Whether contract can be constructed on the basis of conduct of parties?

Very recently, in McDermott International Inc.vs.Burn
Standard Co.Ltd., (2006) 11 SCC 181=2006 SCACTC
283 (SC)=2006 (2) Arb.LR 498 (SC), after perusal of a
plethora of precedents, Their Lordships have enunciated
this aspect of the law in the following manner:
“112. It is trite that the terms of the contract can
be express or implied. The conduct of the parties
would also be a relevant factor in the matter of
construction of a contract. The construction of
the contract agreement is within the jurisdiction
of the arbitrators having regard to the wide
nature, scope and ambit of the arbitration
agreement and they cannot be said to have
misdirected themselves in passing the award by

taking into consideration the conduct of the
parties. It is also trite that correspondences
exchanged by the parties are required to be taken
into consideration for the purpose of construction
of a contract. Interpretation of a contract is a
matter for the arbitrator to determine, even if it
gives rise to determination of a question of law.

IN THE HIGH COURT OF DELHI AT NEW DELHI
Judgment pronounced on: 17.12.2014.
O.M.P. 472/2013
M/S NATIONAL HIGHWAYS AUTHORITY OF INDIA

versus
M/S BSCPL
CORAM:
HON'BLE MS. JUSTICE DEEPA SHARMA



This order shall dispose of the above said two OMPs. Both the cases
are taken up together as in both of them, the challenge relates to the
interpretation of sub-clause 70.3 (xi) of COPA although in both the cases
parties had entered into independent agreements, but the sub-clause 70.3 and
other relevant clauses relating to Price Adjustment Formula are identical.

2.
The present petition has been filed against the award dated 5 th
January, 2013.
3.
In this case, the respondent, who was the claimant/Contractor before
the Arbitral Tribunal, had entered into an agreement with the petitioner for
the construction of 4 lane from Km. 208.00 to Km. 251.70 of Ayodhya-
Gorakhpur Section of National Highway-28 in Uttar Pradesh, contract Pkg
No. LMNHP-EW-II (WB)-package-6.
4.
The last date of submission of the bid was 15 th July, 2005 and the
contract was signed on 19th October, 2005. The total sum of contract was
Rs.262,60,20,168/- and the stipulated period of completion was 36 months
ending on 23rd October, 2008 but the extension of time was granted by
NHAI up to 15th December, 2010. Under the agreement, the contractor was
entitled as per the terms of the contract for price adjustment in bills. The
O.M.P.Nos. 472/2013 and 305/2013
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price adjustment was to be done as per the formula agreed upon by parties
and incorporated in sub-clause 70.3 of COPA. The contractor had submitted
its Interim Payment Certificates (hereinafter referred to as ‘IPCs’) and
claimed price adjustment in these IPCs and the petitioner had released 19
IPCs in terms of the contract. However, thereafter at the stage of 20th IPC
and onward, the petitioner introduced a different interpretation to the
calculation of the percentages of bitumen, cement and steel (X,Y,Z) factors
in the formula of price adjustment and also attempted recovery of the money
paid against the 19 IPCs on the ground that over payment had been made.
5.
The dispute, therefore, relates to the calculation of percentage of
bitumen, cement and steel (X,Y,Z) factor in the price adjustment formula.
The petitioner had unilaterally changed the method of calculating the
percentage of these factors in price adjustment formula, after clearing 19
IPCs while till that time the petitioner was calculating the percentage of
these factors in price adjustment formula, on taking the cost of these factors
that is, bitumen, cement and steel used in execution of the work in that
month as per the IPC.
6.
It is clear from the facts of the case that under the contract, the
Engineer was the authority to determine and interpret the terms of the
O.M.P.Nos. 472/2013 and 305/2013
Page 3 of 45
contract. Uptil 19 IPCs, the Engineer had interpreted the relevant clause
pertaining to the price adjustment in one particular manner, i.e., by taking
the cost price of bitumen, cement used in execution of the work in the month
of IPC. It is also clear from the undisputed facts of this case that the
requirement to change the method of calculation of percentage of these
factors arose when during the internal audit by the auditors of the petitioner,
the auditors had pointed out that the value of X,Y,Z was to be calculated by
taking into account the cost of cement, steel and bitumen as it stood 28 days
prior to the date of submission of the bids. This audit report was for the
period from October, 2007 to March, 2008 and was communicated to the
Engineer on 28th March, 2009 i.e. after 5 months after the original date of
completion of the contract i.e. 23rd October, 2008 and 40 months after
signing the contract.
7.
On 25th October, 2008, during the site visit by the General Manager of
the petitioner, the Project Director (PD) advised the Team Leader to revise
the calculation of price adjustment with an altered interpretation of sub
clause 70.3 (xi).
8.
Aggrieved by the said unilateral order of the PD, the contractor took
up the matter with the PD on 26th October, 2008 and PD sought the
O.M.P.Nos. 472/2013 and 305/2013
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Engineer’s opinion. Even, the Engineer vide its letter dated 21st November,
2008 wrote back to the Project Director that in his view the footnote of
clause 70.3 (xi), percentage of factors bitumen, cement and steel (X,Y,Z)
was the actual percentage of cost of procurement of these articles in the said
month, and that they would continue to use the said method till instructed to
change it. The petitioners, thereafter, referred the dispute to the Dispute
Resolution Board (DRB) consisting of three experts into the field. The DRB
had also given its finding in favour of the contractor and against the
petitioner and opined that the interpretation given till 19 IPCs by the
Engineer, was the correct one. It has held that the value of X,Y,Z as per
clause 70.3 (xi) is to be calculated on the basis of procurement cost of the
month relating to IPC and not on the basis of the cost of these articles, as it
stood 28 days prior to the date of submission of the bids. The petitioner,
however, did not accept these findings.
9.
The arbitration clause was invoked and the Arbitral Tribunal was
appointed. The Arbitral Tribunal has dealt with this dispute between parties
as claim No.2
10.
The claim No. 2 reads as under:-
“Claim No.2:- Application of sub clause 70.3 (xi)-
Calculation of Price Adjustment factors X,Y,Z-
O.M.P.Nos. 472/2013 and 305/2013
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(Unilateral Change of Contract provision after 19IPCs
and unjustified recovery of certified payments.”
11.
Dealing with this dispute regarding calculation of the price adjustment
factors X,Y,Z, the learned Arbitral Tribunal has reproduced the clause 70.3
(xi) (page 17) as under.
“xi.
The following percentages will govern the price
adjustment of the contract:
1. Labour-Pl
20%
2. Plant and Machinery and Spares-Pp
20%
3. POL-Pf
10%
4. Bitumen- Pb
x%
5.
Cement- Pc
y%
6. Steel-Ps
z%
7. Other materials-Pm
50% -(x+y+z)%
Total
100%
(Note: x,y,z are the actual percentage of cost of materials of
bitumen, cement and steel respectively used for execution of
work as per the Interim Payment Certificate for the month.)
12.
Thereafter, after discussing elaborately all the other relevant factors,
Arbitral Tribunal gave its findings as under:-
“We observe that the “note” below Sub-Clause 70.3 (xi)
explicitly refers to “cost of materials of bitumen, cement and
steel respectively used for execution of work as per interim
Payment Certificate for a month”. 75% of the cost of
procurement of these specified materials, by way of secured
advance, has gone into the value ‘R’ the total value of work
done during the month. There is no doubt that the quantity is a
variable in every IPC. The dispute only is regarding the rate to
be taken into account in working out the cost; whether the rate
too is to be a variable (current invoice) rate from time to time, or
a fixed rate. Had the contract intended only the quantity to be
the variable and a fixed predefined rate, the ‘note’ could have
been worded as “cost of the quantity of bitumen, cement and
O.M.P.Nos. 472/2013 and 305/2013
Page 6 of 45
steel respectively used for execution of work as per the Interim
Payment Certificate for the month, at rates prevailing on a date
28 days prior to the last date for submission of bids”.
But the note has not been so worded. The interpretation
advocated by the Respondent shall clearly amount to rewriting
the contract and therefore illegal.”
13.
The Arbitral Award shows that the petitioner had also raised the
following contentions:-
“5.2.1 That the payment of escalation made in IPC-1 to IPC-19
was made by wrongly calculating the factors x,y,z based on the
procurement costs of the specified materials, whereas it should
have been calculated on the basis of base rates of these materials
as these stood 28 days prior to the last date for submission of the
bids. That accordingly, the Engineer was asked to correct this
mistake and recover the excess payment so made.
5.2.2 That the Engineer could make such a correction in the
payment made in the IPCs under the power vested in him sub
clause 60.9 of contract agreement and even when the Engineer
had allowed payment 19 IPC based on a certain interpretation of
the contract, it did not take away the Engineer’s right to correct
the payment with retrospective effects. That Interim Payment
Certificate (IPCs) issued to the Claimant are interim payments
and open to corrections if any, pursuant to Sub Clause 60.9 of
COPA.
5.2.3 That there was no explicit opinion of the Engineer to adopt
the method used for calculating factors x,y,z the way he did in
IPC-1 to IPC-19, but he had stated that he will follow this very
method till such time he was otherwise directed.
5.2.4 That the audit report had observed that “since the cost of
IPC for the month are based at BoQ, and the cost of
consumption of various components is based on current market
price, basis of numerator and denominators is not the same and
therefore, the percentage calculation is not correct.”
5.2.5 That the audit report had further stated, “since the cost is
not being defined in the contract agreement, whether it is to be
determined on base rate and current rate, hence different PIUs
are using different basis. The same situation exists here.”
O.M.P.Nos. 472/2013 and 305/2013
Page 7 of 45
5.2.6 That the IPC value for a particular month is based on value
of works executed as per BoQ rates in the contract. That for
arriving at a fair calculation of percentage, the numerator and
denominator should be comparable. Thus if the values of x, y, z
are based on current prices prevailing during the IPC of the
month as per the Claimant’s stand, then it would make it
incomparable to the denominator, i.e., the value of work done in
the IPC at the BoQ rates.
5.2.7. That the value of ‘R’ defined in formulae includes secured
advance based on the current procurement cost of materials but
the value of denominator should be only the BoQ value of the
work executed during the month without adding the amount of
secured advance and not the value of ‘R’.
5.2.8 That the contract does not say that the factors x, y, z are to
be derived based on the procurement cost of these materials.
5.2.9 That the bituminous materials like emulsion should not be
included in the specified material ‘bitumen’, as these could be
covered under “other materials”.
5.2.10 That the illegal conduct of the parties cannot be legalised
or enforced.
5.2.11
And that the incorrect original method of calculating
the factors x, y, z was adopted even after the IPC-19 because of
the stay granted by the District Court of Basti, that the resulted
in an excess payment of Rs. 38,39,52,711/- up to IPC-40 which
needs to be recovered.”
14.
Arbitral Tribunal has elaborately discussed and dealt with the
contentions of the petitioner. The Arbitral Tribunal observed as under:-
“6.2.7
we note that the value of the materials is obtained on the
basis of actual cost incurred in the procurement of materials as duly
evidenced by documents verified by the Engineer in accordance with
COPA Sub Clause 60.3 As per COPA Sub Clause 703 the total value of
the monthly work is the sum of the BoQ valuation and secured advance
for input materials valued at current prices, thereby making it clear that
the contract does not equate the BoQ valuation with the so called base
price valuation as it existed 28 days prior to the last date for submission
O.M.P.Nos. 472/2013 and 305/2013
Page 8 of 45
of the bids. Thus the fact that a certain percentage of the current invoice
cost goes into the valuation of IPC as secured material advance, cannot
be lost sight of.
6.2.8 The price adjustment is taken care of the factors Ci-Co/Co, Si-
So/So, Bi-Bo/Bo. These factors continue to remain the same
irrespective amount-component of an IPC for any particular material.
The ‘cost’ of materials as defined in the ‘note’ below Sub-clause 70.3
(xi), is merely used for working out a percentage factor to apportion a
part of the IPC valuation for a particular material. Just as these factors
are empirically specified to be 20%, 20% and 10% for labour, plant and
machinery & POL respectively, the percentage ratios for rest of the
material components are stipulated to be worked out on the basis of the
cost of these materials that could be varying from IPC to IPC. The cost
taken into account in working out the percentage factors x, y & z would
affect only the weightage given to a particular material in apportioning
a percentage of the IPC cost to that material (parties could have agreed
to any mode for working out such apportioning of IPC), but this is not
to be mixed up with the price adjustment as such. The note below Sub-
Clause 70.3 (xi) does not by any means indicate or imply that cost
mentioned therein pertains to a date 28 days prior to the last date for
submission of the bids or that it is intended to be taken into account for
calculating the x, y & z percentages.
6.2.9.
The BoQ rates are quoted by the Claimant to perform the
contract with a reasonable expectation of profit. These include all sort
of indirect costs, cost of temporary and incidental works, provision for
uncertainties and allowance for deficient compensation for escalation I
conformity with the stipulation in Sub-clause 70.2 of COPA. Therefore
the Respondent’s stand that the rates of materials like cement, steel,
bitumen 28 days prior to the submission of the bids and that too
without adding the cost of transportation to site, of wastage and
shortage/handling cost) would be comparable to the BoQ rates is unjust
and erroneous.
6.2.10
It may sometimes happen that when the sum of ‘x’ and ‘y’
and ‘z’ is greater than 50%, the percentage factor for ‘other materials’
might become negative. But since parties have agreed to a certain
formula and if at a later stage such an unexpected outcome crops up, a
party cannot unilaterally resort to a different interpretation to its
advantage in violation of the contract and to the detriment of the other
party. In any case, even in such a contingency, the formulae do not
become inoperable, since it shall only result in reducing the overall
amount of price adjustment by a negative figure for ‘other materials’.”
O.M.P.Nos. 472/2013 and 305/2013
Page 9 of 45
15.
A question for consideration had come up before Arbitrator. The
question was whether a party to a contract, after giving a particular
interpretation to the terms of contract for considerable period, can
unilaterally change it to the disadvantage of other party.
16.
The findings of Arbitral Tribunal is as under:-
“6.2.11 It is an established position that “it parties to a contract,
by their course of dealing, put a particular interpretation on the
terms of it, on the faith of which each of them to the knowledge
of the other acts and conducts their mutual affairs, they are
bound by that interpretation just as if they had written it down as
being a variation of the contract. There is no need to inquire
whether their particular interpretation is correct or not or
whether they were mistaken or not, or whether they had in mind
the original terms or not. Suffice it that they have, by the course
of dealing, put their own interpretation of the contract and
cannot be allowed to go back on it” (Amalgamated Investment
& Property Co.Ltd. vs. Texas Commerce International Bank
Ltd. (1981) 3 ALL ER 577). The Hon’ble Apex Court had held
in AIR 1950 SC 15 (Abdulla Ahmed vs. Animendra Kissen
Mitter) that “the evidence of conduct of the parties in this
situation as to how they understood the words to mean can be
considered in determining the true effect of the contract made
between the parties.........Evidence of acts done under it is a
guide to the intention of the parties in such a case and
particularly when acts are done shortly after the date of the
instrument”. The parties had, from the very beginning for more
than two years in IPC-1 to IPC-19, acted on a certain
understanding of the contract. Additionally, we have already
discussed supra that the initial interpretation of the parties was
correct and in accordance with the stipulations in the contract.”
It is this award which has been assailed by petitioner.
OMP No. 305/2014
17.
In this case, the majority award has been assailed by the petitioner.
O.M.P.Nos. 472/2013 and 305/2013
Page 10 of 45
The petitioner had invited a tender from pre-qualified contractors for the
work of “4 Laning from Km 279.80 to 319.80 of Gorakhpur-Gopalganj
Section of NH-28 in Uttar Pradesh. The bid submitted by the respondent
was accepted by the petitioner and a letter of acceptance was issued on
09.09.2005. The contract price was Rs.253,11,78,955/-. A formal agreement
was drawn between the parties on 25.11.2005. Notice for commencement of
the work was issued on 14.12.2005 and work was to be completed within 36
calendar months. The work was already completed in February, 2011 and
was taken over on 18.02.2011 and Defect Liability Certificate was issued on
23.02.2012. Under this agreement, the respondent was entitled to the price
adjustment of various items while submitting his bills. This price adjustment
was agreed upon due to rise or fall in the cost of labour, equipment, plant,
materials and other inputs to the work. The price adjustment was to be done
in accordance with the formula prescribed therein. As per sub-clause
70.3(xi), the calculation of percentage of X, Y and Z which relates to
materials bitumen, cement and steel was to be done. The note underneath
provided that X,Y and Z are actual percentage of cost of material of
bitumen, cement and steel respectively used for execution of work as per the
interim payment certificate for the month. There is no dispute to the fact that
O.M.P.Nos. 472/2013 and 305/2013
Page 11 of 45
till the 18 IPCs submitted by the respondent, the petitioner had calculated
the value of X, Y and Z in this formula as per the actual cost of these articles
in the relevant IPCs. However, subsequently, the petitioner changed the
method of calculation and started calculating it on the basis of base price of
these articles prevalent 28 days prior to the submission of the bids and also
wrote a letter dated 28.07.2009 to PIU directing it to take necessary action to
recover the excess payments made to the contractor and to apply the new
interpretation in future. Thereafter, a letter dated 24.07.2009 was sent by the
Project Director of the petitioner to the engineer, thereby requesting the
engineer to review all the IPCs immediately. The engineer wrote a letter
dated 01.09.2009 to the respondent that an excess payment of
Rs.12,81,946.46/- has been made and asked the respondent to repay the
excess payment or it would be recovered from the money due. The
respondent thereafter filed the OMP No. 484/2009 under Section 9 of
Arbitration and Conciliation Act, 1996 seeking stay on the operation of the
changed price adjustment mechanism sought to be introduced by the
petitioner and this Court stayed the operation of the changed position subject
to respondent furnishing bank guarantee to recover the differential amount.
This order was upheld by the Division Bench of this Court in appeal vide
O.M.P.Nos. 472/2013 and 305/2013
Page 12 of 45
order and judgment dated 14.01.2011. Respondent thereafter raised the
claim before the Arbitral Tribunal. It is also apparent that the petitioner
changed the interpretation of this clause pursuant to an internal audit.
Before invoking the arbitration clause, the matter was also referred to DRB.
The DRB by a majority decision upheld the interpretation given by the
petitioner and rejected the contentions of the respondent. It has been
contended before the Arbitral Tribunal by respondent that there was no
provision in the contract giving power to the petitioner to direct the engineer
to change its opinion. It is further submitted that the change in interpretation
of the clause is based on the internal audit report which is not specific to this
particular contract. It is further submitted that auditor in his report has
referred to ‘base rate’ by reproducing clause 70.1 from a different contract,
whereas no such ‘base rates’ were stipulated or defined in clause 70.1 of this
contract. It is further submitted that the contract specifically provides that
the value of the R which is total value of the work done during the month.
The secured advance is the value of the materials included in the work. The
value of R including the value of materials accounted for in the secured
advance is the basis for determining the price adjustment and there is no
dispute between the parties in this respect.
O.M.P.Nos. 472/2013 and 305/2013
Page 13 of 45
18.
Before the Arbitral Tribunal, contention of the petitioner was that
while calculating the component X,Y,Z, the base rate prevailing 28 days
prior to the closing dates of the bids have to be used. It was argued that the
words used is actual percentage of cost and not actual cost in the “note”
underneath sub-clause 70.3 (xi) and this actual percentage has to be
calculated of these three factors bitumen, cement and steel while the
notional percentage has been provided in the contract for Labour, Plant and
Machinery and Spares, and POL. The spirit behind price adjustment clause
was that nobody should suffer and nobody should gain from the same. It is
further contended before the Arbitral Tribunal that the term of the contract
have to be understood and interpreted in the manner, i.e., “business
commonsense”. It has further been contended that engineer was not forced
to change his decision. It has also further been contended that the provisions
of sub-clause 70.3 are clear and unambiguous and the conduct or
understanding of the parties for a long period is not material in the case of an
unambiguous and clear stipulation in the contract.
19.
The contention of the respondent before the Arbitrator was that the
“note” underneath sub-clause 70.3 (xi) clearly stipulates that the cost price
of these material used for the work done during the IPC month is to be
O.M.P.Nos. 472/2013 and 305/2013
Page 14 of 45
considered while putting the value of these components in the price
adjustment formula and the petitioner was adopting the same interpretation
till payment of 18 IPCs and it changed it in view of the directions of its
Auditors during internal audit.
20.
The Arbitral Tribunal had crystallized the dispute between the parties
as under:-
“57. The sub-clause 70.3 (xi) is the clause which is
being interpreted by both the parties differently.
Claimant’s contention is that the actual/current
cost of bitumen, cement and steel should be used
for calculating X,Y,Z and the Employer’s
contention is that the cost/rate prevailing 28 days
prior to the closing date of submission of bids
should be used in the said calculation. This is the
dispute between the parties.”
Similar is the dispute raised by the parties before this Court, i.e.,
relating to the interpretation of clause 70.3 (xi) with which Arbitral Tribunal
had already dealt with.
The Arbitral Tribunal has reproduced various relevant clauses of
agreement in its award and gave its findings that note below sub-clause 70.3
(xi) does not suggest that cost of bitumen, cement and steel mentioned
therein has to be considered as cost of these materials prevailing “as on the
date 28 days prior to the last date for submission of bids”. The Arbitral
O.M.P.Nos. 472/2013 and 305/2013
Page 15 of 45
Tribunal has further observed in para 59,60 and 61 as under:-
“59. We have given a serious consideration to
the argument of the Respondent that the use of
actual/current cost of cement, steel and bitumen
for calculating the values of X,Y and Z is not in
keeping with the spirit of the Contract, it
contradicts various provisions in the other
contract clauses and that such use of these values
provides double benefit of escalation etc. We have
also considered the argument that logically it
would not be proper to use the current cost of
these materials in the respective formulae. But if
that was so, no one prevented the Respondent
from drafting the Sub-Clause 70.3(xi) by making
it clear that while calculating the values of X, Y
and Z; prices of these materials prevailing as on
the day 28 days prior to the date of opening of
the bids would be considered. If the sub-clause
would have been drafted properly in keeping with
the argued intentions of the respondent, the
respondent would have felt the need of making
clear cut provision in the contract itself to define
as to how these prices of the materials prevailing
as on the day 28 days prior to the bid opening
date are to be arrived at. The contract, as it was
executed and entered into does not say so.”
60. On a conjoint reading of these clauses and
sub-clauses, it is abundantly clear that what the
respondent wants us to read, we are afraid cannot
be done. We are duty bound to read and interpret
the Contract the way it is made and signed by the
parties.
61. When we consider definition of word ‘cost’
as given in sub-clause 1.1(g)(i) of GCC of the
contract it all the more implies that the cost of
O.M.P.Nos. 472/2013 and 305/2013
Page 16 of 45
bitumen, cement and steel to be considered in the
note below sub-clause 70.3(xi) has to be
considered as actual/current cost. No where the
contract mentions that the definition of cost for
this particular Sub-Clause has to be understood
differently.”
21.
The Arbitral Tribunal has dealt with all the contentions of the parties
quite elaborately and in its majority Award of two members has given its
findings, wherein it has held that the expression ‘cost’ used in sub-clause
70.3(xi) has clearly been defined in clause 1.1 g(i) of General Conditions of
Contract. After reproducing all the clauses of the agreement binding the
parties the Arbitral Tribunal had rejected the contentions of the petitioner
and has concluded that since the cost has been expressly defined in the
contract and since there is no mention that the prices of these materials are
to be calculated on the basis of base rate prevalent 28 days prior to the date
of the bid, the contract had to be interpreted as it had been interpreted by the
petitioner till the clearance of 18 IPCs.
22.
The Arbitral Tribunal has also dealt with the contention of the
petitioner that where the terms of the contract are unambiguous, it has to be
read as such and the understanding of the parties for a long time is
immaterial. The Arbitral Tribunal has held that the terms of contract has to
be read as “it is” and not as “it should be” and while doing so has relied on
O.M.P.Nos. 472/2013 and 305/2013
Page 17 of 45
the findings of Supreme Court in the case of Godhra Electricity Co. Ltd. vs.
The State of Gujarat, in Civil Appeal No. 2016 of 1973 and has reproduced
the findings as under:-
“In the process of interpretation of the terms of a contract,
the court can frequently get great assistance from the
interpreting statements made by the parties- themselves or
from their conduct in rendering or in receiving performance
under it. (paragraph 14)
In Abdulla Ahmed v. Animendra Kissen Mitter (1960) S.C.R.
30, this Court said that where there remains a doubt as to
its true meaning and that evidence of the acts, done under it
is a guide to the intention of the parties, particularly, when
acts are done shortly after the date- of the instrument.”
23.
The learned Arbitrator has also relied on the finding of the Supreme
Court in Central Bank of India Limited vs. Hartford Fire Insurance Col.
Ltd. AIR 1965 SC 1288 and in the award has reproduced the findings as
under:-
“Now it is commonplace that it is the court's duty to
give effect to the bargain of the parties according to
their intention and when that bargain is in writing the
intention is to be looked for in the words used unless
they are such that one may suspect that they do not
convey the intention correctly. If those words are clear,
there is very little that the court has to do. The court
must give effect to the plain meaning of the words,
however it may dislike the result.”
The learned Arbitrator after relying on the aforesaid judgments has
O.M.P.Nos. 472/2013 and 305/2013
Page 18 of 45
held that the ‘Note’ provided under sub-clause 70.3 (xi) of COPA read with
other relevant clauses of the Contract leaves no scope for us to interfere
with the clear meaning it conveys and the same has to be given effect to
without regard to any other consideration.
24.
The award also shows that the Arbitral Tribunal has discussed each
and every contention of the parties and has also even dealt with the
examples quoted by the petitioner before it. The Arbitrator has also clearly
given due consideration to the argument of the petitioner that current/invoice
cost and the BOQ cost are different and that the cost prevailing 28 days prior
to the submission of bids was, for a rational ratio, comparable with the BOQ
cost and had given its finding and rejected the contention that BOQ rates
prevailing 28 days prior to the submission of the bids is to be taken into
consideration. In para 75, the learned Arbitrator has made the following
observations:
“75.
The rethinking by the respondent appears to have
started 4 years after the commencement of the work, i.e., 1
year after the completion of the original contract period of
36 months. At the relevant time, the price of bitumen
increased abnormally, and as a consequence, in the case of
a few IPCs, the sum of X, Y & Z became more than 50 and a
negative percentage factor was the result for ‘other local
materials’. This obviously and admittedly was an
unexpected outcome of the formulae. We find that it is not
that the formulae in such situations cannot be implemented.
O.M.P.Nos. 472/2013 and 305/2013
Page 19 of 45
When the sum of ‘X’ ‘Y’ and ‘Z’ is greater than 50%, the
percentage factor for ‘other local materials’ becomes
negative which acts in reducing and to an extent balancing
the higher escalation payable for bitumen, cement or steel.
It is not a case where the formulae become absolutely
impossible of being implemented. In any case, these are
mathematical/empirical formulae where the results could be
positive or negative. Parties have agreed to a certain
formulae, and if the formulae are not such that they cannot
be implemented, a party cannot negate it unilaterally just
because the results are not favourable to it. A party cannot
unilaterally act on a different interpretation to is advantage.
In this regard the Claimant has referred to the decision of
Hon’ble Supreme Court of India in Delhi Development
Authority vs. Joint Action Committee Allottee of SFS Flats
(2008) 2 SCC 672 where the Hon’ble Supreme Court has
laid down in paragraph 61 as under:-
“........Terms and conditions of the contract can
indisputably be altered or modified. They cannot, however,
be done unilaterally unless there exists any provision either
in contract itself or in law. Novation of contract in terms of
Section 60 of the Contract Act must precede the contract
making process. The parties thereto must be ad idem so far
as the terms and conditions are concerned. If DDA, a
contracting party, intended to alter or modify the terms of
contract, it was obligatory on its part to bring the same to
the notice of the allottee. Having not done so, it, relying on
or on the basis of the purported office orders which is not
backed by any statute, new terms of contract could (sic not
be) thrust upon the other party to the contract.”
It was further held by the Hon’ble Supreme Court in
paragraph 80 of the said case as under:-
“A contract, therefore, must be construed so as to lead to a
conclusion that the parties understood the meaning thereof.
The terms of agreement cannot be vague or indefinite. No
O.M.P.Nos. 472/2013 and 305/2013
Page 20 of 45
mechanism has been provided for interpretation of the terms
of the contract. When a contract has been worked out, a
fresh liability cannot thrust upon a contracting party.”
We observe that very similar situation has arisen in the
present case. The Respondent felt the need to alter the
ordinary meaning of the sub-clause 70.3 (xi). It has been
brought on record that it indeed did so in its similar future
contracts. It also wanted to implement the same changes in
the Contract, which had already been signed and was in
force. To this extent there was nothing wrong. However,
thereafter the Employer implemented these changes
unilaterally without holding any deliberations with the
Claimant, who is also a party to the Contract. We cannot
support this action of the Respondent as we do not have the
liberty traverse outside the four corners of the Contract.”
The Arbitral Tribunal has also clearly held that the contract cannot be
unilaterally altered. The argument of the petitioner before the Arbitral
Tribunal that the interpretation given by the engineer regarding 18 IPCs was
a mistake and that under the contract, the engineer was authorized to correct
his mistake at any stage has also been dealt with and the Tribunal has based
its findings on the findings of the Supreme Court in Bharat Sanchar Nigam
Limited Vs. BPL Mobile Cellular 2008 (8) SCALE 106.
The Supreme Court in the said case has held as under:
“26. If the parties were ad idem as regards terms of
the contract, any change in the tariff could not have
been made unilaterally. Any novation in the contract
was required to be done on the same terms as are
required for entering into a valid and concluded
O.M.P.Nos. 472/2013 and 305/2013
Page 21 of 45
contract. Such an exercise having not been resorted to,
we are of the opinion that no interference with the
impugned judgment is called for.
32. Indisputably, mistakes can be rectified. Mistake
may occur in entering into a contract. In the latter
case, the mistake must be made known. If by reason of
a rectification of mistake, except in some exceptional
cases, as for example, where it is apparent on the face
of the record, mistake cannot be rectified unilaterally.
The parties who that would suffer civil consequences
by reason of such act of rectification of mistake must
be given due notice. Principles of natural justice are
required to be complied with. The fact that there was
no mistake apparent on the face of the records is borne
out by the fact that even the officers wanted
clarification from higher officers. The mistake, if any,
was sought to be rectified after a long period; at least
after a period of three years. When a mistake is not
rectified for a long period, the same, in law, may not be
treated to be one.”
Relying on that, the Arbitrator has rejected the contention of the
petitioner that it was not such a mistake which could be unilaterally
rectified. While holding so, the Arbitral Tribunal had also relied on the
findings of Lord Denning in Amalgamated Investment & Property Co. Ltd.
vs. Texas Commerce International Bank Ltd. cited as (1981) 3 ALL ER 557
(Volume C-3 Page 175-183).
The relevant paragraph is reproduced in
Award:-
“If the parties to a contract, by their course of dealing,
put a particular interpretation o the terms of it, on the
O.M.P.Nos. 472/2013 and 305/2013
Page 22 of 45
faith of which each of them to the knowledge of the
other acts and conducts their mutual affairs, they are
bound by that interpretation just as if they had written
it down as being a variation of the contract. There is
no need to inquire whether their particular
interpretation is correct or not, or whether they were
mistaken or not, or whether they had in mind the
original terms or not. Suffice it, that they have, by the
course of dealing, put their own interpretation on their
contract, and cannot be allowed to go back on it.”
The Arbitral Tribunal has also relied on the following findings in the
case of Godhra Electricity Co. Ltd. (supra):-
“Parties can, by mutual agreement, make their own
contracts; they can also, by mutual agreement, remake
them. The process of practical interpretation
application, however, is not regarded by the parties as
a remaking of the contract; nor do the courts so regard
it. Instead, it is merely further expression by the parties
of the meaning that they give and have given to the
terms of their contract previously made. There is no
good reason why the courts should not give great
weight to these further expressions by the parties, in
view of the fact that they still have the same freedom of
contract that they had originally. The American Courts
receive subsequent actions as admissible guides in
interpretation. It is true that one party cannot build up
his case by making an interpretation in his own favour.
it is the concurrence therein that such a party can use
against the other party. This concurrence may be
evidenced by the other party's express assent thereto,
by his acting in accordance with it, by his receipt
without objection of performances that indicate it, or
by saying nothing when knows that the first party is
acting on reliance upon the interpretation.”
O.M.P.Nos. 472/2013 and 305/2013
Page 23 of 45
Therefore, it is clear that the findings of the Arbitral Tribunal are
based on the settled principle of law. The Arbitral Tribunal has also relied
on the rule of contra proferentem which means that an ambiguity, if found in
a contract, has to be interpreted against the author of the contract.
Undoubtedly, the petitioner is the author of the contract.
25.
The petitioner in both the OMP’s aggrieved by finding of the Arbitral
Tribunals on the issue of interpretation of sub-clause 70.3(xi) has
approached this Court by way of present petitions under Section 34 of the
Act.
26.
Mr. Sudhir Nandrajog, learned senior counsel for the petitioner has
contended that the Arbitral Tribunals has erred in holding that the value of
X,Y,Z is to be calculated on the basis of actual cost of procurement and not
on the basis of base rate, i.e. rate prevailing 28 days prior to the closing date
of submission of the bid. It is also argued that Arbitral Tribunals have
ignored the fact that cumulative weightage of bitumen, steel and cement
should not exceed 50% as the same renders the value of other materials as
negative. The incorrect application of Sub-clause 70.3 has resulted in the
cumulative weightage of the said materials exceeding 50% resulting in
negative value of other materials. The interpretation given by the Arbitral
O.M.P.Nos. 472/2013 and 305/2013
Page 24 of 45
Tribunals to clauses 60 and 70 of COPA is also incorrect and contrary to the
meaning of the aforesaid provisions in the contract.
27.
It is also argued that if the said formula is adopted then for a particular
IPC, the total value of the work done could be more than what was included
in that IPC. Also, by applying the relevant whole sale price index, the
element of inflation affecting the price of a particular material during a
given period of time would be adequately compensated and that it was the
intent of clause 70 of the COPA. It is also contended that the interpretation
given is going to enrich respondent. It is further stated that Arbitrator has
allowed untenable and unsustainable claims of the respondents.
28.
It is also contended that as per sub-clause 60.9, the Engineer is
empowered to make any correction or modification in any previous IPCs as
the payments released under the IPCs are on-account payments, subject to
final calculations in terms of contract, and that the interpretation now given
by the Engineer to these clauses is the correct interpretation. It is further
contended that the Arbitral Tribunal has erred by taking the value of R in the
denominator.
29.
It is further contended that the Arbitral Tribunal cannot go beyond
explicit terms of contract. (Reliance is placed on findings of Supreme Court
O.M.P.Nos. 472/2013 and 305/2013
Page 25 of 45
in Oil and Natural Gas Corporation Ltd vs. Saw Pipes Ltd., 2003(2)
Arb.LR(5) SC para 40) and has reproduced the same in petition as under:-
“in constructing a contract, the Court must look at the
words used in the contract unless they are such that
one may suspect that they do not convey the intention
correctly. If the words are clear, there is very little the
court can do about it.”
30.
In OMP No. 305/2014, it is contended that rejection of claim of the
petitioner by Arbitral Tribunal for recovery of sum of Rs.12,81,946.46/-
which had been paid in excess from IPC No. 1 to 18 is in violation of the
contractual provisions and against the public policy and hence patently
illegal.
It is submitted that the findings of Arbitral Tribunals on the issue of
interpretation of sub-clause 70.3 (xi) are erroneous, and contrary to terms of
agreement and liable to be set aside. It is further contended that the
interpretation which has been given by the Arbitral Tribunals to this clause
leads to payment of excess money to the respondent and this causes loss to
the public exchequer and hence award is against the public policy and so
liable to be set aside.
31.
Both the petitions are contested by the respondents. The contention in
both cases in relation to legal proposition is that the Arbitral Tribunal has
O.M.P.Nos. 472/2013 and 305/2013
Page 26 of 45
given the correct interpretation to the Clause 70.3 (xi), and the findings of
the Arbitral Tribunals regarding interpretation of the terms of the contract
are final as the same are within the exclusive domain of the Arbitral
Tribunals and the courts cannot interfere with said findings simply on the
ground that another interpretation is possible. The courts also cannot re-
appreciate the evidence. Reliance has been placed on the findings in the
cases –(a) 2010 (1) ArbLR 589 (Del) NHAI Vs. UNITECH-NCC JOINT
VENTURE (Para-9), and 178 (2011) DLT 496 (DB) NHAI Vs. UNITECH-
NCC-JV, (b) 2009 (SUPPLE 2) ArbLR 107 (Del) (DB) NHAI Vs. AFCONS
INFRASTRUCTURE LTD. Para 10 & (c) 2009(3) ArbLR 268 (Del) NHAI
Vs M/S ITD CEMENTATION INDIA LTD.
32.
Both the OMPs have been defended on the same grounds. Plea taken
is that once a contract is understood and acted upon in a particular way, the
interpretation of its terms cannot be changed unilaterally. It is also
contended that under the contract, petitioner has no power to direct the
engineer to interpret the contract in a particular manner. It is submitted that
parties are bound by written agreement between them. It is further
contended that nowhere in the contract, it is mentioned that the expression
“cost” used in the sub-clause 70.3(xi) for the material bitumen, steel and
O.M.P.Nos. 472/2013 and 305/2013
Page 27 of 45
cement, used in the work done during the month of IPC, has to be the cost of
these materials prevalent 28 days prior to the submission of the bid. It is
contended that the Arbitral Tribunals have not gone beyond the terms of the
contract and have correctly interpreted the contract giving the plain meaning
to the words used in the contract. It is further argued that since it is a settled
law that when a plausible interpretation to any clause of the agreement is
possible and the Arbitrator has given the award based on that plausible
interpretation of the terms of the contract then the Court cannot set aside the
award solely on the basis that another interpretation is possible. It is further
contended that awards do not suffer with any infirmity or illegality and
simply because the findings of the Arbitral Tribunals do not suit the
petitioner, the award cannot be set aside.
33.
In OMP No. 472/2014, it is further submitted that the petitioner had
paid only the interim payment of Rs.5,87,00,361/- against which the
respondent had furnished bank guarantee, which was subsequently released,
therefore, the interest has been rightly awarded by the Arbitrator. The
respondent has also incurred the expenses of Rs.19,54,781/- charges for
renewing the bank guarantee which do not form the part of the award. It is
argued that in the present case, the Arbitrator has upheld the interpretation of
O.M.P.Nos. 472/2013 and 305/2013
Page 28 of 45
clause 70.3 which had been adopted by the petitioner himself till 19 IPCs
and thereafter had unilaterally changed it, which act was contrary to the
terms of the contract. Hence, the petition is liable to be dismissed.
34.
I have given due consideration to the rival contentions of the learned
counsels of the parties in both the cases and have perused the record.
35.
There is no dispute to the fact that in terms of sub-clause 70.1 of the
contract, the respondents were entitled to price adjustment and the formula
for calculation of the price adjustment is noted in sub-clause 70.3. The
dispute between the parties simply relates to the interpretation of clause 70.3
(xi) of the contract. This clause deals with the calculation of percentage of
three components steel, bitumen and cement which governs the price
adjustment of the contract. Sub-clause 70.1 of COPA states that the
contractor is entitled for the price adjustment and this price adjustment is
necessitated due to rise or fall in the cost of labour, etc. The said clause is
reproduced as under:-
“Sub-Clause 70.1: Price Adjustment:
The amount payable to the Claimant, in various currencies
pursuant to sub-clause 60.1, shall be adjusted in respect of
the rise or fall in the cost of labour, contractor’s equipment
plant, materials and other inputs to the works, by applying
to such amounts the formulae prescribed in this
Clause.
O.M.P.Nos. 472/2013 and 305/2013
Page 29 of 45
Sub-Clause 70.3
Adjustment Formulae
Contract price shall be adjusted for increase or decrease in
rates and price of labour, materials, fuels and lubricants in
accordance with the following principles and procedures as
per formulae given below. The amount certified in each
payment certificate is adjusted by applying respective price
adjustment factor to the payment amounts due in each
currency.
a.
...................
b. ....................
c. Following expressions and meanings are assigned to the
work done during each month:
R = Total value of work done during the month. It would
include the value of materials on which secured advance
has been granted, if any, during the month, less the value of
materials in respect of which the secured advance has been
recovered, if any, during the month. This excludes the cost
of work on items for which rates were fixed under variations
clause (51 and 52) for which the escalation will be
regulated as mutually agreed at the time of fixation of rate.
(ii)
Adjustment for Cement Component
Price adjustment for increase or decrease in the cost of
cement procured by the Contractor shall be paid in
accordance with the following formula:
Vc= 0.85 x Po/100 x Ri x (ci-co)/co
Pc= Percentage of Cement component of work.
(iii)
Adjustment for Steel Component
Price adjustment for increase or decrease in the cost of steel
procured by the Contractor shall be paid in accordance
with the following formula:
Vs= 0.85 x Ps/100 x Ri x (si-so)/so
O.M.P.Nos. 472/2013 and 305/2013
Page 30 of 45
Ps= Percentage of steel component of the work.
v. Adjustment for Bitumen Component
Price adjustment for increase or decrease in the cost of
bitumen procured by the Contractor shall be paid in
accordance with the following formula:
Vb= 0.85x Pb/100 x Ri x (Bi-Bo)/Bo
Pb= Percentage of bitumen component of work.
1.
2.
3.
4.
5.
6.
7.
xi.
The following percentages will govern the price
adjustment of the contract:
Labour-Pl
20%
Plant and Machinery and Spares-Pp
20%
POL-Pf
10%
Bitumen- Pb
x%
Cement- Pc
y%
Steel-Ps
z%
Other materials-Pm
50% -(x+y+z)%
Total
100%
(Note: x,y,z are the actual percentage of cost of materials of
bitumen, cement and steel respectively used for execution of
work as per the Interim Payment Certificate for the
month.).”
36.
In formulae given for price adjustment of cement, steel and bitumen
in the above sub-clause 70.3 (ii) (iii) and (v), Pc, Ps and Pb is the percentage
of cement, steel and bitumen.
37.
Clause 70.3 (xi) provides the method of calculation of the percentage
of these components that is Bitumen, steel and cement which will govern the
price adjustment.
While the percentage of the components relating to
O.M.P.Nos. 472/2013 and 305/2013
Page 31 of 45
labour, plant and machinery and spares, and POL has been fixed as 20%,
20%, 10% respectively, the percentage of components bitumen (Pb),
Cement (Pc) and steel (Ps) is X, Y and Z percentage respectively. The
percentage of other materials PM 50% -(X+Y+Z)% and thus the formula
requires that it should total as 100%.
38.
The note below this clause provides the method of calculation of the
factors X,Y and Z. The note clearly stipulates that X,Y,Z are the actual
percentage of cost of material used for execution of work as per the Interim
Payment Certificate for the month. This clause has no reference to the base
price but relates to the procurement price of these materials, i.e., the cost
incurred by the contractor towards these materials which he has used for
execution of the work done by him as per his Interim Payment Certificate of
that month. This simple interpretation has been adopted by the petitioner’s
Engineer till the 18 and 19 IPCs. Even when the opinion of the Engineer
was sought by the PD, he had reiterated that procurement price of these
articles used as per that month’s IPC would determine its percentage in the
price adjustment formula.
39.
It is abundantly clear that the Engineer changed the interpretation of
this clause only when the petitioner had insisted upon him to do so.
O.M.P.Nos. 472/2013 and 305/2013
Page 32 of 45
Thereafter, instead of calculating the percentage of Pb, Ps and Pc on the
basis of procurement price of these components as per the relevant IPC, the
calculation was done by using the base price prevalent 28 days prior to the
last day of submission of the bid. The petitioner changed its interpretation
from cost price to base price only when the auditor, in the audit report for
the audit conducted for the period October, 2007 to March, 2008 had
observed that the percentage calculation is not correct since the cost has not
been defined in the contract agreement.
40.
The Arbitral Tribunals have dealt with the report of the auditors and
in OMP 472/2013, the Arbitral Tribunal has clearly held “the audit report
was generic in nature covering 23 contract agreements”.
The arbitral
tribunal also observed that “since the audit report is not specific to this
particular contract and since the wording of several clauses are not
identical in other contract but vary from contract to contract, it cannot be
made applicable to this particular contract specially when there are various
inconsistencies and factual errors in this report relating to the contract
before us. For example the report observes that different PIUs (Project
Implementation Units) are using different basis since ‘cost’ is not defined in
the contract, but contrary to this assertion cost has been explicitly defined
O.M.P.Nos. 472/2013 and 305/2013
Page 33 of 45
in the contract before us.”
In OMP No. 305/2014, the Arbitral Tribunal has observed that there is
no dispute to the fact that in the contract under challenge, the cost has been
defined as under:-
41.
Clause 1.1(g) (i) of Contract reads as under:-
“(g) (i)
“cost” means all expenditure properly
incurred or to be incurred, whether on or off the
Site, including overhead and other charges
properly allocable thereto but does not include any
allowance for profit.”
42.
The Arbitral Tribunals have concluded that the audit report, pursuant
to which the petitioner had asked its Engineer to change the interpretation of
sub-clause 70.3 (xi) was not specific to this contract and the auditors while
giving its report have not considered the various terms and conditions of
these contracts. On the other hand, Engineer has been interpreting the each
contracts in the light of its terms and conditions. In OMP No. 472/2014, the
opinion of Engineer, DRB and Arbitral Tribunals have been unanimous.
They all had found that the value of X,Y and Z is to be calculated on the
basis of cost price and not on base price.
43.
The present petition is under Section 34 of the Arbitration and
Conciliation Act and the scope of powers of this court to interfere with the
O.M.P.Nos. 472/2013 and 305/2013
Page 34 of 45
award has been reduced considerably in the new amended Arbitration and
Conciliation Act, 1996. An arbitral award can be assailed under Section 34
of the Act only on the ground enumerated therein, i.e., when the applicant
furnishes the proof that he was under some in capacity, or that the arbitration
agreement was not valid under the law, or that he did not have any proper
notice of the appointment of the arbitrator or of the arbitral proceedings or
otherwise unable to present his case, or that arbitral award deals with the
dispute not contemplated by or not falling within the terms of the
submission of the arbitration, or where the composition of the arbitral
tribunal or arbitral proceedings was not in accordance with the agreement of
the parties or unless such agreement was not in accordance with the
provision of the Arbitration Act where the dispute was not capable of
settlement, or where the arbitral record is in conflict with the public policy
of India.
44.
The petitioner has challenged the awards on the grounds that the
findings of the Arbitral Tribunals are not correct, the same are erroneous and
that the interpretation given by the Tribunals to the several clauses of the
contract is not only wrong but would also lead to heavy loss to public
exchequer and hence against the public policy. It is submitted that the
O.M.P.Nos. 472/2013 and 305/2013
Page 35 of 45
petitioner is doing the work entrusted to it by the Central Government.
45.
The sole question therefore is whether the findings of the Arbitral
Tribunal are against the public policy. The public policy has been defined
by the Hon’ble Supreme Court in Oil and Natural Gas Corporation Ltd vs.
Saw Pipes Ltd., AIR 2003 SC 2629: 2003(2) R.A.J. 1
"31. Therefore, in our view, the phrase "public policy of India" used in
Section 34 in context is required to be given a wider meaning. It can
be stated that the concept of public policy connotes some matter
which concerns public good and the public interest. What is for public
good or in public interest or what would be injurious or harmful to the
public good or public interest has varied from time to time. However,
the award which is, on the face of it, patently in violation of statutory
provisions cannot be said to be in public interest.
Such award/judgment/decision is likely to adversely affect the
administration of justice. Hence, in our view in addition to narrower
meaning given to the term "public policy" in Renusagar case 1994
Supp (1) SCC 644 it is required to be held that the award could be set
aside if it is patently illegal. The result would be -- award could be set
aside if it is contrary to:
(a) fundamental policy of Indian law; or
(b) the interest of India; or
(c) justice or morality, or
(d) in addition, if it is patently illegal.
Illegality must go to the root of the matter and if the illegality is of
trivial nature it cannot be held that award is against the public policy.
Award could also be set aside if it is so unfair and unreasonable that it
shocks the conscience of the court. Such award is opposed to public
policy and is required to be adjudged void."
O.M.P.Nos. 472/2013 and 305/2013
Page 36 of 45
The legal position was crystallized in the later decision in Steel
Authority of India Limited v. Gupta Brother Steel Tubes Limited, (2009)
10 SCC 63 thus (SCC, p. 78):
"18. It is not necessary to multiply the references. Suffice it to say that
the legal position that emerges from the decisions of this Court can be
summarised thus:
(i) In a case where an arbitrator travels beyond the contract, the award
would be without jurisdiction and would amount to legal misconduct
and because of which the award would become amenable for being set
aside by a court.
(ii) An error relatable to interpretation of the contract by an arbitrator
is an error within his jurisdiction and such error is not amenable to
correction by courts as such error is not an error on the face of the
award.
(iii) If a specific question of law is submitted to the arbitrator and he
answers it, the fact that the answer involves an erroneous decision in
point of law does not make the award bad on its face.
(iv) An award contrary to substantive provision of law or against the
terms of contract would be patently illegal.
(v) Where the parties have deliberately specified the amount of
compensation in express terms, the party who has suffered by such
breach can only claim the sum specified in the contract and not in
excess thereof. In other words, no award of compensation in case of
breach of contract, if named or specified in the contract, could be
awarded in excess thereof.
(vi) If the conclusion of the arbitrator is based on a possible view of
the matter, the court should not interfere with the award.
(vii) It is not permissible to a court to examine the correctness of the
findings of the arbitrator, as if it were sitting in appeal over his
findings."
The challenge to awards before me is on the ground that the
O.M.P.Nos. 472/2013 and 305/2013
Page 37 of 45
interpretation given by Arbitral Tribunal to the sub-clause 70.3(xi) is
erroneous and thus against the public policy.
46.
A similar question had come up before the Court in National
1Highways Authority of India Vs. ITD Cementation India Ltd. reported in
2007 (5) RAJ 642 (Delhi). The petitioner in that case had also challenged the
findings in the arbitral award on the ground that the interpretation given by
the arbitrator to the term of the contract was against the public policy.
The Court has given the findings as under:-
“ Suffice it to say that the arbitrators not only looked into the
provisions of the contract but also examined the issues like
whether minor minerals used for construction of highways were
or were not included in the basket of materials whose cost
variation is taken into consideration as an input in the
assumption of the wholesale price index (WPI). Such being the
position, simply because the interpretation placed by the
arbitrators has not favoured one or the other party can be no
reason for the Court to interfere under Section 34 of the Act
with the award made on any such interpretation. It is fairly well
settled by a long line of decisions rendered by the Supreme
Court that a Court dealing with a petition under Section 34 of
the Arbitration and Conciliation Act, 1996 does not sit in an
appeal over the arbitral award. That was the position even
under the Arbitration Act of 1940. As a matter of fact, the scope
of interference with an arbitral award has been substantially
reduced under the new legislation and would be confined to the
grounds set out under Section 34 of the Act as interpreted by the
Supreme Court in Oil and Natural Gas Corporation Ltd vs. Saw
Pipes Ltd., AIR 2003 SC 2629: 2003(2) R.A.J. 1. We, therefore,
see no reason to take a view different from the one taken by the
learned Single Judge that the award made by the arbitrators
cannot be interfered with simply on the ground that another
interpretation of the terms of the contract, no matter equally
plausible, was possible.”
O.M.P.Nos. 472/2013 and 305/2013
Page 38 of 45
In both the cases before me, the Arbitral Tribunal while giving its
findings regarding interpretation of sub-clause 70.3(xi) have referred to all
the relevant clauses relating to price adjustment formula and then reached
to a conclusion. It is also clear that the Arbitral Tribunals have in fact
upheld the interpretation adopted by the petitioner till its internal Auditors
report. It has, in fact, accepted the interpretation of sub-clause 70.3 (xi)
given by the engineers approached by the petitioner and found that that was
the only possible interpretation that could be given to unambiguous sub-
clause and any other interpretation would amount to re-writing the contract.
47.
The Supreme Court in National Highways Authority of India Vs.
Unitech-NCC Joint Venture reported in 2011 (Suppl.1) Arb.LR.94 (Delhi)
(DB), while dealing with the scope of interference by Courts where
arbitrator has given its findings on the interpretation of the terms of
contract after relying on various case laws, has observed as under:-
“para 7.
It is obvious that the interpretation of the
contract forms the fulcrum of the dispute between the two
adversaries before us. As already mentioned, the power to
interpret the contract was reposed in the ‘Engineers’ as per
Clause 5.2.1 of the contract. The Engineers, on a
thorougher and lucid examination of the contract, have
concluded that escalation was contractually payable on the
contract itself as well as on any variation thereto. Even
under the regime of the repealed Arbitration Act, 1940,
Their Lordships have opined in the celebrated judgment of
Sudarsan Trading Company vs. Government of
Kerala, (1989) 2SCC 38= 1989(2) Arb.LR 6 (SC)
O.M.P.Nos. 472/2013 and 305/2013
Page 39 of 45
inasmuch the court reiterated the position that –“Once
there is no dispute as to the contract, what is the
interpretation of that contract, is a matter for the
arbitrator on which the court cannot substitute its
decision.”
The continuity of this opinion is manifest from a reading
of H.P. State Electricity Board vs. R.J. Shah & Co.,
(1999) 4SCC 214= 1999(2) Arb.LR 316 (SC) inasmuch
the court reiterated the position that –“when the arbitrator
is required to construe a contract then merely because
another view may be possible the court would not be
justified in construing the contract in a different manner
and then to set aside the award by observing that the
arbitrator has exceeded the jurisdiction in making the
award.” Numaligarh Refinery Limited vs. Daelim
Industrial Company Limited, (2007) 8 SCC 466=2007
SCACTC471 (SC)=2007(3) Arb.LR 378 (SC) records
that with regard to the interpretation of a contract, the
decision of the arbitrator should not be interfered with by
the court. After adverting to Tarapore & Company Vs.
Cochin Shipyard Limited, 1984 2 SCC 680= 1985 Arb.
LR2 (SC), Their Lordships recorded that “there can be
no quarrel with the proposition that –if a question of law
is specifically referred to by the parties to the arbitrator
for decision, award of the arbitrator would be binding on
the parties and court will have no jurisdiction to interfere
with the award even on ground of error of law apparent
on the face of award.”
Very recently, in McDermott International Inc.vs.Burn
Standard Co.Ltd., (2006) 11 SCC 181=2006 SCACTC
283 (SC)=2006 (2) Arb.LR 498 (SC), after perusal of a
plethora of precedents, Their Lordships have enunciated
this aspect of the law in the following manner:
“112. It is trite that the terms of the contract can
be express or implied. The conduct of the parties
would also be a relevant factor in the matter of
construction of a contract. The construction of
the contract agreement is within the jurisdiction
of the arbitrators having regard to the wide
nature, scope and ambit of the arbitration
agreement and they cannot be said to have
misdirected themselves in passing the award by

taking into consideration the conduct of the
parties. It is also trite that correspondences
exchanged by the parties are required to be taken
into consideration for the purpose of construction
of a contract. Interpretation of a contract is a
matter for the arbitrator to determine, even if it
gives rise to determination of a question of law.
[See Pure Helium India (P) Ltd. v. ONGC: AIR
2003 SC 4519=2003(3) Arb. LR 409 (SC) and
D.D. Sharma v. Union of India, (2004) 5 SCC
325=2004(2) Arb. LR 119 (SC)].
113. Once, thus, it is held that the arbitrator had
the jurisdiction, no further question shall be
raised and the court will not exercise its
jurisdiction unless it is found that there exists any
bar on the face of the award.
114. The above principles have been reiterated in
Chairman and MD, NTPC Ltd. v. Reshmi
Constructions, Builders and Contractors: AIR
2004 SC 1330=2004)1) Arb. LR 156 (SC), Union
of India v. Banwari Lal and Sons (P) Ltd. AIR
2004
SC
1983=2004(2)Arb.LR81(SC),
Continental Construction Ltd. v. State of UP. :
(2003) 8 SCC 4 and State of UP. v. Allied
Constructions:
(2003)
7
SCC
396
Arb.LR106(SC).
8. In the case before us, the Arbitral Tribunal has
unequivocally upheld the interpretation of the contract
expressed by the 'Engineers' who have been contractually
empowered by the parties to impart meaning to the sundry
clauses of the subject Agreement.
9. It would be perilous and constitutionally unjustifiable to
ignore and lose sight of Parliament’s endeavour to curtail
curial interference in arbitration awards. Section 34 of A
and C Act does not contemplate the existence of errors on
the face of the Award, which the Supreme Court has
clarified to be beyond judicial interference. The learned
Single Judge has, in the impugned Order, rendered a
threadbare consideration of the terms of the Contract and
his conscience has not been provoked in the least bit. The
learned Single Judge has failed to find any infraction of
the public policy of India. However much we stretch our

thinking, we cannot conceive of a construction of the
contract contrary to that carried out by the Competent
Authority and more particularly by the learned Single
Judge. Interference by us will be justified if the views of
the learned Single Judge can be perceived as a perversity.”
48.
From the above findings of the Supreme Court, it is emphatically
clear that the award can only be set aside in terms of Section 34(2). The
courts have no jurisdiction to set aside the award on any ground other than
those specified in the Section. The courts are not supposed to sit in appeal,
re-appreciate the evidence as an appellate court. This observation has been
made by the Supreme Court in Judgment P.R. Shah, Shares and Stock
Brokers Private Limited Vs B.H.H. Securities Private Limited and other,
(2012) 1 SCC 594.
49.
Relevant para 21 of the said judgment is reproduced as under:-
“21. A court does not sit in appeal over the award of an arbitral
tribunal by re-assessing or re-appreciating the evidence. An award can
be challenged only under the grounds mentioned in Section 34(2) of the
Act...Therefore, in the absence of any ground under Section 34(2) of the
Act, it is not possible to re-examine the facts to find out whether a
different decision can be arrived at.”
50.
Also in the case of Numaligarh Refinery Ltd. Vs Daelim Indusrial
Co.Ltd. (2007) 8 SCC 466 = 2007 SCACTC 471 (SC) = 2007(3) Arb.LR 378
(SC); the court has clearly held that where the interpretation given by the
arbitral tribunal to the contract is a plausible interpretation, the court should
not interfere even if a different interpretation is plausible.
51.
The Supreme Court has consistently been of the opinion that the court
should refrain itself from interfering with an award if the award is well
reasoned, based on the substantive law and within the four corners of the
terms of the contract and where there is no patent illegality on the face of it.
52.
It is also settled law that an award cannot be set aside simply because
a party feels that the award is unfair or unreasonable, unless the unfairness
and the unreasonableness shock the conscience of the court. (Reliance is
placed on J.G. Engineers Private Limited vs. Union of India and another,
(2011) 5 SCC 758).
53.
In the present case, the petitioner has failed to show any illegality in
the awards. There is nothing in the Awards which shocks the conscience of
this Court. No error that can be said to be apparent on the face of the award
has also been pointed out. From the contentions of the petitioner, it is
apparent that it has challenged the award only on the ground that the
interpretation given by the arbitrator to the term of contract is erroneous.
54.
In McDermott International Inc (supra), it has been held that unless
the illegality is of such a nature that it is not only patent but goes to the very
root of the matter, it can be said that the award is against the public policy.
If the illegality is not patent or does not go to the very root of the matter but
a frivolous or trivial illegality, such an award is not against the public policy.
55.
In the present case, petitioner has failed to point out any illegality in
awards. In these cases, even two interpretation of the terms of the contract is
not possible. There is only one interpretation that can be given to the terms
of the contract which is what has been given by Engineers of the petitioner,
and upheld by the Arbitral Tribunals after elaborate discussion in the
Awards.
56.
The Supreme Court in the case of Bharat Coking Coal Ltd. vs. L.K.
Ahuja (2004) 5 SCC 109 has clearly held that even if two views are
possible, the view taken by the Arbitrator would prevail and the Courts have
no jurisdiction to interfere with such an award. The Court has observed as
under:-
“There are limitations upon the scope of interference
in awards passed by an arbitrator. When the arbitrator
has applied his mind to the pleadings, the evidence
adduced before him and the terms of the contract, there
is no scope for the court to reappraise the matter as if
this were an appeal and even if two views are possible,
the view taken by the arbitrator would prevail. So long
as an award made by an arbitrator can be said to be
one by a reasonable person no interference is called
for.”
57.
In a recent judgment of M/s Navodaya Mass Entertainment Ltd. vs.
M/s J.M. Combines, Civil Appeal Nos. 7128-7129 of 2011, decided on
O.M.P.Nos. 472/2013 and 305/2013
Page 44 of 45
26.08.2014, the Supreme Court again has reiterated the same principle and
relying upon the Bharat Coking Coal Ltd. (supra) and other decisions held
that “once the Arbitrator has applied his mind to the matter before him, the
Court cannot reappraise the matter as if it were an appeal and even if two
views are possible, the view taken by the Arbitrator would prevail.”
58.
In the present case, the Arbitral Tribunals have discussed all the
contentions raised before it by the petitioner and the evidence produced and
the case laws relied upon and then have given its well-reasoned findings.
59.
For the foregoing reasons, there exists no ground to interfere with the
findings of the Arbitral Tribunals. Both the petitions are hereby dismissed
with no order as to costs.
DEEPA SHARMA, J.
DECEMBER 17, 2014