1997 JTR(SC) 124
1997 AIR(SC) 1027 ; 1997 AIR(SCW) 1009 ; 1997 1 ArbLR 275 ; 1997 2 CLT(SC) 63 ; 1997 2 CurCC(SC) 10 ; 1997 3 ICC 682 ; 1997 2 JT 305 ; 1997 1 Scale 786 ; 1997 9 SCC 369 ; 1997 1 SCJ 296 ; 1997 1 SCR 582 ; 1997 KHC 1459 ; 1997 2 Supreme 731
1997(2) Supreme 731
SUPREME COURT OF INDIA
K. Ramaswamy and G.T. Nanavati, JJ.
Himachal Pradesh Nagar Vikas Pradhikaran -Appellant
versus
M/s. Aggarwal & Co. -Respondent
Civil Appeal No. 635 of 1997
(Arising out of SLP (C) No. 14117 of 1996)
Decided on 27-1-1997
Counsel for the Parties :
For the Appellant : Rajesh Srivastava, Ujwal Banerjee and H.K. Puri, Advocates.
For the Respondent : S.B. Upadhyay, Advocate.
Act Referred :CIVIL PROCEDURE CODE : S.47
(A) The Civil Procedure Code, Section 47, governs the enforcement of decrees and orders of courts, including the powers to review or modify orders to ensure compliance with substantive rights as determined judicially. In the present matter, the impugned order of the High Court directed payment of an additional sum on account of the 25% enhancement awarded by the Arbitrator, and the appellant resisted this direction invoking the procedural provisions under Section 47. The analysis under this provision is material in determining the extent to which an arbitral award that has been made rule of court can be interfered with during the calculation and realization of amounts payable, particularly where the award relates to cost escalation and deductions for materials supplied by the department.
(B) The key legal principles emerging from the case are that an arbitral award, once rule of court, binds the parties and must be carried out in accordance with its terms; however, the court must distinguish between the right to escalate costs of work due to delay and the right to recover increased costs for materials supplied by the department where such increase was not actually incurred; the burden of proof lies on the party asserting an entitlement to an escalated rate, and an award in favor of the contractor does not automatically extend to enhanced rates for materials furnished by the department if the contract terms and actual supply position negate such an increase.
Facts of the case:
The respondent entered into an agreement with the appellant for execution of certain works, which was later referred to an Arbitrator due to a dispute. The Arbitrator found delay on the part of the respondent-executive engineer and awarded the respondent a 25% increase over tendered rates for works executed after the stipulated completion date. The award was made rule of court. The appellant worked out the amounts payable, deducting the cost of cement and steel supplied by the SDA without any increase in issue rates, and paid a net sum. The respondent then claimed a further sum, which the appellant resisted under Section 47 of the CPC, but the High Court directed payment of the same.
Findings of Court:
The Court found that the award of 25% increase was applicable to the tendered rates for the executed works and not to the rates or cost of materials supplied by the SDA. It was held that since the materials such as iron and cement were supplied by the department during the relevant period, the actual price paid by the department had already factored in any escalation, and therefore the respondent was not entitled to an additional 25% on such material cost. The High Court was thus held to be in error in directing payment of the contested amount.
Issues:
Whether the 25% enhancement awarded by the Arbitrator extends to the cost of materials supplied by the department when such materials were not procured in the open market by the contractor and were supplied at prevailing rates; whether the High Court was justified in directing payment of the additional sum in view of the contract terms and the nature of the award; and whether Section 47 of the CPC provides a basis for challenging the implementation of the award in this regard.
Ratio Decidendi:
The enhancement of 25% is intended to compensate the contractor for the increased cost of securing materials from the open market due to delay caused by the department, and does not apply to materials supplied by the department itself, as the departments procurement does not attract the same escalation; consequently, the High Court erred in directing payment of the additional sum claimed by the respondent.
Result:
The appeal is allowed and the impugned order of the High Court is set aside, with costs withheld.
(A) The Civil Procedure Code, Section 47, governs the enforcement of decrees and orders of courts, including the powers to review or modify orders to ensure compliance with substantive rights as determined judicially. In the present matter, the impugned order of the High Court directed payment of an additional sum on account of the 25% enhancement awarded by the Arbitrator, and the appellant resisted this direction invoking the procedural provisions under Section 47. The analysis under this provision is material in determining the extent to which an arbitral award that has been made rule of court can be interfered with during the calculation and realization of amounts payable, particularly where the award relates to cost escalation and deductions for materials supplied by the department.
(B) The key legal principles emerging from the case are that an arbitral award, once rule of court, binds the parties and must be carried out in accordance with its terms; however, the court must distinguish between the right to escalate costs of work due to delay and the right to recover increased costs for materials supplied by the department where such increase was not actually incurred; the burden of proof lies on the party asserting an entitlement to an escalated rate, and an award in favor of the contractor does not automatically extend to enhanced rates for materials furnished by the department if the contract terms and actual supply position negate such an increase.
Facts of the case:
The respondent entered into an agreement with the appellant for execution of certain works, which was later referred to an Arbitrator due to a dispute. The Arbitrator found delay on the part of the respondent-executive engineer and awarded the respondent a 25% increase over tendered rates for works executed after the stipulated completion date. The award was made rule of court. The appellant worked out the amounts payable, deducting the cost of cement and steel supplied by the SDA without any increase in issue rates, and paid a net sum. The respondent then claimed a further sum, which the appellant resisted under Section 47 of the CPC, but the High Court directed payment of the same.
Findings of Court:
The Court found that the award of 25% increase was applicable to the tendered rates for the executed works and not to the rates or cost of materials supplied by the SDA. It was held that since the materials such as iron and cement were supplied by the department during the relevant period, the actual price paid by the department had already factored in any escalation, and therefore the respondent was not entitled to an additional 25% on such material cost. The High Court was thus held to be in error in directing payment of the contested amount.
Issues:
Whether the 25% enhancement awarded by the Arbitrator extends to the cost of materials supplied by the department when such materials were not procured in the open market by the contractor and were supplied at prevailing rates; whether the High Court was justified in directing payment of the additional sum in view of the contract terms and the nature of the award; and whether Section 47 of the CPC provides a basis for challenging the implementation of the award in this regard.
Ratio Decidendi:
The enhancement of 25% is intended to compensate the contractor for the increased cost of securing materials from the open market due to delay caused by the department, and does not apply to materials supplied by the department itself, as the departments procurement does not attract the same escalation; consequently, the High Court erred in directing payment of the additional sum claimed by the respondent.
Result:
The appeal is allowed and the impugned order of the High Court is set aside, with costs withheld.
ORDER
Leave granted.
2. This appeal by special leave arises from the judgment and order dated May 2, 1996 of the Himachal Pradesh High Court passed in O.M.P. No. 626/93 in Ex. P. No. 27/1993. The admitted facts are that the respondent had entered into an agreement with the appellant to execute certain works pursuant to which there was a dispute which was referred to the Arbitrator, on directions of the High Court. The Arbitrator in the award dated April 25, 1992 stated as under:
"After considering whole matter submitted to me by both the parties, both verbally and in writing I have come to this conclusions that delay lies on the part of the respondent-Executive Engineer.
It is awarded that the plaintiffs shall be paid by the respondent-Executive Engineer an increase of 25% over and above their tendered rates for all works executed by them after the stipulated date of completion i.e. 21.5.89."
3. The award was made rule of the Court. In implementation of the award, the appellant worked out the details, as mentioned in the letter No.SDA (D)-Acctt-7/93-644-47 dated November 12, 1993 which reads as under :
"With reference to your letter No. AV/SIM/804-93-94 dated 5.10.1993, I am enclosing herewith a cheque bearing No. 807801 dated 12.11.1993 amounting to Rs. 4,99,307/- on account of payment of award announced by the Director which has been made as rule of court by the Hon ble H.P. High Court. The details of the awarded amounts and recoveries due to be made from you are as under :
Gross amount of the work done after 11th R/A Bill i.e. after 21.5.1989 on- wards upto 26th R/A Bill. Rs. 69,78,354.00
Less cost of material i.e. Cement/Steel supplied by the SDA on which there has been no increase in the issue rates. (-) 23,25,685.00
Net amount 46,52,669.00
25% increase on Rs. 46,52,669/0 as awar- ded by the Arbitrator. 11,63,167.00
Less 2% I. = Tax on 23,263/- on Rs. 11,63,167/- 12% S.C. on I. Tax Rs. 2,792.00 (-) 26,055.00
Total Rs. 26,055.00 11,37,112.00
With held on account of recoveries due to be made from you against agree- ment No. 52 of 1987-88 (-) 6,37,805.00
Net payable 4,99,307.00
Please send stamped receipt.
Yours faithfully,
(Executive Engineer (D), Shimla Development Authority, Kasumpti, Shimla-9".
4. It is seen from the contents of the letter that the appellant has deducted only the cost of the material, i.e., cement and steel supplied by the SDA on which there has been no increase in the issue rates. After working out of the details, a sum of Rs. 4,99,307/- became due to the respondent. The appellant calculated the amount actually due and payable to the respondent under the award less the income-tax and surcharge etc. and the balance amount came to be paid. But when the respondent claimed a further sum of Rs.5,81,421/-, the appellant objected thereto under Section 47 of the CPC. The High Court over-ruled the objection and directed payment thereof. Thus, this appeal by special leave.
5. It is submitted by Shri H.K. Puri, learned counsel for the appellant that the enhancement of 25% is relatable to the tendered rates for the works executed by the respondent and does not relate to the rates of raw materials supplied by the appellant. He also submitted that cement and steel were supplied by the Department at the Schedule rates in spite of the delay in execution of the contract. Thus, escalation in price of raw materials supplied by the appellant the entire burden was borne by the appellant and, therefore, no extra payment could have been intended to be made under the award in respect of those items. Therefore, the High Court was not right in directing payment thereof. We find force in the contention. It is contended by Shri Upadhyay, learned counsel for the respondent, that when the Arbitrator recorded a finding that delay in execution was on account of the laches on the part of the Executive Engineer and awarded 25% more than the agreed normal rate, as per the contract and the award having been allowed to become final, it is not open to the appellant to deny 25% escalation charges for the period. In other words, it amounts to interference with the award which has attained finality. In support thereof, the learned counsel relied upon paragraph 12 of the judgment in P.M. Paul v. Union of India1. Therein, the question was whether the contractor was entitled to escalated rates due to delay in execution of the award on the part of the Department. As seen, there is no dispute on the proposition that when the award has been made awarding escalation charges, necessarily the increased rates of the cost of securing the material for performance of the contract are required to be compensated by paying the amount to the extent of the escalated charges. It is seen that under Clause 10 of the contract, the appellant was required to supply the material at the rates prevailing as on the date of the execution and it was entitled to deduct the same from the amounts payable after the execution of the contract. In other words, when the iron and cement were supplied, during the relevant period, even after the expiry of the year for which the award came to be made, necessarily it included the increase in rates. It is stated that they did not charge increased rates but the rates prevailing as on the dates and the amount worked out came to Rs. 23,25,785/-. The respondent is not entitled to 25% of the escalated costs in that behalf. The very object of awarding escalated cost was that the contractor had secured the material from the open market at the price prevailing at the relevant time and used the same for execution of the work. In view of the fact that iron and cement were not procured by the respondent during the extended time and actual price for which they were supplied has been worked out, as detailed earlier, the respondent is not entitled to 25% more on that material supplied by the Department itself. Under these circumstances, the High Court was clearly in error in directing payment of the said amount.
6. The appeal is, accordingly, allowed but in the circumstances without costs.
Appeal allowed
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