IN THE HIGH COURT OF HIMACHAL PRADESH AT SHIMLA Arb. Case No. 95 of 2002 and Arb. Case No. 11 of 2003. Date of Decision: 19th December, 2008 Arb. Case No. 95 of 2002 Executive Engineer Objector Versus M/s Sohan Singh & Co. Respondent Arb. Case No.11 of 2003 M/s Sohan Singh & Co. Claimant/Objector Versus State of H.P. and another Respondents. Coram The Hon’ble Mr. Justice Sanjay Karol,J. Whether approved for reporting1? Yes. For the Claimant: Ms.Salochna Kaundal, Advocate, vice Mr.O.P.Thakur, Advocate. For the State: Mr.J.S.Guleria, Law Officer and Mr.Anil Jaswal, Dy. Advocate General. Sanjay Karol, J. (Oral) In these proceedings under Section 34 of the Arbitration and Conciliation Act, 1996 (hereinafter referred to as the Act) both the claimant M/s Sohan Singh and Co. (for short, the Contractor) as also the State of Himachal Pradesh (for short, State), have assailed the award dated 28.8.2002 passed by the Arbitrator cum Superintending Engineer (Arbitration), HP PWD, Solan, wherein the claimants claims have been Whether the reporters of Local Papers are allowed to see the Judgment? 2 partly allowed for a sum of Rs.14,04,892/- alongwith interest @ 12%/18% per annum. The Notice inviting tenders was issued by the State for execution of works as ‘extension of Air Strip Jubber Hatti (SH: Cutting in earth in hillock & berms left and right side of Air Strip) at Jubber Hatti’. The estimate cost of the project as per the tender was Rs.59,15,489/-. The qualified and eligible persons submitted their bids and the Contractor vide letter dated 18.5.1999 was awarded work for a sum of Rs.1,66,97,423/-. The work was to be executed within a period of 9 months i.e. from 1.6.1999 upto 29.2.2000. During the course of execution of contract, certain additional works were awarded and thus the total work awarded to the contractor was for a sum of Rs.2,87,97,976/-. It is a matter of record that the work was completed on 15.3.2001. It appears that certain disputes were raised by the Contractor with regard to the increase in price due to the deviation in the quantity of work, hence negotiations took place between the parties and parties consented to certain terms. It is a matter of record that vide letter dated 14.6.2000, the contractor recorded the agreed terms as under:- “M/s Sohan Singh & Co. Engineer & Contractors Plot No.6 Punjab Mata Chowk, Vikas Nagar, Pakhowal Road, Ludhiana (Pb.) P.W.D. & B.R. Regd. A Class Contractor in Himachal Irrigation Regd. A Class Contractor in Punjab No… Dated 14.6.2000 Executive Engineer, 3 Shimla Division No.II., Himachal Pradesh, PWD., Shimla-171004 Subject: Extension of Air Strip Jubbar Hatti. Agreement No. 21 of 1999-2000. Sir, This has a reference to the negotiation held in the office room of Chief Engineer (South), on 14.6.2000 regarding rates of my quantities of earthwork beyond the agreement deviation of 30% (Thirty percent). Due to the steep increase in the price of diesel, M.Oil Machinery and Labour it is not possible for me to carry out the work at my agreement rate of Rs.77/- per cum (Seventy Seven). However, in order to maintain goodwill with the Department I am willing to execute the quantities beyond the deviation limit at Rs.92/- per cum (Ninety Two). I further agree for recovery of stones as per the existing terms and conditions of the agreement. I further agree that no escalation shall be payable on my above rate of Rs.92/- per cum (Ninety two). Assuring you of our best services. Sd/- For M/s Sohan Singh & Co.” In spite of the same certain disputes and claims were raised by the Contractor and, as such, clause 25 containing the arbitration clause was invoked by the Contractor and reference was made to the Superintending Engineer (Arbitration), HP PWD, Solan, who entered into reference on 29.12.2001. Various claims were filed by the Contractor before the Arbitrator but, however, no counter claims were filed by the State. The Superintending Engineer of the State issued a letter dated 19.5.2001 addressed to the Executive Engineer sanctioning the grant 4 of extension of time for the period 1.3.2000 to 15.3.2001. the letter is reproduced as under:- “Himachal Pradesh Public Works Department No.SE-IV-CTR-12/20-01-2043 Dated 19.5.2001 To The Executive Engineer, Shimla Division No.II, HP PWD, Shimla – 171 004 Subject: Extension of runway of Jubberhatti Airport, Shimla (SH: Cutting in earth work of Hillock and berms left and right side of Airport Strip at Jubber Hatti (Agr. No. 21 of 1999-2000). Ref: Your office letter No. SD.II.A.C.-Airport (Hill Lock 2001-02-1220 dated 17.5.2001. As recommended by you, the sanction for grant of time extension for the period w.e.f. 1.3.2000 to 15.3.2001 (380 days) is hereby accorded in favour of Shri/ M/s Sohan Singh & Co. This extension is granted without prejudice to the right to recover liquidated damages in accordance with the provision of clause-2 of the said agreement. Sd/- Superintending Engineer, Encls: Nil 4th Circle, HP PWD, Shimla-3.” This fact was brought to the notice of the Arbitrator and considering the material on record, the Arbitrator held the Contractor entitled to compensation as overheads for 380 days on account of machinery, labour and supervisory staff lying idle. The contract period was prolonged due to the breaches on the part of the Executive Engineer/State. Consequently, the Arbitrator awarded various amounts as compensation to the Contractor. The Arbitrator also held that contract in question was 5 essentially a labour contract and therefore no sales tax could have been deducted by the State. Interest @ 12% from the date of the award upto one year and further @ 18% per annum was awarded based on various judicial pronouncements. In effect the Arbitrator awarded the following amounts as compensation:- Sr.No. 1. Description of claim 2. Amount demanded 3. Amount awarded 4 Remarks 5 CLAIMS 1. Damages suffered on account of prolongation of contract work Rs.8,23,000/- (Amended to Rs.23,50,000) Rs.9,27,625 2. Damages suffered on account of idling of labour and heavy machinery Rs.21,80,000/- NIL 3. Wrong deduction of useful/suitable stone not recovered during excavation/ cutting of Hillocks Rs.17,80,000/- (Amended to Rs.35,14,218) NIL 4. Damages suffered on account of mechanical transportation of unsuitable stone to dumping site at a lead of 1.60 KM. Rs.27,49,000/- NIL 5. Damages suffered on account of carriage of suitable/useful stone from quaries (HP. Rs.14,39,000/- NIL 6 PWD) to Crate site. 6. Refund on account of wrongful deduction of sales tax Rs.5,77,000/- Rs.5,77,267/- (Amount confirmed & agreed by both the parties during the proceedings of 7th hearing. 7. Refund of security Rs.1,00,000 Rs.1,00,000/- In the shape of FDR 8. Interest @ 24% per annum @ 12/- per annum simple interest on Rs.5,77,267/- for one year till date of award. 9. Arbitration expenses. Rs.2,00,000/- NIL Total: Rs.15,04,892/- + Rs.1,000,000/- in the shape of FDR + interest as awarded against claim No.8. This Court, taking into account both the objection petitions framed the following issues:- Arb. Case No.11 of 2003 1. Whether the Arbitrator committed a legal error in clubbing claims No.1 and 2 despite objection against such clubbing by the objector, if so, its effect? O.P. Objector. 2. Whether rejection of claims No.3 to 5 is the outcome of misinterpretation of the note given on the schedule of quantities and undertakings obtained from the objector under Clause 12(a) of the agreement, if so, its effect? O.P.Objector 3. Whether the claimant is entitled to interest at the rate of 24% p.a for the left out period w.e.f. 16.3.2000 to 29.8.2001? O.P.Objector 4. Relief. 7 Arb. Case No. 95 of 2002 1. Whether the Arbitrator travelled beyond the scope of arbitration agreement while entertaining and them allowing claims No.1,6 and 8 as well as interest, if so, its effect? O.P.Objector. 2. Whether the Arbitrator has wrongly allowed 12% interest on the sales tax deduction which is as per terms of the agreement on the wrong premise that claim was admitted by the department, if so, its effect? O.P.Objector 3. Whether the Arbitrator wrongly allowed the prolongation charges and interest against the terms of contract, if so, its effect. O.P. Objector 4. Whether the award is not in consonance with Section 31 of the Arbitration and Conciliation Act and is also against public policy, if so, its effect? O.P.Objector 5. If issues No.1 to 4 are decided against the objector, whether no interest is payable on the awarded amount? O.P.Objector 6. Relief. Learned counsel for the parties pressed that all the aforesaid issues be clubbed together and decided claimwise as essentially what is required to be seen is as to whether the award can be faulted on any of the grounds mentioned in Section 34 of the Act. As such all the issues are being clubbed together and decided claimwise. I have heard learned counsel for the parties and also perused the record. It is a settled law that the scope of interference against the arbitral award by the Court is limited. It is only if the award is against the fundamental policy of Indian law, interest of India, justice or morality or 8 contrary to the terms of the agreement that the Court can interfere. [Oil & Natural Gas Corporation Ltd. vs. Saw Pipes Ltd., (2003) 5 SCC 705]. It is also settled law that interpretation of contract is a matter solely within the domain of the Arbitrator and if two views are possible, the Court shall not interfere with the Award by adopting its own interpretation or that reasonableness of an award is a matter which the Court shall not consider unless the award is preposterous or absurd. It is also settled law that the Court cannot reappreciate the evidence or examine the correctness of the conclusions arrived at by the Arbitrator based upon the same and merely because in the opinion of the Court the other view is equally possible would not interfere. [Bhagwati Oxygen Ltd. vs. Hindustan Copper Ltd., (2005) 6 SCC 462]. The Apex Court in Pure Helium India (P) Ltd. vs. Oil & Natural Gas Commission, (2003) 8 SCC 593, reiterated its earlier view expressed in Rajasthan State Mines & Minerals Ltd. v. Eastern Engg. Enterprises, (1999) 9 SCC 283, that if there is a specific term in the contract or the law which does not permit or give the Arbitrator the power to decide the dispute raised by the claimant or that there is a specific bar in the contract to the raising of the particular claim than the Award passed by the Arbitrator in respect thereof would be in excess of jurisdiction. Patent illegality being facet of public policy has also been held to be a ground for interference under Section 34 of the Act [Oil & Natural Gas Company, (supra)]. Correspondences exchanged by the parties can be considered for the purpose of construction of a contract [Mcdermott International Inc. vs. Burn Standard Co. Ltd. and another, (2006) 11 SCC 181]. 9 The Apex Court in Hindustan Zinc Ltd. vs. Friends Coal Carbonisation, (2006) 4 SCC 445, has reiterated the principles laid down in Saw Pipes Ltd. [(2003) 5 SCC 705], and has held as under:- “14. The High Court did not have the benefit of principles laid down in Saw Pipes, and had proceeded on the assumption that award cannot be interfered with even if it was contrary to the terms of the contract. It went to the extent of holding that contract terms cannot even be looked into for examining the correctness of the award. This Court in Saw Pipes has made it clear that it is open to the court to consider whether the award is against the specific terms of contract and if so, interfere with it on the ground that it is patently illegal and opposed to the public policy of India.” In the backdrop of the aforesaid principles of law, the factual matrix of the present case needs to be examined. Even though the work tendered was for a sum of Rs.59,15,489/- only, but, however, shockingly the contractor was awarded works for a sum of Rs.1,66,97,423/-. Not only that additional work was also awarded making the total awarded work to be of Rs.2,87,97,976/-. Why and with whose sanction the same was done is not evident from the record. Certainly it is a matter which calls for an enquiry at the highest level in the Government. There is yet another shocking feature which has come to the notice of the Court. From the record, it is evident that the Contractor had alleged delay in performance of reciprocal obligation on the part of the State to the extent of only 45 days. But, however, in exercise of clause (5) of the agreement the State extended the contract period by 380 days. Importantly the Contractor did not apply for the said extension within a period of 30 days as stipulated in Clause (5) of the agreement. How and whether the person had the authority and competence to do so is also not evident from 10 the record. This promoted the contractor to amend his claim petition as has been noticed hereinafter. Certainly it is also a matter of concern and calls for an enquiry. The Secretary (PWD), State of H.P., is directed to constitute an enquiry and take the matter to its logical conclusion. After all in the distribution of state largesse, State is required to act fairly and show transparency. The State is the custodian of public wealth and moneys. It is to act not like the private entrepreneur. At all levels there has to be transparency and the governmental actions should instill confidence in the minds of public which is essential for good governance. The actions have to be in accordance with rules and norms. Be that as it may be since the Arbitrator has dealt with the Contractor’s claims, itemwise, therefore, as requested by the parties, I propose to deal in the same manner. The issues raised by the learned counsel for the parties have also been answered claimwise. Claim No.1: Damages suffered on account of prolongation of contract work. Rs.8,23,000/- (Amended to Rs.23,50,000/-) As against the claim of Rs.23,50,000/-, the Arbitrator awarded a sum of Rs.9,27,625/-. While doing so, the Arbitrator took into account the letter dated 4.11.2001 whereby the Executive Engineer had given four reasons of delay while recommending extension of contract period by 380 days. The reasons of extension furnished were as under:- “1. Hindrance due to the non-clearance of forest coming in the hillock and dumping site. 2. Due to the non shifting of water supply line. 3. The quantum of the work increased and became double. 4. Due to the hindrance caused by the Airport Authority as working of non schedule flights for which work progress suffered.” 11 The Arbitrator held that notwithstanding the fact that the amount of the tendered price stood enhanced, considering the deviation in the tendered quantity there was no conflict between Clause 10CC and Clause 5 of the agreement and as such against the Contractor’s Claim of 10% of the tendered amount as overhead due to the delay attributable to the State, purely on the basis of guess work, awarded 4% of the entire contracted/awarded amount. For the purpose of adjudicating the controversy in issue, the relevant provisions of the contract are required to be considered and for the purpose of convenience are reproduced as under:- “Clause 5: Extension of Time If the contractor shall desire an extension of time for completion of the work on the grounds of his having been unavoidably hindered in its execution or on any other ground he shall apply in writing to the Executive Engineer within 30 days of the date of hindrance on account of which he desires such extension as aforesaid and the Executive Engineer shall, if in his opinion (which shall be final) reasonable grounds be shown therefore, authorize such extension of time, if any, as may, in his opinion be necessary or proper.” “Clause 10 (CC): If the prices of materials (not being materials supplied or services rendered at fixed prices by the Dept. in accordance with Clause 10 & 34 hereof) and/or wages of labour required for execution of the work increase, the contractor shall be compensated for such increase as per provisions detailed below and the amount of the contract shall accordingly be varied, subject to the condition that such compensation for escalation in prices shall be available only for the work done during the stipulated period of the contract including such period for which the contract is validity 12 extended under the provisions of clause-5 of the contract with out any action under clause 2 and also subject to the condition that no such compensation shall be payable for a work for which the stipulated period of completion is 6 months or less. Such compensation for escalation in the prices of materials and labour, when due, shall be worked out based on the following provisions: 1. The base date for working out such escalation shall be last date on which tenders were stipulated to be received. 2. The cost of work on which escalation will be payable shall be reckoned as 85% of the cost of work as per the bills, running or final and from this amount the value of materials supplied under clause 10 of this contract or services rendered at fixed charges as per clause 34 of this contract, & proposed to be recovered in the particulars bill shall be deducted before the amount of compensation for escalation is worked out, in the case of materials brought to site for which any secured advance is included in the bill the full value of such materials as assessed by the Engineer-in-charge (and not the reduced amount for which secured advance has been paid) shall be included in the cost of work done for operation of this clause. Similarly when such materials are incorporated in the work and the secured advance is deducted from the bill, the full assessed value f the materials originally considered for operation of this clause should be deducted from the cost of work shown in the bill, running or final. Further the cost of the work shall not include any work for which payment is made under clause 12 or 12(a) at prevailing market rates. 3. The components of materials, labour P.O.L. etc. shall be pre-determined for every work and incorporated in the conditions of contract attached to the tender, papers and the decisions of the Engineer-in-charge in working out such percentage shall be binding on the contract. ….” 13 “Clause 12A: In the case of contract or substituted items which individually exceed the quantity stipulated in the contract by more than the deviation limit except the items relating to foundation work which the contract is required to do under clause 12 above the contractor shall within 7 days from the receipt of order claim revision of the rates supported by proper analysis in respect of such items for quantities in excess of the deviation limit, notwithstanding the fact that the rates for such items exist in the tender for the main work or can be derived in accordance with the provisions of sub- clause (ii) of clause 12 and the Engineer-in-charge may revise their rates, having regard to the prevailing market rates and the contractor shall be paid in accordance with the rates so fixed. The Engineer-in-charge shall, however, be at liberty to cancel as his order to carry out such increased quantities of work by giving notice in writing to the contractor and arrange to carry it out in such manner as he may be considered advisable. But, under no circumstances the contractor shall suspend the work on the plea of non- settlement of rates of items falling under this clause.” It is a matter of record that no documentary evidence in support of the claims has been filed by the Contractor. No oral evidence was led during the course of arbitral proceedings. The claims were awarded purely on the basis of pleadings and some correspondence exchanged between the parties. From letter dated 14.6.2000 (as reproduced above), it is evident that additional works beyond the deviation limits of 30% stood awarded to the Contractor. The dispute with regard to pricing was raised by the Contractor and after various negotiations a consensus was arrived at on 14 three counts, (i) the price for works beyond the deviation limit was enhanced from Rs.77/- per cum to Rs.92/- per cum, (ii) recovery of stones in terms of the agreement were to be carried out by the State and (iii) no escalation was to be paid over and above the agreed amount of Rs.92/- per cum. The Arbitrator has definitely not taken this letter into account while adjudicating the claims. It is interesting to note that in the claim petition the contractor had claimed delay of 45 days in the performance of the reciprocal promises on the part of the State; 16 days due to intervention of forest department; 29 days due to intervention of IPH department. The Contractor was emboldened to amend its claim from Rs.8,23,000/- to Rs.23,50,000/- claiming compensation for damages suffered for idling of labour and heavy machinery for 380 days. It has also been noticed that even with regard to 45 days no documentary or oral evidence on record to prove and establish that the Contractor’s men and machinery had been deployed at the site, which remained idle due to the obstruction directly attributable to the Forest and the IPH departments of the State. It is true that interpretation of contract is within the domain of the Arbitrator, but, however, in the present case as noticed hereinafter, the amount awarded is contrary to the terms of the contract. Clause 5 (supra) simply deals with the extension of time of the contract period. Any increase in price of material during the stipulated period including the extended period would entitle the contractor for escalation. In terms of Clause 10(CC), this, however, would be subject to the contractor’s proving (a) that there has been an increase in the price of material, (b) that the work was 15 executed within the stipulated period including the period of extension and (c) that the same is not included in the work for which the payment is made under Clause 12 or Clause 12-A at the prevailing market rate. Clause 12-A deals with fixation of price where the awarded quantity exceeds the deviation limit. Pursuant to the representations of the Contractor, the State had held negotiations and arrived at a settlement in terms of letter dated 14.6.2000. Thus if all the clauses are read in conjunction with each other it would lead to an irresistible conclusion that the Contractor was not entitled to any escalation for the extended period under Clause 10(CC). I have already noticed that there is nothing on record to substantiate an independent claim even under Clause 10(CC). Mere extension of time under clause 5 of the contract by itself would not entitle the contractor for damages. In view of the specific bar under clause 10(CC)(2), no amount could have been awarded to the Contractor and thus the amount under claim No.1 was wrongly awarded to the Contractor. It is contrary to the terms of the agreement. The illegality is patent and writ large, borne out from the record. It is a matter of dispute as to whether four reasons assigned by the Contractor for delay were factually correct or not. It is equally true that while recommending the Executive Engineer had also counter-signed the claim form. The four reasons of delay are alleged to have been furnished by the Executive Engineer. The form stands signed by both the Contractor and the Executive Engineer. As to whether the Contractor had assigned the reasons which were affirmed/recommended by the Executive Engineer or whether the Executive Engineer assigned the same and counter- signed by the Contractor would not matter. Assuming that the reasons were 16 true and correct. In my view the execution of the work stood obstructed only for a period of 45 days and not beyond that. There is nothing