Summary
The Supreme Court upheld the Division Bench's restoration of an arbitral award that had sustained an employer's deduction of liquidated damages for delayed completion of a construction contract, holding that the Single Judge, by reading the extension-of-time clause as excluding liquidated damages, had substituted his own plausible interpretation for the arbitrator's and so travelled beyond the grounds in Section 34 of the Arbitration and Conciliation Act, 1996.
Issues
- Whether the Single Judge, under Section 34 of the Arbitration and Conciliation Act, 1996, could set aside an arbitral award upholding deduction of liquidated damages on the ground that extension of time for completion and levy of liquidated damages cannot go hand in hand.
- Whether the Division Bench, in appeal under Section 37, was justified in reversing the Single Judge and restoring the award.
- Whether, on a reading of clauses 26, 27 and 28 of the contract and Sections 55, 73 and 74 of the Contract Act, the employer could levy liquidated damages despite having granted extensions of time.
Provisions considered
- Section 34, Arbitration and Conciliation Act, 1996Section 34 is the only remedy against an award and is not appellate in nature; an award may be set aside only on the grounds in sub-sections (2) and (2A). Where the arbitrator's view is possible and plausible, the court cannot re-appraise the evidence or adopt a different interpretation of a contractual clause; the Single Judge did exactly that and so exceeded the jurisdiction under Section 34. (¶¶ 21, 22, 23, 24, 28)
- Section 37, Arbitration and Conciliation Act, 1996Since the Single Judge had gone beyond Section 34 in setting aside the award, the Division Bench was justified in reversing that order in appeal under Section 37 and restoring the award. (¶¶ 6, 28)
- Section 55, Indian Contract Act, 1872Where time is of the essence, failure to perform within the stipulated time renders the contract voidable at the promisee's option; where it is not, the promisee is entitled to compensation for loss caused by the delay; and if performance is accepted at a time other than that agreed, compensation for the delay can be claimed only if notice of that intention is given at the time of acceptance. The Court noted that the employer had, on every extension, reserved its right to levy liquidated damages. (¶¶ 16, 17, 18, 20)
- Sections 73 and 74, Indian Contract Act, 1872Section 73 entitles the party suffering a breach to compensation for loss naturally arising from it; Section 74 entitles the party complaining of a breach to reasonable compensation not exceeding the sum named in the contract, whether or not actual loss is proved. The arbitrator had in any event found actual loss (rent paid on old premises and rent lost on the new premises) and the stipulated rate of 0.5% per week to be fair. (¶¶ 11.1, 11.2, 19, 20)
Held
- On a conjoint reading of clauses 26, 27 and 28 of the contract, a plausible view is that the liquidated damages clause (clause 26) is not controlled by the extension-of-time clause (clause 27): if the contractor fails to complete within the stipulated or extended time, the employer may deduct liquidated damages at the rate fixed in the Appendix. (¶¶ 12.1, 12.2, 13.1, 15)
- Where the employer granted every extension expressly without prejudice to its right to recover liquidated damages, and the contractor completed the work five months after the last extended date with the final extension being an ex post facto approval, the arbitrator's finding that liquidated damages were validly levied was a possible and plausible view. (¶¶ 16, 17, 28)
- Section 34 is a restrictive, summary jurisdiction to be invoked conservatively: an award cannot be interfered with merely because it is erroneous in law or because another interpretation of the contract is possible; if two views are possible, the arbitrator's view must prevail, and the court cannot travel beyond the grounds in Sections 34(2) and 34(2A). (¶¶ 22, 23, 24)
- The Single Judge, in holding that extension of time and levy of liquidated damages cannot go hand in hand and setting aside the award on that basis, substituted a different interpretation of clause 26 for the arbitrator's and thereby exceeded the jurisdiction under Section 34; the Division Bench was right to reverse that order under Section 37. (¶¶ 27, 28)
- Mere setting aside of a nil award did not in any event confer any benefit on the contractor. (¶ 28)
Result
Appeal dismissed; judgment of the Division Bench of the Madras High Court under Section 37 restoring the arbitral award upheld; no order as to costs.