M/S Vijai Constructions Raibigo ... vs State Of U.P. Through The ...
2017 Latest Caselaw 3989 ALL

HIGH COURT OF JUDICATURE AT ALLAHABAD, LUCKNOW BENCH
 
 

RESERVED
 
First Appeal From Order No. 596 of 2008
 
M/s Vijai Constructions, Raibigo
 
Kadipur, Sultanpur      				...Appellant.
 
					
 
Versus
 
State of U.P. and others 				...Respondents.
 

 
Hon'ble Dr. Devendra Kumar Arora,J.

Hon'ble Rang Nath Pandey,J.

(Delivered by Dr. Devendra Kumar Arora,J.)

Heard Shri Ashok Nigam, Advocate assisted by Shri Neerav Chitrvanshi, learned Counsel for the appellant and Shri Rajesh Tiwari, Learned Addl. Chief Standing Counsel for the respondents.

This appeal under Section 37 of the Arbitration and Conciliation Act, 1996 [ in short referred to as the ''Act'] has been preferred by the M/s Vijai Constructions [ hereinafter referred to as the ''appellant] against the judgment and order dated 12.3.2008 passed by Sri A.K. Mathur, District Judge, Lucknow, in Regular Suit No. 09 of 2003 whereby the court below allowed the application under Section 34 of the Act preferred by the State of U.P. [ hereinafter referred to as the respondent] and set-aside the award dated 31.10.2002.

According to the appellant, the respondent had entered into an agreement on 19.6.1991 to undertake the work of "strengthening of existing work of two lane pavement from Km. 166 to 181 at National Highway-56". The total value of work under the agreement was Rs. 1,94,01,5000/- The period of completion of work, as per agreement was 18 months commencing from 19.6.1991 upto 18.12.1992. It is said that the work could not be completed in the stipulated period due to paucity of funds with the respondents. According to the appellant, the monthly, interim payments due to the claimants as prepared by the respondents and signed by the claimants were not paid and arbitrarily much lesser amount was paid to the claimants-appellants, which adversely affected the progress of the work. Vide letter no. 77 dated 25.11.1991 issued by the respondents, the appellants-claimants were asked either to continue work with their own funds as there is paucity of fund with the department or seek four months extension and that the final position of funds will be cleared only by January,92. The hold up of work due to shortage of funds with the respondents and its subsequent prolongation has involved extra cost in execution of work and other damages to the claimants. When the Respondent no. 1 had refused to make payment of the losses suffered by the appellant due to prolongation of execution of work as well as interest, the appellant referred the matter for arbitration as per the agreement.

The Arbitral Tribunal comprising of private respondents was constituted, which after considering the entire material and evidences on record gave its award on 31.10.2002 in favour of the appellant. The tribunal on the basis of its findings in the award, awarded the following amounts in favour of the appellant:

a. Loss due to prolongation of contract Rs. 19,67,000.00

b. Loss of interest due to blockage of money

on account of partial payments Rs. 1,84,386.00

c. Loss due to idleness of equipments Rs. 4,99,000.00

d. Extra Expenditure due to extension of bank

guarantee Rs. 4,000.00

e. Interest upto 31.10.2002 Rs. 45,38,000.00

f. 50% of total costs of Arbitration Rs. 1,25,000.00

Total Rs. 73,17,386.00

Awarded amount Rs. 73,17,000.00

According to the learned Counsel for the appellant, the twin issues, namely, estoppel and liability to pay for escalation of prices as well as payment of compensation have elaborately been dealt with by the Tribunal in paragraphs 12-C and 14-C of the award.

Feeling aggrieved by the aforesaid award dated 31.10.2002, the Respondent no. 1 preferred an application for setting aside the award under Section 34 of Arbitration & Conciliation Act, 1996, before the District Judge, Lucknow which was registered as Regular Suit No. 9 of 2003 re: State of U.P. Versus M/s Vijay Construction and others. The appellant has also filed its objections to the said application. Later on, the learned District Judge vide its judgment and order dated 12.03.2008 has allowed the application of the Respondent no. 1 and set aside the award dated 31.10.2002, which is impugned in the present appeal.

It has been vehemently argued that while setting aside the award dated 30.10.2002 vide impugned judgment, the learned Court below has proceeded on wrong premise, which can be summarized as under:-

(I) The work could not be completed by the appellant within stipulated period and a request was made for extension of time, while the admitted factual position was just the opposite . Infact, the work could not be completed within time on account of paucity of funds with the respondent no. 1 and its default in making full payment of the regular running bills of the appellant. Further, the time was sought to be extended only on the request of the respondent no. 1 on account of paucity of funds with it.

(ii) The appellant had given an acknowledgment on 03.09.1993 that whatever work had been done till the said date, it has received the payment for the same and nothing is due against the respondent no.1, which is also factually incorrect. In fact, the said acknowledgement was the enclosure to the final bill prepared by the officials of the respondent no. 1, which itself was signed by the appellant under protest keeping its right reserved for claiming the losses and interest thereon incurred by the appellant on account of default of the respondent no. 1.

Further, the said acknowledgement as well as the ''No claim certificate' given along with application for extension of time were signed by appellant under pressure of the officials of the respondent no. 1, that in case the said documents had not been signed, the pending bills etc. of the appellant as well as application for extension of time would not have been processed, as such the said document were signed under duress.

These and other similar presumption of incorrect facts by the learned court below has led it to totally perverse findings of facts and law which has resulted into the impugned judgment and order setting aside the award dated 30.10.2002, which is quite contrary to the facts on record.

Elaborating his arguments, learned Counsel for the appellant has contended that the Arbitral Tribunal has only awarded the losses which were caused due to prolongation of the contract on account of the default of the respondent no.1 and the claim of the appellant for escalated prices was rejected overlooking the fact that if the prolongation in the period of contract is due to the delay and default of the employer, the contractor is entitled not only to extension of time but also to compensation for the losses suffered as held by the Apex Court in the case of P.M.Paul Versus Union of India and others; 1989 Supp(1) SCC 368 and K.N.Sathyapalan by LRs versus State of Kerala and another;(2007) 13 SCC 43.

According to the appellant, the respondent no.1 during deliberation had told that matter for extension of time will be considered only when ''no claim certificate' on the printed format of the department is given by him. As the considerable amount was outstanding against the Government and if the ''no claim certificate' was not given as per wishes of the authorities, the outstanding fund would not have been released. So with the view to get the outstanding dues cleared, the ''no claim certificate' was given which would not debar the appellant from claiming losses due to prolongation of work on account of paucity of funds with the department as the signing of ''no claim certificate' was involuntary and under compelling circumstances, as indicated above. It is said that the above assertion is substantiated by the decision of the Apex court rendered in the case of Associated Construction Vs Pawanhans Helicopters Ltd; (2008) 16 SCC 128.

In contrast, the learned State Counsel while defending the impugned judgment passed by the court below stated that the findings given by the court below are based on correct appreciation of evidence on record. The finding of the Arbitral Tribunal that the authorities were entirely responsible for prolongation of work is wholly incorrect. The Arbitral Tribunal failed to appreciate that as per clause-8 of the GPW Form-9, the contractor was required to submit monthly bills but it was not done, hence delay in payment cannot be solely attributed to the authorities. The Arbitral Tribunal exceeded its jurisdiction overlooking the fact that granting of interest and escalation was out of the terms and condition of the agreement. He further submitted that the court below while setting aside the award has relied upon the Apex Court's decision in the case of Steel Authority India Ltd. Versus J.C.Budharaja, Government and Mining Contractor; (1999) 8 SCC 122 wherein it has propounded that award passed in disregard of express terms of the contract would be arbitrary, capricious and without jurisdiction. Further in the case of State of Orissa Vs. Sri S.C.Roy (dead) by LRs; JT 2001 (5) SC 267) the court has held that if agreement contains no escalation clauses, the award of escalation charges cannot be sustained.

In the backdrop of the aforesaid facts, it has been urged that there is no illegality or infirmity in the impugned judgment passed by the District Judge and the instant appeal is liable to be dismissed.

We have gone through the Award passed by the Arbitral Tribunal, the impugned judgment whereby the Award has been set-aside and the other material on records.

On perusal of the material on record it comes out that the core issues for consideration before the learned court below were as to;

1. Whether the appellant was forced to seek extension of time for execution of work at the behest of the respondent no. 1 itself and because of its default in making payments of the running bills as per its contractual obligation may be due to paucity of funds with it as professed? If so, its effect.

2. Whether the ''No claim certificate' submitted along with the application for extension of time as well as the acknowledgement submitted along with the final bill were signed by the appellant under duress? If so, its effect.

As regard the delay in completion of work and ''no claim certificate' given by the appellant, the Arbiter Tribunal has held in explicit words that there was acute paucity of funds when the work was started, which is obvious from the fact that the bills were curtailed from Rs. 18.06 lacs to a lump-sum of Rs. 7 lacs only, from Rs. 21.51 lacs to Rs. 5/- lacs only and from Rs. 36.03 lacs to Rs. 15/- lacs only without assigning any reasons for curtailment. The Field Officer had certified that the work and progress is satisfactory. Subsequently, the authorities of Respondent no.1 asked the appellant to seek extension of time and carry out work to the extent claimants can afford themselves for the time being as the position of allotment of funds is uncertain.

On perusal of record, it emanates that there was sustained paucity of funds with the department which made much less payment than due, resulting into adverse effect on progress and compelling the appellant to formally seek extra time, while continue to work to the extent possible with their own money. Since the default was entirely on the part of the department, it amounts to breach of terms and conditions of the contract.

In P.M.Paul Vs. Union of India; 1989 Supp(1) SCC 368 which has been relied upon by the appellant, the dispute that was referred to the arbitrator was as to who is responsible for the delay; what are the repercussions of the delay in completion of the building and how to apportion the consequences of the responsibility. The arbitrator found that there was escalation and, therefore, he came to the conclusion that it was reasonable to allow 20% of the compensation under the claim. He accordingly allowed the same. The Union of India argued that the arbitrator had travelled beyond his jurisdiction in awarding the escalation cost and charges. The Apex Court in paras 11 and 12 of the judgment held as under:-

"It is well-settled that an award can only be set aside under Section 30 of the Act, which enjoins that an award of an arbitrator/umpire can be set aside, inter alia, if he has misconducted himself or the proceeding. Adjudicating upon a matter which is not the subject-matter of adjudication, is a legal misconduct for the arbitrator. The dispute that was referred to the arbitrator was, as to who is responsible for the delay, what are the repercussions of the delay in completion of the building and how to apportion the consequences of the responsibility. In the objections filed on behalf of the respondent, it has been stated that if the work was not completed within the stipulated time the party has got a right for extension of time. On failure to grant extension of time, it has been asserted, the contractor can claim difference in prices.

In the instant case, it is asserted that the extension of time was granted and the arbitrator has granted 20% of the escalation cost. Escalation is a normal incident arising out of gap of time in this inflationary age in performing any contract. The arbitrator has held that there was delay, and he has further referred to this aspect in his award. The arbitrator has noted that Claim-I related to the losses caused due to increase in prices of materials and cost of labour and transport during the extended period of contract from 9.5. 1980 for the work under phase I, and from 9.11.80 for the work under phase II. The total amount shown was Rs.5,47,618.50. After discussing the evidence and the sub- missions the arbitrator found that it was evident that there was escalation and, therefore, he came to the conclusion that it was reasonable to allow 20% of the compensation under Claim I, he has accordingly allowed the same. This was a matter which was within the jurisdiction of the arbitrator and, hence, the arbitrator had not mis-conducted himself in awarding the amount as he has done."

In the case of Food Corporation of India Vs. A.M. Ahmed & Co. and another 2006 13 SCC 779 the court was considering the issue with regard to absence of escalation clause in agreement and has observed as under:-

"32. Escalation, in our view, is normal and routine incident arising out of gap of time in this inflationary age in performing any contract of any type, In this case, the arbitrator has found that there was escalation by way of statutory wage revision and, therefore, he came to the conclusion that it was reasonable to allow escalation under the claim. Once it was found that the arbitrator had jurisdiction to find that there was delay in execution of the contract due to the conduct of FCI, the Corporation was liable for the consequences of the delay, namely, increase in statutory wages. Therefore, the arbitrator, in our opinion, had jurisdiction to go into this question. He has gone into that question and has awarded as he did. The arbitrator by awarding wage revision has not misconducted himself. The award was, therefore, made rule of the High Court, rightly so in our opinion. "

Ordinarily, the parties are bound by the terms agreed upon in the contract,but in the event one of the parties to the contract is unable to fulfill its obligations under the contract which has a direct bearing on the work to be executed by the other party, the arbitrator is vested with the authority to compensate the second party for the extra costs incurred by him as a result of the failure of the first party to live up to its obligations. In the case of K.N. Sathyapalan (Dead) By LRS. Vs. State of Kerala and another (2007) 13 SCC 43 the question before the Apex Court to answer was whether in the absence of any price escalation clause in the original agreement and a specific prohibition to the contrary in the supplemental agreement, the appellant could have made any claim on account of escalation of costs and whether the arbitrator exceeded his jurisdiction in allowing such claims. has observed as under:-

"33. We have intentionally set out the background in which the arbitrator made his award in order to examine the genuineness and/or validity of the appellant's claim under those heads which had been allowed by the arbitrator. It is quite apparent that the appellant was prevented by unforeseen circumstances from completing the work within the stipulated period eleven months and that such delay could have been prevented had the State Government stepped in to maintain the law and order problem which had been created at the work site. It is also clear that the rubble and metal, which should have been available at the departmental quarry at Mannady, had to be obtained from quarries which were situated at double the distance, and even more, resulting in doubling of the transportation charges. Even the space for dumping of excess earth was not provided by the respondents which compelled the appellant to dump the excess earth at a place which was faraway from the worksite entailing extra costs for the same.

34. In the aforesaid circumstances, the arbitrator appears to have acted within his jurisdiction in allowing some of the claims on account of escalation of costs which was referable to the execution of the work during the extended period. In our Judgment, the view taken by the High Court was on a rigid interpretation of the terms of contract and the supplemental agreement executed between the parties, which was not warranted by the turn of events."(emphasis supplied)

We would like to mention that a court does not sit as one in appeal over the award of the arbitrator and if the view taken by the arbitrator is permissible,no interference is called for on the premise that a different view was also possible. One must keep in mind that in commercial transactions all situations cannot be visualized and the positive finding that the delay in the execution of the work was occasioned on account of reasons attributable to respondent no.1, cannot be brushed aside lightly. Furthermore, the Arbiter Tribunal has rightly recorded an explicit finding that respondent no.1 was solely responsible for the prolongation of the contract due to acute paucity of fund with it and that the ''No claim certificate submitted alongwith the application for extension of time as well as the acknowledgement given alongwith the final bills were signed by the appellant only under duress. It would not be out of place to mention here that under the provisions of the Contract Act, the party who suffers when a contract is broken, is entitled to receive compensation for any loss or damage cause to him thereby, which naturally arose in the usual course of things from such breach, or which the parties knew, when they made the contract, to be likely to result from the breach of it.

On perusal of the record, it comes out that the appellant was under tremendous pressure owing to the compelling circumstances and was not in a position to negotiate, the respondent no.1 by using its dominant position had forced the respondent to sign the discharge voucher and accept the payment.

In National Insurance Co. Ltd. vs. Boghara Polyfab (P) Ltd.(2009)1 SCC 267 the question that arose was whether the discharge in the present case upon acceptance of compensation and signing of subrogation letter was not voluntary and whether the claimant was subjected to compulsion or coercion and as such could validly invoke the jurisdiction under Section 11 of the Act. The court held as under:-

"26. When we refer to a discharge of contract by an agreement signed by both the parties or by execution of a full and final discharge voucher/receipt by one of the parties, we refer to an agreement or discharge voucher, which is validly and voluntarily executed. If the party which has executed the discharge agreement or discharge voucher, alleges that the execution of such discharge agreement or voucher was on account of fraud/coercion/undue influence practiced by the other party and is able to establish the same, then obviously the discharge of the contract by such agreement/voucher is rendered void and cannot be acted upon. Consequently, any dispute raised by such party would be arbitrable."

In the case at hand, a careful scrutiny of records shows that there were sufficient materials on record to indicate that the authorities of the respondent no.1 were bent upon denying the appellant its just dues, and, on the other hand, they had deducted certain amounts which were due and payable on account of Running Bills submitted by the appellant. Thus the appellant was successful to prove before the learned Arbitrator that the appellant had been compelled by circumstances to submit the No Objection Certificate.

Our above view is countenanced by the decision of the Apex Court in the case of Associated Construction Vs. Pawanhans Helicopters Limited (2008) 16 SCC 128 where one of questions for consideration before the Apex Court as to whether there was any duress or coercion on the contractor which had compelled it to give a "no dues certificate", the Apex Court held as under:-

"We have reproduced the correspondence in extenso to show that the contractor was compelled to issue a "no-dues certificate" and in this view of the matter, it could not be said that the contractor was bound by what he had written. It is also clear that there is voluminous correspondence over a span of almost 2 years between the submission of the first final bill on 03.06.1991 and the second final bill dated 02.02.1993 and as such the claim towards escalation or the plea of the submissions of a "no-dues certificate" under duress being an afterthought is not acceptable. "

In a decision which may come to haunt the coercive tactics of the Governments, the Supreme Court recently in R.L. Kalathia & Co. v. State of Gujarat, (2011) 2 SCC 400 has declared that merely because a contractor has given no dues certificate, it cannot be argued that it has relinquished all claims and debts. Holding that it was obligatory practice to get the money from the Government departments for the contractor to issue no due certificate, the Supreme Court declared that it would not be consequential to the matter if the contractor alleged that the no-dues certificate was given under coercion/threat etc. The Court inter alia observed as under:-

1) It is true that when the final bill was submitted, the plaintiff had accepted the amount as mentioned in the final bill but "under protest". It is also the specific claim of the plaintiff that on the direction of the Department, it had performed additional work and hence entitled for additional amount/damages as per the terms of agreement. Merely because the plaintiff had accepted the final bill, it cannot be deprived of its right to claim damages if it had incurred additional amount and able to prove the same by acceptable materials.

2) Before going into the factual matrix on this aspect, it is useful to refer the decisions of this Court relied on by Mr. Altaf Ahmed. In the case of Chairman and MD, NTPC Ltd vs. Reshmi constructions, Builders & Contractors, (2004) 2 SSC 663, which relates to termination of a contract, contract comes to an end by completion of the Contract work and acceptance of the final bill in full and final satisfaction and after issuance of a ''No Dues Certificate' by the contractor, can any party to the contract raise any dispute for reference to arbitration?While answering the said issue this Court held that :-

"27. Even when rights and obligations of the parties are worked out, the contract does not come to an end inter alia for the purpose of determination of the disputes arising thereunder, and, thus, the arbitration agreement can be invoked. Although it may not be strictly in place but we cannot shut our eyes to the ground reality that in a case where a contractor has made huge investment, he cannot afford not to take from the employer the amount under the bills, for various reasons which may include discharge of his liability towards the banks, financial institutions and other persons. In such a situation, the public sector undertakings would have an upper hand. They would not ordinarily release the money unless a "No-Demand Certificate" is signed. Each case, therefore, is required to be considered on its own facts.

28. Further, necessitas non habet legem is an age-old maxim which means necessity knows no law. A person may sometimes have to succumb to the pressure of the other party to the bargain who is in a stronger position".

In the aforesaid Kalathia's case, the Apex court enunciated following principles:-

(I) Merely, because the contractor has issued "No Due Certificate", if there is acceptable claim, the court cannot reject the same on ground of issuance of "No Due Certificate".

(ii) Inasmuch as it is common that unless a discharge certificate is given in advance by the contractor, payment of bills are generally delayed, hence such a clause in the contract would not be an absolute bar to a contractor raising claims which are genuine at a later date even after submission of such" No claim Certificate".

(ii) Even after execution of full and final discharge voucher/receipt by one of the parties, if the said party able to establish that he is entitled to further amount for which he is having adequate materials, is not barred from claiming such amount merely because of acceptance of the final bill by mentioning "without prejudice" or by issuing ''No Due Certificate'."

On scrutiny of the instant case in the light of the aforesaid observations, it is found that the learned District Judge while allowing the application under-Section 34 of the Act proceeded on the wrong presumption that the work could not be completed by the appellant within the stipulated period and the request was made for extension of time. More, the court below has also not recorded any finding in respect of the fact that ''No claim certificate was submitted by the appellant alongwith the final bill under duress or not and even then proceeded to set aside the award. We have carefully perused the award. The award, in our view, is not vitiated by an error of fact or law on the face of the record and the Arbitral Tribunal has not committed any misconduct within the meaning of the Act. The learned District Judge has failed to consider that when the respondent no.1 was not in a position to effect payment, it looses its right to claim time bound performance from the contractor. Moreover, it has come on record that on verification it has been found that the words "under protest" was written below the signature of the claimants in the final bill. It is to be noted that when a contract contains reciprocal promises, and one party to the contract prevented the other from performing his promise, the contract becomes voidable at the option of the party so prevented; and he is entitled to compensation from the other party for any loss which he may sustain in consequences of the non-performance of the contract.

In view of the aforesaid legal position and discussion, we are of the considered view that the award, in our view, is not vitiated by any error of fact or law on the face of the record and the Arbitral Tribunal has not misconducted within the meaning of the Act. In view of the latest verdict given by the Apex Court, referred to above, the case laws as relied upon by the respondent are of no avail.

In that view of the matter, the objections of the respondent as allowed by the court below while allowing the application under Section 34 of the Act, cannot be sustained. The impugned judgment dated 12.3.2008 is set-aside and the award dated 31.10.2002 is made the rule of the court. Consequences to follow.

The instant appeal stands allowed in above terms.

Order Date:05.09.2017

Ashish