Texmaco Limited vs Union Of India
1993 Latest Caselaw 363 Del

JUDGMENT

C.M. Nayar, J.

(1) This is a petition under Sections 8 and 20 of the Arbitration Act, 1940, for direction that the arbitration Agreement contained in Contract No.NG/CPG/MC/S-G/2/AGLT dated 8/1/1983, be filed in this Court and respondent be directed to give a panel of three persons, from whom the petitioner may choose as the sole Arbitrator,within such time, as may be fixed and the disputes and differences, set out in paragraph 25 of the petition, be referred to the said sole Arbitrator, in accordance with the arbitration clause.

(2) The petitioner is a company, incorporated under the Companies Act, having its registered office at Belgharia,Calcutta. Shri P.K.Ray is the General Manager (Marketing-Structural ) of the petitioner and fully conversant with the facts of the case. It is contended that he was authorised to institute the present suit and sign and verify the pleadings by a Power of Attorney dated April 24,1989. The Government of India through its agent National Hydro-electric power Corporation Limited, (hereinafter referred to as NHPC), a company wholly owned by the Government of India, issued a notice No. NH/CPG/MC/ S-G/2 dated June 21, 1982, inviting tender for design, fabrication, supply, erection and commissioning of spill way radial gates, hoists, stoplogs, draft tube gates and gantry cranes for Salal Hydro-electric project, Jyotipuram. The tenderers were to submit technical data in the prescribed proforma and specifications as also tonnage of basic steel materials in different sections of the aforesaid work, along with the tender. The petitioner has submitted that in response to the aforesaid notice inviting tenders, the petitioner as also other parties submitted their respective tenders. The petitioner also submitted the required design calculations and technical data sheets, drawings along with their bids in accordance with the tender notice requirements.

(3) It is alleged that thereafter, various discussions were held between the representatives of the petitioner and the respondent The price offered by the petitioner, as mentioned in the contract, was arrived at on the basis that total tonnage of steel involved in the aforesaid work and submitted with the datas is 3200 M.T. On scrutiny of the datas submitted and the clarifications offered, the respondent accepted the offer of the petitioner on evaluation and placed the order through Nhpc vide letter dated October 21, 1982 and consequently, on 8/1/1983, the contract agreement was executed at Delhi by and between the petitioner and the respondent through their agent NHPC. The total amount payable under the said contract for the work was Rs.5,75,32,960.00 and the same is referred to in paragraph 8 of the petition as follows:- i) Fabrication and supply Rs. 4,80,00,520.00 ii) Transportation Rs. 46,43,560.00 iii) Erection and Commissioning Rs. 48,88,880.00 Rs. 5,75,32,960.00

(4) The petitioner has submitted in paragraph 9 of the petition that pursuant to the aforesaid contract, they took up the job and designs were submitted and finalised. The work of the project commenced immediately on receipt of letter of award dated October 21, 1982. The designs were finalised upon such modifications, as decided by the Engineer- in-charge from time to time in a phased manner and when a particular design of a particular component was finalised, the petitioner took up the work of fabrication of such components. By this process, the designs were finalised for such modifications, as decided by the Engineer-in-charge of Nhpc by the end of 1984 and by April 1985, the petitioner nearly completed the work of fabrication of various components, as per designs, as modified by NHPC.

(5) The petitioner has alleged that during the process of approval of designs and drawings it was pointed out at times that some of the changes desired by the Engineer in-charge were arbitrary and unnecessary as per specification of the work. It was also pointed out that such additional/extra measures had not been considered originally at the tender stage and would saddle the petitioner with additional and anfractuous expenses not originally contemplated. However,since the decision of the Engineer in-charge was final, modifications of the designs had, perforce, to be carried out by the petitioner.

(6) The petitioner, by letter dated April 14, 1985, brought to the notice of the Senior Manager (Civil) of Salal Hydro-electric Project , that in view of the modifications of designs, made at the instance of Nhpc, the volume of steel work had increased to the tune of 558 Mt and the additional costs of Rs-94,40,802.00 plus applicable taxes had to be incurred and a complete break up of this amount was also submitted to the respondent.

(7) The respondent did not accept the plea of the petitioner and they sent a reply dated 17/12/1986, by a covering letter dated 27/3/1987,that the claim made by the petitioner was not justified and that indicative weight, mentioned at the time of tender, had no bearing on the contract price, as the contract had been fixed for sets and not for weight. The work under the contract was, however, completed in October, 1987.

(8) The disputes and differences obviously arose between the parties and they are referred to in paragraph 25 of the petition. These may be enumerated as follows: (A)Is the petitioner entitled to receive and the respondent is liable to pay Rs.27,06,858.00 as cost of extra 558 M.T. of steel? (b) Is the petitioner entitled to receive and the respondent liable to pay Rs.41,41,476.00 as charges for fabrication, supply (including loading at manufacturing works) and paintings etc. in respect of 558 M.T. of steel? (c) Is the petitioner entitled to receive and the respondent liable to pay Rs. 14,36,850.00 as the cost of transportation of extra 558 M.T. of steel by rail/road to the site of the work? (d) Is the petitioner entitled to receive from the respondent Rs. 11,55,618.00 as the cost and expenses incurred for assembly, field painting, erection and installation of the said extra quantity of 558 M.T. of steel? (e) Is the respondent liable to pay and/or reimburse the petitioner for taxes and duties on such amount as may be ascertained to be due and payable by the respondent to the petitioner? (f) Is the petitioner entitled to claim interest @ 18% per annum on the outstanding amount and, if so, for which period? (g) What other reliefs, if any, the petitioner is entitled to ?

(9) The following issues were framed by this Court on December 2, 1991: 1. Whether the petition has been signed, verified and instituted by a duly authorised person? 2. Whether there is a valid and subsisting arbitration agreement between the parties? 3. Whether disputes and differences within the ambit and scope of the arbitration agreement have arisen between the parties? 4. Relief.

(10) The relevant clauses of the contract, may be reproduced as follows:

"CLAUSE20 Responsibility Of The CONTRACtor. 20.1 The contractor shall be entirely responsible for the execution of the entire contract in accordance with the specification, schedules, drawings, appendices etc. He shall further guarantee and be responsible for the quality and workmanship of all materials and completed works, correct designs and drawings, correct delivery of material within the guaranteed completion and maintenance/defects liability period. 20.2 The Corporation shall have the fight to require the contractor to make any change in the design which may be necessary in the opinion of the Engineer-in-Charge to make the plant and materials conform to the provisions and contents of the specification. Approval by the Engineer-in-charge or by the representative of the Corporation, of the contractor's or Sub-contractor's drawings, designs, materials, or of the other parts of works involved in the contract or the tests carried out either by the sub-contractor, shall not relieve the contractor of any obligation for the correctness of the contractor's designs and drawings, or any other obligation under the contract. Any manufacture or work performed prior to the approval of drawings and tests will be at the contractor's risk and responsibility. Clause 21 Contract Drawings 21.1 The contractor shall be responsible to prepare all necessary drawings in respect of general arrangements, shop fabrication, assembly and erection covering the entire equipment and materials to be furnished and erected under the contract. The contractor shall also be responsible for correct fitting of all parts, and he shall furnish, while obtaining approval of the aforesaid drawing from, the Engineer in-charge, all drawings along with design calculations and Drawing Office dispatch list in quadruplicate.The Engineer-in-charge shall return to the contractor one set of drawings and drawing office dispatch list and design calculations duly approved or with comments duly checked within four weeks of receipt of the same but the approval of drawing or design shall not relieve or absolve the contractor of his responsibility regarding adequacy of design and correctness of drawings. Unless otherwise specifically provided for in the schedule or these conditions or in the drawings, the contractor shall furnish; all materials, accessories and appurtenant parts called for in the specifications or shown in the drawings. Anything shown in the drawings but not mentioned in the specifications or called for in the specifications but not shown on the drawing shall be furnished by the contractor as if called for or shown in both. The contractor shall be furnished such additional copies of all such specifications and drawings as may be considered by the Engineer in-charge to be required for performing the work. 21.2 If any dimension figured upon a drawing or a plan differ from those obtained by scaling the drawing or plan, the dimensions as figured upon the drawing or plan shall be taken as correct. 21.3. The Engineer-in-charge or his duly authorised representative shall have the right at all reasonable times to inspect, at the factory of the . contractor drawings or any portion of the equipment. Clause 39 Power To Vary Or Omit WORK; 39.1 No alterations, amendments, omissions, additions, substitutions, or variations of the equipment or work (hereinafter referred to as 'variations ')under the contract shall be made by the contractor except as directed in writing by the Engineer-in-charge but the Engineer in-charge shall have full power, subject to the provisions contained in the tender document etc. to instruct the contractor by notice in writing from, time to time during the execution of the contract to make such variations as will not result in change of the scope of the contract and the contractor shall carry out such variations and be bound by the same conditions as though the said variations occurred in the contract. 39.2 If any suggested variations would, in the opinion of the contractor, if carried out, prevent him from fulfillling any of his obligations or guarantees, under the contract, he shall notify the Engineer-in-charge thereof in writing and the Engineer-in-charge shall decide forthwith whether or not the same shall be carried out, and if the Engineer in-charge confirms his instructions, the contractor's obligations and guarantees shall be modified to such extent as may be confirmed. The decision of the Engineer-in-charge in this regard shall be final and binding. 39.3 The difference in cost, if any, occasioned by such variations, shall be added to or deducted from, the contract price, as the case may be. The amount of such difference, if any, shall be ascertained and determined in accordance with the rates specified in the agreement. In case such rates are not available in the agreement they shall be settled jointly by the Engineer-in-charge and contractor. 39.4 In the event of the Engineer-in-charge requiring any variations, such reasonable and proper notice shall be given to the contractor as will enable him to make his arrangements accordingly, and in cases where goods or materials are already prepared/procured, or any designs, drawings or patterns made or work done that require to be altered, a reasonable sum, in respect thereof shall be allowed by the Engineer-in-charge. 39.5 In every case in which the contractor shall receive instructions from the Engineer-in-charge for carrying out any work, which either then or later, will in the opinion of the contract, involve a claim for additional payment, the contractor shall, as soon as reasonably be possible after the receipt of such instructions, inform the Engineer-in-charge for additional payment. 39.6 Provided always that if the rate for a particular additional, altered or substituted or extra items of work cannot be determined inaccordance with sub-clause 1 to5 above,the rate for such items will be determined by the Engineer-in-charge on the basis of actual analysed cost, comprising cost of materials to be supplied by the contractor (including transportation and taxes etc.if paid), labour actually engaged for the particular work and operation cost of plant and machinery used for the work plus 15% for supervision, overheads, profits etc. The rates determined by the Engineer-in-charge under the sub clause shall be final and binding. Provided further that in case of individual deviated items for which rates are determined in accordance with the provision of this sub-clause such rates shall apply to the quantities actually executed in excess of the limits specified vide sub-clause 2 above in case of increased quantities; and for the total quantities actually executed in respect of items where quantities are reduced below the provision of aforesaid sub-clause 2." Clause 56 Finality Clause It shall be accepted as an inseparable part of the contract that in matters regarding materials, workmanship, removal of improper work, interpretation of the contract drawings and contract specifications, mode of procedure and the carrying out of the work as stipulated in the clause Nos. 7,8,10,12,16,17,20,21,22,23,27,28,29,33,34,39,41,42,45,46 & 48 of Section Iv of Part I and clause 2.6 of Part Ii, the decision of the Engineer-in charge, which shall be given in writing, shall be final and binding on the contract. Clause 57 refers to Arbitration. The relevant portion reads as follows: 57.1 Except as otherwise provided, in clause 56 herein before, all questions, disputes, or differences in respect of which the decision has not been final and conclusive, arising between the contractor and the Corporation, in relation to or in connection with the contract shall be referred for arbitration in the manner provided as under and to the sole arbitrator appointed as follows:- (i) Either of the parties may give to the other notice in writing of the existence of such questions, dispute or difference; (ii) Within thirty(30)daysofreceiptof such; notice from either party the Chief Engineer in-charge, of work at the time of such dispute shall send to the contractor a panel of three persons (not employee of the Corporation) and thereafter the contractor within fifteen ( 15) days of receipt of such panel communicate to the Chief Engineer the name of one of the persons from such panel and a person shall then be appointed sole arbitrator by the Chief Engineer.

Issue NO.1

(11) The present petition has been filed on behalf of the petitioner by Shri P.K.Ray, General Manager,( Marketing-structural) as a duly constituted Attorney. It is stated in paragraph I of the petition that he is fully conversant with the facts of the case and is authorised to institute the suit, sign and verify the pleadings by virtue of the Power of Attorney dated April 24,1989. There is no evidence to the contrary. I accordingly hold that the petition has been signed, verified and instituted by a duly authorised person. Issues NOS. 2 And 3

(12) The only dispute between she parties relates to the variations and modifications of the drawings and the petitioner has made a claim for an amount of Rs. 94,40,802.00 on account of additional steel work and additional costs in respect thereof.

(13) The learned counsel for the petitioner has contended that the modifications and variations of the drawings, at the instance of the Engineer-in-charge, are beyond the terms of the contract and, as some additional work has been done, the petitioner is entitled to the amount, as referred to above. He has made reference to the letter dated September 7, 1983 to reiterate the proposition that the drawings have been revised, as asked by the Engineer-in-charge and this has caused further expenditure. He has submitted that the 608 drawings were modified at the instance of Engineer-in-charge and has referred to the following paragraphs of this letter:- "DRAWINGSNo. 116/6078/8517A, 8518A and 8519A, detail of horizontal girder It was agreed in the meeting held on 27th and 28th July, 1983, that the size and number of bolts connecting the horizontal girder to arm will be revised as per our comments sent vide our letter No. NP/CW/04/17/4002 dated 4.7.83. The same may please be carried out......... Drawing No. 116/6078/8513 and 8514- skin plate details As the shape of the hood has been changed from circular shape to water nape profile, the level of the hood joint requires to be modified with the revision of the level of hood joint, the length of a number of items like 2,3,4,8,8x9,9x,10" 10x etc. requires to be changed......."etc. etc.

(14) The counsel has then referred to the reply of the petitioner of 31/1/1984, in which it has been reiterated that the drawings have been revised as per the comments of the Engineer-in-charge. The following paragraph of the letter has been cited, in which it has been highlighted that the petitioner will be burdened with unnecessary expenses, which were not previously envisaged:- "WE would like to point out that our essentiality certificate for materials have been based on our designs as submitted earlier.Those designs were made as per our vast experience for similar work. A number of drawings of various projects completed to our designs have also been forwarded to you from time to time for your kind reference. Gates at all such projects have been functioning satisfactorily over the last few decades. Therefore, withholding of approval prior to effecting such changes in thickness of some members of increase of depth of sill hence or other such changes etc. which in no way shall affect or improve performance, may not be insisted upon, on this would adversely affect our procurement of prime steel, and consequentially may lead to delays. This will also burden us with unnecessary and infructuous expenses not previously envisaged. However, for the sake of expeditious approval in most of the instances we have revised the sections as desired by you."

(15) The learned counsel for the respondent, on the other hand, has contended that the petition is misconceived as the variations and modifications of the drawings form part of the excepted matters and the disputes raised by the petitioner, are covered under Finality Clause 56 of the Contract and the Engineer-in-charge has the jurisdiction to decide them and no jurisdiction, as a consequence, is vested in the arbitrator. Reliance is placed on clause 39.6 to contend that if the rate for particular additional, altered or substituted or extra items of work cannot be determined in accordance with sub-clauses 1 to 5, the rate for such items will be determined by the Engineer-in-charge, on the basis of actual analysed cost, comprising cost of materials, to be supplied by the contractor (including transportation and taxes etc, if paid) etc. The rates determined by the Engineer in-charge, under this sub clause, shall be Final and binding. Reference is made to the judgments of the Hon'ble Supreme Court in Vishwanath Soodv. Union of India and another. and Prabartak Commercial Corporation Ltd. v. Chief Administrator, Dandakaranya Project and another . It is accordingly reiterated that clause 56, which has already been referred above (Finality Clause), covers the variations and modifications of drawings by the Engineer in-charge, whose decision shall be final and binding on the contract and such matters are not covered by arbitration clause (clause 57), which had no application to the dispute in question.

(16) The counsel for the petitioner, on the other hand, has strongly relied upon clause 39.3 to support the proposition that the decision of the Engineer-in-charge cannot be final in case, there is a difference in cost, which has been occasioned by variations. He has further reiterated that the provisions of clause 39.6 will have no application, as the Engineer-in-charge has failed to act despite communications of the petitioner dated 31/1/1984 and 14/4/1985respectively. In that case, the Arbitrator will have to decide the disputes between the parties in respect of the extra cost, occasioned by variations and modifications of the drawings, which has increased the total weight of steel work, fabrication, transportation and erection charges etc. He has accordingly reiterated that the rates are not available in the p73 Agreement and they shall be settled jointly by the Engineer-in-charge and Contractor and there being a difference of opinion between the two, such a matter is referable to arbitration.

(17) There is force in this contention, as the additional costs, which may have resulted by variations of the drawings, have to be mutually settled by the Engineer-in-charge and the Contractor and the same having not been settled in terms of the clauses, as mentioned above, the disputes which may arise,are referable to arbitration. The counsel for the petitioner has accordingly contended that the variations and modifications, as made by the Engineer-in-charge are not within the frame work of the contract and his decision not being final, the disputes have arisen between the parties and the same are referable to arbitration under clause 57.

(18) In any case, the Engineer-in-charge has failed to act and it will be Open for this Court to pass an appropriate order in this petition. The question, whether, any variation or modification of the drawings, which may have led to extra expenditure by the petitioner, could be considered as extra items or not, would depend upon the interpretation of the contract and the Arbitrator, as such, will be at liberty to decide the same. It will also be open for the arbitrator to decide the plea of the excepted matters and it is not necessary for this Court to adjudicate upon the same.

(19) In Union of India v. Salween Timber and Construction Co., (India) and others , the Hon'ble Supreme Court laid down the proposition of law as follows:-

"THE test for determining the question is whether recourse to the contract by which both the parties are bound is necessary for the purpose of determining whether the claim of the respondent firm is justified or otherwise. If it is necessary to take recourse to the terms of the contract for the purpose of deciding the matter in dispute, it must be held that the matter is within the scope of the arbitration clause and the arbitrators have jurisdiction to decide this case. In Heyman v.Darwins Ltd., 1942 Ac 356 atp-366 the law on the point is very clearly stated in the following passage: "AN arbitration clause is a written submission agreed to by the parties to the contract, and, like other written submissions to arbitration, must be construed according to its language and in the light of the circumstances in which it is made. If the dispute is whether the contract which contains the clause has ever been entered into at all, that issue cannot go to arbitration under the clause, for the party who denies that he has ever entered into the contract is thereby deny ing that he has ever joined in the submission. Similarly if one party to the alleged contract is contending that it is void ab in it to (because, for example, the making of such a contract is illegal), the arbitration clause cannot operate, for on this view the clause itself also is void. But in a situation whether the parties are at one in asserting that they entered into a binding contract,but a difference has arisen between them whether there has been a breach by one side or the other, or whether circumstances have arisen which have discharged one or both parties from further performance, such differences should be regarded as differences which have arisen "in respect" of or "with regard to", or "under" the contract,and an arbitration clause which uses these, or similar expressions should be construed accordingly."

(20) This Court in M/s Bindra Builders v. Delhi Development Authority Air 1985 Delhi 370, reiterated the law, as settled by the Supreme Court, and came to the following conclusion:- "THE position of law in this regard is well settled that where the test for determining whether the dispute is one arising out of the contract or in connection with the contract is whether recourse to the contract by which both the parties are bound is necessary for the purpose of determining whether the claim of the party is justified or otherwise. If it is necessary to take recourse to the terms of the contract for the purpose of deciding the matter in dispute, it must be held that the matter is within the scope of the arbitration clause and the arbitrators have jurisdiction to decide that dispute. Seen in this regard the decision of the Supreme Court in Union of India v.Salween Timber and Construction Co. . The controversy, therefore, in the present case with regard to the interpretation of different terms and conditions of the contract and further where in the context of facts which the parties may bring forth, the case would be one of substitution or of reduction is primarily within the domain of the arbitrator. If he finds that the case is of substitution, he would naturally adjudicate upon the same. If however, he comes to the view that the case is one of reduction, then to that extent he will be bound by the decision of the Chief Project Engineer in terms clause25-B. Thus I had the occasion to observe in similar circumstances in the case Suit No. 160A of 1983 M/s Shiv Hari Tandon v. Union of India decided on 22.4.1985 as under: "Adverting to the other plea about the excepted matters, it need hardly be impressed that the interpretation of the terms of contract is entirely within the domain of the arbitrator. He has to give effect to the same. In case any of the terms envisages that particular authority's decisions on certain matters have to be final, the arbitrator would certainly be bound by those decisions and would not question them. By doing so he would be only acting in terms of the contract and giving effect to those terms while determining the rights of the parties. This is made .clear and it is directed that the arbitrator will act accordingly. Whether any particular work could be considered as extra items or not would also depend upon the interpretation of the contract and the arbitrator as such will consider them. His appointment as arbitrator arises from the clause existing in the contract, and naturally he acts within the limits of the contract".

(21) The plea of excepted matters can also be raised before the arbitrator and it will be open to the respondent to raise such a question and the arbitrator would examine the same, as to whether there is any exception provided under the contract itself, (see Central Warehousing Corporation v. Batra Contractors and another 1991 (2)Arb.L.R. 150)

(22) The counsel for the respondent. Union of India, has argued that the variations and modifications are within the terms of the contract and the decision of the Engineer in-charge in this regard is final and no reference can be made. There is, however, no doubt that in case, the variations and modifications, which have been made by the Engineer-in-charge, are outside the jurisdiction of the Engineer-in-charge, his decision cannot be termed as final. If the variations and modifications have been made, as referred to in the letter of the respondent dated 7.9.1983, which were not contemplated by the terms of the contract, as contended by the petitioner and extra expenditure had to be incurred in this regard, the disputes relating thereto, can be referred to arbitration as the Contractor and the Engineer-in-charge have not mutually settled the same jointly. On the other hand, if the variation and modifications of the drawings are within the framework of the contract, this will be an excepted matter to which Finality Clause applies, then no dispute arises, which can be referred to arbitration.

(23) In the circumstances of the case, it will not be safe for this Court to determine the question, which may require some technical skill, for arriving at a finding that the variations and modifications are covered by the provisions of the contract and vice versa. It will be accordingly appropriate for this Court to leave it to the arbitrator, before whom the parties would lead evidence, to decide only those disputes and differences, which are not covered by the Finality Clause 56 of the Contract. The arbitrator will also be well equipped to decide, whether, the present dispute between the parties is an excepted matter, in view of the fact that the variations and modifications of the drawings are within the framework of the contract and such a dispute is not referable to arbitration, as the decision of Engineer-in-charge is final.

(24) In view of the above, this petition is allowed. Let the arbitration agreement be filed and reference be made, in terms of clause 57 of the contract. The arbitrator, so appointed, shall enter upon the reference and will first decide, whether the claim, which is raised by the petitioner, in respect of the variations and modifications of the drawings, fall within the ambit of the contract, for which no extra payment is provided. This question indeed is referable and, in case, the same is answered by the Arbitrator in the affirmative, there will be no dispute, which need to be decided by the Arbitrator, as the decision of the Engineer-in-charge is final and binding. There shall be no order as to costs.