It was in the absence of a specific prohibition against the award of price escalation that the Supreme Court observed that ordinarily, the parties would be bound by the terms agreed upon in the contract, but in the event one of them is unable to fulfill 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. In these circumstances, it was held that the arbitrator had acted within jurisdiction in allowing some of the claims on account of the escalation of costs which was referable to the execution of work during the extended period. Where, however, the contract contains a specific prohibition of the nature envisaged in clause 17(iii) as in this case, the general principle would have to give way to the specific prohibition contained in the contract.
Bombay High Court
M/S.Bombay Railways Engineering ... vs General Manager on 10 July, 2013
Bench: Dr. D.Y. Chandrachud, S.C. Gupte
The learned Single Judge has dismissed a petition under Section 34 of the Arbitration and Conciliation Act, 1996. The challenge was to an arbitral award dated 12 August 2011.
2 The Appellant was awarded the work of Shallow Screening of Track by a contract dated 10 April 2000 at a total cost of Rs.37.80 lakhs. The period of completion was six months commencing from January 2000 (the date of issuance of a letter of authority). Work was completed on 13 March 2002. The Appellant was paid an amount of Rs.42 lakhs.
3 The Appellant challenged the award insofar as the arbitral tribunal had declined to award claims 1, 10 and 11, namely those for (i) Under utilisation sat 2/5 app 451-2010 of labour force; (ii) overhead charges, and (iii) loss of profits occasioned by an extension of the contract.
Clause 17(iii) of the General conditions provided as follows :
" In the event of any failure or delay by the Railway to hand over to the Contractor possession of the lands necessary for the execution of the works or to give the necessary notice to commence the works or to provide the necessary drawings or instructions or any other delay caused by the Railway due to any other cause whatsoever, then such failure or delay shall in no way affect or vitiate the contract or alter the character thereof or entitle the Contractor to damages or compensation therefor but in any such case, the Railway may grant such extension or extensions of the completion date as may be considered reasonable."
4 Clause 17(iii) is prohibitory in nature. The effect of the clause is that notwithstanding the grant of an extension by the Central Railways, the Appellant would not be entitled to claim damages for compensation. Clause 17(iii) has been interpreted in a judgment of a Division Bench of this Court dated 19 October 2012 in Union of India vs. M/s. Shyam Constructions1. This Court followed the decision of the Supreme Court in Ramnath International Construction Private Limited v. Union of India 2 and held as follows :
" A similar provision was interpreted in the judgment of the Supreme Court inRamnath International Construction Private Limited v. Union of India3. In that case, the contractual conditions stipulated that no claim in respect of compensation or otherwise howsoever arising as a result of the extensions granted shall be admitted. The Supreme Court held that in view of the clear terms of the contract, the award of compensation had been rightly 1 Appeal (Lodging) No.309/2011 in Arbitration Petition 404/2008 2 AIR 2007 SC 509.
3 AIR 2007 SC 509.
sat 3/5 app 451-2010
set aside by the High Court. A similar view was taken in a judgment of a Learned Single Judge of this Court in Chaitanya Electrical Private Limited v. General Manager Central Railway4 while interpreting the provisions of Clause 17(3). An appeal against the decision was dismissed by the Division Bench on 17 March 20035. In view of the express terms of the contract, the arbitral Tribunal has manifestly erred in ignoring the contract and awarding the claim;"
As the above extract from the judgment would indicate, the same view had been taken in a judgment of a learned Single Judge which has been upheld by the Division Bench on 17 March 2003.
However, the Petitioner, who appears in person, has relied upon the judgment of the Supreme Court in K.N. Sathyapalan (Dead) By Lrs. vs. State of Kerala6. The judgment of the Supreme Court, however, dealt with a situation where there was no prohibitory clause in the contract. This is evident from the following observation in paragraph 33 of the decision which is as follows :
" The question which we are called upon to answer in the instant appeal is whether in the absence of any price escalation clause in the Original Agreement and a specific prohibition to the contrary in the Supplemental Agreement, the appellant could have made any claim on account of escalation of costs and whether the Arbitrator exceeded his jurisdiction in allowing such claims as had been found by the High Court."
It was in the absence of a specific prohibition against the award of price escalation that the Supreme Court observed that ordinarily, the parties would be bound by the terms agreed upon in the contract, but in the event one of them is 4 Arbitration Petition No.370 of 2002 5 Appeal 69 of 2003 in Arbitration Petition 370 of 2002 6 JT 2006 10 SC 165 sat 4/5 app 451-2010 unable to fulfill 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. In these circumstances, it was held that the arbitrator had acted within jurisdiction in allowing some of the claims on account of the escalation of costs which was referable to the execution of work during the extended period. Where, however, the contract contains a specific prohibition of the nature envisaged in clause 17(iii) as in this case, the general principle would have to give way to the specific prohibition contained in the contract.
6 As regards the payment of interest on account of delay, Clause 16(2) of the General Conditions provides as follows :
" No interest will be payable upon the earnest money or the security deposit or amounts payable to the Contractor under the contract, but Government Securities deposited in terms of Sub-clause (1) of this clause will be repayable with interest accrued thereon."
The Supreme Court has in Sree Kamatchi Amman Constructions vs. The Divisional Railway Manager (Works), Palghat 7 held that if there is a specific bar against the payment of interest in the contract, it would not be open to the arbitrator to award any interest for the pre-reference period or pendente lite.
7 Finally, as regards claim no.3 which relates to non-payment of muck disposal, the learned Single Judge has noted that the arbitral tribunal 7 2010 ALL SCR 2282.
sat 5/5 app 451-2010 while rejecting the claim had relied upon a copy of the measurement book and the bills produced which showed that the Appellant had signed the measurement book and the bills in token of their acceptance for operation of this item in NS No.1. Hence for these reasons, we do not find that any case for interference has been made out.
8 The appeal is dismissed. There shall be no order as to costs.
ig (Dr. D.Y.Chandrachud, J.)
(S.C. Gupte, J.)
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