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Dda v. Naraindas R. Israni .
Summary of the Court's Opinion
Factual and Procedural Background
A contract for construction of MIG Houses in Rohini Residential Complex was awarded to the claimant-respondent. The contracted works were completed on 4 February 1986 after a delay of approximately five and a half months. Disputes arose and the matters were referred to sole arbitration by Sh. S.C. Kapoor, Chief Engineer (Retd.), who published his award on 30 December 1999.
The appellant, Delhi Development Authority (DDA), filed objections to the arbitral award under Section 30 and Section 33 of the Arbitration Act, 1940 before a Single Judge of this Court. By an order dated 28 October 2005 the Single Judge rejected the objections except insofar as Claim No. 17 was concerned; the award was made a rule of the Court with the modification that future interest would be payable at 9% p.a. instead of 18% p.a. The present appeal under Section 39 of the Arbitration Act, 1940 challenges that Single Judge's order.
Legal Issues Presented
- Whether the arbitrator was correct in concluding that Clause 10CC of the contract did not bar the claimant from making a separate claim for compensation on account of factors (overheads, idle machinery, centering, shuttering, scaffolding, tools & plant, loss of opportunity/profit etc.) other than the specific items covered by Clause 10CC.
- If Clause 10CC did not bar such a claim, whether the arbitrator was justified in awarding Rs. 3,68,989 by relying upon cost/index-based calculations (wholesale price index method) to quantify compensation for those additional losses.
Arguments of the Parties
Appellant's Arguments (Ms. Salwan)
- The arbitral award was contrary to the terms of the contract and therefore unsustainable.
- Relying on decisions in Delhi Development Authority v. U. Kashyap and DDA v. S.S. Jetley, the Single Judge erred in upholding Claim No. 22.
- Claim No. 9 (balance payment under Clause 10CC) was rejected by the arbitrator as "not pressed"; therefore any further or independent claim for compensation on account of delayed completion (Claim No. 22) was untenable because Clause 10CC entirely governed rights and obligations in event of delay.
- The additional claim was based on wholesale price index calculations which, she argued, had already been taken into account by the appellant in giving effect to Clause 10CC; hence the separate claim was unjustified and unsupported by material.
Respondent's Arguments (Mr. Markanda)
- The arbitrator correctly awarded the amount claimed by the respondent and the court should not interfere in proceedings under Sections 30 and 33 of the Arbitration Act, 1940 since those proceedings are not appellate in nature.
- The Single Judge properly rejected the objections to the award in respect of Claim No. 22 because the amount paid under Clause 10CC did not take into account escalation in the prices of inputs (materials, labour and POL) during the extended period; therefore the additional award was justified.
Table of Precedents Cited
| Precedent | Rule or Principle Cited For | Application by the Court |
|---|---|---|
| Delhi Development Authority v. U. Kashyap — 1999 (1) Arb. LR 88 (also referred later as 1991 (1) ALR 88 in the opinion) | The arbitrator had applied a formula other than the one prescribed by Clause 10CC and, relying on the Supreme Court decision in Associate Engineering, was held to have exceeded jurisdiction by not following the contractual formula for escalation. | The court distinguished Kashyap: in the present case Claim No. 22 did not suffer from the infirmity present in Kashyap (i.e., applying a different formula for Clause 10CC). Therefore Kashyap did not require interference with the present award. |
| Delhi Development Authority v. S.S. Jetley — 2001 (1) Arb. LR 289 | Confirmed that, alongside claims under Clause 10CC for escalation in material/labour/POL, a contractor could maintain a separate claim for damages (idle labour, staff, machinery, centering, shuttering etc.) arising from prolongation of the contract, founded on Sections 73 and 74 of the Contract Act. | The court relied on Jetley to support the view that Claim No. 22 (compensation for idle establishment, tools and plants, scaffolding etc.) was legally permissible and not barred by Clause 10CC. |
| Associate Engineering v. Government of Andhra Pradesh and Anr. — 1991 (2) ALR 180 | Applied in Kashyap's case to hold that arbitrators must follow the contractual formula and cannot apply a different method to compute escalation where the contract prescribes one. | The opinion references Associate Engineering as authority relied upon in Kashyap to show the circumstances in which an arbitrator may be held to have exceeded jurisdiction; the court used this to distinguish the present case from Kashyap. |
Court's Reasoning and Analysis
The court proceeded by (i) examining what the arbitrator had actually decided regarding Claim No. 9 and Claim No. 22, (ii) construing Clause 10CC of the contract, and (iii) addressing two specific questions arising from those facts.
First, the opinion reproduces the arbitrator's findings on Claim No. 9 — the claim for Rs. 24,945 as "balance payment due under Clause 10-CC" — where the arbitrator recorded that the claimants "did not press this claim" and therefore the claim was treated as dropped. From that, the court concluded that the entire amount payable under Clause 10CC had been paid and that the claimant had not persisted with Claim No. 9 before the arbitrator.
Second, the court examined Claim No. 22, which sought Rs. 12,85,311 as compensation for damages due to prolongation of the contract: losses alleged included idle establishment, tools and plants, centering, shuttering, scaffolding, and loss of opportunity/profit resulting from extension of the contract period. The arbitrator's reasoning — as recorded — was that Clause 10CC compensates "only partially" and is limited to increases in prices of certain materials and part of labour; it does not cover overheads, loss of profit, idle machinery, centering and shuttering, scaffolding, T&P etc. The arbitrator therefore entertained the separate claim and assessed compensation using cost index calculations, awarding Rs. 3,68,989.
Addressing Question No. 1 (whether Clause 10CC bars separate claims for other losses), the court analysed the text of Clause 10CC. The clause plainly deals with compensation for increases in prices of materials and wages of labour, computed by a specified formula and applicable to work done during the stipulated period (and extended period validly granted). The clause does not (a) expressly forbid the contractor from making other claims, nor (b) prescribe any formula for damages relating to items outside the clause (idle machinery, overheads, loss of profit, etc.). Consequently, the court concluded that a contractor may still claim damages for such other losses arising from a breach or prolongation and that those claims can be examined and awarded by the arbitrator on the evidence. The court expressly relied on DDA v. S.S. Jetley to support that view and distinguish the present case from Kashyap, where the arbitrator had applied a different formula in computing amounts under Clause 10CC and thereby exceeded jurisdiction.
Addressing Question No. 2 (whether the arbitrator was justified in awarding Rs. 3,68,989 based on cost/index calculations), the court noted that the arbitrator recorded a factual finding that the claimant had suffered losses of the kinds claimed. The court observed that proof of actual idle staff, machinery and other items could be required, but also that the arbitrator is entitled to adopt any reasonable method for quantification. Although the cost/index method "may not be a scientifically accurate method" of determining precise loss, it remains a permissible method. Because the arbitrator relied on such a method and made a considered factual determination, and because he was an expert in the field, the court found no illegality or perversity — no misconduct — justifying interference. Therefore the quantification was upheld.
On these bases the court answered both questions in the affirmative: Clause 10CC did not preclude the separate claim, and the arbitrator's quantification by reference to cost/index calculations was not so unreasonable as to warrant setting aside the award.
Holding and Implications
APPEAL DISMISSED.
Holding: The appeal was dismissed. The Single Judge's order rejecting the appellant's objections to the arbitral award (except for the limited modification already made by the Single Judge concerning interest on Claim No. 17) stands; the arbitrator's award in respect of Claim No. 22 (the compensation for prolongation quantified at Rs. 3,68,989) is sustained.
Implications: The direct consequence is that the arbitral determination of liability and the quantification of compensation for losses other than those covered by Clause 10CC were upheld by the court. The opinion does not purport to set out any new broad legal principle beyond applying existing authorities (notably DDA v. S.S. Jetley and distinguishing DDA v. U. Kashyap); no new precedent is announced by this decision beyond its application to the facts before the court.
T.S Thakur, J.:— This appeal under Section 39 of the Arbitration Act, 1940 arises out of an order dated 28th October, 2005 passed by a Single Judge of this Court whereby the objections raised by the appellant to the arbitral award have been rejected and the award made a rule of the Court with partial modification.
2. A contract for the construction of MIG Houses in Rohini Residential Complex was awarded in favour of the claimant-respondent in terms of an agreement executed between the parties. The contacted works were, it appear, completed on 4th February, 1986 after a delay of nearly 5-1/2 months. Disputes between the parties in relation to the contract having arisen, the same were referred to the sole arbitration of Sh. S.C Kapoor, Chief Engineer (Retd.) who made and published his award on 30th December, 1999. Aggrieved by the Award, the appellant DDA filed objections before a Single Judge of this Court under Section 30 and 33 of the Arbitration Act, 1940. These objections were examined by the learned Single Judge who rejected the same except insofar as Claim No. 17 was concerned in respect of which the award was set aside with the modification that the claimant would be entitled to future interest @ 9% p.a instead of 18% p.a The present appeal calls in question the correctness of the said order.
3. Appearing for the appellant Ms. Salwan strenuously argued that the award made by the arbitrator was contrary to the terms of the contract hence unsustainable. Relying upon two division bench decisions of this court in Delhi Development Authority v. U. Kashyap 1999 (1) Arb. LR 88 and Delhi Development Authority… v. S.S Jetley…. 2001 (1) Arb. LR 289, Ms. Salwan argued that the view taken by the learned Single Judge in regard to the validity of the award qua Claim No. 22 made by the claimant was erroneous and deserved to be set aside. She submitted that since the arbitrator had rejected as not pressed Claim No. 9 made by the claimant in regard to the balance payment due under Clause 10CC of the Agreement executed between the parties, any further or independent claim for payment of compensation on account of delayed completion of the work was wholly untenable. She argued that Clause 10CC of the agreement entirely governed the issue regarding the rights and obligations of the parties in the event of the completion of the contracted works getting delayed. The arbitrator as also the learned Single Judge had not according to the leaned counsel correctly appreciated the purpose underlying Clause 10CC of the agreement or the effect of rejection of Claim No. 9 for payment of any further damages arising out of the delayed completion of the work. Such a claim was, argued Ms. Salwan, untenable in the absence of any material especially when it was based entirely on the wholesale price index which had already been taken into account by the appellant while giving effect to Clause 10CC of the agreement.
4. On behalf of the respondents, it was on the contrary argued by Mr. Markanda that the arbitrator had correctly awarded the amount claimed by the respondent which award could not be interfered with by the court in proceedings under Section 30 and 33 of the Act. Such proceedings were not in the nature of an appeal against the view taken by the arbitrator. He contended that the learned Single Judge was justified in rejecting the objections to the award qua Claim No. 22 keeping in view the fact that the amount paid to the claimant by the appellant under Clause 10CC of the agreement for the extended period did not take into account the escalation in the prices of inputs like materials, labour and POL during the extended period.
5. We have given our careful consideration to the submissions made at the bar. The claimant had, apart from other claims, made a claim for payment of what was described as the balance amount in terms of Clause 10CC of the agreement executed between the parties. That claim was rejected by the arbitrator as not pressed. The relevant portion of the award in regard to the said claim reads:
“Claim No. 9: CLAIMANTS CLAIM Rs. 24,945/- ON ACCOUNT OF BALANCE PAYMENT DUE UNDER CLAUSE 10-CC.
SUBMISSION BY THE CLAIMANTS:
The Learned Counsel for the Claimants reiterated the statement of facts. The claimants did not press this claim.
SUBMISSIONS BY THE RESPONDENTS:
The Respondents reiterated the counter statement of facts and stated that the claim is false and beyond the truth. The contractor has already been paid under clause 10CC as per the term and condition of the agreement. Hence the claim is denied and liable to be rejected.
AWARD:
Since the Claimants did not press for this claim hence the claim is treated as dropped.”
6. The above clearly shows that the entire amount payable to the claimant under Clause 10CC of the agreement stood paid which was the reason why the claim for recovery of the balance amount was not pressed before the arbitrator.
7. The claimant had however made a further claim for a sum of Rs. 12,85,311/- towards compensation for damages allegedly suffered by him due to prolongation of the contract period. This claim proceeded on the basis that the appellant DDA, had not properly discharged its contractual obligations resulting in an extension in the contract period and consequent loss to the claimant on account of idle establishment, tools and plants, centering, shuttering, scaffolding etc. The argument advanced before the arbitrator, as is evident from a reading of the award, was that Clause 10CC of the agreement compensates the contractor for the statutory increases in the wages of labour and cost of material. The said compensation however did not take into consideration the losses, if any suffered on account of idle establishment which the contractor may have mobilized but which remained un-utilized at the works. On behalf of the appellant, it was on the other hand contended before the arbitrator that the only provision which the contract made for payment of any compensation on account of the extension in the work period was in the form of Clause 10 CC of the agreement. The said clause, it was contended, prescribe a formula based on the wholesale price index of the material to be used by the contractor for purposes of compensating him on account of any increase in the prices that may have taken place during the extended work period. The arbitrator took note of the rival submissions urged before him and came to the conclusion that Clause 10CC of the agreement compensates the contractor only partially and on the basis of a formula that is laid down in the clause. The contractor was not, according to the arbitrator, compensated for factors other than materials, labour and POL. The arbitrator observed:
“Clause 10-CC encompasses within its fold a part of increase in prices of certain materials and a part of increase in wages of labour. It excludes from consideration the following:
(a) Overheads, both on site and off site;
(b) Loss of Profit during the extended period of contract;
(c) Idle machinery;
(d) Idle Centering and shuttering, scaffolding etc.;
(e) T&P.”
“The Claimants during this period would be bound down with this work thereby losing on overheads, both at site and off site, Idle machinery, Idle centering and shuttering, scaffolding etc. T&P and furthermore loss of opportunity to take up any other work or business and thus loss on profits which he could earn on other jobs. In view of above I am not in agreement with the contention of the Respondent that the Claimant can't claim damages for this contract.”
8. Having recorded the above finding, the arbitrator proceeded to determining the amount of compensation payable to the contractor and relied upon the cost index calculations to award a sum of Rs. 3,68,989 to the contractor in the following words: “For working the amount of damage the claimants have furnished details of extra expenditure as follows: The cost index calculations. The contractors carried out the work of the value of Rs. 10,69,298.00. This value included as per C.P.W.D analysis an element of 10% as profits and overhead. Deducting an amount of Rs. 1,06,930.00 and also an amount of Rs. 1,32,120.00 awar4ded under claim No. 17 from the amount of Rs. 6,07,939.00 as per details given by the claimants balance amount of Rs. 3,68,989.00 would reasonably cover the losses suffered by the claimants due to various reasons”.
9. Two questions arise for consideration in the above contexts:
(i) Whether the arbitrator was correct in taking the view that Clause 10CC did not debar the claimant from making a claim for compensation on account of factors other than those that go into consideration while giving him the benefit of the said clause; and
(ii) If the answer to question No. (i) is in the affirmative, whether the arbitrator was justified in awarding an amount of Rs. 3,68,989.00 towards overhead charges relying upon the wholesale price index.
10. We shall deal with both the questions ad seriatim.
Re Question No. 1:
11. Clause 10CC of the agreement is as under:
“Clause 10(CC): If the prices of materials (not being materials supplied or services rendered at fixed prices by the department in accordance with clause 10 & 34 thereof) and/or wages of labour required or 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 in validity extended under the provisions of clause 5 of the contract without 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 the last date on which tenders were stipulated to be received.
2. The cost of work in 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, and proposed to be recovered in the particular 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 material 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 of the materials originally considered for operation of this clause should be deducted from the cost of the work shown in the bill running or final. Further the cost of work shall not include any work for which payment is made under clause 12 or 12(a) at prevailing market rates.
3. 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 decision of the Engineer-in-Charge in working out such percentages shall be binding on the contractor. The components of materials and labour shall be taken as 75% and 25% respectively.
4. The compensation for escalation for materials, labour and P.O.L shall be worked out as per the formula given below:
VM = Cost
Variation in material cost i.e increase or decrease in the amount in rupees to be paid or recovered.
W = Cost of work done worked out as indicated in sub-para 2 above.
X = Component of materials expressed as percent of the total value of work.
MI & MIO = All India whole sale Index for all commodities for the period under reckoning as published by the Economic Adviser to Government of India. Ministry of Industry and Commerce, for the period under consideration and that valid at the time of receipt of tenders, respectively.
VL = Variation in labour cost i.e increase or decrease in the amount in rupees to be paid or recovered.
W = Value of work done, worked out as indicated in sub-para 2 above.
Y = Component of labour expressed as percent of the total value of work.
LI & LI0 = Consumer price index for industrial labour (All India) declared by labour Bureau, Government of India as applicable for the period under consideration, and that valid at the time of the receipt of tenders, respectively.
VF = Variation in cost of fuel, oil and lubricant, increase or decrease in rupees to be paid or recovered. W = Value of work done, worked out as indicated in sub-para 2 above.
Z = Component of P.O.L expressed as a percent of the total value of work as indicated under the special conditions of contract. FI & FI0 = Average index number of wholesale price for groups (fuel, power, light & lubricants) as published weekly by the Economic Adviser to Govt, of India, Ministry of Industry for the period under reckoning, and that valid at the time of receipt of tenders, respectively.
5. The following principles shall be followed while working out the indices mentioned in sub-para 4 above:—
(a) The index relevant for any month will be the arithmetical average of the indices relevant to the three calendar months preceding the month in question.
(b) The base index will be the one relating to the month in which the tender was stipulated to be received.
(c) The compensation for escalation shall be worked out at quarterly intervals and shall be with respect the cost of work done during the previous three months. The first such payment will be made at the end of three months after the month (excluding) in which the tender was accepted and thereafter at three months' interval.
6. In the event the price of materials and/or wages of labour required for execution of the work decrease/s, there shall be downward adjustment of the cost of work so that such price of materials and/or wages of labour shall deductable from the cost of work under this contract and in this regard the formula hereinbefore stated under the clause 10(cc) shall mutatis mutandis apply provided that:—
(i) No such adjustment for the decrease in the price of materials and/or wages of labour aforementioned would be made in case of contracts in which the stipulated period of completion of the work is less than six months.
(ii) The Engineer-in-charge shall otherwise be entitled to lay down the principles on which the provision of this sub-clause shall be implemented from time to time and the decision of the Engineer-in-charge in this behalf shall be final and binding.
7. The provisions of the preceding clause 10(c) shall not be applicable for contracts where provision of this clause 10(cc) are applicable. However, in contracts where provisions in clause 10(cc) are not applicable, then provisions in clause 10(c) will become applicable.
12. A plain reading of the above would show that the same deals with a situation where there is an increase in the prices of materials and stores and wages of the labour required for execution of the work. The clause entitles the contractor to compensation for such increase in terms of the formula enumerated thereunder. Such escalation shall be available only for the work done during the stipulated period of contract including the period during which the contract is validly extended under provisions of Clause 5 of the contract. There is no gainsaying that the amount of compensation payable under Clause 10CC is limited to the increase in the prices of materials and stores and/or wages of labour required for execution of the work. The clause does not either forbid the contractor from making a claim nor does the same provide for any formula or mechanism for determination of compensation on account of factors other than those that are specifically mentioned in the clause. This would necessarily mean that if in addition to increase in the prices of materials and stores and wages of labour required for execution of the work, the contractor suffers any damages on any other account as for instance on account of idle plants and machinery, scaffolding etc. or on account of blocked capital resulting in loss of profit or staff either posted on the work site or otherwise, he can make a suitable claim for payment on that account. Any such claim arising out of a breach of the agreement executed between the parties can be examined and awarded by the arbitrator depending on the evidence that the contractor may adduce to prove any such loss. We are supported in that view by the decision of this court in Delhi Development Authority… v. S.S Jetley…. 2001 (1) Arb. LR 289. That was also a case where the contractor had made two claims, one for payment of sums under clause 10CC of the agreement and the other on account of compensation for idle labour, staff, machinery, centering, shuttering etc. during the extended period of work. The arbitrator had awarded the said claim which the court found to be legally permissible under Sections 73 and 74 of the Contract Act which entitles the aggrieved party to claim damages for losses suffered due to a breach of the contract by the opposite party. The relevant portion of the decision in Jetley's case (supra) is as under:
It was the case of the respondent that because of prolongation of the Contract due to the fault on the part of the appellant, the respondent was made to incur the expenditure on idle labour, staff, machinery centering, shuttering and other ancillary requirements like electricity, water, petroleum, etc. It was the case of the respondent that it was necessary for the respondent to keep regular establishment including graduate engineer at site till the work is completed as required under Clause 36 of the agreement. The Arbitrator found that the respondent had in fact incurred expenditure on the aforesaid grounds and awarded the claim @5,000 per month for the period of delay which was 44 months and on this basis a sum of Rs. 2,20,000 was awarded. It was clear, therefore, that Claim No. 17 was for damages on account of prolongation of Contract inasmuch as respondent was made to incur unnecessary expenditure due to the fault of the appellant in prolonging the Contract. This claim is, therefore, maintainable as per Sections 73 and 74 of the Contract Act which gave entitlement to the respondent to claim damages/loss suffered due to breach of contract by the appellant”.
13. Reliance by Ms. Salwan upon the decision of this court in DDA v. U. Kashyap 1991 (1) ALR 88 is, in our view, misplaced. That was a case where the arbitrator had, while awarding compensation for increase in the cost of material and labour necessary for execution of the work, applied a formula other than the one stipulated under clause 10CC of the agreement. Relying upon the decision of the Supreme Court in Associate Engineering v. Government of Andhra Pradesh and Anr. 1991 (2) ALR 180, this court held that the arbitrator had exceeded his jurisdiction in making the award by applying a formula different from the one set out in clause 10 CC of the agreement.
14. In the present case, Claim No. 22 for compensation on account of factors other than those covered by Clause 10CC did not suffer from any infirmity like the one noticed in Kashyap's case (supra). There was, in that view, no illegality in the arbitrator entertaining and examining Claim No. 22, nor was there any conflict between the said claim and Clause 10CC as contended by the appellant so as to call for any interference from this court. Question No. 1 is accordingly answered in the affirmative.
Re Question No 2
15. The arbitrator has recorded a clear finding of fact to the effect that claim No. 22 was on account of overhead of the work site, idle machinery, centering and shuttering, scaffolding etc. besides idle tools and plants as also on account of loss of opportunity to take up other works resulting in loss of profits that the claimant may have earned. There can be no dispute that these items are independent of the factors that go into consideration under Clause 10CC of the agreement and even when a contractor is compensated under Clause 10CC, he may be entitled to claim additional compensation on the above counts. The question is however one of determining the loss which the contractor had suffered on those counts. The arbitrator may do so by insisting on actual proof of the staff, machinery, plants and tools, centering, shuttering, scaffolding etc. remaining idle on the spot. He may also adopt any other method considered suitable for determining the actual amount of loss as has been done by him in the instant case. The determination of the amount of loss by reference to cost index calculations may not be a scientifically accurate method of determining as to how much loss was suffered but may still be one of the methods that could be pressed into service. Inasmuch as the arbitrator relied upon that method and determined a sum of Rs. 3,68,989/- as the amount which could be said to cover the loss suffered by the claimant on account of prolongation of the contract period for reasons attributable to the Delhi Development Authority, he cannot be said to have committed any illegality or perversity of a kind that would constitute misconduct to call for interference. The determination of the amount of loss based on a formula that is not wholly alien to the process of determination would be respected by the court additionally for the reason that the arbitrator who has undertaken that exercise is an expert and brings his experience in the field to bear upon the process of determination. Our answer to Question No. 2 therefore is in the affirmative.
16. In the result, there is no merit in this appeal which fails and is hereby dismissed but in the circumstances without any order as to costs.
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