Janaki Krishnamoorthi discusses the 15th in a series of case studies referred for arbitration.
A computer hardware and software supplier entered into an agreement with an electrical contractor to provide electrical works and for supply and installation of DG (diesel-generator) sets at its new office premises in Haryana. The parties entered into two agreements: one for electrical works and the other for DG sets in August and October 1998 respectively. Both assignments were to be completed within four months; the agreed completion dates were December 15, 1998 and February 8, 1998 respectively. The work, however, was delayed and was finally completed only in March 1999 under both contracts.
During payment of the final bill, the employer deducted liquidated damages (LD) at 5 per cent of contract value allegedly for delayed completion of work by the contractor. Later, the employer’s project manager informed the contractor that it had deducted 5 per cent as LD instead of 10 per cent owing to an oversight and that the same would be recovered from the contractor’s security deposit. The contractor protested, saying he was not responsible for the delay and hence not liable to pay LD.
The contractor contended that the delay was caused owing to extra work given by the employer even after the stipulated completion date and non-availability of some areas like the basement because of water logging and others because of incomplete civil work. On the other hand, the employer maintained that the contractor did not mobilise adequate resources to execute the job on time and that the extra work was of a minor nature and could have been completed easily within the scheduled time. Further, when the employer shifted to the new premises in January 1999 there was no power connection available for operating light, lifts, etc. The employer asked the contractor to operate the DG sets. As this was not part of the original agreement, the contractor presented his quotations and operated the DG sets till the employer made his own arrangement to run them. The contractor submitted his bill amounting to around Rs 2.12 lakh for the same that, however, remained unpaid. As the employer failed to heed his plea, the contactor invoked the arbitration clause in March 2002.
The arbitral tribunal
The tribunal comprised co-arbitrators Dr Vandana Bhatt, nominated by the contractor (claimant), and another engineer nominated by the owner (respondent). A retired Delhi high court judge was appointed presiding arbitrator. The hearings were held in Delhi. The tribunal concluded the case in a remarkable period of five months. The statement of claim was filed by contractor in August 2003 and the award was granted in January 2004. This was a majority award with the owner’s arbitrator filing his dissenting award. The contractor’s claims were largely for recovery of the LD amount deducted from the final bill and adjusted against the security deposit, payment for running DG sets and interest on the outstanding amount.
The respondent’s objections
The employer’s counsel objected to the contractor’s claims saying it was not maintainable under the Code of Civil Procedure of 1908 (CPC) and was also barred by the Law of Limitation. He argued that as the statement of claim lacked material particulars, basic pleadings, particulars of the claim and relief sought, it was not maintainable under Order 7 Rule 11 of CPC.
While agreeing that the claimant’s statement should have been more explicit, the arbitral tribunal rejected the respondent’s application stating that as per Section 19 of The Arbitration and Conciliation Act 1996, the tribunal was not bound by CPC. The tribunal also overruled the other objection asserting that the limitation started from the date of certificate of payment deducting LD and not from the date of completion of work as submitted by the employer. The tribunal explained that when the employer’s architect made the deduction in his final certificates, the contractor questioned it and that was the date of the cause of action and consequently the date of the start of limitation.
Observations and rulings
The arbitral tribunal had to rule on three major issues: who was responsible for the delay in work; whether the employer was entitled to recover LD from the contractor; and whether the contractor was entitled to payment for running the DG sets.
Responsibility: The tribunal held the employer responsible for the delay as he ordered extra work not only till the end of the contract period but also beyond and as he also delayed handing over several sites including the basement.
Liquidated damages: The tribunal ruled that the employer cannot claim liquidated damages as he was responsible for the delay and, as extra work was ordered after the stipulated completion date, the contract time ceased to be applicable. The tribunal, therefore, ordered the employer to return all monies deducted as LD to the contractor.
Costs for operating DG sets: The respondent’s counsel argued that the claim for running DG sets cannot be awarded in the absence of the architect’s approval in writing that was essential under contract terms. The tribunal observed that though the contractor acted in good faith on verbal order, they were unable to award the amount as he did not have a written confirmation as per contract provisions.
The arbitral forum gave the final award as follows:Against electrical works: Security deposit @ 5 per cent: Rs 421,898.20Against LD @ 5 per cent: Rs 421,898.20Security deposit @ 5 per cent on extras: Rs 69,398.30Total 1: Rs. 913,194.70
Against DG sets: Security deposit @ 5 per cent: Rs 222,866.45Against LD @ 5 per cent: Rs 222,866.45Total II: Rs 445,733.30Total of I and II: Rs 1,358,928.00The tribunal also awarded interest at 12 per cent per annum on the outstanding amount from June 1999 till payment and asked the respondent to bear the costs of arbitration.
In a nutshell
Project: Electrical work, supply and installation of DG setsLocation: HaryanaParties in dispute: Electrical contractor and company supplying computer hardware/softwareIssues under dispute: Responsibility for work delay, employer’s right to liquidated damages, contractor’s right to payment for extra work Arbitration invoked: By contractor in March 2002 Arbitral tribunal: Co-arbitrators Dr Vandana Bhatt, nominated by contractor, and another engineer nominated by owner; presiding arbitrator: a retired high court judgeClaims submitted: August 2003Award declared: January 2004
Dr Bhatt’s views on…
Laws and the construction industry: We do not have a separate construction law like other countries. We rely largely on the Contract Act of 1872 and laws related to other industries. No doubt, the law of the land is applicable but it should be correlated to the latest needs of technology. This is largely missing in India, particularly in the construction fi eld. This is the root cause of several problems and disputes that keep emerging in the industry.
Invoking bank guarantee: Rules regarding encashment of a bank guarantee (BG) must be reframed to suit the situation in the construction industry. BG given by a contractor as an assurance for his performance is often misused by employers. Even when a project is completed, the employers cash the BG claiming defective performance or breach of contract on the contractor’s part without substantiating this. For instance, one project was aborted owing to a problem at the employer’s end but they blamed the contractor and encashed his Rs 20 crore BG! Often when a contractor submits claims, employers threaten to cash his BG if he does not withdraw them. It has become an arm-twisting tool. Despite Supreme Court ruling that a stay on BG encashment can be given if there is prima facie evidence of fraud, the chances of lower courts granting a stay is less than 1 per cent. Alternately, courts can order the contractor to revalidate the BG till disputes are settled, taking care of both the employer’s and contractor’s interests.
One-sided contracts: Most contracts in India, particularly government contracts, are one-sided, favouring employers. Such unfair terms often compel contractors to quote a higher price, compromise on the quality of work or even abandon the work. The consequences are not only borne by contractors but by society as such contracts are often for constructing a building, a bridge, road or dam - all of which are for the benefi t of the public. Ultimately, it is public money and interest that suffer if a project is not executed properly or on time, or if there is a dispute leading to arbitration/litigation. Hence, we need uniform and fair contract terms, particularly for public works.
Escalation clause: A typical example is the escalation clause in contracts, which is based on the RBI index dealing with prices of rice, wheat, pulses, etc. We do not have construction industry based indices like other countries. We have taken up this issue with the government but to no avail. There should be an inbuilt mechanism in the contract to cope with cost escalation. When an employer calls for the tender he should put up a star rate for all materials based on the prevailing market rate and ask the contractor to quote his price based on these rates. If there is a further increase or decrease in the rate, prices should be adjusted accordingly. Contractors cannot be made to bear abnormal price rises of material largely controlled by the government. For instance, several contracts with one government organisation were terminated owing to a rise in steel and cement prices. Many contractors did not even bother about their bank guarantee being encashed or their machinery being confi scated as they felt carrying on the work at the price quoted in the contract would be even worse. All these cases are in arbitration and it is society that suffers as the projects are incomplete. It is public money being wasted in arbitrations.
Challenging awards: The majority of awards are often challenged in courts without good reason, making a mockery of arbitration and again leading to wastage of public money. Such cases go on for several years as many of them get challenged further in higher courts. One of my own cases where I am a legal consultant is awaiting a ruling in a lower court for the past 22 years. The original owner has expired, his son has become old and his grandson is now handling the case! The Arbitration Act should be amended to prevent such rampant challenging of awards. Anybody challenging the award should be asked to deposit the award amount with the court first. This will act as a deterrent. We can also have special technology courts like other countries. An award should only be challenged in such courts where experts in the construction industry or judges who have handled construction cases are appointed to adjudicate. After this, no further challenges should be permitted.
False or infl ated claims: There are several false and inflated claims raised by contractors and even employers. Many arbitrators see through them but they are still a waste of public money. In the US under the False Claim Act, anybody who does not succeed in proving 30 per cent of his claim must pay a huge penalty for submitting such claims. In the absence of such regulation here, we must introduce some preventive measures. Government organisations have begun to put a cap on this by introducing a condition in the contract that says that certain issues are ‘excepted matters’ and cannot be taken up in arbitration. However, this is unfair as it prevents even those who have genuinely suffered from raising the issue. Instead we can have an inbuilt mechanism in contracts. For example in a contract in Madhya Pradesh, a clause stated that if the contractor opted for arbitration, he would have to deposit 3 per cent of his claim with the employer. Such a clause would prevent infl ated or fraudulent claims. The Supreme Court has endorsed the introduction of such clauses.
Contract and project administration: Many construction industry professionals in India do not understand the importance of contract and project administration. In other countries, there are attorneys dealing solely with construction-related litigation who evaluate contract documents and advise their clients accordingly. In addition, all important correspondence and other records are routed through these attorneys. In India, we do not follow such a practice. The majority of contractors do not even bother to read the contract or maintain records through correspondence or progress reports on work done, delays, changes in design, etc. Even if records are maintained, they are often inaccurate or incomplete. Proper records make it easy for arbitrators to take a fair decision. Regular exchange of letters and minutes also help identify problems earlier, prevent disputes and help resolve them. It is like going for a regular health check up to identify and treat problems before they become acute.
Women arbitrators: There are only a handful of women arbitrators in India both from engineering and law. Gender bias does exist here even today. Women arbitrators from engineering are not preferred by judiciary. Frequently, I have to assert myself while explaining technical details to judicial experts, which at times ends in subtle ego clashes. All this perhaps will change if more women engineers take to arbitration.
Dr Vandana Bhatt
The details of this case have been provided by co-arbitrator Dr Vandana Bhatt, one of the few women to break into this male-dominated domain. She has handled several cases as arbitrator and techno-legal consultant. Formerly a Class I Engineer of the Government of India, Dr Bhatt now practises as a project administration consultant. She has won several awards including the Dadabhai Naoroji International Award from the Dadabhai Naoroji Centenary Committee (1998) and the Award of Distinction for cultural heritage conservation work from UNESCO (2007). She was nominated for her leadership qualities for the 2002 Honoree International Who's Who of Professional and Business Women Award. Now teaching construction law to postgraduate students in several institutions including the Indian Institute of Technology - Mumbai, she has conducted several workshops and presented numerous papers on construction management. You can email Dr Bhatt at firstname.lastname@example.org