Ramnath International ...

vs Union Of India on 11 December, 2006

Supreme Court of India

Ramnath International ... vs Union Of India on 11 December, 2006
Author: H.K.Sema
Bench: H. K. Sema, R. V. Raveendran
CASE NO.:
Appeal (civil) 3167-3168 of 2005

PETITIONER:
Ramnath International Construction Pvt. Ltd

RESPONDENT:
Union of India

DATE OF JUDGMENT: 11/12/2006

BENCH:
H. K. SEMA & R. V. RAVEENDRAN

JUDGMENT:

J U D G M E N T H.K.SEMA,J.

The validity and legality of the judgment dated 31.10.2002 of the Division Bench of the High Court
of Madras in OSA. No. 27/1995 and 25/1996 is assailed in these appeals.

2. The appellant was awarded two contracts - the first for construction of LRMR Aircraft Hangar
and Airtech Hangar and connected works; and the second for construction of roads and allied works
at NAS Arakonam. In respect of the two contracts, hereinafter referred to as the Hangar Contract
and Road Contract, the tenders submitted by appellant were accepted on 10.10.1988 and 3/5.1.1989
respectively. The necessary agreements were executed between the parties. Disputes arose between
the parties in respect of those contracts and the matter was referred to Arbitration. The Arbitrator
after examining the oral and documentary evidence made his Awards dated 20.7.1993 and 5.3.1994.
Applications were filed before the learned Single Judge by the respondent herein for setting aside
the Awards. The learned Single Judge by orders dated 24.8.1994 and 22.9.1995 rejected the
applications and in each case made a rule of the court in terms of the award. Being aggrieved the
respondent filed OSA Nos. 27/1995 and 25/1996, which were partly allowed by the Division Bench
of the High Court. Hence, the present appeals by the claimant contractor.

3. It may not be necessary for us to refer to the entire facts leading to the filing of the present
appeals as the substantial question of law posed requires reference to limited facts. Suffice it to say
that awards of the learned Arbitrator related to claims under several heads. The controversy in these
appeals relate to award in respect of item no. 24 in the Hangar contract and items 13 to 16 in respect
of the road contract. The particulars thereof are extracted below :

Item No. Description of work Amount claimed Amount awarded Hanger Contract Amount due on
account of escalation in materials and labour Rs.2,77,41,692 Rs.51,36,015/98 Road Contract Loss of
profit due to turnover loss for staying beyond contract period Rs.2,34,78,404 Rs.41,51,847/50

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 Ramnath International ... vs Union Of India on 11 December, 2006

14. Additional compensation for work done beyond original contract period Rs.22,89,200 Loss of
profit on balance work due to termination of contract Rs.26,00,000

16. Escalation payable for the period 5.3.1992 to date of termination Rs.3,50,000

4. In regard to Hangar Contract, undisputedly, the contract work had to be completed in two phases,
the first phase by 31.10.1989 and the second phase by 30.4.1990. However, the contract work could
not be completed within the stipulated time, partly due to the default on the part of respondent. It is
also undisputed that on the request of the contractor, the employer gave several extensions by a
letter dated 28.2.1990 the period of completion of work was extended up to 30.6.1990; by a letter
dated 10.5.1991 it was extended up to 31.5.1991; by a letter dated 27.8.1991 it was extended up to
30.9.1991; by a letter dated 23.1.1992 the time was extended up to 15.4.1992; by a letter dated
15.5.1992 it was extended up to 28.5.1992 and by a letter dated 4.6.1992, it was further extended up
to 22.6.1992. The contract was subsequently terminated by the employer on 1.7.1992.

5. In respect of the road contract, the date of commencement of work was 3.1.1989. The due date of
completion was 2.11.1990 (21 months). The employer granted extensions from time to time on the
request of the contractor up to 31.5.1992. Subsequently, the contract was terminated by the
employer on 14.7.1992.

6. The basis of the disputed claims is that the execution of work was delayed on account of breaches
on the part of the employer and the employer is liable to compensate the contractor for all losses
and extra cost on account of such delay and extended execution.

7. These claims were resisted by the employer on the ground that the contractor himself was liable
for delays; that the employer had granted extension for the delays; and that the contract prohibits
the contractor from making any claim for compensation or otherwise, howsoever, arising as a result
of extension of time granted in terms of the contract.

8. The Arbitrator held that where the work was delayed on account of delays attributable to the
employer, grant of extension of time by the employer for completing of work does not exonerate the
employer from the liability to pay damages for breach on account of the delay caused by the
employer unless the employer establishes that the contractor has consented to accept the extension
of time alone, in satisfaction of his claims for the delay. The Arbitrator held that in these two
contracts, the employer was not released of his liability for damages on account of the delays, by
granting extension of time. He, therefore, proceeded to quantify the loss and awarded the amounts
as aforesaid. The awards of the Arbitrator on these items were affirmed by the learned Single Judge
by making the awards a rule of the court, by judgments dated 24.8.1994 and 22.9.1995.

9. The Division Bench of the High Court after considering the threadbare submissions on the
question of law arrived at a conclusion that the Arbitrator has exceeded its jurisdiction in making an
award towards claim no. 24 in the Hangar Contract and an award towards claim nos. 13 to 16 in the
Road Contract, as they were made in derogation of clause 11(C) of the contract, which prohibited the
contractor from making any claim for compensation or otherwise, howsoever, arising, as a result of

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extension of time granted under the contract.

10. The core questions which arise for our consideration are these :

(a) Whether claim no. 24 of Hangar Contract and claim nos. 13 to 16 of road contract are
unsustainable being in derogation of clause 11(C) of the contract, which prohibits any compensation
as a result of extension of time granted by the department?

(b) Whether the Arbitrator committed a legal misconduct for not acting in terms of clause 11(C) of
the contract though pleaded and submitted before him?

Re : Question (i)

11. Section 11 of the General Conditions of Contract relates to time, delay and extension. We extract
below the portions of section 11 relevant for our purpose:

"Section 11 : Time, Delay and Extension (A) Time is of the essence of the contract and is specified in
the contract documents or in each individual works order.

As soon as possible after contract is let or any substantial work order is placed and before work
under it is begun, the G.E. and the contractor shall agree upon the time and 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.
It shall include the forecast of the dates for commencement and completion of the various trades
processes or sections of the work, and shall be amended as may be required by agreement between
the G.E. and the contractor within the limitation of time imposed in the contract documents or
works order. If the work be delayed :

(i) by force majeure, or

(ii) by reason of abnormally bad weather, or

(iii) by reason of serious loss or damage by fire, or

(iv) by reason of civil commotion, local combination of workmen, strike or lockout, affecting any of
the trades employed on the work, or

(v) by reason of delay on part of nominated subcontractors, or nominated suppliers which the
contractor has, in the opinion of G.E., taken all practicable steps to avoid, or reduce, or

(vi) by reason of delay on the part of contractors or tradesmen engaged by government in executing
work not forming part of the contract, or

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(viii) by reason of any other cause, which in the absolute discretion of the accepting officer is beyond
the contractors control;

then in any such case the officer herein after mentioned may make fair and reasonable extension in
the completion dates of individual items or groups of items of works for which separate periods of
completion are mentioned in the contract documents or works order, as applicable.

x x x x x (B) If the works be delayed :

(a) by reason of non-availability of government stores in schedule B or

(b) by reason of non-availability or breakdown of government tools and plant listed in schedule C;

then, in any such event, notwithstanding the provisions hereinbefore contained, the accepting
officer may in his discretion, grant such extension of time as may appear reasonable to him and the
same shall be communicated to the contractor by the G.E. in writing. The decision so communicated
shall be final and binding and the contractor shall be bound to complete the works within such
extended time.

(C) No claim in respect of compensation or otherwise, howsoever arising, as a result of extensions

granted under condition (A) and (B) above shall be admitted."

Clause (C) provides that where extensions have been granted by reason of the delays enumerated in
Clause (A) which were beyond the control of the contractor, or on account of the delays on the part
of the employer specified in Clause (B), the contractor is not entitled to make any claim either for
compensation or otherwise, arising in whatsoever manner, as a result of such extensions. After
enumerating certain delays, sub-clause (viii) of Clause (A) specifically mentions delay on account of
any other cause beyond the control of the contractor. The causes for delays specified in clause A,
thus, encompass all delays over which the contractor has no control. This will necessarily include
any delays attributable to the employer or any delay for which both the employer and the contractor
are responsible. The contract thus provides that if there is any delay, attributable either to the
contractor or the employer or to both, and the contractor seeks and obtains extension of time for
execution on that account, he will not be entitled to claim compensation of any nature, on the
ground of such delay, in addition to the extension of time obtained by him. Therefore, the claims for
compensation as a consequence of delays, that is claim 24 of Hangar Contract and claims 13 to 16 of
Road Contract are barred by clause 11(C).

12. We are fortified in this view by several decision of this Court. We may refer to two of them. In
Associated Engineering Co. vs. Government of Andhra Pradesh [1991 (4) SCC 93], this Court was
concerned with an appeal which related to similar claims based on delays in execution. The High
Court had held (reported in AIR 1990 AP 294) thus :

Applying the principle of the above decision to the facts of the case before us, it must be held that
clause 59 bars a claim for compensation on account of any delays or hindrances caused by the

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department. In such a case, the contractor is entitled only to extension of the period of contract.
Indeed, such an extension was asked for, and granted on more than one occasion. (The penalty
levied for completing the work beyond the extended period of contract has been waived in this case).
The contract was not avoided by the contractor, but he chose to complete the work within the
extended time. In such a case, the claim for compensation is clearly barred by clause 59 -of the
APDSS which is admittedly, a term of the agreement between the parties.

This Court noticed that the claims were set aside by the High Court on the ground that those claims
were not supported by any agreement between the parties, and that the arbitrator had travelled
outside the contract in awarding those claims. This Court held that the said claims were not payable
under the contract and that the contract does not postulate, in fact prohibits, payment of any
escalation under those heads. It affirmed the decision of the High Court setting aside the award of
those claims.

In Ch. Ramalinga Reddy vs. Superintending Engineer [1999 (9) SCC 610], while considering the
similar claim, this Court observed thus :

"Claim 8 was for 'payment of extra rates for work done beyond agreement time at schedule of rate
prevailing at the time of execution'. The arbitrator awarded the sum of Rs.39,540. Clause 59 of the
A.P. Standard Specifications, which applied to the contract between the parties, stated that no claim
for compensation on account of delays or hindrances to the work from any cause would lie except as
therein defined. The claim falls outside the defined exceptions. When extensions of time, were
granted to the appellant to complete the work, the respondents made it clear that no claim for
compensation would lie. On both counts, therefore, claim 8 was impermissible and the High Court
was right in so holding."

We, therefore, answer the first question in the affirmative.

Re : Question (ii) :

13. The arbitrator in his two speaking Awards recorded the following finding regarding delay :

"From the facts and evidence placed before me, I find that the department cannot absolve itself of
partial breaches committed which are of fundamental nature and had snow-ball effect. The
department alone is not fully responsible, the contractor also has contributed to certain delays." (in
the Hangar Contract).

"The documents, the evidence and the arguments clearly indicate that the delay for completing has
been a joint responsibility of both the Department and Contractor" (in Road Contract).

Inspite of having held that both were responsible for the delay and having noticed the arguments
based on clause 11(C) of the General Conditions of contract, the Arbitrator proceeded to award
damages on the ground of delay on the reasoning that the contractor is entitled to compensation,
unless the employer establishes that the contractor has consented to accept the extension of time

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 Ramnath International ... vs Union Of India on 11 December, 2006

alone in satisfaction of his claim for delay. As rightly held by the High Court, which decision we have
affirmed while considering questions no. (i), clause 11 (C) of the General Conditions of Contract is a
clear bar to any claim for compensation for delays, in respect of which extensions have been sought
and obtained. Clause 11(C) amounts to a specific consent by the contractor to accept extension of
time alone in satisfaction of his claims for delay and not claim any compensation. In view of the
clear bar against award of damages on account of delay, the arbitrator clearly exceeded his
jurisdiction, in awarding damages, ignoring clause 11(C). In Associated Engineering Co. (supra) this
Court held :

"The arbitrator cannot act arbitrarily, irrationally, capriciously or independently of the contract. His
sole function is to arbitrate in terms of the contract. He has no power apart from what the parties
have given him under the contract. If he has travelled outside the bounds of the contract, he has
acted without jurisdiction ..."

x x x x A dispute as to the jurisdiction of the arbitrator is not a dispute within the award, but one
which has to be decided outside the award. An umpire or arbitrator cannot widen his jurisdiction by
deciding a question not referred to him by the parties or by deciding a question otherwise than in
accordance with the contract. He cannot say that he does not care what the contract says. He is
bound by it. It must bear his decision. He cannot travel outside its bounds. If he exceeded his
jurisdiction by so doing, his award would be liable to be set aside In the instant case, the umpire
decided matters strikingly outside his jurisdiction. He outstepped the confines of the contract. He
wandered far outside the designated area. He digressed far away from the allotted task. His error
arose not by misreading or misconstruing or misunderstanding the contract, but by acting in excess
of what was agreed. It was an error going to the root of his jurisdiction because he asked himself the
wrong question, disregarded the contract and awarded in excess of his authority. In many respects,
the award flew in the face of the provisions of the contract to the contrary."

In Rajasthan State Mines & Minerals Ltd. v. Eastern Engineering Enterprises & Anr. [1999 (9) SCC
283], this Court held thus :

"The rates agreed were firm, fixed and binding irrespective of any fall or rise in the cost of the work
covered by the contract or for any other reason or any ground whatsoever. It is specifically agreed
that the contractor will not be entitled or justified in raising any claim or dispute because of increase
in cost of expenses on any ground whatsoever. By ignoring the said terms, the arbitrator has
travelled beyond his jurisdiction as his existence depends upon the agreement and his function is to
act within the limits of the said agreement. This deliberate departure from the contract amounts not
only to manifest disregard of the authority or misconduct on his part but it may be tantamount to
mala fide action .It is settled law that the arbitrator is the creature of the contract between the
parties and hence if he ignores the specific terms of the contract, it would be a question of
jurisdictional error which would be corrected by the court and for that limited purpose the
agreement is required to be considered . He cannot award an amount which is ruled out or
prohibited by the terms of the agreement."

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14. In the view that we have taken the Arbitrator clearly misconducted himself in awarding
compensation under claim no. 24 under Hangar Contract and claim nos. 13 to 16 under the Road
Contract which was rightly set aside by the High Court in the order impugned herein, on the ground
that the Arbitrator had acted in excess of his jurisdiction.

15. There is no infirmity in the impugned order of the High Court. These appeals being devoid of
merits are, accordingly, dismissed. Parties are asked to bear their own costs.

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