M/S LABH CONSTRUCTION & INDUSTRIES LTD v. CENTRAL GOVT EMPLOYEES WELFAR HOUSING ORGANISATION

1. The appellant assails the order dated 23.4.2019 passed by the learned Single Judge in OMP No. 278/2013 whereby the learned Single Judge has disposed of the objections preferred by the respondent –Central Government Employees Welfare Housing Organization (CGEWHO). The learned Single Judge has interfered with the award made by the learned Arbitrator on two claims, namely, Claim No. 1 of the appellant-contractor for escalation for the period between Letter of Intent (LOI) (27.10.1998) to the date of the signing of the contract agreement (11.7.2001). The other claim interfered with by the learned Single Judge was Claim no. 20 in the counter-claims made by the respondent to claim loss of interest on the awarded amount.

2. It appears that the bid made by the appellant-contractor was accepted by the respondent on 27.10.1998. On 3.11.1998, the Letter of Intent was issued to the appellant. On 31.8.2000 a MOU was entered into between the appellant and the respondent. The contract agreement was signed on 11.7.2001. Thus, evidently there was a time gap of nearly 3 years between the date of acceptance of the bid of the appellant and the date of signing of the contract agreement. The contract agreement contained an escalation clause, which reads as under:- “5. ESCALATION Cement and Steel will be provided by the Organisation at a fixed rate as shown in Schedule-“B”. Any increase in labour charges and cost of materials by an Act of Legislation will be reimbursed in accordance with para 29.0.0 of General conditions of contract. For the purpose of payment of escalation, cost of construction hereafter defined in para 7(b) and 7(c) only shall be reckoned.

6. For the purpose of calculation of escalation, the date of signing of this contract agreement between the Organisation and the Company will be the base date applicable for escalation.” (emphasis supplied)

3. The appellant-contractor raised its claim for escalation for the period 27.10.1998 and 11.7.2011 on the ground that delay in execution of the contract agreement was not attributable to the appellant-contractor and the escalation in rates - which has taken place during the said period, be awarded to the appellant. The arbitral Tribunal allowed the said claim partially. The arbitrator awarded the escalation to the appellant i.e. from 31.8.2000 which was a date on which the parties signed the MOU, and the date of signing of the contract agreement i.e. 11.7.2001 amounting to Rs.22,78,564/-.

4. The letter of intent dated 03.11.1998 contained the following escalation clause: “ESCALATION Labour and Material Escalation shall be payable to you as per the Clause No. 29.0.0 of the General Conditions of Contract. Cost of Cement and Tor Steel will be absorbed by the organisation. The date of signing of the Contract Agreement will be the base date for application of escalation clause.” (emphasis supplied)

5. The learned Single Judge held that in the light of the aforesaid, the arbitral Tribunal did not have the jurisdiction to award escalation for the period prior to signing of the contract agreement. The appellant-contractor, to justify the said claim, had sought to rely upon the Minutes of Meeting held between the parties on 17.9.2001 i.e. after the execution of the contract agreement on 11.07.2001. In so far as the aspect of escalation is concerned, it was recorded in the Minutes of the said meeting as follows:- “Escalation Since the project had been delayed inordinately the issue of escalation payable was put forth by M/s Labh. It was then brought out that since the MOU with CAG was signed on 03.08.2000 escalation in cost beyond this date may be payable to LCIL due to the fact that the delay was not attributable to them. M/s Labh then stated that escalation should be payable from the date of LOI to them. However, it was stated by the CEO that the matter regarding the escalation shall be taken up with our Governing Council and also with the office of CAG at appropriate time after approximately 2/3rd of works were completed. If and only if the case was approved by Governing Council and CAG, the same shall be paid. The case for escalation of CGEWHO portion of work shall also be taken up for approval by Governing Council at the same time.” (emphasis supplied)

6. The learned Single Judge held that the aforesaid Minutes did not tantamount to novation of the contract, as respondents had only stated that the matter regarding escalation shall be taken up to the Governing Council of the respondent and also with the office of the CAG at appropriate time after approximately 2/3rd of works are completed, and, “if and only if the case was approved by the Governing Council and CAG, the same shall be paid.”

7. The submission of learned counsel for the appellant is that the learned Single Judge has re-appreciated the evidence which was beyond the scope of Section 34 of the Arbitration and Conciliation Act. He further submits that the Minutes of Meeting dated 17.9.2001 show that the same vested the contractor with the right to claim escalation even for the pre-contract agreement period, and consequently, the said Minutes vested the arbitral Tribunal with the jurisdiction to entertain the claim for escalation for the period prior to the contract agreement.

8. Learned counsel has sought to place reliance on the decisions of the Supreme Court on Assam State Electricity Board and Others Vs. Buildworth Private Limited, (2017) 8 SCC 146, to submit that even in a case where the contract prohibits grant of escalation, the jurisdiction of the arbitral Tribunal to consider such a claim is not ousted. He particularly places reliance on paragraphs 14 and 16 of this judgment, which referred to the earlier decisions of the Supreme Court in P.M.Paul Vs. Union of India, 1989 Supp (1) 368 and K.N.Sathyapalan Vs. State of Kerala, (2007) 13 SCC 43. These paragraphs read as follows:- “14. The view which has been adopted by the arbitrator is in fact in accord with the principles enunciated in the judgments of this Court. In P.M. Paul Vs. Union of India 1989 Supp (1) 368, a Bench of two learned Judges of this Court has held that: “12. …Escalation is a normal incident arising out of gap of time in this inflationary age in performing any contract. The arbitrator has held that there was delay, and he has further referred to this aspect in his award....After discussing the evidence and the submission the arbitrator found that it was evident that there was escalation and, therefore, he came to the conclusion that it was reasonable to allow 20% of the compensation under claim, he has accordingly allowed the same. This was a matter which was within the jurisdiction of the arbitrator and, hence, the arbitrator had not misconducted himself in awarding the amount as he has done.” This Court held that the contractor was justified in seeking price escalation on account of an extension of time for the completion of work. Once the arbitrator was held to have the jurisdiction to determine whether there was a delay in the execution of the contract due to the respondent, the latter was liable for the consequence of the delay, namely, an increase in price. 15..…X X X X X X X

16. In K.N.Sathyapalan Vs. State of Kerala, (2007) 13 SCC 43, this Court has held that: “32. Ordinarily, the parties would be bound by the terms agreed upon in the contract, but in the event one of the parties to the contract is unable to fulfil its obligations under the contract which has a direct bearing on the work to be executed by the other party, the arbitrator is vested with the authority to compensate the second party for the extra costs incurred by him as a result of the failure of the first party to live up to its obligations. That is the distinguishing feature of cases of this nature and Alopi Parshad case AIR 1960 SC 588, and also Patel Engg. case (2004) 10 SCC 566. As was pointed out by Mr Dave, the said principle was recognised by this Court in P.M. Paul 1989 Suppl. (1) SCC 368 where a reference was made to a retired Judge of this Court to fix responsibility for the delay in construction of the building and the repercussions of such delay. Based on the findings of the learned Judge, this Court gave its approval to the excess amount awarded by the arbitrator on account of increase in price of materials and costs of labour and transport during the extended period of the contract, even in the absence of any escalation clause. The said principle was reiterated by this Court in T.P. George case.”

9. Learned counsel further submits that while dealing with the decision in K.N. Sathyapalan (supra), the learned Single Judge has resorted to reappreciation of evidence by referring to the letter dated 11.3.2004 issued by the appellant to the respondent.

10. On the aspect of grant of interest by the learned Single Judge on the counter-claims of the respondent, learned counsel for the appellant submits that the arbitral Tribunal having consciously declined grant of interest claimed by the respondent by observing that interest has already been awarded against each claim and no additional or separate interest is, therefore, awarded, the learned Single Judge could not have interfered with the decline of interest on counter-claims made by the respondent. In this regard, he has specifically drawn the attention of this Court to the award of interest made in respect of counter-claim No.13. He has also fairly brought to the notice of this Court the decision in Hyder Consulting (UK) Limited Vs. Governor, State of Orissa (2015) 2 SCC 189.

11. We have considered the submissions of learned counsel for the appellant. So far as the order passed by the learned Single Judge upsetting the award made in favour of the appellant on claim no.1 for escalation – for the period between the letter of intent i.e. 27.10.1998 to the date of signing of the contract agreement i.e. 11.07.2001 is concerned, we do not find any merit in the submission of learned counsel for the appellant. The learned arbitrator has awarded the said claim by granting escalation between the date of the MoU i.e. 31.08.2000, and the date of signing of the contract agreement i.e. 11.07.2001, amounting to Rs.22,78,564/-. We do not agree with this submission of learned counsel for the appellant that the arbitral tribunal had the jurisdiction to examine the said claim for escalation. The arbitral tribunal is a creature of the contract and is bound by the terms of the contract. He cannot travel beyond the said terms.

12. The decisions relied upon by learned counsel for the appellant have no bearing in the facts of the instant case. In Assam State Electricity Board (supra), the arbitrator, inter alia, awarded interest for the period 07.03.1986 to 31.12.1997, which was for the period after the parties had entered into the agreement. The purchase order had been issued on 06.09.1982.

13. The value of the contract had been determined at the time of signing of the contract between the parties, and the period of completion was also stipulated under the contract. The claim made by the appellant, and awarded by the arbitrator, related to the period prior to the date of signing of the contract agreement. Till such signing and execution of the contract agreement, there was no binding contract between the parties. The appellant, with open eyes, entered into the agreement, which clearly stipulate that for the purpose of calculation of escalation, the date of signing of the contract agreement between the parties “will be the base date applicable for escalation”. Thus, with open eyes, the appellant agreed to execute the work on the quoted rates in respect whereof the bid of the appellant contractor was accepted on 27.10.1998. Similarly, the decisions in K.N. Sathyapalan (supra) and P.M. Paul (supra), which are referred in Assam State Electricity Board (supra), relate to claims for escalation made for the period after the execution of the contract agreement.