M/S. Hindustan Construction Co. Ltd. vs National Hydro Electric Power ... on 11 February, 2010

[Cites 3, Cited by 1]

Delhi High Court

M/S. Hindustan Construction Co. Ltd. vs National Hydro Electric Power ... on 11 February, 2010

1. This judgment will dispose of eight connected matters as given in the heading. Arguments have been addressed in CS(OS) 554A/1997, which case is CS(OS) 554-A/1997 and CS(OS) 129A,1110A, 1111A, 156A, 948A,949A, 1192A OF 1997 Page 3 taken as the lead case. The facts stated therein are referred to, and reference is not made to the individual facts of each case because the facts and issues in all these cases are similar.

I.A.        /1997 (to be numbered-objections to an Award)
and CS(OS) 554A/1997

2. These are objections filed under Sections 30 and 33 of the Arbitration Act, 1940. The objections have to be treated as an Interim Application in the suit. The I.A. has not been numbered. Let this I.A. be numbered by the Registry.

3. A contract was entered into between the petitioner/objector/claimant/ contractor with the respondent/non-objector/owner for construction of a Power House Complex, Switch Yard Power Tunnel, Surge Shaft and Pressure Shaft at Chamera Hydro Electric Project, Himachal Pradesh. The contract is dated 19.02.1986. Disputes arose between the parties with regard to the issue of entitlement of mark-up percentage on the non-tendered extra items and deviation items of work done by the objector/contractor. Being non-tendered items marking up was to be done on the cost of such works because a payment for work done by a contractor includes, besides the actual cost of such work, the elements of overheads; supervision charges and other costs for carrying out such works as also the contractor‟s profit margin thereto. The rationale for marking up is that in the tendered work all components are in built, but, for extra work obviously there being no tendered price, therefore while calculating CS(OS) 554-A/1997 and CS(OS) 129A,1110A, 1111A, 156A, 948A,949A, 1192A OF 1997 Page 4 the consideration payable for such work there has to be a marking up on the cost of the work. The issue which arose was whether the 25% point mark-up has to be applied to the value of extra works to the total cost of material used in that item or the said cost cannot include the cost of material supplied by the respondent/owner to be incorporated in the works. By the impugned Award, the learned Arbitrator has accepted the stand of the respondent herein and has dismissed the claims of the contractor for mark-up on the total value of the work and has restricted the mark-up to the total value of the work minus the cost of material supplied by the respondent to the petitioner.

4. The conclusions given by the Arbitrator, forming the basis of the Award are as under:

" On the basis of the terms of the contract and the material placed before me, I have come to the conclusion:

(i) that the supply of materials emanates from two different sources of supply viz., the Corporation and the Contractor;

(ii) that the Corporation makes the supply of materials in fulfilment of its promise and obligation under the contract to make such materials available for the propose of the execution of work by the Contractor as mentioned in Schedule B and Annexure A to the contract;

(iii) that the contractor makes the supply of all materials except those to be supplied by the Corporation in terms of Schedule B and Annexure A, for the purpose of fulfilling its promise and obligation to execute the work;

(iv) that the materials required to be supplied by the Corporation under the contract fall in a category separate from the category in which the materials supplied by the Contractor fall.

(v) that materials supplied by the Corporation cannot be deemed to be materials required "to be supplied by the Contractor" and remain outside the purview of the components comprising the actual analysed cost mentioned in Clause 18.2(iii);

(vi) the value of materials supplied by the Corporation under Schedule B either at the market rate or at the rates mentioned in Schedule B, is not to be included in the total cost under G.C. Clause 18.2(iii) and ;

(vii) that the cost of material supplied by the Corporation not being a component of the total cost payable under G.C. Clause 18.2(iii) is not to be taken CS(OS) 554-A/1997 and CS(OS) 129A,1110A, 1111A, 156A, 948A,949A, 1192A OF 1997 Page 5 into account for determining the additional amount payable to the contractor in terms of Schedule D."

In view of the aforesaid findings/conclusions/reasoning as given by the Arbitrator, he has held as under:

" On the basis of the aforesaid findings, it is held that the Contractor is not entitled to get payment of the additional 25% under Schedule D to cover his overheads, profits, supervision and other charges on the cost of materials supplied by the Corporation for the work under G.C. Clause 18.2(iii) of the Contract.

The claim accordingly fails and is dismissed. Parties will bear their own costs."

5. The scope for hearing of objections under the provisions of Sections 30 and 33 of the Arbitration Act, 1940 is sufficiently pronounced upon. The law is that if an Arbitrator mis-conducts himself or the proceedings, the Court is entitled to, and in fact duty bound, to interfere with the Award. An Arbitrator misconducts himself and the proceedings if he does not consider a vital document, and which will surely include to mean non-consideration of relevant portions of the document. The Supreme Court in the judgment of K.P Poulose. vs. State of Kerala, AIR 1975 SC 1259 has held that an Arbitrator mis-conducts himself and the proceedings when he ignores a vital document. In my opinion, the Award in the present case is liable to be interfered with, inter-alia, on account of the Arbitrator failing to apply and consider the following relevant clauses of the contract:-

"18.1 The Engineer-in-Charge shall have powers to make any deviations in the original specifications or drawings or designs of the works or any part thereof that are, in his opinion, necessary at the time of or during the course of execution of the works. For the aforesaid purpose or for any other reason, if it shall, in the opinion of the Engineer-in-Charge, be desirable, he shall also have the powers to make Deviations, such as (i) CS(OS) 554-A/1997 and CS(OS) 129A,1110A, 1111A, 156A, 948A,949A, 1192A OF 1997 Page 6 Variations (ii) Extra (iii) Additions/Omissions and (iv) Alterations or Substitutions of any kind. No such Deviations in the specifications or drawings or designs or Schedule of Quantities, as aforesaid, shall in any way vitiate or invalidate the contract and any such Deviations which the contractor may be directed to do shall form integral part of the contract as if originally provided therein and the contractor shall carry out the same on the same conditions in all respects on which he agreed to do the works under the contract."

"Schedule "B"

"Issue of Departmental Materials to the Contractor (Refer Clause 23 of General Conditions of Contract and Special Condition No.4).

-------------------------------------------------------------------------------------------- Materials for the work which will be issued to the contractor, cost whereof will be recovered from the contractor at the rates mentioned below:-"

--------------------------------------------------------------------------------------------

       Sl. Particulars         Unit              All inclusive              Place of
       No. Materials                             recovery rate              Issue
                                                 (RS.)

------------------------------------------------------------------------------------------- 1 2 3 4 5

--------------------------------------------------------------------------------------------"

(Emphasis supplied) "23.4 For the materials listed in Schedule „B‟, which the Corporation has agreed to supply to the contractor for the work under the contract, the contractors shall, before 90(ninety) days of his requirement in accordance with the agreed phased programme of the construction of work(s), send a requisition in writing to the Engineer-in-Charge. The issue of such materials shall be subject to the following terms and conditions:

(i) All materials issued by the Corporation to the Contractor for use in the work shall vests in the Corporation and the contractor shall hold all such items of materials as mere custodian-in trust on behalf of the Engineer-in- Charge.

(ii) All costs, such as loading, transportation, unloading, storage etc. whatsoever as may be required:

(a) From the place/period of issue/supply by the Corporation to the ultimate use for/in the works and/or

(b) in connection with the return of material by the contractor to the Corporation stores, wherever necessary under the provisions of the contract, shall be borne by the contractor.

(iii) The contractor shall maintain an account of receipt and use of materials issued by the Corporation each day and submit the same monthly to the Engineer-in-Charge in the form as may be prescribed for the purpose of check and accounting. The contractor shall also, from time to time render proper CS(OS) 554-A/1997 and CS(OS) 129A,1110A, 1111A, 156A, 948A,949A, 1192A OF 1997 Page 7 account of ali materials issued by the Corporation. If the contractor fails to do so as aforesaid, no further material shall be issued to him and he shall be held responsible for any delay in the execution of work which may occur on this account.

(iv) The godowns/stores of the contractor for storing the material like cement, etc. issued by the corporation shall be provided with two locks on each door. The key of one lock of each door shall remain with the Engineer-

in-Charge or his representative and the other with the contractor‟s authorized agent at the site so that material is removed from the godowns/stores only according to the daily requirements with the acknowledge of both the parties.

(v) CEMENT:

(a) Cement will be supplied to the contractor in bags as received from the suppliers or by weight at the rates specified in Schedule „B‟ and will be consumed in work as per mix-design approved by the Engineer-in-Charge.

(b) In case cement is issued by bags as received from the suppliers and consumed by weight, an allowance of 5% (five percent) of the quantity of cement issued will be allowed to account for the difference between the quantity issued and that consumed. Alternatively, if cement is supplied by the Corporation by weight and also consumed by weight, an allowance of 2% (two percent) of the quantity issued will be allowed to account for the difference between the quantity issued and that consumed.

(c) The allowance as mentioned in (b) above shall be considered as inclusive of all wastages on account of handling, rehandling, transportation, storage or any other account whatsoever as may be involved at any stage and such allowance shall be to the contractor‟s account. The recovery in this regard shall be affected by the Engineer-in-Charge from the monthly running bills at the rate as specified in Schedule „B‟. However, if the limit of allowance in cement exceed the aforesaid permissible limits, the recovery shall be effected for such excess quantity at double the rate indicated in Schedule „B‟ by the Engineer-in-Charge from the amount due to the contractor.

(vi) STEEL:

(a) Reinforcement steel and structural steel will be supplied to the contractor on sectional weight basis (based on linear measurements multiplied by corresponding unit weights) at the rates specified in Schedule „B‟. The same shall be accounted for on sectional weight basis while working out consumption.

(b) In respect of reinforcement steel, cut pieces of 2 metre in length or more shall be returned by the contractor to the Corporation. For calculation of actual consumption of reinforcement laid at site (for purposes of measurements and payments) according to the bar-bending schedules, including lappages as authorised by the Engineer-in-Charge, shall be taken into account. In addition to the above, an allowance of 2% for the quantity of reinforcement steel shall be considered as extra for chairs, pins and spacers, including cut pieces (non-returnable) and to cover wastes, if any for the purpose of accounting only. The contractor shall also make payment for this 2% as aforesaid to the Corporation at the rates specified in Schedule „B‟ and CS(OS) 554-A/1997 and CS(OS) 129A,1110A, 1111A, 156A, 948A,949A, 1192A OF 1997 Page 8 the Engineer-in-Charge shall make recovery on this account from the Contractor‟s bills or other dues. In case there is wastage of more than the permissible limit of 2% as aforesaid, the contractor shall pay to the Corporation for such excess at double the issue rate specified in Schedule „B‟ and the Engineer-in-Charge shall recover the amount on this account from the contractor.

(c) Structural steel shall be used by the Contractor most economically and strictly in accordance with the construction drawing or written instruction of the Engineer-in-Charge. For the purpose of accounting, the contractor shall be allowed 2% (two percent) of the quantity of structural steel supplied to his as extra to cover any wastage at his cost, at the rates specified in Schedule „B‟. In case the difference between the quantity supplied to the contractor and account of consumption rendered exceeds 2%, then the contractor shall pay to the Corporation in respect of such excess at double the rate(s) as specified in Schedule „B‟ and recovery thereof on this account shall be made by the Engineer-in-Charge from the Contractor.

(vii) Such materials shall be supplied for the purpose of the Contract only and the value of materials so supplied at the rates specified in the aforesaid schedule shall be set off or deducted, as and when materials are consumed in items of work for which payment is being made to the contractor, from any sums then due or which may thereafter become due to the contractor under the contract. At the time of submission of bills, the Contractor shall properly account for the materials issued to him to the satisfaction of the Engineer-in-Charge and certify that balance of materials supplied is available at site.

(viii) Explosive, Detonators will be issued to the Contractor from the Corporation magazine only after the contractor has constructed the magazines or has arranged portable magazine, obtained licence for storage of same, arranged licensed blaster and complied with all the relevant provisions of Law such as Indian Explosive Act, 1940 with amendments thereto.

(ix) Materials rendered surplus shall, on completion of the works or on foreclosure of work or cancellation of contract shall be returned by the contractor at his expense at the place from where the same was issued by the Corporation. If the Contractor is advised to return such materials at a place other than from where it was issued, the contractor shall deliver the material accordingly and in that case, the Corporation shall bear the extra charges, if any, on this account. Surplus stores and /or materials returned by the Contractor will be credited to him at a price not exceeding that at which the stores and materials were originally issued to him but due consideration shall be given to and allowance claimed by Corporation in respect of any depreciation or damage suffered by the stores and /or materials whilst in the custody of the contractor.

(x) On completion of work/foreclosure/cancellation the contractor shall return forthwith all the materials issued to him by the Corporation lying in his possession/custody, failing which the Engineer-in-Charge shall be at liberty CS(OS) 554-A/1997 and CS(OS) 129A,1110A, 1111A, 156A, 948A,949A, 1192A OF 1997 Page 9 to effect recovery at double the rates specified in Schedule „B‟ for the aforesaid materials."

6. Keeping in mind the aforesaid clauses, particularly the Italicised and underlined portions, let us turn to the clause which has been interpreted by the Arbitrator, and the interpretation of which is the bone of contention between the parties, being Clause 18.2(iii), and which reads as under:

"18.2(iii) Provided where some extra items and /or analogus 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 analysed 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."

The crux of the matter and the real dispute between the parties turns on the expression "material to be supplied by the contractor" in this Clause 18.2(iii).

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......."

CS(OS) 554-A/1997 and CS(OS) 129A,1110A, 1111A, 156A, 948A,949A, 1192A OF 1997 Page 10 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"

CS(OS) 554-A/1997 and CS(OS) 129A,1110A, 1111A, 156A, 948A,949A, 1192A OF 1997 Page 11 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 CS(OS) 554-A/1997 and CS(OS) 129A,1110A, 1111A, 156A, 948A,949A, 1192A OF 1997 Page 12 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 works 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, CS(OS) 554-A/1997 and CS(OS) 129A,1110A, 1111A, 156A, 948A,949A, 1192A OF 1997 Page 13 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 item 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 CS(OS) 554-A/1997 and CS(OS) 129A,1110A, 1111A, 156A, 948A,949A, 1192A OF 1997 Page 14 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 mis-

conducting himself and the proceedings.

CS(OS) 554-A/1997 and CS(OS) 129A,1110A, 1111A, 156A, 948A,949A, 1192A OF 1997 Page 15

10. It was canvassed by Mr. Kailash Vasdev, learned senior counsel for the respondent that the interpretation which is adopted by the Arbitrator cannot be interfered with by this Court while hearing objections under Sections 30 and 33 of the Arbitration Act, 1940. No doubt, while hearing objections under Sections 30 and 33 of the Arbitration Act is well settled that this Court will not interfere when there is one reasonable interpretation, however, when an interpretation is given by an Arbitrator ignoring a document, in that he ignores the relevant and applicable clauses of a contract, then, the Arbitrator is guilty of clearly mis- conducting himself and the proceedings for this Court to interfere with the Award under Sections 30 and 33 as held by the Supreme Court in the case of K.P. Poulose referred to by me in the very beginning of that judgment. Further, by ignoring the relevant applicable clauses there is caused clear perversity of interpretation and conclusions entitling this Court to interfere as per the law as applicable under Sections 30 and 33. In Security Printing & Minting Corp. Vs. Gandhi Industrial Corp. 2007(13)SCC 236, under the 1996 Act it has been held that a Court can interfere with the Award when there is a perverse interpretation of a document by an Arbitrator and which will apply equally to the 1940 Act. In view of the above, I accept the objections to the Award and which is therefore set aside.

11. Since I am only exercising powers under Sections 30 and 33 for setting aside of the Award, and not sitting as an Appellate Court, it is necessary, CS(OS) 554-A/1997 and CS(OS) 129A,1110A, 1111A, 156A, 948A,949A, 1192A OF 1997 Page 16 therefore, that the present matter be remanded back to the Arbitrator for determination of the claims of the petitioner/objector on merits in accordance with law, however, keeping in mind the interpretation of Clause 18.2(iii) and other observations as given by me above.

12. In view of the above observations, the I.A. and the suit stand disposed of. In the facts and circumstances, however, I leave the parties to bear their own costs.

13. In view of the above judgment in CS(OS) 554-A/1997, Awards in the cases CS(OS) Nos. 129A/1997, I.A. 7861/1997 and CS(OS) 1110A/1997, CS(OS) 1111A/1997, I.A. 5040/1997 and CS(OS) 156A/1997, I.A. 5220/1997 and CS(OS) 948A/1997, CS(OS) 949A/1997 & CS(OS) 1192A/1997 are also set aside and the matters are remanded back to the Arbitrator for passing of a fresh Award on merits in accordance with law and in terms of interpretation of Clause 18.2(iii) of the contract and the other observations given by me above. In the facts and circumstances, however, I leave the parties to bear their own costs with respect to these matters also.

VALMIKI J.MEHTA, J February 11, 2010 dkg CS(OS) 554-A/1997 and CS(OS) 129A,1110A, 1111A, 156A, 948A,949A, 1192A OF 1997 Page 17

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