FAO(OS) 427.07 Page 1 of 65 * IN THE HIGH COURT OF DELHI AT NEW DELHI Judgment reserved on: 25.09.2009 % Judgment delivered on: 17.11.2009 + FAO(OS)No.427 OF 2007 NATIONAL HIGHWAYS AUTHORITY OF INDIA ..... Appellant Through: Mr. A.S. Chandhiok and Mr. Chetan Sharma, Senior Advocates with Mr. Tarun Dua, Ms. Geetika Panwar and Mr. Abhishek Kumar, Advocates. versus SOM DATT BUILDERS- NCC-NEC(JV) & ORS. ….Respondents Through: Mr. V.A. Mohatta and Mr. Amit K. Chadha, Senior Advocates with Mr. Arvind Minocha, Advocate. CORAM: HON’BLE MR. JUSTICE MUKUL MUDGAL HON’BLE MR. JUSTICE VIPIN SANGHI 1. Whether the Reporters of local papers may Yes be allowed to see the judgment? 2. To be referred to Reporter or not? Yes 3. Whether the judgment should be reported Yes in the Digest? VIPIN SANGHI, J. 1. This appeal under Section 37 of the Arbitration and Conciliation Act (The Act) has been preferred by National Highway Authority of India (NHAI) to challenge the judgment of the learned single Judge of this Court in OMP 316/2005 dated FAO(OS) 427.07 Page 2 of 65 29.8.2007 whereby the objections preferred by the appellant under Section 34 of the Act, to the award dated 3.6.2005 made by the Arbitral Tribunal have been dismissed. 2. The appellant awarded a contract to respondent no.1 in respect of Four Laning and strengthening of existing Two Lane Section of NH-2 near Kanpur. The contract was awarded on 27.3.2002 for an amount of Rs.4.961 billion. The contract awarded was a unit rate contract comprising of a detailed Bill of Quantities (hereinafter referred to as the BOQ). The BOQ contained the description of the items of the work to be executed by the contractor and the estimated quantities of each item involved in the execution of the contractor. The rates were to be filled by the bidders/contractors against the estimated quantities provided by the employer i.e. NHAI in the BOQ. During the progress of the work, a dispute arose between the parties in respect of Item No.7.07 (ii) of the BOQ which reads as under: Item Description Unit Quant ity Unit Rate Amount In figures In words 7.07 Providing reinforced earth work as per Technical Specifications clause 703 with precise concrete plain finish facia panel in cruciform FAO(OS) 427.07 Page 3 of 65 shape (grade of concrete M 35, thickness 180 mm) including soil reinforcing geogrid with all approved design & drawing of specialized firm. i) ------------- ----- ---- ----- ---- ---- ii) Greogrid/geo- textile reinforcement fabric with necessary overlaps jointing or stitching etc. complete as per drawing. Sq. m 6800 00 300.00 Three Hundre d Only 204,000,000.00 (iii) ----------- ---- ------ ----- ----- ------ 3. From the above it would be seen that for the estimated quantity of work of 6,80,000 Sq. Mtrs. Of ‗Geogrid/geotextile reinforcement fabric‖, the respondent contractor quoted a rate of Rs.300/- Sq. Mtrs. 4. The dispute that was referred to arbitration was not really in respect of the quality or nature of work to be performed, but was the consequence of the geogrid/geotextile material exceeding the estimated quantity as indicated in the BOQ contained in the contract. While the appellant claims that under the contractual terms the Engineer is entitled to seek re- negotiation of rates since the quantity of geogrid required to FAO(OS) 427.07 Page 4 of 65 execute the contractual work exceeded the BOQ quantity by nearly three times, according to respondent No.1 the rates do not call for re-negotiation under the contractual terms in the given fact situation. 5. The relevant contractual terms, which are contained in the General Conditions of Contract (GCC) and conditions of Particular Application (COPA) may be stated before we proceed further. Alterations, Additions and Omissions “51.1 Variations (GCC) The Engineer shall make any variation of the form, quality or quantity of Works or any part thereof that may, in his opinion, be necessary and for the purpose, or if for any other reason it shall, in his opinion, be appropriate, he shall have the authority to instruct the Contractor to do and the Contractor shall do any of the following:- (a) increase or decrease the quantity of any work included in the Contract, (b) omit any such work (but not if the omitted work is to be carried out by the Employer or by another contractor), (c) change the character or quality or kind of any such work, (d) change the levels, lines, position and dimensions of any part of the Works, (e) execute additional work of any kind necessary for the completion of the Works, or (f) change any specified sequence or timing of construction of any part of the Works. FAO(OS) 427.07 Page 5 of 65 No such variation shall in any way vitiate or invalidate the Contract, but the effect, if any, of all such variations shall be valued in accordance with Clause 52. Provided that where the issue of an instruction to vary the Works is necessitated by some default of or breach of contract by the Contractor or for which he is responsible, any additional cost attributable to such default shall be borne by the Contractor. 51.2 Instructions for Variations (GCC) The Contractor shall not make any such variation without an instruction of the Engineer. Provided that no instruction shall be required for increase or decrease in the quantity of any work where such increase or decrease is not the result of an instruction given under this Clause, but is the result of the quantities exceeding or being less than those stated in the Bill of Quantities. 52.1 Valuation of Variations (GCC) All Variations referred to in Clause 51 and any additions to the Contract Price which are required to be determined in accordance with Clause 52 (for the purposes of this Clause referred to as ―varied work‖), shall be valued at the rates and prices set out in the Contract if, in the opinion of the Engineer, the same shall be applicable. If the contract does not contain any rates or prices applicable to the varied work, the rates and prices in the Contract shall be used as the basis for valuation so far as may be reasonable, failing which, after due consultation by the Engineer with the Employer and the Contractor, suitable rates or prices shall be agreed upon between the Engineer and the Contractor. In the event of disagreement the Engineer shall fix such rates or prices as are, in his opinion, appropriate and shall notify the Contractor accordingly, with a copy to the Employer. Until such time as rates or prices are agreed or fixed, the Engineer shall determine provisional rates or prices to enable on-account payments to be included in certificates issued in accordance with Clause 60. FAO(OS) 427.07 Page 6 of 65 (COPA) ―Where the Contract provides for the payment of the Contract Price in more than one currency, and varied work is valued at, or on the basis of, the rates and prices set out in the Contract, payment for such varied work shall be made in the proportions of various currencies specified in the Appendix to Bid for payment of the Contract Price. Where the Contract provides for payment of the Contract Price in more than one currency, and new rates or prices are agreed, fixed, or determined as stated above, the amount or proportion payable in each of the applicable currencies shall be specified when the rates or prices are agreed, fixed, or determined, it being understood that in specifying these amounts or proportions the Contractor and the Engineer (or, failing agreement, the Engineer) shall take into account the actual or expected currencies of cost (and the proportions thereof) of the inputs of the varied work without regard to the proportions of various currencies specified in the Appendix to Bid for payment of the Contract Price.‖ 52.2 Power of Engineer to fix Rates (GCC) Provided that if the nature or amount of any varied work relative to the nature or amount of the whole of the Works or to any part thereof, is such that, in the opinion of the Engineer, the rate or price contained in the Contract for any item of the Works is, by reason of such varied work, rendered inappropriate or inapplicable, then, after due consultation by the Engineer with the employer and the Contractor, a suitable rate or price shall be agreed upon between the Engineer and the Contractor. In the event of disagreement the Engineer shall fix such other rate or price as is, in his opinion, appropriate and shall notify the Contractor accordingly, with a copy to the Employer. Until such time as rates or prices are agreed or fixed, the Engineer shall determine provisional rates or prices to enable on-account payments to be included in certificates issued in accordance with Clause 60. (COPA) FAO(OS) 427.07 Page 7 of 65 ―Where the Contract provides for the payment of the Contract Price in more than one currency, the amount or proportion payable in each of the applicable currencies shall be specified when the rates or prices are agreed, fixed or determined as stated above, it being understood that in specifying these amounts or proportions the Contractor and the Engineer (or, failing agreement, the Engineer) shall take into account the actual or expected currencies of cost (and the proportions thereof) of the inputs of the varied work without regard to the proportions of various currencies specified in the Appendix to Bid for payment of the Contract Price.‖ (GCC) Provided also that no varied work instructed to be done by the Engineer pursuant to Clause 51 shall be valued under Sub-Clause 52.1 or under this Sub-Clause unless, within 14 days of the date of such instruction and, other than in the case of omitted work, before the commencement of the varied work, notice shall have been given either: (a) by the Contractor to the Engineer of his intention to claim extra payment or a varied rate or price, or (b) by the Engineer to the Contractor of his intention to vary a rate or price. (GCC) (COPA) ―Provided further that no change in the rate or price for any item contained in the Contract shall be considered unless such item accounts for an amount more than 2 percent of the Contract Price, and the actual quantity of work executed under the item exceeds or falls short of the quantity set out in the Bill of Quantities by more than 25 percent.‖ 52.3 Variations Exceeding 15 per cent (GCC) FAO(OS) 427.07 Page 8 of 65 If, on the issue of the Taking-Over Certificate for the whole of the Works, it is found that as a result of: (a) all varied work valued under Sub-Clauses 52.1 and 52.2 and (b) all adjustments upon measurement of the estimated quantities set out in Bill of Quantities, excluding Provisional Sums, dayworks and adjustments of price made under Clause 70, But not from any other cause, there have been additions to or deductions from Contract Price which taken together are in excess of 15 per cent of the ―Effective Contract Price‖ (which for the purposes of this Sub-Clause shall mean Contract Price, excluding Provisional Sums and allowance for dayworks, if any) then and in such event (subject to any action already taken under any of Sub-Clause of this Clause), after due consultation by the Engineer with the Employer and the Contractor, there shall be added to or deducted from Contract Price, such further sum as may be agreed between the Contractor and Engineer or, failing agreement, determined by the Engineer having regards to the Contractor‘s Site and general overhead costs of the Contract. The Engineer shall notify the Contractor of any determination made under this Sub-Clause, with copy to the Employer. Such sum shall be based only on the amount by which such additions or deductions shall be in excess of 15 per cent of the Effective Contract Price. (COPA) ―Where the Contract provides for the payment of the Contract Price in more than one currency, the amount or proportion payable in each of the applicable currencies shall be specified when such further sum is agreed or determined, it being understood that n specifying these amounts or proportions the Contractor and the Engineer (or, failing agreement, the Engineer) shall take into account the currencies (and the proportions thereof) in which the Contractor‘s Site and general overhead cost of the Contract were incurred without being bound by the FAO(OS) 427.07 Page 9 of 65 proportions of various currencies specified in the Appendix to Bid for payment of the Contract Price. (COPA)‖ Measurement 55.1 Quantities(GCC) The quantities set out in the Bill of Quantities are the estimated quantities for the Works, and they are not to be taken as the actual and correct quantities of the Works to be executed by the Contractor in fulfillment of his obligations under the Contract.‖ 55.2 Omissions of Quantities (COPA) Items of Works described in the Bill of Quantities for which no rate or price has been entered in the Contract shall be considered as included in other rates and prices in the Contract and will not be paid for separately by the Employer.‖ 6. After adopting the procedure prescribed under the contract for settlement of disputes through a Dispute Resolution Board (DRB) (who opined in favour of the respondent contractors‘ contention), the dispute was referred to arbitration consisting of a panel of three arbitrators- one appointed by each side while the third Arbitrator was appointed by the two Arbitrators so appointed. All the three were technical persons conversant with the nature of the transaction. The limited question raised before the Arbitral Tribunal for adjudication was ―whether as per the provisions contained in the contract, the Engineer has the right to revise the rate for additional quantities of BOQ which are required for actual execution of work of RE Wall as per the approved FAO(OS) 427.07 Page 10 of 65 design‖. The award rendered by the Arbitral Tribunal is a majority Award, with one of the learned arbitrators viz. Shri S.N. Mane giving a dissenting opinion. The Arbitral Tribunal in its award upheld the interpretation advanced by the respondent. It held that variation in terms of Clause 51.1 was not established. The appellant was directed to pay to the respondent for the actual quantity of geogrid required to be executed to complete the work of the RE Wall as per the approved design at the BOQ rate. 7. The Arbitral Tribunal took note of the fact that the design approved by the Engineer requires execution of 19,58,105 sq. meters of geogrid as compared to 6,08,000 sq. meters as estimated in the BOQ. In paragraph 7.5 of the award the Tribunal notes the disagreement between the parties on the point whether in a situation the increase or decrease in quantity is not the result of an instruction, but is the result of quantity exceeding or being less than those stated in the Bill of Quantities, it constitutes a ―variation‖ or not. While the appellant/ claimant contended that it constitutes a ―variation‖ and consequently the rate could be re- negotiated by the Engineer for the excess quantity, the respondent contended that such increase or decrease, where instructions are not required and it is not the result of instructions but is the result of quantity exceeding or being less than those stated in the Bill of Quantities as per proviso in sub-Clause 51.2, it would not constitute a ―variation‖ and provisions made under sub-Clause FAO(OS) 427.07 Page 11 of 65 52.2 are not applicable to this situation. The respondent also contended that the rates could be re-negotiated only where the ―variation‖ in work is the result of an instruction issued by the Engineer pursuant to Clause 51. 8. The respondent relied upon the stand taken by the petitioner before the DRB which was contained in a question as framed by the appellant/claimant and the answer given by it to the said question. The question framed by the appellant/claimant was ―Would the Engineer be contractually correct to fix a new rate on a variation of quantity over and above the Contract bill of Quantities, which varies from the original design concept?‖ Answer given by the appellant/claimant was ―Normally and contractually this practice is not done as Clause 51.1 does not permit a change in rate due to change in quantity as long as the form or character of the line item is not altered or affected, however, because the Contractor’s design varies considerably from the original design, a negotiated rate should be considered‖. 9. The Tribunal observed that the claimant/appellant had admitted that the design evolved by the respondent‘s consultants met the specified criteria. Consequently, there was no change in design and no such change was established before the Tribunal. The implication of this finding was that there was no instruction given by the Engineer referable to Clause 51.1 of the GCC. The Tribunal also held that the quantity of geogrid given at the tender FAO(OS) 427.07 Page 12 of 65 stage has been found to be wrong. Therefore, the increase in quantity is a mere increase to meet the requirement for completion of RE Wall work. The Tribunal further held that ―in a contract of the type in question which is an item rate contract based on the priced schedule of provisional quantities the ultimate contract amount can be ascertained when all the work done in terms of the contract is finally measured and the contract amount computation done on the basis of the prices and rates set out in the Bills of Quantities. The contract between the parties, therefore, is a framework which determines the parties rights and obligations.‖ 10. The Tribunal held that the parties knew about the scope of work of RE wall and both the parties knew ―that it was impossible to determine the ultimate contract amount before the completion of RE Wall work and if ultimate quantity exceeds the BOQ quantity, it will be an automatic change and shall be paid at BOQ rate in such type of measurement contracts where the quantities are provisional and ultimate quantities required for completion of the work are to be executed and paid as per the quoted rate.‖ 11. The Tribunal further held ―The fact that ultimate measured amount of work performed is different from estimated quantity is irrelevant because both the parties contracted on the basis that the ultimate quantity may increase or decrease.‖ FAO(OS) 427.07 Page 13 of 65 12. In support of its conclusion the Tribunal took into account the fact that the Engineer and the project director demanded funds for the increased quantity of work at the contractual rate. The Tribunal further held that ―………the second para of sub-clause 52.2 clearly provides that the provision in this Sub-clause is applicable only for varied work instructed to be done by Engineer as per Clause 51 and the present case before us is not a case where Engineer’s instruction are required as per the provisions of Sub-Clause 51.2. The Engineer who was administering the contract, when the variation became known, did not give any notice of 14 days of any intention to vary the rate; rather he found in his opinion that BOQ rate shall apply being a mere change in quantity and the work including the use of geogrid material was allowed to be executed accordingly, checked at every stage and paid at BOQ rate. The COPA which is continuation of sub para to sub-Clause 52.2 mentioned above accordingly will not apply in the present case. The notices on 28th October, 2003 and subsequently are just after-thoughts and we hold these being of no effect, and not applicable to the present case.‖ 13. The Tribunal also placed reliance upon the FIDIC Guide. 14. In his dissenting opinion the Arbitrator Sh. S.N. Mane took note of Clause 67.3 and particularly Clause 67.3(iii) of the contract. According to Clause 67.3 the Arbitral Tribunal had full power to open up, review and revise any decision, opinion, instruction, FAO(OS) 427.07 Page 14 of 65 determination, certificate or valuation of the Engineer and any recommendation of the DRB. According to Clause 67.3 (iii) neither party was limited in the proceedings before the Tribunal to the evidence or arguments raised before the DRB. He observed that in an item rate measurement contract, each item was an entity by itself with its own nomenclature, specification, rate and quantity and could not be treated as contingent to other items. In a way, in a construction contract each item was contingent upon other to produce the net product i.e. the completed work as a whole. 15. He held that the variation in the quantity of geogrid was a result of an instruction and, even if the same was not an instructed variation, to the extent of the variation, the rates could be revised by the Engineer. He held that the Engineer had given notice to the contractor of his intention to re-negotiate the rate vide letters dated 20.10.2003 and 22.11.2003 even before the commencement of varied work i.e. the work exceeding the quantity set out in the BOQ by more than 25 per cent. Thus the authority of the Engineer to re-negotiate the rate in terms of the contract agreement stood established, according to him. 16. The learned Single Judge while passing the impugned order took note of the appellant‘s submission that Clause 51.1 refers to all kinds of variations which will include variations arising as a result of issuance of instructions by the Engineer as well as variations which are not the result of any instructions by the FAO(OS) 427.07 Page 15 of 65 Engineer. After setting out the relevant clauses of the contract agreement the learned Single Judge observed that Clause 52.1 “deals only with the variations as provided for in Clause 51 which are required to be determined in accordance with Clause 52”. He also noted the respondent‘s submission that the aforesaid clauses had no application to the case in hand as there were no instruction given by the Engineer — the increase in the quantities of geogrid occurring only on the account of increase in the BOQs. 17. After considering the rival submissions, the learned Single Judge held as follows: A. That there was little doubt that clause 51.1 read with the other clauses referred to the variations which are instructed variations, i.e. variations which are a consequence of issuance of instructions and clause 52 did not come into play since the same applied only to variations arising as a result of issuance of instructions. B. It was the categorical finding of the Arbitral Tribunal that the ultimate measured work performed was different from the estimated quantity but the parties contracted on the basis that such quantity may increase or decrease. FAO(OS) 427.07 Page 16 of 65 C. There was no change in the design in view of the clear admission of the appellant before the DRB that the design was reviewed and found according to the specified criteria and the appellant was not able to establish any change in the design. D. The Arbitral Tribunal had not held that the Engineer failed in its duty to give the 14 days notice but had, in fact, held that since the matter fell within the domain of uninstructed variations i.e. variations which resulted without the issuance of instructions, the Engineer was not required to give 14 days‘ notice, that would have been the requirement only in case of variations resulting from the issuance of instructions. E. He adopted the decision in Grinaker Construction (TVL) (Pty) Ltd Vs. Transvaal Provincial Administration 1982 (I) AD 78 wherein a somewhat similar contractual clause was interpreted by the Appellate Division of the South African Court. In that case it was held that automatic increases or decreases in quantities did not constitute variation. The learned Single Judge noted the similarities in the relevant clause before the South African Court and the relevant clauses of the contract in question. The learned Single Judge agreed with the