Union of India (UOI) Vs Cementone

I.P. Mukerji, J.@mdashThis is an application to set aside an arbitration award made on 27th September, 2006. The proceedings were conducted and the award made under the Arbitration and Conciliation Act, 1996. The learned sole Arbitrator, sole was appointed by the Hon''ble the Chief Justice of this Court on 1st July, 2004. This application is made by the Union of India on behalf of Eastern Railway Administration, u/s 34 of the above Act to set aside such award.

2. The Respondent is a registered partnership firm carrying on business in New Alipore in Kolkata. The Eastern Railway Administration entered into a contract with them on or about 20th February, 2002. This contract was reduced to a formal agreement between the parties on 5th April, 2002. The Respondent was to supply and load 20000 Cubic Metres of stone dust into railway wagons at inter alia Pakur. Rajgram and other quarries nominated by the railways. The railways needed such stone dust for restoration of about 24 Kms. of railway track. The rate at which the Respondent was to be paid was Rs. 72.50 per Metric ton. The duration of the contract was three months from 20th February, 2002. As is usual in railway contracts, apart from the signed contract document, the General and Special Conditions of Contract of the railways were incorporated into the contract. The work was ultimately completed on 29th November, 2002. It was required to have been completed by 19th May, 2002. This delay was made up by three extensions granted by the railways. Each letter of extension said that the contract was extended till a particular date "in terms of Clause 17(2) of the General Conditions of Contract" and that "the other terms and conditions of the original contract will remain the same as before". The terms of this extension are the subject matter of much dispute between the parties, which will be discussed in detail later.

3. Some terms and conditions of this contract are most significant for determination of this application. The first is Clause 25 of the Special Conditions which is as follows:

Clause 25 of the Special Conditions: The tenderer while quoting the rates shall take into account the possible fluctuation of the market rate in respect of labour, materials, taxes etc. during currency of the contract and also the extension of the same granted from time to time under Clause 17(3) of the General Conditions of contract and standard Specifications (1969) Edition.

4. The second is Clause 17(2) of the General Conditions which is as follows:

If the Contractor be delayed at any time in the progress of the works by any act or neglect of the Railway''s employees or by any other contractor employed by the Railway under Sub-clause (4) of Clause 20 of these conditions, or by strikes, lock-outs, fire, unusual delay in transportation, unavoidable casualties or any causes beyond the Contractor''s control, or by delay authorised by the Engineer pending arbitration, or by any cause which the Engineer shall decide to justify the delay, then the time of completion of the works may be extended for such reasonable time as the Engineer on behalf of the Railway may decide.

5. The third is Clause 17(3) of the General Conditions which is as follows:

17(3) Extension of time on Railway Account - In the event of any failure or delay by the Railway to hand over to the Contractor possession of the lands necessary for the execution of the works or to give the necessary notice to commence the works or to provide the necessary drawings or instructions or any other delay caused by the Railway due to any other cause whatsoever, then such failure or delay shall in no way affect or vitiate the contract or alter the character thereof or entitle the Contractor to damages or compensation therefore but in any such case, the Railway may grant such extension or extensions of the completion date as may be considered reasonable.

6. The other clauses which have same significance are Clause 6 and clause 11 which are also inserted below:

Clause 6 of the General Conditions: The Railway Administration may extend the period of Contract for any period whatever by giving notice to the contractor and the contractor shall be bound to complete the work within the period so extended and the terms and conditions of the Original contract will also be operative during the extended period.

Clause 11 of the General Conditions: The contractor will not be entitled to any compensation for any delay for execution of the work ensuring from delay caused by the Railway. The delay so caused and assessed and accepted by DEN shall be taken into consideration for determining any extension of time required to complete the work for which purpose only such accepted delay will be taken into consideration. If the matter is not brought to the notice of DEN immediately after the occurrence of such delay, no consideration for extension of time will be made later on. The contractor must accept as final and bidding the decision of DEN.

7. The total amount payable under the contract was about Rs. 14,30,562/-. 99.5% of the contractual amount has been paid by the Railways or Partly paid and the rest to be paid as a result, of their not challenging some portions of the award.

Claims and Summary of Award

8. Nevertheless, the Respondent went to arbitration and made the following claims before the learned Arbitrator.

a) Additional expenditure incurred by the Claimant on account of revision in wages of workers/labourers for the work of stone dust beyond the contractual period -- Rs. 92,026.00p

b) Additional expenditure incurred by the Claimant for loading stone dust into wagons after sunset on orders of the Railways. Quantity of Stone dust 20501.977 cum @ Rs. 20/- ------ Rs. 4,10,040.00p

c) Additional expenditure incurred for increase in price of diesel for stone-dust supplied beyond contractual time of 3 months. Quantity of stone dust supplied 15312.081 cum Rs. 5.10 per cum:-----Rs. 78,092.00p

d) Payment of lesser measurement in quantity of stone dust at the destination unloading point. Quantity 332.726 cum @ Rs. 7250 per cum----- Rs. 24,123.00p

e) Increase in market rate of stone-dust beyond 3 months of the contractual period. Quantity supplied 15312.00 cum @ Rs. 17.50 per cum-----Rs. 2,67,960.00p

f) Additional expenditure incurred for prolonged establishment beyond the contractual period of 3 months from 21-05-2002 to 30-11-2002 = 6 months 10 days at the rate of Rs. 50,000/- per month.-------Rs. 3.16.667.00p.

From 01-12-2002 to 31-07-2003 = 8 months @ Rs. 15,000/- per month Rs. 1,20,000.00p

Total Rs. 4,36,667.00p

g) Payment for final bill for 574.222 cum of stone dust Rs. 72.50 per cum------Rs. 41,631.00p

h) Release of Security Deposit deducted from running account bill-----Rs. 50,923.00p

i) Release of Earnest Money deposit converted into Security Deposit in the form of Bank Fixed Deposit -

CDR No. 0318598/2K Dated 23.05.2000

Rs. 22,500.00

CDR No. 0179508/1107/2000 Dated 28-11-2000

Rs. 6,000.00

Rs. 29,100.00

j) Interest @ 18% p.a. on the aforesaid amounts from the date of completion of work and up to the date of payment to the Claimant. As to be assessed.

k) Claim for cost of Arbitration.

9. Claims (a), (b), (c) and (e) have been awarded with a full award. Claim (d) has been rejected by the learned Arbitrator. Claim (f) is awarded partially. Awards for claim (g), (h) and (i) are not challenged by the Petitioner. Claim (j) is for interest which has been awarded substantially together with costs assessed as Rs. 1,00,000/-.

10. The arguments of the respective counsel for the parties will be noticed while discussing the merits of the claim.

Award:

11. Claims (a), (c) and (e) have been awarded for Rs. 4,38,078/-. Claim (a) is for alleged additional expenditure incurred by the Respondent on account of upward revision in wages of workers. Claim (c) is for such expenditure for increase in price of Diesel and claim (e) for increase in price of stone dust after the contract period of three months. Claim (b) is for expenditure for loading stone dust into wagons after sunset further to orders of the Railways. The amount awarded for such claim is Rs. 4,10,040/-. Claim (f) is for an additional establishment charge for prolongation of the contract for Rs. 3,16,667/-. The learned Arbitrator has awarded Rs. 2,60,900/-. Further the Arbitrator has awarded interest @ 12% from 20th October, 2003 till the date of the award and 15% on such sum from the award till its realization.

Arguments:

12. These claims awarded except the claim for interest were in the nature of damages. The damage claimed was on the premise that the right to claim it was retained while the duration of the contract was extended from time to time. The learned Senior Advocate for the Petitioner placed reliance on the above extension letters. He argued that when extension was on the same terms and conditions as the original contract, no further amount could be claimed by the Respondent on account of alleged damage suffered for the extended period. According to him, it was a fixed price contract. The entire amount under the contract has been paid or would be paid in circumstances stated above. Therefore, the Respondent was not entitled to any further amount. He cited the case of State of Orissa Vs. Sudhakar Das (Dead) by Lrs., in particular paragraph 2 of the report which is as follows:

2. It is not disputed that the arbitration agreement contained no escalation clause. In the absence of any escalation clause, an Arbitrator cannot assume any jurisdiction to award any amount towards escalation. That part of the Award which grants escalation charges is clearly not sustainable and suffers from a patent error. The decree, insofar, as the award of escalation charges is concerned, cannot, therefore, be sustained.

13. He did not forget to cite Oil and Natural Gas Corporation Ltd. Vs. SAW Pipes Ltd., which judgment is cited in almost all arbitration cases for setting aside of an arbitral award. He argued, relying on paragraph 14 of the report that an award against the terms of the contract was patently illegal. To advance this proposition he also cited Rajasthan State Mines and Minerals Limited Vs. Eastern Engineering Enterprises and Another, . He even went to the extent of arguing that the claims awarded were excepted matters and that the arbitrator had no jurisdiction to decide them relying on paragraph 8 of General Manager Northern Railways and Another Vs. Sarvesh Chopra, He placed the case of Rashtriya Chemicals and Fertilizers Ltd. Vs. Chowgule Brothers and Others, to urge that revision in wages could not be claimed in an escalation claim, in a fixed price contract.

14. Decisions were cited by the learned Counsel for the Respondent which permitted such escalation to be claimed and awarded. Reference may be made to the cases of Hyderabad Municipal Corporation Vs. M. Krishnaswami Mudaliar and Mudaliar and Another, and P.M. Paul Vs. Union of India (UOI), It was also contended that in the absence of unreasonableness or perversity or apparent errors the Court deciding a Section 34 application should not interfere with the findings of the learned Arbitrator. The Respondent introduced many new cases in the written submissions which were not cited in Court. I have not taken note of those cases. Moreover, irrelevant cases cited have not been dealt with in this judgment.

Analysis:

15. Some terms and conditions in the contract are quite conflicting. More conflict is introduced by certain reservations introduced in the letters of extension.

16. I think the clause of utmost importance is Clause 17(2) of the General Conditions of Contract. It says that if the work is delayed due to any action of the Railways or its employees or any third party, in special circumstances, then the Railways would be obliged to extend the time. This clause is to be read with Clause 17(3). Now, this clause clearly states that if the delay is caused by the railways, then also they have the discretion to extend the time but the contractor cannot claim any damages or compensation. Clause 17(2) which concerns extension by virtue of delay of the railways, in special circumstances, is silent regarding compensation. Therefore, if in two related clauses, in one there is a prohibition to claim compensation and the other is silent, I would interpret the clause with such silence, that is, Clause 17(2) that in cases where delay is caused by the railway, in special circumstances, there is no impediment to claiming compensation. Furthermore, the letters of extension are stated to be under Clause 17(2). Therefore, the railways have admitted in those letters that because of delay on their part in special circumstances they were extending the contract. Therefore, Clause 11 of the General Conditions stating that the contractor will not be entitled to any compensation for any delay of the Railways must refer to ordinary circumstances only. Furthermore, in my opinion, Clause 25 of the Special Conditions of Contract relate to price fluctuation in normal conditions, during the contract period and do not relate to any unforeseen price fluctuations during the extended period of the contract where such extension was granted due to fault of one of the parties, admitting the above special circumstances.

17. Therefore, in my opinion, the claim for escalation is permitted by the contract. Such claim is not contrary to the terms, far less being an excepted matter. Therefore, State of Orissa Vs. Sudhakar Das (Dead) by Lrs., , General Manager Northern Railways and Another Vs. Sarvesh Chopra, Oil and Natural Gas Corporation Ltd. Vs. SAW Pipes Ltd., do not, in the special facts of this case apply.

18. In Rashtriya Chemicals and Fertilizers Ltd. Vs. Chowgule Brothers and Others, the contract specifically provided that no escalation in wages could be claimed for a specific period and the Arbitrator had awarded the claim for that very period.

19. The case of Hyderabad Municipal Corporation Vs. M. Krishnaswami Mudaliar and Mudaliar and Another, nd P.M. Paul Vs. Union of India (UOI), cited by the Respondent''s learned Counsel are closer to the case at hand. In such cases there was no bar to claim escalation. As in this case, there was prolongation of the contract. The claimed escalation was awarded by the Arbitrator and upheld by the Supreme Court. I would apply those principles in this case.

20. I do not think, on my above interpretation of the contract, that the award granting escalation on account of increase in wages is bad.

21. Moreover, I am not prepared to interfere with the sound reasons given by the learned Arbitrator in making the award.

22. But, in my opinion, the award for claim (c) was uncalled for. The contract was a composite contract for sale and supply of stone dust. When an escalation in the price of stone dust has been granted in claim (e), claim (c) for increase price of diesel ought not to have been granted, as that claim is included in claim (e), in my considered opinion. Therefore, claims (a), (e), (b), (f) are upheld. Claim (d) has been rejected. There is no challenge to such rejection.

Interest:

23. Now I will deal with the claim for interest.

24. A Special Bench of the Hon''ble Supreme Court of India told us a long time ago that the arbitrator had the power to grant interest, only if the agreement permitted him to do so. It was considering a case under the Arbitration Act, 1940 and pre reference interest. But the dicta in paragraphs 47 and 48 were general enough to include interim interest as well. (See Executive Engineer, Dhenkanal Minor Irrigation Division, Orissa, Vs. N.C. Budharaj (Dead) by Lrs. etc. etc., Then came The The Board of Trustees for the Port of Calcutta Vs. Engineers-De-Space-Age, which said that a clause prohibiting a claim for interest against a party did not prevent the Arbitrator from granting interest pendente lite.

25. In Sayeed Ahmed and Co. Vs. State of U.P. and Others, the same Court considered Section 37 of the Arbitration and Conciliation Act, 1996. This provision says that unless there is a prohibition in the agreement, the Arbitrator has the power of grant interest from the date of accrual of cause of action to the date of the Award. The highest Court said that this section abolished the compartment of pendente lite interest recognized by earlier decisions of the Courts. It went on to say that if a provision in the contract prohibited one party from claiming interest from another party, there need not be another bar upon the arbitrator granting such interest. It doubted the correctness of Th The Board of Trustees for the Port of Calcutta Vs. Engineers-De-Space-Age, and said the following in paragraphs 23 and 24:

23. The observation in Engineers-De-Space-Age that the term of the contract merely prohibits the department/employer from paying interest to the contractor for delayed payment but once the matter goes to the arbitrator, the discretion of the arbitrator is not in any manner stifled by the terms of the contract and the arbitrator will be entitled to consider and grant the interest pendente lite, cannot be used to support an outlandish argument that bar on the Government or department paying interest is not a bar on the arbitrator, awarding interest. Whether the provision in the contract bars the employer from entertaining any claim for interest or bars the contractor from making any claim for interest, it amounts to a clear prohibition regarding interest. The provision need not contain another bar prohibiting the arbitrator from awarding interest. The observations made in the context of interest pendente lite cannot be used out of contract.

24. The learned Counsel for the Appellant next contended on the basis of the above observations in Engineers-De-Space-Age, that even if Clause G1.09 is held to bar interest in the pre-reference period, it should be held not to apply to the pendente lite period, that is, from 14-3-1997 to 31-7-2001. He contended that the award of interest during the pendency of the reference was within the discretion of the arbitrator and therefore, the award of interest for that period could not-have been interfered with by the High Court. In view of the Constitution Bench decisions in G.C. Roy and N.C. Budharaj rendered before and after the decision in Engineers-De-Space-Age, it is doubtful whether the observation in Engineers-De-Space-Age in a case arising under the Arbitration Act, 1940 that the arbitrator could award interest pendente lite, ignoring the express bar in the contract, is good law. But that need not be considered further as this is a case under the new Act where there is a specific provision regarding award of interest by the arbitrator.

26. The above was a two judges'' bench decision of the Court.

27. Another two judges'' bench of the same Court in Sree Kamatchi Amman Constructions Vs. The Divisional Railway Manager (Works), Palghat and Others, has considered the above decision, and many more in the field including Engineers de space (supra) and come to the same conclusion. It is very important to note that it has considered the case of Madnani Construction Corporation (P) Ltd. Vs. Union of India (UOI) and Others, cited by the learned Counsel for the Respondent. It may be noted that in Madnani the Court had upheld the view in Engineers de Space. Madnani was rendered by two judges'' bench of the Court after its decision in Sayeed (supra), which was not even cited before it.

28. It may be noted that the other decisions, were cited by the learned Sr. Counsel for the Petitioner.

29. The interest barring Clause here is 16(2) prohibiting payment of interest by the railways to the contractor. This clause was directly in issue in the case of Kamatchi (supra).

30. Therefore the grant of interest by the Arbitrator upto the date of the award was not correct. That portion of the award is set aside. The Respondent will be entitled to post award interest but at the rate of 12 percent simple interest.

31. No arguments were advanced against the rejection of the Counterclaims.

32. Therefore the award is partly set aside by deleting the award for Rs. 78,092/- for claim (c), and also deleting the award of interest from 20th October, 2003 till 27th September, 2006.

33. The award for costs is not disturbed.

34. The Award is partly upheld and the application for setting aside the award is partly allowed as above.

No Order for costs.