The Delhi High Court in the case of Delhi State Industrial & Infrastructure Development Corporation Ltd. v. M/s. H.R. Builders, FAO (OS) (Comm.) 77/2022 dated 03.06.2022, held that the issue preceding the ‘excepted matter’ in the agreement between the parties is an arbitrable subject matter, and can be decided by the Arbitral Tribunal.
FACTS
The Government of National Capital Territory of Delhi (“GNCTD”) had launched a project for the renovation and upgradation of 198 schools run by the GNCTD. Delhi State Industrial and Infrastructure Corporation Ltd. (hereinafter referred to as “the Appellant”) was entrusted with the implementation of part of the said project.
For this purpose, the Appellant invited tenders for carrying out the entire work including electrical and civil work for 25 schools. The bid of HR Builders (hereinafter referred to as “the Respondent”) was accepted and the said work was awarded to the Respondent.
Thereafter, an agreement was entered between the Appellant and Respondent for the execution of the said work. The agreement stipulated for handing over of 23 schools instead of 25 schools.
The Respondent caused a significant delay of 478 days in the completion of the work. As a result, the Appellant withheld the part payment of final bills and also made recoveries from the amount payable to the Respondent on account of the delay. The Appellant further sought damages from the Respondent, alleging that the executed work was faulty.
The Respondent claimed that it was entitled to the withheld payments and additional compensation due to escalation and prolongation of works, along with profits for the reduced scope of work arising out of the two schools which were not handed over to the Respondent for the execution of work.
As disputes arose between the parties, the Arbitration Clause under the agreement was invoked by the Respondent to refer the dispute to Arbitration. The Arbitral Tribunal was thereafter constituted with a Sole Arbitrator appointed by the Chief Engineer of the Appellant.
The Respondent’s claim submitted in its Statement of Claim was more than the claim made in its request for Arbitration. Further, the Respondent claimed for Arbitration costs, which was not included in the request for Arbitration. Thus, the claim filed before the Tribunal by the Respondent included disputes which were not referred to Arbitration initially.
The Respondent issued a separate letter thereafter requesting to modify the amount of the claim and enhance the dispute to include Arbitration costs as well. The said request was rejected by the Arbitral Tribunal and the Tribunal clarified that it would not exceed the claim that had been initially referred.
The Respondent then filed an application under Section 23(3) of the Arbitration and Conciliation Act, 1996 (hereinafter referred to as “the Act”) for amendment of claims. The Arbitral Tribunal allowed the addition of the claim for Arbitration costs, but did not allow the enhancement of the existing claim.
The Respondent subsequently filed a writ petition before the Delhi High Court. During the pendency of this petition, the Arbitral Tribunal rendered the Award directing the Appellant to pay to the Respondent the due amounts and dismissed the counterclaim of the Appellant. Hence, the petition before the Delhi High Court was withdrawn by the Respondent.
The Respondent filed objections under Section 34 of the Act with respect to the Tribunal’s previous Order which had rejected the Appellant’s enhanced claim. The Appellant also filed separate objections under Section 34 of the Act challenging the Award of the Tribunal. The said objections were dismissed by the Ld. Single Judge Bench of the Delhi High Court. Aggrieved, the present Appeal was preferred under Section 37 (1) (c) of the Act.
ISSUES BEFORE THE HIGH COURT
1. Whether the issue preceding the ‘excepted matter’ can be decided by the Arbitral Tribunal?
2. Whether the objection regarding ‘excepted matter’ can be raised after the conclusion of Arbitral proceedings?
3. Whether the Award passed by the Tribunal was patently illegal and in breach of the fundamental policy of Indian laws?
CONTENTIONS OF THE PARTIES
The Appellant contended that the amount withheld as compensation for delay is an “excepted matter”, as Clause 2 of the agreement between the parties declares the Project Director’s decision to levy compensation as final and binding. Thus, the said matter fell outside the jurisdiction of the Arbitral Tribunal.
In this regard, the Appellant relied on the Supreme Court’s ruling in Mitra Guha Builders (India) Company v. Oil and Natural Gas Corporation Limited, 2020 (3) SCC 22. The Appellant submitted that the compensation levied on account of delay was not arbitrary, as time was of the essence in the contract.
The Appellant argued that the Arbitral Tribunal had erred in awarding Labour Cess at 1% and DVAT at 3% of the quantum of work done, as the claim granted was beyond the rates approved by the concerned authority.
The Appellant further stated that as the Respondent did not include the escalation for labour and material component of works executed in the bills submitted by them, it was deemed that the Respondent had waived its claim in this regard.
The Appellant submitted that the computation of escalation by the Tribunal was not done as per the manner of computation of such amount laid down by Clause 10CC of the agreement. The Appellant argued that the Tribunal’s findings were patently erroneous as they were completely beyond the terms of the agreement, and inconsistent with the law laid down by the Supreme Court in State of Rajasthan v. Nav Bharat Construction Co., (2006) 1 SCC 86, Bharat Coking Coal Ltd. v. L.K. Ahuja and Co. (2001) 4 SCC 86 and Continental Construction Co. Ltd. v. State of M.P. (1988) 3 SCC 82, wherein it was observed that an Arbitrator cannot go beyond the terms of the contract in the guise of doing justice, and cannot pass an award contrary to the terms of the agreement.
The Appellant contended that the dismissal of the counterclaim was also patently erroneous as the Appellant suffered damages and loss of reputation on account of loss of work, as GNCTD had withdrawn the work of development of 20 new schools from the Appellant and transferred to another department due to prolongation and delay in completion of the work of upgradation of schools.
Further, the Appellant submitted that the Award rendered was illegal and in breach of the fundamental policy of law as laid down in Oil and Natural Gas Corporation Ltd. v. Saw Pipes Ltd. (2003) 5 SCC 705.
The Respondent contended that the issue pertaining to the quantum of compensation was an excepted matter, but not the determination of the preceding fact. The preceding fact determined was delay/prolongation which was not an excepted matter, and the Arbitrator had rightly concluded that compensation was unjustified on the ground of delay not attributable to the Respondent. Thus, the Respondent submitted that there was no patent illegality of breach of the fundamental policy of India, and the appeal was without merit.
DECISION AND FINDINGS
The High Court observed that Arbitration arises out of contracts and the parties are free to determine the jurisdiction and legal authority of the Arbitrator, including determining the disputes which are arbitrable and the exclusions to disputes being arbitrable known as ‘excepted matters.’
The High Court, on perusing Clause 2 of the agreement, noted that the computation of compensation by the specified Authority was final and binding and the ‘excepted matter’. However, the determination of whether the Respondent was responsible for the delay in completion was an arbitrable matter and not excluded by Clause 2 of the agreement.
Thus, the High Court held that the Arbitral Tribunal did not commit any jurisdictional error, as it only examined the existence of delay on the basis of which compensation could be paid, but did not assess the quantum of compensation payable in terms of Clause 2 of the agreement.
The High Court relied on the Supreme Court’s decision in J.G. Engineers Pvt. Ltd. v. Union of India & Anr. (2011) 5 SCC 758, wherein a similar conclusion was drawn by the Supreme Court on perusal of a similar clause, that the issue of determining if the delay was caused by the contractor was not an excepted matter, and only the issue of computation of compensation was excluded from Arbitration.
The High Court further noted that the objection to the Arbitral Tribunal’s jurisdiction was an afterthought as the said question was not raised during the Arbitration proceedings or before the Ld. Single Judge of the High Court, and the Appellant had itself joined the Arbitration proceedings through its counterclaim for recovery and damages. Thus, the High Court held that the Ld. Single Judge had rightly upheld the Arbitral Tribunal’s award based on evidence and pleadings, and that the Award did not suffer from any patent illegality.
Additionally, the High Court observed that the Arbitral Tribunal’s rulings on payment of Labour Cess and DVAT, and escalation costs to the Respondent were rightly upheld by the Ld. Single Judge on the basis of facts and evidence.
With regards to the Counter Claim, the High Court opined that the claim was not based on any evidence to prove any direct loss with a hypothetical calculation, and was never raised at the material time nor asserted by the Appellant that they had incurred any loss.
Thus, the High Court held that the decision of the Arbitrator in the Award, including dismissal of the Counter Claim, was well reasoned and based on the interpretation of various clauses of the agreement and facts of the case.
The High Court noted that the Award could not be termed as patently illegal or perverse, and the Ld. Single Judge had rightly held the challenge under Section 34 of the Act to be beyond the scope of judicial interference. Thus, the High Court dismissed the appeal as devoid of merits.
AMLEGALS REMARKS
Through this decision, the High Court highlighted the principle of ‘excepted matters’ within Arbitration and the extent of arbitrability of issues preceding or succeeding such excepted matters.
The High Court held that the issue preceding the excepted matter, i.e., the existence of delay attributable to the Respondent, was not an excepted matter as the agreement only excluded the computation of compensation arrived at by the specified Authority as non-arbitrable.
Additionally, the High Court emphasized that a challenge to the Arbitral Tribunal’s jurisdiction with regards to an excepted matter, which was not raised at the time of Arbitration, cannot be raised at a later stage in an application under Section 34 of the Act and would only be considered as an afterthought.
For any queries or feedback, please feel free to get in touch with rohit.lalwani@amlegals.com or riddhi.dutta@amlegals.com.
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