THE STATE OF MADHYA PRADESH versus M/S SEW CONSTRUCTION LIMITED & ORS. on 18 November 2022

[2022] 9 S.C.R. 731

THE STATE OF MADHYA PRADESH

v.

M/S SEW CONSTRUCTION LIMITED & ORS.

(Civil Appeal No. 8571 of 2022)

NOVEMBER 18, 2022

[A. S. BOPANNA ANDPAMIDIGHANTAM SRI NARASIMHA, JJ.]

Arbitration – Arbitral Award – In the instant case, the Stateissued tender notice for construction of Masonry Dam and theappellant-contractor was successful bidder – During the courseof work, the contractor requested for an alternate quarry whichrequest was denied and the matter was referred for arbitration –Thereafter, the contractor made another request for anotheralternate quarry (Mahuar Quarry) – Upon inspection, theconstituted committee approved the request and a conditionalpermission was granted to the contractor – Despite conditionalpermission, the contractor raised claim of Rs 5,51,03,040/-towards escalated cost of transportation – The claim was rejectedby the authority but the same was accepted in arbitral proceedingby the Arbitrator – High Court upheld the award – Hence instantappeal – Held: A contractual clause which provides for thefinality of rates quoted by the Contractor and disallows any futureclaims for escalation is conclusive and binding on the partiesand if the clause debarring future claims permits escalationsubject to certain conditions, and the conditions are satisfied,which in the present case were actually satisfied as thecircumstances were beyond the control of the contractor, theContractor will have a right to claim escalation.

Contract: Government contracts – The rights and dutiesof the parties to the contract subsist or perish in terms of thecontract itself – Even if a party to the contract is a governmentalauthority, there is no place for discretion vested in the officersadministering the contract – Discretion, a principle within theprovince of administrative law, has no place in contractual mattersunless, of course, the parties have expressly incorporated it as apart of the contract – It is the bounden duty of the court while

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[2022] 9 S.C.R.

Ainterpreting the terms of the contracts, to reject the exercise ofany such discretion that is entirely outside the realm of thecontract.

Dismissing the appeal, the Court

HELD: 1. Determination of the claim for escalationBdepends on the construction of clause 3.11(A) of the contract,which provides that the claim for escalation will not beentertained unless there exist circumstances beyond thecontrol of the contract. Further, the claim is admissible onlyupon the written order of the Superintending Engineer inCcharge of the work. In instant case both conditions are satisfied.In the first instance, the inspection report clearly indicatesthat the original quarry is depleted of the sand and thereforean alternative quarry is necessary for the execution of thecontract. Secondly, this is a circumstance which is certainlybeyond the control of the Contractor. Further, the permissionDgranted by the Superintending Engineer is in completesatisfaction of the requirement of the clause. Therefore the claimfor escalation is in full satisfaction of the terms of the contract.[Para 18][739-C-E]

2. A contractual clause which provides for the finality ofErates quoted by the Contractor and disallows any future claimsfor escalation is conclusive and binding on the parties. If theclause debarring future claims permits escalation subject tocertain conditions, no claim is admissible if the conditions arenot satisfied. However, if the conditions are satisfied, theFContractor will have a right to claim escalation. This is acontractual right. The right originates and subsists by virtueof the contract itself. It is the duty of the Court, whileinterpreting the contract to decipher the true and correctmeaning the parties intended and enforce the rights arisingout of the contract. Officers administering the contract willGnot have any discretion whatsoever to admit or deny escalationafter the conditions specified in a contract are satisfied. [Para22][740-C-E]

3. The Executive Engineer has acted beyond the scopeof clause 3.11(A). Under the clause, if a circumstance beyondH

THE STATE OF MADHYA PRADESH v. M/S SEW CONSTRUCTIONLTD.

the control of the Contractor exists and the SuperintendingEngineer, in charge of work grants a written order to the effect,a right to seek escalation arises. When the two conditionsprovided under clause 3.11 (A) were satisfied, there was nodiscretion left with the Executive Engineer to impose anyfurther conditions for claiming escalation. The ExecutiveEngineer has certainly acted beyond the scope of the contract.The role of the Executive Engineer was only to forward thedecision of the Superintending Engineer and enable theContractor to raise a claim for escalation. [Para 23][740-E-G]

4. The rights and duties of the parties to the contractsubsist or perish in terms of the contract itself. Even if a partyto the contract is a governmental authority, there is no placefor discretion vested in the officers administering the contract.Discretion, a principle within the province of administrativelaw, has no place in contractual matters unless, of course, theparties have expressly incorporated it as a part of the contract.It is the bounden duty of the court while interpreting the termsof the contracts, to reject the exercise of any such discretionthat is entirely outside the realm of the contract. [Para 24][740-G-H; 741-A-B]

5. In the instant case, whether the escalation is justifiedor not is another matter, and it is for the Arbitral Tribunal todecide the admissibility of the claim depending on the evidenceon record. That will be a finding of fact. For the reason statedthe Arbitrator was justified in granting the claim for escalationas the conditions precedent for raising a plea for escalationare admittedly satisfied by the inspection report followed bythe letter of the Superintending Engineer. [Para 25][741-B-C]

CIVIL APPELLATE JURISDICTION: Civil Appeal No. 8571of 2022.

From the Judgment and Order dated 03.05.2019 of the High Courtof Madhya Pradesh, Bench at Gwalior in Arbitration Revision No. 04 of2009.

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ASaurabh Mishra, AAG, Abhinav Shrivastava, Sunny Choudhary,Madhav Gupta, Advs. for the Appellant.

Dr. Menaka Guruswamy, Sr. Adv., D. Bharat Kumar, Aman Shukla,Yash S. Vijay, Utkarsh Pratap, M. Chandrakanth Reddy, Sandeep Singh,Ms. Kaadambari, Navin Kr. Thakur, Rameshwar Prasad Goyal, Advs.Bfor the Respondents.

The Judgment of the Court was delivered by PAMIDIGHANTAM SRI NARASIMHA, J.

1. Leave granted.

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2. This appeal is against the decision of the High Court of MadhyaPradesh in an Arbitration Revision No. 4 of 2009 under Section 19 of theMadhya Pradesh Madhyastham Adhikaran Adhiniyam, 1983[1] wherebythe award of the Arbitral Tribunal was upheld.

3. The short facts leading to the Arbitral Award and thereafterDthe decision of the High Court may be stated as under.

4. The State issued a tender notice[2] for the construction of aMasonry Dam and eventually, Respondent No. 1 (hereinafter referredto as ‘the Contractor’) was selected as the successful bidder. A contractwas entered into on 06.11.1993 for a total consideration ofERs. 1,22,81,86,600/-, to be completed within a period of sixty months.

5. As the only issue arising for consideration, in this case, relatesto the claim of escalation made by the Contractor, the relevant clause isextracted hereunder:

“3.11(A) The quoted rates of the contractor shall be inclusiveof the leads and lifts and in no case separate payment forleads or lifts to any materials including water shall be payable.Similarly no leads or lifts for the materials issued by thedepartment as prescribed in the tender documents shall bepayable. The contractor shall bring approved quality ofmaterials. Different quarries are shown in Annexure C. Thedetails shown in the Annexure C are only as a guide to thecontractor but the contractor before tendering should satisfyhimself regarding the quantity and quality available and allother details of Annexure C and provide for any variation inrespect of leads, lifts, place and method of quarrying, type of F

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THE STATE OF MADHYA PRADESH v. M/S SEW CONSTRUCTIONLTD. [PAMIDIGHANTAM SRI NARASIMHA, J. ]

rocks to be quarried and all such other aspects in his tenderedrate. Later on any claim whatsoever shall not entertainedexcept where any quarry is changed for circumstance beyondthe control of contract under the written order ofSuperintending Engineer in-charge of work.”

6. Though the contract was entered into in 1993, the work wassuspended for a long time and it resumed on 18.09.2000. While carryingout the construction work under the contract, the Contractor requestedan alternate quarry on 07.03.2002, which was denied by the ExecutiveEngineer on 11.03.2002. The decision of the Executive Engineer wasalso confirmed by the Superintending Engineer on 12.12.2002 and thishas led the Contractor to seek a reference of the matter to arbitration[3](hereinafter referred to as ‘the first arbitration’).

7. While the above-referred claim for an alternative quarryfollowed by the reference to the arbitration was pending, the Contractorrenewed the request for an alternate quarry, this time for excavatingsand from Mahuar quarry. This request was made on 20.10.2002. Onthe basis of this request, a committee of two Executive Engineers andone Sub-Divisional Officer conducted an inspection of the original quarrythat was allotted to the Contractor i.e., the Barua Sand quarry as well asthe new proposed quarry i.e., the Mahuar Sand quarry. This inspectionreport dated 31.10.2002 suggested that there was no sand available inthe quarry originally allotted under the contract and there was justificationfor the request made by the Contractor for allotment of the Mahuarquarry which had sufficient stock of sand available.

8. Following the inspection report the Superintending Engineer byhis letter dated 12.11.2002 granted permission to the Contractor toexcavate sand from Mahuar quarry. It is important to mention here thespecific and categorical statement of the Superintending Engineer thatthe permission granted under his letter would be subject to the conditionsspecified in Clause 3.11(A) of the contract. The relevant portion of theletter is extracted hereinbelow:

“….Accordingly after inspection and discussion, thepermission for excavating the sand from Mahua river sandquarry, to the executive engineer is proposed, so theconstruction work would not adversely affected.In this regardon telephone, I have discussed the matter with the Chief

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AEngineer on 31/10/2002 and his inspection report dated 17/09/2002 and 18/09/2002 was referred in which it has beenmentioned that, if in Barua Nala sand Quarry the sand is notavailable then the sand from Mahua river be obtained, whichwas confirmed by him on 31/10/2002 during telephonicconversation…..B

….Therefore it is directed to the Executive Engineer,Madikheda Dam(concrete Dam), Sindh Project and ExecutiveEngineer, Sindh Project(Mud Dam), in place of Barua Nala,the sand of Mahuar River be used for construction of projectsunder clause 3.11A of the condition of contract agreement,Cthe permission is granted. The Executive Engineers are furtherdirected that they will grant permission to the respectivecontractor under clause 3.11A of the condition of contractagreement, so the construction work would not be adversely”affected.

D9. In compliance with the above-referred letter of theSuperintending Engineer, the Executive Engineer granted conditionalpermission to use the Mahuar quarry under his letter dated 23.12.2002which stated as under:

“Permission to collect sand from Mahua river is herebyEaccorded with following conditions.

1. It is assumed as per clause 3.11A that provision in the tenderrate already exist for extra expenditure due to change in lead,hence no payment for extra lead is admissible in this account,nor any claim on this subject shall be acceptable by this office.Fxxx

5. No extra time, fate or payment shall be allowed forconstruction to this change”

10. Despite the conditional permission granted by the ExecutiveGEngineer, the Contractor for the first time on 10.11.2006 raised a claimof Rs. 5,51,03,040/- towards escalation for the enhanced cost incurreddue to the transportation of sand from the Mahuar quarry. The requestwas rejected by the Superintending Engineer in his letter dated 14.12.2006,stating that:

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THE STATE OF MADHYA PRADESH v. M/S SEW CONSTRUCTIONLTD. [PAMIDIGHANTAM SRI NARASIMHA, J. ]

“As per the clause 2.25 of N.l.T. page 50 of the agreementand note Annexure -C page 85 which stat that “This statementis only for the guidance of the contractor. The Tender shouldsatisfy himself regarding availability of the required quantityand quality of materials.”

Thus as per this clause the tender is therefore supposed tosatisfy himself about the availability of the quantity and qualityof material to be used before tendering. The lead chart is forguidance only. Therefore this aspect is covered in the item ofworks of schedule of quantities (Annexure -1) appended withthe tender and no claim is entertained of this page.

Therefore according to above referred clause of agreementyour claim of sand for extra lead is not valid and hencerejected.”

11. Aggrieved by the above-referred rejection of the claim by theSuperintending Engineer, the Contractor raised a claim under Section 7of the Adhiniyam seeking resolution of the dispute through statutoryarbitration.

12. By Award dated 26.11.2008, the Arbitrator accepted the claimraised by the Contractor and awarded an amount of Rs. 5,51,03,040/-with 9% interest in favour of the Contractor. The revision filed by theState against the Award under Section 19 of the Adhiniyam was dismissedby the order impugned herein. The High Court rejected arguments ofthe State and allowed the claim of the Contractor on mainly three grounds:(a) the claim filed by the Contractor is not barred by limitation; (b) theprinciple of res judicata is not appliable, and (c) the Contractor is entitledto the escalation as provided in clause 3.11(A) of the contract.

Submissions by the Parties:

Submissions by the Parties:

13. Shri Saurabh Mishra, learned Additional Advocate Generalfor the State of Madhya Pradesh submitted that the claim made by theContractor is barred by res judicata. What he really means is that theoriginal claim made by the Contractor on 07.03.2002 leading to theinitiation and rejection of claims under the first arbitral award dated06.10.2007 become final, and therefore a similar claim is inadmissible.Shri Saurabh Mishra took us through the letters in the additionalcompilation evidencing the request for arbitration, the rejection by theExecutive Engineer dated 11.03.2002 and thereafter by the Superintending A

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AEngineer dated 12.12.2002, the communication for reference to arbitrationdated 24.12.2002, and its culmination into the first award dated06.10.2007. None of these facts are disputed by Ms. MenakaGuruswamy, learned Senior Advocate appearing on behalf of theRespondent No.1.B14. Shri Saurabh Mishra also argued that the letter of the B14. Shri Saurabh Mishra also argued that the letter of theSuperintending Engineer dated 12.12.2002 followed by the letter of theExecutive Engineer was implicitly accepted by the Contractor in letterand spirit and without any protest. It is only after a period of four yearsthat the Contractor for the first time raised a plea for escalation, claimingan amount of Rs. 5,51,03,040/- under a letter dated 10.11.2006. He would,Ctherefore, argue that this plea should not be permitted to be raised. Hefinally submitted that while the Superintending Engineer rejected eventhe belated request on 14.12.2006, the claim for arbitration was beyondthe period of limitation as per the contractual terms as the claim wasmade only on 10.12.2007.D

15. Countering the submissions of the State, Ms. MenakaGuruswamy submitted that sand is an essential ingredient for theexecution of the contract. Initially, the lead provided for her client was ata distance of 20 kilometers from the Baruanala quarry. The transportationfrom the lead and the lifting of the sand, together constitute an integralEpart of the cost. Both these components have a serious impact on theprofitability for the Contractor. According to her, it is an admitted factthat the Baruanala was depleted of sand and therefore, it becamecompelling to provide an alternative site for executing the contract.However, the alternative site is at an additional distance of 40 kilometersand therefore her client had to incur the extra cost for the transportationFof the sand. It is for this reason that the Superintending Engineer, as wellas the Executive Engineer, have granted the requisite permissions afterdue inspection and therefore, the claim for escalation is justified.

16. It was further argued that the first arbitral award dated06.10.2007 rejecting the previous claim will have no bearing on the presentGproceedings as the former related to the first part of the clause and thepresent arbitration would relate to a period thereafter. She argued thatas the request for arbitration relates to the later part of the clause, theearlier award cannot operate as res judicata.

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17. We may mention at this very stage that this argument has theeffect of bifurcating the contract into two parts which is an impermissibleinterpretation. The contract is a solitary agreement, intended to beperformed, executed and discharged as a single obligation. The rightsand obligations under the contract cannot be read separately by dividingit into two parts. This argument is, therefore, rejected at the outset.However, we will now proceed to consider the other submissions.

Analysis and Findings:

Analysis and Findings:

18. Determination of the claim for escalation depends on theconstruction of clause 3.11(A) of the contract, which provides that theclaim for escalation will not be entertained unless there existcircumstances beyond the control of the contract. Further, the claim isadmissible only upon the written order of the Superintending Engineer incharge of the work. In our view, both conditions are satisfied. In the firstinstance, the inspection report dated 31.10.2002 clearly indicates thatthe original quarry is depleted of the sand and therefore an alternativequarry is necessary for the execution of the contract. Secondly, this is acircumstance which is certainly beyond the control of the Contractor.Further, the permission granted by the Superintending Engineer dated12.11.2002 is in complete satisfaction of the requirement of the clause.We are of the opinion that the claim for escalation is in full satisfactionof the terms of the contract.

19. The most important submission of the State is that the claimfor arbitration is in fact barred by res judicata. We have examined thissubmission in detail and our findings are as follows.

20. The initial request for a change of quarry was made on07.03.2002. This request was rejected by the Executive Engineer on11.03.2002 and the same was confirmed by the Superintending Engineeron 12.12.2002. Without any factual basis justifying the need, or provingcircumstances beyond the control of the Contractor, a claim was madefor arbitration at the first instance on 24.12.2002. It is this reference thatthe Arbitrator considered and rejected by his award dated 06.10.2007.As is evident from the above, (a) the request for arbitration was made in2002 itself, (b) there was no proof of the fact that the Contractor was ina position which is beyond his control, (c) there was no written order bythe Superintending Engineer granting sanction for the change of quarry,(d) there were in fact letters of the Superintending Engineer as well as AB

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Athe Executive Engineer rejecting the claim for an alternate quarry. Thesefour factors make all the difference between the first arbitral award andthe present proceedings. Hence, the principle of res judicata is notapplicable.

21. A further question which remains for consideration is withBrespect to the letter of the Executive Engineer granting conditionalpermission. Shri Saurabh Mishra has submitted that while the Contractoraccepts the alternate quarry, they cannot wriggle out of the condition ofno escalation. We will presently deal with this submission.

22. A contractual clause which provides for the finality ofCrates quoted by the Contractor and disallows any future claims forescalation is conclusive and binding on the parties. If the clausedebarring future claims permits escalation subject to certainconditions, no claim is admissible if the conditions are not satisfied.However, if the conditions are satisfied, the Contractor will have aright to claim escalation. This is a contractual right. The rightDoriginates and subsists by virtue of the contract itself. It is the dutyof the Court, while interpreting the contract to decipher the trueand correct meaning the parties intended and enforce the rightsarising out of the contract. Officers administering the contract willnot have any discretion whatsoever to admit or deny escalationEafter the conditions specified in a contract are satisfied.

23. The Executive Engineer has in our opinion acted beyond thescope of clause 3.11(A). Under the clause, if a circumstance beyondthe control of the Contractor exists and the Superintending Engineer, incharge of work grants a written order to the effect, a right to seekFescalation arises. When the two conditions provided under clause 3.11(A) were satisfied, there was no discretion left with the ExecutiveEngineer to impose any further conditions for claiming escalation. TheExecutive Engineer, in our opinion, has certainly acted beyond the scopeof the contract. The role of the Executive Engineer was only to forwardthe decision of the Superintending Engineer and enable the ContractorGto raise a claim for escalation.

24. In the context of discretion, we may reiterate this principle.The rights and duties of the parties to the contract subsist or perishin terms of the contract itself. Even if a party to the contract is agovernmental authority, there is no place for discretion vested inH

the officers administering the contract. Discretion, a principle withinthe province of administrative law, has no place in contractualmatters unless, of course, the parties have expressly incorporatedit as a part of the contract. It is the bounden duty of the court whileinterpreting the terms of the contracts, to reject the exercise of anysuch discretion that is entirely outside the realm of the contract.

25. Returning to the facts of the present case, whether theescalation is justified or not is another matter, and it is for the ArbitralTribunal to decide the admissibility of the claim depending on the evidenceon record. That will be a finding of fact, with which we are not concerned.For the reason stated above, we are of the opinion that the Arbitratorwas justified in granting the claim for escalation as the conditions precedentfor raising a plea for escalation are admittedly satisfied by the inspectionreport dated 31.10.2002 followed by the letter of the SuperintendingEngineer dated 12.11.2002.

26. The last submission of Shri Saurabh Mishra that the HighCourt has acted beyond the scope of Section 19 of the Adhiniyam remainsto be considered. Section 19(2) of the Adhiniyam is as under:

“19. High Court’s power of revision: (1)…..

(2) If it appears to the High Court that the Tribunal —

(a) has exercised a jurisdiction not vested in it by law; or (b) has failed to exercise a jurisdiction so vested; or

(c) has acted in exercise of its jurisdiction illegally, or withmaterial irregularity; or (d) has misconducted itself or the proceedings; or (e) has made an award which is invalid or has been improperlyprocured by any party to the proceedings, the High Courtmay make such order in the case as it thinks fit.

(3) The High Court shall in deciding any revision under thissection exercise the same powers and follow the sameprocedure as far as may be, as it does in deciding a revisionunder Section 115 of the Code of Civil Procedure, 1908 (No.5of 1908).”

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A27. Having examined the matter in detail, we are of the opinionthat there are no errors of jurisdiction or acts of misconduct or events ofinvalidity or impropriety in the conduct of proceedings by the Arbitrator.For this reason, the High Court has rightly refrained from exercising itsrevisional jurisdiction under Section 19(2) by not interfering with theaward passed by the Arbitral Tribunal.B

28. For the reasons stated above, the Civil Appeal arising out ofSpecial Leave Petition (C) No. 907 of 2020 is accordingly dismissed.

29. Parties to bear their own costs.

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Devika Gujral

(Assisted by : Mahendra Yadav, LCRA)

Appeal dismissed.

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