Nowadays an arbitration clause is present in almost all agreements. People who are party to an agreement are now preferring to settle disputes by way of arbitration rather than filing a suit in court. This shift in preference can be attributable to party autonomy provided by arbitration law.
Section 7 of the Arbitration and Conciliation Act, 1996 (Act) talks about arbitration agreement and gives liberty to the parties in an arbitration agreement to refer "all" or "certain" disputes which have arisen between the parties to arbitration proceedings. Section 7(1) of the Act is reproduced hereunder:
"7. Arbitration agreement.—(1) In this Part, "arbitration agreement" means an agreement by the parties to submit to arbitration all or certain disputes which have arisen, or which may arise between them in respect of a defined legal relationship, whether contractual or not."
It is a well-settled law that arbitrators are creatures of the contract and while adjudicating a dispute in hand, arbitrators cannot travel beyond the terms and conditions of the contract. Therefore, all the disputes that are referred to an arbitrator must arise out of that particular contract and the dispute must be within the scope of the arbitrator to decide.
There is a common trend in most commercial contracts that some of the disputes which may arise while execution of work, are reserved for the relevant authority to decide. Issues which are excluded from the scope of arbitration are called "excepted matters". Generally, in most construction contracts entered into with the government, the quantum of delay and compensation for the same is left to be solely adjudicated by one of the engineers who is an employee of that particular government department and the private contractor has no say in the decision of the said engineer. Consequently, one of the most important issues in a construction project i.e., adjudication regarding delay is made an excepted matter.
Interestingly, the issue of excepted matter came before the Supreme Court recently in the case of Mitra Guha Builders (India) Company v. Oil and Natural Gas Corporation Limited(Mitra Guha)1 wherein a three-judge bench comprising of hon'ble Justices R. Banumathi, A.S. Bopanna and Hrishikesh Roy adjudicated upon the issue whether excepted matters are non-arbitrable in nature and it was held in the affirmative stating that excepted matters are not arbitrable in nature.
However, prior to the judgment of Mitra Guha, various judgments on the issue of excepted matter have been pronounced. Some of these judgments have been discussed hereunder:
- Vishwanath Sood v. Union of India and Anr. (Vishwanath Sood)2: In this case, Clause 2 of the provision regarding compensation for delay in execution of works provided that if there was a delay on part of the contractor in executing the work, then the contractor would be liable to pay compensation equal to one percent or smaller amount as the Superintending Engineer would determine, and whose decision shall be final and "provided always that the entire amount of compensation shall not exceed 10 percent of the estimated cost of work as shown in the tender". Further, Clause 25 of the Dispute Resolution Clause in the agreement mentioned the phrase "except otherwise provided". Therefore, the question for determination was whether the issue of compensation to be paid was arbitrable or not. In this, the court held that "As we see it, Clause 2 contains complete machinery for determination of the compensation which can be claimed by the Government on the ground of delay on the part of the contractor in completing the contract as per the time schedule agreed between the parties. The decision of the Superintending Engineer, it seems to us, is in the nature of a considered decision which he has to arrive at after considering the various mitigating circumstances that may be pleaded by the contractor or his plea that he is not liable to pay compensation at all under this clause. In our opinion the question regarding the amount of compensation leviable under Clause 2 has to be decided only by the Superintending Engineer and no one else.
- Bharat Sanchar Nigam Limited v. Motorola India Private
Limited3:In this case, Clause 16.2 of the
contract provided that if the tenderer failed to deliver goods and
services on turnkey basis within the prescribed time period, then
the purchaser would be entitled to recover damages. The clause
further provided that "quantum of liquidated damages assessed
and levied by the purchaser shall be final and not challengeable by
the supplier". Clause 20.1 of the contract i.e. the Dispute
Resolution Clause provided that "except to the matters,
the decision to which is specifically provided under this
While arguing this case, Vishwanath Sood's judgment was relied upon and it was contended that the issue of liquidated damages was an excepted matter. However, the said contention was rejected by the hon'ble Supreme Court. While distinguishing the judgment of Vishwanath Sood, it was held that "the Superintendent Engineer acted as the revisional authority to decide disputes between the two parties by an adjudicatory process, there being complete machinery for settlement of the disputes in the relevant clause and most importantly, the Superintendent Engineer had the discretion on consideration of the facts and circumstances including mitigating facts, held no damages was payable".4 Therefore, the court had come to the conclusion that the determination of delay is not an excepted matter and therefore, the same is arbitrable.
- J.G. Engineers Private Limited v. Union of India (J.G. Engineers)5: In this case, the clause for compensation for delay was very similar to the case of Vishwanath Sood and the clause stated that if the contractor failed to comply with the time schedule and if there was any delay then the contractor would be liable to pay compensation equivalent to one percent or such small amount as the Superintending Engineer (whose decision shall be final) may decide on the estimated cost of the whole work for every day that the quantity of work remained incomplete. Also, the dispute resolution clause stated that "except where otherwise provided in the contract".
A two-judge bench of the Supreme Court held that "a party alleging breach cannot decide the question whether there was a breach" and therefore, the said issue had to be resolved by a proper adjudicatory forum. Therefore, the court had come to the conclusion that determination of delay was not an excepted matter and therefore, the breach had to be decided by the arbitrator.
Conclusion and Analysis
In the author's view, the case of Mitra Guha has set a wrong precedent by deciding that the issues that are "excepted" in the contact are not arbitrable and hence, the final authority on the "excepted matter" lies with the Superintending Engineer. While deciding the matter, the court considered the judgment of Vishwanath Sood and held that the case squarely applies to the case of Mitra Guha, however the case of J. G. Engineers was not considered at all by the hon'ble court, which also had identical clauses as in the case of Vishwanath Sood and Mitra Guha and therefore, the direct conflict between the two decisions of J.G. Engineering and Vishwanath Sood was never recognised by the court.
The issue of "delay" in construction contracts plays a significant role and the quantification of damages is done based on the quantum of delay. However, if one of the contracting parties is given the power to decide the breach of the other contracting party, then it directly violates the principle of "nemo judex in causa sua" i.e., no person can be a judge in his own cause.
It is of utmost importance to understand that the right to quantify damages arising out of a breach does not include the right to decide if there was any breach in the first place or not6. The quantum of damages that has to be paid by the defaulting party can be made an excepted matter, but it is an act of severe injustice to let a contracting party decide whether there was a breach of the contractual provisions or not.
It can be concluded that misinterpretation of such relevant clauses can result in severe injustice to an aggrieved party and would ultimately result in abuse of powers by the authority with whom such powers are vested under the contract.
2. (1989) 1 SCC 657
3. (2009) 2 SCC 337
4. (2009) 2 SCC 337
5. (2011) 5 SCC 758)
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