1 IN THE HIGH COURT OF JUDICATURE AT BOMBAY O. O. C. J. ARBITRATION PETITION NO.287 OF 2007 WITH ARBITRATION PETITON NO.288 OF 2007 Mumbai Metropolitan Region Development Authority. ...Petitioner. Vs. M/s. Unity Infraproject Ltd. ...Respondent. .... Mr. Gaurav Joshi with Mr. Kiran Gandhi and Ms. Parvathi Kaushik i/b. Little & Co. for the Petitioner. Mr. Rajiv Kumar with Mr. Sharan Jagtiani and Ms. Sonali Mathur i/b. Divya Shah Associates for the Respondent. ..... CORAM :DR.D.Y.CHANDRACHUD, J. February 15, 2008. JUDGMENT : On 20th July 2003, the Petitioner invited tenders for the construction of 1648 tenements for the rehabilitation of project affected households at Kanjur Marg. This was a World Bank Project. The work was to be carried out in two phases. Phase I envisaged the completion of 384 tenements. Phase II involved the completion of the 2 balance. The area where residential premises were to be constructed was densely populated and was congested with dwelling units of an informal nature. The two phase programme of work was to be in accordance with the availability of vacant space for the construction of buildings. The contractor was to initially complete three or four buildings and upon the shifting of project affected families in the space which would be vacated, other buildings were to be constructed. The contractor was on notice that he would have to co- ordinate the work in such a manner as would avoid any hindrance in progress of the work “for which he would not be paid any additional sum”. The contention of the Petitioner is that offers were invited on a lump sum basis for the entire work without adjustments. 2. The offer submitted by the Respondent was the lowest responsive offer and a letter of acceptance was issued on 3rd November 2003. During the course of the work, the Respondent raised claims inter alia towards loss of overheads, increases in costs, under-utilization of machinery, refund of excise duties, increase in 3 steel and cement prices and compound interest. The Engineer appointed under the contract refused to certify the claims of the Respondent by a letter dated 13th July 2004. Clause 24 of the agreement stipulated that in the event that a decision taken by the Engineer was outside the authority conferred by the contract or was wrong, the decision was to be referred to an adjudicator. In the meantime, the Respondent continued to raise bills including claims for the aforesaid amount, a practice which was followed from R.A. Bill 3 which was submitted on 24th August 2004 upto R.A. Bill 9 submitted on 24th February 2005. The Adjudicator was required to take a decision within 28 days. The Respondent referred the dispute to the Adjudicator on 3rd September 2004. On 27th October 2004, the Respondent invoked arbitration under the arbitral provisions contained in clause 25.2 of the contract, principally on the basis that the Adjudicator had failed to render a decision within the stipulated period. The Adjudicator was thereupon informed in a meeting held on 16th March 2005 that the Respondent did not desire to continue with adjudication for those claims which were referred to arbitration. 4 Subsequent claims were referred by the Respondent to the Adjudicator on 7th March 2005. The Adjudicator held that the Respondent was entitled to an extension of time without levy of liquidated damages until 26th April 2005. The Engineer had by a letter dated 27th December 2004 imposed liquidated damages on the Respondent on account of delay in the completion of work under Phase I and declined to grant an extension of time. On 10th January 2005, the Respondent addressed a communication to the Petitioner recording therein that the Petitioner was not responsible for the delay in the completion of work under what was described as Mile Stone-I and sought an extension of time for completion without levy of liquidated damages. The Respondent undertook that on account of a revision of the date for the first milestone until 31st March 2005, the Respondent “shall not stake any extra claim whatsoever on any of the above account” against the Petitioner and the Petitioner is not responsible in respect thereof. By a letter dated 25th January 2005, the Petitioner agreed to waive liquidated damages. 5 3. The contention of the Respondent in a letter dated 7th March 2005 and in a subsequent letter dated 18th March 2005 was that while it had waived all its claims by its letter dated 10th January 2005, that letter was written under duress. The Petitioner declined to nominate an Arbitrator, the submission being that this was on the basis that there was no arbitrable dispute. The contention of the Petitioner in a letter dated 2nd November 2004 was that since no decision of the Adjudicator had been received, there was no occasion for a reference to the arbitral Tribunal. The Institution of Engineers appointed an Arbitrator under clause 25.3 of the contract and the Arbitral Tribunal was constituted. The Petitioner raised an objection under Section 16 of the Arbitration and Conciliation Act, 1996, to challenge the jurisdiction of the Arbitral Tribunal. The application was rejected by an order dated 22nd October 2005. Eventually, by its award dated 17th April 2007, the arbitral Tribunal awarded an aggregate sum of Rs.1,65,03,119/- together with interest at the rate of 10% per annum from 3rd May 2005 till the date of the publication of the award and future interest at the rate of 12% per annum from the 6 date of the award till payment. The award has been questioned in these proceedings. 4. The principal foundation of the challenge to the arbitral award is contained in three submissions that were urged before the Court by Counsel appearing on behalf of the Petitioner. These submissions were (i) There is an absolute prohibition in the contract on the entertainment and award of extra claims; the only entitlement of the Contractor being an extension of time required for completion of work. Despite the contract being a lump sum contract, the arbitral Tribunal considered and awarded some of the extra claims contrary to the express prohibition contained in clauses 13.4 and 44.2 of the Contract. An arbitral award that is in the face of the express terms of the Contract is liable to be set aside under Section 34 of the Arbitration and Conciliation Act, 1996; (ii) The Arbitrator had no jurisdiction to entertain the claims inasmuch as the procedure under clauses 24 and 25 of the Contract read with clause 5 was not followed. The reference to arbitration took place even prior to the 7 decision of the adjudicator. Consequently, the reference to arbitration was not competent; (iii) There is no arbitrable dispute inasmuch as by the Contractor's letter dated 10th January 2005, an extension was sought of the period required for the completion of the contract on an express assurance and representation that the Contractor undertook not to make any extra claim. The Petitioner waived liquidated damages and granted an extension of time for completion on the assurance of the Contractor that he would not raise any extra claim. The arbitral award suffers from a patent illegality in awarding extra claims despite the clear and express terms of the Contractor's letter dated 10th January 2005. The arbitral Tribunal was patently in error in rejecting this defence which was raised in an application under Section 16(2); (iv) The findings of the arbitral Tribunal on merits with respect to (a) Variation of depth under which Rs. 15.27 lakhs was awarded; (b) Loss of overheads wherein Rs. 1.37 crores was awarded; and ( c) Underutilization of machinery where Rs. 10.12 lakhs was awarded, are contrary to the express terms of the Contract; (v) The award of interest is contrary to the contractual terms. 8 5. Each of these heads of challenge will now be taken for consideration. While dealing with the challenge under each head, the submissions of the Petitioner on the one hand and the Respondent on the other, will be elaborated and considered. I. Nature of the Contract : 6. The first submission which has been urged on behalf of the Petitioner is that the contract in the present case was a lump sum contract and the submission of extra claims stood barred and prohibited. 7. An Arbitrator appointed by parties to a contract to adjudicate upon a dispute is bound by legal precept to adjudicate in accordance with the contract. An Arbitrator cannot ignore the conditions of contract or award a head of claim which is prohibited by the contract. An Arbitrator derives his authority under the contract pursuant to which his jurisdiction is created. An award which is 9 passed in manifest disregard of the contract is liable to be set aside. These principles emerge from the decisions of the Supreme Court in : a) Associated Engineering Co. Vs. Government of Andhra Pradesh reported in AIR 1992 SC 232; b) Ramchandra Reddy & Co. Vs. State of Andhra Pradesh 2001(4) SCC 241; c) New India Civil Erectors Pvt. Ltd. Vs. ONGC reported in 1997(11) SCC 75; and d) ONGC Vs. Saw Pipes reported in 2003(5) SCC 705. These principles form the foundation of substantive arbitral law in India. The nature of the challenge in the present case is that the contract was a lump sum contract and as a consequence, the bid price quoted by the Contractor was unalterable and incapable of adjustment. Clause 13.4 of the Conditions of Contract was to the following effect : “13.4 The lump sum bid price quoted by the bidder shall be fixed for the duration of the contract and shall not be subject to adjustment on any account.” Now a reading of clause 13.4 (and clause 44.2 under which the 10 contract price was not liable to be increased in the event that a compensation event resulted in additional cost) in isolation from other provisions would be susceptible of the inference that there was a prohibition in the contract against a variation of price during the contractual term. But the submission of the Respondent is that the modern rule of construction of contracts is that the provisions of a contract must be considered as a whole without regarding parts in isolation from others. The contractual terms in the present case , when read in their entirety would indicate that although lump sum bids were invited, the contract did not prohibit extra payment for extra work. Variation in quantities and payments for variation are contemplated in clauses 38, 39, 40, 42 and 44.3 of the Contract. That in substance is the defence. 8. In order to analyse the submissions, a reference to the contractual provisions would be in order. Clause 7 of the Instructions to Tenderers requires bidders to visit the site. The expression “contract price” is defined thus: 11 “The Contract Price is the price stated in the Letter of Acceptance and thereafter as adjusted in accordance with the provisions of the Contract.” (emphasis supplied) . Site Investigation Reports were defined to be those included in the bidding documents and factual interpretative reports about the surface and sub-surface conditions at the Site. Clause 14.1 mandated that the Contractor in preparing the bid was to rely on the Site Investigation Report supplemented by any information available to bidder. The foundations of the buildings were to be designed so as to be based on a Geo Technical Investigation Report. Under Clause 3.3.1.1, the foundation was to be in accordance with the safe bearing capacity of the soil as provided in the Geo Technical Investigation Report and the foundation strata was to be approved by the Engineer-in-Charge. The contract stipulated that no variations were expected except in foundation depth. Variations in foundation depth were liable to be compensated as prescribed by the contractual terms. The structural design of the building was based on an average 12 five meters depth of piles below the bottom of pile caps. In the event that the actual average depth increased beyond 5.5 meters, the bidder was to be paid for the extra quantity of work at the rate of Rs. 2.2 lakhs per meter of increased depth. Each bidder was under the contract permitted by clause 10 of the Special Conditions to adopt an alternative design only for the foundation of the buildings so as to provide inter alia an open foundation instead of a pile foundation. 9. Clause 32.1 of the Contract provides an early warning stipulation to the following effect : “32. Early Warning: 32.1 The contractor is to warn the Engineer at the earliest opportunity of specific likely future events or circumstances that may adversely affect the quality of the work, increase the Contract Price or delay the execution of work. The Engineer may require the Contractor to provide an estimate of the expected effect of the future event or circumstances on the Contract Price and Completion Date. The estimate is to be provided by the Contractor as soon as reasonably possible. 32.2 The Contractor shall cooperate with the Engineer in making and considering proposals for how the effect of such an event or circumstances can be avoided or reduced 13 by anyone involved in the work and in carrying out any resulting instruction of the Engineer.” Under Clause 37, the contractor was to provide an activity schedule. Clause 38 provides for a change in quantities and clause 39 stipulated that a variation was to be included in the work programmes. Clause 40 provides for payments for variations : “40.1 The Contractor shall provide the Engineer with a quotation (with breakdown of unit rates) for carrying out the variation when requested to do so by the Engineer. The Engineer shall assess the quotation, which shall be given within seven days of the request or within any longer period stated by the Engineer and before the Variation is ordered. 40.2 Deleted. 40.3 If the Contractor' s quotation is unreasonable, (or if the Contractor fails to provide the Engineer with the quotation, within a reasonable time specified by the Engineer in accordance with Clause 40.1) the Engineer may order the variation and make a change to the Contract Price, which shall be based on Engineer's own forecast of the effects of the Variation on the Contractor's costs. 40.4 If the Engineer decides that the urgency of varying the work would prevent a quotation being given and considered without delaying the work, no quotation shall be given and the variation shall be treated as a compensation event. 14 40.5 The contractor shall not be entitled to additional payment for costs, which would have been avoided by giving early warning.” Clause 44.1 of the Contract enunciates what are termed as Events of Compensation. These are regarded as Compensation Events if they are attributable to the Petitioner. Amongst the Compensation Events is the failure of the Petitioner to grant access to a part of the Site by the Site Possession Date; delay in the issuance of drawings, specifications or instructions; and where ground conditions prove to be substantially more adverse than was reasonably assumed before the issuance of the Letter of Acceptance. Clauses 44.2 and 44.3 of the Contract are material for the purposes of the present proceedings and it would, therefore, be necessary to refer to them in extenso: “44.2 If a Compensation Event would cause additional cost or would prevent the work being completed before the Intended Completion Date the Contract Price shall not be increased and only the Intended Completion Date will be extended. 44.3 As soon as information demonstrating the effect of each Compensation Event upon the Contractor' s forecast 15 cost has been provided by the Contractor, it is to be assessed by the Engineer and the Contract Price shall be adjusted accordingly. If the Contractor's forecast is deemed unreasonable, the Engineer shall adjust the Contract Price based on Engineer's own forecast. The Engineer will assume that the Contractor will react completely and promptly to the event.” 10. By these two conditions, on the one hand, parties stipulated in Clause 44.2 that the contract price shall not be increased and it was only the intended date of completion that would be extended if a compensation event were to cause additional cost or to prevent work from being completed before the stipulated date of completion. On the other hand, clause 44.3 provides that immediately after the effect of a compensation event, on the forecast cost of the contractor, is provided by the Contractor to the Petitioner the Engineer must assess its effect and the contract price shall be adjusted accordingly. In the event that the contractor' s estimation was unreasonable, the Engineer was entitled to adjust the contract price in terms of his own assessment. The Engineer, it may be noted, was defined by the Contract to be a person named in the contract data, who was 16 responsible for supervising the execution of the work and administering the contract, recommending payments due to the contractor, issuing and valuing variations to the contract, recommending extensions of time and valuing compensation events. 11. In interpreting a contract, the Court cannot place emphasis on an isolated provision divorced from the context and unrelated to the other provisions which govern contractual obligations. Contracts represent business understandings between the parties. Commercial dealings between persons who are well versed in the transaction of business are regulated by contracts which parties opt to govern themselves. The law regulates those contracts and provides an ordered framework in which business dealings can be implemented. The duty of the Court when called upon to assess where the balance lies in a contractual dispute, is to read the contract as a whole in order to understand the business meaning which the parties attributed to their obligations. Interpretation in law must ensure in commercial matters that the view which the Court takes records the sense which 17 the parties to an arms length transaction attribute to the terms which they incorporate. The law is not divorced from business realities nor can the vision of the Judge who interprets the law be disjointed from the modern necessities to make business sense to business dealings. 12. The Contract in the present case cannot be regarded as prohibiting extra payments. There is merit in the submission that a reading of the entirety of the contract would indicate that although lump sum bids were invited, the contract did not prohibit extra payment for extra work. The contract envisages the appointment of an Engineer for supervising the execution of work and administering the contract and his functions are by definition to include issuing and valuing variations, recommending extensions of time and valuing compensation events. The definition of the expression “contract price” envisages adjustment after the letter of acceptance, in accordance with the terms of the contract. Under the early warning provision in Clause 32.1, the contractor was to intimate the Engineer 18 of likely events or circumstances that may affect the work or increase the contract price. The requirement of such an intimation would have no meaning unless the contract were to imply a variation of the contract price as a result of events or circumstances that took place after acceptance. In such cases it was the Engineer who was empowered to assess, in the first instance, the legitimacy of the contractors demand. The contract envisages that where an additional cost could have been avoided by furnishing an early warning, the Contractor would not be entitled to additional payment. This again is an other indicator that additional payments were not prohibited so long as they fell within the purview of the terms of the Contract. The valuation of work was to include valuing variations and compensation events. It is in this background that the provisions of the contract will have to be construed. Clause 13.4 of the Instructions to Bidders and Clause 44.2 cannot be read in isolation. In fact, Clause 44.2 is immediately followed by Clause 44.3 which prescribes machinery for the adjustment of the contract price upon the occurrence of a compensation event. Clause 44.3 envisages that once the Contractor 19 has demonstrated the effect of a compensation event on the costs that were forecast, it was for the Engineer to assess the claim and adjust the price accordingly. The totality of the contractual provisions would, therefore, militate against the acceptance of the view that the contract as envisaged is a lump sum contract in the strictest possible sense in which variations and additional payments were absolute barred. The contractual provisions are liable to give rise to an inference to the contrary. 13. Hudson' s elaboration in his seminal work on engineering contracts contains an illuminating discussion on “Fixed price” or “lump sum” contracts on the one hand and “mixed contracts” on the other. The former, the author states, “are contracts where a fixed price or prices are quoted for carrying out and completing the work described in the drawings and specifications.” Hudson then elaborates that the appellations which parties ascribe are “not necessarily hard and fast categories of contract” and that “the particular nomenclature chosen by the parties to describe the contract as opposed to the substance of 20 the contract intention with regard to pricing to be derived from its detailed provisions, should not be treated as all-important”.1 The author goes on to state that contracts involving technical or civil works may well be of a mixed nature: “Moreover, construction contracts are to be found containing mixed characteristics. Thus many lump sum or fixed price contracts may have particular elements of work where the quantities are recognized as being unpredictable and where owners see an advantage in permitting an adjustment of the price of that particular item in either direction. So the use of provisional sums or provisional quantities, both of which will require an adjustment in the light of final “as built” quantities, are quite common in many lump sum contracts, although standard forms usually opt for one or the other.” The task of the Court in such cases, according to Hudson, is to ascertain only the objective intention of the contract as evidenced by the words used and not the subjective intentions of the parties. (page 113). Hudson emphasizes that the rule of evidence is that the whole of the contract should be examined before construing an individual part. The text relies upon a succinct statement of law by Lord 1 13th Edition page 419 21 Wilberforce in Prenn v. Sunmonds;2 one that would shed considerable light on the approach which must be followed in the present case: “The common and universal principle ought to be applied, namely that an agreement ought to receive that construction which its language will admit, and which will best effectuate the intention of the parties, to be collected from the whole of the agreement, and that greater regard is to be had to the clear intention of the parties than to any particular words which they may have used in the expression of their intent.” The approach of the Court is based on Justice Cardozo's dictum in Utica City National Bank v. Gunn3 (1918) 118 N.B. 607 where the Court held that it was the “genesis and aim of the transaction” that must be construed. Lord Diplock has emphasized the business commonsense principle in Antaios Compania Naviera S.A. V. Salen Resderierna A.B.4 : “If detailed semantic and syntactical analysis of words in a commercial contract is going to lead to a conclusion that flouts business commonsense, it must be made to yield to business commonsense.” 2 [1971] 1 W.I.R. 1381 3 (1918) 118 N.B. 607 4 [1985] A.C. 191 22 14. The same question of interpretation can be analysed from the perspective of four principles which can usefully be applied to the construction of the contract in this case. These principles are (i) Giving effect to the intention of the parties as found in the words they use; (ii) Repugnancy of an exclusion clause; (iii) The Contra Preferentum Rule; and (iv) Standard form and exclusion clauses. (i) Intention of parties : 15.