Janaki Krishnamoorthi presents the 14th in a series of case studies referred for arbitration.
An entertainment company awarded a contract for building a multiplex theatre in Gujarat to a contractor. The contract value of the project, comprising a main building and utility building, was Rs 435 lakh. The work, which began in September 2001, was to be completed in April 2002. However, it was completed only in October 2002 . This delay, for which both parties blamed each other, led to several disputes with each claiming to have incurred losses.
While submitting the final bill in June 2003, the contractor made a claim for compensation and escalation owing to the delays. This bill, certified by the companyâ€™s project engineer in March 2004, was not settled by the company, who in turn claimed compensation for damages suffered owing to the delay. The case went for arbitration.
The arbitral tribunal comprised Dr Roshan Namavati, nominated by the contractor, and two architects, one epresenting the company and the other appointed presiding arbitrator. The arbitral proceedings began in May 2004 and concluded in December 2005 after 21 meetings. The award was declared in March 2006.
Award by majorityAt the first meeting when the claims were discussed, a difference of opinion surfaced between the arbitrators on the issue of delay and payment of damages to the contractor. While the contractorâ€™s arbitrator and the presiding arbitrator felt that the claimant was entitled to damages for 50 per cent of the delay caused by the respondent, the companyâ€™s arbitrator disagreed, maintaining that the respondent was not responsible for any delay and hence no damages should be paid to the claimant. The other two arbitrators did not agree with this view. Hence, decisions were taken and awards given by majority members with the dissenting member submitting his award.
Objection over jurisdiction overruledThe owner (respondent) raised the question of jurisdiction saying the tribunal was prohibited from entertaining any claim beyond the specific terms of contract and did not have the power to decide on claims raised by the contractor (claimant). The contractor had submitted claims for an unpaid certified amount, escalation for work done during extended period of contract, compensation for delays and prolongation of contract period, financial loss, interest on delayed and outstanding payments and cost of arbitration. The tribunal, however, overruled the objections stating that the clauses referred to in the contract were either not applicable or did not cover the specific issues covered by the contractorâ€™s claims.
The contractorâ€™s claimsAfter studying the documents submitted, oral evidence presented and judgements quoted by both parties, the majority tribunal decided that the claimant was entitled to the payment of the outstanding and certified amount, delay damages, interest on delayed payments and future interest. The tribunal, however, rejected the claim for escalation and financing loss and ruled that parties bear their own legal and arbitration costs. Some of the claims analysed and adjudicated by the tribunal are given below.
Claim against unpaid certified amountAmount claimed: Rs 8,261,966Amount awarded: Rs 8,204,293Against the unpaid bill amount, the respondent insisted on deducting Rs 14,58,743 for defective work, housekeeping, cost of power distribution board, electricity supplied, etc, which was initially unacceptable to the claimant. Later, however, they agreed to deductions for housekeeping, power, electricity, but not for defective work amounting to Rs 1,400,990. The claimant maintained that they worked as per specification and rectified defects and that their work was monitored regularly by the respondentâ€™s engineer. Further, they argued that the deduction had been calculated on the total area instead of just the small damaged area that was against established practice. The tribunal agreed that deduction on the entire rather than the damaged portion of the work was improper and contrary to established trade practice and hence disallowed the deduction for bad work. However, other deductions, also accepted by the claimant, were allowed by the tribunal.
Claim against escalationAmount claimed: Rs. 627,593 Amount awarded: NilThe claimant alleged that owing to extensive failures on the part of the respondent, much of the work was delayed beyond the initial completion period and claimed escalation costs for rise in price of materials and labour during the extended period. The respondent, however, contended that the delay was caused by the claimant and contract clause 13.1 lays down that the contractorâ€™s price will remain firm and free of any escalation till the completion of work. In addition, they maintained that the claimant should have made the claim monthly as per contract. This was not done and nor was their claim certified by their engineer. The claimant, however, opined that this was applicable only when the work was completed within the stipulated period and could not be operative for an indefinite period. The tribunal stated that clause 13.1 and the crucial words â€œtill completion of workâ€ should be read with clause 44 which provided for power to extend the time. Hence, â€œtill completion of workâ€ with a reasonable limit would apply to an extended period too and not just to the original contractual period. Based on this interpretation, the tribunal rejected the claim.
Claim for delay damagesAmount claimed: Rs 12,286,050 Amount awarded: Rs 4,350,000 This claim included delay damages for site and office overheads, departmental labour for contract period and extended period and financing loss, etc. The respondent argued that the delay was owing to a deficiency in resources as well as poor quality of work by the claimant. Further, they also said that as the claimant as per clause 44 made no application for extension of time citing its financial effect, this claim should not be entertained. According to the tribunal, this claim revolved around three issues: the person responsible for the delay, whether the claimantâ€™s work was defective, and whether the contract disallowed delay damages. The tribunal held the respondent responsible for 50 per cent of the delay as many drawings were issued late and several major changes in design were made during the course of work. In addition, the respondentâ€™s own witnesses also accepted responsibility for 50 per cent of the delay.
The poor quality work plea by the respondent was rejected by the tribunal as the concrete, load and ultrasonic tests did not indicate poor quality. Further, the respondent was granted the licence to operate the theatre that would not have been issued if the work was of poor quality. The tribunal maintained that clause 44 read in right perspective showed that in ordinary course, it was the engineerâ€™s duty to grant an extension unless there were special circumstances calling for an application from the claimant. Hence, the respondent was incorrect to mix up the question of application and financial loss and equating financial loss in work to delay damages. Further, the tribunal held that the contract did not bar compensation for delay except when the delay was caused because of rectification or reconstruction of rejected quality of material or work. Based on the above observations, the tribunal ruled that the claimant was entitled to reasonable compensation for delay damages for 50 per cent of the delay; that is, for 91 days of the total delay period of 182 days. However, while computing the damages, the tribunal declined to include office overheads, department labour, etc, as the claimant did not produce evidence to prove them.
Respondentâ€™s counter claim for loss of profitAmount claimed: Rs 27,848, 205 Amount awarded: NilThe respondent put forth a counter claim of Rs 27,848, 205 based on loss of profit suffered during the delay period which, according to them, was caused by the claimant. The claimant denied this, saying the respondent was responsible for the delay and if they had suffered loss they should have claimed liquidated damages. The respondent in turn submitted that liquidated damages was a contingent provision and did not come into force as preconditions for levying liquidated damages were not satisfied and hence their counter claim was based on Section 73 of the Indian Contract Act. And if the tribunal held that the contract had a valid liquidated damages clause, they may be awarded liquidated damages at 10 per cent of contract value. The tribunal rejected the respondentâ€™s submission that the clause for liquidated damages was a contingent provision and rejected the claim on the ground that the damages were not payable when the clause of liquidated damages existed in the contract.
Project: Construction of multiplex theatreLocation: GujaratContract value of work: Rs 435 lakhArbitral tribunal: Dr Roshan Namavati appointed by contractor and two architects, one representing the company and the other appointed presiding arbitratorArbitration period: May 2004 to December 2005Award declared: March 2006
Dr Roshan H NamavatiThe details of this case have been provided by Dr Roshan H Namavati, a civil engineer and architect with a doctorate in philosophy of law (property) from Bombay University. Dr Namavati has been practising as a valuer, surveyor, architect and techno-legal consultant in Mumbai for over five decades. He has been an arbitrator on several construction-related cases and in several disputed valuation of properties referred to by the tribunals of the Income Tax Department. Twice elected president of the Institution of Valuers, Dr Namavati is a fellow of the Indian Institute of Architects, the Institution of Engineers (India) and the Institution of Surveyors; an associated member of the Institution of Arbitrators (India); and member of the Indian Council of Arbitration. He was a member of the ad-hoc committee appointed by the Government of India for suggesting norms of valuation for taxation and has also authored several books on valuation.
Dr Namavati can be contacted on e-mail at firstname.lastname@example.org
Dr Roshan Namavati shares his views onâ€¦.
â€¢ Reasons behind disputes: There are several factors that give rise to disputes, the main one being an increase in project cost by two to threefold or even more. The reasons for such an increment could be non-application of mind, lack of knowledge, want of foresightedness, failure to study site condition, etc. Sometimes, in order to secure works or show the owner a rosy picture, low estimates are made. It is accepted that an estimate may increase owing to latent features by about 25 per cent but if it increases to 200 per cent with no change in specifications, from where will the employer bring in such an increment? And who is at fault if a dispute arises here and the case goes for arbitration? Many architects are unaware of the terms of contract and their position â€“ the fact that they are the interpreter of the contract, quasi arbitrator or dispute preventer. How many architects have effectively donned these roles to prevent disputes?
â€¢ Retired judges as arbitrators: There are two schools of thought. One group is in favour of only architects and/or engineers being appointed sole or joint arbitrators as they know construction rules and practices better. The other school thinks that individuals from the legal fraternity including retired judges should be appointed along with architects and engineers. I am in favour of the second group as the help we get from the legal fraternity is immense. Often the arbitral procedure is set on the right platform because of them. The architects and engineers who object to the legal fraternity should realise that arbitration has originated from the legal field and not from the construction field; law is the ultimate converging point for settling the issues arising in the construction field.
â€¢ Unfair contract terms: In some circles, it is pleaded that the contracts in the construction industry, especially government contracts, are one-sided. This circle often refers to the Unfair Contract Terms Act, existing in the UK to find out how far government contract terms are one-sided. I think this group should specify the unfair terms, start a debate on them and take it up with the government instead of just complaining. I would also like to point out two factors. Why do contractors take up the work if contract terms are one-sided? A number of construction disputes have gone before the courts but have they ever declared that some terms of contract are totally one-sided?
â€¢ Prolonged arbitral proceedings: The delay in arbitral procedures can be on the part of the parties, their advocates or arbitrators. I will rule out the arbitrators and the advocates as in the majority of cases, the delay is on the part of the parties. If they do not give instructions in time, what can others do? Some amendments are needed in the Arbitration & Conciliation Act 1996 to set a deadline to declare awards.
â€¢ A final appeal: I appeal to the arbitrators' fraternity to treat arbitration as a social obligation to society where money is a secondary consideration, similar to our village panchas (five people settling a dispute unanimously or by majority) where service to society comes first.