1 IN THE HIGH COURT OF JUDICATURE AT BOMBAY ORDINARY ORIGINAL CIVIL JURISDICTION ARBITRATION PETITION NO.369 OF 2007 Maharashtra State Road Development Corporation .. Petitioner Versus Larsen & Toubro Limited .. Respondents Mr.E.P.Bharucha, Senior Advocate with Naval Agarwal, Manvendra Kane i/b. Amarchand & Mangaldas & S.A. Shroff & Company for petitioners Mr.Atul Rajadhyaksha, Senior Advocate with Kedar Wagle for respondents. CORAM : S.C.DHARMADHIKARI, J. Reserved on : 17th September 2009 Pronounced on : 17th December 2009 ORAL JUDGEMENT: 1] By this petition under section 34 of the Arbitration and Conciliation Act, 1996, the Award made by the Sole Arbitrator on 16th May 2007 is challenged by the petitioner which is a Government of Maharashtra undertaking. 2] Brief facts leading to the filing of this petition are as set out below:- 2 In or around November 1998, the petitioner invited bids for construction of sections of the Mumbai – Pune Expressway. Pursuant thereto, the respondent submitted its bid to the petitioner for construction of the Mumbai – Pune Expressway section C (Kusegaon to Ozarde with Kusgaon connector to NH-4. By its letter of Intent dated January 1, 1998, the petitioner awarded the contract for the construction of the works to the respondent, and thereafter, the parties entered into a contract agreement dated January 27, 1998. The petitioner also appointed M/s.Frishmann Prabhu (India) Pvt.Ltd., as the Engineer under the Contract. Under Clause 2.1 (b) of Part -I General Conditions read with Clause 2.1(i) of Section III part B (General Conditions of Contract – Conditions of particular application), the Engineer was required to obtain the specific approval of the Employer – the petitioner herein, before granting any claims to the Contractor – respondent herein. 3] The relevant clause i.e. Clause 2 of the contract provides as under:- “2. Electric power supply – The Employer has taken 3 action to set up transformerrs of 600 kv at following location along proposed Mumbai Pune Expressway Section – A Ris and Bhatan Section – B Kharsundi – 2 Nos. Section – C Kusgaon and Pimploli Section – D Urse and Prandwadi The cost of erection of transformer including MSEB charges etc. will be born by Employer. These Transformers will be available to contractor for the work of Expressway. Necessary running maintenance repairs etc. and MSEB charges will have to born by the Contractor. The supply will be given at one point and the Contractor shall make further arguments required. The electric meter will be transferred in the name of contractor and contractor shall pay all monthly electricity bills promptly. After the work is completed, the contractor shall hand over transformer stations in the same condition as it was at the time of taking over from employer. In addition the contractor shall maintain stand by diesel generators of adequate capacity. Non availability of electric power will not be considered as a reason for delay in progress.” 4 4] Clauses 3(c) and 4 of Section VII (B) of the Special Conditions of Contract/ Supplementary Information inter alia provides as under:- “3(c) Power Supply:- MSRDC has already taken up the matter with MSEB and requisite power supply is expected to be available to the contractors at site” “4] Electricity, Water and Telephone connections :- The Contractor shall submit his requirement of Electric power supply for carrying out permanent or temporary works, operating plants and machinery as a part of his work plan. The employer will issue the necessary certificates and extend help to the contractor for obtaining the power supply. However, the employer accepts no responsibility for any delays in obtaining the power connections and delay in progress caused thereby. In addition, the contractor shall have to maintain standby diesel generators of adequate capacity.” “(b) Accordingly, the petitioner took necessary steps to ensure 5 that electric power supply was made available by the Maharashtra State Electricity Board (MSEB) at site, as intimated to the respondent and other potential bidders vide the aforesaid clauses of Section VII (B) of the Bid Document. Under the contractual provisions, MSEB power was imperative and charges for the same were to be borne by the respondent. The use of generators was expressly stated to be “in addition” to MSEB power and not in substitution thereof. Being imperative, the respondent was liable to pay for the MSEB power even assuming that the respondent chose to use generators for their power requirements. At no time, prrior to or during the execution of the Contract did the Respondent inform the petitioner that they would not be using MSEB power. The petitioner was accordingly, justified in withholding and deducting the charges levied by MSEB in the sum of Rs.27,19,438/- from the payments due to the respondent for the Works executed under the contract, albeit, the Engineer subsequently recommended the release of these amounts. The said amounts were withheld on April 4, 2000, as admitted by the respondent vide its own statement tendered at the hearing on April 20, 2007, which was taken on record by the learned Arbitrator and marked as Document C-22(D), the respondent claimed these amounts vide their 37th 6 final bill dated March 5, 2001. A copy of the summary sheet of the said bill dated March 5, 2001 was filed by the respondent as document C-5 and a complete copy of the said bill was before the learned Arbitrator as an Annexure to the letter of March 22, 2001 (Document R-13). 5] It is the case of the petitioner that it took necessary steps to ensure that electric power supply was made available by the then M.S.E.B. at site. That was intimated to the respondent and other potential bidders vide aforementioned clause of bid documents. It was the case of the petitioner that under the contractual provisions, power from MSEB was imperative and charges for the same were to be borne by the respondents. Use of generators was expressly stated “in addition to MSEB power” and not in substitution. Being imperative, the respondent was liable to pay for MSEB power even assuming that it chose to use generators for the power requirements. At no time prior to and during the execution of the contract was it informed by the respondent to the petitioner that they would not be using MSEB power. The petitioner was, therefore, justified in withholding and deducting charges levied by MSEB in the sum of Rs. 27,19,438/- from the payment due to the respondent for the works 7 executed under the contract. Although, the Engineer subsequently recommended release of this amount, this was the first claim. 6] The second claim pertains to retention of amounts on account of Pavement Quality Concrete as recommended by the Engineer. It is stated that these defects were obviously noted and required to be rectified by the respondents from time to time. However, defects recurred even where repaired and the respondent failed to find a solution for them and/or carry out repairs of a permanent nature thereto. It is in such circumstances that retention money of Rs.109.45 lakhs was withheld in view of the audit objection raised by CAG. Thus, an amount of Rs.1.98 Crores has been wrongfully paid to the respondents for repairs to the damaged surface when the damage had occurred during the Defects Liability Period. Therefore, the damage ought to have been rectified without extra cost. Therefore, the respondent was informed that a sum of Rs.25 lakhs was withheld on account of Pavement Quality Concrete. 5] The next claim is pertaining to reimbursement of Works Contract Tax. It appears that respondent had filed a Writ Petition bearing W.P.No. 8 1585 of 2006 in this Court and in the said petition, following order was passed:- “1) Petitioners and Respondents jointly state that petitioners and respondents have arrived at an Agreement that the issues relating to payment due to petitioners and withheld by respondents on account of Energy Bills, PQC, Retention money and works Contract Tax will be referred to arbitration. 2](a) Mr.A.S.Mago, former Chief Secretary of the Government of Maharashtra is appointed as Arbitrator who shall conduct the arbitration in accordance with the provisions of the Arbitration and Conciliation Act, 1996, on any modification thereof; (b) The arbitration shall be time bound and shall be completed as expeditiously as possible but in any case within a period of four months from the date of the 1st meeting in the arbitration. 9 (c) The venue of the arbitration shall be Mumbai and the cost of the arbitration shall be shared equally between the parties. 2] In the light of the above petitioners do not seek to prosecute the present Writ Petition. 3] The petition is disposed of in the above terms.” 7] Pursuant thereto, the Arbitrator issued directions and the pleadings came to be filed. After referring to the contract document and reproducing the relevant clauses, the claimant/ respondent urged that they had executed the work under the Contract to the full satisfaction of the petitioner and the Engineer nominated by the petitioner. The petitioner issued taking over certificate in terms of clause 48.1 of the Conditions of Contract on 31st October 2000. The Engineer issued certificate dated 30th January 2001 stating that the respondent had successfully completed the contract on 30th October 2000 and that the delay in completion was mainly attributed to the increase in the scope of work and land acquisition problem. The petitioner also issued a certificate dated 9th December 2003 10 recording that the respondent has completed the contract to their entire satisfaction and the delay cannot be attributed to the respondents. 8] It is the case of the respondent that pursuant to completion of contract, it raised 37th and final bill on the petitioner but despite certification from the Engineer, after taking the measurement, the petitioners arbitrarily and wrongfully withheld certain amount. That is how, the aforementioned writ petition was filed and ultimately the minutes of the order came to be tendered. 9] It is in these circumstances that a reference to arbitration was made and the first claim raised by the respondent was for witthholding the amount on account of energy bills. It is the case of the respondents that it completed the project on 31st Octoberr 2000, the defect liability period (three years) came to an end on 30th October 2003. It is on completion of the project that the 37th and final bill, a copy of which is enclosed to the statement of claim, came to be forwarded. The Chief Resident Engineer in his letter dated 19th March 2001 informed his Director that the respondent had not used any power from MSEB and that the respondent 11 had rather used the power from its own generators installed at the site of project. Therefore, the Engineer recommended release of the amounts withheld towards Energy Bills. Copies of these documents including the recommendation and the letter of the Chief Resident Engineer is annexed to the statement of claim. This position was reiterated by the Engineer in their letter dated 30th March 2004. However, it is alleged that the petitioner wrongfully refused to release payment of Rs.27,19,438/- from the said final bill. 10] The respondent asserted that from a reading of clause 4 of the Special Conditions of Contract/ Supplementary information under section VII of the Contract, it is clear that the role of the petitioner was only to facilitate the respondent in getting power supply from MSEB. For that the respondent was to submit its power requirements. However, the respondent neither sought any help nor submitted any requirement of power supply. Therefore, no question of installation/ supply of electricity by the petitioner to and on account of respondent does not arise. Therefore, deduction of this amount from the final bill is unreasonable. This amount is liable to be released with interest. After 12 inviting my attention to clause 2 of the Addendum to Volume I of the Bid Document at Section V, it was stated by the respondent that the installation charges had to be borne by them and they cannot be shifted. Attention was also invited to the petitioners letter dated 22nd February 2006 wherein it was stated that the electricity charges paid by the petitioners to MSEB towards installation / supply of electricity at site. Therefore, this amount cannot be reimbursed even though L & T has not used the power (AS CERTIFIED BY PMC) . 11] It was urged that admittedly the respondents did not use MSEB power. The respondents would have been liable only to the extent of electricity bills and necessary monthly repairs, MSEB charges on using the said Transformer, in the absence of said usage, respondents cannot be wrongfully saddled with the cost of supply of electricity. 12] The respondents repeatedly requested for releasing this amount but the petitioner failed to do so. Ultimately, a letter dated 3rd December 2003 was addressed, whereafter a reminder was also addressed but there were no replies. Thereafter, the aforementioned letter of 22nd February 13 2006 was sent whereto a table was enclosed by the petitioner, outlining the reasons for withholding the various sums. Such a communication was sent for the first time and, therefore, the reason that the amount was withheld because of electricity charges were paid by MSRDC/ petitioner is not acceptable. There is no justification for such withholding and more particularly when the Engineer’s recommendations are to the contrary. The stand taken is an after thought and that is how this claim was made before the Arbitrator. Various pleas were raised to support the claim No.I. 13] The claim No.II was with regard to Pavement Quality Concrete (PQC). As far as that claim is concerned, the argument was that the work had been completed and the site handed over to the complete satisfaction of the petitioner. The Engineer in his letter dated 22nd March 2001 original proposed an ad hoc deduction of Rs.25.25 lakhs. However, the respondent has attended to the defects during the defect liability period to the complete satisfaction of the petitioner. Therefore and when the Engineer vide letter dated 15th March 2004 had certified that the defects had been rectified as per their satisfaction and hence the balance sum retained can be released, but the petitioners failed to do so. Reliance was 14 placed upon the completion certificate dated 9th December 2003. The matter was followed up by letters but once again the petitioner despatched a communication dated 22nd February 2006 enclosing the table justifying the retention/ withholdding of sums under this head/ claim. Therefore, the petitioners were called upon to pay the same along with interest. The claim was made to the extent of Rs.25 lakhs. 14] Claim No.III was on account of non release of 4th and final installment of retention amount. There also it was contended that the first installment of retention money was released in October 2000 and the second installment in October 2001. Both installments were to the tune of Rs.102.22 lakhs. From the third installment of the said amount only a sum of Rs.95 lakhs was released in October 2002 and a sum of Rs.7.22 lakhs was withheld from 3rd installment. 15] Subsequent to the completion of defect liability period i.e. 30th October 2003, respondent released their bill towards release of 4th and final installment of retention money to the tune of Rs.1,04,44,970/- being the balance due under the third and final installment. 15 16] A joint inspection was carried out by the Engineer along with respondent’s representative on 11th March 2004 and pursuant to this the Engineer had written to his Director informing that the repair works had been carried out successfully by the respondent’s contractor and hence, further action be taken against the balance retention amount. The respondent submitted their final bills towards release of 4th and final installment of retention money to the Engineer on 16th March 2004. Thereafter, the letter dated 3rd December 2004, reminder letters dated 16th May 2005 and 15th September 2005 were addressed. 17] Surprisingly, there was no response from the petitioner, save and except a letter dated 27th January 2006 wherein it was stated that the amounts have been withheld in view of Audit objection raised by Comptroller and Auditor General (CAG) and the amount will be released after resolution of these objections. There was no reason or any substantiation given in this letter and, therefore, further correspondence followed. That is how the claim has been raised. 16 18] Claim No.IV is on account of reimbursement of amounts paid by respondent as additional liability of works contract tax. It is stated that the respondent, during execution of the contract had to bear the additional liability on account of works contract tax. On submission of proof of delay, the petitioner reimbursed the respondents the claim of Rs. 1,46,81,913/- on 16th August 2001. This was for the liability incurred during the period 1st May 1998 to 31st March 2000. 19] However, subsequently, the petitioner illegally and arbitrarily deducted this sum, from the amounts due to the respondents, from another contract relating to the works of Khandala and Lonavala by-pass. By letters dated 4th April 2002 and 29th July 2003, the respondents sought reimbursement of the amount on account of WCT liability. Letters had been addressed pursuant to the submission of necessary documents/ clarification of the matter to Mr.A.B.Ghanekar, Sales Tax Consultant of the petitioner. 20] The respondents had already submitted their claim supported by Chartered Accountant’s certificate. In such circumstances, they requested 17 for early release of WCT claims amounting to Rs.2,02,57,800/-. This is the correspondence in the year 2002 and 2003 and, thereafter, there is a reminder on 16th May 2005 and 8th December 2005. The amount was neither refunded nor any reasons were given and ultimately, the petitioner informed the respondent by a letter dated 13th February 2006 that they had appointed Mr.Sharad Upasani, retired Chief Secretary as a sole arbitrator to decide the disputes in all matters, as far as WCT reimbursement is concerned. Respondents were surprised at this communication and, therefore, they filed a writ petition on the ground that this sum was never disputed. It is in such circumstances that the deduction was challenged and ultimately the total claim made was of Rs.2.02,57,800/-. 21] On receipt of the statement of claim the petitioners filed their defence, which contained several preliminary objections. What was stated on merits of the claims is that the Engineer had not recommended to pay the amount of WCT. This claim is not, therefore, arbitrable and beyond the jurisdiction of the Arbitrator. Reliance on clause 8 of the Addendum to the contract Volume -I was placed and it is contended that the respondent ought to have given particulars of their base liability 18 contemplated by them while bidding especially of the items in Bills of Quantifies (BOQ). The words “any increase” was applied to over and above what was existing at the bidding time. The respondents have vaguely and without any particulars claimed this amount and, therefore, the same is not payable. 22] It was the stand of the petitioners that the price and liability of BOQ item was included in the contract. The extra items of work and works executed beyond the contemplated contract amount are outside the contract. Therefore, there is no question of making any reimbursement. It is for the respondents to bear the liability against payment prior to 1st May 1998. Hence, the working was given and it was stated that some of the items will have to be excluded from the consideration under this head. 23] As far as this claim is concerned, from para 9.3.1 to 9.10 of the statement of defence, the petitioners pointed out as to how the claim is untenable. 24] As far as Claim No.I is concerned, the stand is that the petitioners 19 have spent on the installations at works site and paid the bills to MSEB in that behalf. They have appropriated this sum towards the payment of WCT under this contract. It is contended that when the bid was submitted, the respondent is deemed to have worked out the cost taking into consideration the non supply. It is stated that the petitioners have notified to the respondents that they should submit their requirements of electric power supply for carrying out permanent works, operating plants and equipment, labourer’s camp and field office etc. It was pointed out that in addition, the contractor shall maintain stand-by Diesel Generator of adequate capacity for obtaining plant and equipment etc., non availability of electric power will not be considered as delay in progress. It is stated that Rs.27.19 lakhs have been recovered from the final amount towards minimum electricity charges paid by petitioners to MSEB towards installation and supply of electricity at site. Therefore, this amount also cannot be reimbursed even though respondent (L & T) has not used power from MSEB installation. 25] It was urged that if the petitioner have paid any amount to respondents under this head that would amount to undue enrichment of 20 the respondent and loss to the petitioner. Further, the respondent did not inform MSRDC that they will not use MSEB power supply and they shall not make any such arrangement with MSEB, at the appropriate time. Therefore, nothing is due and payable under Claim No.I. 26] As far as claim No.2 is concerned, the argument is that the petitioner does not admit the interpretation of the contractual terms and the statements made by the respondents in para 2.1 to 2.7 of their statement of claim. It was urged that the respondent has misinterpreted the contents of the said documents as well as misinterpreted the relevant contract clauses for taking over certificate. They have made false and wrongful statements to mislead the petitioner. The petitioners disputed this claim, with the dates of completion, as mentioned in the statement of claim. It has been submitted by the petitioner that a joint inspection be arranged under the orders and directions of the Arbitrator so that the defects could be verified. If they are permanent, then, appropriate deductions be made and the claim can be allowed in part. 26] As far as claim No.III is concerned, it is stated that the petitioner 21 does not admit that 30th October 2003 is the date of completion of defect liability period. Further, it was contended that the respondent has not produced any defect liability certificate under clause 49.1. Exh.C-13 dated 15th March 2004 is not a completion certificate under the Contract. Petitioners craved leave to refer to and rely upon clauses 49.1 to 49.4 and contended that this clause must be read with clause 48.1 to 48.4. In these circumstances and when the Engineer is stating that the balance works are not completed, then, even this claim need not be granted. 26] For the aforementioned reasons, it was contended that the claims be rejected. I have diverted to this stand of parties only to appreciate the contentions of Mr.Bharucha learned Senior Counsel for petitioners. He submits that under clause 48.1 of Part I – General Conditions of the Contract, upon substantial completion of the project, the Contractor was entitled to call upon the Engineer to issue a Taking Over Certificate. The respondent, therefore, called upon the Engineer to do so. The Engineer granted a Taking over certificate dated 31st October 2000. 27] The contract permitted the petitioner to retain a certain percentage 22 of the contract value (retention money) for a specified duration of time after completion of the contract. The same was dealt with by clause 60.3 of part I General Conditions of the Contract. A corrigendum was issued in respect of Clause 60.3(b). In the light of the corrigendum, the Retention Money became payable to the respondent in four equal installments. The first installment was payable on the respondent being granted a completion certificate. The second third and fourth installments became payable on the expiry of the first, second and third anniversaries of the date of the Completion Certificate. It is pertinent however that the Engineer was entitled to retain so much of the balance Retention Money as