Finality of Superintending Engineer’s Decision: ONGC v. Contractor

In a significant legal ruling, the Supreme Court of India addressed the case of ONGC and the Contractor, emphasizing the exclusivity of the Superintending Engineer’s decision on compensation for delays. The judgment established the finality of the Superintending Engineer’s determination, highlighting the importance of adhering to contractual adjudicatory processes. This landmark case sheds light on the distinct role of designated authorities in resolving disputes arising from contractual obligations.

Facts

  • The Division Bench highlighted that the notices given by the ONGC to the contractor regarding defects and liquidated damages were not a retaliatory measure.
  • The learned Single Judge found that the imposition of liquidated damages was akin to a penalty rather than a legitimate claim.
  • The Single Judge noted that a significant portion of the delay was attributable to the ONGC, casting doubt on their entitlement to liquidated damages.
  • The Arbitrator disallowed the imposition of liquidated damages, presuming it to be a penalty.
  • The High Court dismissed petitions challenging the Arbitrator’s decision on liquidated damages.
  • The Division Bench held that the decision of the Superintending Engineer on liquidated damages was final and not arbitrable as per the contract.
  • The Division Bench overturned the findings of the Arbitrator and the Single Judge, emphasizing the exclusivity of the Superintending Engineer’s decision.
  • The Division Bench clarified the interpretation of Clause 2 of the contract regarding liquidated damages and finality of the Superintending Engineer’s decision.
  • Appellant and respondent entered into a contract for construction work.
  • Work completion delayed until 24.05.1999 from the stipulated date of 21.08.1997.
  • Claimant invoked arbitration clause due to disputes.
  • Claimant’s delay was 371 days, while respondent’s delay was 160 days.
  • Claimant also responsible for delay in another project for ONGC.
  • ONGC claimed compensation for delays totaling 640 days.
  • Arbitrator found both parties responsible for delays.
  • Actual work commencement and completion dates differed from contract dates.

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Arguments

  • Mr. Bipin Prabhat, counsel for the appellant, argued against the High Court’s judgment
  • He asserted that Clause 25 of the contract does not empower the Superintending Engineer to decide on liquidated damages
  • The High Court’s failure to understand this distinction was highlighted in the argument
  • The respondent, ONGC, imposed pre-estimated liquidated damages and reasonable compensation in accordance with Clause 2 of the contract.
  • ONGC contends that the levy of liquidated damages in accordance with the contract is final and falls outside the Arbitrator’s jurisdiction.
  • The Arbitrator, in Arbitration Case No.297A/2002, disallowed the estimated liquidated damages presuming it to be a penalty.
  • The Division Bench upheld that the imposition of liquidated damages was not an afterthought and not within the Arbitrator’s jurisdiction.
  • The contract stipulated the work duration from 22.02.1996 to 21.08.1997, with delays attributed to both parties.
  • The Single Judge found both parties responsible for the delay and held that damages were payable by either party.

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Analysis

  • Clause 2 of the agreement between the parties confers the right to levy damages for delay exclusively upon the Superintending Engineer and is a complete mechanism for liability determination.
  • The decision of the Superintending Engineer regarding the quantum of reduction for sub-standard work is final and not subject to arbitration.
  • The compensation levied under Clause 2, determined by the Superintending Engineer, cannot be referred to an arbitrator.
  • The power to levy compensation for delay, as per the terms of the agreement, rests with the Superintending Engineer, and the decision is final.
  • The finality clause in the contract indicates that the decision of the Superintending Engineer cannot be challenged as illegal.
  • Clause 25 of the agreement outlines the procedure for settlement of disputes by arbitration.
  • The Superintending Engineer’s decision in writing regarding compensation in case of failure to comply with conditions is final.
  • If the Superintending Engineer changes, the new person can continue from where the previous one left off with mutual consent of both parties.
  • If the arbitrator originally appointed cannot continue, the Director of ONGC Ltd. can appoint a replacement.
  • The agreement between the parties explicitly states that the Senior Regional Manager has the authority to adjudicate on failures of contractors and their liability for losses, with the decision being final and binding on both parties.
  • In the present case, the Superintending Engineer has been designated as the final authority for determining compensation for delays, with his decision being considered conclusive and not subject to arbitration.
  • The Superintending Engineer’s decision on the amount of compensation under the contract clause is deemed to be the only valid assessment, and cannot be questioned in arbitration.
  • The Division Bench of the High Court rightfully overturned an arbitrator’s decision regarding liquidated damages, stating that such damages are adjustable against the final bill payable by the party.
  • In the legal precedent involving Bharat Sanchar Nigam Limited, a clause similar to the one in this case only conferred the entitlement to collect damages in case of delay, not a liability to pay liquidated damages.
  • The Supreme Court rulings in various cases have consistently upheld the finality of decisions made by designated authorities, such as the Superintending Engineer, in matters specified as ‘excepted matters’ in the contract.
  • The courts lack jurisdiction to entertain arbitration requests on issues deemed ‘excepted matters’ where the contract specifies a designated adjudicator, like the Superintending Engineer, whose decision is considered final.
  • Once parties agree to have certain matters adjudicated by a specific authority with final decision-making power, such matters cannot be subject to arbitration.
  • The case of Food Corporation of India further emphasized the importance of respecting the adjudicatory process outlined in the contract, rather than seeking alternative avenues like civil courts for resolving claims.
  • The impugned judgment is considered final and does not have any significant flaws for intervention.
  • The subject matter of the judgment could not have been resolved through arbitration.

Also Read: Railways vs. Contractors: Arbitration Appointment Dispute

Decision

  • Appellant deposited Rs.75,00,000 before the Supreme Court in compliance with the order.
  • Total amount of compensation/liquidated damages withheld by ONGC is Rs.66,99,117.
  • Balance of Rs.11,232 along with accrued interest to be refunded to the appellant.
  • Levy of compensation of Rs.32,79,828 in Arbitration Case No.297A of 2002 and Rs.42,08,940 in Arbitration Case No.297 of 2002.
  • Total amount awarded by the learned Arbitrator in favor of the appellant is Rs.1,24,47,416.
  • Amount of Rs.74,88,768 along with accrued interest ordered to be paid to ONGC.
  • ONCG has deposited Rs.2,10,41,965 towards satisfaction of the arbitral award.

Case Title: M/S. MITRA GUHA BUILDERS (INDIA) COMPANY Vs. OIL AND NATURAL GAS CORPORATION LIMITED

Case Number: C.A. No.-005511-005511 / 2012

Click here to read/download original judgement

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