SUPREME COURT REITERATES THAT AN ARBITRATOR CANNOT GO BEYOND THE TERMS OF A CONTRACT AND ALLOW ADDITIONAL CLAIMS

Recently, a three Judge Bench of the Supreme Court comprising of Justice K.M. Joseph, Justice Krishna Murari and Justice B.V. Nagarathna passed a Judgment dated 23-03-2023 in the matter of Union of India and Ors. vs. M/S. Bharat Enterprise Civil Appeal Nos. 3441-3442 of 2015 and observed that the Ld. Arbitrator cannot travel beyond the contours of the Contract dated 02-07-2001 executed by the Parties and thereby, allow the Additional Claims made by the Respondent, in contravention of the Contractual provisions.

Facts

i) In the present case, a Contract dated 02-07-2001 was executed between the Appellants-(1) Union of India, Ministry of Defence through Secretary, (2) Chief Engineer of Western Command, New Delhi, (3) Commissioner Works Engineer, Chandigarh, (4) Gamson Engineer, Chandigarh (Appellants) and the Respondent- M/s. Bharat Enterprise through its Sole Proprietor, Shri. U.V. Gupta, Panchkula (Respondent- Contractor), for repair of bathrooms and other allied works.

ii) The Appellant No. 2, Engineer-in-Chief certified that the maintenance period of the Contract expired on 18-01-2003.

iii) Accordingly, upon execution of work, the Respondent- Contractor submitted a Final Bill dated 13-02-2002 (Final Bill) with the Appellants, within the stipulated period of three (3) months from the date of completion of the work. However, the Bill amount was not paid for more than a period of one year.

iv) Thereafter, around a year later, the Respondent-Contractor sent a List of Additional Claims on 25-02-2003.

v) When the Respondent-Contractor issued a Notice invoking Arbitration Clause in the Contract for non-payment of dues, the Appellants then cleared the Final Bill dated 13-02-2002 and made the payment of Rs. 1,00,358/- on 25-11-2003, vide Voucher No.21/1307/BR-II. However, the Appellants did not pay the amounts claimed by the Respondent under the List of Additional Claims of 25-02-2003.

vi) Aggrieved, the Respondent-Contractor sent a Letter dated 08-09-2004 to the Appellants and informed the latter about invocation of Arbitration Clause and appointment of arbitration.

vii) The Respondent filed a Petition on 12-11-2007 under Section 11 (6) of the Arbitration and Conciliation Act 1996 (Arbitration Act) (Appointment of arbitrators) before the Hon’ble High Court of Punjab and Haryana at Chandigarh (High Court), which was allowed, vide Order dated 12-11-2007.

viii) Thereafter, a fresh Agreement for Arbitration was entered into by the Parties on 22-11-2007, thereby providing for appointment of a new arbitrator.

ix) A former District and Sessions Judge was appointed as a new arbitrator.

x) The Ld. Arbitrator passed an Award dated 16-07-2009, which was allowed in favor of the Respondent-Contractor.

xi) Aggrieved, the Appellants filed a Petition under Section 34 of the Arbitration Act (Application for setting aside arbitral award) before Shri. S.K. Aggarwal, District Judge, Chandigarh in ARB-168-2009.

xii) The Ld. District Court passed an Order dated 10-07-2013 and allowed the Section 34 Petition and set aside the Arbitral Award dated 16-07-2009, on the ground that as per Clause 65-A of the Contract, no further claims shall be made by the Contractor after submission of a Final Bill and these shall be deemed to have been waived and extinguished. Thus, as the Respondent’s Additional Claims were deemed to have been waived and extinguished by virtue of Clause 65-A of the Contract, hence, the Award directing payment towards such Additional Claims, was set aside by the District Court.

xiii) Aggrieved, the Respondent-Contractor filed an Appeal bearing FAO-4290-2013 before the High Court. The High Court, vide Judgment dated 11-02-2014, observed as follows:

(a) If the final bill was presented on 13.2.2002, and payment of the same was made belatedly on 25.11.2003 to the pecuniary disadvantage of the Contractor, then it would appear not to lie in the mouth of the Engineer-in-Charge/employer to invoke an exclusionary clause as is found embedded in Clause 65-A.

(b) Clauses 65 and 65-A cannot be read as waiver or extinguishment of right of a contractor, …. to lay further claims after the presentation of the final bill if money or interest is demonstrably owed by the offeror of the contract to the contractor. Thus, these two clauses justly deserve to be read against the offeror of the works contract in the light of the well established doctrine of contra proferentum applicable to the law of contracts.

(c) Accordingly, the High Court held that the aforementioned Clauses 65 and 65-A of the Contract are unfair and opposed to public policy / public good / public interest.

(d) Thus, the High Court overturned the District Court Order dated 10-07-2013 and allowed the Arbitral Award in favor of the Respondent-Contractor.

Supreme Court Observations

Aggrieved by the High Court Judgment dated 11-02-2014, the Appellants filed Civil Appeal Nos. 3441-3442 of 2015 before the Supreme Court. The Apex Court passed a Judgment dated 23-03-2023 and observed as follows:

1) That in the present case, the Respondent has failed to establish (i) if at all the Final Bill was raised by him under duress / coercion and (ii) as a result of which, he had to raise a List of Additional Claims.

2) Hence, the Final Bill cannot be said to have been overridden by the vitiating factors under the law such as coercion or compulsion, etc. Thus, the Bench held that when the Final Bill is deemed to be legally valid, there is no justified reason for raising Additional Claims with the Appellant. Moreover, in accordance with Clauses 65 and 65-A of the Contract, any claims made after submission of the Final Bill would anyway stand extinguished. Therefore, the Respondent was held to be not entitled to raise Additional Claims after submission of Final Bill, as per Clauses 65 and 65-A of Contract.

3) Further, the Ld. Arbitrator was bound to act within the contours of Clauses 65 and 65-A of the Contract, which provide that any claims made after submission of the Final Bill would stand extinguished. But the Arbitrator travelled against the terms of the said Clauses and passed an Award allowing Additional Claims submitted after submission of the Final Bill. Thus, the Bench observed that going against the terms of clauses 65 and 65A would indeed render the Award vulnerable on the basis that it is illegal being contrary to the contract and, therefore, without jurisdiction.

Conclusion

Therefore, based on the aforesaid observations, the Supreme Court allowed the Appellants’ Appeals and held that (i) the Respondent was not entitled to raise the Additional Claims after submission of the Final Bill, in terms of Clauses 65 and 65-A of the Contract and (ii) the Ld. Arbitrator could not have travelled beyond the contours of the Contractual provisions and allow such Additional Claims, vide Arbitral Award dated 16-07-2009. Hence, the Bench set aside the High Court Judgment dated 11-02-2014, which had upheld the aforementioned Arbitral Award.

The Apex Court further held that, in the present case, the Appellants had caused substantial delay in making payments to the Respondent-Contractor. Perhaps, if the final bill itself was not kept pending for such a long time, the entire dispute may not have arisen at all. Thus, the Bench directed the Appellants to pay Rs. 3 Lakhs to the Respondent as a full and final settlement of all claims of the Respondent.

Harini Daliparthy

Senior Associate

The Indian Lawyer