Delhi High Court
N.J.Devani Builders P.Ltd. vs Indian Farmers Fertilizer ... on 5 December, 2012
Author: Vipin Sanghi
* IN THE HIGH COURT OF DELHI AT NEW DELHI
Judgment reserved on: 17.09.2012
% Judgment delivered on: 05.12.2012
+ FAO(OS) No. 483/2008
N.J.DEVANI BUILDERS P.LTD.
..... Appellant
Through: Mr. Sameer Parekh, Mr.D.P.Mohanty,
Mr. Kshtrashal Raj, Mr. Galav
Sharma & Ms. Sarabjyot Walia,
Advocates
versus
INDIAN FARMERS FERTILIZER COOPERATIVE LTD.
..... Respondent
Through: Mr. Ravinder Sethi, Sr. Advocate
with Mr. Manoj Verma & Mr. Rajiv
Kumar Ghawana, Advocates.
CORAM:
HON'BLE MR. JUSTICE SANJAY KISHAN KAUL
HON'BLE MR. JUSTICE VIPIN SANGHI
JUDGMENT
VIPIN SANGHI, J.
1. The appellant, by way of the present appeal under Section 39
(1)(vi) of the Arbitration Act, 1940 (hereinafter referred to as the "Act"),
seeks setting aside of order dated 22.09.2008 in CS (OS) No. 1817A of
1997, being objections under Section 30 of the Act to the arbitral award
dated 25.07.1997. By the impugned order, the Ld. Single Judge has
dismissed the objections preferred by the appellant.
2. The dispute between the parties related to the claim of the
appellant herein for enhanced payment- on account of escalation in
minimum wages and material cost- during the scheduled period of the
contract as also the extended time period.
3. The aforesaid contract was in relation to the work of
construction of 161, Type-C quarters at Alona, Dist. Bareilly (U.P.), which
came to be executed on 31.07.1985. The contract price was Rs. 2.89 Crores
which was subsequently raised to Rs. 3.5 Crores. The original period of
completion of the said work was 18 months i.e. up to 31.01.1987, which
came to be subsequently extended up to 30.4.1987. After having completed
the work within the extended period, the appellant submitted along with its
final bill, a bill claiming escalation charges of Rs. 89,33,295.00/- and Rs.
3,97,159.00/- towards escalation of labour component and escalation of
material component respectively. In response thereto, the respondent herein
paid an amount of Rs. 16,83,357.00/- on the basis that clause 3 of the
contract provided for a maximum ceiling limit- with regards to the payments
of escalation of all items, being 5% of the contract value. The said clause
reads as under:
"3.0 Escalation
A. The payments for escalation shall be payable as per the
formula given hereunder:
i) Escalation for labour component
???????? − ????????
???? = 0.2 ???? ×
????????
WHERE Lo = is the minimum wage rate for
Bareilly on date of opening
price bids
Li = is the revised minimum wage
rate at Bareilly as per
Government Notification.
W= Value of the work done after
the minimum wage rate is
revised as per Government
Notification.
P= Amount payable to contractor
extra over the contract price
due to labour escalation.
ii) Escalation for materials procured by Contractor:-
???????? − ????????
???? = 0.25 ???? ×
????????
WHERE P = amount of escalation payable to
contractor.
W= Value of work done during the month
under reference.
Ci = All India Whole Sale Price Index (all
commodities as published by Reserve
Bank of India for the month for
which amount towards escalation is
payable.
Co = All India Whole Sale Price Index (all
commodities as published by Reserve
Bank of India for the month in which
price bids are opened.
The contractor shall not specify any other formula for
escalation/except referred to above If escalation coverage by
above formula is not felt adequate by the contractor, the same
shall be covered by the contractor in his quotation/lump sum
amount quoted, as the case may be.
However, the total escalation on all items together will be
limited to a maximum ceiling limit of 5% of the contract value.
The ceiling for escalation as asked for will be taken for loading
the Contractors bid.
Bill for escalation will be submitted every month if there is any
change in wages of labour or whole Sale Price Index afore-
mentioned in sub-clauses A(i) and A(ii)."
4. The said dispute, inter alia, came to be referred to arbitration,
wherein it was averred by the appellant/claimant that at the time when the
tender was opened, i.e. on 17.05.1985, and the contract was awarded- the
minimum wages payable to the workers under the Minimum Wages Act was
Rs. 8/- per day which, thereafter, came to be increased in an extraordinary
and unexpected manner by the U.P. Government. In view of the same, it was
submitted that the Ceiling of 5% fixed in the year 1985, had become
impractical and uneconomic for the appellant/contractor and as such had
become irrelevant. The increase in the minimum wages of the workers
during the relevant period, as culled out from the affidavit of the appellant
herein before the arbitrator, is as under:
"(1) From 24.2.85 to 28.6.85 Rs. 8/- per day
(2) From 29.6.85 to 31.7.85 Rs. 16.65/- per day
(3) From 1.8.85 to 31.1.86 Rs. 16.80/- per day
(4) From 1.2.86 to 31.7.86 Rs. 17.96/- per day
(5) From 1.8.86 to 31.1.87 Rs. 18.70/- per day
(6) From 1.2.87 to 31.7.87 Rs. 20.15/- per day"
5. The sole arbitrator, Justice G.C. Jain (Retd.) by award dated
25.07.1997 rejected the said claim of the appellant herein on the following
grounds:
I. The extra ordinary increase in the minimum wages, admittedly, took
place before the work order dated 20.07.1985 was issued. The
appellant/contractor with open eyes, without any protest and with its
own free will, executed the contract on 31.07.1985, which contained
the aforesaid ceiling clause. The appellant did not reserve any right
to claim escalation in the wages at that stage. Therefore, the appellant
cannot wriggle out of the said condition of the contract.
II. The contention of the appellant/claimant that it received copy of the
notification from the respondent with its letter dated 26.08.1985 is no
excuse and would make no difference.
III. The ceiling clause was unconditional. It does not say that it will not
apply if there was steep, extra-ordinary or unexpected statutory
increase in the minimum wages. The condition relating to the ceiling
was binding on the contractor in all circumstances.
IV. The plea of the appellant/claimant that due to steep rise in the labour
wages, the contract became uneconomic is frivolous. There is no law
of must earn profits in contracts. A party can suffer loss and
sometimes huge loss. Even otherwise, there was no evidence of the
appellant having suffered loss as a whole.
V. The submission that the ceiling clause was limited to escalation for
materials procured by the contractor and it was not applicable to
escalation in labour component was never raised in the statement of
claim. It was only averred that the ceiling had become irrelevant in
view of the extra ordinary and unexpected increase in wages. Even
otherwise, the said plea has no merit. The words "on all items
together", in the proviso, are wide enough to take in their fold both
the material component and the labour component. It cannot be
suggested that these words meant all items of material procured by the
contractor. Even before the words "on all items together" the words
are "total escalation". The use of the words "total escalation" on all
items together, mean that the maximum amount payable to the
contractor towards escalation was 5% of the contract value. Further,
as per the last Para of clause 3, the contractor is required to submit bill
of escalation every month- if there was any changes in wages of
labour or whole sale price index aforementioned in sub-clause (A) (i)
and A (ii). This Para mentions both labour component and material
component and, therefore, it could not be said that the ceiling applied
to labour component because the ceiling clause appeared after sub-
clause A (ii). Read as a whole, the proviso covered both labour
component and material component.
VI. Escalation clause means a clause which takes care of the rise and fall
in price but the parties can always agree that the contractor would not
be entitled to any escalation whatsoever or that the contractor would
be entitled to escalation limited to a certain amount or a certain
percentage of the contract. Such a stipulation is not illegal or
inconsistent. The contractor continues to be under a statutory
obligation to pay to its workers minimum wages as fixed by the State
Government from time to time. However, the liability of the
respondent to compensate the appellant/contractor for such payment,
in view of the ceiling clause, is limited to 5% of the contract value.
Clause 3 of the agreement is not a ceiling on the statute. It is a ceiling
on the right of the contractor to get an escalation on account of the
increase in the prices of material or wages statutorily, or otherwise.
The ceiling clause does not say that the contractor would not pay to its
workers more than 5% of the wages prevalent on the date of opening
of the price bids. For such reasons, it could not be said that the ceiling
clause or the interpretation thereto as given by the respondent was
opposed to all norms of law and equity and was illegal and void.
VII. The decision of the Supreme Court in Tarapore & Co. v. Cochin
Shipyard Ltd. Cochin, (1984) 2 SCC 680 and of the High Court of
Delhi in Arvind Khanna v. International Airport Authority of India,
(1994) 31 DRJ 374, as relied upon by the appellant/claimant, do not
apply to the facts of the present case. In these cases, there was no
express clause providing for a ceiling on the escalation or
compensation for increase in price. The contract, in these cases,
unlike the present one was silent about any escalation.
6. The appellant filed objections to the aforesaid award, under
Section 30 of the Act, before the Ld. Single Judge. The Ld. Single Judge
upon examination of the facts, along with the afore-stated observations and
findings of the arbitral tribunal vide the impugned order dated 22.09.2008
dismissed the objections as meritless.
7. In addition to the afore-stated reasons, as cited by the arbitrator,
Learned Single Judge observed that the appellant/objector cannot on the one
hand rely upon Clause 3 for the purpose of computing escalation amount
and, on the other hand, claim that the ceiling limit of 5% prescribed in the
said clause would not be applicable. The said clause has to be read as a
whole and cannot be bifurcated into two parts.
8. Learned Single Judge also examined the various decisions
relied upon by the appellant/objector, some of which have also been cited
before us, and observed that where the contract is silent on payment of
compensation on account of enhanced minimum wages, an arbitrator can
certainly examine the implied terms and on applying principles of equity
award compensation. The Ld. Single Judge upheld the distinction drawn by
the arbitrator in the facts of the present case with that of the judgments relied
upon the appellant/objector inasmuch as the cited cases did not contain a
specific clause prohibiting or placing a maximum cap on award of escalation
in costs of material and labour, as in the present case.
9. Aggrieved by the aforesaid order, the appellants herein have
preferred the present appeal.
10. Mr. Sameer Parekh, learned counsel for the appellant, has
argued that in view of the extraordinary increase in the minimum wages
payable to the workers, it would not be reasonable to apply the ceiling
clause of 5% in the present case. Placing reliance on the judgment of the
Supreme Court in Tarapore & Co. (supra), it is submitted that the ground
position with regards to execution of the contract had changed drastically
beyond anybody‟s contemplation and as such there was an implied term for
reimbursement for any extraordinary changes under the contract.
Reference is made to Clause 12 of the Contract which entitles the Contractor
to seek variation in the contract price.
11. It is argued that payment of the statutory increase in minimum
wages cannot be barred under the contract. The appellant would be entitled
to the said increase de hors the contract. Relying upon the judgment of the
Andhra Pradesh High Court in T. A. Choudhary v. State of A.P. & Ors.,
2004 (3) ALD 357, he submits that such a ceiling clause is against public
policy and, as such, is bad in law.
12. Placing reliance on the Judgment of the Supreme Court in Food
Corporation of India v. A.M. Ahmed & Co., (2006) 13 SCC 779, it is
further argued that even where there is a specific clause barring payments
other than the rates agreed to between the parties under the contract, the
contractor would be entitled to payment for escalation charges.
13. It is further submitted that the term „items‟ occurring in clause
3 of the contract does not include the word „labour‟ and as such the
escalation for labour component would not be subject to the ceiling limit of
5 %, which was in relation to the escalation for the materials procured by the
appellant/contractor. Mr. Parekh further contends that the
appellant/contractor, as per Article 34 of the contract, is obligated to comply
with the statutory obligations, which includes statutory increase in the
minimum wages payable to the workers and, as such, would be entitled for
the escalation of labour component in case of statutory increase in minimum
wages. To fortify his submission he places reliance on the judgment of this
Court in Krishna Kumar Madhok v. Union of India & Ors., (1980) ILR
NULL 164.
14. On the hand, Mr. Sethi, Learned Senior counsel for the
Respondent, while putting forth and relying upon the aforementioned
reasoning given by the Arbitral tribunal and Learned Single Judge in
rejecting the claim of the appellant herein, submits that a perusal of the
tender submitted by the appellant on 15.05.1985 clearly suggested that the
appellant had gone through each and every term of the tender/contract. It is
submitted that after going through the same, the appellant had suggested
certain changes in the contract vide letters dated 15.05.1985 and 16.05.1985,
which, thereafter, came to be formalised, awarded to and accepted by- the
appellant on 20.07.1985. Thus, the appellant entered into the contract with
open eyes, being well aware of the 5% ceiling clause in escalation of costs.
15. It is further submitted that the value of the contract had been
revised to Rs. 3.5 Crores and the date of completion of the work was also
extended to 30.04.1987. Yet the appellant contractor did not raise any
objection. It is submitted that the argument about Clause 12 of the Contract
was not raised at any stage, i.e. either during the pendency of the contract;
during the arbitration, or, even before the Ld. Single Judge. The appellant
cannot be heard, at this juncture to claim that the change in the terms was
fundamental or the ceiling was illegal or against public policy. It is also
submitted that Clause 12 has no application in the facts of the case.
16. Mr. Sethi submits that, even otherwise, in view of the express
stipulation/ceiling with regards to the claim of the contractor for escalation
charges, the appellant contractor cannot claim any amount de hors the
contract. To bolster his submission, Mr Sethi has sought to place reliance on
the judgment of the Supreme Court in the cases of Continental
Construction Co. Ltd. v. State of Madhya Pradesh, AIR 1988 SC 1166, and
New India Civil Erectors (P.) Ltd. v. Oil and Natural Gas Corporation,
AIR 1997 SC 1980.
17. Having perused the award and the impugned judgment of the
Ld. Single Judge and considered the rival submissions, we are of the view
that there is no merit in the present appeal and the same is liable to be
dismissed. It is clear from a bare perusal of the impugned award that the
learned Arbitrator has, in depth, examined the contractual terms and given
his interpretation to the same. The interpretation given by the learned
Arbitrator cannot be said to be perverse or contrary to the terms of the
contract. It is a plausible interpretation. The Court while hearing objections
to the Award does not sit in appeal over the Award and would not interfere
with an Award if it is founded upon a plausible interpretation of the
contractual terms. The reasoning adopted by the learned Arbitrator which
has found favour with the learned Single Judge as well, cannot be said to be
misdirected or to constitute a patent illegality in the award. \
18. The judgment of the Supreme Court in Tarapore & Co. (supra)
relied upon by the appellant has been distinguished by the learned Arbitrator
by observing that in that case, there was no express clause providing for a
ceiling on the escalation or compensation payable to the contractor on
account of increase in prices during the continuation of the contract,
whereas, in the present case the contract expressly limits the right of
contractor to claim escalation to 5% of the contract value. In fact, the
respondents have relied upon Continental Construction Co. Ltd. (supra)
wherein the Supreme Court had the occasion to distinguish the judgment in
Tarapore & Co. (supra), in the aforesaid terms. Para 10 of the judgment in
Continental Construction Co. Ltd. (supra) reads as follows:
"10. The question about specific reference on a question of law
was examined by this Court recently in the case of Tarapore
and Company v. Cochin Shipyard Ltd., Cochin [(1984) 2 SCC
680] . There it was observed that if the agreed fact situation, on
the basis of which agreement was entered into, ceases to exist,
the agreement to that extent would become otiose. If rate
initially quoted by the contractor became irrelevant due to
subsequent price escalation, it was held in that case that
contractor's claim for compensation for the excess expenditure
incurred due to the price rise could not be turned down on
ground of absence of price escalation clause in that regard in
the contract. Agreement as a whole has to be read. Reliance
was placed very heavily on this decision on behalf of the
appellant before us. It has to be borne in mind that in the
instant case there are specific clauses referred to hereinbefore
which barred consideration of extra claims in the event of
price escalation. That was not so in Tarapore and Company
case [(1984) 2 SCC 680]. That made all the difference. The
basis of bargain between the parties in both these two cases
were entirely different." (emphasis supplied)
19. For the same reason, the judgments in Food Corporation of
India (supra) and Arvind Khanna (supra) have no application in the facts
and circumstances of the present case.
20. Reliance placed on Krishan Kumar Madhok (supra) also
appears to be misplaced. In that case, the term of the contract stated that the
Contractor shall have no claim whatsoever, if on account of any "local
regulations or otherwise", he is required to pay wages in excess of the fair
wages shown in the schedule of fair wages. The increase in the fair wages
in that case was not affected by any "local regulation", but by the
notification issued by the Central Government. In these circumstances, the
claim of the Contractor was allowed as the fair wages were effected not by a
local regulation. The word, "otherwise" employed in the tender condition
was interpreted ejusdem generis with the words, "local regulation", to mean
increase in wages due to local causes. The said case, therefore, has no
application in the facts of the present case.
21. The appellant has lastly relied upon the judgment of the Andhra
Pradesh High Court in T.A.Chaudhary (supra). It was the case of the
Contractor that on account of the delay on the part of the department, in
handing over the site completely, the work was held up and consequently
the time for completion of the work was extended from time to time on
account of which the contractor was made to pay escalated rates. The
Department, on the other hand, resisted the claim for compensation by
placing reliance upon Clause 59 of the Contract which, in effect, provided
that no claim for compensation on account of delays or hindrances to the
work from any acts whatsoever shall lie, except as defined in the contract.
Reasonable extension of time was to be allowed by the Executive
Engineer/office competent to sanction extension for unavoidable delays
which may result from causes beyond the control of the Contractor. The
Andhra Pradesh High Court after taking into account the provisions of the
Contract Act and in particular Sections 23 and 73 thereof opined that no
agreement can overwrite the statutory provisions and such an agreement
could be void ab initio. The Court further observed that in the instant case,
the contractor was expected to commence the work only after the site was
handed over to it by the Department. Referring to Section 54 of the
Contract Act, it was held that the Department would be liable to compensate
the contractor for any loss sustained by the latter on account of non-
performance of the contract. In such circumstances, it was held that clause
59 cannot come in the way, which would apply only for delays which were
beyond the control of the contractor - which did not include delays on the
part of the Department. It was held that escalation of prices is not covered
by clause 59 and what is contemplated under clause 59 is only compensation
for the delays committed and it never prohibited the contractor from
claiming the escalation charges.
22. In our view, the aforesaid decision has no application in the
facts of the present case. Firstly, the present is not a case which prohibits
the grant of compensation to the appellant for any wrong doing, act or
omission of the respondent. Secondly, the contract does provide for
escalation to the extent of 5% of the contract value. What it does is to
prevent any further escalation. The imposition of limitation on the amount of
escalation that the Contractor may claim by a contractual term cannot be
said to be a term which offends public policy or to be forbidden by law. In
contractual matters, the promisee may desire that the promisor should make
a definite promise with regard to the costs to be incurred by the promisee for
getting the work done. Such kind of contracts are not unknown to law.
Fixed price or lump sum contracts are commonplace. It is for the promisor
to make his own estimation and evaluation on the basis of his experience
and to make his offer on that basis, keeping in view the contractual terms.
As observed by the Ld. Arbitrator, it is not that the Contractor must make
profit in every contract. In business, a party may make profit in some
contracts while incur losses in others. These are business risks and hazards
which every businessman has to face. Moreover, the appellant, as observed
by the Ld. Arbitrator failed to show that it had actually incurred an overall
loss on account of escalation in labour prices. This decision was rendered
on the interpretation of the contractual clause 59 in that case, which is not
the same as clause 3 in the present contract.
23. The ceiling of 5% increase in the wages as provided for in the
contract does not mandate that the appellant shall not make payment of
wages beyond the increase of 5%. It only limits the right of the appellant to
recover from the respondent any increase in wages statutorily made beyond
the extent of 5%. The contractual clause in question, therefore, cannot be
said to be contrary to any statutory provision or void on that account.
24. For all the aforesaid reasons, we find no merit in the present
appeal and dismiss the same leaving, the parties to bear their own costs.
(VIPIN SANGHI)
JUDGE
(SANJAY KISHAN KAUL)
JUDGE
DECEMBER 05, 2012
bsr/sl
