Delhi High Court: A petition was filed under Section 34 of the Arbitration and Conciliation Act, 1996 assailing the Arbitral Award dated 11-01-2009, read with the order dated 26-02-2009 passed by the Arbitral Tribunal on an application filed by the petitioner under Section 33(1) of the Arbitration and Conciliation Act, 1996. Sachin Datta, J., sets aside the arbitral award as entertaining financial claims based on novel mathematical derivations, without proper foundation in the pleadings and/or without any cogent evidence in support thereof can cause great prejudice to the opposite party.
The disputes between the parties pertaining to a contract for the construction of civil works of pressure shafts and powerhouse complex of the ‘Nathpa Jhakri Hydro-Electric project’. The subject matter of the dispute is the alleged quantum increase in the minimum wages payable to labour during the execution of the contract. It is the case of the respondent (‘claimant’ before the Arbitral Tribunal) that, as of 30 days prior to submission of the bid, the minimum wage of unskilled labour, as notified by the State Government of Himachal Pradesh was Rs. 22/- per day which was subsequently after submission of the bid, was increased to Rs. 24/- per day w.e.f. 14-11-1993 and thereafter to Rs. 26/- per day w.e.f. 01-10-1994. This had a quantum increase to Rs. 45.75/- per day w.e.f. 01-03-1996.
The impugned award held that the respondent/claimant had incurred expenditure of Rs.77.26 crores towards labour wages during execution of the contract in the relevant period. Out of the aforesaid expenditure of Rs. 77.26 crores, Rs. 35.62 crores was inbuilt in the BOQ item rates, and was realised during execution of the said BOQ items. In addition to the aforesaid amount of Rs. 35.62 crores, the respondent also realised Rs.14.21 crores through escalation payable under Clause 70 (iii) of the GCC. The actual amount of escalation paid to the Respondent by applying the formula contained in Clause 70(iii) of the GCC is Rs. 43.18 crores.
However, for the purpose of making out a claim, the respondent (Claimant) has assumed the labour escalation recovered by it to be only to the tune of Rs. 14.39 crores i.e. 1/3rd of Rs. 43.18 crores on the basis that the price escalation formula is premised on the labour component being 30% whereas according to the Respondent (Claimant), while submitting their bid, they had indicated the breakdown of their rates in a sealed cover, as per which labour component is only to the tune of 10%.
Hence, the labour escalation paid under Clause 70(iii) has also been scaled down proportionately to compute the claim. Thus, the total amount the respondent recovered towards labour was Rs. 49.83 crores (Rs. 35.62 crores + Rs.14.21 crores. The balance of Rs. 27.42 crores as the additional expenditure were occasioned due to the revision of minimum wages (the difference of aggregate expenditure amount of Rs.77.26 crores and the recovered amount of Rs. 49.83 crores). Thus, the Tribunal, after making some adjustments keeping in mind the claim period, sustains the entitlement of the respondent for an amount of Rs. 26.90 crores.
On the aspect that whether the respondent was able to establish the extent of additional cost(s) asserted by it as having been incurred on account of revision of Minimum Wages, the Court noted that the formula propounded by the respondent in its statement of claim to work out the additional cost on account of enhancement of minimum wages, was rejected by the arbitral tribunal itself (as noticed herein above). It was in the light of the difficulty with the formula propounded by the respondent that it sought to found its claim on basis of the actual additional cost borne by it. However, while avowedly seeking to demonstrate the “actual amount paid towards enhanced wages” the respondent resorts to a mathematical derivation [as contained in Statement-2, (supra)]. This was not materially different from the formula propounded by the claimant originally alongwith its statement of claim which was rejected by the arbitral tribunal itself. Thus, there was no basis for the arbitral tribunal to reach the conclusion that the respondent had “incurred an expenditure of Rs. 77.26 crores” towards labour wages in the relevant claim period.
On the aspect how much of the expenditure incurred by the claimant towards labour wages, it was recovered through the BOQ item rates, the Court noted that even though the actual amount paid to the respondent/claimant towards labour escalation is Rs. 43.18 crores, it was notionally reduced to Rs. 14.39 crores. (1/3rd of Rs. 43.18 crores). Thus, although, by applying the price escalation formula incorporated in clause 70(iii) of the GCC, the respondent has pocketed an amount of Rs. 43.18 crores, for the purpose of assessing the claim of the Respondent, this amount has been assumed to be Rs. 14.39 crores which is clearly ex-facie arbitrary, perverse and results in re-writing the contract between the parties.
The Court observed that there is simply no basis to conclude that although labour escalation is computed and paid on 30% of the contract price, however, it must be assumed that out of this 30% percent, only 10% thereof is towards labour costs and 20% is in respect of other heads of cost. The notional scaling down of the labour escalation amount (from Rs. 43.18 crores to Rs. 14.39 crores) results in re-writing Annexure-XI of the contract. It is also unfathomable that when an amount of Rs. 43.18 crores has been actually paid to the respondent towards labour escalation, why should 2/3rd thereof be ignored while assessing the extent to which the Respondent/ Claimant was required to be compensated on account of increase in minimum wages.
The Court further observed that it is also unfathomable as to how and on what basis it has been concluded that 2/3rd of Rs. 43.18 crores (i.e. Rs. 28.78 crores), although paid to the Respondent under the head “labour escalation” was towards items “other than labour expenses”. It is completely perverse to proceed on the basis that the respondent/claimant realised only an amount of Rs.14.21 crores (and not 43.18 crores) through escalation payable under Clause 70 (iii) of the GCC. Thus, entertaining financial claims based on novel mathematical derivations, without proper foundation in the pleadings and/or without any cogent evidence in support thereof can cause great prejudice to the opposite party. Especially in the context of construction contracts where amounts involved are usually astronomical, any laxity in evidentiary standards and absence of adequate diligence on the part of an arbitral tribunal in closely scrutinizing financial claims advanced based on mathematical derivations or adoption of novel formula, would cast serious aspersions on the arbitral process.
Thus, the Court sets aside the arbitral award for being perverse, ex-facie arbitrary and held the finding being without merits.
[Satluj Jal Vidyut Nigam Ltd. v. Jaiprakash Hyundai Consortium, 2023 SCC OnLine Del 4039, decided on 12-07-2023]
Advocates who appeared in this case :
Mr. Sanjay Jain, ASG alongwith Mr.Uttam Datt, Ms. Sonakshi Singh, Ms. Tanya Aggarwal, Mr. K. K. Upadhiya and Mr. Kumar Bhaskar, Advocates for the Petitioner;
Mr. A. S. Chandhiok, Sr. Adv. alongwith Mr. Lovkesh Sawhney, Sr. Adv., Ms. Simran Kohli, Ms. Vidushi Keshan, Mr. Durgesh Kr. Pandey and Mr. Rohit Kumar Advocates for the Respondent.
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