liquidated Damages.
So it is apparent that there is no dispute between clause 62
and clause 16.2.
20.For the reasons aforesaid, we are of the view that the High
Court was justified in passing the impugned judgment and
there is no infirmity in the impugned order for which we
can interfere with the order of the High Court. The appeal is
therefore dismissed. There will be no order as to costs.
................................J.
[Tarun Chatterjee]
New Delhi; ...................................J.
September 15, 2008. [Lokeshwar Singh
Panta]
27
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