O.M.P./455/2010 of NATIONAL HIGHWAYS AUTHORITY OF INDIA Vs HINDUSTAN CONSTRUCTION COMPANY LIMITED

IN THE HIGH COURT OF DELHI AT NEW DELHIO.M.P. 455/2010

Reserved on: November 17, 2011Decision on: November 30, 2011

NATIONAL HIGHWAYS AUTHORITY OF INDIA

HINDUSTAN CONSTRUCTION COMPANY LIMITED

O.M.P. 456/2010

NATIONAL HIGHWAYS AUTHORITY OF INDIA

versus

HINDUSTAN CONSTRUCTION COMPANY LIMITED

Sethi, Ms. Suman Yadav,Ms. Paula Ghose andMs. Sarabjot Walia, Advocates.

CORAM: JUSTICE S. MURALIDHAR

JUDGMENT30.11.2011

1. The National Highways Authority of India (‘NHAI’) has filedO.M.P. No. 455 of 2010 and O.M.P. No. 456 of 2010 under Section 34of the Arbitration and Conciliation Act, 1996 (‘Act’) challenging twoAwards dated 30[th]March 2010 passed by the Arbitral Tribunal inrelation to disputes between NHAI and the Respondent HindustanConstruction Corporation Ltd. (HCC) arising out of the contract dated2[nd]June 2004 concerning the Construction Package-ABP-2 in the Stateof Uttar Pradesh (‘UP’) for the work of Allahabad Bypass Project –Construction of Road from Km 158 to Km 198 (except Ganga Bridge).There were two references in relation to the disputes that arose from thesaid contract. Reference No. 1 related to Dispute Nos. 1, 2 and 3 andReference No. 2 related to Dispute Nos. 4, 5, 6 & 7.

2. By the first Award dated 30[th]March 2010 in relation to ReferenceNo.1, the three-member Arbitral Tribunal allowed the claims of HCCunder Disputes 1, 2 and 3. There was dissenting note of one of thelearned Arbitrators in respect to Dispute No. 2. The said first Awarddated 30[th]March 2011 allowing HCC’s claims in Dispute Nos. 1, 2 and3 has been challenged by NHAI in O.M. P. No. 455 of 2011.

3. By the second Award dated 30[th]March 2011 in relation to ReferenceNo. 2, HCC’s claims under Dispute Nos. 4, 5 & 7 were allowed by the

Arbitral Tribunal with dissenting note of one of the learnedArbitrators in relation to Dispute No. 4. Dispute No.6 was withdrawnby HCC before the Arbitral Tribunal. The said second Award dated 30[th]March 2011 allowing HCC’s claims in Dispute Nos. 4, 5 and 7 hasbeen challenged by NHAI in O.M. P. No. 456 of 2011.

4. Dispute No. 1 related to reimbursement of additional costs incurreddue to increase in the rates of royalty and associated sales tax on soil,sand and crushed stone aggregates. The Arbitral Tribunal allowed thisclaim and directed NHAI to reimburse HCC Rs. 2,69,91,248/- asadditional cost till 31[st]December 2008 along with interest and alsomake payment of the additional cost incurred by the HCC for theperiod beyond December 2008 on account of the increase in Royaltyand associated sales tax along with interest @ 12% per annumcompounded monthly on the said amounts from the respectivedates/months from which they were due. The Arbitral Tribunal alsoawarded future interest in the vent of failure by NHAI to pay theamounts within 90 days @ 12% per annum compounded annually.

5. Dispute No. 2 related to non payment for executed work ofembankment with Soil/Pond ash for the initial 150 mm depth strippedin accordance with the requirements of the contract.The ArbitralTribunal allowed this claim and directed NHAI to pay HCC Rs.3,77,74,427/- towards formation of embankment for initial 150 mm, topay the price adjustment of the above sum in terms of Clause 70.3 ofthe ‘Conditions of Particular Application’ (‘COPA’) using the priceadjustment formulae and indices for the respective months as have beenused by the Engineer in the certification of respective Interim Payment

Certificates (‘IPCs’). The Arbitral Tribunal also awarded 12% interestcompounded monthly on the above amount and also directed NHAI torelease payment for the period beyond December 2008 together withprice adjustment and interest together with future interest for delay inpayment by NHAI beyond 90 days @ 12% per annum compoundedmonthly. The dissenting note of one member of the Arbitral Tribunalheld HCC not to be entitled to any amount under this claim.

6. Dispute No. 3 related to reimbursement of additional costs incurreddue to increase in the rates of Forest Transit Fee due to subsequentlegislation/notification. The Arbitral Tribunal held that NHAI shouldpay HCC Rs. 3,77,74,427.39/- together with interest till 31[st]July 2008,make the payment of additional costs incurred by HCC for the periodbeyond July 2008 on account of increase in forest transit fee along withinterest together with future interest for delay in payment beyond 90days @ 12% per annum compounded monthly.

7. Dispute No. 4 related to outstanding amount on account of“construction of embankment with pond ash in accordance with BOQItemNo.2.02(b)readwithClause305.2.2.3oftechnicalspecifications”.The Arbitral Tribunal directed NHAI to pay HCC atotal sum of Rs. 21,92,02,495/-, to pay HCC the price adjustment onthe above sum in terms of Clause 70.3 of COPA using the priceadjustment formulae and the indices applicable for the month of March2009 as have been used by Engineer in the certification of IPCs,interest@12%perannumcompoundedmonthlyontheaforementioned amount from 1[st]April 2009 till the date of the Awardand for embankment construction work with pond ash if any executed

for the period beyond March 2009 by adopting the above principles.Future interest @ 12% per annum compounded monthly was awardedfor the period of delay of over 90 days in NHAI making the payment.The dissenting note of one member held that NHAI did not have to payany sum to HCC as regards this claim

8. Dispute No. 5 related to the claim for additional cost due tointroduction of toll charges/tax on the new Naini Bridge undersubsequent legislation in terms of Clause 70.8 of COPA. The ArbitralTribunal allowed HCC’s claim and directed NHAI to pay HCC Rs.20,49,924/- together with interest @ 12% per annum compoundedannually from the respective periods when the amounts were due tillthe date of the Award and additional cost if any towards the toll chargesfor use of Naini Bridge for the period beyond 28[th]February 2009.Future interest @ 12 % per annum compounded monthly was heldpayable by NHAI for payment beyond the period of 90 days from thedate of the Award.

9. Dispute No. 7 was the claim towards the additional cost due tointroduction of service tax on transportation of goods under subsequentlegislation in terms of Clause 70.8 of COPA. NHAI was directed bythe Arbitral Tribunal to pay HCC sum of Rs. 49,29,411/- togetherwith interest @ 12 % per annum compounded monthly from therespective periods when the amounts were deposited by the claimantand the additional cost if any towards the service tax for the periodbeyond 31[st]May 2009 and future interest @ 12 % per annumcompounded annually.

10.At the first hearing of these cases on 3[rd]August 2010, it wassubmitted by Mr. Sandeep Sethi, learned Senior counsel appearing forthe NHAI that Dispute Nos. 1 & 3 in O.M.P. No. 455 of 2010 andDispute Nos. 5 & 7 in O.M.P. No. 456 of 2010 were covered in favourof NHAI by two judgments of this Court in Larsen and ToubroLimited v. National Highways Authority of India (O.M.P. No. 514 of2009 decided on 9[th]September 2009) and National HighwaysAuthority of India v. M/s OSE-GIL J.V. (O.M.P. No. 613 of 2009decided on 11[th]March 2010). At the subsequent hearing on 8[th]July2011, it was pointed out by learned counsel for the HCC that both theabove judgments had been reversed by the Division Bench of thisCourt.Mr. Pravin H. Parekh, learned Senior counsel appearing forHCC has produced copy of the judgment dated 9[th]February 2011 ofthe Division Bench of this Court in FAO (OS) No. 347 of 2010 (M/sOSE-GIL J.V. v. National Highways Authority of India) in which theDivision Bench held the case to be covered by an earlier decision of theDivision Bench in National Highways Authority of India v. ITDCementation India Ltd. 2008 (100) DRJ 431 (DB) and reversed thejudgment of the learned Single Judge. By judgment dated 3[rd]June2011 in FAO (OS) No. 345 of 2010 (Larsen & Toubro Limited v.National Highways Authority of India) the Division Bench againallowed the appeal on the basis of the judgment of the Division Benchin National Highways Authority of India v. ITD Cementation IndiaLtd. The said judgment recorded the submission of the counsel for theNHAI that S.L.P. (C) No. 10070 of 2008 against the judgment of theDivision Bench in National Highways Authority of India v. ITDCementation India Ltd. was pending in the Supreme Court. TheDivision Bench in Larsen & Toubro Limited v. National Highways

Authority of India observed that “instead of keeping the Appealspending, awaiting the decision in the SLP, the Division Benchesdisposed of those Appeals in terms of ITD Cementation. . . The courseof action which commends itself to us in the present Appeal is to allowthe Appeal as well in the light of ITD Cementation. Any other courseof action would amount to inconsistency in views of the DivisionBenches”.

11. Mr. Sandeep Sethi, learned Senior counsel for the NHAI submittedthat this Court should await the decision of the Supreme Court in theS.L.P. filed against the judgment of the Division Bench in NationalHighways Authority of India v. ITD Cementation. Considering thatthe Division Bench in Larsen & Toubro Limited v. NationalHighways Authority of India did not consider it appropriate to keepthe said appeal pending, this Court rejects the said submission.

12. Mr. Sethi then submitted that there were certain aspects of Disputes1, 3, 5 and 7 that would not be covered by the decision in NationalHighways Authority of India v. ITD Cementation. He submitted thatthe NHAI did not furnish actual documentary or other proof of havingincurred the additional costs under the said heads of claims. Thecircular dated 1[st]December 2004 referred to by HCC was not anotification and therefore did not qualify as ‘subsequent legislation’within the meaning of Clause 70.8 of COPA. Even as regards theroyalty, there had to be contemporaneous claim by the HCC as andwhen the additional cost was incurred. The Engineer had to verify thepayments so made at that very stage. He referred to clause 53.1 of theGeneral Conditions of Contract (‘GCC’) for this purpose.He

submitted that not only the said procedure was not followed but theArbitral Tribunal undertook random sample check of the documentsplaced on record belatedly by HCC along with its written submissions.He further submitted that any increase in toll charges or an increase inany statutory levy was already accounted for in the price adjustmentclause.It was set as an objective standard based on the WholesalePrice Index (‘WPI’). Any sum directed to be paid by the impugnedAwards would be contrary to the express terms of the contract.

13. As regards Dispute No. 2, Mr. Sethi referred to the relevant clausesregarding Clearing and Grubbing and submitted that backfilling wasincluded in the work. The Dispute Review Board (‘DRB’) had heldback-filling to be part of clearing and grubbing. Mr. Sethi invited theattention of the court to the relevant clauses of the TechnicalSpecifications (‘TS’) which had to be read in conjunction with Clauses201.1 and 201.3 of the GCC. He submitted that there could not be aseparate claim for back filling. The Arbitral Tribunal had erred inreferring only to the TS not to the modified form of the said clause asfar as the GCC was concerned. The finding on this aspect, according toMr. Sethi was contrary to the express terms of the contract.

14. As regards Dispute No. 3, it was submitted that there is nothing toshow that the goods had passed through the area of reserved forest andthis could not be determined without their being notification underSection 20 of the Forest Conservation Act, 1980 (FCA). Referring tothe judgment of the Allahabad High Court in Subhash Stone Productsv. State of U.P. 2007 (3) ADJ 635, it was submitted that the saidjudgment would apply only where the transit of goods was through

reserved forest and not otherwise. There was no question, therefore, ofHCC being compensated for any additional cost incurred on thisaccount.

15. As regards Dispute No. 4, Mr. Sethi submitted that as per clause305.8 of the TS, compensation for use of pond ash was separate fromcompensation for use of soil/earth. Each had to be paid for in terms oftheir corresponding rates. Referring to the decision in Abdulla Ahmedv. Animendra Kissen Mitter AIR 1950 SC 15, it is submitted that theconduct of parties was only an external aid in the interpretation of therelevant clause and cannot change its meaning. As regards Dispute No.No. 5, it was submitted that Mr. Sethi that HCC did not submit anyactual proof of payment of additional toll charges on account of thegoods having to pass through the Naini Bridge. Further, HCC did notdemonstrate that there was no alternative route.Lastly, as regardsDispute No. 7, it was again submitted that there was no proof of havingincurred additional costs on account of service tax on the transportationof goods.16. Countering the above submissions, Mr. Pravin H. Parekh, learnedSenior counsel for the HCC drew the attention of this Court to the factthat there are two types of contract, one known as EPC (Engineering,Procurement & Construction) contract and the other the BOQ (Bill ofQuantities) contract.In the former, no provision is made for futureincreases either on account of the costs or on account of the specificlegislation. However in BOQ contracts, the contractor is expected tobid on the basis of legislation as it existed 28 days prior to the last dateof submission of the bid. In BOQ contracts, the subsequent taxes and

levies are sought to be compensated. Consequently, in BOQ contractsparties usually quote lower price in the expectation of thereimbursement of the additional costs.

17. As regards increase in rates of Royalty and associated sales tax onsoil, sand and crushed stone aggregates, Mr. Parekh states that therewas specific notification dated 24[th]November 2011 issued by theGovernment of Uttar Pradesh which increased the sales tax and royaltywith effect from 21[st]December 2004. There was also notificationdated 15[th]December 2004 whereby the U.P. Mine & Minerals(Concession) Rules, 1963 were amended to increase the rate of royaltyon various constructions materials like sand, aggregates and earth witheffect from 16[th]December 2004. These two notifications constituted achange in legislation within the meaning of Clause 70.8 of COPA. INany event claims in Disputes 1, 3, 5 and 7 were covered by thejudgment of the Division Bench in National Highways Authority ofIndia v. ITD Cementation Ltd.

18. It is further submitted by Mr.Parekh that HCC immediately notifiedthe Engineer by letter dated 5[th]January 2005 claiming the differencein the royalty rates. The Engineer’s representative, however, did notrespond and the additional costs incurred by HCC was neither certifiednor paid. HCC had kept the month-wise details of the costs incurredalong with documentary proof and also provided the exact figure of theadditional cost to the NHAI and the Engineer. It is submitted thatthroughout HCC has been providing detailed information to theEngineer. These were, however, never examined. As regards thepayment for embankment construction work, it is submitted that this is

factual dispute. The Arbitrators were retired highway engineershaving considerable experience. The factual determination by them didnot call for interference within the scope of the powers of this Courtunder Section 34 of the Act. It is further submitted that themeasurement for payment of earth work in embankment should bemade before the work of embankment starts (i.e., after the work ofclearing and grubbing/removal of the top soil up to 150 mm iscompleted) and after its completion in accordance with Clause 305.8 ofTS. The Arbitral Tribunal, by majority of 2:1, found that the activityof back filling was liable to be paid for under the BOQ items and nodeduction could be made while measuring the embankment work. It issubmitted that the factual finding that the removal of top soil ofspecified thickness of 150 mm was an essential activity to be carriedout before the commencement of embankment work did not call forinterference. It could not be classified as associated or ancillary activitywhen there was no separate provision for back filling. Reliance wasplaced on the decisions in Mcdermott International Inc. v. BurnStandard Co. Ltd. & Ors. (2006) 11 SCC 181 and Steel Authority ofIndia Limited v. Gupta Brother Steel Tubes Limited (2009) 10 SCC63.

19. As regards Dispute No. 3 Mr. Parekh submitted that there was aclear change in law concerning the forest transit fee. The Governmentof U.P. amended the U.P. Transit of Timber and other Forest ProduceRules, 1978 and provided for increase in the rate of Forest Transit Feeof Rs. 5/- per MT to Rs. 38/- per MT on forest produce by notificationdated 14[th]June 2004.According to him, all additional costs arisingfrom such an increase were liable to be paid within the purview of

Clause 70.8 of COPA. There was no alternate route to the passagethrough reserved forests or the Naini Bridge. HCC notified theEngineer’s representative of such additional costs with the detailedbreak up. The DRB recommended for reimbursement of the additionalcosts but the NHAI had rejected this recommendation. The decision ofthe Arbitral Tribunal on additional costs was based on appreciation ofevidence and was unanimous. It was submitted that HCC in factfurnished the details of payment to the NHAI but this was neververified. There were voluminous documents available with HCC and itwas prepared to provide these to NHAI for verification.

20. As regards Dispute No.4 concerning construction of embankmentand pond ash, it is submitted that the pond ash could not be constructedwithout the use of the soil. The measurements were to be strictly inaccordance with the TS (MORTH specifications) and Clause 305.8thereof was relevant. The method of measurement had to be the samewhether the embankment construction was in terms of item No. 2.02 (a)or 2.02 (b). There was no provision in the contract for separatemeasurement of the earth cover and the pond ash core.

21. As regards Dispute No. 5 about reimbursement of additional cost ofintroduction of toll charges/tax on the new Naini Bridge, it is pointedout by Mr.Parekh that the dispute was referred initially to the Engineerwho rejected the claim. The DRB failed to give its decision andthereafter the matter was referred to the Arbitral Tribunal. It is pointedout that when the work commenced, HCC was using the existing oldbridge over the river Yamuna for the transport of aggregates andboulders. The old bridge was restricted, after the construction of the

new bridge, to light vehicles. Therefore, there was no alternate routeavailable. HCC had notified the Engineer that toll was being collectedas consequence of the Gazette notification and was covered underClause 70.8 of COPA. The Engineer rejected the claim of the HCC.

22. As regards Dispute No. 7, the Engineer himself had recommendedthat HCC should be reimbursed for the introduction of service tax ontransportation of goods by the Government of India notification witheffect from 1[st]January 2005.

23. The above submissions have been considered. Disputes 1,3 , 5 and7 regarding reimbursement of additional costs do appear to be coveredby the decision in National Highways Authority of India v. ITDCementation. If and when the Supreme Court allows the said specialleave petition and reverses or modifies the said judgment, it would beopen to NHAI to seek appropriate remedies as may be permissible inlaw to revive its challenge to the impugned Awards as regards the saiditems of claim. However, as of now this Court is bound by the decisionof the Division Bench in National Highways Authority of India v. ITDCementation. Therefore the contention of NHAI that the claims foradditional costs under the above heads are inadmissible as they havebeen accounted for in the price adjustment clause in the contract ishereby rejected.

24. This Court finds merit in the contention of HCC that the claim foreach item of additional cost was covered by Clause 70.8 of the COPA.In other words, the additional costs had to be incurred by HCC on theseheads of claims on account of subsequent statutory/legislative changes.

HCC has been able to demonstrate that the changes were brought aboutas result of gazette notifications or amendments to the relevant rules.As regards HCC having to submit documentary proof of havingactually incurred additional costs, it is seen that the Arbitral Tribunalfirst sought the assistance of the Engineer of NHAI to verify thedocuments submitted by HCC. The Engineer however appears to havedeclined. The Arbitral Tribunal thereafter took upon itself the task ofverifying sampling of the documents. The Arbitral Tribunal cannot befaulted for adopting the approach that it did.

25. NHAI has failed to satisfactorily counter the contention of HCCthat it had lodged claims for additional costs contemporaneously andhad also provided the requisite documentation to the Engineers whodeclined to examine such claims for some reason. It cannot, therefore,be said that HCC failed to submit any proof in support of its claim forreimbursement of additional costs incurred by it. The unanimousfinding of the Arbitral Tribunal is that as result of the subsequentlegislative change the additional cost on account of change in royaltyand sales tax HCC was entitled to be reimbursed by the NHAI.Considering that this was BOQ contract, such claim was admissibleand rightly allowed by the Arbitral Tribunal.

26. As regards non-payment for executed work of embankment whichforms the subject matter of Disputes 2 and 4, this is purely questionof fact based on the measurement. There is no dispute in relation to theconstruction of the embankment that is covered under item 2.02 (a) ofthe BOQ. In fact NHAI has already paid HCC for the said construction.Clause 305.8 of the MORTH TS provides for measurement of the cross

section of the embankment as one whole composite section and paidunder item No. 2.02 (b). The decision of the majority members of theArbitral Tribunal based on an analysis of the material before them wasa possible view to take. Merely because another view as evidenced bythe dissenting opinion is possible interference by this Court underSection 34 of the Act is not warranted.

27. As regards reimbursement of the additional costs due to theincrease in the forest transit fee, HCC proved to the satisfaction of theArbitral Tribunal that this was as result of legislative changeattracting Clause 70.8 of COPA. Likewise the decision as regards theclaim for reimbursement of additional costs on account of theintroduction of toll charges on the new Naini Bridge and account of theservice tax were supported by notifications. The decision of the ArbitralTribunal on these claims was based on an appreciation of evidence anddoes not call for interference.

28. The impugned Awards dated 30[th]March 2011 of the ArbitralTribunal cannot be said to be vitiated by patent illegality in terms ofSection 34 of the Act. The petitions are accordingly dismissed withcosts of Rs. 25,000/- each which will be paid by NHAI to HCC withina period of four weeks from today.

NOVEMBER 30, 2011

S. MURALIDHAR, J