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PETITIONER: VISHWANATH SOOD

       Vs.

RESPONDENT: UNION OF INDIA & ANR.

DATE OF JUDGMENT24/01/1989

BENCH: RANGNATHAN, S. BENCH: RANGNATHAN, S. MUKHARJI, SABYASACHI (J)

CITATION:  1989 AIR  952            1989 SCR  (1) 288  1989 SCC  (1) 657        JT 1989 (1)   585  1989 SCALE  (1)154

ACT:     Arbitration  Act,  1940: Section 3, 14, 17, 30,  31  and 33--Arbitration agreement--Clause providing penalty as  com- pensation to Department for default on part of contractor in adhering to time schedule--Compensation to be determined  by Superintending Engineering and none else--Award of compensa- tion--Whether liable to be questioned before Arbitrator.

HEADNOTE:     The  appellant undertook the construction of a  Farmers’ Community Centre Building by an agreement entered into  with the  Union of India and the State of Himachal  Pradesh,  the respondents in the appeal.     The agreement dated June 20, 1968 provided, by Clause 2, for the payment of compensation for delay, if the contractor should  have been guilty of delay in commencing the work  or in  completing it, the quantum of compensation to be  deter- mined  by the Superintending Engineer and that his  decision was final. Clause 25 provided for settlement of disputes  by arbitration.  It excluded from arbitration matters  or  dis- putes in respect of which provision had been made  elsewhere or otherwise in the contract.     Certain disputes arose between the parties, and in terms of  clause 25 of the agreement they were referred to a  sole arbitrator.     The Contractor submitted a claim in respect of 9  items, and the department filed a counter claim to the effect  that they  were entitled to receive from the Contractor a sum  of Rs.24,000 on account of payment of 10 per cent  compensation for not executing the work in accordance with the terms  and conditions of the agreement. The arbitrator gave his  award, and the same was filed in the Court.     The  Contractor  filed objections  for  modification  in respect  of items 1, 8 and 9 of his claim and item no. 1  of the  respondents’ counter claim. The department  also  filed its objections. The Single Judge dismissed the objections of the respondents and 289 allowed the appellants’ claim only in respect of item no.  1 of the respondents’ counter claim. The single Judge took the

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view that a reading of clause 2 with clause 25 made it clear that  any compensation under clause 2 could  be  adjudicated upon only by the Superintending Engineer or the  Development Commissioner  and that it was not open to the arbitrator  to have  entered  upon a reference in regard to this  claim  at all.     Both  parties filed appeals to the Division  Bench.  The Bench  reversed the order of the Single Judge  and  restored the award to its original terms. It held that inasmuch as  a bonafide  dispute can be raised by the contractor in  regard to  his liability to compensation under clause 2 and  as  no machinery  was  provided in clause 2 for the  resolution  of such dispute, there is ample justification for holding  that resort  can be had to arbitration under clause 25.  On  this view of the matter, the Bench did not agree with the  Single Judge that the arbitrator had traveled outside his jurisdic- tion in awarding compensation to the Government against  the contractor for the delay in executing the work.     In  the appeal to this Court it was contended on  behalf of the appellants that the terms of Clause 2 clearly  envis- age the determination of the amount of compensation for  the delay in the execution of the work only by the  Superintend- ing Engineer and specifically mentions that the decision  of the  Superintending Engineer in writing shall be final.  The opening  words of Clause 25, "Except otherwise  provided  in the  contract" clearly take out of the purview of Clause  25 any  dispute in respect of a claim under Clause 2.  Even  if Clause  25 be held applicable, the question of submitting  a dispute in this regard to the arbitrator could only arise if there had been a determination and a dispute under Clause 2. It  was further submitted that there was no dispute  at  all between the parties on the question of compensation and that a dispute cannot be said to arise merely because a  counter- claim  was for the first time put forward by the  Department before the arbitrator.     On  behalf of the respondent-Department the  appeal  was contested by contending that Clause 2 was in the natore of a penal  clause which automatically takes effect  irrespective of  any default. The clause made the contractor  liable  for the penalty prescribed therein whenever there was a delay in the  completion of the contract, whatsoever might have  been the  reason therefore, the question as to whether  the  con- tractor was at default or not being totally immaterial.  The Department was, therefore, entitled to automatically  deduct from  the bills payable to the contractor, the  compensation or penalty at the rate mentioned in Clause 2 290 or such reduced amount as may be determined in a  particular case by the Superintending Engineer and that if the contrac- tor  objected  to the deduction that would give  risc  to  a dispute which can be the subject matter of arbitration under Clause 25. Allowing the appeal,     HELD: 1. Clause 2 of the contract makes the time  speci- fied for the performance of the contract a matter of essence and  emphasises  the need on the part of the  contractor  to scrupulously  adhere  to the time schedule approved  by  the Engineer-in-charge. With a view to compel the contractor  to adhere to this time schedule, this clause provides a kind of penalty in the form of a compensation to the Department  for default in adhering to the time schedule. [297E-F]     2. Clause 2 contains a complete machinery for determina- tion of the compensation which can be claimed by the Govern- ment  on  the ground of delay on the part of  contractor  in completing  the contract as per the time schedule agreed  to

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between  the  parties. The decision  of  the  Superintending Engineer is in the nature of a considered decision which     has to arrive at after considering the various  mitigat- ing  circumstances that may be pleaded by the contractor  or his  plea that he is not liable to pay compensation  at  all under this clause. [298E-F]     3.  The  question regarding the amount  of  compensation leviable under Clause 2 has to be decided only by the Super- intending Engineer and no one else. [298G]     4.  The opening part of Clause 25 clearly excludes  mat- ters  like those mentioned in Clause 2 in respect  of  which any  dispute is left to be decided by a higher  official  of the Department. [299C]     5. The question of awarding compensation under Clause  2 is  outside the purview of the arbitrator and the  compensa- tion,  determined under Clause 2 either by the  Engineer-in- Charge  or on further reference by the Superintending  Engi- neer will not be capable of being called in question  before the arbitrator. [299D]     6. Clause 25 which is the arbitration clause starts with an  opening  phrase excluding certain matters  and  disputes from  arbitration and these are matters or disputes  in  re- spect  of which provision has been made elsewhere or  other- wise in the contract. These words can have reference only to provisions such as the one in paranthesis in Clause 2 291 by  which  certain types of determination are  left  to  the administrative authorities concerned. [299B-C]     7. The question of any negligence or default on the part of  the contractor has many facets and to say that  such  an important aspect of the contract cannot be settled by  arbi- tration but should be left to one of the contracting parties might  appear to have far reaching effects. In  the  instant case,  it  is  made clear that the  decision  regarding  non arbitrability  is only on the question of  any  compensation which the government might claim in terms of Clause 2 of the contract.  This  is not an undefined power.  The  amount  of compensation is strictly limited to a maximum of 10  percent and  with a wide margin of discretion to the  Superintending Engineer. It is this power that is kept outside the scope of arbitration. [299E, F, H; 300A]

JUDGMENT:     CIVIL  APPELLATE JURISDICTION: Civil Appeal No. 1524  of 1982.     From the Judgment and Order dated 5.9.1977 of the  Hima- chal Pradesh High Court in F.A.O. No. 8 of 1975.     A.B.  Rohtagi,  Mrs. Urmila Kapoor, Miss S.  Janani  and Naresh K. Sharma for the Appellant. Miss A. Subhashini for the Respondents. The Judgment of the Court was delivered by     RANGANATHAN, J. The appellant Vishwanath Sood  undertook the construction of a Farmers’ Community Centre Building  at Thanedhar  by  an agreement entered into with the  Union  of India  and  the State of Himachal Pradesh  dated  20.6.1968. Certain disputes arose between the parties to the  agreement and  in terms of clause 25 of the agreement, they  were  re- ferred  to  a sole arbitrator. The  contractor  submitted  a claim of Rs. 1,28,000 while the respondents also submitted a counter-claim.  By an award dated 20.3.1972, the  abritrator awarded  an amount of Rs.31,932 to the contractor and a  sum of Rs.21,504 to the respondents. The award was filed in  the court. The contractor filed an application in the court  for

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modification or correction of the award in respect of  three items  of  his  claim ( 1, 8 and 9) and item no.  1  of  the respondent’s  counter claim. The Department also  filed  its objections to the award and prayed that a sum of Rs.8,080.29 should  be awarded in favour of the Department or the  award remitted to arbitrator. The 292 learned  single  Judge dismissed the objections of  the  re- spondents. So far as the appellant’s prayers were concerned, he  allowed  the same only in respect of item 1 of  the  re- spondent’s  counter claim. He held that the  arbitrator  was not  justified  in  granting  to the  Government  a  sum  of Rs.20,000  against the contractor. Both the  contractor  and the respondents preferred appeals to the Division Bench. The Bench reversed the order of the learned single Judge. It set aside the order of the learned single Judge in so far as the sum  of Rs.20,000 was deleted thereby from the award of  the arbitrator. The award was restored to its original terms and the  contractor was held entitled to interest at 6 per  cent on  the  amount  found due to him after  adjusting  the  sum awarded  by  the  arbitrator in  favour  of  the  Government against the sum awarded in favour of the contractor.     The  contractor  has preferred this  appeal  by  special leave  from  the  order of the Division Bench  of  the  High Court.     Learned  counsel for the appellant pressed  the  conten- tions in respect of the four items to which he had  objected before  the  learned single Judge and  the  Division  Bench. Three  of these items pertain to the claims put  forward  by the  contractor  which were rejected by the  arbitrator  and held by the courts to have been rightly rejected. The  first claim  (item no. 1) made by the contractor was of a  sum  of Rs. 12,720 which, according to him, was the loss incurred by him by reason of the Department’s delay in handing over  the site  to him for executing the contract. The learned  single Judge  discussed  this aspect of the matter  at  length.  He observed  that, on this point, there was, on the  one  hand, oral  evidence  adduced on behalf of  the  Department  while there  was  only the bare denial of the  contractor  on  the other. He pointed out that the arbitrator had fully  consid- ered  the  matter and that it was not open to the  court  to re-assess the evidence and that there was no error  apparent on the face of the record. The second claim (item no. 8) was for a sum of Rs.6,172 being the amount kept as security with the  respondent.  In respect of this item also  the  learned single  Judge discussed the evidence which showed  that  the security amount had been properly adjusted by the Department which had been constrained to take up the work departmental- ly at the cost and risk of the contractor. He held that this was  an aspect which had been considered by  the  arbitrator and  a  proper conclusion arrived at. The  third  claim  put forward  by  the petitioner (item no. 9) was for  a  sum  of Rs.30,000,  claimed as compensation for an amount  spent  by the  contractor for the purchase of a truck for  this  work. The  learned  single Judge here again pointed  out  that  no material had been placed before 293 the  arbitrator by the contractor to show that he was  enti- tled to the amount and that, in any event, having regard  to the fact that the work was executed by the Department at the cost  and risk of the contractor, there was no  question  of the contractor preferring any claim in respect of this item. The above three claims of the petitioner were also  rejected by the Division Bench which pointed out that the award  made by the arbitrator was not a speaking award and that the face

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of the award did not show any error. We do not think that so far  as these claims are concerned, that the  appellant  has any  arguable  case at all. As pointed out by  the  Division Bench of the High Court, the award was a non-speaking award. The  arbitrator had considered the materials  placed  before him  and had arrived at his conclusions. The award does  not on the face of it disclose any error, much less any error of law,  which needs to be set fight. We therefore,  hold  that the  High Court was justified in affirming the award so  far as the rejection of these three claims is concerned.     The  position  in  regard to the counter  claim  of  the respondents  which  was allowed by the  arbitrator  and  the Division  Bench stands on a different footing. The  respond- ents’  claim before the arbitrator was that they were  enti- tled to receive from the contractor "Rs.24,000 on account of payment  of 10 per cent compensation on the tendered  amount for not executing the work in accordance with the terms  and conditions  of  the agreement". As against  this  claim  the arbitrator  awarded the respondents a sum of Rs.20,000.  The learned  single  Judge took the view that having  regard  to clause  2  of the contract (pertaining to the claim  by  the respondent)  read with clause 25 it was clear that any  com- pensation  under clause 2 could be adjudicated upon only  by the superintending Engineer or the Development  Commissioner and  that it was not open to the arbitrator to have  entered upon a reference in regard to this claim at all. In order to appreciate  the finding of the learned single Judge it  will be  useful to set out clauses 2 and 25 of the conditions  of contract on which his decision was based:               "Clause  2: Compensation for delay:  The  time               allowed  for carrying out the work as  entered               in  the tender shall be strictly  observed  by               the  contractor and shall be deemed to be  the               essence  of  the contract on the part  of  the               contractor  and  shall be  reckoned  from  the               fifteenth  day  after the date  on  which  the               order  to commence the work is issued  to  the               contractor.  The  work  shah  throughout   the               stipulated period of the contract be proceeded               with  all  due diligence  and  the  contractor               shall pay as compensation an amount               294               equal to one per cent, or such smaller  amount               as the Superintending Engineer (whose decision               in  writing shall be final) may decide on  the               amount of the estimated cost of the whole work               as shown in the tender for every day that  the               work remains uncommenced, or unfinished, after               proper  dates.  And further,  to  ensure  good               progress during the execution of the work, the               contractor  shall  be bound in  all  cases  in               which  the time allowed for any work  exceeds,               one  month (save for special jobs to  complete               one-eighth  of  the whole of the  work  before               one-fourth of the whole time allowed under the               contract  has  elapsed;  three-eighth  of  the               work,   before  one-half  of  such  time               has  elapsed,  and threefourth  of  the  work,               before three-fourth of such time has  elapsed.               However,  for special jobs if a  time-schedule               has  been submitted by the Contractor and  the               same  has  been accepted by  the  Engineer-in-               charge,  the contractor shall comply with  the               said  time-schedule. In the event of the  con-               tractor failing to comply with this condition,

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             he  shall be liable to pay as compensation  an               amount  equal to one per cent or such  smaller               amount  as the Superintending Engineer  (whose               decision in writing shall be final) may decide               on  the said estimated cost of the whole  work               for  every day that the due quantity  of  work               remains  incomplete; provided always that  the               entire amount of compensation to be paid under               the provisions of this clause shall not exceed               ten  per  cent, on the estimated cost  of  the               work as shown in the tender."               "Clause 25: Settlement of disputes by Arbitra-               tion:  Except where otherwise provided in  the               contract, all questions and disputes  relating               to the meaning of the specifications,  designs               drawings  and instructions  hereinbefore  men-               tioned and as to the quality of workmanship or               materials used on the work or as to any  other               question,  claim, matter or thing  whatsoever,               in  any way arising out of or relating to  the               contract,  designs, drawings,  specifications,               estimates, instruction, order, or these condi-               tions or otherwise concerning the works or the               execution  or  failure  to  execute  the  same               whether  arising  during the progress  of  the               work  or after the completion  or  abandonment               thereof shall be referred to the sole arbitra-               tion  of  the person appointed  by  the  Chief               Engineer,  Himachal Pradesh Public  Works  De-               partment  ........  " 295 The  Division  Bench  did not agree with  the  view  of  the learned  single  Judge. It pointed out that,  while  in  the ordinary  course,  the rate of compensation payable  by  the contractor  is one per cent of the amount of  the  estimated cost  of the whole work, under clause 2, the  Superintending Engineer is authorised to depart from this figure and deter- mine  the compensation at a smaller amount if there are  any extenuating  circumstances in favour of the contractor.  The question  however  was whether the  compensation  determined under  clause  2 is excluded from the scope  of  arbitration under  clause 25. The Division Bench answered this  question in  the  negative. It pointed out that the sine qua  non  of clause 2 was that the contractor should have been guilty  of delay  in  commencing the work or in completing it  but  the clause did not specify either the authority or the procedure for  determining whether the contractor is  responsible  for the  default. Observing that there can be a serious  dispute in a particular case as to the person who is responsible for the delay, the Bench took the view that the determination of this dispute cannot be excluded from the scope of clause 25. The Bench observed that inasmuch as a bona fide dispute  can be  raised by the contractor in regard to his  liability  to compensation under clause 2 and no machinery is provided  in clause 2 for the resolution of that dispute, there is  ample justification for holding that resort can be had to arbitra- tion  under  clause 25. The statement in clause 2  that  the decision of the Superintending Engineer is final,  according to  the  Bench,  merely constituted a  declaration  that  no officer in the Department could disturb his  quantification. But  this finality cannot be construed as extending  to  ex- clude the jurisdiction of the arbitrator under clause 25. On this  view  of the matter, the Division Bench  found  itself unable  to  agree  with the learned single  Judge  that  the arbitrator had traveled outside his jurisdiction in awarding

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a sum of Rs.20,000 as compensation to the Government against the contractor for the delay in executing the work.     It will be seen from the narration above that so far  as this  item  was  concerned, both parties  proceeded  on  the footing  that the claim of the Government was a claim  under clause 2 and that the arbitrator had awarded the sum only in terms  of clause 2. This is also borne out by the fact  that the claim of the Department was based on a percentage of the total  cost of the work and the restriction of the claim  to 10%  also appears to have been the result of the proviso  to clause  2.  The award, therefore, on a fair reading  of  it, contains  a grant by the arbitrator of compensation  to  the Government in terms of clause 2. It is therefore open to the parties  to urge before this Court, as they did  before  the High Court also, that, on a proper construction of clauses 2 and 25, 296 this  award  was not justified. It is in this  respect  that this  counter claim of the Department stands on a  different footing from the earlier claims of the contractor which have been  rejected  and  which, we have held  above,  have  been rightly rejected.     Learned  counsel  for the appellants contends  that  the terms of clause 2 clearly envisage the determination of  the amount of compensation for the delay in the execution of the work  only by the Superintending Engineer  and  specifically mentions that the decision of the Superintending Engineer in writing  shah  be  final. The opening words  of  clause  25: "Except  where otherwise provided in the  contract"  clearly take out of the purview of clause 25 any dispute in  respect of  a  claim under clause 2. He submitted  that  the  clause authorised  only the Superintending Engineer to go into  the question  whether there is any delay or not and the  reasons therefore  and to determine the rate at  which  compensation should  be charged from the contractor. If the  Engineer-in- charge levies a compensation under clause 2, the  contractor can  apply to the Superintending Engineer. If  the  Superin- tending  Engineer finds that there was no fault on the  part of  the  contractor at all he could waive  the  compensation under clause 2 and that cannot be challenged by the  Depart- ment  before the arbitrator. Per contra, where the  Superin- tending  Engineer confirms that there has been a  delay  for which compensation should be charged, it will not be open to the contractor to challenge the conclusion before the  arbi- trator.  Learned counsel also submitted that even if  clause 25 were to be held applicable, the question of submitting  a dispute in this regard to the arbitrator could only arise if there had been a determination and a dispute under clause 2. Clause  2 envisages that the Engineer-in-charge  should,  in appropriate cases, levy a compensation at the rate specified in that clause. If he did, it was open to the contractor  to dispute the same and approach the Superintending Engineer to reduce or waive the compensation for any reason  whatsoever. Or, it may be that, even where the Engineer-in-charge levied no  compensation, the Superintending Engineer could,  either on his own motion or on being moved by the department, after considering the facts charge a compensation with the quantum of which the department may not be satisfied in which  event a  dispute could arise. But in the present case neither  the Engineer-in-charge  nor  the  Superintending  Engineer   had determined any liability at all under clause 2. There was no compensation  levied against which there was any protest  by the  contractor,  and there was no matter submitted  to  the Superintending Engineer for determination. In these  circum- stances,  the  submission  of the learned  counsel  for  the

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appellant  is that there was no dispute at all  between  the parties on 297 the  question of compensation and that a dispute  cannot  be said  to  arise merely because a counter claim  is  for  the first time put forward by the Department before the arbitra- tor.     On  the other hand, the learned counsel for the  Depart- ment  contended  that clause 2 is in the nature of  a  penal clause which automatically takes effect irrespective of  any default.  He described it as an "agreed penalty" clause.  He stated  that the clause made the contractor liable  for  the penalty prescribed therein whenever there was a delay in the completion  of the contract, whatsoever might have been  the reason therefore, the question as to whether the  contractor was at default or not being totally immaterial. The  Depart- ment  was, therefore, entitled to automatically deduct  from the  bills  payable to the petitioner  the  compensation  or penalty  at the rate mentioned in clause 2 or  such  reduced amount  as  may be determined in a particular  case  by  the Superintending Engineer and that if the contractor  objected to  this deduction that would give rise to a  dispute  which can be the subject matter of arbitration under clause 25. He therefore  submitted  that the Division  Bench  has  rightly construed the terms of the contract and confirmed the  award made by the arbitrator.     We have gone through the judgment of the Division  Bench of the High Court and we have also considered the  arguments advanced  on  both sides. With great respect, we  find  our- selves unable to agree with the interpretation placed by the Division Bench on the terms of the contract. Clause 2 of the contract makes the time specified for the performance of the contract a matter of essence and emphasises the need on  the part  of the contractor to scrupulously adhere to  the  time schedule approved by the Engineer-in charge. With a view  to compel the contractor to adhere to this time schedule,  this clause provides a kind of penalty in the form of a compensa- tion  to the Department for default in adhering to the  time schedule.  The  clause envisages an amount  of  compensation calculated  as  a percentage of the estimated  cost  of  the whole work on the basis of the number of days for which  the work  remains  uncommenced or unfinished to  the  prescribed extent  on  the  relevant dates. We do not  agree  with  the counsel for the respondent that this is in the nature of  an automatic levy to be made by the Engineer-in charge based on the  number  of days of delay and the  estimated  amount  of work.  Firstly, the reference in the clause to the  require- ment that the work shall throughout the stipulated period of the contract be proceeded with due diligence and the  refer- ence in the latter part of the clause that the  compensation has  to be paid "in the event of the contractor  failing  to comply with" the prescribed time 298 schedule  make  it clear that the levy  of  compensation  is conditioned on some default or negligence on the part of the contractor.  Secondly,  while the clause fixes the  rate  of compensation at 1 per cent for every day of default it takes care to prescribe the maximum compensation of 10 per cent on this  ground  and it also provides for a discretion  to  the Superintending Engineer to reduce the rate of penalty from 1 per cent. Though the clause does not specifically say so, it is clear that any moderation that may be done by the  Super- intending Engineer would depend upon the circumstances,  the nature and period of default and the degree of negligence or default  that  could be attributed to the  contractor.  This

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means  that the Superintending Engineer, in determining  the rate  of compensation chargeable, will have to go  into  all the aspects and determine whether there is any negligence on the  part of the contractor or not. Where there has been  no negligence on the part of the contractor or where on account of  various  extraneous  circumstances referred  to  by  the Division  Bench such as vis major or default on the part  of the  Government or some other unexpected circumstance  which does not justify penalising the contractor, the Superintend- ing  Engineer will be entitled and bound to reduce  or  even waive the compensation. It is true that the clause does  not in  terms  provide for any notice to the contractor  by  the Superintending Engineer. But it will be appreciated that  in practice the amount of compensation will be initially levied by  the Engineer-in-charge and the  Superintending  Engineer comes  into the picture only as some sort of  revisional  or appellate  authority  to  whom the  contractor  appeals  for redress. As we see it, clause 2 contains a complete  machin- ery  for  determination  of the compensation  which  can  be claimed by the Government on the ground of delay on the part of the contractor in completing the contract as per the time schedule agreed to between the parties. The decision of  the Superintending Engineer, it seems to us, is in the nature of a  considered decision which he has to arrive at after  con- sidering  the various mitigating circumstances that  may  be pleaded by the contractor or his plea that he is not  liable to pay compensation at all under this clause. In our opinion the  question regarding the amount of compensation  leviable under clause 2 has to be decided only by the  Superintending Engineer and no one else.     The  Division  Bench  has construed  the  expression  in clause 2 in parenthesis that "the Superintending  Engineer’s decision shall be final" as referring only to a finality qua the  department; in other words, that it only constitutes  a declaration that no officer in the department can  determine the  quantification  and that the  quantum  of  compensation levied by the Superintending Engineer shall not be 299 changed without the approval of the Government. After refer- ring to certain judicial decisions regarding the meaning  of the  word  "final" in various statutes, the  Division  Bench concluded that the finality cannot be construed as excluding the  jurisdiction of the arbitrator under clause 25. We  are unable to accept this view. Clause 25 which is the  arbitra- tion clause starts with an opening phrase excluding  certain matters and disputes from arbitration and these are  matters or  disputes  in respect of which provision  has  been  made elsewhere  or otherwise in the contract. These words in  our opinion  can have reference only to provisions such  as  the one  in  parenthesis in clause 2 by which certain  types  of determinations  are left to the  administrative  authorities concerned. If that be not so, the words "except where other- wise provided in the contract" would become meaningless.  We are  therefore  inclined to hold that the  opening  part  of clause  25 clearly excludes matters like those mentioned  in clause  2  in  respect of which any dispute is  left  to  be decided by a higher official of the Department. Our  conclu- sion, therefore, is that the question of awarding  compensa- tion under clause 2 is outside the purview of the arbitrator and that the compensation, determined under clause 2  either by  the  Engineer-in-charge or on further reference  by  the Superintending Engineer will not be capable of being  called in question before the arbitrator.     We may confess that we had some hesitation in coming  to this  conclusion. As pointed out by the Division Bench,  the

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question  of  any negligence or default on the part  of  the contractor has many facets and to say that such an important aspect of the contract cannot be settled by arbitration  but should  be  left  to one of the  contracting  parties  might appear  to have far reaching effects. In fact, although  the contractor  in  this  case might object to  the  process  of arbitration  because  it has gone against  him,  contractors generally  might  very well prefer to have the  question  of such  compensation decided by the arbitrator rather than  by the  Superintending Engineer. But we should like to make  it clear that our decision regarding non arbitrability is  only on  the  question of any compensation which  the  Government might  claim in terms of clause 2 of the contract.  We  have already pointed out that this is a penalty clause introduced under  the  contract  to ensure that the  time  schedule  is strictly  adhered  to. It is something which  the  Engineer- incharge  enforces from time to time when he finds that  the contractor is being recalcitrant, in order to ensure  speedy and proper observance of the terms of the contract. This  is not  an  undefined  power. The  amount  of  compensation  is strictly limited to a maximum of 10% and with a wide  margin of discretion to the Superintending Engineer, who might  not only  reduce  the  percentage but who, we  think,  can  even reduce it 300 to  nil, if the circumstances so warrant. It is  this  power that is kept outside the scope of arbitration. We would like to  clarify  that this decision of ours will  not  have  any application to the claims, if any, for loss or damage  which it may be open to the Government to lay against the contrac- tor,  not in terms of clause 2 but under the general law  or under  the Contract Act. As we have pointed out at the  very outset  so  far as this case is concerned the claim  of  the Government has obviously proceeded in terms of clause 2  and that  is the way in which both the learned single  Judge  as well  as the Division Bench have also approached  the  ques- tion.  Reading clauses 2 and 25 together we think  that  the conclusion  is irresistible that the amount of  compensation chargeable under clause 2 is a matter which has to be  adju- dicated  in accordance with that clause and which cannot  be referred to arbitration under clause 25.     As  stated earlier, an alternative ground was  urged  by the learned counsel for the appellant that, no penalty under clause 2 having been imposed by the respondents in the first instance, no dispute had at all arisen which could have been referred to arbitration. This point was not taken before the High  Court and the relevant facts are not on  record.  That apart,  in  the  view we have taken, it  is  unnecessary  to express  any  opinion on this argument and we  refrain  from doing so.     For the reasons above mentioned, we restore the judgment of  the learned single Judge. In the result, the  amount  of compensation  of  Rs.20,000  awarded by  the  arbitrator  in favour  of the Government will stand deleted. The amount  of interest  payable to the contractor, if any, will be  worked out on the basis of the award as modified by us above.     The  appeal is allowed. We however make no order  as  to costs in the circumstances of the case. N.V.K.                                 Appeal allowed. 301