Bharat Sanchar Nigam Ltd. &Amp; ... vs Motorola India Pvt. Ltd on 15 September, 2008
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Supreme Court of India
Bench: Chatterjee]
REPORTABLE
IN THE SUPREME COURT OF INDIA
CIVIL APPELLATE JURISDICTION
CIVIL APPEAL NO.5645 OF 2008
[Arising out of SLP(C) No. 3459 of 2007] Bharat Sanchar Nigam Ltd.
& Anr. .......Appellants Versus
Motorola India Pvt. Ltd. ....Respondent JUDGMENT
TARUN CHATTERJEE, J.
1. Leave granted.
2. This appeal is directed against the judgment and final order dated 26th of
October, 2006 of the High Court of Kerala at Ernakulam in AR No 18 of 2006
whereby, the High Court had allowed the prayer for appointment of the
arbitrator at the instance of the respondents and directed the parties to
submit their disputes to arbitration.
3. The pivotal questions that need to be decided in this appeal are:
i) Whether the levy of liquidated damages under clause 16.2 of the
tender document is an 2
"excepted matter" in terms of clause 20.1 of the said document so
that the same cannot be referred to arbitration or looked into by the
arbitrator.
ii) Whether clause 62 of the special conditions of the tender document
will prevail over clause 16.2 of the general conditions of the contract.
4. The relevant facts, which would assist us in appreciating the controversy
involved are narrated in a nutshell, which are as follows:
The appellant had issued a notice inviting tender dated 4th of
January, 2001, calling upon the eligible bidders for turn key project on
planning, engineering, supply, installation and commissioning of Indian Mobile
Personal Communications System in the telecom circles of Kerala, Karnataka,
Tamil Nadu and Andhra Pradesh. The respondent submitted its bid in response to
the notice inviting tender and after the technical, commercial and financial
bid evaluation, the respondent was 3
awarded the tender and an Advance Purchase Order (APO) dated 5th of September,
2001 for phase I and Phase II was issued to it by the appellant. The purchase
order provided, inter alia, the terms for payment and the schedule for
delivery of the goods. It also provided for liquidated damages in the event of
failure on the part of the respondent to meet with the delivery schedule.
Clause 16.2 of the general conditions of the tender document provided for
liquidated damages to the extent of 0.5% of the value of the delayed quantity
of the goods and services for each week of delay or the part thereof for a
period of upto 10 weeks and thereafter charge 0.7% of the value of delayed
quantity or part thereof, for a period of upto 10 weeks thereafter. It is the
case of the appellants that the respondent had failed to complete phase I and
phase II of the project within the schedule as provided in the tender document,
and therefore, liquidated damages were imposed by the Tamil Nadu Circle of the
appellant on 21st of May, 2004 under clause 16.2 of the tender document,
quantification of which was 4
beyond the purview of the arbitration agreement. There was an exchange of
correspondence between the Tamil Nadu Circle of the appellant alleging the
delay in the purchase of goods and the respondents denying any such delay and
objecting to the levy of liquidated damages. On 24th of March, 2006, the
respondent invoked the arbitration clause by sending a letter through its
counsel to the appellants to which they did not concede and justified the
imposition of liquidated damages. The respondent filed an arbitration
application before the High Court of Kerala at Ernakulam for the appointment
of arbitrator under section 11 of the Arbitration and Conciliation Act, 1996 in
respect of the liquidated damages assessed by the appellant. In the counter
affidavit filed in the High Court, the appellant alleged that the liquidated
damages assessed and quantified by the appellant under clause 16.2 of the
tender document was an excepted matter as per clause 20.1 of the said document
and, therefore, not arbitrable. The High Court, as noted herein earlier, by the
impugned 5
judgment allowed the arbitration request of the respondents holding that the
imposition of liquidated damages by the appellant was not an "excepted
matter" and therefore, subject to arbitration. It is this judgment of the
High Court, which is impugned in this appeal, in respect of which leave has
already been granted.
5. Before proceeding further, we deem it appropriate to note the relevant
clauses of the tender document and the purchase order, which would assist us in
determining whether the matters alleged are an excepted matter. Clause 16.2
reads as under:-
"16.2. Should the tenderer fail to deliver the goods and services
on turn key basis within the period prescribed, the purchaser shall be entitled
to recover 0.5% of the value of the delayed quantity of the goods &
services, for each week of delay or part thereof, for a period upto 10 weeks and
thereafter at the rate of 0.7% of the value of the delayed quantity of the goods
and services for each week of delay or part thereof for another 10 weeks of
delay. In the present case of turn key solution of supply, installation and
commissioning, where the delayed portion of the delivery and provisioning of
services materially hampers effective user of the systems, Liquidated Damages
charged shall 6
be levied as above on the total value of the concerned package of the purchase
order. Quantum of liquidated damages assessed and levied by the purchaser shall
be final and not challengeable by the supplier."
Clause 20.1 which is the arbitration clause and provides for excepted
matters, i.e., those matters the decision to which is specifically provided in
the agreement itself reads as under:-
20.1 In the event of any question, dispute or difference arising under this
agreement or in connection there-with (except as to the matters, the decision to
which is specifically provided under this agreement), the same shall be referred
to the sole arbitration of the CGM, Kerala Telecom Circle, BSNL or in case his
designation is changed or his office is abolished, then in such cases to the
sole arbitration of the officer for the time being entrusted (whether in
addition to his own duties or otherwise) with the functions of the CGM, Kerala
Telecom Circle, BSNL or by whatever designation such an officer may be called
(hereinafter referred to as the said officer), and if the CGM Kerala Telecom
Circle or the said officer is unable or unwilling to act as such, then to the
sole arbitration of some other person appointed by the CGM, Kerala Telecom
Circle or the said officer. The agreement to appoint an arbitrator will be in
accordance with the Arbitration and Conciliation Act, 1996. 7
There will be no objection to any such appointment on the ground that the
arbitrator is a Government Servant or that he has to deal with the matter to
which the agreement relates or that in the course of his duties as a government
servant he has expressed his views on all or any of the matters in dispute. The
award of the arbitrator shall be final and binding on both the parties to the
agreement. In the event of such an arbitrator to whom the matter is originally
referred, being transferred or vacating his office or being unable to act for
any reason whatsoever, the CGM, Kerala Telecom Circle, BSNL or the said officer
shall appoint another person to act as an arbitrator in accordance with the
terms of the agreement and the person so appointed shall be entitled to proceed
from the stage at which it was left out by his predecessors.........."
Clause 15.2 of Section III of the tender document, which deals with the
"delays in the supplier's performance" reads as under:
"Delay by the Supplier in the performance of its delivery obligations
shall render the Supplier liable to any or all of the following sanctions,
forfeiture of its performance security, imposition of liquidated damages, and/or
termination of the contract for default".
8
Clause 62 of Section IV of the tender document which deals with liquidated
damages and incentive reads as under:-
"The bidder shall be charged liquidated damages at the rates as
defined in the General conditions of contract as contained in Section III for
any delay in the turnkey job entrusted to the bidder. However he shall be
provided an incentive @ 0.5% of the cost of the network of each service area
(Telecom Circle), for each week of early commissioning of the entire network in
that service area, subject to a maximum of 3% of the value of the contract of
the circle".
6. Since this appeal arises out of an order, which appointed an arbitrator, to
decide the dispute referred to by the respondent, we, in this appeal, need to
decide that whether in view of the arbitration clause in the tender document
provided under clause 20 of the said document, the breach specified in 16.2 is
an "excepted matter".
7. Mr. Gopal Subramaniam, Additional Solicitor General of India appearing on
behalf of the appellant contended that in view of the decision of this Court in
Vishwa Nath Sood 9
vs. UOI [(1989) 1 SCC 657], a conjoint reading of clause 16.2 and clause 20.1
would clearly show that clause 16.2 is covered under the excepted matters as
provided in clause 20.1 of the tender document. He further contended that the
High Court had erred in holding that the quantification of the liquidated
damages was subsequent to the decision of liability of liquidated damages to be
payable to the appellant. Therefore, he contended that the respondent had
specifically subscribed to each and every clause of the agreement without any
objection at the tender stage and accordingly, it was not open to them to claim
immunity from the contractual obligations. Thus, the matter in respect of
which the respondent sought reference to arbitration was "excepted
matter" in terms of clause 16.2 of the tender agreement.
In order to satisfy us in the aforesaid contentions, the learned
Additional Solicitor General, Mr. Gopal Subramanium placed strong reliance in
the case of Food Corporation of India Vs. Sreekanth Transport 1999 10
(4) SCC 491, which has given the following principles relating to
"Excepting matters" as under :- "1. These appeals by the grant
of Special Leave pertains to the effect of the usual `excepted clause' vis-`-vis
the arbitration clause in a Government contract. While it is true and as has
been contended, that the authorization of the arbitrators to arbitrate, flows
from the agreement but the High Court in the judgment impugned
thought it fit to direct adjudication of `excepted matters' in the
agreement itself by the arbitrators and hence these appeals before this Court.
2. At the outset, it is pertinent to note that in the usual Government
contracts, the reference to which would be made
immediately hereafter, there is exclusion of some matters from the
purview of
arbitration and a senior officer of the Department usually is given
the authority and power to adjudicate the same. The
clause itself records that the decision of the senior officer, being
the adjudicator, shall be final and binding between the parties - this is what
popularly known as `excepted matters' in a Government or
Governmental agencies' contract.
3. `Excepted matters' obviously, as the parties agreed, do not require
any further adjudication since the agreement itself provides a named adjudicator
- concurrence to the same obviously is
presumed by reason of the unequivocal
acceptance of the terms of the contract by 11
the parties and this is where the courts have found our lacking in its
jurisdiction to entertain an application for reference to arbitration as regards
the disputes arising therefrom and it has been the consistent view that in the
event the claims arising within the ambit of excepted matters,
question of assumption of jurisdiction of any arbitrator either with
or without the intervention of the court would not arise; the parties themselves
have decided to have the same adjudicated by a particular officer in regard to
these matters; what are these exceptions however are questions of fact and
usually mentioned in the contract documents and forms part of the
agreement as such there is no ambiguity in the matter of adjudication
of these
specialized matters and termed in the
agreement as the excepted matters....." Keeping the aforesaid
principles in mind, let us proceed further.
We may keep on record that the appellants alleged that respondents had not
completed phase I and phase II of the project within the schedule as provided
in the tender document whereupon the appellants had to impose liquidated
damages and invoke clause 16.2 of the tender document. But the respondents
refuted these 12
allegations. The contention of the respondent in this case was that the delay,
if any, was caused due to the appellant's delay in supplying necessary inputs
to the respondent. So the respondent contends that it had performed its part
of the contract in time and the blame for delay lies on the appellant. Thus it
is to be noted that there is a dispute between the parties on the question
whether any breach was committed in this case.
8. The appellant had contended before the High Court of Kerala that the levy of
the liquidated damages on the respondent was a matter outside the purview of
the scope of arbitration proceedings as it "squarely falls within the
exception provided under Clause 20 of Section III, being the matters for which
mode of decision is provided under the Agreement itself."
The respondent on the other hand contended that the claim of the
petitioner that the dispute pertaining to levy of liquidated damages falls
outside the arbitration agreement being an excepted matter is fallacious. 13
The High Court held that there was no reason why the arbitration request on
behalf of the respondent should not be allowed. It held that clause 16.2 is not
an excepted matter under clause 20 of the tender document.
9. Having heard the learned counsel for the parties and after examining the
judgment of the High Court and the other materials on record, we are of the
view that this appeal must be dismissed. Clause 20 is the arbitration clause
and provides that any question, dispute or difference arising under this
agreement or in connection therewith would be referred to arbitration. To this,
an exception is also provided which lays down that the matters, the decision to
which is specifically provided under this agreement, would not be referred to
arbitration. From a bare reading of clause 16.2 of Section III of the tender
document, it is clear that if the tenderer fails to deliver the goods and
services on turnkey basis within the period prescribed, the purchaser shall be
entitled to recover liquidated damages and the quantum of the liquidated
damages assessed and levied by the 14
purchaser shall be final and not challengeable by the supplier.
10. We are in full agreement with the findings of the High Court that there was
a dispute as to whether the respondent had at all acted in breach of any terms
and conditions of the tender document.
The question to be decided in this case is whether the liability of
the respondent to pay Liquidated Damages and the entitlement of the appellant,
to collect the same from the respondent is an excepted matter for the purpose
of clause 20.1 of the General Conditions of contract. The High Court has
pointed out correctly that the authority of the purchaser (BSNL) to quantify
the Liquidated Damages payable by the supplier Motorolla arises once it is
found that the supplier is liable to pay the damages claimed. The decision
contemplated under clause 16.2 of the agreement is the decision regarding the
quantification of the Liquidated Damages and not any decision regarding the
fixing of the liability of the 15
supplier. It is necessary as a condition precedent to find that there has been
a delay on the part of the supplier in discharging his obligation for delivery
under the agreement.
It is clear from the reading of clause 15.2 that the supplier is to be held
liable for payment of liquidated damages to the purchaser under the said clause
and not under clause 16.2. The High Court in this regard correctly observed
that it was not stated anywhere in clause 15 that the question as to whether
the supplier had caused any delay in the matter of delivery will be decided
either by the appellant/BSNL or by anybody who has been authorized on the terms
of the agreement. Reading clause 15 and 16 together, it is apparent that
clause 16.2 will come into operation only after a finding is entered in terms
of clause 15 that the supplier is liable for payment of liquidated damages on
account of delay on his part in the matter of making delivery. Therefore,
clause 16.2 is attracted only after the supplier's liability 16
is fixed under clause 15.2. It has been correctly pointed out by the High
Court that the question of holding a person liable for Liquidated Damages and
the question of quantifying the amount to be paid by way of Liquidated Dmages
are entirely different. Fixing of liability is primary, while the
quantification, which is provided for under clause 16.2, is secondary to it.
There is no provision in the agreement, apparent on the face of it, relating to
a decision made by any specified authority on the issue of levy of Liquidated
Damages, as is contemplated under clause 20.1 of the agreement which is
excepted from the purview of arbitration. No decision coming within the scope
of excepted matters under clause 20.1 is envisaged by any portion of the
agreement regarding the liability of the supplier to liquidated damages.
Quantification of liquidated damages may be an excepted matter as argued
by the appellant, under clause 16.2, but for the levy of liquidated damages,
there 17
has to be a delay in the first place. In the present case, there is a clear
dispute as to the fact that whether there was any delay on the part of the
respondent. For this reason, it cannot be accepted that the appointment of the
arbitrator by the High Court was unwarranted in this case. Even if the
quantification was excepted as argued by the appellant under clause 16.2, this
will only have effect when the dispute as to the delay is ascertained. Clause
16.2 cannot be treated as an excepted matter because of the fact that it does
not provide for any adjudicatory process for decision on a question, dispute
or difference, which is the condition precedent to lead to the stage of
quantification of damages. The above stated position can be ascertained
through the judgment of this Court in the case of State of Karnataka vs. Shree
Rameshwara Rice Mills, (1987) 2 SCC 160. This Court in the said case, made a
clear distinction between adjudicating upon an issue relating to a breach of
condition of contract and the right to assess damages arising from a breach of
condition. It 18
was held that the right conferred to assess damages arising from a breach of
condition does not include a right to adjudicate upon a dispute relating to the
very breach of conditions and that the power to assess damages is a subsidiary
and consequential power and not the primary power.
11.Clause 20.1 regarding excepted matters reads "In the event of any
question, dispute or difference arising under this agreement or in connection
there-with (except as to the matters, the decision to which is specifically
provided under this agreement)...". Therefore it is clear from this
provision, matters which will not fall within the arbitration clause are
questions, disputes or differences, the decision to which is specifically
provided under the agreement. Clause 16.2 is not a clause where in any decision
making power is specifically provided for with regard to any question, dispute
or difference between the parties relating to the existence of breach or the
very lack of liability for damages, i.e. the levy of Liquidated Damages. 19
12.The learned senior counsel for the appellant relied on the decisions of
this court in Vishwanath Sood vs. UOI [(1989) 1 SCC 657], and General Manager,
Northern Railway vs. Sarvesh Chopra [(2002) 4 SCC 45]. These cases, we are
afraid, will not be of any help to the appellants being distinguishable on
facts and having different contractual clauses. We may note that clause 16.2
cannot be treated as an excepted matter. This is because admittedly, it does
not, provide for any adjudicatory process for decision on a question, dispute
or difference, which is the condition precedent to lead to the stage of
quantification of damages nor is it a no claim or no liability clause.
In Vishwanath Sood's case (supra), it was held by this court that a
particular claim of the government was excluded because the Superintendent
Engineer acted as the revisional authority to decide disputes between the two
parties by an adjudicatory process, there being a 20
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. Again in the case of Sarvesh Chopra, this court had
held that the claims covered by the no claims clause, i.e., where the
contractor had given up the right to make a claim for breach on the part of the
government was not arbitrable in terms of the arbitration clause contained
therein and clause 63 of the general conditions of the contract which provided
for exclusion because no claim clause was excepted as such claims were simply
not entertainable. In view of the discussions made hereinabove, we hold that
the disputes raised by the respondents are arbitrable and not excepted from
scope of arbitration. 13.We feel that there are certain other issues that are
to be discussed while disposing of this appeal. The respondent contended in
its written submission filed before this court 21
on 14th May, 2007 that the quantum of damages calculated by the appellant in
respect of clause 16.2 of the tender document, simply cannot have the effect of
rendering all the above disputes as not being arbitrable. We find that there is
considerable merit in this argument. The true essence of any arbitration
agreement is to arbitrate the matters in a cordial way in respect of issues
where there is a dispute between the parties. To construe such limited words in
clause 16.2 as being so all encompassing would destroy the very foundation of
the bargain between the parties. The appellant in the present case is acting in
an unfair way by seeking to exclude, from arbitration, what it has agreed to
arbitrate in the first place.
14.The appellant contended that it has the unilateral right to determine the
Liquidated damages under clause 16.2 and that the quantum of Liquidated Damages
decided by the appellant, even if it is exorbitant, would be final and cannot
be challenged. We find the contention of the respondent that if the said
contention of the appellant is supported, it would mean that a party would be
held liable to damages of 22
whatever amount the other party demands without recourse to a remedy, to be
relevant and should be given due importance. Such a contention by the appellant
would be in violation of Section 28 and Section 74 of the Indian Contract Act.
15.The learned counsel of the appellants had submitted before this court that
it was the appellant, which had the right to appoint the arbitrator. This
submission cannot be accepted. The respondent had invoked the arbitration
clause on the ground that there was no delay on its part by sending a letter
to this effect to the appellants on 24th of March, 2006. On 25th April, 2006,
the appellants/BSNL replied stating that they had rightly recovered the
Liquidated Damages and that the recovery of the damages was not arbitrable. The
appointing authority in this matter, i.e., CGM Kerala, did not respond to the
notice requiring the appointment of arbitrator and failed to act within the
time prescribed under the Arbitration and Conciliation Act 1996. Since the
appointing authority appointed no arbitrator, the 23
respondent/Motorolla, on 25th of May, 2006, filed a petition under Section 11
of the said Act before the High Court at Kerala. In the case of Datar
Switchgear vs. Data Finance Lt. [(2000) 8 SCC 151], which was affirmed in Punj
Llyod Ltd. vs. Petronet MHB Ltd. [(2006) 2 SCC 638], it was held that once a
minimum of 30 days is expired and a petition is filed to the court, the
appointing authority loses the right to make the appointment. Therefore, the
appellant/BSNL has now lost its right to appoint any arbitrator for settling
the disputes under the agreement. 16.Further, CGM Kerala Circle has already
taken a decision as is evident from his letter dated 25th of April, 2006, that
the appellant was right in imposing the liquidated damages and therefore, the
question of such a person becoming an arbitrator does not arise as it would not
satisfy the test of impartiality and independence as required under Section 12
of the Arbitration and Conciliation Act, 1996. Moreover it would also defeat
the notions laid down under the principles of natural justice wherein it has
been 24
recognized that a party cannot be a judge in his own cause. The judgment of
this Court in State of Karnataka vs. Shree Rameshwara Rice Mills, (1987) 2 SCC
160, is significant in this matter. The Court had stated: ".....Even
assuming that the terms of Clause 12 afford scope for being construed as
empowering the officer of the State to decide upon the question of breach as
well as assess the quantum of damages, adjudication by the officer regarding the
breach of the contract can not be sustained under law because a party to the
agreement cannot be an arbiter in his own cause. Interest of justice and equity
require that where a party to a contract disputes the committing of any breach
of conditions the adjudication should be by an independent person or body and
not by the other party to the contract".
17.The provision under clause 16.2 that quantification of the Liquidated
Damages shall be final and cannot be challenged by the supplier Motorolla is
clearly in restraint of legal proceedings under section 28 of the Indian
Contracts Act. So the provision to this effect has to be held bad.
25
18.Pursuant to section 4 of the Arbitration and Conciliation Act, 1996, a
party who knows that a requirement under the arbitration agreement has not been
complied with and still proceeds with the arbitration without raising an
objection, as soon as possible, waives their right to object. The High Court
had appointed an arbitrator in response to the petition filed by the appellant.
At this point, the matter was closed unless further objections were to be
raised. If further objections were to be made after this order, they should
have been made prior to the first arbitration hearing. But the appellant had
not raised any such objections. The appellant therefore had clearly failed to
meet the stated requirement to object to arbitration without delay. As such
their right to object is deemed to be waived. 19.Finally we are of the
opinion that the contention of the Respondent that Clause 62 referring to
special clauses has an overriding effect on Clause 16.2, cannot be accepted..
There is in fact no conflict between clause 62 and 16.2. Clause 62 has two
parts in it. One part referring to the 26
Liquidated damages and the other part refers to incentives in case the
respondent/Motorolla performs its part of the contract within time. The part
dealing with Liquidated Damages under clause 62 in fact refers it back to
clause 16.2 dealing with the quantification of Liquidated Damages. So it is
apparent that there is no dispute between clause 62 and clause 16.2.
20.For the reasons aforesaid, we are of the view that the High Court was
justified in passing the impugned judgment and there is no infirmity in the
impugned order for which we can interfere with the order of the High Court. The
appeal is therefore dismissed. There will be no order as to costs.
................................J.
[Tarun Chatterjee]
New Delhi; ...................................J. September 15, 2008.
[Lokeshwar Singh Panta]
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