Bombay High Court
Municipal Corporation Of Greater ... vs Arabian Jacking Enterprises For ... on 31 March, 2017
Bench: N.M. Jamdar
1 _2_ ARBP 162.09 with ARBP 925.12 Judt.doc
JPP
IN THE HIGH COURT OF JUDICATURE AT BOMBAY
ORDINARY ORIGINAL CIVIL JURISDICTION
ARBITRATION PETITION NO. 162 OF 2009
M/s. Angerlehner Structural and
Civil Engineering Co., 2078 "B" Wing,
2nd floor, Oberoi Gardens, Chandivali
Studio Compound, Saki Vihar Road,
Sakinaka, Andheri (East),
Mumbai - 400 072. ... Petitioner.
V/s.
The Municipal Corporation of Greater
Mumbai, constituted under the provisions
of the Mumbai Municipal Corporation
Act, 1888 having its office at 3rd floor,
Annex Building, Municipal Head Office,
Mahapalika Marg, Fort, Mumbai - 400 001. ... Respondent.
with
ARBITRATION PETITION NO. 925 OF 2012
The Municipal Corporation of Greater Mumbai
constituted under the provisions of Mumbai
Municipal Corporation Act, 1888, having its
office at Mahapalika Marg, Fort,
Mumbai - 400 001 - through the Chief
Engineer (SP), Cement Godown Building,
3rd floor, Room No. 311, 564, N.M. Joshi Marg,
Byculla, Mumbai - 400 011. ... Petitioner.
::: Uploaded on - 05/04/2017 ::: Downloaded on - 06/04/2017 00:29:08 :::
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V/s.
M/s. Arabian Jacking Enterprises for
Contracting and Trading Co. (AJECT)
C/o. Aegis Management & Financial
Consulting (India) Pvt. Limited, No.3,
Swaroop Bhavan, Plot No.38, Tarun Park,
Chakala, Andheri (East), Mumbai - 400 099
and also having their office at 214, Vardhaman
Complex, 10, L.B.S. Marg, Vikhroli (West),
Mumbai - 400 083. ... Respondent.
Mr. Zal Andhyarujina a/w. Mr. Hursh Meghani, Mr. Javed Gaya,
Ms. Vidya Chaudhari i/b. Chambers of Javed Gaya for the
Petitioners in ARBP 162 of 2009 and for the Respondent in ARBP
925 of 2012.
Mr. Kevic Setalwad, Senior Advocate a/w. Ms. Daisy Dubhash, Mr.
R.Y. Sirsikar i/b. S.H. Ujjainwala for the Respondents in ARBP 162
of 2009 and for the Petitioners i/b. R.A. Malandkar in ARBP 925 of
2012.
Coram : N.M. Jamdar, J.
Reserved on : 31 January 2017.
Pronounced on : 31 March 2017.
Judgment :-
These two Arbitration Petitions arise from the contracts
entered into by the Municipal Corporation of Greater Mumbai with
the Contractors, M/s. Angerlehner Structural and Arabian Jacking
Enterprises.
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2. Since the Petitions are argued together, by consent of
parties the Petitions are disposed of by this common judgement.
3. For the sake of brevity, M/s Angerlehner Structural is
referred to as 'Angerlehner'. Arabian Jacking Enterprises is referred
to as 'AJECT'. Municipal Corporation Greater Mumbai is referred
to as 'Corporation'.
4. In both the cases the terms of the contract are identical.
The terms have been adopted from the standard contract templates
issued by the International Federation of Consulting Engineers
based in Geneva, Switzerland. This federation is popularly known as
FIDIC, an acronym for its French name Federation International
Docs Ingenieurs - Conseils. The present contracts were financed by
the World Bank. The World Bank stipulates that if a contract is to
exceed eighteen months in duration, it must incorporate a clause for
Price Escalation. The controversy in these Arbitration Petitions
centres around the Price Escalation clause (the Clause). The central
question that arises in these two Petitions is whether the Clause,
which is in the nature of a formula, is open to interpretation and
what is the position of law regarding the interpretation of a formula.
5. In the dispute between the Angerlehner and the
Municipal Corporation, the Arbitrators have interpreted the Clause
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and have dismissed the claim of Angerlehner, which has led to
Angerlehner filing an Arbitration Petition No.162 of 2009.
6. In the dispute between AJECT and the Corporation, the
Arbitrators have taken a view that no modification of the Clause is
possible as a principle, nor is permissible in the facts of the case and
have granted the claim of AJECT, against which the Corporation has
filed an Arbitration Petition No. 925 of 2012.
7. The different set of Arbitrators, in these two arbitration
proceedings have taken a diametrically opposite view. In the dispute
between Angerleher and the Corporation, the Arbitrators have
interpreted the Clause holding that it is permissible to do so. In the
dispute between AJECT and Corporation, the Arbitrators have held
that interpretation of a term in the contract is not permissible.
8. It is the stand of the Corporation that the interpretation
of such clause-cum-formula is permissible in law and it has been
interpreted correctly. Stand taken by the contractors Angerlehner
and AJECT is that the price escalation clause contains a formula and
no interpretation of a formula is permissible and it must be applied
as it stands. An additional ground is also taken that it because of the
Clause that the bid has been accordingly adjusted.
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9. A part of the Price Escalation Clause, which is the central
point of dispute, is reproduced to put the rival contentions and the
facts in perspective. At this stage, it will suffice to reproduce only
the method of calculation. The entire sub-clause 70.3 is reproduced
subsequently in this judgement. The sub-clause 70.3 of the contract
deals with the price adjustment. The preamble to this sub-Clause
reads thus :-
" c. Following expressions and meanings are
assigned to the value of the work done during each
quarter :
R = Total value of work done during the month.
It would include the value of materials on which
secured advance has been granted, if any, during the
month, less the value of materials in respect of
which the secured an advance has been recovered, if
any, during the month. This will exclude cost of
work on items for which rates were fixed under
variations clause (51 and 52) for which the
escalation will be regulated as mutually agreed at the
time of fixation of rate.
RI = Portion of 'R' as payable in Indian Rupees.
RF = Portion of 'R' as payable in foreign currency
(at fixed exchange rates).
R = RI + RF
To the extent that full compensation for any rise or
fall costs in the contractor is not covered by the
provisions of this or other clauses to the contract,
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the unit rates and prices included in the contract
shall be deemed to include amounts to cover the
contingency of such other rise or fall in costs."
10. This formula refers to value 'R'. As per the explanation
given, 'R' is equal to RI plus RF. RI is a portion in Indian rupees
and 'RF' is a portion in foreign currency. After the preamble, the
sub-rule lays down the adjustment formula in respect of each of the
components. Such as the labour component, the cement
component, the fuel component, the lubricant component, etc. For
instance, in case of Labour the formula is : 0.85 x P1/100 x R x (Li -
Lo)/Lo. The dispute centres around the meaning of 'R'.
11. The Arbitration Petition No. 162 of 2009 is filed by
Angerlehner. Angerlehner is a body corporate registered in Austria.
It has a project office in Mumbai. The Corporation was desirous of
undertaking the work of rehabilitation of sewering in the city by
lining and quoting method. The project was financed by the World
Bank. Bids were invited in August 1999. Angerlehner submitted its
bid in November 1999. The Corporation accepted the bid
submitted by Angerlehner vide letter dated 21 September 2000
and the contract was entered into. The work was commenced by the
Angerlehner after receipt of work order in April 2011. Interim bills
and invoices were raised by Angerlehner in respect of the price
escalation. The bills were rejected by the Engineer of the
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Corporation on the ground that foreign currency component cannot
be again taken into consideration. On 14 February 2002, a joint
meeting was held for resolution of the differences. The differences
were not resolved. Angerlehner approached the Dispute Resolution
Board constituted as per the terms of the contract. The Dispute
Resolution Board did not accept the case of Angerlehner.
Thereafter, Angerlehner invoked the arbitration clause contained in
the contract. An arbitral tribunal of two Arbitrators nominated by
the parties, and a presiding Arbitrator, was constituted. Angerlehner
made a claim of US $ 10,29,665.88 comprising of US $ 7,53,033.15
towards principal and US $ 2,76,632.74 towards interest at the rate
of 18% till 15 September 2005. It was contended by Angerlehner
that the formula contained in Clause 70.3 of Conditions of
Particular Application (COPA) for calculating the price adjustment
has to be read as it is. It was contended that this formula is used to
determine the amounts payable to the contractors in various
currencies after making the adjustment and the action of the
Corporation in unilaterally construing the formula and eliminating
the foreign currency component from the calculations altogether, is
impermissible. There was no case of mistake or fraud to rectify such
formula, assuming it is permissible. On behalf of the Corporation, it
was urged that if the interpretation placed by Angerlehner is
accepted, it will lead to double payment to Angerlehner. A stand
was also taken that the foreign currency component was already
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taken into consideration. It was also pointed out that reading the
contract as a whole, the claim of Angerlehner for double payment,
cannot be accepted. The Arbitrators analyzed the Clause and held
that the value of foreign currency cannot again be taken into
consideration while calculating the local currency component. They
held that the interpretation of Angerlehner will lead to absurdity as
the price adjustment would not be on the value of 100% of the work
done but on the value of 165%. The Arbitrators, by majority award
dated 11 July 2007 dismissed the claim made by Angerlehner. The
minority award was given by the dissenting Arbitrator on 27 June
granting the claim made by the Angerlehner. Against the majority
Award, Angerlehner has approached this Court by way of
Arbitration Petition No.162 of 2009.
12. In Arbitration Petition No.925 of 2012 is filed by the
Corporation against AJECT. The Corporation invited bids for the
work of installation of sewers by micro tunnelling and pipe jacking
methods at various locations in Mumbai. The project was funded by
the World Bank. World Bank granted approval to the list of pre-
qualified bidders. On 27 April 1998, the Corporation invited bids
from five pre-qualified bidders. Pre-bid meeting was held on 27
May 1998. The AJECT submitted its bid on 27 July 1998. On 31
October 1998, AJECT submitted substantiation in respect of total
requirement of foreign currency amounting to US $ 72,50,000 and
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the remaining portion payable in local currency. Work was awarded
to AJECT on 19 January 1999 and a work order was issued. The
initial cost of work was Rs.34.88 crores [Rs.4,18,12,500 (11.98%) +
US $ 72,50,000 (88.014%)] and the additional work was of Rs.9.00
crores (Rs. 1,07,96,012 + US $ 18,71,920). Interim bills were
raised from March 2000 till June 2001. Sixteen interim bills were
processed. Thereafter, the Engineer of the Corporation took a stand
that there was a mutual error in the invoices wherein in the
calculations regarding local indices foreign currency component
were included. Correspondence was entered into between the
parties in respect of the same. A meeting was held in September
2001, but the dispute was not resolved. AJECT referred the dispute
to Dispute Review Board as per sub-clause 67.1 of Conditions of
Particular Application (COPA). On 29 November 2002, the
Dispute Resolution Board accepted the contentions of the
Corporation that use of 'RI' in place of 'R' is logical and correct and
should be adopted. AJECT invoked the arbitration clause. Arbitral
Tribunal of three learned Arbitrators was constituted AJECT filed a
claim for an amount of Rs.6,61,16,395 along with interest from
December 2001 amounting to Rs.5,61,98,935 along with interest at
the rate of 10% till realization. The Corporation filed written
statement and contested the claim. On 20 May 2011, AJECT filed
an application for amendment of the claim. By amendment it
sought to increase the claim amount and interest to Rs.70,585,757
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and Rs.66,640,690. The amendment was permitted by the Arbitral
Tribunal. The Arbitral Tribunal, by its award dated 18 April 2012
partly allowed the claim of AJECT and granted a sum of
Rs.6,10,71,887 with interest at the rate of 10% per annum from 9
December 2001 till payment. Other claims were rejected.
Corporation has filed Arbitration Petition No.925 of 2012
challenging the Award.
13. I have heard Mr. Zal Andhyarujina, learned Advocate for
the Petitioner - Angerlehner in Arbitration Petition No. 162 of 2009
and for the Respondent - AJECT in Arbitration Petition No. 925 of
2012, and Mr. Kevic Setalwad, learned Senior Advocate for the
Corporation in both the Arbitration Petitions.
14. Mr. Andhyarujina, in short, submitted :
(a) Clause 70.3 clearly stipulates the meaning of 'R'. 'R' is total of
'RF' and 'RI', 'RF' being the foreign currency component and 'RI'
being Indian currency component, there is absolutely no ambiguity
in the said definition. Thereafter, the Clause deals with calculation
of individual categories such as labour, cement, etc. wherein a
specific mathematical formula has been laid down.
(b) The interpretation of term of a contract is different than
modification of a mathematical formula. There is no question of
modification of a mathematical formula. There is no mistake in the
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said formula and after due deliberation, the formula has been
incorporated.
(c) If 'RF' is completely excluded from the mathematical formula,
then it amounts to modification of the formula. Therefore, the
dissenting Award in Angerlehner and the majority of the Award in
AJECT have correctly taken a view that such course of action is not
permissible.
(d) This view has been reiterated by the Calcutta High Court in
Taisei Corporation v/s. West Bengal State Electricity Distribution
Co. Ltd.1. The contracts in both the matters have been modelled on
the standard contract templates issued by FIDIC, which have been
followed all over the world and the mathematical formulas in such
standard formats contracts are not subject to modification.
(e) There is no mutual mistake in the formula and unless there
exist a cogent proof of mutual mistake, a term in a contract cannot
be modified. Haji Abdul Rahman Alla Rakhia and Anr. v/s. The
Bombay and Persia Steam Navigation Company 2 and DCM Ltd. v/s.
Municipal Corporation of Delhi and Anr .3 It is also explained in
Hudson's Building and Engineering Contracts a leading
commentary on the subject that Price Escalation Clauses are never
perfect and they may under or over say compensate. It is because of
the formula that the bid has been given by the contractors. In the
present cases, there has been no such over compensation as bids were
1 FMA 2659/13 dt. 14/1/15
2 1892 ILR Vol XVI 561
3 (1997) 7 SCC 123
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adjusted in view of the formula. Therefore, 'RF' and 'RI' will both
have to be included as an input in working out the formula.
(f) In the Arbitration proceeding in Angerlehner, the view taken
in the case of AJECT was sought to be placed however, have been
wrongly discarded by the Arbitrators.
(g) In award concerning AJECT, the Corporation had issued
sixteen bills on the basis of the formula by including 'RF' component
and therefore, the Corporation had clearly acted as per the formula
and this understanding of the Corporation will have to be noted.
(h) Even though in the case of Angerlehner, Angerlehner had
received payment calculated deleting the 'RF' component, protests
were raised by the Angerlehner and it was not the case that there was
any acceptance by Angerlehner.
(i) The stand of the Corporation in the cases of Angerlehner and
AJECT are different. In Angerlehner, the contention is that 'RF' will
have to be treated as 'Zero' and in AJECT the contention is that 'R'
will have to be read as 'RI', as by mistake 'I' has remained to be
suffixed to 'R'.
(j) The consequence of working of a formula is irrelevant and
interpretation cannot be placed because of the consequence which
will modify the formula especially when a bid has been adjusted
based on the formula.
(k) In the case of AJECT, witness had deposed regarding the bids
submitted in view of the formula and there has been no cross-
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examination and therefore, his evidence is rightly accepted.
(l) Therefore, in the case of Angerlehner, the Arbitrators have
exceeded their jurisdiction in interpreting a mathematical formula
consciously adopted by the parties and the Award therefore is against
the terms of the contract and must be set aside. In AJECT, the
Arbitrators have rightly confined themselves within the terms of the
contract after rendering a finding that it is because of the formula
that AJECT had given a bid of a particular amount. Therefore, the
Award passed in AJECT requires no interference.
15. Mr. Setalwad, learned Senior Advocate on behalf of the
Corporation contended :
(a) It is admitted position that as per the contracts the foreign
currency component is 65% and Indian currency component is 35%.
(b) In Angerlehner for 64% of the work done amount was paid as
per the interpretation of the Corporation, which was accepted by
Angerlehner.
(c) The work was completed on 31 May 2003 and after one year
that is sometime in May 2004, that dispute is sought to be raised by
Angerlehner.
(d) There is no modification of the formula which is merely a term
in the contract. 'RF' has been taken into consideration but value has
been assigned as 'Zero'. An assertion made by the Corporation that
100% of foreign currency component has been taken into account is
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not denied. What is sought to be claimed by both Angerlehner and
AJECT is that they should be paid not on 100% of their work but on
165%, which is absurd and cannot be in contemplation of the
parties.
(e) The contract terms cannot be read in isolation. The price
escalation clause will have to be read with other clauses of the
Contract. Clause 5.2 read with clause 60.2 gave discretion to the
Engineer to adjust the discrepancies. In clause 70 the entire
methodology has laid down.
(f) The conjoint reading of the entire contract, especially the
scheme of clause 70.3 shows that the component listed from clause
(i) to (vi) are Indian Currency indices, for which there cannot be any
inclusion of foreign currency component which has been separately
dealt with in clause (vii).
(g) The foreign currency component being independently
calculated and admittedly given, again it cannot be included in other
clauses which deal only with the Indian Currency Component. 'RF'
will have to be assigned as value 'Zero' and 'R' will have to be
treated as 'RI' since 'RF' is 'Zero'.
(h) In Angerlehner, the Arbitrators correctly read the term of the
contract and assigned its correct meaning. In AJECT, the
Arbitrators have erroneously denuded themselves by their powers to
look into the meaning of the clauses of the contract.
(i) In AJECT, the Arbitrators have held that they are powerless to
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construe a term in the contract, which is not correct position in law,
in view of the Delhi High Court decision in the case of M/s. R.S.
Builders v/s. Delhi Development Authority4 and the Apex Court in
the cases of National Highways Authority of India v/s. ITD
Cementation India Limited5 and McDermott International INC v/s.
Burn Standard Co. Ltd. & Ors.6
(j) The power existed with the Engineer in clause 5.2 and 60.2 as
well as with the arbitrators to look at the dispute afresh.
(k) In case of Angerlehner, one year after work was completed
that dispute was sought to be raised by Angerlehner. Angerlehner
raised no objection and therefore, it was clearly a mutual mistake.
(l) The contract clearly indicated the methodology to be adopted
if the contract is bided in different foreign currency. It is an
undisputed fact that the foreign currency component has already
been taken into consideration and is sought to be taken again into
consideration. This being the position, a clear case of unjust
enrichment arises and such unjust enrichment at the cost of the
public body would be against the fundamental policy of Indian Law.
(m) The Dispute Resolution forum is specifically appointed to
resolve the dispute at the first level and had clearly given its finding,
which cannot be discarded from consideration. The minority award
in the case of Angerlehner proceeds on a mistaken impression that in
no circumstances the contract cannot be interpreted.
4. 2008 (2) ARBLR 361 (Delhi)
5 (2015) 14 Supreme Court Cases 21
6 (2006) 11 Supreme Court Cases 181
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(n) In case of AJECT, nothing has been shown by the AJECT
except its bare words, that a bid was placed taking into consideration
the Clause. There were no specific negotiations to include a clause
which would give rise to double enrichment. No such stand was
taken before the Dispute Resolution Board.
(o) Sub clause 31.2 gave instructions to the bidders that price
escalation cannot be computed while submitting the bid and
therefore, the contention that bid was submitted based on this
formula, cannot be accepted.
(p) The cross-examination of witness examined by AJECT was not
considered by the Arbitrators before straight away drawing a
conclusion that because of the formula bid was placed by the
contractor.
(q) In case of AJECT, though payments were made by the
Corporation as per the interpretation of AJECT for interim bills
from 16 to 25, the Corporation corrected the position and in
interim bill no.25, the amount was reconciled. In spite of this
position, in Angerlehner, which contract was subsequent,
Angerlehner raised bills as per the interpretation of the Corporation.
The bank guarantee had to be submitted against release of payment
and it cannot be that payment will be made even though it is not
covered by the bank guarantee. It would be the position if 165% of
foreign currency component is taken into consideration.
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(r) The interpretation placed by the Corporation that 'RF' will
have to be assigned value 'Zero' and as a consequence 'R' will have to
be read as 'RI' is the correct interpretation.
(s) The Arbitrators had full power to interpret the contract and
resolve all disputes. In the case of Angerlehner, the Arbitrators
correctly approached the matter and held that stand of Angerlehner
would lead to absurdity. In case of AJECT, the view taken by the
Arbitrators that it is impermissible to interpret the contract, is against
their terms of the mandate as well as ignoring the fundamental
policy of Indian Law against unjust enrichment. It proceeds on an
error on the face of the record that the Arbitrators have no power to
interpret the contract.
16. Mr. Andhyarujina in rejoinder contended: the grounds
based on sub-clauses 5.2, 70.3 and 31.4 were not taken before the
Arbitrators nor that are taken in the Arbitration Petition and cannot
be accepted even otherwise. Sub-clauses 5.1 and 5.2 are limited to
resolving inter-se priority between the documents. The Dispute
Resolution Board is only a recommendatory body. In case of
Angerlehner, a rejoinder was filed placing on record that the
Angerlehner had protested regarding the calculations of the
Corporation. The conduct of the parties loses its importance as
the Corporation had also acted contrary to its own interpretation.
Decisions relied upon by the Corporation are clearly distinguishable
and do not apply to the facts of the case. Section 95 of the Evidence
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Act will have to be taken into consideration. In further response Mr.
Setalwad contended: Sub-clause 5.1 will have to be read along with
sub-clause 67.9, which gives ample power to the engineer to take a
decision. The power vested in the Engineer can be vested in the
Dispute Resolution Board as well as the Arbitral Tribunal by virtue
of Clause 67. Though the specific clause may not have been
referred, the power of the engineer has been relied upon and in
rejoinder it is further clarified. As far as sub-clause 31.4 is
concerned, the same has been taken as a ground in the petition and
was also urged.
17. The basic thread of arguments on the part of the
contractors and the Corporation is the same in both these matters.
The contractors Angerlehner and AJECT have taken a stand that the
contract must be read as it is and there is no mistake. What is sought
to be interpreted is not the contract but a mathematical formula,
which cannot be changed and it on the basis of this formula that the
contractors submitted their bids. If the formula is changed now the
contractors, will be gravely prejudiced. The stand taken by the
Corporation is that what is sought to be interpreted is only a term in
the contract and it was open to the Arbitrators as well as to the
Engineer to take a particular view. The parties have agreed to take
into consideration the foreign currency component and the Indian
currency component in a determined ratio and that since the foreign
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currency component was taken into consideration, it cannot again be
taken into consideration which will raise the value to 165%. It is an
admitted position that foreign currency component has already
availed off even though 'R' is sum total of 'RF' and 'RI'. It is further
contended that since 'RF' is already taken into consideration, what
remains is only 'RI' for application of the particular formula and if
value 'Zero' is assigned to 'RF', there is no modification of the
formula.
18. Whenever a question interpretation of the term of a
contract arises, the contract in its totality has to be considered.
While interpreting a term in the contract, the Court cannot read it
out of context. The contracts entered into by commercial entities
reflect their business understanding. This understanding is
discernible from the holistic reading of the contract. It is therefore
necessary to scrutinise the entire mechanics of the contract. The
question as to the meaning of a clause, formula or a condition,
whether it is meant to be an absolute unalterable term or that it is
open to interpretation, cannot be decided by focusing on the clause
alone. The approach suggested by the Contractors that the Court
must restrict itself to the clause under consideration without
looking into the entire scheme of the contract, its annexures and
schedule, is not warranted nor is it desirable.
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19. It will be therefore necessary that a survey of the relevant
clauses of the Contract is taken before considering the rival
contentions.
20. The contracts in both the Petitions contain identical
clauses. The contract document is voluminous. The documents of
contract are the Contract Agreement; the Letter of Acceptance; the
Bid and the Appendix to Bid; the Conditions of Contract, Part II;
the Conditions of Contract, Part I; the Specifications; the Drawings;
the priced Bill of Quantities; and other documents, as listed in the
Appendix to Bid. List of bidding documents contain various
sections. Part one contains invitation to bids. Part two contains
instructions to bidders. These instructions dealt with general
instructions such as eligibility, eligible materials, qualifications.
21. Sub-clause 15.2 of the General Conditions of Contract
reads thus :
"The unit rates and the prices shall be quoted by the
bidder entirely in the currency of the Employer's
country specified in the Bidding Data and Conditions of
Particular Application. A bidder expecting to incur
expenditures in other currencies for inputs to the Works
supplied from outside the Employer's country (referred
to as "the foreign currency requirements") shall indicate
in the Appendix to bid the percentage(s) of the Bid Price
(excluding Provisional Sums) needed by him for the
payment of such foreign currency requirements, limited
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to no more than three foreign currencies of any member
country of the Bank. For the purpose of this clause, the
European Currency Unit (ECU) is also considered an
eligible currency."
It contains instructions to bidders which state that the unit rates and
prices shall be quoted by the bidder entirely in the currency of the
employer's country specified in the Bidding Data and Conditions of
Particular Application (COPA). The bidder expecting to incur
expenditures in other currencies for inputs to the works supplied
from outside the employer's country is instructed to indicate the
payment in such requirement for foreign currency requirements,
limited to no more than three foreign currency requirements.
22. Sub-clause 15.5 of General Conditions reads thus :
"Bidders may be required by the Employer to clarify
their foreign currency requirements, and to substantiate
that the amounts included in the unit rates and prices
and shown in the Appendix to Bid are reasonable and
responsive to Sub-clause 15.2, in which case a detailed
breakdown of its foreign currency requirements shall be
provided by the bidder."
In sub-clause 15.5 the bidder is required to clarify the local and
foreign currency requirements.
23. Sub-clause 31.4 of General Conditions, which is of
relevance reads thus :-
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"The estimated effect of the price adjustment provisions
of the Conditions of Contract, applied over the period of
execution of the contract, shall not be taken into account
in the bid evaluation."
Sub-clause 31.4 states that estimated effect of price adjustment
provisions of the conditions of contract, applied over the period of
execution of the contract, shall not be taken into account in the bid
evaluation
24. For the purpose of the resolution of the present dispute,
the Conditions of Particular Applications (COPA) also are of
importance.
25. Sub-clause 5.2 of COPA deals the priority of contract
documents and reads thus :-
Delete the documents listed 1-6 and substitute :
" (1) the Contract Agreement (if completed);
(2) the Letter of Acceptance;
(3) the Bid and the Appendix to Bid;
(4) the Conditions of Contract, Part II;
(5) the Conditions of Contract, Part I;
(6) the Specifications;
(7) the Drawings;
(8) the priced Bill of Quantities; and
(9) other documents, as listed in the Appendix to
Bid."
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26. Sub-clause 60.1 deals with monthly statements. Sub-
clause 60.1 reads thus :-
"The Contractor shall submit a statement in the
number of copies specified in the Appendix to
Bid 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 entitled. The statement
shall include the following items, as applicable,
which shall be taken into account in the sequence
listed :
(a) ..................
(b) ..................
(c) ..................
(d) ..................
(e) .................
(f) .................
(g) Amounts reflecting changes in cost and
legislation, pursuant to Clause 70, expressed in
the relevant amounts of foreign and local
currencies;
(h) ................
(i) ................
(j) ................
(k) ................
(l) .................
The scheme is that the Contractor will submit a statement in the
number of copies specified to the Engineer at the end of each month,
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showing the amounts to which the Contractor considers himself to
be entitled. The statement shall include amongst others the relevant
amounts of foreign and local currencies.
27. The power of the Engineer to deal with the statements
has been laid down in the sub-clause 60.2. Sub-clause 60.2 reads
thus :
"The said statement shall be approved or
amended by the Engineer in such a way that, in
his opinion, it reflects the amounts in various
currencies due to the Contractor in accordance
with the Contract, after deduction, other than
pursuant to Clause 47, of any
sums which may have become due and payable
by the Contractor to the Employer. In cases
where there is a difference of opinion as to the
value of any item, the Engineer's view shall
prevail. Within 21days of the receipt of the
monthly statement referred to in Sub-Clause
60.1, the Engineer shall determine the amounts
due to the Contractor and shall issue to the
Employer and the Contractor a certificate
herein called "Interim Payment Certificate"
certifying the amounts due to the Contractor.
Provided that the Engineer shall not be bound
to certify any payment under this Sub-Clause if
the net amount thereof, after all retention and
deductions, would be less than the Minimum
Amount of Interim Payment Certificates stated
in the Appendix to Tender. However, in such
case the unpaid certified amount will be added
to the next interim payment and the
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cumulative unpaid certified amount will be
compared to the minimum amount of interim
payment.
Notwithstanding the terms of this Clause or
any other Clause of the Contract, no amount
will be certified by the Engineer for payment
until the performance security has been
provided by the Contractor and approved by
the Employer."
The sub-clause 60.2 contemplates that the said statement shall be
approved or amended by the Engineer in such a way that, in his
opinion, it reflects the amounts in various currencies due to the
Contractor in accordance with the Contract, after deduction, other
than pursuant to Clause 47, of any sums which may have become
due and payable. It is provided that in cases where there is a
difference of opinion as to the value of any item, the Engineer's
view shall prevail. Within 21 days of the receipt of the monthly
statement referred to in Sub-Clause 60.1, the Engineer shall
determine the amounts due to the Contractor and shall issue to the
Employer and the Contractor an Interim Payment Certificate
certifying the amounts due to the Contractor. The Engineer will not
be bound to certify any payment under this Sub-Clause if the net
amount thereof, after all retention and deductions, would be less
than the Minimum Amount of Interim Payment Certificates stated
in the Appendix to Tender. However, in such case the unpaid
certified amount, it will be added to the next interim payment and
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the cumulative unpaid certified amount will be compared to the
minimum amount of interim payment. No amount will be certified
by the Engineer for payment until the performance security has been
provided by the Contractor and approved by the Employer. Sub-
clause 60.9 - Correction of Certificates reads thus :
The Engineer may be any Interim Payment Certificate
make any correction or modification in any previous
Interim Payment Certificate which has been issued by
him, and shall have authority, if any work is not being
carried out to its satisfaction, to omit or reduce the value
of such work in any Interim Payment Certificate.
This clause gives power to the Engineer to correct the interim
payment certificate.
28. Clause 70, is the main clause around which the entire
dispute revolves. It need to be reproduced in full. Clause 70 reads
thus :-
Clause 70 - Changes in Cost and Legislation.
Sub-Clause 70.1- Price Adjustment :
The amounts payable to the Contractor, in various
currencies pursuant to Sub-Clause 60.1, shall be
adjusted in respect of the rise or fall in the cost of labor,
contractor's equipment plant, materials, and other
inputs to the works by applying to such amounts the
formulae prescribed in this clause.
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Sub-Clause 70.2 - Other Changes in Cost :
To the extent that full compensation for any rise or fall
in costs in to the contractor is not covered by the
provisions of this or other clauses in the contract,
the unit rates and prices included in the contract shall be
deemed to include amounts to cover the contingency
of such other rise or fall of costs.
Sub-Clause 70.3 - Adjustment Formulae :
Contract price shall be adjusted for increase or decrease
in rates and price of labour, materials, fuels and
lubricants in accordance with the following
principles and procedures as per formula given in the
contact data. The amount certified in each payment
certificate is adjusted by applying the respective prices
adjustment factor to the payment amounts due to each
currency :
(a) Price adjustment shall apply only for work carried
out within the stipulated time or extensions granted by
the Employer and shall not apply to work carried out
beyond the stipulated time for reasons attributable to
the Contractor; shall be paid in accordance with sub-
clause 70.6;
(b) Price adjustment shall be calculated for the local
and foreign components of the payment for work done
as per formulae given in contract data; and
(c) Following expressions and meanings are assigned to
the value of the work done during each quarter :
R= Total value of work done during the month.
It would include the value of materials on which
secured advance has been granted, if any, during the
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month, less the value of materials in respect of which
the secured a advance has been recovered, if any, during
the month. This will exclude cost of work on items for
which rates were fixed under variations clause (51 and
52) for which the escalation will be regulated as
mutually agreed at the time of fixation of rate.
R1= Portion of 'R' as payable in Indian Rupees.
RF= Portion of 'R' as payable in foreign currency
(at fixed exchange rates).
R= RI + RF.
To the extent that full compensation for any rise or fall
costs in the contractor is not covered by the provisions
of this or other clauses in the contract, the unit rates
and prices included in the contract shall be deemed to
include amounts to cover the contingency of such other
rise or fall in costs.
Adjustment for labour component
(i) Price adjustment for increase or decrease in the
cost due to labour shall be paid in accordance with
the following formula:
VL= 0.85 x P/100xRx(Li-Lo)/Lo
VL= increase or decrease in the cost of work
during the quarter under consideration due
to changes in rates for local labour.
Lo = the average consumer price index for
industrial workers for Mumbai centre on the
day 28 days prior to the closing date of
submission of bids as published by Labour
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Bureau, Ministry of Labour, Government of
India.
L1= The average consumer price index for
industrial workers for Mumbai centre on the
day 28 days prior to the last day of the
period to which a particular interim
payment certificate is related as published by
Labour Bureau, Ministry of Labour,
Government of India.
P1 = Percentage of labour component of the
work.
(ii) .................
(iii) ..................
(iv) ..................
(v) .................
(vi) ..................
(vii) ...............
(viii) Foreign currency component
(a) The foreign currency component of
each payment which is convertible into
foreign currency at fixed exchange rate shall
be adjusted according to the following
formula :
VFc= 0.85xRF x (Fei-Feo)/Feo
VFc= Increase or decrease in the cost of
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work payable due to changes in cost of
foreign input.
Feo= The index applicable for the foreign
input (plant, material, engineer's salary etc.
as the case may be) on the day 28 days prior
to date of submission of bids as published in
the country of origin.
Fei= Corresponding index on the day 28
days prior to the last day of the period to
which a particular interim payment
certificate is related (average index in case
indices are published at lesser intervals).
(b) The bidder shall, in his tender, indicate
the foreign input (plant, material, engineer's
salary etc.) and appropriate index, the
source of which shall be the Government
or Public organization. The bidder shall also
attach specimens of the publications of the
last 12 months for information of the
Employer. If this index is not acceptable to
he Employer, then he will specify an
alternative index and the source of
publishing of the index.
(c) If the bidder has requested payment in
more than one foreign currency, RF should
be suitably broken up and the formula
applied separately to each currency
component by taking into account the
foreign input of the currency and
corresponding Indicts (Index and currency
belonging to the same country).
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(d) The currency of foreign exchange
payment and the index shall belong to the
same country.
(e) If the Contractor changes the country
of origin of the source of supply of any
input to the Works, he shall immediately
notify the Engineer who shall modify the
price adjustment provisions subsequent to
such change to reflect the relevant cost index
from the actual country of origin of the
input. If the currencies in which the
Contract Price is expressed are different
from the currencies of the sources of the
relevant indices, the Engineer shall
determine the correction to be applied in
calculating the Price Adjustment Factor
(formula vii(a) in order to avoid distortions
in the amount of price adjustment. Such
correction shall be applied to the increment
of price fluctuation in the base costs of the
respective inputs and shall correspond to
the ratio of the exchange rates between the
respective currencies on the date of the base
indices and the date of the current indices as
defined in sub-clause vii(a).
The following percentages will govern the price
adjustment for the entire contract :
1. Fixed 15%
2. Labour - Pl 15%
3. Cement - Pc 15%
4. Steel - Ps 5%
5. Bitumen - Pb 5%
6. POL - Pf 10%
7. Other materials - Pm 15%
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8. Plants and spares - Pp 20%
Total - 100%
Clause 70 deals with price adjustment and sub-clauses 70.1, 70.2
and 70.3 indicates that the various currencies payable to the
contractor pursuant to sub-clause 60.1 shall be adjusted in respect of
rise or fall in categories stipulated therein by applying the formula
prescribed in sub-clause 70.3(c). 'R' has been defined as total value
of the work done during the month which shall include the items
listed therein. 'RI' is the portion of 'R' payable in Indian Rupees and
'RF' is portion of 'R' payable in foreign currency. 'RI' is agreed to be
35%, 'RF' is 65% which would make 'R' 100%. Thereafter,
adjustment for various individual components such as labour,
cement, plant machinery, coal, fuel, lubricants, etc. has been
provided. Each component is dealt with by way of a formula, for
example labour component is assigned value 'VL' = 0.85 x P1/100 x
R x (Li-Lo)/Lo, Value 'VL' is stated in contract as increase or
decrease in the cost of work during the quarter under consideration
due to changes in rates for local labour. Since 15% is fixed, cost
value 85% has been assigned instead of 100%. The foreign currency
component is assigned value 'VFc' and the formula is 'Vfc' = 0.85 x
RF x (Fei - Feo)/Feo. In sub-clause vii(b) the bidder is required to
indicate the foreign input and appropriate index. If the bidder has
requested for payment in more than one foreign currency, 'RF' is to
be suitably broken up and if the contractor changes the country of
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origin of the source of supply then he is expected to notify Engineer
immediately, who will modify the price adjustment provision. As
per the percentage given in sub-clause 70.3(vii)(e) 100% is
calculated. The other parts of the tender documents such as
technical specifications, bill of quantity drawing, etc. are not
necessary to be reproduced.
29. Therefore, the scheme of the contract as detailed above is
in short as follows. If the contractor desires payment in a particular
foreign currency and local currency, he shall submit a statement to
the Engineer. The Engineer has a power to issue interim payment
certificate. The Engineer has the power to modify or make
correction to the interim payment statement. Sub-clause 70.3 deals
with various components and the foreign currency components is
specifically listed in (vii). Sub-clause 70.3 contains a preamble to
indicate what is the meaning of 'R'.
30. The Corporation proceeded to interpret 'R' in these
formulas from item ( i ) to (vi) as containing in local currency
component alone and therefore 'R' is treated as only 'RI', while the
contractors have insisted that even in clause (i) to (vi), 'R' will
include 'RF' as well. The Corporation, by giving 'Zero' value to 'RF'
and the 'R' as only 'RI' for sub-clause (i) to (vi) has issued 100%
payment.
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31. The Corporation has specifically averred that 100% of
amount payable to the Contractors has already been accounted for
and what is sought by the Contractors is an additional 65%. There is
nothing placed on record to dispute this position.
32. Therefore, one will have to proceed on the admitted
position that 100% payment has already been made to the
Contractors. The question is whether they are entitled to another
65%, that is 165% of the total work. According to Mr. Setalwad
there cannot possibly be a situation where a contractor gets full
payment for the work done, yet gets additional 65%.
33. Mr. Andhyarujina has sought to justify the claim broadly
on the two heads. Firstly, the Clause is a mathematical formula and
it can never be subject to interpretation. Second, that because of the
Clause as it stood, a bid of a particular amount was given and if at
this stage the Clause is altered, grave prejudice will be caused.
34. The sub-set of first contention is that the Clause is a
mathematical formula and thus can never be interpreted. The
Arbitrators in AJECT have accepted this proposition. The
Arbitrators in AJECT felt themselves powerless to even look at the
mechanics and working of the Clause. The Arbitrators in
Angerlehner had looked at the working of the term/ formula. The
Clause is not a mathematical formula contained in any statutory
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enactment. A query was put to the learned Counsel for the parties as
to whether the terms specified under the FIDIC model contracts are
applied in absolute terms across the world. The learned Counsel for
the parties have not been able to place any such material. In fact, the
learned counsel accept that the model contracts will have to be
adapted to the local conditions in each country and for every
contract. The FIDIC contract templates serve merely as a guidelines
to draft a contract.
35. Sub-clause 70.3 is an agreement between the parties as
to how to work out a particular component. Though this
understanding is expressed in mathematical terms, it still remains a
methodology agreed by the parties. All that the parties have agreed
is how to calculate the foreign currency component and Indian
currency component in a given situation. 'R' is not a prime number
nor a pure mathematical quotient. What should be included in 'R'
is a matter of contract between the parties. 'R' therefore being
product of understanding between the parties, it is open to
interpretation. It is not impermissible to find out what is meant by
'R'. This enquiry has nothing to do with changing the mathematical
formula. Operation of the formula remains unaltered. Once what is
the input in 'R' is clear, then it has to be multiplied by 0.85 and
other values. Thus, once the ingredients of 'R' are finalized, then the
mathematical formula will take over. For example, the parties may
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agree that for a quantity of items given, four items will be
correspondingly given back. If the 'quantity of item given' is
expressed in 'P' and the 'quantity returned' is expressed in 'S', then
the formula will be P X 4 =S. Multiplication effect of 4 will be
beyond debate, but parties can certainly contest as how many items
given and what is included in 'P'. Similarly in the present case, there
cannot be any debate about the mathematical part of the formula,
but the parties can certainly dispute as to what would constitute 'R.
Therefore, the absolute proposition advanced by Mr. Andhyarujina
that sub-clause 70.3 is immune from interpretation, cannot be
accepted. 'R' is merely a term in the Contract and as per the settled
legal position it is open for interpretation.
36. The grievance of Mr. Andhyarujina is that differing
stands have been taken by the Corporation in these two proceedings.
According to him, at one point the Corporation has stated that
specifying 'RI' as only 'R' is a mistake when it is 'RI', and other place
that 'R' includes 'RF' but value is assigned 'Zero'. In my opinion
these stands are not mutually exclusive. Broadly, what the
Corporation has stated in both the proceedings is the same. That,
having made provision a for foreign currency component separately
and having paid the same, again it can not to be included in clause (i)
to (vi) of clause 70.3. Though various themes of this main
proposition have been urged there is no conflict within them. Even
assuming these two variations have put forth, the main preposition
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remains the same, that the foreign currency component cannot be
included again. There is therefore no dichotomy in the stands taken
by the Corporation in both these matters.
37. The second sub-set of the first argument of Mr.
Andhyarujina is that even if the clause is open to interpretation, 'R'
will have to be read as 'RF' and it cannot be only 'RI'. This
submission is not correct. If the clauses (i) to (vi) of sub-clause 70.3
are seen, they specifies the figure 'R'. In the preamble it is stated that
'R' will consist of 'RI' + 'RF'. Even in a mathematical formula, it is
permissible to assign value Zero to an ingredient. Zero is also a value.
Therefore if value Zero is assigned, it is not that the constituent is
completely taken out of consideration. Once Zero is a value and is
permissible to be assigned, then there is no modification of the
formula. 'R' continues to be sum total of 'RI' + 'RF', however RF
being assigned Zero, what remains for all practical purposes is only
RI (RI+0). Therefore 'R' specified in clause (i) to (vi) will ultimately
come down to only 'RI'. The Contracts have not been prepared by
mathematicians. They are business contracts. It has been consistent
stand of the Corporation that 'R' will have to be read as only 'RI'
because 'RF' is assigned value 'Zero'. The Arbitrators in the case of
Angerlehner have accepted this stand. It is not an impossible view.
In AJECT, the Arbitrators have proceeded on the basis that they
have no power to look beyond the contract.
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38. The second limb of argument is regarding power of the
Arbitrators to interpret the Clauses. Two clauses of COPA need to
be noted at the juncture.
39. If any dispute arises between the Employer and
Contractor, then Dispute Review Board is contemplated under sub-
clause 67.1. Relevant part of sub-clause 67.1 is reproduced as
under :-
Sub-clause 67.1 is substituted by the following :
" If any dispute arises between the Employer and the
Contractor in connection with, or arising out of, the
Contract or the execution of the Works, whether during
the execution of the Works or after their completion and
whether before or after the repudiation or other
termination of Contract, including any disagreement by
either party with any action, inaction, opinion,
instruction, determination, certificate or valuation of the
Engineer, the matter in dispute shall, in the first place,
be referred to the Disputes Review Board ("the
Board")."
This sub-clause deals with a dispute in connection with or arising out
of the Contract or execution of the work whether during the
execution or after completion whether before and after the
termination of the contract. It also deals with any disagreement by
either party with any opinion, instructions, determination, certificate
or valuation of the Engineer. The Board is comprised of three
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members experienced with the contract of construction. If either the
Employer or Contractor is dissatisfied with the decision/opinion of
the Board, then the matter can be referred for arbitration, in the
manner provided.
40. Sub-clause 67.3 deals with the Arbitral Tribunal which
states that any dispute in respect of any recommendation, if any, has
not become final or binding pursuant to sub-clause 67.1, will be
finally settled by arbitration. The relevant part of sub-clause 67.3 is
reproduced as under :-
" Any dispute in respect of which the
Recommendation(s), if any, of the Board has not
become final and binding pursuant to sub-clause 67.1
shall be finally settled by arbitration as set forth below.
The arbitral tribunal shall have full power to open-up,
review and revise any decision, opinion, instruction,
determination, certificate or valuation of the Engineer
and any Recommendation(s) of the Board related to the
dispute."
The Arbitral Tribunal is given full power to open up review, revise
any decision, opinion, instruction, determination, certificate or
valuation of the Engineer and any recommendation of the Board,
related to dispute.
41. Mr. Andhyarujina relied on the decisions of the Apex
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Court in the case of DCM Ltd. v/s. Municipal Corporation of Delhi
and Anr. and the Division Bench of Calcutta High Court in Taisei
Corporation v/s. West Bengal State Electricity Distribution Co. Ltd.
and Haji Abdul Rahman Alla Rakhia and Anr. v/s. The Bombay
and Persia Steam Navigation Company and the extract from
Hudson's Building and Engineering Contracts. In the case of DCM
Ltd., the Appellant therein had entered into an agreement with the
Delhi Electricity Supply Undertaking for supply of electrical energy.
The clause of the agreement provided that the charges for electricity
will be as per the schedule. A dispute arose between the parties
which was referred to for arbitration. The Arbitrator gave his award,
which was set aside by the learned Single Judge of the High Court.
Appeal was filed before the Division Bench. Thereafter, the matter
reached to the Apex Court. The Apex Court took note of the scope
of reference. In the order of reference itself it was categorically
stated that it was not open to the arbitrator to go into the correctness
of the formula statutorily laid down in the tariff. The Apex Court
held that the arbitrator was required to examine the narrow question
whether the formula was properly applied and held that the
arbitrator was not right in going beyond the formula and
adjudicating on the issue. This decision is clearly distinguishable as
the reference itself had provided that the arbitrator would not go
beyond the formula laid down.
42. In the case of Taisei Corporation, the proceedings arose
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before the Division Bench of the Calcutta High Court from a dispute
between the Taisei Corporation and the West Bengal State
Electricity Distribution Co. Ltd. in respect of price adjustment in
clause 70.1 of the agreement therein. The matter was referred to the
Dispute Review Board. The Appellant therein contended that they
were entitled to price adjustment and such estimated value would
mean value of the whole work which will include value in Indian
Rupee and Japanese YEN. The parties had agreed to a particular
formula for price adjustment. The Division Bench analyzed the
formula and found that the estimated value of work cannot mean
that it will apply to only Indian Rupee portion and there is no such
indication in the clause. The Division Bench analyzed the award
and held that the arbitral tribunal correctly observed that the
formula is not provided in the contract. The perusal of the decision
of the Division Bench indicates that the Division Bench had
considered a specific term of the contract between the parties and
looking at the contract as a whole found that the interpretation
placed by the party could not be accepted. From these decisions
cited, it is not possible to cull out an absolute proposition that
whenever confronted with in clause in mathematical term, the
arbitrator cannot even look at the mechanics of such a clause, even if
it is pointed out that it results in patent absurdity.
43. In this context, the decision relied upon by Mr. Setalwad
clearly indicate that it is permissible to do so. In the case of Mumbai
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Metropolitan Region Development Authority v/s. Unity Infraproject
Ltd.7 the learned Single Judge of this Court held that a term of the
contract will have to be construed as a whole, give it a meaning
keeping in mind the business realities. The learned Single Judge of
Delhi High Court in the case of National Highways Authorities of
India v/s. Unitech-Ncc Joint Venture dealt with an identical clause
of price escalation. That contract was also modelled on FIDIC
templates. It was the contention of the Petitioner, employer therein
that the contractor was not entitled to seek price escalation. The
language of the contract was sought to be strictly adhered to by the
petitioner therein to contend that no modification is permissible and
the respondents were not entitled to any price escalation. The
learned Judge noticed the formula and dealt with the arguments that
a contract must be read as it is. The learned Judge also noticed the
power of the engineer to modify any error or faults. The learned
Single Judge also noticed Section 95 of the Evidence Act and held
that there was a clear typing error and if it is insisted upon, it will
lead to absurdity. This decision is sought to be distinguished by Mr.
Andhyarujina contending that the learned Single Judge had relied on
the power of the engineer to modify the terms however, no such
power exist with the Engineer in the present case. This distinction
cannot be accepted. Clause 5.1 r/w. Clauses 60.9 and other clauses
give ample power to the Engineer in the present case to modify
interim payment and the basis on which such interim payments have
7 (2008) 5 Bom. C.R. 196
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been made. Furthermore, the Dispute Resolution board and the
Arbitral Tribunal had independent power to look into the question
of interpretation of contract. What is emphasized by the learned
Single Judge of the Delhi High Court is that a contract cannot be
read in such a manner that it leads to absurdity.
44. Mr. Setalwad also relied upon the decision of the
Division Bench of Delhi High Court in the case of M/s. R.S.
Builders v/s. Delhi Development Authority. In this case a dispute
arose between the parties in respect of a construction contract. The
claim was made by the contractor therein whereby certain amount
was directed to be paid to the appellant by the learned arbitrator.
An objection was raised by the Respondent that the agreed rates
were derived from Schedule of Rates and the rates were from Rs.
130 to Rs. 138 payable at 100 sq.mtrs. and not for 1 sq.mtr. The
learned Single Judge upheld the contentions of the Respondent -
Planning Authority and modified the award. The learned Single
Judge held that the appellant could not take advantage of the
typographical mistake in the agreement. When Appeal was filed, the
issue of interpretation of the schedule arose before the Division
Bench. The Division Bench analyzed the schedule attached to the
agreement and found that the rate was payable at 100 sq. mtrs. and
not per square meter. The Division Bench held that it was clearly a
typographic error which will lead to grave miscarriage of justice. In
the case of National Highway Authority of India v/s. ITD
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Cementation India Ltd. identical arguments regarding power of the
arbitrator were advanced before the Apex Court. The Apex Court
held that the arbitrator is entitled to take a view on construction of
terms of contract and if the arbitrator construes the contract in a
reasonable manner, the award cannot be set aside. It is only if the
arbitrator construes the contract in the manner no reasonable person
will do that the Court may be entitled to interfere.
45. In the case of McDermott International Inc. v/s. Burn
Standard Co. Ltd. And Ors. Apex Court summarized various
propositions of law. In this case one of the claim was towards
increased overhead and loss of profit. A contention was advanced on
the basis of formula laid down in the manual published by the
Mechanical Contractors Association of America known as "Change
Orders, Overtime, Productivity" commonly known as the Emden
Formula. The contentions advanced that some other formula needs
to be applied was repelled by the Apex Court and it was held that the
construction of a contract agreement is within the jurisdiction of the
arbitrator. Though in this case the formula itself was not
interpreted, the decision is important for the purpose that the
interpretation of a term of a contract is within the domain of the
arbitrator.
46. Considering the above decisions and the clauses of the
Contract, it cannot said that the Arbitrators were powerless to
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interpret the exact meaning of 'R'. In the case of Angerlehner, the
learned Arbitrators exercised this power and observed thus :-
"25. we have given due consideration to undisputed
facts mentioned in para 23 above and the contract
provisions mentioned in para 24 and taken into
consideration arguments advanced by both the parties as
well as the legal authorities referred to by both the parties.
It is amply clear that the purpose of the price adjustment
clause is to compensate to some extent for the increase /
decrease the cost as indicated in clause 70 by adjusting
amounts payable to the contractor, in various currencies
pursuant in sub -clause 60.1 the Tribunal has noted that
in the original bid the contract value was mentioned only
in one currency US Dollars but later on the entire value of
the contract was divided separately in Rupee Component
of 35% and Foreign component of 65% in US Dollars. As
per clause 70.1 the amounts payable to the contractor for
the work done, in various currencies shall be adjusted in
respect of rise or fall by applying the respective price
adjustment factor to the payment amounts due to each
currency. This clearly establishes that the price adjustment
factor is to be applied to amounts calculated in difference
currencies and not to total amount. So far as adjustment
of foreign currency is concerned there is no dispute in the
parties and the formula applied is VFc= 0.85 x RF x (Fei-
Feo) / Feo where RF is the portion payable in foreign
currency. On the same logic when price adjustment on
the value of the work done payable in Indian Currency is
to be calculated, the amount to which it is to be applied
should be the portion of the value of the work done
payable in Indian currency. Therefore, RF, which is value
of the work done payable in foreign currency and which is
already compensated under a separate formula cannot be
include again for calculating compensation to be paid in
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Indian Currency and in the formula VL= 0.85 x
P1/100x(R1+Rf) (L1-Lo)/Lo, the value of Rf will have to
be treated as zero. If RF is again included in calculating
adjustment in Indian currency, it will amount to paying
twice on value of the work in foreign component both
under foreign currency formula and Indian currency
formula or to compensating under Indian currency
formula almost three times on the Indian component of
35 % as it will be compensation on 100% amount by
inclusion of 65% of foreign component. This would also
mean that price adjustment is not on value of 100% work
done but on value of 165% of work done which clearly is
not the purpose of the price adjustment clause.
We have noted that when the Claimant submitted first
three bills prepared by him and covering almost 63% of
total works, he had not included foreign component in
the formula. While the contractor as well as the
Engineer / employer has right to amend the running bills
till the payment of Final Bill, we have to take into
consideration that first three bills out of six bills were
submitted by applying price adjustment factor separately
for Indian currency component and Foreign currency
component and at the same time there was no dispute
about interpretation of the formula. Both on the basis of
the provisions of section 70 as well as conduct of the
parties the clause was interpreted in the same way. Now
the claim is advanced based on another interpretation of
formula in clause 70. The contract has to be considered as
a whole and if there are provisions to which the two
parties to the Contract ascribe different meaning then a
logical interpretation is to be considered based on facts as
well as conduct of the parties to give a harmonious
meaning to contractual terms. Taking into consideration
all these aspects the Arbitral tribunal has no hesitation in
rejection of the claimant."
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As the above analysis would show that the arbitrations looked into
all aspects of the matter and accordingly, arrived at a conclusion that
value of 'RF' will have to be treated as 'Zero' otherwise it will lead to
absurdity.
47. The above interpretation placed by the Arbitrators
cannot be said to be such that no such reasonable person can come to
this conclusion. Clause 73, when it deals with foreign component,
lays down a detailed scheme as to how this component will have to
be looked into. If 'RF' is again to be included in component (i) to
(vi), how the indicates of different currencies will apply to labour
components, is not explained. In fact, if 'RF' is again included in
clause (i) to (vi) it will make the entire scheme of the clause
unworkable, apart from giving double weightage to the foreign
currency component. Therefore, the Arbitrators rightly assigned the
value Zero to it. This interpretation by the Arbitrators, by no
stretch of imagination, can be stated as perverse.
48. In the case of AJECT, the learned Arbitrators, in the first
part of the award, reproduced the relevant clauses and held that from
the conjoint reading of the clauses it is clear that 'R' will have to be
read as 'R' alone. The learned Arbitrators observed "we are duty
bound to read and interpret the contract as it is made and signed by
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the parties". When the dispute was referred to the Arbitrators, the
Arbitrators had a power to examine wether the decision of the
Engineer was correct. The Arbitrators had a power to re-open any
decision and take an original view. It was not warranted for the
Arbitrators to feel helpless and to create a duty to interpret the
contract as it, even though it could result in an absurd conclusion.
The mandate of the Arbitrator was to decide the dispute and one of
the facet of the dispute was to ascertain whether the interpretation of
the Contract by a party was correct. That the Arbitrators had a
power to interpret a contract is borne out from the contract itself.
Further the above referred decisions clearly lay down that
Arbitrators were not powerless to do so. By imposing a non-existing
mandate on themselves thereby abdicating the decision making, the
arbitrators stepped beyond the term of reference, rather refused to
enter into the arena of adjudication. The Arbitrators then went on
to hold that there is no ambiguity neither there is any mutual
mistake. The Arbitrators then held that the Corporation forced a
rectification on AJECT. The arbitrators held that there was no
common or mutual mistake. There is however, no conscious
application of mind as to the argument that the only way correct
payment of 100% can be achieved is by assigning value 'Zero' to
'RF'. The Arbitrators firstly stated that they are powerless to
interpret the contract and secondly stated that nothing stopped the
Corporation from specifying so in the contract. As stated above, if
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'RF' is assigned value 'Zero', then what remains is only 'RI'. This
arena is completely side-stepped by the Arbitrators. The conclusion
of the Arbitrators is this that having made an agreement, taking
various steps preceding to it and having released payments, the
Corporation cannot contend that the Clause needs to be read in a
particular manner. I am not inclined to accept the argument of Mr.
Andhyarujina that the interpretation cannot be based on a
consequence. If the consequence results in complete absurdity and
unjust enrichment to one party, then it cannot be excluded from
consideration while construing a term of contract. No proposition of
law is shown to the contrary.
49. The argument that whether it is a mutual mistake or
unilateral mistake is based on the fact that at some stages of the
proceedings the Corporation has stated that using 'R' was a mistake
in the relevant places. The learned Counsel for the parties have
sought to draw attention to the conduct of each other wherein at
some point of time the parties have acted contrary to their
interpretation. In AJECT, the Corporation issued first sixteen
interim bills and in Angerlehner, the Angerlehner raised a dispute
after period of one year. With this state of affairs, the argument of
the conduct advanced by both the sides gets nullified. Furthermore,
irrespective of this position the arbitrators had power to interpret the
terms of the contract independently. In Angerlehner, it was sought
to be contended that it had protested when wrong bills were
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accepted. There is however no such material placed on record,
except the statement of Angerlehner to that effect.
50. It was contended by Mr. Andhyarujina that clause 5.2
was not urged before the Arbitrators by the Corporation nor it is
reflected in the Arbitration Petition filed by it nor there was any
argument made based on clause 70.3. The submission is not correct.
There was also no discussion regarding clause 31.4. In the case of
AJECT, the Corporation in the Petition has, in grounds (I) and (N)
referred to the clause 60.9 of COPA and that the power of the
Engineer to construe the contract in a particular manner. Though a
particular clause is not referred to, clause 5.2 is part of the scheme to
be read along with clause 60.9. The power of the Engineer was also
relied upon before the Arbitrators. Therefore, it cannot be said that
the Corporation is precluded from urging contentions based on the
power of the Engineer. As far as the instruction clause 31.4, the
same has been urged before the Arbitrator as can be seen from
discussion in paragraph 64 of the award. In the Petition a specific
ground 'O' has been taken by the Corporation
51. In the case of Angerlehner, majority award has interpreted a
term of contract, in the light of all the surrounding circumstances,
and have held that if 'R' in Clauses 70.3 (i) to (vii) is taken as 'RI'
then it will result into harmonious reading of the contract with no
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unjust consequences to either of the parties. The arguments
advanced that the Arbitrators had no power to interpret the contract
and there was no unilateral or mutual mistake, cannot be accepted.
The Arbitrators had full power to interpret the term of the contract
and hold that a particular interpretation will result in absurdity. The
Arbitrators had a power to construe 'R' in a manner wherein 'RF' is
given value Zero. By reading 'R' as 'RI' alone or giving 'RF' value
Zero, the consequence is the same. There is no perversity or error of
law in the view taken by the Arbitrators. Angerlehner has been
given the foreign currency component and wants another 65%
under the same head, ultimately seeking 165% instead of 100%,
which has rightly been refused by the Arbitrators. The Arbitrators
committed no error in refusing to grant excess component, which
was already accounted for.
52. Second limb of arguments of Mr. Andhyarujina that
because of the way the Price Escalation Clause is worded that a bid
of a particular amount was given by the Contractors and if it is
changed subsequently it will prejudice the Contractors. This
submission cannot be accepted for two reasons. Firstly on the basis
contract documents. Secondly because of absence any such evidence.
Clause 31.4 of General Conditions was brought to the notice of the
learned Arbitrators. It reads that "The estimated effect of the price
adjustment provisions of the Conditions of Contract, applied over
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the period of execution of the contract, shall not be taken into
account in the bid evaluation." This clause clearly puts the bidders to
notice that the parameters governing price variations are not to be
made a basis for submitting the bid. Though there was a debate at
the bar as to whether the Instructions to Bidders would form part of
the contract, the fact remains that these bidders are required to take
note of these instructions were presumed to be aware of what is
stated therein. The Arbitrators in AJECT accepted this position, but
held that however once prospective bidder purchased a bid
document, it would rely on the terms therein. This however begs
the question as what is the effect to putting the contractor to notice
that it shall not take into consideration the price variation factors
while submitting a bid. If such clear instructions were given to the
prospective bidder, then it is presumed that a bidder would not have
taken this into consideration. If in spite of this caution, the
Contractor has gone ahead and submitted a bid on the very same
factors then it is for the Contractors to explain the position. If the
Contractor was specifically instructed not to base its bid on a
particular facet of the contract, then it becomes a most material
aspect when the Contractor comes forth and state that the bid was
based on the very same factor. The Arbitrators, therefore, clearly
committed a legal error in not relying on this clause. As held by the
learned Single Judge of this Court in the case of Mumbai
Metropolitan Region Development Corporation, the Court has to be
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alive to business propositions. There are various factors why a
businessman would submit a bid of a particular amount.
Therefore, in spite of a specific caution that if a contractor wants to
assert that a bid was given, heavy burden would lay on such
contractor to produce cogent material regarding the same.
52. The next issue then is what was the material produced.
The Arbitrators held that the evidence was led by AJECT to show
that that bid was submitted based on this Price Escalation clause.
Mr. Andhyarujina relied on the evidence of the witness- Stefanelli
and submitted that there was no cross examination. Mr. Setalwad
pointed out that this assertion is entirely incorrect and drew my
attention to the cross-examination of this witness. This witness was
cross-examined in detail. He was asked whether he had personally
gone through the quote of other bidders, to which he said no. It was
then asked whether the bid submitted by him was more than the
estimate of the Employer, to which he answered as Yes. He was
asked whether he had attended any pre-bid meeting, to which he
said No. He was asked whether he asked for any clarification
regarding any provision of the contract at any point of time, to which
said he did not seek any clarification. He was also asked whether
enquiry was made in writing from anybody, to which he stated No.
He was asked whether he had produced any financial documents to
show that the claimant suffered any financial loss because of price
adjustment formula, to which he said No. He was cross-examined
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on the Historic CPI inflation India. He was asked whether any
break-up of the claim was made to which he said he did not
remember. All these admissions made by this witness do not find
any reference in the Award. There admissions were vital pieces of
evidence. Only the examination in chief of witness cannot be relied
upon omitting the cross examination. This is what the Arbitrators
did, which is a perverse approach. The Arbitrators have simply
looked at the clause and held that it is because of this clause that the
contractor gave its bid and it will be prejudiced if the term is altered.
The finding of the Arbitrators is based on no evidence.
53. In the case of Associate Builders, the Apex Court has
enunciated the concept of fundamental policy of Indian Law. The
Apex Court has also stressed on the judicial approach and
application of mind by the arbitrator. It is laid down that perversity
in decision making arises when relevant factors are excluded from
consideration and finding is based on no evidence. As rightly
contended by Mr. Setalwad, double payment to a party for the same
work out of public exchequer is not permitted by any court or
authority in India.
54. The manner in which the Arbitrators have proceeded in
the case of AJECT, has given rise to various heads of challenge. The
relevant instructions to the bidders, admissions in the cross-
examination are kept out of consideration by the Arbitrators. Non-
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consideration of such germane material is a perversity and is a
ground for setting aside this Award. The Arbitrators failed to
exercise their jurisdiction to interpret the terms of the contract by
creating an artificial barrier against their mandate. By holding that
they had no power to interpret the terms of the contract whatever
the consequence, the Arbitrators acted against the terms of the
contract itself. After the completion of work, the Corporation has
made the payment of 100% of the work done. It is for the additional
65% over and above 100% that the litigation is fought by the two
Contractors. If the argument of the Contractors is accepted, it lead
to them blatantly enriching themselves over and above what they are
entitled. Such completely unjust enrichment, that too at the cost of
public funds, is abhorrent under the fundamental policy of Indian
Law. The award in AJECT, which permits such blatant enrichment
is therefore is also vitiated on the ground that it is against the
fundamental policy of Indian Law.
55. Resultantly, the Arbitration Petition No. 162 of 2009
filed by M/s. Angerlehner Structural and Civil Engineering
Company, is dismissed. The Arbitration Petition No. 925 of 2012
filed by the Municipal Corporation of Greater Mumbai, is allowed
and the Award dated 18 April 2012 is quashed and set aside. No
order as to costs in both the Petitions.
(N.M. Jamdar, J.)
