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Madhya Pradesh High Court · body

2018 DIGILAW 299 (MP)

General Manager v. Raisingh and Company

2018-03-13

HEMANT GUPTA, VIJAY KUMAR SHUKLA

body2018
ORDER Gupta, C.J. -- 1. The challenge in the present revision petition under section 19 of Madhyastham Adhikaran Adhiniyam, 1983 (hereinafter referred to as “the Act”) is to an Award dated 25.4.2016 whereby the respondent (hereinafter referred to as “the contractor”) has prayed for an Award of Rs.26,92,740/- on the ground that the amount of liquidated damages were not liable to be imposed. The contractor has also claimed interest @ 12% p.a. on the amount of liquidated damages claimed from the present respondents. 2. The learned Tribunal found that the respondents (Petitioners herein) are entitled to recover the liquidated damages @ 3% of the contract value i.e. Rs.5,65,73,288/- and the recovery made from the contractor in excess of it is liable to be refunded with interest @ 9% p.a. from the date of recovery until realization. 3. The contractor was awarded the work of Construction/Up-gradation and Maintenance of Roads under Package No. MP-0358 ADB of total contract value of Rs.5,65,73,288/-. An agreement was executed on 25.5.2006 and the work order Ex.P-1 was issued with stipulated period of 12 months for completion of the work including rainy season. As per the agreement, the start date shall be 15 days after the date of issue of notice; therefore, 7.6.2006 was the date for start of the work. Consequently, the stipulated date of completion was 6.6.2007 which, the learned Tribunal has observed that 9.6.2007 was the stipulated date of completion of the work. 4. The contractor sought extension of time for completion of work firstly vide letter dated 3.8.2007 (Ex.P-2). The extension was granted reserving the right to impose liquidated damages as per Clause 4.2 and 4.5 of the Special Conditions in the contract. Second extension of time was granted up to 31.3.2008 on 27.12.2007 (Ex. P-3) reserving the right to impose liquidated damages. Third and fourth extension was granted up to 30.6.2008 vide letter dated 8.5.2008 (Ex.P-4) and up to 31.12.2008 vide letter dated 1.10.2008 (Ex.P-5) but, reserving the right to impose liquidated damages. The contractor completed the work by 31.3.2009. The last extension was granted with liquidated damages @ 6% of the original contract value vide Ex.P-7 dated 24.6.2009. 5. The contractor submitted representation to quash the order of liquidated damages. The contractor completed the work by 31.3.2009. The last extension was granted with liquidated damages @ 6% of the original contract value vide Ex.P-7 dated 24.6.2009. 5. The contractor submitted representation to quash the order of liquidated damages. The contractor filed a writ petition before this Court which was decided on 10.1.2011 with a direction to the Chief Executive Officer to decide the representation dated 18.4.2011 by speaking order. It is thereafter, on 5.12.2011, the liquidated damages @ 6% was upheld. The liquidated damages worked out at Rs.33,94,405/-, out of which Rs.16,44,405/- were recovered from 31st running bill and balance of Rs.17,50,000/- was adjusted from miscellaneous deposits deducted from previous running bills. In these circumstances, the contractor prayed for an Award of Rs.26,92,740/-, recovered from it on account of liquidated damages. 6. Learned Tribunal found that intended completion date as per the contract agreement, is the date when extension of time was granted. Therefore, the liquidated damages could not be imposed under Clause 44 of the General Conditions of contract. The Tribunal held that the contractor did not fail to achieve any of the milestones prescribed in the contract during the period allowed for construction. Thus, imposition of liquidated damages is not in consonance with condition No. 44.1 read with Item No. 21 of the contract. However, the Tribunal found that the reasons assigned by the contractor for the delay are of trivial in nature. Thus, the power to impose liquidated damages cannot be treated to have been exercised totally illegally. Having said so, the Tribunal recorded the following findings : “19. The petitioner was expected and required to inspect the site and get acquainted with the site conditions. He cannot blame the employer for difficulties of trivial nature, which he was supposed to be acquainted with. The petitioner must have submitted the tender after getting acquainted to the site conditions and the alleged ground realities. Since the petitioner failed to complete the work within the stipulated period for completion and he is equally responsible for the delay caused in such completion, he is definitely liable to pay the liquidated damages to the extent of his responsibility in causing delay. The contractor has given eight reasons for the delay, as mentioned in Ex.P-17. Out of which, three were found to be correct. Petitioner found partly favour for reason No. 4 and 5. The contractor has given eight reasons for the delay, as mentioned in Ex.P-17. Out of which, three were found to be correct. Petitioner found partly favour for reason No. 4 and 5. Remaining three i.e., reason No.6, 7 and 8 were not found correct because the petitioner could have anticipated them by making inspection of the site. Considering the aforesaid, we find that the liquidated damages @ 3% are justified and the same is, therefore, reduced from 6% to 3%. Accordingly, the imposition of liquidated damages vide Ex.P-7 and P-17 is hereby upheld, however, the rate of liquidated damages is reduced from 6% to 3%. The respondents are found entitled to recover liquidated damages @ 3% of the contract value i.e., Rs.5,65,73,288/-, recovery made from the petitioner in excess of it is liable to be refunded to it with interest @ 9% p.a. from the date of recovery until realization. In the result, the reference petition is allowed in part in the aforesaid manner. Cost of litigation is awarded to the petitioner in proportion to its success. Lawyer’s fees as per schedule, if certified. Memo of costs be prepared accordingly.” 7. Learned counsel for the applicant/petitioner vehemently argued that intended completion date is a date on which the contractor should have completed the work i.e. 6.6.2007 or 9.6.2007. The extension of the period to complete the work does not extend the intended completion date, therefore, the finding recorded by the Tribunal that the liquidated damages were not liable to be imposed under initial part of Clause 44.1 is not correct. The tribunal has observed as under : “13. The C.E.O. of M.P.R.R.D.A. has clearly observed in his order Ex.P.17 dated 5.12.2011 that the Intended Completion Date was 9.6.2007. It has been so correctly observed because the work order was issued on 25.5.2006 and the start date was to be counted 15 days after the date of issue of notice to proceed with the work as per clause 6 of the contract agreement. Clause 44.1 of General Conditions of Contract makes liable the contractor to pay liquidated damages at the rate per week or part thereof stated in the Contract Data for the period that the Completion Date is later than the Intended Completion Date. Clause 44.1 of General Conditions of Contract makes liable the contractor to pay liquidated damages at the rate per week or part thereof stated in the Contract Data for the period that the Completion Date is later than the Intended Completion Date. This clause further empowers the employer to withhold the amount as liquidated damages at the same rate if the contractor fails to achieve the milestones prescribed in the Contract Data. In the case in hand, it is an admitted position that the contractor has completed the work by the intended completion date, meaning thereby; within the extended period of time, as revealed in the Completion Certificate date 31.3.2009 (Ex.P-19) as described in paragraph No. 2 above. In view of this factual position, liquidated damages were not liable to be imposed under initial part of clause 44.1.” 8. We have heard learned counsel for the parties and find that the Award suffers from material irregularity. The extension in time was granted to the contractor from time to time, reserving the right to impose liquidated damages, therefore, the contractor cannot dispute the levy of liquidated damages as it has failed to complete the awarded works within the time granted. The extension in time does not extend the period of completion of the agreement. It only permits the Contractor to complete works but also subject to payment of liquidated damages. The agreement contemplated imposition of liquidated damages up to the extent of 10% of the total contract value but, the liquidated damages @ 6% alone have been imposed. Thus the learned Tribunal could not have reduced the liquidated damages to 3% only for the reason that it finds it justified, when such damages were imposed in terms of the agreement executed between parties. The contractor has failed to complete the work within the time granted. Thus, the claim of liquidated damages was in terms of the contract. Therefore, the learned Tribunal has acted with material irregularity when reducing the amount of liquidated damages to 3%. The Arbitral Tribunal is not a Court of appeal and is bound by the terms of the agreement between parties. 9. Thus, the claim of liquidated damages was in terms of the contract. Therefore, the learned Tribunal has acted with material irregularity when reducing the amount of liquidated damages to 3%. The Arbitral Tribunal is not a Court of appeal and is bound by the terms of the agreement between parties. 9. In terms of section 19 of the Act, an Award of the Arbitral Tribunal is liable to be set aside even if it suffers from the material irregularity as the High Court in revision can interfere with the Award of Arbitral Tribunal on the following grounds : “(a) has exercised a jurisdiction not vested in it by law; or (b) has failed to exercise a jurisdiction so vested; or (c) has acted in exercise of its jurisdiction illegally, or with material irregularity; or (d) has misconducted itself or the proceedings; or (e) has made an award which is invalid or has been improperly procured by any party to the proceedings. the High Court may make such order in the case as it thinks fit.” 10. The Supreme Court in a judgment, reported as (2003)5 SCC 705 , (Oil and Natural Gas Corporation Ltd. v. Saw Pipes Ltd.) considered the claim of liquidated damages which could be interfered with by the Arbitral Tribunal constituted under the Arbitration and Conciliation Act, 1996. section 34 of the said Act empowers the Court of Principal Civil Court to set aside an Award inter alia on the ground if it is against public policy. The relevant extract from the judgment reads as under : “42. Further, in arbitration proceedings, the Arbitral Tribunal is required to decide the dispute in accordance with the terms of the contract. The agreement between the parties specifically provides that without prejudice to any other right or remedy if the contractor fails to deliver the stores within the stipulated time, the appellant will be entitled to recover from the contractor, as agreed, liquidated damages equivalent to 1% of the contract price of the whole unit per week for such delay. Such recovery of liquidated damages could be at the most up to 10% of the contract price of whole unit of stores. Such recovery of liquidated damages could be at the most up to 10% of the contract price of whole unit of stores. Not only this, it was also agreed that : (a) liquidated damages for delay in supplies will be recovered by paying authority from the bill for payment of cost of material submitted by the contractor; (b) liquidated damages were not by way of penalty and it was agreed to be genuine pre-estimate of damages duly agreed by the parties; (c) this pre-estimate of liquidated damages is not assailed by the respondent as unreasonable assessment of damages by the parties. 43. Further, at the time when respondent sought extension of time for supply of goods, time was extended by letter dated 4.12.1996 with a specific demand that the clause for liquidated damages would be invoked and the appellant would recover the same for such delay. Despite this specific letter written by the appellant, the respondent had supplied the goods which would indicate that even at that stage, respondent was agreeable to pay liquidated damages. 68. From the aforesaid discussions, it can be held that : (1) Terms of the contract are required to be taken into consideration before arriving at the conclusion whether the party claiming damages is entitled to the same. (2) If the terms are clear and unambiguous stipulating the liquidated damages in case of the breach of the contract unless it is held that such estimate of damages/compensation is unreasonable or is by way of penalty, party who has committed the breach is required to pay such compensation and that is what is provided in section 73 of the Contract Act. (3) Section 74 is to be read along with section 73 and, therefore, in every case of breach of contract, the person aggrieved by the breach is not required to prove actual loss or damage suffered by him before he can claim a decree. The Court is competent to award reasonable compensation in case of breach even if no actual damage is proved to have been suffered in consequences of the breach of a contract. The Court is competent to award reasonable compensation in case of breach even if no actual damage is proved to have been suffered in consequences of the breach of a contract. (4) In some contracts, it would be impossible for the Court to assess the compensation arising from breach and if the compensation contemplated is not by way of penalty or unreasonable, the Court can award the same if it is genuine preestimate by the parties as the measure of reasonable compensation. 69. For the reasons stated above, the impugned award directing the appellant to refund the amount deducted for the breach as per contractual terms requires to be set aside and is hereby set aside. 73. It is to be reiterated that it is the primary duty of the arbitrators to enforce a promise which the parties have made and to uphold the sanctity of the contract which forms the basis of the civilized society and also the jurisdiction of the arbitrators. Hence, this part of the award passed by the Arbitral Tribunal granting interest on the amount deducted by the appellant from the bills payable to the respondent is against the terms of the contract and is, therefore, violative of section 28(3) of the Act. 74. In the result, it is held that : (A) ........ (B) (1)The impugned award requires to be set aside mainly on the grounds : (i) there is specific stipulation in the agreement that the time and date of delivery of the goods was the essence of the contract; (ii) in case of failure to deliver the goods within the period fixed for such delivery in the schedule, ONGC was entitled to recover from the contractor liquidated damages as agreed; (iii) it was also explicitly understood that the agreed liquidated damages were genuine pre-estimate of damages; (iv) on the request of the respondent to extend the time limit for supply of goods, ONGC informed specifically that time was extended but stipulated liquidated damages as agreed would be recovered; (v) liquidated damages for delay in supply of goods were to be recovered by paying authorities from the bills for payment of cost of material supplied by the contractor; (vi) there is nothing on record to suggest that stipulation for recovering liquidated damages was by way of penalty or that the said sum was in any way unreasonable. (vii) In certain contracts, it is impossible to assess the damages or prove the same. Such situation is taken care by sections 73 and 74 of the Contract Act and in the present case by specific terms of the contract.” 11. In later judgment, reported as (2011)1 SCC 394 (Bharat Sanchar Nigam Limited v. Reliance Communication Limited) the Supreme Court has held as under : “47.According to Chitty on Contracts “whether a provision is to be treated as a penalty is a matter of construction to be resolved by asking whether at the time the contract was entered into the predominant contractual function of the provision was to deter a party from breaking the contract or to compensate the innocent party for breach. The question to be always asked is whether the alleged penalty clause can pass muster as a genuine pre-estimate of loss”. (See para 26-126 of Chitty on Contracts, 30th Edn.) The fact that damage is difficult to assess with precision strengthens the presumption that a sum agreed between the parties represents a genuine attempt to estimate it and to overcome the difficulties of proof at the trial. 48. According to the Law of Contract by G.H. Treitel (10th Edn.), a clause is penal if it provides for “a payment stipulated as in terrorem of the offending party to force him to perform the contract. If, on the other hand, the clause is an attempt to estimate in advance the loss which will result from the breach, it is a liquidated damages clause. The question whether a clause is penal or pre-estimate of damages depends on its construction and on the surrounding circumstances at the time of entering into the contract.” 53. Lastly, it may be noted that liquidated damages serve the useful purpose of avoiding litigation and promoting commercial certainty and, therefore, the Court should not be astute to categorize as penalties the clauses described as liquidated damages. This principle is relevant to regulatory regimes. It is important to bear in mind that while categorizing damages as “penal” or “liquidated damages”, one must keep in mind the concept of pricing of these contracts and the level playing field provided to the operators because it is on costing and pricing that the loss to BSNL is measured and, therefore, all calls during the relevant period have to be seen. (See Communications Law in India by Vikram Raghavan at p.639). Since Clause 6.4.6 represents pre-estimate of reasonable compensation, section 74 of the Contract Act is not violated. Thus, it is not necessary to discuss various judgments of this Court under section 74 of the Contract Act.” 12. The judgments in the cases of Saw Pipes Ltd. (supra), and in Reliance Communication Limited (supra), arises out of the Arbitration and Conciliation Act 1996. But the principal laid down in the aforesaid judgments are very well applicable in respect of the jurisdiction of Arbitral Tribunal even under the Act. In view of the aforesaid judgment, the Arbitrator under the Act cannot announce an Award in contravention of the terms of the contract. The agreement contemplates that the contractor shall be liable to pay liquidated damages at the most of 10% of the contract value. The extension in time was granted time and again on the request of the contractor with a specific condition that such extension is subject to payment of liquidated damages. The liquidated damages are being claimed on account of breach of the contract and that such amount cannot be said to be unreasonable or is by way of penalty. 13. Therefore, keeping in view the principle of law laid down in the aforesaid judgments and that the contract agreement providing for liquidated damages not exceeding 10% of the contract value, therefore, quantification of liquidated damages @ 6% could not have been interfered with by the learned Tribunal only for the reason that the Tribunal found to be justified. The terms of the contract are paramount to which the parties are bound. Since the liquidated damages were imposed in terms of the agreement entered into between the parties, the Tribunal could not have interfered with the amount of liquidated damages only for the reason that the contractor has claimed such amount through the statutory arbitration. 14. Consequently, the revision petition is accepted. The Award passed by the Tribunal is set aside.