Satluj Jal Vidyut Nigam Ltd. v. M/S Jaiprakash Hyundai Consortium & Ors.

(IV) At the end of each quarter defined by the months March, June, September and December of each year, the Contractor shall submit, to the Engineerin-Charge, a claim, if any, on account of Price Adjustment for the completed quarter in accordance with the provisions of Contract. However, interim payments for price adjustment shall be certified every month on the basis of indices of the preceding quarter and adjustment that may be necessary after the indices for the corresponding quarter are available shall be made in the next immediate Interim Payment Certificate of the quarter.

(v) Subsequent Legislation

If, after the date 30 days prior to the latest date of submission of bids for the works, there occur in India changes to any National or State statute, Ordinance, Decree or other Law or any regulation or bye-law of any local or other duly constituted authority, or the Introduction of any such National or State Statue, Ordinance, Decree, Law, Regulation or bye-law which causes additional or reduced cost to the contractor, other than under sub-clauses (i), (ii) of this clause, in the execution of the works, such additional or reduced cost shall be certified by the Engineer-in-charge after examining the records provided by the contractor and shall be paid or credited to the NJPC and the Contract Price adjusted accordingly. Notwithstanding, the foregoing, such additional or reduced cost shall not be separately paid or credited if the same shall already have been taken into accounting the indexing of any input to the price adjustment formulae in accordance with sub-clauses (i), (ii) and(iii) of this clause. ……………….."

4. Annexure-XI which is referred to in the aforesaid formula is reproduced as under:- “……. PERCENTAGE OF LOCAL LABOUR COMPONENT, LOCAL MATERIAL COMPONENT AND LOCAL FUEL AND LUBRICANTS COMPONENT FOR PRIOR ADJUSTMENT (Refer Clause-70 of Chapter-111)

┌───────────────────────────────────────────────────────────────────────────────────────────────────────────┐
│                                FOR PRIOR ADJUSTMENT                                                       │
│                                               (Refer Clause-70 of Chapter-111)                            │
│                                Sl. No.                      Component                        Percentage   │
├───────────────────────────────────────────────────────────────────────────────────────────────────────────┤
│                                      1.                     Local Labour               Thirty Percent     │
│                                      2.                     Local Materials                               │
└───────────────────────────────────────────────────────────────────────────────────────────────────────────┘

3. Local Fuel and Lubricants Fifteen Percent ………”

5. Two crucial aspects of the aforesaid contractual provisions are as under:

(i) for the purpose of calculating price adjustment payable towards increase or decrease in cost of local labour, the labour component is prescribed as 30%; this percentage is inbuilt in Annexure-XI, and is made an input to the formula prescribed in GCC Clause 70(iii);

(ii) the calculation of price escalation is pegged to the relevant consumer price index ( hereinafter referred to as “CPI”) for industrial workers for the quarter under consideration, as published by Labour Bureau, Ministry of Labour.

6. Although the contract contains the aforesaid formula for calculation of the escalation amount payable to the claimant/contractor to cover increase in the labour cost during the course of execution of the contract, it was the contention of the claimant that the sudden spurt in the minimum wage was an event which was not taken into account in indexing of any inputs to the aforesaid formula as prescribed vide sub-clauses (i), (ii) and (iii) of Clause 70 of GCC, and the claimant was therefore entitled to reimbursement of the additional cost occasioned thereby on the basis of Clause 70 (v) of GCC. The Statement of Claim

7. The respondent in their statement of claims prayed for the following: “…………..

(i) award an amount of Rs.66,03,82,096.00 (Rupees sixty six crores three lacs eighty two thousand ninety six only) to the Claimant as per Annexure-A.

(ii) award an amount of Rs. 77,77,10,892.00 (Rupees seventy seven crores seventy seven lacs ten thousand eight hundred and ninety two only) towards interest up to 05.12.2005 as per Annexure- A.

(iii) award interest @16% per annum compounding on monthly basis on the sum of amounts, as mentioned in para (i) and (ii) above from 05.12.2005 up to the date of award,

(iv) award interest @18% per annum compounding on monthly basis on the sum of amounts as mentioned in para (i) (ii) and (iii) above for the period from the date of award to the date of payment.

(v) award Rs. 5.75 lacs (subject to modification to actuals) as the cost of arbitration as requested in para 6.7.[5] herein above,

(vi) grant such other relief as considered fit and proper by the Arbitral

8. The Statement of Claim filed by the respondent before the Arbitral Tribunal seeks an amount of Rs.66.03crores (plus interest) on the basis that in the formula prescribed in the contract is required to be tweaked/ altered so as to ensure that the calculation of price escalation be pegged to the minimum wages, instead of CPI. In this regard, the following was pleaded in the statement of claim filed by the respondent before the arbitral tribunal: “……….. 6.3.1. The additional expenses that the Claimant had to incur on account of quantum jump in the minimum wages, both verifiable and nonverifiable, can be computed based on the formula provided in the Contract for price adjustment for labour cost by replacing the average consumer price index number for industrial workers in H.P. by minimum wages as under: VL = 0.85P1x R1w-w0 100 w0 where VL = Increase or decrease in the cost of work in rupees during the quarter under consideration P[1] = Percentage of the local labour component (30%) R[1] = Portions of total value of work done during the quarter payable in rupees. w0 = Minimum Wages on the date 30 days prior to the last date of submission of bid w = increased minimum wages in rupees. The additional cost worked out from the aforesaid formula comes to Rs.66,03,82,096.00 up to December, 2003 i.e., end of maintenance period as per the details given in Annexure – A. ……………” Alternate methodology canvassed during Arbitral Proceedings

9. During the course of arbitral proceedings, the respondent/claimant sought to canvass an alternative basis for its claim. The circumstances which impelled the respondent to do so will be adverted to hereinafter. Under this alternative methodology, the alleged additional cost due to enhanced wages worked out to the tune of Rs. 27,42,89,815.00/- (plus interest). This has been amplified in a communication dated 24.09.2007 addressed by the claimant to Arbitral Tribunal in which it is inter alia stated as under:- “ ……….

1.0 During presentation of its claim by the Claimants, the Hon'ble Arbitral Tribunal had desired the Claimants to submit documents in support of the actual additional cost occasioned to the Claimants on account of increase in the minimum wages. The Claimants had brought to the notice of Hon‟ble Arbitral Tribunal that it was not possible to produce documentary evidence in support of the entire additional cost borne by the Claimants because, in addition to direct payment by the Claimants, several works/jobs were also got done through subcontracts, workshops and other sundry workers, therefore, the Claimants had to pay increased cost to them as well after aforesaid statutory increase in the minimum wages. This was however, brought to the notice of the Hon'ble Arbitral Tribunal, that the Claimants had some muster rolls amounting to Rs, 17,47,42,445/-for the payment made to the unskilled labour deployed directly on works. The Claimants submitted the list of available muster rolls during the proceedings held on 23.01.2007 and details of additional cost incurred due to quantum increase in minimum wages vide letter no. JA:T&C:17.4/AT/D- 10/186 dated 14.02.2007. ………..”

10. The aforesaid communication enclosed two statements viz. “Statement-1” and “Statement-2” purporting to establish that the total amount incurred by the claimant towards “labour component” was to the tune of Rs.77.26 crores as against Rs.35.62 crores inbuilt in the Contract Price. It has been further sought to be brought out that as against this extra expenditure, the proportionate escalation recovered in terms of the contractual formula [prescribed in Clause 70(iii) of the GCC (supra)] was Rs.14.21 crores; hence, the total amount realised/ recovered towards expenditure on labour during the relevant period was Rs.35.62 crores [being inbuilt in the contract price] + Rs.14.21 crores [recovered through the price escalation formula], totalling Rs. 49.83 crores. The difference between the incurred costs of Rs. 77.26 crores and the recovered amount of Rs. 49.83 crores i.e. Rs. 27.42 crores was stated to be recoverable by the respondent from the petitioner.

11. Further reference to the “statements” enclosed alongwith the aforesaid communication dated 24.09.2007 addressed by the respondent to the Arbitral Tribunal would be apposite while dealing with the challenge mounted by the petitioner to the impugned Award. The Award

12. The impugned Award after noting the background and the rival contentions of the parties, proceeds to delineate the issues that arose before it for consideration as under:- “……………. i) Whether, under the facts and circumstances of the matter, the claim is barred by limitation as contended by the Respondents. ii) Whether, the notifications issued by the Govt. of Himachal Pradesh fixing/revising the minimum wages under the Minimum Wages Act, 1948 amount to subsequent legislation attracting the provisions of Clause 70(v) of the General Conditions of contract. iii) Whether, under the facts and circumstances of the matter, the claim of the Claimants for expenses that the Claimants had to incur on account of revision of Minimum wages is tenable as per the Contract. iv) If the answer to the issue no.iii supra is in the affirmative, as to what extent the claim is tenable. v) Other reliefs. ……………”

13. As regards the issue (i) above, the impugned award proceeds to hold that the claims raised by the respondent/claimant were not barred by limitation.

14. With regard to issue (ii), the Tribunal proceeds to hold as under:- “………… Seeing tile Scheme of the Minimum wages Act, legal and constitutional provisions, the Arbitral Tribunal is of the opinion that notifications issued by the State Govt. of HP fixing/revising the Minimum wages in respect of the scheduled employment under the powers conferred on it under its Section 5(2) are legislative in nature and are subsequent legislation. Any change in the Minimum Wages by issue of notification issued by the State Govt. of HP under the powers conferred on it by Section 5(2) of the Minimum Wages Act shall attract the provisions of clause 70(v) of the General Conditions of Contract. ………….”

15. With regard to issue (iii) the impugned award holds that the additional cost which the respondent/claimant had to allegedly incur due to revision of minimum wages was payable to the respondent. Importantly, however, the impugned award specifically and rightly holds that the escalation on the labour component already received by the Claimants as per the formula given in Clause 70(iii) shall have to be deducted while working out the „additional costs‟ that could be awarded to the respondent (claimant).

16. As regards issue (iv), the impugned award holds that the basis upon which an amount of Rs.66,03,82,096.00 had been claimed in the statement of claim [viz. substituting the CPI with another set of inputs] was unsustainable. As to the extent to which any claim could be awarded to the respondent (claimant), the Arbitral Tribunal proceeds to hold as under: “….. a) The Claimants has put up calculations showing that he had incurred an expenditure of RS.77.26 crore towards the labour wages out of which Rs.35.62 crore has been realized through the BOQ items as on base date. He has further been reimbursed Rs.14.21 crore through escalation as per clause 70(iii) on the labour component only. Thus, the total labour expenses and escalation recovered amounts to Rs.49.83 crore. This leaves a balance of Rs.27.42 crore as the additional expenditure which has occasioned due to revision of minimum wages. There appears to be no reason to dispute this figures. b) ………….. c) The expenditure of RS.27.23 crores incurred additionally shall now have to be considered for further calculations. This amount is for the period of March 1996 to Dec 2003. However, the work has admittedly been completed on 31.12.2002. The corresponding amount of such additional expenditure for this period from March, 1996 to Dec 2002 as calculated on the basis of statement on record comes to Rs.26.90 crore only. This additional expenditure is with regard to the base rate of RS.22.00 per day (reference Ann-A on page 16 of the SOC). In this way, the claim of the Claimants is sustained for Rs.26.90 crore only….” …………..”

17. Thus, the impugned award holds as under:-

(i) That the respondent/claimant had incurred expenditure of

(ii) Out of the aforesaid expenditure of Rs. 77.26 crores, Rs. 35.62 crores was inbuilt in the BOQ item rates, and was realised during the course of execution of the said BOQ items; (iii)In addition to the aforesaid amount of Rs. 35.62 crores, the respondent/claimant also realisedRs.14.21 crores through escalation payable under Clause 70 (iii) of the GCC. It may be noted that the actual amount of escalation paid to the Respondent by applying the formula contained in Clause 70(iii) of the GCC is Rs. 43.18 crores. However, for the purpose of making out a claim, the Respondent (Claimant) has taken/ assumed the labour escalation recovered by it to be only to the tune of Rs. 14.39 crores i.e. 1/3rd of Rs. 43.18 crores. As elaborated in para 11(c) of the award, this has been done on the basis that the price escalation formula is premised on the labour component being 30% whereas according to the Respondent (Claimant), while submitting their bid, they had indicated the breakdown of their rates in a sealed cover, as per which labour component is only to the tune of 10%. Hence, the labour escalation paid under Clause 70(iii) has also been scaled down proportionately, for the purpose of computing the claim. Whether or not this scaling down is justified or not is the central controversy in this matter. (iv)Thus the total amount recovered by the respondent/claimant towards labour was Rs. 49.83 crores (Rs. 35.62 crores + Rs.14.21 crores)

(v) Thus the balance of Rs. 27.42 crores as the additional expenditure which was occasioned due to revision of minimum wages (being the difference of aggregate expenditure amount of Rs.77.26 crores and the recovered amount of Rs. 49.83 crores).

(vi) In para 19 (d) of the Award, the Tribunal, after making some adjustments keeping in mind the claim period, sustains the entitlement of the respondent/for an amount of Rs. 26.90 crores. The Tribunal also proceeds to grant pre-award and post-award interest on the said amount.

18. The majority award was rendered by the two out of three Arbitrators whereas one of the Arbitrators gave a dissenting award.

SUBMISSIONS ON BEHALF OF THE PARTIES:-

19. In the above background, Mr. Sanjay Jain, learned ASG appearing for the petitioner has attacked the interpretation accorded by the Arbitral Tribunal to the clause 70 of GCC. According to him, the price escalation formula incorporated in Clause 70 (iii) of the GCC already provides a dispensation for compensating the Respondent (contractor) on account of increase in cost of labour. According to him, this makes Clause 70 (v) inherently inapplicable since the latter contemplates only such kind of costs for which there is no provision in Clause 70 (iii).

20. However, the primary submission that has been advanced on behalf of the petitioner, is with regard to the manner in which the respondent has computed its claim before the arbitral tribunal. In particular, it is emphasised that the entire price escalation already paid to the respondent/contractor by applying the formula under GCC Clause 70(iii) has not been taken into account while computing the alleged extra cost/s on account of enhancement of minimum wages. He submits that although an amount of Rs. 43.18 crores has been paid to the respondent by applying the said formula, in the Respondent‟s computations, credit has been given for only 1/3rd of the said amount. He submits that there is virtually no reasoning in the award for this arbitrary and notional reduction.

21. It is further submitted on behalf of the Petitioner that according to the respondent/claimant itself, it paid a sum only of Rs. 17.47 crores to unskilled workers between March, 1996 to December, 2003. There is no proof as regards payment made to unskilled, semi-skilled and other categories. Yet, for the purpose of the award, it has been assumed that the respondent/claimant had incurred an expenditure of Rs. 77.26 crores towards labour wages during the course of execution of the contract in the relevant period. He therefore submits that the award is based on no evidence and as such, it is liable to be set aside.

22. Per contra, learned senior counsel for the respondent strenuously emphasized that the interpretation accorded by the arbitral tribunal to the relevant provisions of the contract is beyond the pale of interference in exercise of jurisdiction under Section 34 of the Arbitration and Conciliation Act, 1996. He submits that since minimum wages were not an input for the purpose of the price escalation formula contained in clause 70 (iii), and since minimum wages are also not taken into account in the CPI basket, the arbitral tribunal was justified in concluding that the respondent was entitled to additional costs in terms of clause 70 (v).

23. It is further submitted on behalf of the respondent that the substantive pleas of the Respondent in support of its entitlement, are fully covered by the judgment of Supreme Court in the case of NHAI vs. ITD Cementation India Ltd. (2015) 14 SCC 21. It is also submitted that the arbitral tribunal is the master of quality, quantity and adequacy of evidence and the same cannot be reappraised by this Court. In this regard, he relied upon the judgment of Supreme Court in Associate Builders. Vs. Delhi Development Authority(2015) 3 SCC 49.

24. Reliance is also placed on behalf of the respondent upon the analysis furnished by the petitioner to the arbitral tribunal vide its letter dated 01.05.2007 and the analysis furnished by the respondent vide letter dated 24.09.2007. He submits that the said analysis proceeds on the basis that the labour component of the contract in question was to the tune of 10%, as mentioned in the sealed bid envelope submitted by the respondent at the time of submission of bid. He submits that it was on account of this that the tribunal has rendered a finding that although the price escalation formula refers to the weightage of labour being 30%, the actual labour component to which the formula caters is only 10% whereas the remaining 20% is for other items of works. Therefore, the arbitral tribunal was right in slashing/ reducing the price variation paid in terms of clause 70 (iii) for the purpose of computing the entitlement of the Respondent (Claimant). He has further submitted that the members of the arbitral tribunal were experienced technical persons who considered all aspects of the matter and the view taken by them is not liable to be interfered with. In this regard, he relied upon the following judgments:a) Subhash Ramkumar Bind alias Vakil and Another versus State of Maharashtra[1] b) State of Madhya Pradesh versus Ramcharan[2] c)State of Bombay and another versus F. N. Balsara[3] d) Kailash Nath and Another versus State of U.P. and Others[4] e) Video Electronics (P) Ltd.& Anr. versus State of Punjab & Anr.[5] f) Narinder Chand Hem Raj versus Lt. Governor & Administrator, UT H.P. & Ors. 6 g) U. Unichoyi & Ors. v. State of Kerala[7] h) Edward Mills c. Ltd Vs. State of Ajmer[8] i) Modi rubber Ltd Vs. CCE[9]

25. He further refers to the judgment of the Supreme Court in McDermott International Inc. v. Burn Standard Co. Ltd., (2006) 11 SCC 181, to contend that the law permits the arbitral tribunal to adopt any formula for quantification as deemed appropriate.

AIR 1977 MP 68 1951SCR 682 AIR 1957 SC 790

(1962) 1 SCR 946 (1955) 1 SCR 735 ILR (1978) 2 Del 352 ANALYSIS AND CONCLUSION:-

26. At the outset, it is necessary to take note of the scope of the present proceedings.

27. In Associate Builders versus Delhi Development Authority10, after taking note of the judgments of the Supreme Court in the case of ONGC Ltd. versus Saw Pipes Ltd.11, Hindustan Zinc Limited versus Friends Coal Carbonisation12, McDermott International Inc. versusBurn Standard Co. Ltd. & Ors.13, Centrotrade Minerals & Metals Inc. versus Hindustan copper Ltd.14, DDA versus R. S. Sharma & Co.15, JG Engineers (P) Ltd. versus Union of India & Anr.16, Union of India versus Col. L.S. N. Murthy & Anr.17, and ONGC Ltd. versus Western Geco International Ltd.18, the Supreme Court delineated the scope of examination of an arbitral award in proceedings under Section 34 of the Arbitration and Conciliation Act, 1996.

28. It was emphasized that when a Court is applying the “Public policy” test to an arbitral award, it does not act as a Court of appeal and consequently, errors of facts cannot be corrected. A possible view by the arbitrator on facts has necessarily to pass muster as the arbitrator is the ultimate master of the quantity and quality of evidence to be relied upon when he delivers any arbitral award.

29. At the same time, it was also held that where (i) a finding is based on no evidence or (ii) an arbitral tribunal takes into account something irrelevant to the decision which would necessarily be perverse (iii) ignores vital evidence in arriving at a decision; such a decision would necessarily be perverse. For the purpose of considering whether a decision could be regarded as perverse, the Supreme Court took note of the judgment in the case of H. B. Gandhi, Excise and Taxation Officer-cum-Assessing Authority, Karnal and Others versus M/S Gopi Nath &Sons and Others19 wherein it was observed as under:- “........... 7........ It is, no doubt, true that if a finding of fact is arrived at by ignoring or excluding relevant material or by taking into consideration irrelevant material or if the finding so outrageously defies logic as to suffer from the vice of irrationality incurring the blame of being perverse, then, the finding is rendered infirm in law. ………..”

30. In the context of considering whether patent illegality vitiates an award, it was held by the Supreme Court in Associate Builders (supra) as under:- “………… 42.[3] (c)....... An arbitral Tribunal must decide in accordance with the terms of the contract, but if an arbitrator construes a term of the contract in a reasonable manner, it will not mean that the award can be set aside on this ground. Construction of the terms of a contract is primarily for an arbitrator to decide unless the arbitrator construes the contract in such a way that it could be said to be something that no fair-minded or reasonable person could do. …………..” In the above conspectus that it needs to be examined whether the impugned arbitral award deserves to be sustained or not.

31. As regards the conclusions drawn by the arbitral tribunal on the issue 1992 Supp (2) SCC 312 as to whether the notifications issued by the government of Himachal Pradesh fixing/revising the minimum wages under the Minimum Wages Act, 1958, amounts to “subsequent legislation” this Court is inclined to defer to the conclusions/findings rendered by the arbitral tribunal. This is in view of the settled legal position that interpretation of the contract is the domain of the arbitral tribunal and the same would not be interfered in proceedings under Section 34, as long as such interpretation is not ex-facie perverse. Further, in a situation when two interpretations are possible, the interpretation accorded by an arbitral tribunal would pass muster, if the view taken by the arbitral tribunal is a possible view, even if a more plausible interpretation is canvassed by the petitioner.

32. Thus, the conclusion of the arbitral tribunal to the effect that notification/s issued under the Minimum Wages Act attract the provisions of Clause 70 (v) of the GCC, brook no interference in exercise of jurisdiction under Section 34 of the A&C Act, 1996.

33. This brings us to the more troublesome aspect of the award viz whether the claimant was able to establish the extent of additional cost/s asserted by it as having been incurred on account of revision of Minimum Wages.

34. As noted hereinabove, in the statement of claim that was filed by the respondent, the respondent (claimant) initially sought to advance its claim by seeking to alter/substitute the contractual formula [contained in GCC Clause 70(iii)] by replacing one set of inputs therein with another. The arbitral tribunal rightly found that the same could not be permitted. The relevant findings in this regard in the impugned award are as under:- “……

15. ii…. e.… It may be noted here that the Claimants have submitted a claim of Rs.66,05,82,096.00 as per the formula given hereinabove. This formula is not given in the Contract. The Claimants state that they have calculated the price adjustment for labour cost by replacing the average consumer Price index Number for industrial workers in HP by minimum wages as per CPWD norms, discussed above. ……….The Arbitral Tribunal opines that the contention of the Claimants for calculating the additional cost due to increase in minimum wages by a formula not given in the Contract cannot be sustained. The additional cost for labour incurred by the claimants cannot be calculated on the basis of some formula not provided in this Contract….. ……. The Arbitral Tribunal opines that the Claimants have to be compensated for the extra cost caused to them by enhancement of Minimum Wages, however they cannot be allowed to be compensated on the basis of the formulae adopted by them in calculations given in the Statement of Claims as the same is not a part of the Contract. The Claim of the Claimants in this respect has been made for the sum of Rs.66,03,82,096.00.……. 19… (a)….The formula given by the contractor for calculating the increased cost due to additional payment for the amount of Rs. 66.03 crores is not part of the agreement and cannot be used for the claim for payment of additional cost….. ……………”

35. Having so rejected the claim as advanced in the Statement of Claim, the tribunal proceeds to consider an alternative hypothesis advanced by the respondent/claimant for the purpose of sustaining its claim. This alternative hypothesis was advanced without any formal amendment of the Statement of Claim and the foundation for this, is to be found in a communication dated 24.09.2007 addressed by the respondent to the arbitral tribunal. The gist of this communication has been noticed hereinabove. The purport of this communication was to demonstrate to the arbitral tribunal that “work for about 75% of the Contract Price was actually executed by the claimants after the quantum increase in minimum wages i.e., during 01.03.1996 to 31.03.2003 and the claimants had to incur Rs. 77.26 crores on the labour component as against Rs. 35.62 crores built in the Contract Price (Statement-2) for the works executed during the period” [para 3.2.2.[3] of the said communication dated 24.9.2007].

36. It was also sought to be submitted by the respondent that as per the muster rolls available with it, the actual payment made by the respondent to unskilled labour, was Rs.17,47,42,445/- (approximately Rs.17.47crores). According to the claimant, this amount was actually expended on unskilled labour did not include the amount spent on skilled and semi-skilled labour as well as indirect expenses on labour. This has been brought out in “Statement-1” enclosed alongwith the communication dated 24.09.2007 which is reproduced as under:

37. As noted above, the purport of the above statement was to bring out that the actual expenditure on unskilled labour (as worked out on the basis of muster rolls available with the respondent/claimant itself) was to the extent of Rs. 17,47,42,445/- (approximately 17.47 crores). It has also been brought out therein that but for the enhancement in minimum wages, this amount would have been Rs.7,75,44,442/- (approximately Rs. 7.75 crores).

38. Alongwith the aforesaid “Statement-1”, the communication dated 24.09.2007 also encloses a “Statement-2”, the purport of which is to establish the quantum of total additional cost as a result of the jump in minimum wages with effect from 01.03.1996. “Statement-2” is reproduced as under: ADDITIONAL COST ARISING OUT OF QUANTUM JUMP IN MINIMUM WAGES W.E.F. 01.3.1996 INTEREST THEREON FROM THE DATE OF ACCRUAL UPTO THE DATE OF REFERENCE TO HON’BLE ARBITRAL TRIBUNAL All amounts are in Rupees Percentage of contract: 74.99 Price i.e., 475 crores = 75

39. Significantly, the purported actual expenditure on unskilled labour as brought out in “Statement-1” is not reflected in “Statement-2” at all. The said “Statement-2” seeks to arrive at the total expenditure on labour not on actuals, but on the premise that labour expenditure amounts to 10% of the total work done under the contract. As per the said statement, since the total contract value was to the tune of Rs. 356,21,32,414/- (Rs. 356.21 crores), labour expenses @ 10% amount to Rs. 35,62,13,249/ ( Rs. 35.62 crores). Further, in the said “Statement-2”, this amount has been increased proportionate to the extent of increase in minimum wages so as to reach the conclusion that the amount actually paid to the labourers is to the tune of Rs. 77,26,82,952 (approximately Rs. 77.26 crores).

40. Significantly, although “Statement-2” uses the expression “actually paid” [in the relevant column where the aforesaid amount of Rs. 77.26 crores is derived], the computation therein is only a mathematical derivation, and is not supported by any evidence at all as to the actual amount expended by the respondent/claimant on labour. As mentioned, the muster rolls available with the respondent/claimant showing expenditure on unskilled labour were only to the extent of Rs. 17.47 crores. The arbitral award notes in Para 19 (B) that “the claimant has put up calculation showing that he had incurred an expenditure of Rs. 77.26 crores”. Thus, even the arbitral tribunal itself notes that this figure of Rs. 77.26 crores is based on a mathematical calculation/ derivation. There was no evidence before the arbitral tribunal to reach the conclusion that the extent of actual expenditure on labour was to the tune of Rs. 77.26 crores. Yet, for the purpose of the claim, the award proceeds on the basis that Rs. 77.26 crores was the actual expenditure incurred by the respondent/claimant on labour. In doing so, the arbitral tribunal acted without evidence.

41. Learned senior counsel for the respondent/claimant is right in contending that the respondent/claimant is not precluded from claiming damages/ amounts based on a formula. Indeed, many judgments of various High Courts and of the Supreme Court have recognised that award of damages on the basis of recognised industry formula such as the Hudson’s formula, is permissible. However, it is completely incongruous to suggest that a mathematical formula can be deployed to work out the “actual payment” to labour.

42. It is also notable that that the formula propounded by the claimant in its statement of claim to work out the additional cost on account of enhancement of minimum wages, was rejected by the arbitral tribunal itself (as noticed herein above). It was in the light of the difficulty with the formula propounded by the respondent/claimant that it sought to found its claim on basis of the actual additional cost borne by it. However, while avowedly seeking to demonstrate the “actual amount paid towards enhanced wages” the respondent/ claimant resorts to a mathematical derivation [as contained in Statement-2, (supra)]. This was not materially different from the formula propounded by the claimant originally alongwith its statement of claim which was rejected by the arbitral tribunal itself.

43. Thus, there was no basis for the arbitral tribunal to reach the conclusion that the respondent/claimant had “incurred an expenditure of Rs.

77.26 crores” towards labour wages in the relevant claim period.

44. The subsequent part of the award is even more problematic.

45. After concluding that the claimant had incurred an expenditure of Rs.

77.26 crores towards the labour wages, the tribunal proceeds to ascertain how much of it was actually recovered through the BOQ item rates and on account of payment of price escalation as per the formula prescribed in GCC Clause 70(iii).

46. Admittedly, the BOQ rates quoted by the respondent/claimant factored in expenditure on account of labour wages. Assuming the labour component of the contract was to the extent of 10% of the contract price, the amount already recovered out of BOQ rates paid to the respondent/claimant was to the tune of Rs. 35.62 crores (10% of the total original contract price). In addition to the original BOQ rates, the respondent/claimant had also been paid an amount towards price escalation as per the formula prescribed in clause 70 (iii) of the GCC. Admittedly, the amount paid to the Respondent/ Claimant as per the said formula was to the tune of Rs. 43.18 crores. This has been noted in Para 11of the award. Thus, when one adds the figure of

35.62 crores to the actual price escalation of Rs. 43.13 crores duly paid to the respondent/claimant, the total amounts to approximately Rs. 78.75 crores i.e., more than the amount of total expenditure stated to have been incurred by the respondent/claimant towards labour wages. As such, the price escalation formula more than adequately makes up for the additional cost on account of minimum wages and therefore there was no occasion to award any additional amount to the respondent (claimant) on that count.

47. It was in this backdrop, that the respondent (claimant) resorted to a novel device/ mechanism. It was asserted that as per the breakdown of unit rates provided by the claimant at the time of tendering, the labour component of the total contract value was stated to be only 10%. For this reason, even though labour escalation had actually paid to the respondent/claimant on 30% of the contract value, the same must be proportionately scaled down/ reduced. Although contention of the respondent (claimant) to this effect is recorded in para 11 of the award, the same does not form part of the pleaded case of the respondent (claimant) at all.

48. Thus, through the above devise/ mechanism, even though the actual amount paid to the respondent/claimant towards labour escalation is Rs.

43.18 crores, it was notionally reduced to Rs. 14.39 crores. (1/3rd of Rs.

43.18 crores). In other words, although, by applying the price escalation formula incorporated in clause 70(iii) of the GCC, the respondent/claimant have actually pocketed an amount of Rs. 43.18 crores, for the purpose of assessing the claim of the Respondent, this amount has been assumed to be Rs. 14.39 crores. Clearly, this is ex-facie arbitrary, perverse and results in rewriting the contract between the parties.

49. The only portion in the award where this aspect has been adverted to is reproduced hereunder:: “………… 11.…. c) Now in the aforesaid statement dt.24.09.2007, the Claimants have submitted that the amount of wages incurred by them comes to Rs.77,26,82,952.00 against which they have recovered Rs.35,62,13,249.00 through the BOQ items and RS.14,21,79,888.00 through escalation on the proportionate basis on payment to labour. The Respondents in their letter dt.01.05.2007 have indicated the escalation paid to the Claimants for the labour component in local currency is Rs.43.18 crore as shown in para 9(C) above. It is be worthwhile to mention here that the escalation is calculated on the labour component as 30% of the value of work done in a particular period. In the sealed bid filed by the Claimants as per the contract condition, the labour expenses are indicated as about 10% only as shown at sl no.F in para no.9 above. The Respondents have also considered 10% component of labour in their Statement furnished with letter dt.01.05.2007, while calculating the realized labour component, in para 3.2.2.[4] of their letter dt.24.09.2007, the Claimants have stated that the entire escalation calculated by the Respondents and considered towards labour component is totally misleading. The Claimants states that the price adjustment formula is only a mechanism to regulate the total escalation on the amount of work done compared to base date for the relevant period. The escalation recovered through mechanism of labour component also caters to those items which do get escalated but are not directly covered in the price adjustment formula. Such expenses can be like cost of machinery, salary of staff, overhead etc. in this way, when the total labour expenses (direct and indirect @ 150%) are only 10% of the cost of work. The Price adjustment formula in clause 70(iii) provides escalation @ 30%. This difference of 20% obviously indicates escalation payable on items other than labour expenses although they are covered under the heading labour component. The Claimants have indicated that @ 10%, the escalation amount received by them on labour expenses is Rs.14.21 crore. The total escalation paid towards labour component as per the Respondents @ 30% is Rs.43.18 crore. The corresponding proportionate escalation received by the Claimants thus comes to Rs.43.18/3 - Rs.14.39 crore against which the Claimants has shown the receipt of Rs.l[4].21 crore. The figures of the Claimants and the Respondents towards escalation paid to the Claimants on labour expenses compare with each other, it will be justified to take the figure of Rs.14.39 crore as per the Respondents in further calculations. This brings to the conclusion that the Claimants have received an amount of Rs.50.03 crore by way of payment through BOQ item and as well as escalation on labour component. Leaving an amount of (Rs.77.26 (-) Rs.50.03) =Rs.27.23 crore (approximately) only unrealized towards labour expenses. This amount is within the amount of the claim of Rs.28.88 crore put up before the DRB. ……… …

15. … c) ……the proportionate escalation recovered on in-built labour component for 75% of the work executed during the period works out Rs.14.21 crore only….. …… 19…. b) The Claimants has put up calculations showing that he had incurred an expenditure of Rs.77.26 crore towards the labour wages out of which Rs.55.62 crore has been realized through the BOQ items as on base date. He has further been reimbursed RS.14.21 crore through escalation as per clause 70(iii) on the labour component only. Thus, the total labour expenses and escalation recovered amounts to Rs.49.83crore. This leaves a balance of Rs.27.42 crore as the additional expenditure which has occasioned due to revision of minimum wages. There appears to be no reason to dispute this figures. …. ……………….”

50. While recording the contention of the respondent/claimant in para 11(c) of the award (as extracted above), the impugned award does not give any reasons for accepting the aforesaid plea of the respondent/claimant. Thus, the award on this count is not only at variance with the pleaded case of the Respondent (Claimant), it is also unreasoned and palpably absurd. There is simply no basis to conclude that although labour escalation is computed and paid on 30% of the contract price, however it must be assumed that out of this 30% percent, only 10% thereof is towards labour costs and 20% is in respect of other heads of cost. In this regard, it is notable that Annexure-XI of the contract (supra) specifically mentions 30% to be the local labour component on which labour escalation is paid as per GCC Clause 70(iii). Similarly, Annexure-XI assigns weightage to “steel”, “other materials” and “local fuel and lubricants” for the purpose of applying the price escalation formula. The notional scaling down of the labour escalation amount (from Rs. 43.18 crores to Rs. 14.39 crores) results in rewriting Annexure-XI of the contract.

51. It is also unfathomable that when an amount of Rs. 43.18 crores has been actually paid to the respondent/claimant towards labour escalation, why should 2/3rd thereof be ignored while assessing the extent to which the Respondent/ Claimant was required to be compensated on account of increase in minimum wages. It is also unfathomable as to how and on what basis it has been concluded that 2/3rd of Rs. 43.18 crores (i.e. Rs. 28.78 crores), although paid to the Respondent/ Claimant under the head “labour escalation” was actually towards items “other than labour expenses” [as per the contention of the Respondent/ Claimant recorded in para 11 (c) of the award].

52. It is completely perverse to proceed (as the impugned award does) on the basis that respondent/claimant realised only an amount of Rs.14.21 crores (and not 43.18 crores) through escalation payable under Clause 70

(iii) of the GCC. In the face of such perversity which is writ large on the face of the impugned arbitral award, the same cannot be sustained.

53. The reliance sought to be placed by learned counsel for the respondent on petitioner‟s communication dated 01.05.2007 and/or other communication/s addressed by the petitioner during the course of arbitration, is totally misplaced. The purport of the said communication/s was evidently to highlight the contradiction/s in the respondent‟s calculations. The same cannot be construed as any admission on the part of the petitioner as regards the „scaling down‟ of the escalation amount.

54. At this stage, it would be apposite to highlight the duty of care that Arbitrators must exercise in dealing with financial claims based on the mathematical derivations in the context of complex construction contracts. An arbitrator‟s obligation of care, skill and integrity has been emphasized by the various authors and has also been judicially recognized. In Mustill and Boyd: Commercial Arbitration20, it has been stated as under: “…..… When accepting the burden of the reference, the arbitrator can be regarded as undertaking three principle duties – namely to take care, to proceed diligently and to act impartially. The existence of a moral obligation to perform these duties is undeniable. ……..” In Gary B. Born: International Commercial Arbitration21, it has been stated as under: Sir Michael J. Mustill, Stewart C. Boyd – Commercial Arbitration (Second Edition),, PP. 224 Gary B. Born, International Commercial Arbitration, Second Edition, PP. 1992 “……… International Arbitrator’s Obligations of Care, Skill and Integrity The arbitrator‟s obligation to resolve the parties‟ dispute includes an obligation to conduct the arbitral proceedings and decide the case with appropriate care, skill and professional integrity. The arbitrator‟s duties of care and skill are in some respects akin to those imposed on other professionals, such as lawyers, accountants and bankers (although as discussed below, the enforcement of these obligations is radically different because of the arbitrator‟s entitlement to immunities). This obligation includes devoting the necessary time and attention to the case, and addressing the evidence and submissions with the skill and ability necessary to understand. These obligations also extend to a duty to decline appointment in arbitrations for which a potential arbitrator is ill-prepared or illsuited, whether by virtue of lack of expertise, language abilities, or otherwise… ……….” Entertaining financial claims based on novel mathematical derivations, without proper foundation in the pleadings and/or without any cogent evidence in support thereof can cause great prejudice to the opposite party. Especially in the context of construction contracts where amounts involved are usually astronomical, any laxity in evidentiary standards and absence of adequate diligence on the part of an arbitral tribunal in closely scrutinizing financial claims advanced on the basis of mathematical derivations or adoption of novel formula, would cast serious aspersions on the arbitral process. The present case is an example where substantial liability has sought to be fastened on one of the contracting parties based on specious paper calculations. It cannot be overemphasized that arbitral tribunals must exercise due care and caution while dealing with such claims.

55. In the circumstances, the impugned arbitral award is set aside. Accordingly, the present petition stands allowed. All pending applications also stand disposed of. There shall be no orders as to cost. JULY 12, 2023 SACHIN DATTA, J rb/rohit