IN THE HIGH COURT OF HIMACHAL PRADESH SHIMLA Arbitration Case No. 25 of 2004 Reserved on: 18.7.2008 Date of decision: 31.07.2008 Vinod Karnal …Claimant/Objector Versus The State of H.P.& another …. Respondents Coram: The Hon’ble Mr.Justice Surinder Singh, J. Whether approved for reporting ?1yes. For the Claimant/Objector: Mr J.S.Bhogal,Senior Advocate, with Mr.Suneet Goel,Advocate. For the respondents : Mr.J.S.Guleria, Law Officer. Surinder Singh, J. Respondent No.2 Executive Engineer, Kalpa Division, HPPWD invited tenders, for and on behalf of the State of Himachal Pradesh, for the work of “C/O 22 mtrs span RCC T beam bridge over Pangi Nallah No.1 at link road at KM 1/605”. The claimant-Objector submitted the tender, which was submitted by respondent No.2. A formal contract agreement was executed between the parties, on the standard form of contract, adopted by respondent 1 Whether the reporters of Local Papers may be allowed to see the judgment ?yes - 2 - for item rate works and the same has been numbered as “Agreement No.17” of 1993-94 in the office of respondent No.2. The time limit for the aforesaid work was one year and as such the stipulated date of completion was 29.6.1994. The agreement provided for a deviation of 20% and variation in prices of labour and material was covered under the escalation clause 10C Cement and Tor steel at the rate of Rs.130/- per bag and Rs.13,500/- per MT was stipulated to be supplied under clause 43 of the agreement from the store at Kalpa. While executing the work, the scope of work was enhanced and work amounting to Rs.14,55,648/- finalized by respondent No.2 vide 8th and final bill dated 27.7.2000. Extension of time up to 29.12.94 was approved with mutual consent and up to 4.11.95 was approved unilaterally when the work was actually completed. The claimant-Objector filed an application, before this Court, under sub-section (6) of Section 11 of the Arbitration and Conciliation Act, 1996, in short hereinafter to be referred as “the Act”, for the appointment of an Arbitrator for release of his payment for the work done and dispute relating to it. Vide order dated 17.9.98 passed in Arb. Petition No.9 of 1998, - 3 - respondents were ordered, by this court, to release the final payment of the claimant/objector, after approval of deviation from the competent authority within two months of the order and thereafter to appoint an Arbitrator, if any dispute remains to be settled. Consequently, the Superintending Engineer, Arbitration Circle, HP PWD, Solan, was appointed as a sole Arbitrator to decide and make an award regarding the claims/disputes of the claimant and the counter claim, if any, filed by the respondents. The claimant-Objector raised the following claims before the Arbitrator: Claim No.1 Payment of final bill Rs.97,427/- Claim No.2 Payment of market rates for deviated items Rs.7,52,437/- Claim Bo.3 Damages for breach of contract Rs.10,15,999/- Claim No.4 Refund of security deposit Rs.77,698/- Claim No.5 Payment of interest @ 24% per annum The Arbitrator passed the award on 25.3.2004. The claimant-Objector felt aggrieved and dissatisfied with the award, filed objections under section 34 of the Act in this Court on the grounds that while conceding that the objector had submitted the analysis of rates for the deviated items vide - 4 - letter dated 28.11.94, the learned Arbitral Tribunal did not allow the said rates to the claimant-objector on the plea that the claimant- Objector did not lead any evidence in support of the market rates, which is against the settled principle of law. Relying upon the analysis of rates submitted by the respondents and against the settled law, the award was liable to be set aside being opposed to the Public Policy of India. The learned Arbitrator has not given any reason for restricting the period of interest to three years, as such prayed for to seta side the award. In reply, the respondents raised preliminary objections that the award passed by the arbitrator is reasonable, legal and valid and the objections filed, under section 34(3) of the Act, by the claimant-objector are not maintainable. ON merits, it is contended that neither the award is against the law and facts nor the same is against the Public Policy of India. In fact clause 12(A) of the said agreement specifically provides, that the market rates are to be claimed by the contractor, which are supported by the analysis for items under the said provisions, the final authority has been made the Engineer-in-Charge. When the Engineer-in- - 5 - Charge has taken a final decision, taking cognizance of the said final decision the learned Arbitrator had taken note of analysis of rate given by the Engineer-in-Charge to the Contractor, which is reasonable and legal, therefore, the same is not liable to be set aside. More specifically, when the respondents have accepted the findings and released the payment to the claimant/Objector. It was also averred that the learned Arbitrator has rightly held entitled the contractor for interest after July, 2007 due to the reason that the contractor had changed the correspondence address and the respondent made the correspondence on his old address for finalization of the bill but the letter sent were received back. For this reason, the respondent cannot be held responsible for payment of interest up to July, 2007. Thus, prayed for dismissal of the objection petition. On the rival contentions of the learned counsel for the parties, this court on 31.8.2004 framed the following issues: 1. Whether the Award of the Arbitrator is liable to be set aside as being against the Public Policy of India? - 6 - 2. Relief. I have heard the learned counsel for the parties and gone through the record of the learned Arbitrator. Issue No.1 As a matter of fact, sub section (1) of section 34 of the Act provides for setting aside the award of the arbitrator, on an application made by the aggrieved party in case the award suffers from the vice of sub section (1) of section 34 of the Act. The arbitral award is not open to challenge save and except specifically provided under section (2) of section 34 of the Act read with grounds 13 and 16 of the Act. In the instant case, the claimant-Objector has challenged the award under sub section (2) of Section 34 of the Act. Now this court has to see whether the ground contemplated therein exists in the present case or not? Phrase “Public Policy of India” used in Section 34 in the context was given wider meaning by the Apex Court in Oil & Natural Gas Corporation Ltd. Versus Saw Pipes Ltd. (2003) 5 Supreme Court Cases 705 and held that the concept of public policy connotes some matter which concerns public - 7 - good and the public interest. What is for public good or in public interest or what would be injurious or harmful to the public good or public interest has varied from time to time. However, the award which is, on the face of it, patently in violation of statutory provisions cannot be said to be in public interest. Such award/judgment/decision is likely to adversely affect the administration of justice. Hence, in addition to the narrower meaning given to the term “Public Policy” in Renusagar’s case: 1994 Supp (1) SCC 644 it has to be held that the award could be set aside if it is patently illegal. The result would be that an award could be set aside if it is contrary to: (a) fundamental policy of Indian Law; or (b) the interest of India; or (c) justice or morality; or (d) in addition, if it is patently illegal. Illegality must go to the root of the matter and if the illegality is of trivial nature it cannot be held that award is against the public policy, Award could also be set aside if it is so unfair and unreasonable that it shocks the - 8 - conscience of the court. Such an award is opposed to public policy and is required to be adjudged void. In the instant case, the contention raised by the claimant-objector that the learned Arbitrator has wrongly and erroneously decided claim No.2 is unsustainable on the ground that it had decided against Clause 12A of the agreement, which reads as under: “CLAUSE 12 A-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 contractor is required to do under clause 12 above, the contractor shall, within 7 days from the receipt of the 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 - 9 - 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 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 consider 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. All the provisions of the preceding paragraph shall equally apply to the decrease in the rates of items for quantities in excess of the deviation limit, not withstanding the fact that the rates for such items exist in the tender for the main work can be derived in accordance with the provisions of sub clause (ii) of the preceding clause 12, and the Engineer-in-Charge may revise such rates having regard to the prevailing market rates.” Perusal of the above clause of the agreement reveals that the claimant-Objector is - 10 - entitled for a fair and equitable rate for the contract or substituted items, which individually exceed the quantity stipulated in the contract by more than the deviation limit. The learned Arbitrator has rightly noticed that this clause though debars payment of items of foundation work at fair and equitable rates but in the present case where the deviations are of the order of 100% over and above the agreemental amount, the contractor is not bound to do the deviated quantities on agree mental rates to any unlimited quantity especially in the present case where the deviation have occurred due to the increased foundation depth of the sub-structure requiring extra cost as such he was entitled for the payment of fair and equitable rate for the agree mental / substituted items which individually exceeded the deviation limit of 20%. The rates submitted by the claimant/objector were not held to be fair and equitable rates. Respondent No.2 on the direction of the Arbitrator supplied analysis of market rate at the relevant time vide his letter dated 22.1.2002. According to which, the rates should have been as follows: - 11 - Sr.No. Item Agree mental rate Analysed rate 1. Excavation in earth work Rs.60/- Rs.125-80P 2. C.C. 1:3:6 Rs.1200/- Rs.1593.65P 3. Form work in vertical surfaces Rs.250/- Rs.250.75P 4. Form work in edges of slabs Rs.100/- Rs.57.15P 5. C.C.1:2:4 Rs.1500/- Rs.1777.40P 6. Mild/Tory Steel Rs.19/- Rs.16.35 P 7. R.R.Masonry Rs.800/- Rs.1255.30P 8. Stone filling Rs.125/- Rs.310.45P 9. Making holes - Rs.60.90P The details of the quantities, as provided in the agreement and as executed are tabulated as below: Sr.No. Desc. Of item Qnty. as per agreement Total executed qnty. As per MB/final bill. Qnty. as per deviation limit (i.e. 20%) Net qnty under clause 12- A (4-5) 1. Excavation in foundation 133.27 cum 564.36 159.88 404.48 cum 2. P/L CC 1:3:6 (a) foundation & plinth 12.24 cum - - - b)p/l CC 1:3:6 piers coloumns 72.25 cum 357.64 cum 86.70 cum 270.91 cum 3 (a) Form work with steel sheeting vertical surfaces 153.01m2 444.67M2 183.61M2 261.06M2 b)Beams cantilevers. 226.69m2 208.41m2 - - c)Flat surfaces 90.98m2 98.75m2 - - d)Edges of slab 55.54 Rmt 258.50Rmt 66.64 191.86 Rmt. 4. a) R.C.C. 1:2:4 copping bed plates etc. 6.70 cum 6.696 cum - - - 12 - b)kerbs steps and the like 5.90 cum 5.69cum - - 5. C.C.1:2:4 20cm in walls 4.77 cum 5.41 cum - - 6. R.C.C. 1:1 ½:3 20M in lintel beams etc. 67.24 cum 67.73cum - - 7. C.C.1:2:4 40mm road pavement 5.00cum 8.61cum 6.00cum 2.61cum 8. Providing mild/tor steel a) mild steel b)Tor steel 33.53 kgs 11739.77 Kg - 20761.70 - 14087.72 - 6673.98 9. P/F roller bearing with box 2 Nos. 2 Nos - - 10. P/F roller bearing with box 2 Nos. 2 Nos - - 11. P/F suspension joints 10.40 Rmt. 10.40 Rmt. - - 12. P/F railing MS angles with GI Pipes 45.14 Rmt. - - - 13. P/F 100mm/dia GI pipes for drainage 14 Nos. 14 Nos. - - 14. P/L C.C. 1:6:12 in foundation and plinth 1.98 M3 2.18M3 - - 15 RR Masonry in breast wall 19.07 cum 82.05cum 22.88cum 59.17cum 16. Dry rubble masonry in breast wall 25.94 cum 12.53 cum - - 17. Stone filling 12.36cum 131.96cum 14.83cum 117.13cum Substi -tute items 18. P/L C.C. 1:4:8 in foundation - 23.243cum - - 19. Extra making holes 32 mm dia - 312.00 Rmt - - In the opinion of the Arbitrator only the quantity of excavation in Earth work, C.C. 1:3:6 in piers and coloumns, form work in vertical surfaces, for work in edges of slab CC 1:2:4 in pavement, Tor steel, RR masonry stone filling, have only exceeded the prescribed deviation limit of 20%, which were ordered to be paid at the fair and equitable rate - 13 - at the relevant time, to which the claimant- objector objected to. An identical clause, in a similar contract, came up for consideration before the Calcutta High Court in Union of India versus Khetra Mohan Banerjee 1960 Calcutta 190. Division Bench of that court took the view that from the words used in the clause it was reasonable to conclude that the intention of the parties was that if the Engineer-in-Charge did not indicate the rates quoted by the contractor were not acceptable, they would be presumed to have been accepted by the Engineer-in-Charge entitling the contractor for payment of rates quoted by him. Decision of the aforesaid Division Bench of the Calcutta High Court was affirmed by the Hon’ble Apex Court in Civil Appeal No.206 of 1961, Union of India versus Khetra Mohan Banerjee (supra) decided on November 22, 1962 which reads as under: “The second contention turns upon the construction of clause 12 of the agreement. The relevant part of the agreements reads: “If such class of work is not entered in the said schedule of rates, then the constructor shall within seven days of the date of his receipt of the order to - 14 - carry out the work inform the Engineer- in-Charge of the rate which it is his intention to charge for such class of work and if the Engineer-in-Charge does not agree to this rate, he shall by notice in writing, be at liberty to cancel his order to carry out such class of work and arrange to carry it out in such manner as he may consider advisable, provided always that if the contractor shall commence work or incur any expenditure in regard thereto before the rates shall have been determined as lastly herein before mentioned, then and in such case he shall only be entitled to be paid in respect of the work carried out or expenditure incurred by him prior to the date of the determination of the rate as aforesaid according to such rate or rates as shall be fixed by the Engineer-in-Charge. In the event of a dispute the decision of the Superintending Engineer of the Circle shall be final.” The claimant-Objector, acted as per clause 12- A of the agreement aforesaid in the case on hand, but the Engineer-in-Chief, did not cancel his order to carry out such increased quantities of work by giving a notice in writing to the claimant-objector and arrange to carry it out in such a manner, as he - 15 - might have considered advisable. Rather the arbitrator has gone to extent of doing modifications of the infirmities in the analysis of rates and got it done from the Head-draughtsman of his office and modified rates of excavation and awarded the amount for which he was not authorized, under the agreement. Accordingly, I hold that claim No.2 decided by the learned Arbitrator is patently in violation of the statutory provisions and is against the Public Policy of India, as held in Oil & Natural Gas Corporation Ltd.case (supra). In so far as the interest part is concerned it cannot be faulted. The Arbitrator was within his power to award the interest, which cannot be interfered with. Relief. For the reasons aforesaid, the objection petition is partly allowed. The Award made by the learned arbitrator in respect of Agreement No. 17 for 1993-94 dated 25.3.2004, qua claim No.2 is set aside. Parties to bear respective costs. July 31, 2008 (Surinder Singh),J. (D) - 16 -