This petition has been filed under Section 34 of the Arbitration and Conciliation Act, 1996, (Act), to set aside the award passed by the Arbitral Tribunal, dated 03.08.2004.
2. The Arbitral Tribunal consisted of three members, who are impleaded as respondents 2 to 4 herein. The respondents 2 & 3, passed an award accepting the claim made by the first respondent company (hereinafter referred to as claimant) and passed an award while the fourth respondent recorded his dissent.
3. The petitioner is the Ennore Port Limited, have challenged the majority award and seek for setting aside the same and to allow the claim made by the petitioner in the statement of the claim and as awarded by the learned Arbitrator namely, fourth respondent in his minority view. The claimant entered into an agreement with the petitioner in respect of a contract under agreement No.24, dated 06.06.1996, for the execution of the Rock quarrying and Transportation and Stockpiling of rocks for the use of construction of Breakwater for the Ennore Coal Port Project. The total approximate value of the contract was around Rs.1,19,52,21,700/-. The work to be carried out by the claimant was to be supervised by M/s.Haskoning, Royal Dutch Consulting Engineers and Architects of Netherlands, and the Engineer is not only an Administrator of the contract on behalf of the petitioner and has also been conferred with certain independent duties to be performed. The contract envisages the quarrying and transportation of 3.07 Million Tons of rocks by road from Karaikal quarrying to Melpakkam Transfer Station for a distance of 25kms and by rail from Melpakkam to Ennore Port site for a distance of 95kms. The petitioner was required to arrange for rail wagons for transportation of rock through Southern Railway as a facility provided to the claimant. For such purpose a sum of Rs.5500/-, was charged by the petitioner on behalf of the claimant by deducting the same from the claimant's monthly earnings at the end of each month. As per the terms of the contract, base unit rates and prices quoted by the bidder in the Bill of Quantities are subject to price adjustment during the performance of the contract. Such price adjustment has been referred to in sub-clause 16.1 of the Conditions of Particular Application read with sub-clause 70.1 to 70.3 of the contract. The claimant, during the currency of the contract, has been submitting periodic monthly statements, which were verified and certified by the Engineer and payments were released. It is submitted that there is no disagreement on the payments being released to the claimant. While so, during the course of Audit, the Controller and Auditor General pointed out that the petitioner has provided/supplied the wagons to the claimant and the price adjustment should have been calculated after deducting the wagon charges from the base unit rates and prices. Thus, the audit objected that there was excess payments towards price adjustment due to the failure to deduct the wagon charges from the basic unit rates and prices. It appears that these objections of the audit para were based upon an assessment made by comparing it with general practice in other contracts, but not with particular reference to the terms and conditions contained in the contract between the petitioner and the claimant, namely, General Conditions of Contract and Conditions of Particular Application. The petitioner had given certain clarifications to the Audit Department, stating that no excess payments were made and it appears that no further proceedings were initiated and the audit objection was not precipitated any further. However, the petitioner, based on the observations made by the audit, had stated that they have effected certain excess payments to the claimant and that the claimant was liable to refund the same. When the claimant resisted such amount, dispute arose between the parties. The clause 67.1 provides for the settlement of the disputes, in terms of which clause 67.2, the parties were to attempt an amicable settlement and when the matter could not be resolved either under clause 67.1 or 67.2, the parties have to resort to the procedure under clause 67.3, which deals with Arbitration. The Arbitration was to be done under the Rules of Conciliation and Arbitration of the International Chambers of Commerce by one or more Arbitrators appointed by such Rules. Ultimately, the matter was before the Arbitral Tribunal, where apart from the claims made by the respondent/claimant, the petitioner had also raised certain counter claims.
4. In the instant case, we are only concerned about the counter claim No.2, which has been titled as 'Escalation towards Wagon Charges'. Though in paragraph 3.0 of the impugned award, the other disputes, which have been referred for Arbitration has been set out, the present award pertains only to counter claim No.2, 'escalation towards wagon charges'. The challenge to the impugned award is not on any of the grounds set out in Section 34(2)(a)(i)to(a)(v). The challenge appears to be that the impugned award is not in accordance with the public policy and amounts to an unjust enrichment on the part of the claimant.
5. As pointed out earlier, the short question, which led to the dispute being referred for Arbitration, is on the alleged ground that the petitioner has effected certain extra payments to the claimant, which they sought to recover/deduct. The allegation was on the ground that since the petitioner had supplied the wagons to the claimant, the price adjustment should have been calculated after deducting the wagon charges from the base unit rates and prices. Thus, the petitioner alleged that there was an excess payment towards the price adjustment due to the failure to deduct the wagon charges from the base unit rates and prices.
6. In other words, the petitioner would contend that in terms of the agreement between the parties as in the pre-bid meeting held on 29.11.1995, and the clarification meeting held on 27.02.1996, it was accepted that the charges for the wagons hauled on each round trip on behalf of the contractor/claimant shall be Rs.5500/-. In the meeting held on 27.02.1996, the exact figure, that has to be deducted, has been also arrived at by adopting an average of 13tons of rock in each skip. Further, when the Southern Railway increased the wagon hire charges from Rs.5500/- to Rs.7055/-, per wagon from 01.04.1998 and from Rs.7055/- to Rs.8185, from 01.04.1999, the increased freight charges were absorbed by the petitioner as the wagon hire charges of Rs.5500/- per wagon indicated in the agreement is fixed throughout the contract period. Therefore, it is the case of the petitioner that while price adjustment is calculated, it should have been done after deducting the wagon charges from the base unit rates and prices. This is the sum and substance of the contention of the petitioner before the Arbitral Tribunal.
7. The claimant on the other hand submitted that the attempt made by the petitioner is to re-write the terms of contract, which they are not entitled to and relied upon various clauses in the contract to state that the procedure under the contract has been strictly followed and there is no error nor any dispute of excess payment made to the claimant and the entire issue arose only because of an audit para raised by the Audit Department.
8. The Arbitral Tribunal examined the rival contentions and two of the three Arbitrators, concurred with the claimant and passed the award, the third Arbitrator recorded his dissent and has held that the price variation contemplated in the agreement is only compensation to the contractor for the inputs provided for carrying out the works and 100% of the wagons provided to the contractor by the Southern Railway is not an input of the contractor for claiming price variation and the claimant was not a party to the arrangement between the petitioner and the Southern Railway, and during the existence of the contract, the claimant did not make any payments to the Railways either as wagon hire charges or freight charges and hence, the question of adjustment formula for such wagon charges paid by the claimant does not arise and the amount of Rs.5500/- per round trip has to be excluded, while working out the price adjustment. Further, it was pointed out that when the claimant furnished the performance security, the wagon hire charges was deducted and not included in the total sum for demanding performance security. Further, it held that the sequential events contemplated under the contract agreement were not strictly adhered to, which go to show that the sequence can be changed according to the work and whenever, wagons were not utilised during the said month, they have to be subtracted from the estimated work.
9. Before the Court ventures to test the correctness of the majority and minority award, it is necessary to take note of the scope and jurisdiction of the Court under
Section 34 of the Act.
10. In ONGC Ltd. Vs. Saw Pipes Ltd. [reported in 2003 (5) SCC 705], the scope of the court's jurisdiction under Section 34 of the Act was under consideration. The Hon'ble Supreme Court considered the meaning that can be assigned to the phrase 'public policy of India' occurring in
Section 34(2)(b)(ii) of the Act being alive to the subtle distinction in the concept of "enforcement of the award" and "jurisdiction of the court in setting aside the award" and the decision in Renusagar Power Co. Ltd. Vs. General Electric Co. [reported in 1994 Supp. (1) SCC 644], and held in Saw Pipes Ltd., as follows :
"The term 'public policy of India' in
Section 34 was required to be interpreted in the context of the jurisdiction of the court where the validity of the award is challenged before it becomes final and executable in contradistinction to the enforcement of an award after it becomes final. Having that distinction in view, with regard to
Section 34, this Court said that the expression 'public policy of India' was required to be given a wider meaning. Accordingly, for the purposes of
Section 34, this Court added a new category - patent illegality - for setting aside the award. While adding this category for setting aside the award on the ground of patent illegality, the Court clarified that illegality must go to the root of the matter and if the illegality is of trivial nature it cannot be held that the award is against public policy. Award could also be set aside if it was so unfair and unreasonable that it shocks the conscience of the court."
11. Bearing the above legal principle in mind, the Court proceeds to consider the correctness of the impugned award. As pointed out earlier, the dispute between the parties in the instant case lies in a very narrow compass pertaining to price adjustment. To examine the controversy, it is necessary to take note of the following clauses in the General Conditions of Contract, namely, clause 1.1(e)(i), which defines Contract Price as follows:-
General Conditions of Contract:-
1.1(e)(i)'Contract Price' means the sum stated in the Letter of Acceptance as payable to the Contractor for the execution and completion of the Works and the remedying of any defects therein accordance with the provisions of the Contract.
67.3 Any dispute in respect of which:
(a) the decision, if any, of the Engineer has not become final and binding pursuant to Sub-Clause 67.1, and
(b)amicable settlement has not been reached within the period stated in Sub-Clause 67.2 shall be finally settled, unless otherwise specified in the Contract, under the Rules. The said arbitrator/s shall have full power to open up, review and revise any decision, opinion, instruction, determination, certificate or valuation of the Engineer related to the dispute.
Arbitration may be commenced prior to or after completion of the Works, provided that the obligations of the Employer, the Engineer and the Contractor shall not be altered by reason of the arbitration being conducted during the progress of the Works.
Conditions of Particular Application:-
clause 60 Certificates and Payment Clause 60 of the General Conditions is deleted and the following Sub-Clauses 60.1 to 14 are substituted therefor:
Sub-Clause 60.1 Monthly Statements The Contractor shall submit a statement in 4 copies to the Engineer at the end of each month, in a tabulated form approved by the Engineer, showing the amounts to which the Contractor considers himself to be entitle. The statement shall include the following items, as applicable, which shall be taken into account in the sequence listed:
(a) the estimated contract value of the Temporary and Permanent Works executed up to the end of the month in question, at base unit rates and prices and in local currency;
(b) the actual value certified for payment for the Temporary and Permanent Works executed up to the end of the previous month, at base unit rates and prices and in local currency;
(c) the estimated contract value at base unit rates and prices of the Temporary and Permanent Works for the month in question, in local currency, obtained by deducting (b) from (a);
(d) the equivalent of the amount set forth in (c), expressed in the various currencies in which the contract price is payable, and calculated by applying the proportions and the exchange rates set forth in the Appendix to Bid to the amount set forth in (c):
(e) the value of any variations executed up to the end of the month in question, less the amount certified in the previous interim Payment Certificate, expressed in the relevant amounts of foreign and local currencies, pursuant to Clause 52;
(f) amounts approved in respect of Daywork executed upto the end of the month in question, less the amount for Daywork certified in the previous interim Payment Certificate, indicating the amounts of foreign and local currencies as determined from the Daywork Schedule of the Bill of Quantities;
(g) amounts reflecting changes in cost and legislation, pursuant to Clause 70;
(h) any credit or debit for the month in question in respect of materials and Plant for the Permanent Works, in the relevant amounts, in foreign and local currencies, and under the conditions set forth in Sub Clause 60.3;
(i) any amount to be withheld under the retention provision of Sub-Clause 60.5, determined by applying the percentage set forth in Sub-Clause 60.5 to the amounts in foreign and local currencies due under paragraphs 60.1(d), (e), (f) and (g);
(j) any amount to be deducted as repayment of the Advance under the provision of Sub-Clause 60.7; and
(k) any other sum, expressed in the applicable currency or currencies, to which the Contractor may be entitled or the Employer may be entitled to deduct, under the Contract.
(l) the amount to be deducted towards the advance income tax, which shall be at the rate of 2 percent, and the advance works contract tax at the prevailing rate, from the amounts due to the Contractor.
Changes in Cost and Legislation Clause 70 of the General Conditions is deleted and the following Sub-Clauses 70.1 to 8 are substituted therefor:
70.1 Price Adjustment The amounts payable in local currency to the Contractor and valued at base rates and prices pursuant to Sub-Clause 60.1 (d),(e) and (f) shall be adjusted in respect of the rise or fall in the cost of labour, materials and other inputs to the Works, by the addition or subtraction of the amounts determined by the formula prescribed in this Clause.
12. On a perusal of the Conditions of Particular Application, more particularly, sub-clause 60.1, it stipulates that the contractor shall submit a statement in four copies to the Engineer at the end of each month, which should be in a tabulated form, approved by the Engineer and the statement shall include the items set out into clauses (a) to (l) in sub-clause 60.1, as applicable, which shall be taken in account in the sequence list. The effect of the said clauses in the statement, which the contractor furnishes he shall include all the items as set out in clauses (a) to (i) in sub-clause 60.1, more importantly in the sequential order. This is a mandatory condition as the contract uses the expression 'shall'.
13. Price Adjustment is in accordance with the sub-clause 70.1, (supra). The clause says that the amount payable to the contractor and valued at the base rates and prices pursuant to sub-clauses 60.1(d)(e) and (f), shall be adjusted in respect of the raise or fall in the cost of labour, material and other inputs to the works, by the addition or subtraction of the amounts determined by the formula prescribed in the said clause. The adjustment formula has been given in sub-clause 70.3.
14. In the appendix to the bid document, the factors for price adjustment formula has been stipulated as follows:-
Factors for price adjustment formula Factor and Description Value Range Contractor's Requirement
(a) Fixed
(b) Labour
(c) Diesel
(d) Lubricating Oil
(e) Explosives 15% 20-40% 25-45% 5-15% 5-15% 15% 35% 30% 5% 15% Total 100
15. Thus, on a combined reading of the above clauses, it is clear that the contracts specifically provides for as to when and on what amount the price adjustment can be done or in other words, the variation can be applied. Admittedly, the variation is not based on any abstract principle, but it is on a structured formula. The said formula as set out in sub-clause 70.3, shows that it is a scientific calculation. When the said formula is read with the factors or price adjustment formula as given in the appendix to bid, it shows that the value range has been fixed for factor and description. For example in respect of fixed factors initially the value range was '0'. Subsequently it was amended as 15%. This would go to show that in respect of the fixed factor, the contractor is not assured that whatever is the price escalation incurred by him, would be compensated. The formula is so structured that at the time, even if the contractor faces extreme escalation in prices or inputs, yet if the value range is restricted to a particular percentage he gets nothing more and has to accept the said value range. Thus, the formula has been thoughtfully considered, so that it not only balances the interest of the contractor, but also the employer/petitioner. Therefore, the finding recorded by the fourth respondent in the dissent opinion that the sequence adopted is not strictly followed, is a finding based on no material or in other words, it is a perverse finding, as there was no evidence to the said effect. The formula contemplated in the contract is mandatory and the sequence of events as stipulated in sub-clause 60.1 has to be adhered to and cannot be breached. There was no evidence before the Arbitral Tribunal that there was breach of the sequential events.
16. Equally perverse is the findings by the fourth respondent in his minority opinion that whenever the wagons are not used, deduction has to be made. If this view is to be accepted, it would tantamount to re-writing the terms of the contract agreed to between the petitioner and the claimant and the Arbitral Tribunal has no jurisdiction to do so. The contract has been so structured that whatever the contractor asks for is not to be unwill be granted in full. As mentioned above, the factors for price adjustment formula stipulates a value range and the contractor gets nothing more. Equally so, is a claim if made by the petitioner from a contractor. The Arbitral Tribunal, which rendered the majority opinion as authored by the respondents 2 & 3, has made an in-depth analysis of the conditions of the contract, referred to the conditions and held that the contract price includes the wagons charges. The said findings of the Arbitral Tribunal is perfectly in order as the contract price has been defined in the GCC to be the sums stated in the letter of acceptance, as payable to the contractor. There is no distinction or dichotomy in the said amount and for all purposes, the contract price shall mean the sum stated in the letter of acceptance and if that is so, the parties had to reconcile to the fact that wagon charges also form part of the contract price as it was one of the component included and stated in the letter of acceptance. Therefore, the majority finding recorded by the Arbitral Tribunal is perfectly justified. In fact, this clearly demonstrates the intention of the parties and when the parties have agreed to a particular method by which the contract could be performed, they have to be bound by such conditions.
17. Furthermore, the majority view recorded by respondents 2 and 3, clearly held that nowhere in the tender documents it was specified that the wagon hire charges will be deducted from the contract price for applying price variation formula as per clause 70 of the Conditions of Particular Application. Therefore, the Arbitral Tribunal correctly held that it cannot go into the minds of frames of the contract agreement as to why they have done so.
18. Furthermore, on a reading of clause 3.6 of the pre-amble to the BOQ read along with sub-clause 60.1(k), deduction shall be made from the contractor's earnings and it shall be as per sequence specified in preparation of monthly statements and the wagon charges can be deducted only under sub-clause 60.1(k) and not earlier and if done so, it would amount to breach of the sequential events and even prior to that stage, the contractor is entitled for applying for price adjustment/variation.
19. One more important aspect to be taken note of is with regard to the response given by the petitioner, when the CAG pointed out the alleged mistake in their Audit para. The petitioner in no uncertain terms accepted the fact that the payments were made to the claimant as certified by the Engineer appointed for the purpose and the agreement also did not provide for deduction of wagon charges before working out the escalation charges and hence, there was no payment. The Arbitral Tribunal while recording its majority opinion in paragraph 9.6.1, has extracted this reply given by the petitioner to CAG, when they raised the audit objection. This will clearly go to show that the petitioner had understood the terms of the contract in a correct manner. The Engineer, who was appointed, was given full responsibility for certifying the bills and apart from that he had independent powers. The contract is an exhaustive document drafted by a firm which was approved by the Asian Development Bank. Therefore, it will be too late in the day for the petitioner to make an argument contrary to the terms of the contract. Thus, the majority view of the Arbitral Tribunal is fully justified and the reasons assigned by the Arbitral Tribunal are valid and the petitioner is unable to point out any error in the award so as to bring in within the para-meters as set out in
Section 34(2) of the Act. As mentioned earlier, this Court cannot convert itself as an Appellate Court over the award passed by the Arbitral Tribunal.
20. Hence, for all the above reasons, the petitioner has not made out to set aside the majority view of the Arbitral Tribunal nor to affirm the minority view of the Arbitral Tribunal. Accordingly, the challenge to the impugned award fails and the Original Petition is dismissed.