Contract – NHAI Contracts – Price adjustment formula, ‘note’ appended thereto – Interpretation of – Respondents-contractors awarded contracts by appellant-NHAI for construction of roads etc. – Tender document envisaged a ‘Price Adjustment formulae – Sub-clause 70.3 of the Contract provided for the ‘adjustment formulae’ for calculating the price adjustment amount wherein the work is divided into seven components for which specific percentages were given to govern the price adjustment– However, such specific percentages were given only for 4 components, and for rest three components i.e. bitumen, cement and steel, variable percentages were given as x%, y%, z% which were to be worked out – ‘Note’ after sub-para (xi) of sub-clause 70.3 mentioned that x, y, z were the actual percentage of the cost of material of bitumen, cement and steel respectively which were used for execution of the work – Dispute between parties as to basis for calculation of actual percentage of cost of material of bitumen – Plea of NHAI that base rate (i.e. the rate prevailing 28 days prior to the submission of the bid) of these materials should be considered while applying the formula – Respondents contended that it is the prevailing rate in that particular month which would be the determining factor – Dispute Review Board (DRB) held in favour of NHAI – Respondents invoked arbitration – Arbitration Tribunal allowed the claim – NHAI filed objections u/s.34, 1996 Act before High Court – Objections dismissed by High Court – On appeal, held: Clause relating to price adjustment indicates that certain components which go into the execution of the projects like labour component, cement component, steel component, plant and machinery and spares component, bitumen component etc. may not remain static insofar as their price is concerned – There is a possibility that from the date when the price of these components was quoted by the contractor in his bid, there may be increase or decrease in the said price from time to time during the execution of the contract – Towards this, adjustment formula for working out the cost, at the time of execution of the contract, is provided – This adjustment has to be arrived at, in comparison with the base price/rates referred by the contractor/bidder – Thus, while applying price adjustment formula for calculating the price adjustment of bitumen, it is the base rate which is to be applied and not the current rate – Arbitration and Conciliation Act, 1996 – s.34.
Allowing the appeals, the Court
HELD: 1.1 Clause 70 of Conditions of Particular Application (COPA) of the contract pertains to price adjustment. Clause 70.3(v) deals with ‘Adjustment for Bitumen Component’. As per this clause, the price adjustment for increase or decrease in the cost of bitumen is to be paid in accordance with the following formula:
“ Vb=0.85 x Pb/100 x R1 x (Bi – Bo)/Bo”
Vb is increase or decrease in the cost of work during the month under consideration due to changes in the rate of bitumen. Pb denotes percentage of bitumen component of the work and R1 is the total value of the work. Bi denotes current rate/cost as it is the average official retail price of bitumen at IOC Depot at Barauni/Haldia on the day 28 days prior to the submission of bids, which makes it clear that it is equivalent to the base rate. Thus, when this formula is considered of its own, Bo clearly refers to the base rate. [Paras 14-16] [1029-E-F, G-H; 1030-F-G, G]
1.2 Pb = X% is calculated by NHAI by following mathematical formula:
“Pb = Quantity of Bitumen consumed during the month x base rate of bitumen x 100
Total Work done during the month of x BOQ rates.”
[Para 18] [1031-B-C]
1.3 The issue relates to price adjustment and such an adjustment can be made in respect of various components which are used in the contract. The contractual provisions specifically deal with adjustment for labour component, cement, steel etc. These components are seven in numbers which may undergo price adjustment during the period when the contract is in progress, depending upon the market conditions, namely, increase or decrease in market prices of these components from time to time. The very nature of this price adjustment suggests that such variation would have relevance with the price which was indicated in respect of these components at the time of submitting the tender by the successful contractor and, in that sense, it can have reference only to the base price. The clause relating to price adjustment indicates that certain components which go into the execution of the projects like labour component, cement component, steel component, plant and machinery and spares component, bitumen component etc. may not remain static insofar as their price is concerned. There is a possibility that from the date when the price of these components was quoted by the contractor in his bid, there may be increase or decrease in the said price from time to time during the execution of the contract. It is for this reason, clause relating to price adjustment is provided so as to give effect to the rise or fall in the costs to the contractor. To this adjustment formula for working out the cost, at the time of execution of the contract, is provided. This adjustment which has to be arrived at, naturally, has to be in comparison with the base price that was stated by the contractor. [Paras 25, 26] [1037-C-E, F-H; 1038-A-B]
1.4 In the present case, the intention in the formula as well is to keep in mind the base cost while arriving at the price adjustment. Clause 70.3 (xi) deals with percentages on various components that will govern the price adjustment. Insofar as labour, plant and machinery and spares, and POL (Petrol, Oil and Lubricants) are concerned, there is a fixed percentage prescribed, i.e., 20%, 20% and 10% respectively. However, with regard to the other three components, namely, bitumen, cement and steel variable percentage is mentioned which has to be calculated. Seventh component is ‘Other Material’. Insofar as this component is concerned, it is the balance percentage, after percentage of bitumen, cement and steel is arrived at, as it mentions “50 – (x+y+z)” percentage. From this, one can infer that normally the combined percentages of x, y and z has to be less than 50%. However, when the current cost is taken into consideration while working the formula, the percentages of x, y and z far exceed 50% which would make the percentage of other materials in the negative. Such a negative aspect has to be avoided. [Paras 27, 28] [1038-C-F]
1.5 The word “actual” in the note under sub-clause 70.3(xi) of Conditions of Particular Application (COPA) relates to the percentage and not to the cost. The percentage x, y, z are mentioned to ensure that the contractor is compensated realistically on the actual material used each Interim Payment Certificate (IPC). Therefore, it seems more logical and proper to adopt the base cost of material while working out the price adjustment. When the dispute was raised, as per the provisions contained in the contract, in the first instance, it was referred to the Dispute Review Board (DRB) which went into the issue in detail. [Paras 29, 30] [1039-B-C]
1.6 The DRB thereafter worked out a formula. It also pointed out that if the current cost of material is adopted, instead of base cost as claimed by the contractor, price adjustment will be paid twice. One due to increase in percentage factor (x, y and z) due to use of current rate instead of base rates and second due to application of price adjustment factor b 1 -bo/bo. It also demonstrated, by giving examples, that when the base rate is adopted, the price adjustment was quote proximate with the prevailing price which compensated the contractor realistically. On the other hand, on adoption of current rate, the calculation of price adjustment was almost three times the amount of increase in cost of bitumen incurred by the contractor. The aforesaid analysis carried out by the DRB is quite acceptable. [Paras 31 33] [1040-G; 1041-D-F]
1.7 As a result, it is held that while applying price adjustment formula for calculating the price adjustment of bitumen, it is the base rate which is to be applied and not the current rate. [Para 35] [1043-F-G]
1.8 The NHAI has entered into multiple contracts with different parties containing the same clauses of price variation. Arbitral Tribunals have been taking different views, and the view taken in favour of the NHAI is also one of the possible interpretations, the effect thereof would be to uphold both kinds of awards even when they are conflicting in nature in respect of the same contractual provision. It may not be appropriate to countenance such a situation which needs to be remedied. Once the formula is interpreted in the manner indicated above, the necessary consequences would be to hold that the Arbitral Tribunal(s) did not decide the cases with the correct application of the formula and further that the claim for price adjustment in respect of bitumen laid by the contractors was not correct. Therefore, it can be held that the Award(s) are contrary to the contractual terms. At the same time, this outcome poses a dilemma inasmuch as in these cases, the Arbitral Tribunal has taken a particular view and when this was a plausible view, keeping in mind the parameters of judicial review of the Court in exercise of powers under Section 34 of the Arbitration and Conciliation Act, 1996 normally the Court would not interfere with such Awards. However, as already indicated above, such a situation has arisen because of conflicting Awards given by the Arbitral Tribunals themselves, which has provoked this Court to take a final view in the matter, necessitated by the aforesaid reason. If one takes into consideration the theory that one applies the principle mechanically i.e. that a plausible view is not to be interfered with, then it may lead to very anomalous situation. In such an eventuality, view taken by a particular Arbitral Tribunal in favour of the Contractor would be upheld as plausible view. Likewise, the Court will have to uphold the view taken by a particular Arbitral Tribunal in favour of NHAI as well, as a plausible view. Therefore, the purpose is to avoid such a situation which cannot be permitted as it would result in upholding both kinds of arbitral awards interpreting the same clause, whether they go in favour of the employer or they go in favour of the contractor. When the exercise is done keeping in view these considerations and outcome thereof is not determined, interest of justice would also demand that this result has to be applied to the pending cases, which have not attained finality. Therefore, in these peculiar circumstances, it is held that the principle of issue estoppel will apply only in those cases where matters have attained finality and no judicial proceedings are pending. In all those cases, including the present one, where awards are challenged on this particular aspect, this judgment will govern the outcome. [Paras 13, 36 and 37] [1026C-D; 1043-H; 1044-A-F] Hindustan
Zinc
Ltd
v.
Friends
Coal
Carbonisation (2006) 4 SCC 445; Associate Builders v. Delhi Development Authority (2015) 3 SCC 49; Bhakra Beas Management Board v. Krishan Kumar Vij & Anr. (2010) 8 SCC 701 : [2010] 10 SCR 462; Bhanu Kumar Jain v. Archana Kumar & Anr. (2005) (1) SCC 787 : [2004] 6 Suppl. SCR 1104; Godhra
Electricity Co. Ltd. & Anr. v. State of Gujarat & Anr. (1975) 1 SCC 199; Bank of India v. K.Mohandas & Ors. (2009) 5 SCC 313 – referred to.
As published in the Supreme Court Reports, Supreme Court of India. Text from the Indian Supreme Court Judgments open data set (Dattam Labs), CC BY 4.0.
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