Supreme Court Upholds “Excepted Matter” Clause in Construction Contract: Mitra Guha Builders vs. ONGC (2019)

Introduction

Date of the Judgment: November 8, 2019
Citation: Not Available in Source
Judges: R. Banumathi, J., A.S. Bopanna, J., Hrishikesh Roy, J.
Can a dispute regarding liquidated damages, decided by a Superintending Engineer as per a contract clause, be challenged in arbitration? The Supreme Court of India addressed this question in a case between M/s. Mitra Guha Builders and Oil and Natural Gas Corporation Limited (ONGC). The core issue was whether the decision of the Superintending Engineer regarding liquidated damages was an “excepted matter” and thus not subject to arbitration. The judgment was delivered by a three-judge bench consisting of Justices R. Banumathi, A.S. Bopanna, and Hrishikesh Roy, with Justice R. Banumathi authoring the opinion.

Case Background

M/s. Mitra Guha Builders (India) Company (the appellant) and Oil and Natural Gas Corporation Limited (ONGC) (the respondent) entered into two contracts on January 5, 1996, for the construction of residential flats and other structures for ONGC. The first contract, No. DHL/Civil/NOIDA/6/94, was for 28 ‘C’ type guest house and other structures. The second contract, No. DHL/Civil/NOIDA/5/94, was for 20 ‘B’ type residential flats. Disputes arose between the parties, with the contractor raising claims that were refuted by ONGC. Consequently, the contractor invoked the arbitration clause (Clause 25) of the contract on September 7, 2001, for both contracts.

Timeline

Course of Proceedings

The designated authority appointed Justice P.K. Bahri (Retd.) as the sole Arbitrator on January 3, 2002. The Arbitrator, on July 1, 2005, allowed the contractor’s claims and disallowed the liquidated damages/compensation imposed by ONGC, which he considered a penalty. ONGC challenged this award before the High Court of Delhi under Section 34 of the Arbitration and Conciliation Act, 1996. A Single Judge of the High Court dismissed ONGC’s petitions on November 2, 2007, upholding the Arbitrator’s decision and correcting a clerical error in the award amount in Arbitration Case No. 297A of 2002. However, the Division Bench of the High Court, in appeals filed by ONGC under Section 37 of the Arbitration Act, 1996, set aside the Single Judge’s order and the Arbitrator’s award on February 16, 2009. The Division Bench held that the levy of liquidated damages was an “excepted matter” under Clause 2 of the contract and not arbitrable.

Legal Framework

The case primarily revolves around the interpretation of two clauses in the contract: Clause 2, which deals with compensation for delay, and Clause 25, which deals with the settlement of disputes through arbitration. Clause 2 states that if the contractor fails to complete the work on time, they shall pay compensation equal to ½% per week, as decided by the Superintending Engineer, whose decision shall be final. The relevant portion of Clause 2 reads as follows:

“The contractor shall pay compensation on amount equal to ½ % per week as the Superintending Engineer (whose decision in writing shall be final) may decide on the amount of the contract, value of the whole work as shown in the agreement, for every week that the work remains uncommenced, or unfinished, after the proper dates…”.

Clause 25 provides for arbitration of disputes, but it also excludes certain matters from its purview. The relevant portion of Clause 25 reads as follows:

“The decision of the Superintending Engineer regarding the quantum of reduction as well as his justification in respect of reduced rates for sub-standard work, which may be decided to be accepted, will be final and would not be open to arbitration.”

The contract also specifies that if the contractor does not demand arbitration within 90 days of receiving intimation that the bill is ready for payment, the claims would be deemed waived.

Arguments

Appellant (M/s. Mitra Guha Builders) Arguments:

• The appellant argued that Clause 25 of the contract does not empower the Superintending Engineer to decide on the levy of liquidated damages.
• The appellant contended that the dispute regarding compensation for delay under Clause 2 read with Clause 25 is not an “excepted matter” and was rightly adjudicated by the Arbitrator.
• The appellant submitted that the High Court erred in re-appreciating the evidence and overturning the findings of the Arbitrator and the Single Judge under Section 37 of the Arbitration Act.
• The appellant argued that the liquidated damages were imposed as a counterblast to their claims, and thus, the Arbitrator rightly disallowed it.

Respondent (ONGC) Arguments:

• The respondent argued that the Arbitrator wrongly disallowed the liquidated damages, which were a pre-estimated and reasonable compensation for delay.
• The respondent submitted that the Arbitrator exceeded his jurisdiction by disallowing the liquidated damages, which was an “excepted matter” under Clause 2 of the contract.
• The respondent contended that the decision of the Superintending Engineer on the levy of liquidated damages is final and binding, and thus, not arbitrable.
• The respondent argued that the levy of liquidated damages was not an afterthought but a legitimate exercise of contractual rights.

The innovativeness of the argument by the Appellant was that the dispute relating to levy of compensation for delay provided under Clause 2 read with Clause 25 of the contract is not an “excepted matter” and the same has been rightly adjudicated upon by the learned Arbitrator.

The innovativeness of the argument by the Respondent was that the learned Arbitrator travelled beyond the terms of the contract and disallowed the liquidated damages to the respondent even though it was an “excepted matter”, not falling within his jurisdiction.

Issues Framed by the Supreme Court

The Supreme Court framed the following issues for consideration:

1. Whether the levy of pre-estimated liquidated damages and reasonable compensation by the Superintending Engineer, in terms of Clause 2 of the contract, is “arbitrable”?
2. Whether the respondent-ONGC is right in contending that the levy of liquidated damages in terms of Clause 2 of the contract is final and an “excepted matter” not falling within the jurisdiction of the Arbitrator, and whether the learned Arbitrator has travelled beyond the terms of the contract?

Treatment of the Issue by the Court

Authorities

The Supreme Court considered the following authorities:

On the finality of the Superintending Engineer’s decision:

• Vishwanath Sood v. Union of India and Another (1989) 1 SCC 657 – Supreme Court of India: The court relied on this case to emphasize that when a contract provides a mechanism for determining compensation by a specific authority (like the Superintending Engineer), and that decision is deemed final, it cannot be challenged in arbitration. The court reiterated that the question regarding the amount of compensation leviable under clause 2 has to be decided only by the Superintending Engineer and no one else.
• Food Corporation of India v. Sreekanth Transport (1999) 4 SCC 491 – Supreme Court of India: This case was cited to support the view that “excepted matters” do not require further adjudication since the agreement itself provides a named adjudicator, and the courts lack jurisdiction to entertain an application for reference to arbitration regarding disputes arising from these matters.

On the interpretation of contract clauses related to liquidated damages:

• Bharat Sanchar Nigam Limited and another v. Motorola India (P) Ltd. (2009) 2 SCC 337 – Supreme Court of India: This case was distinguished by the court. The court noted that in this case, the clause did not create a liability to pay liquidated damages but only provided for entitlement to collect damages. The court held that in BSNL’s case, there was a need to determine if there was a delay, which was a matter for arbitration. In contrast, in the present case, Clause 2 of the agreement was a complete mechanism for determining liability.

Judgment

The Supreme Court upheld the decision of the Division Bench of the High Court, ruling that the levy of liquidated damages by the Superintending Engineer was an “excepted matter” and not subject to arbitration. The court held that Clause 2 of the contract provided a complete mechanism for determining compensation for delay, and the Superintending Engineer’s decision was final.

How each authority was viewed by the Court?

• Vishwanath Sood v. Union of India and Another [CITATION]: The Supreme Court followed this case to emphasize that when a contract provides a mechanism for determining compensation by a specific authority, and that decision is deemed final, it cannot be challenged in arbitration.
• Food Corporation of India v. Sreekanth Transport [CITATION]: The Supreme Court relied on this case to support the view that “excepted matters” do not require further adjudication since the agreement itself provides a named adjudicator.
• Bharat Sanchar Nigam Limited and another v. Motorola India (P) Ltd. [CITATION]: The Supreme Court distinguished this case, noting that unlike the present case, the clause in BSNL’s case did not create a liability to pay liquidated damages but only provided for entitlement to collect damages, and required a determination of delay, which was a matter for arbitration.

What weighed in the mind of the Court?

The Supreme Court’s decision was primarily influenced by the explicit terms of the contract, particularly Clause 2, which conferred finality on the Superintending Engineer’s decision regarding liquidated damages. The Court emphasized that the parties had consciously agreed to this clause, and therefore, the matter was not arbitrable. The Court also relied on previous judgments that supported the concept of “excepted matters” in contracts. The Court was not swayed by the argument that the liquidated damages were a penalty, instead treating them as a pre-agreed compensation for delay.

Logical Reasoning:

The Court did not consider any alternative interpretations that would allow the matter to be arbitrable, given the clear language of Clause 2 and the precedent set by previous cases. The Court rejected the argument that the liquidated damages were a penalty, instead treating them as a pre-agreed compensation for delay.

The Court’s decision was based on the following reasons:

• The contract explicitly stated that the Superintending Engineer’s decision on compensation was final.
• The parties had consciously agreed to the terms of the contract, including the finality clause.
• Previous Supreme Court judgments supported the concept of “excepted matters” in contracts.
• The liquidated damages were not a penalty but a pre-agreed compensation for delay.

The following are the direct quotes from the judgment:

“The very Clause 2 itself would show that such a decision taken by the Superintending Engineer shall be final. The finality clause in the contract in terms of Clause 2 makes the intention of the parties very clear that there cannot be any further dispute on the said issue between the parties; much less before the arbitrator.”

“The intention of the parties to exclude some of the decisions of the Superintending Engineer from the purview of arbitration is clearly seen from the abovesaid clause. Claim No.6 made by the appellant is to declare that the penalty imposed by ONGC under Clause 2 was illegal and unwarranted and the amount withheld by ONGC was payable to the appellant. The very prayer to declare the amount levied by the Superintending Engineer as illegal is against the tenor of the terms of the contract (Clause 2) between the parties.”

“Once the parties have decided that certain matters are to be decided by the Superintending Engineer and his decision would be final, the same cannot be the subject matter of arbitration.”

There were no majority or minority opinions in this case. The three-judge bench unanimously agreed on the decision.

Key Takeaways

• Contract clauses that designate a specific authority to decide on certain matters, and declare that decision final, will be upheld by the courts.
• Parties should be aware of “excepted matters” clauses in contracts, as these matters are not subject to arbitration.
• Liquidated damages, when clearly defined in a contract, are treated as pre-agreed compensation for delay and not as a penalty.
• This judgment reinforces the importance of carefully drafting and understanding contract terms.

Directions

The Supreme Court directed that the amount of Rs.74,88,768/- along with accrued interest be paid to the respondent-ONGC. The balance of Rs.11,232/- (Rs.75,00,000 – Rs.74,88,768/-) along with accrued interest was ordered to be refunded to the appellant.

Specific Amendments Analysis

Not Applicable as no specific amendments were discussed in the judgment.

Development of Law

The ratio decidendi of this case is that when a contract clause specifies that the decision of a particular authority (such as a Superintending Engineer) on certain matters (such as liquidated damages) is final, such matters are considered “excepted matters” and are not subject to arbitration. This ruling reinforces the principle of upholding contractual agreements and the finality of decisions made by designated authorities within those agreements. This case does not change the previous positions of law but rather reaffirms the existing principles.

Conclusion

The Supreme Court’s judgment in M/S. MITRA GUHA BUILDERS (INDIA) COMPANY vs. OIL AND NATURAL GAS CORPORATION LIMITED clarifies that when a contract designates a specific authority to decide on certain matters and declares that decision final, those matters are “excepted matters” and not subject to arbitration. This ruling emphasizes the importance of understanding and adhering to contractual terms and reinforces the principle of finality in contractual agreements.

Category

• Contract Law
  • Arbitration Clause
  • Liquidated Damages
  • Excepted Matters
  • Construction Contracts
  • Clause 2
  • Clause 25
• Arbitration Law
  • Arbitration and Conciliation Act, 1996
  • Section 34, Arbitration and Conciliation Act, 1996
  • Section 37, Arbitration and Conciliation Act, 1996
• Contract Law
  • Clause 2, Contract Law
• Contract Law
  • Clause 25, Contract Law

FAQ

Q: What are “excepted matters” in a contract?
A: “Excepted matters” are specific issues or disputes that the parties agree will not be subject to arbitration. Instead, these matters are decided by a designated authority as specified in the contract, and their decision is considered final.

Q: What are liquidated damages?
A: Liquidated damages are a pre-agreed sum of money that one party pays to the other in the event of a breach of contract. They are meant to compensate for the losses caused by the breach.

Q: What does it mean when a contract says a decision is “final”?
A: When a contract states that a decision is “final,” it means that the parties have agreed to accept that decision without further challenge, including through arbitration or litigation.

Q: How does this judgment affect construction contracts?
A: This judgment reinforces the importance of carefully drafting and understanding construction contracts. Parties should be aware of clauses that designate specific authorities to decide on certain matters and declare those decisions final, as these matters will not be subject to arbitration.

Q: What should I do if I have a dispute related to liquidated damages in my contract?
A: If your contract has a clause similar to Clause 2 in this case, the decision of the designated authority (such as the Superintending Engineer) will likely be considered final. You may not be able to challenge this decision through arbitration. It is advisable to seek legal advice to understand your rights and obligations.