New Delhi Apartment Group Housing ... vs Jyoti Swaroop Mittal
2007 Latest Caselaw 2308 Del

JUDGMENT

T.S. Thakur, J.

1. This appeal under Section 37 of the Arbitration and Conciliation Act, 1996 arises out of an order passed by a learned Single Judge of this court whereby the Award made by the sole arbitrator has been modified and the appellant herein held to be liable to pay to the respondent a sum of Rs. 7,79,025.71ps with interest @ 12% per annum from the date of the Award till the date of actual payment.

2. The appellant society appears to have engaged the services of the respondent contractor in connection with the construction of 114 dwelling units at Chila Dallupura, Vasundhara Enclave, Delhi. A formal agreement stipulating the terms and conditions subject to which the construction work had to be executed, was also entered into between the parties on 8.4.1987. Two letters one dated 9/10th January, 1987 and the other dated 16.2.1987 exchanged between the parties were also taken as forming part of the said agreement. Letter dated 9/10.1.1987 inter alia provided that in the event of increase and decrease in the rate of material/labour, the same shall be reimbursed to the contractor in terms of the provisions of the CPWD Manual. Clause 7 of the said letter may in this connection be extracted:

7. If there is any increase or decrease in rate of material/labour with any reasons shall be reimbursed to us as per CPWD Clause.

3. The above clause was modified in terms of the second letter forming part of the agreement between the parties. Para 7 of the said letter modified the earlier extracted Clause 7 in the following words.

Clause No. 7 is modified as that is if there shall by any statutory increase or decrease in labour wages rates shall be reimbursed to us. (The labour components shall be 25% of the gross value of work done out or which 12% for unskilled labour and 13% shall be for skilled labour as per the CPWD Manual.

4. It is evident from a reading of the two clauses mentioned above that while Clause 7 envisaged reimbursement of any increase in the rate of material and labour as per the CPWD norms, the modification thereto in terms of letter dated 16.2.1987 confined the reimbursement to any statutory increase or decrease in the labour wages only. That modification in turn was introduced on account of the fact that the respondent had, subsequent to the execution of the agreement, agreed to supply cement, steel and bricks to the appellant at the agreed rates specified in the schedule of quantities. This implied that any escalation in the prices of the said materials had to be borne by the appellant itself with no burden on account of any such escalation falling upon the respondent-contractor. The respondent-contractor had, in the light of that change, given up his claim for reimbursement of the escalation in the cost of material. The modified clause in that view limited the claim of reimbursement only to escalation in the labour component as per the CPWD manual. The modification also stipulated that the labour component shall, for the purposes of reimbursement of escalation be taken as 25% of the gross value of contract out of which 12% shall be treated as the unskilled labour component while the remaining 13% shall be counted towards skilled labour charges.

5. It is common ground that contractor started construction at the work side with the help of material supplied by the appellant from time to time. It is also common ground that the escalation in the cost of the material was borne entirely by the appellant with the result that the contractor continued to receive the said supplies at the rates stipulated in the schedule to the agreement. Certain extra items which did not find place in the schedule were also executed by the contractor under the instructions of the Architect of the appellant with the help of the material supplied by the appellant. Running account bills were, on the basis of the work actually done by the contractor, raised by the contractor and paid by the appellant after proper certification of the Architect. The appellant's case is that payment of all these bills was provisional and subject to finalisation, and adjustment in the final bill payable to the contractor. In the process, as many as 27 running account bills were paid by the appellant. On receipt of 28th bill which happened to be final bill, the appellant noticed certain serious discrepancies in the bills for the first time revealing to the appellant that it had paid an amount far in excess of what was due and payable to the respondent towards escalation and labour cost under the provisions of the Contract and the CPWD Manual. Disputes having thus arisen between the parties were referred by this Court to the sole arbitration of Justice P.K. Bahri, a Former Judge of this Court in terms of an order dated 18.7.2000 passed in an arbitration application No. 115/1998.

6. Before the arbitrator, the principal question that fell for consideration was whether the CPWD manual had any application to the contract in question and if so, what was the true and correct interpretation of the provisions relating to escalation on account of labour charges having regard to the modifications which the parties had introduced in terms of the two letters referred to earlier. The learned arbitrator entertained the reference and heard the parties and made a speaking Award dated 6.2.2002 holding that the cost of materials supplied by the appellant had to be deducted by the respondent while calculating the labour escalation to be reimbursed by the appellant to him. The arbitrator also found that the contractor had overdrawn a sum of Rs. 15,68,845/- which was held repayable by it with interest @ 18% per annum from the date of the Award till the date of payment. The arbitrator was of the view that on a true and appropriate interpretation of clause 7 (supra), there was no escape from the conclusion that the parties had agreed that escalation would be calculated in accordance with provisions of CPWD manual. The arbitrator further found that the contractor had, while submitting its running bills, calculated the amounts on the basis of the formula appearing in the CPWD manual, but while doing so, the contractor had committed a mistake in not excluding the cost of cement, steel and bricks from the gross value of the work and thus claimed a higher amount than what was actually due to it. The reasoning adopted by the arbitrator while arriving at that conclusion and in holding that the contractor had made an overclaim proceeded on the following lines:

26. Clause 10 (CC) of CPWD Manual as explained in para 33.81 to 33.8.9 clearly required exclusion of value of the material being supplied at fixed rates.

27. The formula envisaged in CPWD manual in para 38.8.9.6 is as follows:

(i) VL = WY = L1-L10

100 L 10

VL = Variation in labour cost, i.e. Amount of increase or decrease in rupees to be paid or recovered.

W = Value of work done, worked out as indicated in sub-para (2) above.

Y = Component of labour expressed as percentage of the total value of the work.

L 10 = Minimum daily wages.

L1 = Minimum wages fixed on the last day of the quarter to the one during which the escalation being paid.

The value of the work as per sub-para '2' provided as follows:

...(2) The cost of work on which escalation will be payable shall be reckoned as 85% of the cost of work as per bills running or fixed and from this amount the value of materials supplied under clause 10 of this contract or service rendered at fixed charges as per clause 34 of this contract and proposed to be recovered in the particular bill, shall be deducted before the amount of compensation of escalation is worked out....

The claimant in 1st R/S Bill (page 160 of documents filed by the respondent) had worked out escalation for that bill as follows:

851301 x 85 x 12 x (18.80) - (15.90) 100 100 21.25 = 15837.41

for unskilled labour and for skilled labour as below:

851301 x 85 x 13 (25.10) - (21.25) 100 100 21.25 = 17043.05 32880.46

28. In the cost of work for that period in that bill amounting to Rs. 851301 the claimant did not exclude the amount of Rs. 462390 the cost of the material of steel, cement and bricks supplied by the respondent on the fixed rates. Same mistake has been made in all subsequent bills admittedly.

7. The arbitrator on the above findings and after giving adjustments for the amount found due under other heads awarded a total sum of Rs. 7,89,870/- in favor of the appellant society and against the respondent-contractor. The said amount was made payable within two months failing which the amount was to be paid with interest @18% per annum from the date of the Award till the date of actual payment.

8. Aggrieved by the interpretation placed upon the terms of the contract between the parties as modified by the two letters referred to earlier, the contractor filed a petition under Section 34 of the Act. The learned Single Judge has, by the order impugned in this appeal, found fault with the interpretation of the terms of the agreement between the parties and substituted the same by his own interpretation and moulded the relief in modification of the award. The court has taken the view that while the formula prescribed by the CPWD manual was applicable for calculating the amounts reimbursable to the contractor on account of escalation in labour charges, the value of W in the said formula was the value of the work done which was different from the gross value of work done in terms of the modification to Clause 7 extracted earlier. Taking that reasoning to its logical conclusion, the Court declared that the value of the work done referred to in the formula applicable for determining the escalation in labour charges must not suffer any deduction and must be taken to be the gross value of work done. The Award made by the arbitrator was on that footing held to be unsustainable in so far as the same declared an excess payment of Rs. 15,68,843/- having been received by the contractor. Reversing the finding of the arbitrator on the question of excess payment received by the respondent-contractor, the Court held that the contractor was entitled to recover a sum of Rs. 7,79,025.71/- from the appellant with interest @ 12% per annum from the date of the Award till the date of actual payment. The present appeal assails the correctness of that view and the resultant modification of the award as already noticed above.

9. We have heard learned Counsel for the parties at a considerable length and perused the record. The order passed by the learned Single Judge in our opinion, is unsustainable for two precise reasons. Firstly because the learned Single Judge has, while exercising his power under Section 34 of the Arbitration and Conciliation Act, 1996, substituted his own interpretation for that placed by the arbitrator upon the terms of the contract between the parties. As already mentioned earlier, the entire controversy between the parties related to a true and correct interpretation of the relevant provisions of the CPWD Manual dealing with the escalation in labour charges as modified by the parties for purposes of the contract executed between them. The arbitrator had adopted an interpretation of the said terms and come to the conclusion that while calculating the amount of escalation payable to the contractor, the cost of material, cement, steel and bricks supplied by the appellant society had to be deducted from the value of the work which was one of the components of the formula stipulated by the Manual. That was so because the said items were under the terms agreed between the parties to be supplied by the appellant at fixed rates stipulated in the schedule implying thereby that the escalation on the said items was to be borne by the appellant society. In support of that view, the learned arbitrator had placed reliance upon Clause 10(cc) of CPWD Manual, Sub-para 2 whereof specifically required the deduction of the value of material supplied under clause 10 of the contract or service rendered at fixed rates as per Clause 34 of the contract from the cost of the work before the amount of compensation and escalation is worked out in terms of the formula. The arbitrator was of the view that once the CPWD manual extended to the contract between the parties for purposes of calculating the escalation charges on account of labour, the formula stipulated under the same and the method of working out the value of work could not be ignored. In other words, the correct application of the formula was dependent on a correct determination of the inputs relevant to the same, including a correct determination of the value of work which as per the CPWD Manual could be worked out only after deducting the cost of material supplied by the society and/or service rendered on payment of fixed charges. The view taken by the arbitrator is indeed a possible view. There was nothing so grossly irrational or perverse about the interpretation placed by the arbitrator upon the provisions in the CPWD manual as to justify an out of hand rejection of that interpretation by dubbing the same as an error of jurisdiction. We need to remember that the role of the Court examining the objections to an Award has always been very limited. It was limited under the Arbitration Act of 1940 and continues to be so under the 1996 Act also. The decision of the Supreme Court in Oil and Natural Gas Corporation Ltd. v. SAW Pipes Ltd. , has no doubt interpreted the expression "Public Policy of India" to include cases of patent illegality but that is far from saying that a court exercising powers under Section 34 can sit in appeal over the findings of fact recorded by the arbitrator or interpretation placed upon the provisions of the agreement particularly when such interpretation is a possible interpretation initiated in no way by any perversity of any kind. It is true that extreme situation where a finding of fact or interpretation recorded by the arbitrator may be found to be perverse may, at times, call for interference, but that does not mean that the Court should be ever so ready to substitute its own interpretation for that of the arbitrator just because the alternative interpretation appeals to the Court more than the one placed by the arbitrator. The court would, in our view, be well advised to exercise restraint in the matter and resist the temptation of interfering unless such an interference is found to be absolutely necessary to correct a patent illegality or error of jurisdiction. The learned Single Judge was not, therefore, justified in interfering with the Award by substituting his own interpretation for that of the arbitrator.

10. Even on merits, we do not think that the learned Single Judge had any compelling reason to take a view different from the one taken by the arbitrator. The arbitrator as also the learned Single Judge both have held that escalation on account of labour charges, had to be paid in terms of the provisions of the CPWD manual. If that were so, the formula prescribed by the manual would immediately become applicable to any process of calculating escalation charges. A careful reading of para 2 upon which the arbitrator has placed reliance in the Award made by him, would leave no manner of doubt that while calculating escalation charges the value of material supplied and the services rendered at fixed charges, is liable to be deducted. The modification of Clause 7 (supra) did not, in our view, modify or displace the essential requirement of making a deduction, nor was there any occasion for the parties to do so. That is because clause 7 was modified not because the parties had found the working of the CPWD manual in relation to the calculation of escalation charges to be impracticable, but because the parties had agreed that instead of the contractor supplying steel, cement and bricks needed for the work in question, the same would be supplied by the appellant society at fixed rates. That the material was accordingly supplied by the society is not in dispute. Such being the position, the formula prescribed in the manual would demand exclusion of the value of the said supplies while working out escalation in the labour charges. There is no reason much less a compelling one nor was any suggested to us at the bar why the parties may have intended to depart from the methodology prescribed by the manual for working out the escalation on account of the labour charges. Use of the words "Value of the work" in the formula stipulated by the CPWD Manual and the word "Gross value of the work" in the letter of modification cannot, in our view, be overplayed to read into the later expression an intention to alter the very basis of the calculation. As a matter of fact, the interpretation placed upon the terms of the contract by the learned Single Judge would lead to anomalous and inaccurate result. That is because one cannot apply the formula from the manual correctly unless the inputs for calculating the amount of escalation are also correctly determined and applied.

11. The only other aspect that needs our consideration is the rate of interest awarded by the arbitrator. As seen earlier, the amount awarded by the arbitrator has been made payable with interest at the rate of 18% per annum from the date of the Award till the date of actual payment. This, in our opinion, is marginally higher than what may be a just and fair rate having regard to the bank rate of interest prevalent during the relevant period. Even the learned Single Judge has modified the rate of interest to 12% per annum. Having regard to the totality of circumstances and the bank rate of interest prevalent during the relevant period, interest @ 10% per annum on the amount payable under the award should, in our opinion, serve the ends of justice. The Award made by the arbitrator would, therefore, deserve to be modified only to that extent.

12. In the result, we set aside the judgment and order passed by the learned Single Judge and dispose of the petition under Section 34 of the Arbitration and Conciliation Act, 1996 with the modification that the rate of interest awarded by the arbitrator shall stand reduced from 18% per annum to 10% per annum payable from the date of Award till the date of actual payment of the awarded amount to the appellant.

13. No costs.