Supreme Court clarifies the scope of Clause 59 in construction contracts: K. Marappan vs. The Superintending Engineer (27 March 2019)

Case Background

The case involves a contractor, K. Marappan, who entered into three agreements with the State of Andhra Pradesh for irrigation works. The agreements were numbered 10/78-79, 11/78-79, and 14/79-80.

• Agreement No. 10/78-79: Signed on 10 March 1979, site handed over on 16 November 1979.
• Agreement No. 11/78-79: Signed on 10 March 1979, site handed over on 21 April 1979.
• Agreement No. 14/79-80: Signed on 28 June 1979, site handed over on 28 June 1979.

The work was to be completed within 18 months from the date of handing over the site. Disputes arose, and the contractor raised several claims, which were initially referred to a panel of arbitrators. After the initial awards were set aside, a sole arbitrator was appointed, who passed three awards on 19 August 1988. The contractor’s claims included extra lead for materials, non-supply of food grains, short supply of cement, accumulated materials, and interest.

Timeline:

Course of Proceedings

The arbitrator awarded various sums to the contractor, rejecting claims 6 and 8. The respondent-State challenged the awards under Sections 30 and 33 of the Arbitration Act, 1940. The contractor filed suits to make the awards decrees of the court. The sub-court partly agreed with the respondent-State, modifying some of the arbitrator’s awards. The High Court completely sided with the respondent-State, holding the awards unsustainable due to Clause 59 of the agreement. The High Court set aside the awards of the arbitrator in respect of Claim Nos. 1, 2, 3, 4, 5, and 7. The High Court also set aside the award of interest.

Legal Framework

The case revolves around the interpretation of Clause 59 of the agreement, which reads:

“59. Delays and extension of time: No claim for compensation on account of delays or hindrances to the work from any cause whatever shall lie, except, as hereinafter defined. Reasonable extension of time will be allowed by the executive Engineer or by the officer competent to sanction the extension for unavoidable delays, such as may result from causes, which, in the Opinion of the Executive Engineer, are undoubtedly beyond the control of the contractor. The Executive Engineer shall assess the period of delay or hindrance caused by any written instructions issued by him, at twenty five per cent in excess of the actual working period so lost. In the event of the Executive Engineer failing to issue necessary instructions and thereby causing delay and hindrance to the contractor, the latter shall have the right to claim an assessment of such delay by the superintending Engineer of the Circle whose decision will be final and binding. The contractor shall lodge in writing with the Executive Engineer a statement of claim for any delay or hindrance referred to above, within fourteen days from its commencement, otherwise, no extension of time will be allowed. Whenever authorized alterations or additions made during the progress of the work are of such a nature in the opinion of the Executive Engineer as to justify an extension of time in consequence thereof, such extension will be granted in writing by the Executive Engineer or other competent authority when ordering such alterations or additions.”

The Arbitration Act, 1940, particularly Sections 15, 30, and 33, also play a crucial role, defining the powers of the court to modify or set aside an arbitration award.
Section 15 of the Arbitration Act, 1940 states:

”15.Power of Court to modify award. The Court may by order modify or correct an award-
(a) where it appears that a part of, the award is upon a matter not referred to arbitration and such part can be separated from the other part and does not affect the decision on the matter referred; or
(b) where the award is imperfect in form, or contains any obvious error which can be amended without affecting such decision; or
(c) where the award contains a clerical mistake or an error arising from an accidental slip or omission.”

Arguments

Appellant’s Arguments:

• The arbitrator’s award should not be interfered with unless there is misconduct or an error apparent on the face of the record.
• The arbitrator has the authority to interpret the contract and evaluate the evidence.
• Clause 59 does not bar the claims made by the appellant.
• Claim No. 1: The contractor was compelled to quarry materials from a greater distance, incurring additional expenses, which should be compensated.
• Claim No. 3: The department failed to supply food grains as agreed, forcing the contractor to purchase them at higher market rates.
• Claim No. 4: The department did not provide sufficient cement, compelling the contractor to procure it from other sources.
• Claim No. 7: The contractor had purchased materials and stocked them at the site, and the department prevented the appellant from carrying out the work, hence the contractor is entitled to the value of the materials.
• Claim No. 9: The contractor is entitled to interest at 18% per annum under the Interest Act.

Respondent’s Arguments:

• Clause 59 of the agreement bars all claims for compensation due to delays or hindrances.
• The arbitrator exceeded his jurisdiction by awarding claims barred by the contract.
• The contractor failed to prove that the food grains were available and that he had to purchase food grains from the open market.
• The contractor was not authorized to purchase cement from outside.
• The contractor did not produce any vouchers for purchase of cement from outside.
• The Government had the option to either pay compensation or restore the material to the contractor.

Innovativeness of the argument:
The innovativeness of the argument lies in the appellant’s attempt to distinguish between claims arising from “delay” and claims arising from “additional expenses” due to actions beyond the contractor’s control. The appellant argued that Clause 59 does not bar claims for additional expenses that are not directly related to delays.

Submissions by Parties

Issues Framed by the Supreme Court

The Supreme Court considered the following issues:

1. Whether the High Court was correct in holding that the claims of the contractor were not sustainable in view of Clause 59 of the contract?
2. Whether the Sub-Court was justified in modifying the award of the arbitrator in respect of Claim No.1?
3. Whether the arbitrator was justified in awarding Claim Nos. 3, 4, 7 and 9?

Treatment of the Issue by the Court

The following table demonstrates as to how the Court decided the issues:

Authorities

The Supreme Court considered the following authorities:

Judgment

What weighed in the mind of the Court?

The Supreme Court’s decision was primarily influenced by the interpretation of Clause 59 and the specific facts of each claim. The Court emphasized that while Clause 59 bars compensation for delays or hindrances, it does not preclude claims for additional expenses incurred due to other reasons. The Court also considered the contractual obligations of the parties and the evidence presented before the arbitrator.

The Court’s reasoning involved a detailed analysis of the contract, the evidence presented, and the applicable legal principles. The Court emphasized that arbitrators, as creatures of the contract, are bound by the terms of the contract. The Court also highlighted the importance of producing evidence to substantiate the claims made.

The court considered alternative interpretations of Clause 59, particularly whether it barred all claims for compensation, regardless of the cause. However, the Court rejected this interpretation and held that Clause 59 did not bar all claims for compensation.

The court held that the contractor was entitled to compensation for the extra lead, but the amount was to be calculated as per the procedure extant. The Court held that the arbitrator was not justified in awarding Claim Nos. 3, 4, and 7. The Court held that the arbitrator was justified in awarding interest.

“It is our view that it will not be open to a contractor to claim compensation which arises on account of the fact that the work is delayed or hindrance caused to the work from any cause whatsoever.”

“In short, under clause 59 while extension of time on account of delay or hindrance can be granted. Claim for compensation on account of delay or hindrance on account of any cause will not lie.”

“As long as the agreement between the parties does not prohibit grant of interest and the matter is referred to the arbitrator, arbitrator would have power to grant interest pendente lite.”

There were no dissenting opinions in this case.

Key Takeaways

• Clause 59 of a construction contract does not bar all claims for compensation, but only those arising from delays or hindrances.
• Contractors must provide sufficient evidence to substantiate their claims before an arbitrator.
• Arbitrators are bound by the terms of the contract and cannot exceed their jurisdiction.
• An arbitrator has the power to award interest pendente lite if the agreement does not prohibit it.
• The Court can interfere with an award under Section 30 of the Arbitration Act, 1940 if the arbitrator has misconducted himself or if there is an error apparent on the face of the record.

Directions

The Supreme Court directed that the amount for Claim No. I, as accepted by the sub-court, should be calculated and paid within two months of production of a certified copy of the judgment.

Development of Law

The ratio decidendi of the case is that Clause 59 of a construction contract does not bar all claims for compensation, but only those arising from delays or hindrances. The Supreme Court clarified that arbitrators have the power to award interest pendente lite if the agreement does not prohibit it. This case clarifies the scope of Clause 59 and the powers of arbitrators in construction contracts.

Conclusion

The Supreme Court partly allowed the appeals, restoring the award in relation to Claim No. I as accepted by the sub-court along with interest as awarded by the arbitrator. The Court clarified that while Clause 59 bars claims for compensation due to delays or hindrances, it does not bar claims for additional expenses incurred due to other reasons. This judgment provides important guidance on the interpretation of Clause 59 in construction contracts and the powers of arbitrators.

Category

Parent Category: Arbitration Law
Child Categories: Arbitration Act, 1940, Clause 59, Construction Contracts, Interest, Powers of Arbitrator

Parent Category: Contract Law
Child Categories: Section 70, Contract Act, 1872, Construction Contracts, Clause 59

Parent Category: Arbitration Act, 1940
Child Categories: Section 15, Arbitration Act, 1940, Section 30, Arbitration Act, 1940, Section 33, Arbitration Act, 1940

Disclaimer

This document is intended for informational purposes only and should not be considered legal advice. The information provided is based on the facts and legal principles discussed in the judgment of K. Marappan vs. The Superintending Engineer (27 March 2019). For specific legal advice, please consult with a qualified legal professional.