Supreme Court settles jurisdiction of arbitrator in construction contract disputes: Asian Techs Ltd. vs. Union of India (2009)

Date of the Judgment: 07th September 2009
Citation: Where available, provide the case citation in the Indian Supreme Court (INSC) format.
Judges: Markandey Katju, J., Asok Kumar Ganguly, J.

When disputes arise in construction contracts, can an arbitrator’s decision be challenged if it seems to contradict clauses in the original agreement? The Supreme Court of India addressed this question in the case of M/s. Asian Techs Ltd. vs. Union of India & others, focusing on the arbitrator’s jurisdiction in the context of clauses specifying the finality of certain decisions made by the Commander Works Engineer (CWE). The bench comprised Justice Markandey Katju and Justice Asok Kumar Ganguly.

Case Background

M/s. Asian Techs Ltd. (the appellant) entered into an agreement with the Union of India (the respondent) on September 2, 1986, for the construction of a ‘Provision of Lab and Administrative Block’ for NPOL at Kakkanad, Cochin. The contract, valued at Rs. 3,58,96,665/-, stipulated completion by September 8, 1988, spanning a 24-month period.

The appellant contended that delays caused by the respondent prevented completion by June 30, 1990. These delays allegedly stemmed from changes to the work site after the agreement was signed, fundamental alterations to the building’s design (specifically, omitting the basement floor), and belated nomination of prime cost item suppliers. The appellant further claimed that the respondent failed to finalize the design and structural particulars within the contract period, leading to work suspensions, idle labor, and increased costs.

Despite these challenges, the respondents allegedly assured the appellant that rates for extra items would be settled, persuading them to continue the work. Extensions were granted without levying liquidated damages. However, disagreements arose regarding rates for work conducted between September 8, 1988, and June 30, 1990, as well as for extra and altered items. The appellant alleged that the respondent avoided referencing the MES schedule of rates and that rates were fixed by subordinate officials without proper consultation, leading to wrongfully withheld amounts.

Timeline

Course of Proceedings

The Subordinate Judge’s Court, Ernakulam, initially passed a decree in terms of the arbitrator’s award on October 8, 1996, dismissing the application to set aside the award. Subsequently, the respondents challenged this decree before the High Court of Kerala, Ernakulam, in M.F.A. No. 452 of 1997 and CRP No. 1906 of 1998. The High Court then set aside the non-speaking award, except for claim No. 12, which pertained to a payment of Rs. 1,20,000/- wrongfully withheld by the respondents.

Legal Framework

The Supreme Court considered the following clauses of the contract to determine the scope of the arbitrator’s jurisdiction:

• Clause 70 (Arbitration Clause): This clause stipulates that disputes between the parties, except those for which the decision of the CWE or any other person is expressed to be final and binding, shall be referred to arbitration. The clause states:
  
  “70. Arbitration
  All disputes, between the parties to the Contract (other than those for which the decision of the CWE or any other person is by the Contract expressed to be final and binding ) shall, after written notice by either party to the Contract to the other of them, be referred to the sole arbitration of an Engineer Office to be appointed by the authority mentioned in the tender documents.”
• Clause 11 (Time, Delay, and Extension): This clause addresses delays in the works and the granting of extensions. Sub-clause (C) states that no claim for compensation shall be admitted as a result of extensions granted under conditions (A) and (B). The clause reads:
  
  “11. Time, delay and Extension
  (A)Time is of the essence of the contract and is specified in contract documents or in each individual Works Order.
  As soon as possible after the contract is let or any substantial Works Order is placed and before work under it has begun, the G.E. And the Contractor shall agree upon a Time Progress Chart. The Chart shall be prepared in direct relation to the time stated in the contract documents or the Works Order for completion of the individual items thereof, and/or the Contract or Works order as a whole.
  (B)If the works be delayed:
  (a) by reason of non-availability of Government stores mentioned in Schedule 13; or
  (b) by reason of non-availability or breakdown of Govt. Tools and Plant mentioned in Schedule ‘C’ then, in any such event, notwithstanding the provisions hereinbefore contained, the G.E. May in his discretion grant such extension of time as may appear reasonable to him and the Contractor shall be bound to complete the works within such extended time. In the event of the Contractor not agreeing to the extension granted by the Garrison Engineer, the matter shall be referred to the Accepting Officer (or CWE in case of contract accepted by Garrison Engineer ) whose decision shall be final and binding.
  (C)No claim in respect of compensation or otherwise, howsoever arising, as a result of extensions granted under Conditions (A) and (B ) above shall be admitted.”
• Clause 62(G): This clause pertains to the rates for work that cannot be obtained by other methods. It stipulates that the rate shall be decided by the G.E. (Garrison Engineer) based on the cost to the Contractor at Site of Works plus 10% to cover all overheads and profit. It also provides that if the contractor is not satisfied with the decision of the G.E., they can represent the matter to the C.W.E., whose decision shall be final and binding. The clause states:
  
  “(G) For all Contracts –
  If any work, the rate for which cannot be obtained by any of the methods referred to in paras (A) to (E) above, has been ordered on the contractor, the rate shall be decided by the G.E. On the basis of the cost to the Contractor at Site of Works plus 10% to cover all overheads and profit. Provided that if the contractor is not satisfied with the decision of the G.E. He shall be entitled to represent the matter to the C.W.E. Within seven days of receipt of the G.E.’s decision and the decision of the C.W.E. Thereon shall be final and binding.
  If any alterations or additions (other than those authorised to be executed by day work or for an agreed sum) have been covered up by the Contractor without his having given notice of his intention to do so, the Engineer-in -Charge shall be entitled to appraise the value thereof and in the event of any dispute the decision of the G.E. Thereon shall be final and binding.”.

Arguments

• Appellant’s Arguments:
  • The appellant contended that the delays in the project were attributable to the respondents due to changes in the site, alterations in the design, and belated nomination of suppliers. For example, the change of site after the agreement was signed caused significant disruptions and delays.
  • The appellant argued that the assurance given by the respondents to settle rates for extra items persuaded them to continue the work beyond the originally stipulated period. For instance, the letter from the Assistant Garrison Engineer on October 11, 1989, assured the petitioner to settle rates across the table, which induced them to continue the work.
  • The appellant submitted that Clause 62(G) applies only to cases of ‘deviation’ and not to material alterations and additions in the work done. This was supported by the correspondence between the parties, which indicated significant changes beyond mere deviations.
  • The appellant also pointed out that Regulation 439 of the MES Regulations, 1968, fixes the pecuniary jurisdiction of the CWE at Rs. 20,000/-, implying that the CWE had no jurisdiction to decide disputes involving higher amounts.
• Respondent’s Arguments:
  • The respondents likely argued that Clause 11(C) of the contract barred any claims for compensation arising from extensions granted, thereby limiting the arbitrator’s jurisdiction.
  • The respondents probably contended that the finality clauses under 11(C) and 62(G) exempted the decisions of the Commander Works Engineer (CWE) from the purview of the arbitration clause, thus restricting the arbitrator’s authority.
  • The respondents may have asserted that the extensions of time granted to the appellant deprived them of any right to claim payment at prevailing rates for the delayed works.

Issues Framed by the Supreme Court

1. Whether the arbitrator had the jurisdiction to decide on the claims, considering the finality clauses under 11(C) and 62(G) of the contract, which the High Court deemed binding.

Treatment of the Issue by the Court: “The following table demonstrates as to how the Court decided the issues”

Authorities

• State of Rajasthan vs. Nav Bharat Construction Co. (2006) 1 SCC 86 (Supreme Court of India): Cited to emphasize the limited scope of interference by courts in non-speaking awards under the Arbitration Act, 1940.
• Raipur Development Authority vs. Chokhamal Constructions (1989) 2 SCC 721 (Supreme Court of India): Cited to reinforce the principle that courts should not readily interfere with non-speaking awards.
• Arosan Enterprises Ltd. vs. Union of India (1999) 9 SCC 449 (Supreme Court of India): Cited to further support the limited scope of court interference in non-speaking awards.
• Ispat Engineering vs. Steel Authority of India (2001) 6 SCC 347 (Supreme Court of India): Cited to reiterate the principle that the court’s role in non-speaking awards is minimal.
• D.D. Sharma vs. Union of India (2004) 5 SCC 325 (Supreme Court of India): Cited to continue the emphasis on the limited scope of court interference in non-speaking awards.
• National Insurance Company Ltd vs. Boghara Polyfab Pvt. Ltd (2009) 1 SCC 267 (Supreme Court of India): Cited to support the view that even with a full and final discharge voucher, the arbitrator or court can examine whether the liability has been satisfied.
• Chairman and Managing Director, NTPC Ltd. vs. Reshmi Constructions, Builders and Contractors (2004) 2 SCC 663 (Supreme Court of India): Followed by the National Insurance Company Ltd case to reinforce the principle that the arbitrator can examine the satisfaction of liability despite a discharge voucher.
• Board of Trustees, Port of Calcutta vs. Engineers-De-Space-Age (1996) 1 SCC 516 (Supreme Court of India): Cited to assert that a clause like clause 11 only prohibits the department from entertaining the claim, but it does not prohibit the arbitrator from entertaining it.
• Bharat Drilling & Treatment Pvt. Ltd. vs. State of Jharkhand & others in Civil Appeal No. 10216 of 2003 (Supreme Court of India): Followed the view taken in Board of Trustees, Port of Calcutta vs. Engineers-De-Space-Age.

Judgment

What weighed in the mind of the Court?

The Supreme Court’s decision was primarily influenced by the repeated defaults on the part of the respondents, which led to delays in the project. The Court also considered the assurances given by the respondents to the appellant regarding the settlement of rates for extra work, which induced the appellant to continue working beyond the originally stipulated period. Additionally, the Court took into account the limited pecuniary jurisdiction of the Commander Works Engineer (CWE) and the fact that Clause 62(G) of the contract applied only to deviations, not material alterations.

Key Takeaways

• Arbitrators have jurisdiction to decide on claims in construction contracts, even if there are finality clauses, if the delays are due to the defaults of one party and assurances were given to continue the work.
• Finality clauses in contracts apply only to deviations and not to material alterations or additions in the work done.
• The pecuniary jurisdiction of an authority is limited to the amount specified in the regulations, and any decision exceeding that amount is not binding.

Development of Law

The ratio decidendi of this case is that an arbitrator’s jurisdiction is not ousted by finality clauses in a contract if the delays are attributable to one party’s defaults, assurances were given to continue the work, and the decision involves matters beyond the specified authority’s pecuniary jurisdiction or material alterations beyond mere deviations. This clarifies the scope of arbitrator jurisdiction in construction contract disputes.

Conclusion

In the case of M/s. Asian Techs Ltd. vs. Union of India & others, the Supreme Court held that the arbitrator had jurisdiction to decide on the claims, considering the defaults of the respondents, the assurances given to the appellant, and the limitations on the authority’s pecuniary jurisdiction. The Court set aside the High Court’s order and restored the arbitrator’s award, emphasizing the limited scope of interference in non-speaking awards.