Delhi High Court
National Hydroelectric Power ... vs Jaiprakash Industries Ltd. & Anr. on 4 November, 2011
Author: Pradeep Nandrajog
* IN THE HIGH COURT OF DELHI AT NEW DELHI
% Judgment Reserved on: 2nd November, 2011
Judgment Pronounced on: 4th November, 2011
+ RFA(OS) 41/2010
NATIONAL HYDROELECTRIC POWER
CORPORATION LTD. ..... Appellant
Through: Mr.Kailash Vasudev, Sr.Advocate
with Mr.Sachin Datta and
Ms.Gayatri Verma, Advocates
versus
JAIPRAKASH INDUSTRIES LTD & ANR ..... Respondents
Through: Mr.Lovkesh Sawhney and
Mr.Durgesh Kumar Pandey,
Advocates
RFA(OS) 42/2010
NATIONAL HYDROELECTRIC POWER
CORPORATION LTD ..... Appellant
Through: Mr.Kailash Vasudev, Sr.Advocate
with Mr.Sachin Datta and
Ms.Gayatri Verma, Advocates
versus
HINDUSTAN CONSTRUCTION CO. LTD.
& ANR. ..... Respondents
Through: Mr.Gaurav Singh, Advocate
RFA(OS) 43/2010
NATIONAL HYDROELECTRIC POWER
CORPORATION LTD ..... Appellant
Through: Mr.Kailash Vasudev, Sr.Advocate
with Mr.Sachin Datta and
Ms.Gayatri Verma, Advocates
RFA (OS) 41/2010 & connected matters Page 1 of 19
versus
HINDUSTAN CONSTRUCTION CO. LTD.
& ANR. ..... Respondents
Through: Mr.Gaurav Singh, Advocate
RFA(OS) 44/2010
NATIONAL HYDROELECTRIC POWER
CORPORATION LTD ..... Appellant
Through: Mr.Kailash Vasudev, Sr.Advocate
with Mr.Sachin Datta and
Ms.Gayatri Verma, Advocates
versus
CONTINENTAL CONSTRUCTION LTD.
& ANR. ..... Respondents
Through: Mr.Anil Dutt and Ms.Divya Jain,
Advocates for R-1
RFA(OS) 45/2010
NATIONAL HYDROELECTRIC POWER
CORPORATION LTD ..... Appellant
Through: Mr.Kailash Vasudev, Sr.Advocate
with Mr.Sachin Datta and
Ms.Gayatri Verma, Advocates
versus
CONTINENTAL CONSTRUCTION LTD.
& ANR. ..... Respondents
Through: Mr.Anil Dutt and Ms.Divya Jain,
Advocates for R-1.
CORAM:
HON'BLE MR. JUSTICE PRADEEP NANDRAJOG
HON'BLE MR. JUSTICE S.P.GARG
1. Whether the Reporters of local papers may be allowed
RFA (OS) 41/2010 & connected matters Page 2 of 19
to see the judgment?
2. To be referred to Reporter or not?
3. Whether the judgment should be reported in the Digest?
PRADEEP NANDRAJOG, J.
1. At the outset it may be noted that the impugned
order dated 11.2.2010 decides objections filed by the
respondent under Section 30/33 of the Arbitration Act 1940 to
an award made on 21.12.1996 by the sole arbitrator and the
appeals have been filed under Section 39 of the Arbitration Act
1940. The appeals cannot be thus captioned as „Regular First
Appeal (OS)‟. The appeals have to be captioned „First Appeal
against Order (OS)‟. It is unfortunate that in spite of the
Registry of this Court so intimating learned counsel for the
appellant and requiring the appeals to be filed as per format
applicable to a First Appeal against Order, the counsel has
persisted to have the appeals laid before the Court as Regular
First Appeals.
2. An unintentional error may be a mistake but
persistence with an error, in spite of being cautioned to take
reasonable care and rectify the error, would be a wrong and
thus we would be perfectly justified in dismissing the Regular
First Appeals filed against the impugned order as not
maintainable, requiring the appellant to file First Appeal
against Order. But we do not do so in the interest of justice
and as conceded by learned senior counsel for the appellant,
would treat the appeals as First Appeal against an Order i.e.
„FAO (OS)‟.
3. Pertaining to a contract entered into between the
appellant and the respondent, a dispute arose on the issue of
payment to be made by the appellant to the respondent for
the non-tendered extra items of work executed by the
respondent.
4. The contract being an item rate contract, for non-
specified works i.e. extra items or for analogous items not
specified in the schedule of quantities, the applicable clause of
the contract based whereon payment had to be made by the
appellant to the respondent i.e. clause 18.2 (iii) provided as
under:-
"18.2 (iii) Provided where some extra items and/or
analogous items are not available in the Schedule
of Quantities, and for the variation in respect of
individual items exceeding the prescribed limit of
30% as aforesaid, the rates for such items(s) to be
executed shall be determined by the Engineer-in-
Charge on the basis of actual analyzed cost
comprising of the cost of material to be supplied by
the contractor (including transportation and taxes,
levies if paid), labour actually engaged for the
particular work, cost of operation of plant and
machinery used for the work plus such percentage
(as indicated in Schedule „D‟) to cover the
overheads, profits, contractor‟s supervision and
other charges, if any. The decision of the Engineer-
in-Charge in deriving rates as aforesaid, shall be
conclusive and binding on the contractor."
5. The contract envisaged certain raw-material being
supplied to the respondent by the appellant at a fixed price to
be deducted from the running bills. The contract provides for
a price escalation to be paid based on a formula under the
contract i.e. as per clause 46.1 of the contract.
6. It is not in dispute that pertaining to extra works,
raw-material supplied by the appellant to the respondent was
consumed and while making payments under the running bills
the appellant was determining the value of the work, for
purposes of labour escalation being determined, by including
the said raw material and from the amount so determined,
price of the raw material was subtracted i.e. the labour input
was with respect to all materials consumed and likewise
pertaining to the cost of operation of plant and machinery,
overheads, supervision charges, same method to finalize the
running bills was being adopted. The dispute arose at the
stage of settlement of the final bill and at this stage, with
respect to determining labour and other charges payable, the
appellant finalized the final bill by taking into account the cost
of material consumed and after deducting the cost of the
material supplied by it, worked out the labour cost payable on
the balance. Same method was applied to determine other
amounts payable towards operation of plant and machinery,
overheads, supervision charges etc.
7. What was the result? With reference to an
example, we can understand better. Say, for a work done,
value of material supplied by the appellant was `100/- and
value of the material brought and consumed by the
respondent was also `100/-. 10% was the agreed labour cost.
As per the basis adopted to clear the running bills, price
towards labour payable was determined at `100/- + `100/- =
`200/- x 10% = `20/-. As per the revised basis adopted by the
appellant, the labour cost payable was worked out at `100/- x
10% = `10/-.
8. Likewise, amounts payable towards cost of
operation of plant and machinery, overheads and contractors‟
supervision were worked out and suffice would it be to state
that the same resulted in lesser payment being determined to
be paid by the appellant.
9. The justification of so doing, may be noted from the
pleadings of the appellant before the learned Single Judge to
the objections filed to the award dated 21.12.1996 by the
learned sole arbitrator, who obviously held in favour of the
version pleaded by the appellant and before the learned Single
Judge, challenge to the award was by the respondent who had
filed objections under Section 30/33 of the Arbitration Act
1940. The appellant, inter-alia, pleaded as under:-
"The materials are supplied by the corporation at
fixed cost as per Schedule B of the contract. The
cost of the materials supplied by the corporation is
recovered during the payment of running bills of
the contractor. The arrangement is only for
account purpose to effect recovery. The cost of
material supplied by the corporation is included for
arriving at the rate as the same cost is recoverable
after the payment of rate. But for applying 25%
mark-up, the cost of the materials supplied by the
corporation is excluded from the total cost as per
GCC 18.2 (iii)."
10. The dispute before the arbitrator was whether the
25% point mark-up had to be applied to the value of the work
on the total cost of material used or only on the cost of
material supplied by the respondent. It not being in dispute
that 25% point mark-up had to be given effect to.
11. Whereas the stand of the respondent, is but
obvious. The stand had to be the one which would bring in
more money and obviously was that the mark-up had to be
given effect to on the total value of the materials consumed
and the stand of the appellant obviously was, the one which
would render it liable to pay a less amount, i.e. as per its
pleading noted in para 9 above.
12. After noting clause 18.2 (iii), the learned arbitrator
agreed with the stand taken by the appellant and the
reasoning of the learned arbitrator is as under:-
"In case of non-tender items of work which fall in
the category of deviated and extra items, a
special formula has been laid down in Clause
18.2(iii) for determining the cash amount payable
to the contractor. Clause 18.2(iii) specifically
mentions that the materials "supplied by the
Contractor" will be included in determining the
total cost, but does not mention that the costs of
materials supplied by the Corporation will also be
included. In case of deviated and extra items
under Clause 18.2(iii), the cash amount payable as
cost has to be determined purely on the basis of
the actual cost incurred by the Contractor plus
such percentage as is indicated in Schedule D. As
there is no previously agreed total amount of
consideration payable for the work under Clause
18, it has to be worked out on the basis of the
norms laid down in Clause 18.2(iii). There being
no previously agreed quantum of total
consideration with an in-built cost of material in
the amount payable, the question of adding the
cost of materials to be supplied by the Corporation
to the analyzed cost and then deducting the same
from that amount of consideration does not arise.
The cash value of materials supplied by the
Corporation in such a case becomes wholly
irrelevant when the cost of the item of work is
being determined in terms of formula laid down in
Clause 18.2(iii).
The amount of cost for deviated and extra items
of work has to be determined only on the basis of
the terms of Clause 18.2(iii). When cost is
determined under a special formula, it becomes a
formula-based cost structure and it has to be
determined strictly on the basis of the
components required to be considered for
determining the cost. Under Clause 18.2(iii), cost
means actual analyzed cost, comprising of the
various components mentioned therein. And, the
mark-up of 25% mentioned in Schedule D is to be
added only to the cost so determined under
Clause 18.2(iii).
It has been contended by the Contractor that the
"material to be supplied by the Contractor" in
Clause 18.2(iii) means all the material used by the
Contractor in the execution of the work, and that it
is immaterial whether the source of supply of the
material is the Corporation or the open market.
The Corporation on the other hand pleads
otherwise. There is no merit in the contention of
the Contractor. Clause 23 of the General
Conditions of Contract deals with the supply of
materials. Under sub-clause 23.1, the Contractor
has to provide and arrange at his own expense all
materials "except those listed and specified in
Schedule B". Under sub-clause 23.4 again, the
term "the materials listed in Schedule B which the
Corporation has agreed to supply to the
Contractor for the work under the contract" has
been used which shows that the intention of the
parties is to treat the material supplied by the
Corporation as belonging to a separate class. In
sub-clauses (i), (ii) and (iii) of Clauses 23.4 and in
various other clauses in the contract, there is a
clear indication that the material provided, issued,
or supplied by the Corporation falls in a Special
category. Clauses 23.1, 23.2 and 23.4 clearly
make a distinction between materials supplied by
the Contractor and the materials supplied by the
Corporation. Source of supply is the determining
factor. Even Special Condition 4 refers to issue of
materials to the contractor for use in the
execution of the work. The basic source of supply
remains the Corporation. Special condition
No.21.2 runs as under:-
"21.2 In the Contract, unless it is
specifically provided that a particular facility,
material or any other thing is to be provided
by the Corporation at its own cost, it is agreed
by the parties that the same shall be provided
by the Contactor at his own cost."
Clause 21.2 contemplates that all materials have
to be supplied at the cost of the supplier. If the
contractor supplies the material, it has to be at
the contractor‟s cost. If the material is supplied
by the Corporation, then it has to be at the
Corporation‟s cost. It means that whoever incurs
the cost in procuring the material or invests the
money to obtain the material, will be deemed to
be the supplier of that material. In the case of
material supplied by the Corporation either in
terms of Schedule B or in terms of Annexure A,
total investment in procuring the material is made
by the Corporation. At no point of time, the
contractor invests any money in procuring these
materials. The supplies under Schedule B or
Annexure A must accordingly be deemed to be
supplied by the Corporation and not by the
contractor.
Further, in Clause 18.2(iii), except in respect of
"materials", no distinction has been made about
the source of supply. In respect of operation of
the plant and machinery used in the work, no
mention is made about the source of procurement
of supply. It is only in respect of cost of material
that the words "to be supplied by the contractor"
have been used. It is thus apparent that the
words "supplied by the Contractor" have been
used to distinguish and exclude the material
"supplied by the Corporation". The supply of
material by the Corporation is in response to its
promise and obligation to do so under the contract
and the contractor does not have to supply such
material as is required to be supplied by the
Corporation. It is obvious that materials supplied
by the Corporation either in terms of Schedule B
or Annexure A cannot be deemed to be materials
supplied by the Contractor. The cost of such
material cannot accordingly be added for
determining the total cost which is to be
calculated on the basis of "actual analyzed cost"
of components mentioned in Clause 18.2(iii). The
cost of material supplied by the Corporation either
in terms of Schedule B or Annexure A not being a
component for determining the total cost payable
to the contractor cannot be taken into account for
the purpose of enabling the mark-up under
Schedule D, it has to remain out."
13. The learned Single Judge has opined to the contrary
and the reasoning, in paras 7 to 9 of the impugned judgment
and order dated 11.2.2010 is as under:-
"7. One thing which needs to be clearly kept in
mind, while deciding the interpretation of Clause
18.2(iii), is the spirit or the heart or the object of
this Clause. In my opinion, the spirit of this
provision is in the following line as found in the
clause:
"..... labour actually engaged for the particular
work, cost of operation of plant and machinery
used for the work plus such percentage (as
indicated in schedule D) to cover the
overheads, profits, contractor‟s supervision
and other charges, if any............"
I say that this line is the spirit and object of the
clause because this line gives the reason for the
mark-up given to a contractor i.e. the mark-up is
for the elements of overheads, profits and other
expenditure which has to be incurred by the
contractor for the work done of the extra items.
This line also makes it clear that overheads;
supervision cost, other expenses and addition by
way of profits are not to be confined only to the
cost of the work of the extra/deviated items minus
the cost of the material which is supplied by the
respondent/employer but are applied to the total
value of the extra work. Once we keep into focus
this clear intent, purpose and the heart of Clause
18.2(iii), and so very much expressly stated in this
very clause, things, in my opinion, automatically
fall into place, and which clear object of the clause
the arbitrator fell into a clear and apparent
illegality in overlooking, and thereby has
misconducted himself and the proceedings.
8. The intention of the parties to apply mark-up
to the total value of extra work is also clear from a
portion of Schedule B of the contract, however,
whether it is unintentional one does not know.
The said relevant portion of Schedule „B‟ of the
Contract though extremely relevant and
necessary has not been reproduced by the
Arbitrator though he has otherwise reproduced the
other portions of Schedule B. That relevant
portion of Schedule „B‟ is as under:
"Materials for the work which will be issued to
the contractor, cost whereof will be recovered
from the contractor at the rates mentioned
below"
This line shows that the bill which has to be drawn
for payment upon the respondent/employer-owner
comprises of the total value of the work of the
extra items/deviated items i.e. including the cost
of material supplied by the respondent and cost
has to be recovered from the contractor. The
intention of this portion of Schedule „B‟ is further
clarified in paragraphs 23.4(i) and (vii) already
reproduced above, and which paragraphs show
that till the materials which are issued by the
respondent are not incorporated in the works,
they continue to be in trust with the objector and
in ownership of respondent, however, once they
are incorporated in the works, then not only the
ownership therein of the respondent ceases, they
become part of the work done by the contractor
and have to form a part of the bill which is drawn
upon the respondent for payment of that work and
from which bill the employer „recovers‟ the cost of
material it supplies. Dilating further, what I am
saying is that, the value of the work includes
therein the total cost of entire material included in
such work and not only a portion of the cost of
material incorporated in the works as provided by
the contractor. By the relevant language of
Schedule „B‟, Clauses 18.1; and 23.4(i) and (vii);
the cost of the material supplied by the
respondent necessarily becomes part of the bill
and consequently also of the value and total cost
of such work which has to be paid for by the
respondent to the petitioner. Of course, since the
material was in fact supplied by the respondent to
the petitioner, ultimately when final payment has
to be made, the value of this material supplied is
deducted/recovered from the amount of the bill.
Let us take an example and a theoretical case to
understand the mechanics. Suppose material
which is incorporated in the work was supplied by
a third person, and not the respondent, then, the
petitioner would have had to pay the cost of
material to such third person. In this case, such
third person is the owner because certain material
incorporated in the work is supplied is by the
owner-respondent and consequently the amount
of such material is deducted/recovered by the
owner before making payment of the Bill. The
respondent, therefore, wears two hats at the same
point of time i.e. one of an owner and one of the
supplier. In the hat of the employer/owner the
respondent is bound to pay for the work done of
the extra items/deviated items and when it puts
on such hat of such employer/owner it pays for the
cost of the work done, but, when it puts on the
different hat of a supplier of materials, it takes the
cost/price with respect to the material which is
supplied to the contractor/objector by
reducing/recovering from the Bill the value of the
material which it supplies. In view of the aforesaid
discussion and the observations, when we
accordingly look at the expression as found in
clause 18.2(iii) of "material to be supplied by the
contractor", it becomes very clear that the
material to be supplied by the contractor is very
much the total value of the extra work because it
is for this total value of extra work which is done
by the contractor that the contractor raises a bill
upon the respondent for payment, subject of
course, to adjustment of reduction therefrom of
the value of the material which the respondent
supplies to the petitioner. Be it noted that the
words used in this clause are "material supplied
by the contractor" and not the "net value of
material supplied by the contractor although
stated otherwise in the Bill".
9. That the interpretation which is being
adopted by me, is the only possible interpretation
for a reasonable man to have taken in the
admitted facts and circumstances and the
applicable clauses of the contract, is strengthened
when we refer to the expressions of "labour, cost
of operation of plant and machinery" as found in
Clause 18.2(iii). The expression "material" as
found in Clause 18.2(iii) in the scheme of the
contract, has surely to be read noscitur a sociis
with the expressions "labour cost, cost of plant
and machinery" used for the work pertaining to
extra items/deviated items. The mark up is on the
total of the cost of ingredients of labour,
machinery etc. employed in the work, and it is
nobody‟s contention that the labour cost or cost of
operation of plant and machinery contained in an
extra item/deviated items is broken up into two
parts, one part of such cost of labour and running
cost of plant and machinery attributable to the
cost of material supplied by the employer and
which is to be reduced from the bills which are
raised in accordance with Clause 18.2(iii) and the
other part of labour or machinery cost attributable
to the material supplied by the petitioner is to be
paid for under the bills. The line which is found in
Clause 18.2(iii) runs continuously from "material"
till "the cost of operation of plant and machinery",
and it is not that such line and expressions
therein, can be merely for the convenience of the
respondent, bifurcated in two parts, one part till
material and other part till machinery. Once the
cost of labour and cost of running of plant and
machinery is taken as a whole with respect to the
extra items/deviated items for marking up
purposes, i.e. not removing from such ingredients
of the work that proportion attributable to the
value of the work pertaining to the cost of material
supplied by the respondent, then, I do not find any
valid basis to cut down the scope of expression
"cost of material to be supplied by the contractor"
only to the material which is supplied by the
contractor and not the total material incorporated
in the work of extra deviated items. A clear case
for application of the maxim noscitur a sociis.
When we take such reading of this clause, it
becomes abundantly clear, read alongwith heart
of this provision being the intention of the contract
to give a mark up to the contractor on what is the
total cost and value of an extra work/deviated
items, we find that the Arbitrator has strived to
interpret the clause in a direction which gives his
finding a colour of perversity. A perverse reading
of the clause so as to read therein a meaning,
which on a complete reading of the clause and the
other applicable clauses, defeats the very
intention of giving mark-up for the value of the
additional extra items/deviated items amounts to
the Arbitrator misconducting himself and the
proceedings."
14. Challenging the impugned decision, Sh.Kailash
Vasdev learned senior counsel for the appellant urged that it is
settled law that an arbitrator is the final judge to interpret a
contract between the parties and drawing our attention to the
award, relevant portions whereof which have been noted
hereinabove in para 12, it was highlighted that the learned
arbitrator has gone into the issue. Counsel highlighted that
the view taken by the arbitrator is a correct view and without
going into the merits of the view taken by the learned Single
Judge, upon the premise that the said view was also a possible
view, learned senior counsel urged that it was settled law that
where two views were possible to be taken with respect to the
interpretation of an agreement, a Court cannot substitute its
view from the one taken by the arbitrator. So arguing, learned
counsel hastened to add that the view taken by the learned
arbitrator was the only view possible.
15. We have extracted hereinabove in para 4 above
clause 18.2 (iii) which is at the center of the debate and we re-
note the same by breaking its conceptual whole into
identifiable limbs. We break the same as follows:-
Where some extra items and/or analogous items are not
available in the Schedule of Quantities, and for the variation in
respect of individual items exceeding the prescribed limit of
30% as aforesaid,
the rates for such items(s) to be executed shall be determined
by the Engineer-in-Charge
on the basis of actual analyzed cost
(a) comprising of the cost of material to be supplied by
the contractor (including transportation and taxes, levies if
paid),
(b) labour actually engaged for the particular work,
(c) cost of operation of plant and machinery used for
the work
(d) plus such percentage (as indicated in Schedule „D‟)
to cover the (i) overheads, (ii) profits, (iii) contractor‟s
supervision and (iv) other charges, if any.
16. The clause analysis, as aforesaid done by us, would
make it clear that the subject of the clause is the situation
where extra items or work, not available in the Schedule of
Quantities, have been executed by the respondent requiring
price payable for said work to be determined.
17. The second limb of the clause requires not one, but
four determined constants to be worked out and the same are
(a) cost of material to be supplied by the contractor (b) labour
actually engaged for the particular work, (c) cost of operation
of plant and machinery used for the work (d) plus such
percentage (as indicated in Schedule „D‟) to cover the (i)
overheads, (ii) profits, (iii) contractor‟s supervision and (iv)
other charges, if any.
18. Now, the words „the particular works‟ pertaining to
the labour element and the words „the work‟ pertaining to the
cost of operation of the plant and machinery are of
importance, and the learned Single Judge has rightly opined
that the learned arbitrator has totally misread the clause in
question. As broken up by us, it is apparent that while working
out the effect of clause 18.2 (iii) of the contract, labour
charges have to be paid for the labour engaged for the extra
work and in relation to operation of plant and machinery the
price has to be paid for the extra work and this would mean
irrespective of whether a particular raw material consumed in
the work was supplied by the appellant or was brought at site
by the respondent, the labour and costs for operating plant
and machinery as also supervision charges had to be for the
entire work.
19. The matter can be looked at from another angle.
The clause in question requires, for extra work done,
reimbursement to the contractor for the cost of material
supplied by the contractor and thus the cost of material
supplied by the owner of the work has expressly been
excluded, but qua labour actually engaged and cost of
operation of plant and machinery, the reimbursement has to
be for „the work‟. The work would mean the resultant work
ensuing from the labour spent and the machinery used to work
upon the materials supplied either by the contractor or the
owner of the work. Thus, the said elements emanate from or
with respect to the work and not the material for the reason
when individual components are put together by spending
labour and using machinery, a work i.e. a new entity comes
into existence.
20. There is no dispute with the proposition that an
arbitrator is the final judge to interpret a contract or a clause
within a contract between the parties. But that would not
mean that his ipse dixit would be accepted. If the reasoning of
the arbitrator shows that he has digested every word, phrase
and sentence in a clause and thereafter reflected thereon,
howsoever faulty may be the reasoning, subject to the fault
not reaching the level of perversity, the award would be
immune for challenge before a Court. But, where it is
evidenced that the learned arbitrator has ignored words,
phrases or sentences in a clause while interpreting the same,
it would amount to an arbitrator misconducting himself
inasmuch as it would be a case of a legal misconduct. Legal
misconduct would embrace a situation where the person
required to adjudicate a lis ignores words, phrases or
sentences in a clause since this would amount to the arbitrator
substituting the contract between the parties and needless to
state the arbitrator would breach the mandate to the arbitrator
i.e. enforce the contract between the parties.
21. We adopt the reasoning of the learned Single Judge
as also the illustrations given by the learned Single Judge as
per para 7 to 9 of the impugned decision, which we have
extracted hereinabove in para 13 above and the same may be
read as part of our reasoning; supplementing the same with
our reasoning hereinabove, we dismiss the appeals and as per
the ethos of the impugned decision, leave the parties to bear
their own costs.
(PRADEEP NANDRAJOG)
JUDGE
(S.P.GARG)
JUDGE
NOVEMBER 04, 2011
mm
