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Tuesday, April 19, 2016

construction of the terms of a Contract is primarily for an Arbitrator or Arbitral Tribunal to decide and unless the Arbitrator or Arbitral Tribunal construes the contract in such a way that no fair minded or reasonable person could do, no interference by Court is called for.


                        IN THE SUPREME COURT OF INDIA

                        CIVIL APPELLATE JURISDICTION

                        CIVIL APPEAL NO.2529 of 2016
                (Arising out of SLP (Civil) No.9223 of 2014)

National Highways Authority of India                         ….Appellant


M/S JSC Centrodorstroy                          …. Respondent


                        CIVIL APPEAL NO. 2530 of 2016
                (Arising out of SLP (Civil) No.9494 of 2014)

                               J U D G M E N T

Uday U. Lalit, J.

1.    These appeals by special leave arise out of common judgment and  order
dated 20.12.2013 passed by the High Court of Delhi at New Delhi in FAO  (OS)
588 of 2013 and in FAO (OS) 590 of  2013.  The  questions  raised  in  these
appeals being identical, the appeals are dealt with by this common  judgment
and for the sake of convenience, the facts leading  to  the  filing  of  FAO
(OS) 588 of 2013 are dealt with in detail.

      2.    Contract No.TNHP/2, Construction Package  II-C  for  a  contract
price  of  Rs.295.53  crores  for  executing  the  work  of   4-laning   and
strengthening of the existing 2 lanes sections between km 38 to  km  115  on
National Highway-2 in  Uttar  Pradesh  was  awarded  to  the  Respondent  on

      3.    Clause 14.3 of  “Instruction to Bidder”  was as under:-
“All duties, taxes and other levies payable  by  the  Contractor  under  the
contract, or for any other cause, as of  the  date  28  days  prior  to  the
deadline for submission of bids, shall be included in the rates  and  prices
and the total Bid Price submitted by the bidder.”

      The parties adopted FIDIC form of conditions  of  contract  with  some
changes which are called Conditions of Particular Application  (“COPA”,  for
short). Clauses in COPA in the present case are  identical  to  those  dealt
with by this Court in  National  Highways  Authority  of  India  Versus  ITD
Cementation India Ltd.[1].  Clause 70.8 dealing with effect  of  “Subsequent
Legislation” was as under:-

“Clause 70.8: Subsequent Legislation
If, after the date 28 days prior to the closing date for submission of  bids
for the Contract there  are  changes  to  any  National  or  State  Statute,
Ordinance, Decree or other Law or any regulation or by-law of any  local  or
other duly constituted authority or  the  introduction  of  any  such  State
Statute, Ordinance, Decree, Law, regulation or by-law in India or States  of
India which causes additional or reduced cost to the Contractor, other  than
under the preceding Sub-Clauses of this clauses  in  the  execution  of  the
contract, such additional or reduced  cost  shall,  after  due  consultation
with the Employer and the Contractor, be  determined  by  the  Engineer  and
shall be added to or deducted from  the  Contract  Price  and  the  Engineer
shall notify the  Contractor  accordingly  with  a  copy  to  the  Employer.
Notwithstanding the foregoing, such additional or reduced cost shall not  be
separately paid or credited if the same shall already have been  taken  into
account in the indexing of any inputs to the Price  Adjustment  Formulae  in
accordance with the provisions of Sub-Clauses 70.1 to 70.7 of this Clause.”

4.    Disputes having arisen between the parties, the  matter  was  referred
to the Arbitral Tribunal.   Two  claims  were   raised   by  the  respondent

“(i) Dispute No. 1
Compensation for additional cost on account of increase in  Service  Tax  on
the Insurance Premium under the Insurance Policy for the Project.

(ii)  Dispute No. 2
Compensation for additional cost on account  of  Service  Tax  on  the  Bank
Guarantee charges.”

5.    It was submitted by the respondent-claimant that in terms  of   Clause
21.1 of General Conditions of contract, for  the  works  awarded  under  the
contract,  an insurance policy was required  to  be  taken  w.e.f.  1.4.2001
initially  for  a  period  to  13.09.2006  which  was  later   extended   to
30.09.2009.                     It  was  submitted  that  General  Insurance
Policies including insurance for     works were subject to levy  of  service
tax which would be collected by the Insurance  Company  along  with  premium
chargeable. There being revisions in the rate of  service  tax  from  5%  to
10.30%, over a period of time, according to the claimant  service  tax  paid
in excess of 5% was reimbursible by  the  appellant  under  Clause  70.8  of
COPA.  Similarly, in terms of the  Clause  10.1  of  COPA,  the  respondent-
claimant was required to furnish Bank Guarantee for  due  execution  of  the
contract by way of performance security. Service  tax  in  relation  to  the
Bank Guarantee as collected by the Bank had risen from 5% to  10.30%  during
the course of the contract and as such according to the  respondent-claimant
it was entitled to be reimbursed by virtue  of  Clause  70.8  of  COPA.  The
Arbitral Tribunal by  its  unanimous  award  dated  28.2.2013  accepted  the
aforesaid claims and directed that the respondent-claimant   shall  be  paid
following sums in relation to dispute No.1:-

“6.1  The Claimant shall  be  paid  by  the  Respondent  an  amount  of  Rs.
11,34,877/- on account of Service Tax paid by him at rates in excess  of  5%
of the premium paid.

6.2  The Claimant shall also  be  paid  by  the  Respondent  a  sum  of  Rs.
11,22,811 towards interest on the above amount for period upto the  date  of
this award i.e. 28.02.2013.

6.3  Post award interest shall be payable in addition, on the principal  sum
awarded of Rs. 11,34,877/- at the rate of 12% per annum from  01.03.2013  to
the actual date of payment of amounts under pars 6.1 & 6.2  above.  No  post
award interest shall however be payable in case the above sums  are  payable
within 90 days of the date of award.”

Similarly  the  Arbitral  Tribunal  awarded   to   the   respondent-claimant
following sums under dispute No. 2:-
“10.1  The Claimant shall be  paid  by  the  Respondent  an  amount  of  Rs.
63,58,368/- on account of additional cost incurred on  the  Bank  Guarantees
furnished to the Respondent in terms of the Contract.

10.2  The Claimant shall also be  paid  by  the  Respondent  a  sum  of  Rs.
43,84,987/- towards interest on the above amount for period  upto  the  date
of this award i.e. 28.02.2013.

10.3 Post award interest shall be payable in addition on the awarded sum  of
Rs. 63,58,368/- at the rate of 12% per  annum  (simple)  from  the  date  of
award to the actual date of payment of the said sum. No post award  interest
may, however, be paid in case the sums awarded under  10.1  and  10.2  above
are paid within 90 days of the date of the award.”

6.    The award passed by the Arbitral Tribunal proceeds on the ground  that
the additional costs as a result  of  revision  in  service  tax  which  the
respondent-claimant was required to bear, were covered under Clause 70.8  of
COPA. It was observed that service tax was not an input to the indices  used
in Prices Adjustment Formulae in Clause 70.3.  It concluded as under:-

“The claim in question is for reimbursement of  additional  costs  resulting
from change in Central Law which came into effect after  the  base  date  as
defined in Sub-Clause 70.8. In terms of the Sub-clause, such costs  are  not
payable separately if the same have  already  been  taken  into  account  in
indexing of the inputs in Price Adjustment Formulae under  Sub-clause  70.3.
The Claimant has placed  on  record  a  letter  dated  24.01.2008  from  the
Economic  Advisor,  Ministry  of  Commerce  and  Industry,  confirming  that
Service Tax was not an input into indexing  of  Whole  Sale  Price  Indices,
used in India.”

7.    The award passed by  the  Arbitral  Tribunal  was  challenged  by  the
appellant by filing OMP No.623 of 2013 under Section 34 of  the  Arbitration
and Conciliation Act, 1966 before the High Court of Delhi.  By  order  dated
21.10.2013 Single Judge of the High Court dismissed  said  petition.  In  an
appeal arising therefrom i.e. in FAO(OS)588 of 2013, the Division  Bench  of
the High Court  by  its  judgment  and  order  dated  20.12.2013,  which  is
presently under challenge,   affirmed the view taken  by  Single  Judge  and
dismissed the appeal.

8.    The facts leading to the present appeal arising out of  FAO(AS)590  of
2013 are more or less identical.   In  that  matter  identical  claims  were
raised on two counts but arising out of a different  contract  by  the  very
same claimant.  The Arbitral Tribunal granted Rs.8,84,969/-  in  respect  of
dispute no. 1 with interest @ 12% per annum under  identical  two  heads  as
found in the earlier case.  Similarly,  in respect  of  dispute  no.2,   the
Arbitral Tribunal awarded Rs.42,35,385/- with interest @ 12% per annum.

9.    In NHAI  v. ITD Cementation India Ltd.(Supra) impact of  Clauses  70.1
to 70.7 on one hand and 70.8 of COPA was considered  and the view  taken  by
the Arbitral Tribunal as affirmed by the High Court was accepted.   In  that
case impact as a result of increase  in  the  rates  of  royalty  and  issue
whether the Arbitral Tribunal was right  in  observing  that  the  case  was
covered under Clause 70.8 of COPA were considered by this court.   The  view
taken by the Arbitral Tribunal was found to be consistent with the terms  of
the contract and challenge at the instance of National Highways  Authorities
of India was negated.

10.   The fact that there had been revision in  the  rates  of  service  tax
from time to time was not disputed by the  appellant.   Ms.  Indu  Malhotra,
learned Senior Counsel appearing for the appellants  in  both  the  matters,
however, submitted that only those claims which were  constructional  inputs
alone would be eligible to be covered under Clause 70   of   COPA.   In  her
submission, the service  tax on bank guarantee could have  been  avoided  by
the claimant,  if the bank guarantee was  replaced by   tendering  cash  and
that the  facility  of bank guarantee was optional and at the discretion  of
the claimant.  Similarly, money advances were given for the benefit  of  the
claimant and any cost associated with such benefit  would  not  come  within
the scope of Clause 70.8.  Mr. Biswajit  Das,   learned  Advocate  appearing
for the respondent-claimant in both the  appeals   however,  submitted  that
the bank guarantees were required to be given under the contract itself  and
such requirement was stipulated by the appellant  primarily  to  reduce  its
financial  risk  and  to   bind  the  claimant  for   its   performance   or
protecting the  money advanced to  the  respondents.   In   his  submission,
furnishing a performance bank guarantee @ 10% of the contract  price  was  a
mandatory condition of the contract under Clauses 10.1  and  10.2  of  COPA.
Though at some stage the option of performance bond was mentioned  in  COPA,
such option was withdrawn making performance security to be compulsorily  in
the form  of  an  unconditional  bank  guarantee.   Such  requirement  being
directly referable to essential conditions and arising out of the  terms  of
the Contract, according to him the matter was definitely  within  the  ambit
of Clause 70.8 of COPA.

11.   Having considered rival submissions, we  are  of  the  view  that  the
assessment made by the Arbitral Tribunal in the instant case as affirmed  by
the  High  Court  was  definitely  within   its   jurisdiction.     It   has
consistently been laid down by this Court that construction  of   the  terms
of a  Contract is  primarily for  an  Arbitrator  or  Arbitral  Tribunal  to
decide and  unless  the  Arbitrator  or  Arbitral  Tribunal   construes  the
contract in such a way that no fair minded  or reasonable  person could  do,
no interference by Court is called for.  Viewed thus,  we  do  not  see  any
reason or justification to interfere in  the  matter.   The  view  that  the
increase in rates of service tax in respect of bank guarantee and  insurance
premium is directly relatable to  terms  of  the  contract  and  performance
under the Contract is certainly a possible view.

12.   In the circumstances,  we  do  not  find  any  merit  in  the  present
appeals.  Both the appeals are dismissed without any order as to costs.

                                                         (Dipak Misra )

                                                          (Uday Umesh Lalit)

New Delhi
April 18, 2016
      [2]         2015(6) SCR 107

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