Union of India (Ministry of Railways) v. M/S J. Sons Engineering Corporation Ltd.

10. The learned Arbitrator framed six issues.

11. On issue No.1, which relates to the respondent‟s failure to get QAP approved from the RDSO upto May 10, 2004. The learned Arbitrator was of the following view:- “On appreciating the matter, I find that the fabrication of the Girders was to be done as per RDSO drawings. It was to conform to IRS Code of Welded bridges. For maintaining and ensuring quality, the RDSO was required to do inspection at various stages. As per conditions of contract, the Respondents could have entrusted this work to RITES. But in this contract this work was given to RDSO. Obviously, the Railways should have been concerned about the QAP for the safety of the running trains. But it appears that no efforts were made by the Respondents to prepare the QAP in consultation with the RDSO although admittedly as per the Respondents own admission the Claimant was ready with jigs, fixtures and raw material inspection on or before 16.12.2003. It cannot be denied that Quality Assurance Plan for inspection, testing and approval were the domain of the Employer for maintaining the Quality of the work. The Respondents in this case did not rise to the occasion and failed to implement the QAP for inspection & testing by RDSO as per contract conditions and Code for Welded Bridges. It was for the Respondents to ensure the quality of the work by arranging stage-wise inspection and testing by RDSO for which RDSO had to approve the action plan. The Respondents failed to prepare this plan which should have been their priority. The Contractor could not have started the fabrication of the girders without inspection of the preparatory work and 1st stage inspection by RDSO. He prepared himself and offered for such inspection but the Respondents could not arrange this inspection as RDSO did not oblige the Respondents to inspect the work done by the Contractor without 1st approving the QAP. No further work of fabrication by the Contractor was possible without 1st stage inspection by RDSO. No fault can, therefore, be found with the Claimant for this.”

12. Based on the finding on issue No.1, it was the finding of the learned Arbitrator that the petitioners were not justified in cancelling the contract agreement on May 10, 2004. In fact, the learned Sole Arbitrator on issue No.3 had also concluded that the cancellation of contract dated May 10, 2004 also suffered from procedural impropriety inasmuch as the show cause notice dated May 07, 2004 having received by the respondent on May 11, 2004, whereas the contract was cancelled on May 10, 2004, the petitioners did not allow the respondent to even reply to the show cause notice before issuing the impugned order dated May 10, 2004. Hence, there was a breach of procedure.

13. Based on the aforesaid conclusion, the learned Arbitrator allowed the claim No. 2 which is relatable to issue No. 4(b), which was a claim for an amount of Rs. 10 lakhs for expenditure incurred on additional deployment of resources for completion of work. The learned Arbitrator was of the view that the respondent had definitely done preparatory work and was ready for first day inspection i.e. jigs, fixtures and raw materials as is evident from the petitioners‟ letters dated December 16, 2003 and March 24, 2004. According to him, as it has been held by him in the award on claim No. 1 that the petitioners were never justified in cancelling the contract agreement of the respondent and by drawing an inference that the respondent may have made investments, and it must have suffered loss in non utilization of these items had granted Rs. 2 lakhs, and against claim No. 3, the learned Arbitrator had contemplated to earn 15% profit but had claimed a loss of profit of 10% only and the contract agreement was for an amount of Rs.78,70,150/- and the petitioners were not justified in cancelling the contract, he had awarded 10% of the total contract value as against the loss of profit i.e. Rs.7,87,000/-.

14. Similarly, the claim No. 5 which relates to refund of security of Rs. 50,000/-, the Arbitrator on a finding that the cancellation of the contract has been held to be illegal, has granted the claim of Rs. 50,000/-.

15. Insofar as the counter claim is concerned, the Arbitrator was of the following view: “In the evidence, to substantiate their counter claim, the respondents have not filed the details of actual cost of extra cost incurred by them in getting the balance work done through third agency, the copy of such contract agreement, comparative statement and certificate of the Engineer-in-Chief certifying the extra cost has also not been filed before me. The counter claim no. 1 is not sustainable on this ground alone. Moreover, it has already been concluded hereinabove that the contract failed only because the respondents could not fulfil their precedent obligations and they cancelled the contract agreement in an unjustified way. The impugned order dated 10.05.2004 cancelling the contract also suffers from procedural impropriety. As per this, the counter claim no. 1 is also not sustained in view of the law as laid dowb bv the Apex Court in the case of K.C.Skaraia Supra. The respondents have no reason to recover any amount from the claimant, as risk and cost expenses or any sort of damages from the claimant in this respect. The claimant‟s claim No. 6 is, therefore, sustained and the respondents counter claim No. 1 for the recovery of Rs.37,62,350.00 is rejected. I B. Lal, Sole Arbitrator, therefore, direct the respondents (Union of India & Others) that they are not entitled to recover Rs.37,62,350.00 or any other amount as risk and cost expenses or any sort of damages from the claimant in this respect of this contract”.

16. Mr. A.K.Singh, learned counsel appearing for the petitioners, has after taking me through the facts as noted above, would submit that the claims raised by the respondents herein were not arbitrable being “excepted matters” in view of clauses 62, 63 and 64(i) of the General Conditions of Contract. Apart from that, he would state that the finding of the learned Arbitrator is totally perverse. According to him, it was the respondent, who had failed to discharge its obligations in getting the approval from RDSO. In this regard, he would state that even though, the contract had commenced from June 10, 2003, it was only on September 26, 2003 that the respondent had proposed to engage RDSO for doing the inspection of the girders in terms of the welded bridge code, para 27. Further, he would state that the revised QAP which was supposed to be prepared by the respondent has not been prepared despite various communications from petitioner No. 5. He would justify the termination of the contract. He would state that there was no illegality in termination of the contract. He would state, instead of entertaining the claims of the respondent, the learned Arbitrator should have granted the counter claim of the petitioners. He would rely upon the following judgments of this Court:

1. NTPC Ltd. Vs. Deconar Services Pvt. Ltd., 2010 (5) AD (Delhi) 698

2. Videsh Samachar Nigam Ltd. Vs. Ess Kay Furnishers, 2009 (6) R.A.J. 1

17. On the other hand, Mr.Raman Kapoor, learned Senior Counsel appearing for the respondent would at the outset, submit, by drawing my attention to the scope of judicial review in a matter of this nature where objections have been filed under Section 34 of the Arbitration and Conciliation Act, 1996 (Act, in short) by referring to the judgment of this Court reported as (2004) 3 Arb.L.R. 548 (Delhi) (DB), Delhi Development Authority Vs. Bhagat Construction Co. (P) Ltd. and Anr., to contend that it is a settled position of law that on a decision rendered by the Arbitrator, this Court will not substitute its own view even if this Court comes to a different conclusion unless the decision of the Arbitrator is manifestly perverse or has been arrived at on the basis of the wrong application of law. He would also submit that the petitioners are estopped/precluded from taking a plea of “excepted matters” in terms of clause 62, 63 and 64 of the General Conditions of Contract as no such plea was ever advanced before the Arbitrator. He would state that the appropriate remedy for the petitioners was to file an application under Section 16 of the Act. In the absence of any such application, the Arbitrator proceeded on a premise that he had the jurisdiction to decide the claims. That apart, he would also rely upon the judgment of the Supreme Court reported as 2008 (12) SCALE, Bharat Sanchar Nigam Ltd. and Anr. Vs. Motorola India Pvt. Ltd., wherein, according to him, the Supreme Court has held, a stipulation of a similar nature as existed in clause 63 of the General Conditions of the Contract, whereby any dispute decided by the Railways is final and cannot be challenged, has been held to be in violation of Section 28 and under Section 74 of the Indian Contract Act. In other words, it is his case that clause 63 which stipulates that the matters which have been decided by the Railways on the contractor‟s representation relating to clauses 8, 18, 22(5), 39, 43(2), 45(A), 55, 55A(5), 57, 57A, 61(1), 61(2) and 62(I) to (XIII) (B) of General Conditions of Contract would be deemed to be „excepted matters‟ which will stand specifically excluded from the purview of the arbitration clause and could not have been referred to arbitration, as void. He has drawn my attention to the reply filed by the petitioners before the Arbitrator wherein, according to him, despite taking an objection, such a plea was not urged before the learned Arbitrator. In fact, no issue related to this objection was framed. On merit, it was his contention that the delay in execution of the contract was attributable to the petitioners. In that regard, he would state the Letter of Acceptance having been given on June 10, 2003, it was only on August 25, 2003, the drawings could be collected from the office of the petitioner No. 5. Immediately, thereafter, the QAP was prepared and sent to RDSO on September 25, 2003. A copy of the letter was sent to the petitioners with a request to pursue with the RDSO. According to him, the RDSO had informed the respondent that RDSO does not entertain proposal directly and it has to be routed through the Railways. It was only on December 16, 2003 that the Railways could able to send the proposal along with the Quality Assurance Plan to the RDSO. Unfortunately, the objections put forth by RDSO were not communicated by the petitioners to the respondent till March 25, 2004 even thereafter. Vide its communication dated March 25, 2004, the petitioners had sent a copy of the letter, which they had sent to the RDSO. According to Mr. Raman Kapoor, till the issuance of the show cause notice dated April 26, 2004 or for that matter, May 7, 2004, the petitioners had not informed the objections as raised by the RDSO. In other words, there was no occasion for the petitioners to remove the objections as put forth by the RDSO in the QAP. He would also state that the notice dated May 7, 2004 was received on May 11, 2004, after communication dated May 10, 2004 was issued. He would state that keeping in view the aforesaid facts and the limited scope of judicial review, the present petition need to be dismissed.

18. Having considered the submissions made by the learned counsel for the parties, the first and foremost question that would arise for consideration is whether, the claims raised by the respondent are „excepted matters‟ in view of clause 62, 63 and 64.[1] of the General Conditions of Contract. To appreciate the said submission, I reproduce herein the said clauses: “61.(1) Right Of Railway To Determine The Contract: The Railway shall be entitled to determine and terminate the contract at any time should, in the Railway's opinion, the cessation of work becomes necessary owing to paucity of funds or from any other cause whatever, in which case the value of approved materials at site and of work done to date by the Contractor will be paid for in full at the rate specified in the contract. Notice in writing from the Railway of such determination and the reasons therefor shall be conclusive evidence thereof. (2) Payment On Determination Of Contract: Should the contract be determined under sub clause (1) of this clause and the Contractor claims payment for expenditure incurred by him in the expectation of completing the whole of the work, the Railways shall admit and consider such claims as are deemed reasonable and are supported by vouchers to the satisfaction of the Engineer. The Railway's decision on the necessity and propriety of such expenditure shall be final and conclusive. (3) The Contractor shall have no claim to any payment of compensation or otherwise, howsoever on account of any profit or advantage which he might have derived from the execution of the work in full but which he did not derive in consequence of determination of contract.

62. Determination Of Contract Owing To Default Of Contractor: (1) If the Contractor should:

(i) Becomes bankrupt or insolvent, or

(ii) Make an arrangement with of assignment in favour of his creditors, or agree to carry out the contract under a Committee of Inspection of his creditors, or

(iii) Being a Company or Corporation, go into liquidation (other than a voluntary liquidation for the purposes of amalgamation or reconstruction), or (iv) Have an execution levied on his goods or property on the works, or (v) Assign the contract or any part thereof otherwise than as provided in Clause 7 of these Conditions, or (vi) Abandon the contract, or (vii) Persistently disregard the instructions of the Engineer, or contravene any provision of the contract, or (viii) Fail to adhere to the agreed programme of work by a margin of 10% of the stipulated period, or (ix) Fail to remove materials from the site or to pull down and replace work after receiving from the Engineer notice to the effect that the said materials or works have been condemned or rejected under Clause 25 and 27 of these Conditions, or (x) Fail to take steps to employ competent or additional staff and labour as required under Clause 26 of the Conditions, or (xi) Fail to afford the Engineer or Engineer's representative proper facilities for inspecting the works or any part thereof as required under Clause 28 of the Conditions, or (xii) Promise, offer or give any bribe, commission, gift or advantage either himself or through his partner, agent or servant to any officer or employee of the Railway or to any person on his or on their behalf in relation to the execution of this or any other contract with this Railway. (xiii) (A) At any time after the tender relating to the contract, has been signed and submitted by the Contractor, being a partnership firm admit as one of its partners or employee under it or being an incorporated company elect or nominate or allow to act as one of its directors or employee under it in any capacity whatsoever any retired engineer of the gazetted rank or any other retired gazetted officer working before his retirement, whether in the executive or administrative capacity, or whether holding any pensionable post or not, in the Railways for the time being owned and administered by the President of India before the expiry of two years from the date of retirement from the said service of such Engineer or Officer unless such Engineer or Officer has obtained permission from the President of India or any officer duly authorized by him in this behalf to become a partner or a director or to take employment under the contract as the case may be, or (B) Fail to give at the time of submitting the said tender: (a) The correct information as to the date of retirement of such retired engineer or retired officer from the said service, or as to whether any such retired engineer or retired officer was under the employment of the Contractor at the time of submitting the said tender, or (b) The correct information as to such engineers or officers obtaining permission to take employment under the Contractor, or (c) Being a partnership firm, the correct information as to, whether any of its partners was such a retired engineer or a retired officer, or (d) Being in incorporated company, correct information as to whether any of its directors was such a retired engineer or a retired officer, or (e) Being such a retired engineer or retired officer suppress and not disclose at the time of submitting the said tender the fact of his being such a retired engineer or a retired officer or make at the time of submitting the said tender a wrong statement in relation to his obtaining permission to take the contract or if the Contractor be a partnership firm or an incorporated company to be a partner or director of such firm or company as the case may be or to seek employment under the Contractor.

XXX XXX XXX

63. Matters Finally Determined By The Railway: All disputes and differences of any kind whatsoever arising out of or in connection with the contract, whether during the progress of the work or after its completion and whether before or after the determination of the contract, shall be referred by the contractor to the GM and the GM shall, within 120 days after receipt of the contractor‟s representation, make and notify decisions on all matters referred to by the contractor in writing provided that matters for which provision has been made in Clauses 8, 18, 22(5), 39, 43(2), 45(a), 55, 55- A(5), 57, 57A,61(1), 61(2) and 62(1) to (xiii)(B) of Standard General Conditions of Contract or in any Clause of the Special Conditions of the Contract shall be deemed as „excepted matters‟ (matters not arbitrable)and decisions of the Railway authority, thereon shall be final and binding on the contractor; provided further that „excepted matters‟ shall stand specifically excluded from the purview of the Arbitration Clause. 64.(1) Demand For Arbitration: In the event of any dispute or difference between the parties hereto as to the construction or operation of this contract, or the respective rights and liabilities of the parties on any matter in question, dispute or difference on any account or as to the withholding by the Railway of any certificate to which the contractor may claim to be entitled to, or if the Railway fails to make a decision within 120 days, then and in any such case, but except in any of the “excepted matters” referred to in Clause 63 of these Conditions, the contractor, after 120 days but within 180 days of his presenting his final claim on disputed matters shall demand in writing that the dispute or difference be referred to arbitration.

19. The aforesaid clauses have come up for consideration before the Supreme Court in the case reported as (2002) 4 SCC 45, General Manager, Northern Railway and Another Vs. Sarvesh Chopra, wherein, the Supreme Court has held as under:

24. Based on the above conclusion on issue No. 1, the issue No. 2 which relates to the justification in rescinding the contract vide letter dated May 10, 2004, the learned Arbitrator was of the view that the petitioners have not been able to establish any default on the part of the respondent. The stand of the petitioners that the delay was attributable to the respondent, was rejected by the learned Arbitrator. According to him, the petitioners had acted in haste with an intention to cancel the contract. He has also concluded that the stand of the petitioners that they had no obligations under the contract and the obligations were that of the respondent were unfounded. Finally, the learned Arbitrator held that the respondent was not responsible for the delay caused in the completion of work; so the cancellation of the contract was not justified.

25. That on issue No. 3; whether the impugned order dated May 10, 2014 suffers from any procedural impropriety, the learned Arbitrator has held as under: “Obviously, the respondents did not allow the statutory 7 days period to the claimant for reply. The contention of the respondents that the claimant in reply to show cause notice only asked for arbitration does not appears to be correct at this stage. The 7 days show cause notice dated 26.04.2004 was replied by the claimant on 04.05.2004. The respondent issued the 48 hours notice on 07.05.2004. Obviously, the respondent did not have the claimant‟s letter dated 04.05.2004 while issuing 48 hours notice. In this 48 hours notice, no reference has been made to claimant‟s reply dated 04.05.2004. Obviously, the respondent‟s contention is an after thought. The contractor submits that he had invoked the arbitration clause vide his letter dated 04.05.2004 for adjudication of the disputes by an arbitrator who was to be appointed by the respondents themselves. I wonder, whether, the respondents should have proceeded to cancel the contract agreement without getting the dispute adjudicated by an arbitrator as requested by the claimant. The claimant has contended that the respondents gave a 48 hours notice on 07.05.2004 and cancelled the contract agreement after 3 days on 10.05.2004. In this case, the respondents did not allow even the time taken by the postal department in onward transmission of notice/letter what to say for the back transmission of its reply. The respondents obviously counted the 48 hours notice from the date of issue of the letter on 07.05.2004. This show cause notice was received by the claimant on 11.05.2004. But his contract agreement had already been cancelled on 10.05.2004. The respondents have not been able to rebut these allegations of the claimant. From the above discussion, it is clear that the respondents although issued 7 days and 48 hours statutory notices but did not allow these periods to the claimant for his reply before issuing the impugned order dated 10.05.2004 cancelling the contract. Obviously, the order dated 10.05.2004 vide which the contract agreement, has been cancelled suffers from procedural impropriety. Issue No. 3 is thus answered accordingly.”

26. I agree with the aforesaid conclusion of the learned Arbitrator on issue No. 3.

27. The findings on issue No. 4, which relates to claim Nos. 2, 3, 8 & 9, the learned Arbitrator relying upon the judgment of the Supreme Court in the case of A.T. Brij Paul Singh Bros. Vs. State of Gujarat, AIR 1964 SC 1703; Y.C.Rattaya and Anr. Vs. D.Venketramaya, AIR 1959 AP 551; Gambhirmull Vs. Indian Bank Ltd. and Anr., AIR 1963, Cal 163 was of the view that as per the respondent, it had contemplated to earn 15% profit on contract agreement and the respondent having claimed loss of profit at 10% only coupled with the fact that the petitioners have failed to counter the claim of the respondent and the fact that the petitioners were not justified in cancelling the contract, the learned Arbitrator awarded an amount of Rs. 7,87,000/- being 10% of the total contractual value. The award under this claim of loss of profit is a necessary consequence of cancelling of the contract illegally. I have already upheld the conclusion of the learned Arbitrator that the rescinding of the contract was illegal. I find, the profit of 10% awarded is justified and not on the higher side.

28. Against claim No. 2, even though the respondent had sought Rs. 10 lakhs as the expenditure incurred on additional deployment of resources for completion of work, the learned Arbitrator on a conclusion that the respondent had done preparatory work and was ready for first stage inspection i.e. for jigs, fixtures and raw material for taking up the work and it had suffered loss in non utilization of these items, on a rough estimate, had awarded Rs. 2 lakhs, which I find, is justified, not on the higher side, keeping in view the total contract value being Rs. 78,70,000/-.

29. The issue No. 6 which relates to claim No. 5 for refund of security of Rs. 50,000/- which was been granted by the learned Arbitrator on the ground that the same was withheld illegally as the termination of the contract was held to be illegal, the award for refund of Rs. 50,000/- is justified.

30. Insofar as the grant of interest against claim No. 8(b) is concerned, the learned Arbitrator had granted an interest @ 12% p.a. to meet the ends of justice by relying upon Section 31(7)(b) of the Act, which I find is on the slightly higher side as it is a common knowledge that the bank interest rates were in and around 10%, I deem it fit to reduce the interest to 10%. [Reference: (2005) 6 SCC 678 Rajendra Construction Co. vs. Maharashtra Housing & Area Development Authority and Ors. & 166 (2010) DLT 99 Mittal Estates Private Ltd. vs. Delhi Development Authority & Ors.].

31. On claim No. 9 relating to cost of arbitration, the learned Arbitrator noting that his total fee was Rs.80,000/- to be paid equally by both the parties, whereas the respondent had paid its share of Rs. 40,000/and the petitioners had paid only Rs.10,000/- as their share, with a condition that the balance amount of Rs. 30,000/- if not paid by the petitioners, to be paid by the respondent and the respondent having actually paid Rs.30,000/- on November 10, 2006, the learned Arbitrator has allowed the claim to the extent of Rs. 50,000/-, which included Rs. 30,000/- paid by the respondent on behalf of the petitioners, in effect, the cost of arbitration awarded by the Arbitrator is only Rs. 20000/-, the same is justified.

32. Insofar as the counter claim filed by the petitioners is concerned, the same was rightly rejected, as the learned Arbitrator has held the termination of the contract was illegal.

33. In view of conclusion above, I am of the view, the award of the learned Arbitrator is proper and justified and this Court would not like to interfere with the same except the interest against claim No. 8(b) is reduced from 12% to 10%.

34. The petition is disposed of accordingly. No costs.

(V.KAMESWAR RAO)

JUDGE APRIL 15, 2015 akb