Fertilizers Vs. Puran Chand Nangia  INSC 516 (17 October 2000)
appeal, which arises out of an award passed under the Indian Arbitration Act,
1940 concerns the interpretation of a 'variation' clause in the contract which
allows the appellant, the National Fertilizers Ltd., to issue directions to the
contractor varying the extent of the contract work, both upwards and downwards
upto 25%. Question is whether ( as contended by the appellant) the said 25% is
to be arrived at by taking into account the net overall increase in the work
adding up the increases in work and deducting therefrom the decreases in work
or whether ( as contended for the respondent-contractor) the 25% was to be
computed by adding up the total variations, both involving the increase in the
work and the decrease in the work. The importance of the point is that if the
variations exceed 25% of the contract price, the contractor is not confined to
the contract rates but can claim market rates.
disputes were referred to arbitration and the arbitrator gave a non-speaking
award. The arbitrator's award was set aside by the learned District Judge on
the ground that the reference was bad. He, however, gave alternative findings
accepting the conclusions in the award. As the learned District Judge held the
reference was bad, he set aside the award. The contractor appealed to the High
Court which by its judgment in Civil Misc.(First)Appeal No.211 of 1991 dated
18.10.94 held the reference was valid and allowed the appeal and directed the
award be made Rule of Court. It is against the said judgment that this appeal
facts of the case are as follows. Quotations were called by the appellant for
works amounting to Rs.3,39,88,000. It appears that the respondent submitted his
quotation which was opened on 12.9.84.
tender was accepted. But, instead of giving him the entire contract, the
appellant awarded only 48% of the work of Rs.3,39,88,000 amounting to
Rs.1,52,94,235, by letter dated 5.11.84. Part I
of the work was upto Rs.94,34,323 and Part
II was upto Rs.94,34,323.
letter of intent was issued on 5/6.11.84 and then a work order was issued on
22.1.85. The said letter dated 22.1.85 of the appellant contained the + 25%
clause which permitted rates higher than the contract rates to be paid, as an
exception. It stated as follows:
contract price has been arrived at on the basis of your quoted rates in your
tender and the enclosed schedule of quantities, your quoted rates shall hold
good for a variation of+25% (plus/minus twenty five percent) of the contract
price stated in this work order, beyond which your quoted rates will be
suitably revised subject to mutual agreement." It appears the site was not
made available on time and there were lot of disputes between the parties.
was correspondence between the appellant and respondent. The appellant varied
the works both upwards and downwards. As, according to the contractor, the sum
total of variations went above 25% of the contract value, the contractor asked
for higher rates in his letters dated 20.11.86, 8.12.86 and 9.12.86. The final
bill was submitted by the contractor on 9.12.86 for Rs.85,98,705 as detailed in
the Annexure A thereto.
plea for extra rates was rejected on 31.1.286 by the appellant stating that the
+ 25% clause applied to the overall net increase. The letter stated:
enhancement is justified unless the total contract value of the work has
increased or decreased by 25%. Enhancement of rates is therefore not on account
of any increase or decrease in the quantity of individual items.......on
completion of the entire work, it is expected that there will not be any
variation in the contract value within the limits of + 25%." The letter
also blamed the contractor for delay in the work.
not denied that the original date of completion was 30.6.86 and was extended
total value of work done upto 30.10.86, according to the appellant, was Rs.1,01,84,968.58.
According to the appellant, the Contractor abandoned the work in November,
1986. According to the contractor, the appellant committed breach. Another
contractor was appointed by the appellant for the balance work and in fact, a
cross claim for compensation for Rs.7.64 lakhs was raised against the
26.12.86, the respondent claimed reference to arbitration. By consent, the
District Court appointed Sri Dharwadkar, Ex. General Manager, Northern Railway,
as sole arbitrator. It was stated that he was also connected with the
appellant. He entered on the reference on 22.1.88. The arbitrator in his award
accepted the plea of the contractor for higher rates upto the extended date. On
the disputed claim No.4 he held as follows:
of final bill, 50% of the revised including extra rates amount awarded. for
increase & decrease Balance escalation in the quantities at on the original
Rs.80,08,000(approx.) rate only may be Revised on 17.6.1986 as allowed upto
Rs.70,98,852.67 30.10.86 In other words, the arbitrator awarded 50% of Rs.70,98,852.67
towards increase in rates. So far as the cross claim by the appellant for
compensation for delay, the arbitrator negatived the same. That would mean that
the breach was not by the contractor.
appellant filed an appeal before the District Court for setting aside the
award. (No appeal was preferred so far as the rejection of the cross-claim) The
District Court, as already stated, set aside the award on the ground that the
reference itself was bad.
it gave alternative findings on merits. It held that, as the award was not a
reasoned award, but was one made on consideration of all documents, the NIT,
the tender papers, the offer, the acceptance and correspondence, it was not
permissible to probe into the mind of the arbitrator. The District Court
referred to Madan Lal vs. Hukum Chand [1967 (1) SCR 106], Hindustan Steel Works
vs. Rajeswar Rao [1987 (4) SCC 93] and held that the award was not liable to be
set aside on merits.
District Court also found (para 38) that the value of variations in the work,
both upwards and downwards exceeded 25% and was in fact more than 100%. It
of modifications in quantities of items of work, which the respondent required
the applicant to execute, the deviation difference was more than 100%, what to
talk about 25%. Therefore, the arbitrator has not misconducted in awarding 50%
of the claimed amount." It is necessary to explain what the Arbitrator
meant by 'Balance of escalation'. As pointed by the respondent in his counter
filed in this Court, it appears that 75% of the escalation was released by the
appellant and the balance 25% was not paid on the ground that the appellant
slowed down. While the matter was pending before the arbitrator, the appellant
prepared a final bill and the balance 25% was also allowed but only upto
30.11.85. The balance escalation was not allowed upto 30.10.86, on the ground
that the delay was attributable to the contractor. It was this balance that was
allowed upto 50% by the arbitrator. (These facts are clear from the reply of
the appellant on 18.3.88 filed before the arbitrator).
High Court, as already stated, held that the reference was maintainable and it
set aside the judgment of the learned District Judge and directed the award be
made a Rule of Court.
appeal, it was contended by the learned senior counsel for the appellant Sri Bhaskar
P.Gupta that the arbitrator acted without jurisdiction in granting extra amount
or higher rates for the work done upto the extended date 30.10.86. This was
prohibited by several clauses of the NIT, Special and general conditions and
under annexure R attached to the work order dated 22.1.85. The variation limit
of plus/minus 25% of the contract price was applicable on the 'total contract
price' and not on any individual quantities or items. Any revision of rates
would be permissible only after the total contract price stood increased or
decreased beyond 25% on actual execution and completion of the contract
project. In any event, the arbitrator could not have allowed a uniform increase
of 50% for all items.
other hand, Sri S.Ganesh, learned counsel for the respondent-contractor
contended that the question was not one of increase or decrease in total
contract value. If the sum total of the variations i.e.
plus and minus exceeded 25%, the contract rates were no longer binding and
market rates had to be paid.
learned District Judge had found, as a fact, that the sum total of the
additions and deletions in the work exceeded 100%. A tabular statement in this
behalf was also filed before us to show that the total variation, both upward
and downwards in the work was of a value of more than 25% of the contract
price, and in fact it was more than 100%.
above contentions, the following points arise for consideration.
Whether, in view of the various clauses in the NIT, special and general
conditions, schedules and Annexure R, the arbitrator acted without jurisdiction
in revising the rates and in ignoring the contract rates which were to be
"firm" upto date of extension of the contract? (2) Whether, the case
fell within the exception of escalation of "+25% of contract price".
If so what was the meaning of that clause? Did it mean the overall net increase
in contract price after deducting the value of the reduction in work from the
value of the additional items of work (as contended by the appellant) or did it
mean that the plus and minus variations had to be added or pooled together (as
contended by the contractor) to find out if they were together above 25% of the
contract price? (3) Was the arbitrator wrong in granting 50% out of the
escalation claimed by the respondent? Points 1 and 2:
true that there are various conditions in the NIT, the Tender Form and the
Special and General Conditions that no extra amount or higher rates will be
allowed under any circumstances whatsoever. These have been strongly relied
upon by the appellant. We shall refer to them.
Notice inviting tender (NIT) is dated 24.7.84.
instructions to the tenderer require 4 envelopes to be submitted. Envelope 1
related to earnest money deposit, envelope 2 to contain tenderer's conditions,
envelope 3 to contain tender documents as filed.
envelopes 1 to 3 were opened and discussions were over, envelope 4 which
contained papers relating to resultant modification, were opened. The Tender
Form contained an undertaking to be signed by the contractor that he had seen
the NIT, the instructions and the special conditions, the particular
specifications and the general conditions of contract Schedules A, B and E and
the drawings. Schedule A contained the rates of work fixed by the appellant and
Schedule E contained the time stipulations. It also stated in para 11 which
referred to deviations/variations as follows:
"Para 11: Maximum limit +(plus/minus) 25 of deviation/
(twenty five) per- variation cent of the contract value" That meant that
the appellant's officers could entrust work upto the said variations and the
contractor would have to execute the same without any extra payment or higher
Special conditions, it was stated in para
the rates quoted would remain "firm" throughout the pendency of
contract; including the extended period and "shall not be subject to any
sort of escalation" even if labour costs, material or petroleum oil and
lubricant (P.O.L.) prices increased. The rates were to be quoted by the tenderer
to the approximate Bill of quantity. Para
4 dealt with 'additional works and states that', if required, the contractor
was to execute works to the extent of an extra 25%. "No adjustment of
rates shall be made for the additional work ordered upto this limit. Terms and
conditions of the contract remain unaltered.
General Conditions of the contract defined 'contract value' in clause 3(e) to
mean, in the case of item rate contracts, the cost of works arrived at after
execution of the quantities shown in the schedule of quantities of the items
rates quoted by the tenderer for variations. Para 11 of the general condition also required additional work to be carried
and it permitted "alterations, omissions, additions" to the work, at
the same price as agreed. Schedule A to the general conditions stated in para
1.00.02 that "The total quantities of work may vary upto + 20% (later
amended as 25%) on either side and nothing extra will be paid on this
account." Para 1.00.05 also stated that the
quantities in the schedule were approximate and nothing extra would be paid
above the quoted rates if there was any increase or decrease in quantities.
will be noticed that the above clauses permitted increase or decrease in the
work upto 25% of the contract price. As to what should happen if the value of
the variations exceeded 25% of the contract price was stated in Annexure R
attached to the letter of the appellant dated 22.1.85 by which the general and
special conditions were modified. This clause in Annexure R has already been
extracted and it permitted higher rates to be paid if the "variation is +
25% (plus/minus, twenty five percent) of the contract price".
question therefore is as to what is the meaning of this clause. The arbitrator,
as already stated, granted 50% of the extra rates obviously on the basis that
the case fell within the above exception.
District Court found that the total variations - both plus and minus - exceeded
contention of the appellant is that the above exception is applicable only to
the net difference between the increases and decreases and if it works out to
more than 25% of the contract value, then rates can be revised. For example if
the contract value is Rs.
the increases are of a value of Rs. 15 lakhs and the reductions are of a value
of Rs. 10 lakhs, the net difference according to the appellant, in the overall
contract value is only Rs. 5 lakhs and being 10% of Rs. 50 lakhs, there can be
no escalation in rates.
other hand, the respondent contends that one has to add up the total variations
both plus and minus and hence, in the above example, the value of total
variation, both plus and minus amounts to Rs.25 lakhs which works out to more
than 25% ( in fact 50%) of the contract price and the enhanced rates will be
opinion, the construction put on this escalation clause by the learned counsel
for the respondents, Sri S. Ganesh is the proper one. On that basis, this case
would come within the exception and there was no error of jurisdiction on the
part of the arbitrator.
point raises certain important issues concerning integrity of the contract. The
concept of variation of the question of work is no doubt a common feature of
works contracts. This is because in contracts relating to major works, the
estimates of work at the time the tenders are invited can only be approximate.
But, it was also realised that the power of the employer to vary the terms
relating to the quantum of work cannot be unlimited. In Hudson's Building and Engineering
Contracts (8th Ed.) (pp.294- 296) it has been pointed out that this power
"although unlimited, is in fact limited to ordering extras upto a certain
value." McCardie, J. in Naylor, Benson & Co. vs.
Industrie Gessellschaft [1918 (1) KB 331] said that the words "even though
general, must be limited to circumstances within the contemplation of the
Parkinson (Sir Lindsay) & Co. Ltd. vs.
of Works and Public Buildings [1949 (2) KB 632], Asquith, LJ. stated (at p.682) that the
words enabling the employer to add extra work, though wide, have to be limited
for otherwise it would amount to 'placing one party so completely at the mercy
of the other'.
LJ. observed (p.673) that, to confer an unbridled power on the employer to vary
the quantities of work would lead "to manifest absurdity and injustice as
stated by Mathew, J. in Bush vs. Whitehaven Town & Harbour Trustees (I)
(1888) 52 J.P. 392.
also state that under the general law of Contracts, once the contract is
entered into, any clause giving absolute power to one party to override or
modify the terms of the contract at his sweet will or to cancel the contract
-even if the opposite party is not in breach, - will amount to interfering with
the integrity of the contract (Per Rajamanner, CJ. in Maddali Thathiah vs.
Union of India AIR 1957 Mad.82). On appeal to this Court, in that case, in
Union of India vs. Maddali Thathiah [ 1964(3) SCR 61 =AIR 1966 SC 1724] the
conclusion was upheld on other grounds. The said judgment of the Madras High
Court was considered again AIR 1965 SC 1288) but the principle enunciated by Rajamanner
CJ was not differed from. (See the discussion on this aspect in Mulla's
Contract Act, (10th Ed.) PP.371-372, under Section 31 of the Indian Contract
Act.) There is thus good reason as to why, in modern works contract, a
limitation upto 20% (now 25%) has been put on this power of alteration, both
plus and minus.
Law Relating to Building and Engineering Contracts in India, 3rd Ed., pp.410-412). Such a
limitation upto 20% or 25% is now imposed under clause 12A of the Standard
Terms of CPWD Contracts.
aspects were discussed in detail in S.Harcharan Singh vs. Union of India [1990
(4) SCC 647] by a three Judge Bench of this Court. That judgment is very much
relevant to the present case both on principle and on facts. It was held by S.C.Aggarwal,
for the Court that the arbitrator could award higher rates on the analogy of
clause 12 A of CPWD contracts for excess variations beyond 20%. The contract
rate was Rs.129 per thousand cft plus 2% but the contractor claimed at Rs.200
per cubic ft in respect of the excess over 20% extras. The arbitrator upheld
part of the enhancement claimed and that was upheld by this Court.
12A of the CPWD contract which permits variations upto 20% again come up for
consideration recently in Himachal Pradesh State Electricity Board vs.
& Co. [1999 (4) SCC 214]. In that case, the arbitrator gave a non-speaking
award on disputes 1, 2 and 4. Dispute 1 related to revision of rates.
2 was whether the quantities were payable at the deviated rates, where
quantities of individual items exceeded the deviation limit. Dispute 4 was as
to whether the quantities to be considered for the purpose of deviation limit.
Under clause 3(2)(e) (ii) deviations upto 20% were liable to be carried without
any extra. The contention of the department was that the contract was an items
rate contract and that it was only those items which crossed the deviation
limit that were to be paid at revised rates. The rate for work in excess of the
deviation limit was to be fixed only as per clause 12A. It was contended for the
Board that the arbitrators acted beyond their jurisdiction and could not have
revised the rates of items merely because the overall value of the contract
which was executed exceeded 20%. On the other hand, it was contended for the
contractor that the claim as to revised rates must be deemed to have been
specifically referred to the arbitrator, the arbitration clause being wide, and
that the construction put on the 20% clause by the arbitrator could not be held
to be vitiated by any error apparent on the face of the word. Kirpal, J. after
referring to a number of judgments dealing with the power of the arbitrator to
interpret the terms of the contract, - including Hindustan Construction Co.
Ltd. vs. State of J&K [1992 (4) SCC 217], K.R.Ravendranathan vs. State of Kerala
[1998 (9) SCC 410],-held that the grant by the arbitrator at a rate higher than
the contract rate could not be treated as outside his jurisdiction. It was
construction placed on the contract by the contractor cannot be said to be an
implausible one. Even if the arbitrators considered the terms of the contract
incorrectly, it cannot be said that the award was in excess of
jurisdiction." It was, however, contended before us for the appellant that
by a wrong construction of the clause permitting revised rates as stated in
Annexure R, the arbitrator could not have clutched at jurisdiction he did not
have. The question then is whether the arbitrator clutched at jurisdiction he
did not have, by an unreasonable construction of the clause "+ (25%)"
for purposes of escalation.
of the view that the abovesaid clause "+25%" was understood by the
arbitrator in a reasonable manner as being applicable to a case where the value
of the sum total of the additions and deletions exceeded 25% of the contract
price. That construction, in our view, cannot be said to be vitiated by any
serious error of law. The following are our reasons.
contractor bids in a contract, he has to offer reasonable rates for the works
which are both difficult to perform and other works which are not that
difficult to perform. Every contractor tries to balance his rates in such a
manner that the employer may consider his offer reasonable. In that process the
contractor tries to get a reasonable margin of profit by balancing the more
difficult (and less profitable items) and the less difficult (and more
bid is, normally, a package. If the employer is permitted in law to make
variations upwards and downwards - even if it be upto a limit beyond which
market rates become payable - then the interpretation of the clause must be one
which balances the rights of both parties. For example, if the plus and minus
variations go beyond 25% and are made in a manner increasing the less
profitable items and decreasing the more profitable items, and if the net
result of the contract is to be the basis, as contended by the appellant, then
it may work out that the contractor could be made to perform a substantially
new contract on the same contracted rates.
fact, if the said reasoning of the appellant is accepted and if, in a given
case, the value of the increases in unprofitable items is 50% of the contract
value and the value of the reductions of the remaining more profitable items is
50% of the contract value, it could still be contended for the appellant that
the net variation was nil, even though that was a situation where the contract
had been substantially modified and was almost a different contract from the
an unreasonable construction is to be avoided and was rightly avoided by the
additions and decreases in work are, in our opinion, therefore both independent
for the purpose of finding out the + 25% variation and have to be pooled
together. The arbitrator was right in thinking that the case fell within the
exception. Obviously, he must have felt that the plus and minus variations are
more than 25% and that the contract rates are no longer binding.
construction of the clause appears to be rational and just and cannot be said
to be unreasonable.
result, the interpretation put on the clause by the arbitrator appears to us to
be quite reasonable and very plausible and it cannot therefore be said that the
award is vitiated by any error of law affecting his jurisdiction. In fact, the
learned District Judge found that the total variation - both upwards and
downwards was more than 100% of the contract price. For the aforesaid reasons,
we are of the view that Points 1 and 2 should be answered in favour of the
concerns the question whether the arbitrator could have awarded at a flat rate
of 50% of the extra claim or at 50% of the difference between the market prices
and the contract rates. Both on law and on facts, the case of the appellant
cannot be accepted.
is material on record that the appellant had, during the pendency of the
arbitration proceedings, not seriously disputed that market rates were payable
because the plus and minus variations exceeded 25% of the contract price. As
pointed out in the respondent's counter filed in this Court, the appellant had,
in a reply dated 18.3.88 filed before the arbitrator conceded having paid 75%
of the additional work at the revised rates though not upto the extended date.
Now the award by the arbitrator was for the 'balance' and upto 30.10.86. That
is also an indication that, on facts, the arbitrator's construction of the
"+ 25%" clause was correct.
appellant's defence to the respondent's claim before the arbitrator, there was
no specific denial of the contractor's right to the market rates.
appellant was relying more on its general plea that the + 25% clause was not
attracted at all as the contract value as a whole or the net increase was to be
taken into consideration. In fact, there were favourable recommendations of the
departmental officers for payment at higher rates. In S.Harcharan Singh's case
to which we have referred earlier, there were similar recommendations of the
officers. The arbitrator cannot, therefore, be said to have acted illegally on
facts for he has not in fact granted at the full market rate claimed by the
contractor but has only granted at 50% of the claim.
also, the appellant has no case. In the case of a non-speaking award, it is not
permissible for the Court to probe into the mental process of the Rao ( 1987(4)
SCC 93)] when he rejected 50% of the claim in favour of the appellant and
accepted 50% of the claim in favour of the contractor. In two decided cases of
non- speaking awards when a flat increase of 20% or 25% for permissible items
of additional work was granted by the arbitrator, this Court accepted the same
as not being illegal. See P.M.Paul vs. Union
of India [1989 Suppl.
SCC 368] and Himachal Pradesh Nagar Vikas Pradhikaran vs. M/s Aggarwal &
Co. [AIR 1997 SC 1027].
merely because the increase was at a flat rate, we cannot find fault with the
award. The arbitrator was appointed by consent and he was a former General
Manager in the Railways and was also associated with the appellant corporation.
We do not therefore find any error apparent on the face of the record in the
award of 50% of the escalation claimed and in the claim upto the extended date,
the aforesaid reasons, the appeal is dismissed. The interim orders passed by
this Court stand vacated. No costs.