@JUDGMENTTAG-ORDER
Justice S. Muralidhar
1. National Highways Authority of India (''NHAI'') challenges an Award dated 31st January 2009 passed by the arbitral Tribunal (''AT'') by majority of 2:1 in the disputes between the Petitioner NHAI and the Respondent M/s BEL-ACC (JV) arising out of a contract dated 1st February 2001 whereby the project of strengthening and four laning of the existing two lane sections between Km. 307.500 to Km. 321.00 of Etawah Bypass on NH-2 in Uttar Pradesh was awarded by the NHAI to the Respondent. The period for completion of the work was 30 months and the stipulated date of completion was 3rd October 2003. There were delays at the initial stages by the Respondent for mobilization of manpower and equipments. A notice was issued on 15th November 2001 by the Engineer to the Respondent for slow progress of the work. A letter dated 19th November 2001 issued by the Engineer showed that the Respondent had executed work for Rs. 136 lakhs against planned requirement of Rs. 602 lakhs. According to the NHAI, the progress review meetings held from May to December 2002, showed that the progress was still slow on account of various reasons attributable to the Respondent such as non-availability of the required equipment, shortage of manpower and short supply of materials.
2. In view of the policy decision of the Ministry of Road Transport and Highways (''MoRTH''), Govt. of India, the issue regarding the variations in the work was discussed for the first time during the progress review meeting held on 19th November 2001. The Respondent expressed its willingness to execute the work by its letter dated 28th November 2001. The Engineer issued goods for construction drawings for the varied works in the months of February, March, April and May 2002. The drawings included the details of the varied works i.e. including the service road. The revised quantities for the total project was given by the Engineer by a letter dated 8th August 2002. The final quantities were given by the letter dated 11th October 2002. Thereafter, the Respondent started the work on the varied works which included concentric widening, retaining structures and service road.
3. The Respondent submitted a proposal for its executing the varied works as per the revised scope by the letter dated 18th October 2002 explaining that there were fundamental changes on account of variation in the scope of work causing abnormal increase in quantities. According to the Respondent, the changes in "original bill of quantity (''BOQ'') affected the integrity of the Contract Agreement (''CA'')". The revised rates were given by the Respondent under three categories. The total value of the work as per the BOQ proposed by the Respondent was Rs. 114 crores. The Engineer by letter dated 17th December 2002 to the Respondent submitted a scrutiny report on the Respondent''s proposal in terms of which the total revised cost of the project worked out to Rs. 109.6 crores.
4. A Revised Programme (''REV-I'') was submitted to the Respondent on 30th December 2002 for completion of the project under revised scope, subject to approval of revised rates. The revised date of completion given by the Respondent was March 2004. The revised programme was approved by the Engineer on 9th January 2003. This revised programme included all variations i.e. concentric widening, retaining structures and service roads. The progress review meetings held between January to November 2003 showed that a decision on the revised scope and rates given by the Respondent remained pending and the progress of work was unsatisfactory. The Respondent submitted a re-revised work programme (''REV-II'') on 26th November 2003 indicating the date of completion as January 2006. The Engineer raised some observations on 12th December 2003.
5. There was further correspondence between the parties regarding the revised rates given by the Respondent by its letter dated 6th May 2003. NHAI appointed a Variation Committee which took a decision that the service road be deleted. This decision was conveyed by the Engineer to the Respondent by letters dated 24th and 28th June 2003. According to the Respondent by this time it had already begun work on the construction of the service road. By letter dated 21st July 2003, the Respondent disputed the deletion of the service road.
6. The Engineer communicated the final decision of NHAI by letters dated 26th July and 12th August 2003, according approval to the varied works by excluding the service road. By a letter dated 9th March 2004, the Respondent represented to the Engineer against the decision to exclude the service road. The mediation meetings held between the parties were not successful. On 16th August 2004, NHAI wrote to the Respondent proposing a draft Supplementary Agreement (''SA''). On 19th August 2004, NHAI issued a show cause notice regarding slow progress of the work to the Respondent. The said show cause notice was replied by the Respondent by its letter dated 31st August 2004.
7. During September and October 2004, a proposal concerning the SA was discussed between NHAI, Respondent and the Engineer. On 4th November 2004, the Engineer submitted a detailed report to NHAI recommending expulsion of the Respondent and completion of the balance work by NHAI. A copy of this letter was endorsed to the Respondent on 20th December 2004. There were meetings held on 16th February 2005 and 9th March 2005 to review the progress of the work. Thereafter, an expulsion noticed dated 5th April 2005 was issued by NHAI under the signature of its General Manager (''GM'') (DK). A joint inspection was thereafter undertaken by the Respondent and the Engineer on 20th and 21st April 2005. Thereafter, the balance work including the work of service road was awarded to a new agency at the risk and cost of the Respondent.
8. Before the AT, the Respondent submitted 11 items of claim. The AT framed the following issues:
(i) Whether the contract has been validly terminated or not?
(ii) What is the effect of the parallel Arbitration proceeding on this case?
(iii) Whether the contractor has been materially alerted, if so to what effect?
(iv) Whether the Claimant is entitled to claim no. 1 to 9;
(v) Whether the Claimant has come to arbitration without referring the Claims to the Engineer barring Claim No. 2;
(vi) Relief.
9. The decision of the AT by the majority Award dated 31st January 2009 was as under:
(a) For the period from the date of the award of the work i.e. 6th March 2001 till the proposed major variations were initiated by NHAI (19th November 2001), the progress of the work was slow and the Respondent was solely responsible for this;
(b) For the period from the date on which proposal for major variation was initiated by NHAI (19th November 2001) till variation order was approved by the Engineer on 24th/26th June 2003 by excluding the service road, the Respondent could not be held responsible for any delay, since the decision had to be taken by NHAI. Therefore, both the parties were held responsible for slow progress of the work;
(c) The Engineer too was responsible for not operating the CA in proper manner. The Engineer had the authority to fix rate in accordance with General Conditions of Contract (''GCC'') Clause 52.1. The Engineer could have fixed provisional rates to enable work to progress. The parties could have objected to its decision and decided to go for arbitration;
(d) On the one hand, NHAI issued notice under Clause 46.1 and on the other hand, tried to find an alternative solution with the Respondent. This showed lack of clarity on the part of NHAI, for the course of action. The certificate dated 4th November 2004 of the Engineer lost its value with simultaneous efforts being made to find alternative solution;
(e) In case NHAI intended to terminate the contract then another certificate should have been issued by the Engineer giving a copy to the Respondent by referring to all that happened after earlier certificate. Thereafter, expulsion order could have been issued in reasonable time. The expulsion order of NHAI was "illegal, improper and not justified";
(f) Since, the termination order was not issued by the competent authority, it was illegal;
(g) Disputes arising on account of termination order issued by NHAI would be dealt with by AT-II and another dispute by AT-I.
(h) The varied works awarded to the Respondent included the service road. At much later stage on 26th July 2003, it was conveyed that service road had been taken out from the scope of the work. NHAI did not act in a proper manner by withdrawing the service road at a belated stage without any reasons. At the alternative of Engineer deciding on provisional rates and work of service road being allowed to be completed, a submission of the Respondent that contract was materially altered stood proved beyond any doubt.
10. The majority then proceeded to decide the individual items of claim. It is held that under Claim No. 1, Respondent was entitled to a sum of Rs. 3,47,17,511 towards balance payment due for the work done and the refund of retention money. Under Claim No. 2, it held that the Respondent was entitled to Rs. 4,52,20,890 towards refund of the performance bank guarantee (''PBG'') that was encashed by NHAI consequent upon the illegal termination of the contract. Under Claim No. 3, the Respondent had claimed Rs. 2,65,60,000 on account of infructuous enabling and infrastructure expenses incurred for the execution of the work. The majority noted that the Respondent had given details only up to December 2004. It was held that for the initial period from March to November 2001, the Respondent was responsible for the slow progress. For the period from December 2001 to July 2003, the responsibility for the slow progress was of both parties. Therefore, apportioning 10 months of slow progress to each party on pro rata basis, the Respondent was held responsible for delay to the extent of 41% and NHAI 59%. Consequently, the claim was allowed to the extent of 59% which worked out to Rs. 1,56,70,400.
11. Claim No. 4 for a sum of Rs. 3,63,90,000 towards infructuous overhead expenditure for the varied work till the date of termination was rejected for lack of proof. Under Claim No. 5 for a sum of Rs. 4,78,000 towards payment due for overhead expenditure incurred by the Respondent in the project after its illegal termination, the majority awarded 50% i.e. Rs. 2,39,000. Under Claim No. 6 for refund of the amount recovered by NHAI by encashing the BG furnished towards mobilization of machinery in the sum of Rs. 60,20,878, the majority awarded the Respondent Rs. 52,88,462. Claim No. 7 was for a sum of Rs. 4,99,26,119 towards compensation due for illegal confiscation of the Respondent''s machinery lying at site, consequent upon the illegal termination of the contract. The majority was of the view that credit for hire charges could not be given. The alternative was to give credit at the market value as machinery was physically available with the NHAI. The claim was held partly justified and the Respondent was asked to be paid Rs. 2,85,93,192 by NHAI after deducting the value of machinery items which were subjudice.
12. Under Claim No. 8, the majority awarded the Respondent Rs. 85,25,289 towards value of the materials lying at the site. Under Claim No. 9, the majority considered 10% of the value of the work to be reasonable sum to compensate the Respondent for the loss of profit. NHAI was asked to pay the Respondent Rs. 5,03,76,642 towards loss of profit. For the amount awarded under different claims, simple interest @ 15% per annum was awarded from different dates. In aggregate, it worked out to Rs. 7,47,00,119. Each of the parties were directed to bear their own costs. Future interest @ 15% per annum was awarded on the amount awarded under the claims from the date of the Award till the date of actual payment.
13. Additional reasons were given by the majority by a Supplementary Award dated 31st January 2009. Significant in the additional reasons was the decision of the majority that since it was the GM (DK) and not the Chairman of NHAI who had signed the termination order, it was not valid. The Government''s policy mandating public access to the highways, thereby requiring the construction of retaining walls and service roads had imposed a new regime which in turn required major changes in the CA. In the absence of a new contract, the rights and obligations of the parties remained undefined. It was wholly unjust and unreasonable to expect that the Respondent would continue the new work on old rates and terms and conditions. It was held that NHAI''s professional advisors "were wrong in continuing with the old contract by calling new BOQ as variations. These were new works and not variations".
14. In the dissenting Award, the third member of the AT held that NHAI did not exercise the option to terminate the contract lightly. The decision to do so was arrived at by the Chairman after giving full opportunity to the Respondent. The administrative action of communicating the Chairman''s decision was through a letter of the GM (DK) on behalf of NHAI and therefore the said action did not suffer from any irregularity. The decision to terminate the contract was taken mechanically after following "the due process with deliberations at each stage". The Respondent was given "ample opportunity to accelerate the rate of progress but could not avail of them because of its own compulsions". Accordingly, the dissenting Award held that the claims of the Respondent were not maintainable and rejected them entirely.
15. It was first submitted by Ms. Padma Priya, learned counsel appearing for NHAI, that the decision of the majority that the termination order was bad only because the Chairman of NHAI did not issue it was unsustainable in law. The notes on file, which were produced before the AT, showed that it was the Chairman who took the final decision to terminate the contract. The ministerial act of issuing the letter conveying the said decision was performed by the GM (DK).
16. It was next submitted that the work was in two phases. In Phase-I, the Respondent was to construct two additional lanes by widening the existing 7.3 Km. long two lane road. This was later changed to placing one lane each on either side of the existing two lanes within the same land (right of way). The second phase involved a new construction of four lanes of 6.7 Km. The value of the work involved in the two phases was in the proportion of 28% for Phase-I and 72% for Phase-II. It was sought to be contended that even if there was delay in proceeding with the work in relation to Phase-I for reasons not strictly attributable to the Respondent, there was no impediment in commencing and completing the work in relation to Phase-II within the stipulated time.
17. The above submissions were countered by Mr. Amit George, learned counsel appearing for the Respondent who pointed out that the case of NHAI that the work was to be performed in two phases was urged by it for the first time in the present proceedings. He referred to the clauses of the CA and the relevant findings thereon of the majority to submit that no interference was called for with its findings. He submitted that the provision of a service road affected both stretches of the road and therefore the entire work. With the decision on the revised rates for the service roads being unduly delayed and later that portion of the work being dropped, the Respondent could not be expected to proceed with the work on either phase.
18. The fact that the termination order was not issued by the Chairman of the NHAI himself was not the only reason why the majority held it to be bad in law. There were several other reasons given by the majority to come to the said conclusion. While the Respondent was held responsible for the slow progress till 19th November 2001 when major variations were initiated, the delay in NHAI taking a decision on the revised programme submitted by the Respondent led to the delay in progress thereafter. As pointed out by the majority if the decision making process was such that the decision on the revised programme could not be taken at an early stage, then the Engineer could have fixed provisional rates to enable the work to proceed unhindered. While on the one hand, a show cause notice was issued to the Respondent by NHAI for slow progress of the work, on the other hand, there were negotiations between the parties on the draft SA. Without clarity on the issue of service road, the Respondent could not be expected to complete the work, as this affected the entire stretch of the 14 Km road. An abrupt decision taken by the NHAI nearly two years later in July 2003 to exclude the service road justified the apprehension of the Respondent in regard to the varied works.
19. The changes in the CA brought about by the policy decision of the MoRTH for providing free access to roads meant that the construction of service roads and retaining walls became mandatory. This was in fact a major variation in the work. The letters written by the Respondent to NHAI on 7th February 2002 and 24th June 2002 indicate that the revised drawings issued by NHAI did show that there were substantial changes in the scope of work between 0 to 7 Km. which included service roads, retaining walls on both sides and additional under passes. The Respondent pointed out that the said work could not be treated as "additional scope of work for all practical purposes" and that "revised rates shall be made applicable for all the items of work to be executed under the revised scope of work". The letter dated 24th July 2002 from NHAI to the Respondent clearly stated that the revised BOQ received from LBG were being provided to the Respondent for necessary action and this included the retaining wall and service road. The Engineer too by letter dated 8th August 2002 informed the Respondent that a service road would have to be constructed.
20. The minutes of meeting of the Variation Committee bears out the submission of the Respondent that since cost of construction of the service road and retaining wall on the revised rates proposed by the Engineer would take it beyond the permissible limit for the purpose of ''variation'', a conscious decision was taken to drop the service road from the items of work. The minutes record as under:
8. The Variation Committee was informed that the total financial implication due to above variations works out to be Rs. 16,59,20,755.2 and the revised contract value will be Rs. 86,03,38,537.2 which is about 23.89% excess over the original contract value of Rs. 69,44,17,782.
In view of the above, the Variation Committee decided the following:
(i) To approve the revised scope of work for Etawah Bypass by excluding construction of service roads as indicated in Annexure-I & II.
(ii) To agree to the revised rates, as recommended by the Engineer for the quantities beyond BOQ for the two items i.e. item no. 7.10 (b) RCC M 25 Foundation & Substructure and item no. 7.10 (c) HYSD Reinforcement, wherein variation is more than 25% of the quantity of the individual item and the amount of varied work exceeds 5% of the contract amount.
(iii) To approve the revised contract price of Rs. 86,03,38,537.2 (including maintenance work) with a variation of Rs. 16,59,20,755.2 (23.89% Excess) over the original contract value of Rs. 69,44,17,762 including rates as indicated in Annexure-I & II.
21. In the above circumstances, the decision of NHAI to recommend termination of the contract after making the Respondent carry on the work of construction of service road for nearly two years was not a reasonable or valid one. The decision of the majority holding the termination to be illegal, therefore, does not call for interference.
22. Although Ms. Padma Priya sought to place reliance on the dissenting Award in support of her submissions, she was unable to persuade this Court to hold that the majority Award in relation to the individual items of claim suffered from any patent illegality. Once it was held that the termination of the contract by NHAI was illegal, the decision in respect of individual items of claims was consequential. The decision of the majority to award the Respondent loss of profit at 10% of the contract value finds support from the decision of the Supreme Court in
