Case Note & Summary
The dispute arose from a works contract between Himachal Pradesh Nagar Vikas Pradhikaran (appellant) and M/s Aggarwal & Co. (respondent) concerning execution of certain works. After a dispute, the matter was referred to arbitration on the High Court's directions. The arbitrator held delay attributable to the Executive Engineer and awarded a 25% increase over and above tendered rates for all works executed after stipulated completion date, 21 May 1989. The award was made rule of court. While implementing the award, the appellant calculated amount payable as Rs 4,99,307 after deducting cost of cement and steel supplied by the department and taxes. The respondent claimed a further Rs 5,81,421 contending the 25% escalation applied also to the value of department-supplied cement and steel. The appellant objected under Section 47 CPC. The High Court overruled the objection and directed payment of further sum, prompting this appeal by special leave. Chronologically, agreement was executed, works were delayed beyond 21-05-1989, arbitrator passed award on 25-04-1992. Letter dated 12-11-1993 detailed gross work done after 21-05-1989 Rs 69,78,354, less cost of material Rs 23,25,685, net Rs 46,52,669, 25% increase Rs 11,63,167, less income tax and surcharge Rs 26,055, net Rs 11,37,112, withheld recoveries Rs 6,37,805, net payable Rs 4,99,307. Respondent claimed further Rs 5,81,421. High Court allowed. Legal issues were whether 25% escalation awarded by arbitrator covered cost of cement and steel supplied by department and whether High Court erred. Appellant contended escalation only on tendered rates, not raw materials; department supplied cement and steel at contract rates and bore escalation. Respondent argued award final and relied on P.M. Paul v. Union of India. Court noted object of awarding escalated cost was contractor procured material from open market at prevailing prices. Under Clause 10 of contract, department required to supply material at prevailing rates as on date of execution and entitled to deduct same from amounts payable. Department supplied cement and steel at rates prevailing on supply dates, not increased rates; amount worked out Rs 23,25,785. Therefore contractor did not bear escalation on those materials; not entitled to 25% on their cost. P.M. Paul distinguishable. High Court's direction erroneous. Appeal allowed; order of High Court set aside; no costs.
Headnote
A) Arbitration Law - Execution of Award - Interpretation of Escalation Award - Code of Civil Procedure, 1908, Section 47 - The arbitrator awarded a 25% increase over and above tendered rates for all works executed after the stipulated completion date. The dispute was whether this escalation applied to the cost of cement and steel supplied by the department. The Court held that the object of awarding escalated costs was to compensate contractor for securing materials from open market at prevailing prices; since the contractor did not procure these department-supplied materials, no entitlement to 25% on their value arose. Held that the High Court erred in directing payment of the further sum. B) Contract Law - Escalation Clauses - Exclusivity of Tendered Rates for Works - Clause 10 of Contract - Clause 10 required the department to supply material at rates prevailing on the date of execution and to deduct the same from amounts payable. The department supplied cement and steel at prevailing rates without charging increased rates, so the contractor suffered no escalation burden for those materials. The Court held that 25% escalation awarded was limited to the tendered rates for works executed and did not extend to department-supplied material costs. Held that the appeal is allowed without costs.
Issue of Consideration
Whether the 25% escalation awarded by the arbitrator over and above tendered rates for all works executed after the stipulated date of completion applied to the cost of cement and steel supplied by the appellant department, and whether the High Court erred in directing payment of further sum under Section 47 CPC.
Final Decision
Appeal allowed; High Court order directing payment of further sum set aside; no costs.
Law Points
- 25% escalation under arbitration award applies only to tendered rates for works executed and not to cost of department-supplied materials
- contractor not entitled to escalation on materials supplied by department where department bore price increase
- escalation clause compensates contractor for procuring materials from open market at prevailing prices
- Section 47 CPC objection to execution of award permissible
