The Road to Resolution

02 Aug 2010 CW Staff

Janaki Krishnamoorthi presents the 19th in a series of case studies referred for arbitration

A government agency entered into a contract with a private construction company in December 2000 to widen and strengthen the existing lanes and carriageway of a section of the National Highways in Eastern India. While the work was in progress, disputes rose on several issues that were first referred to the Disputes Review Board (DRB) as per the terms of contract. However, as the recommendations of the DRB were unacceptable, the matter was referred for arbitration.

The construction company (contractor) first submitted three claims; and while the hearing was nearing completion, submitted five more claims. After discussion it was mutually agreed that the award for the first set of claims would be declared and then the new claims would be taken up and a separate award would be announced. In the first arbitral hearing, there were no counterclaims from the government agency or respondent, though in the second they raised four counterclaims.

Contractor’s claims

In all, the contractor submitted eight claims, three of which were dealt in the first arbitration proceedings and the balance in the second. The claims were largely for payment/non-payment for various work carried out by the contractor like removal of roots of trees, sand filling in pits, refilling of trenches and foundations of structures, embankment construction, provision for pre-moulded filter joints in culverts, minor bridges and underpasses, and wrongful extension of DLP by respondent. Three of the claims from the two awards are briefly enumerated below:

Non-payment for removal of roots of trees with girth above 300 mm

Amount claimed: Rs 14,34,011
Amount awarded: Rs 13,51,747
The contractor pointed out that the BoQ (bill of quantities) provided for cutting of trees and removal of stumps/roots under two different items. The first one was for clearing and grubbing including cutting of trees and removal of roots/ stumps of trees up to 300 mm girth and removal of only stumps of trees of girth above 300 mm. The second provisional item included cutting of trees with the removal of stumps of trees above 300 mm girth and refilling of pits. During execution, the work to be carried out under the provisional item was removed from the scope of the contractor’s work and entrusted with another agency who, however did not complete the work.

According to the contractor, the employer, who was also acting as engineer then, asked the claimant to remove the stumps and roots left behind by the other agency and - as this work was not a part of the BoQ-agreed to treat it as a variation item and pay for it at an agreed rate in a meeting. Subsequently, the engineer appointed by the employer rejected the claim.

On the other hand, the respondent contended that the removal of stumps and roots of trees above 300 mm girth was covered in the contract and hence it was not a variation item. The respondent further maintained that as per the supplementary technical specifications (STS) of the contract, removal of stumps of trees over 300 mm girth was similar to removal of signboards and their foundations because roots were nothing but foundations of stumps. The arbitral tribunal observed that as the contractor executed a portion of work (removal of stumps/roots and refilling of pits) out of the provisional item of BoQ that was entrusted to another agency, it must be treated as a varied item.

The tribunal also observed that the general technical specifications (GTS) and STS covered only the removal of ‘stumps’ of trees of above 300 mm girth and ‘roots’ of trees of above 300 mm girth was omitted, though it was included for trees below 300 mm girth in the specifications. Hence, the tribunal ruled that as the bid documents were drafted by the employer, the rule of contra proferentum (that says that if words of a contract are ambiguous, they should be interpreted against the drafter of the contract) would be in favour of the contractor.

The tribunal also did not accept the employer’s argument that removal of stumps of trees with roots was akin to removal of signboards, pointing out that signboards do not grow like tree roots in size and shape in all directions over a period of time. Further, the engineer’s own definition of stump indicated in a letter includes only the portion of tree trunk above ground level and below ground level and the root ball. Hence, the tribunal concluded that roots were a different entity and that the roots of trees/stumps of above 300 mm girth had to be treated separately.

Based on the above observations, the tribunal concluded that the cost of removal of roots and refilling of pits for trees above 300 mm girth was payable separately to the contractor. It awarded Rs 13,51,747 including interest at 10 per cent per annum for the applicable period.

Non-payment of refilling of trenches of foundations of structures with approved foreign material

Amount claimed: Rs 4,125,039
Amount awarded: Rs 2,628,151
Trenches excavated for foundations of structures have to be filled up to original ground level with suitable soil around the foundations/portions of structures constructed below ground level. As per the BoQ, this work was incidental to excavation if refilling was done with suitable excavated material. But if adequate suitable excavated material was not available and the refilling was done with approved foreign material, the work was payable. The contractor was accordingly paid up to a certain stage and then the engineer began rejecting payments and recommended deduction to adjust payments made earlier in this regard.

The respondent contended that the work of refilling trenches up to original ground level with suitable earth around the foundations and below the ground level with suitable excavated materials or with approval foreign material was incidental to excavation for foundation under the BoQ. The provisions of refilling trenches with approved materials were superfluous and they were not to be operated. Hence, the error committed by the engineer in certification of earlier payments was rectified.

The tribunal pointed out that on the contractor’s representation, the samples of excavated material were collected jointly and sent to IIT - Kharagpur by the engineer and the test results indicated that the material was not suitable. Thereafter, on further representation by the contractor the engineer expressed doubts on the collection of samples and on the certification done earlier. The tribunal noted that the engineer’s behaviour raised doubts about his performance and impartiality and opined that the stand taken by the engineer was untenable.

The tribunal also declined to accept the respondent’s contention that the BoQ provisions on refilling trenches with approved materials were superfluous and non-operative. “If this was the intention of the employer, inclusion of such provisions would mean misleading the bidders to believe that refilling with foreign material would be paid separately without any intention of doing so,” observed the tribunal and added that as the bid documents with such ambiguous clauses were drafted by the employer, the verdict would again go in favour of the contractor by rule of contra proferentum.

The tribunal then worked out the amount payable to the contractor considering various factors like total suitable quantity of excavation, how much of it was used for refilling of trenches and embankment construction, and how much foreign material was used as against BoQ specifications that the entire suitable quantity from the structure’s excavation should be used for trench filling. The tribunal also worked out the price variation amount and granted interest at 10 per cent per annum for the applicable period. The tribunal thus awarded Rs 2,066,719 as cost of work, Rs 229,489 as price variation amount, and Rs 331,943 as interest, adding up to Rs 2,628,151.

Payment for provision of 20 mm pre-moulded filter joints in retaining walls

Amount claimed: Rs 136,969 Amount awarded : Nil
The contractor contended that there was no provision for expansion joints in the contract and it should be treated as a varied item and paid accordingly. This was, however, turned down by the engineer stating that no rate was provided for it in the BoQ.

The tribunal noted that the provision of joints in the retaining wall was included in technical specifications and in the relevant drawing contrary to the contractor’s statement. However, no rate for this item was provided in the BoQ and the preamble to the BoQ clearly stated, “Where no items are provided, the cost shall be deemed to be distributed among the rates and prices entered for related items of work.” Hence, the tribunal ruled that no separate payment was necessary for this work.

In a nutshell

Project: Widening and strengthening a section of National Highways
Location: Eastern India
Parties in dispute: Government agency and construction company
Arbitration invoked: By construction company in two parts resulting in two separate hearings and awards
Arbitral tribunal: SN Mane, Presiding Arbitrator, and two co-arbitrators (civil engineers) nominated by respondent and claimant
First award declared: November 2006
Second award declared: July 2007

SN Mane shares his views on…

Reasons behind disputes: The majority of the disputes stem from defective drafting of contracts, leading to different interpretations by different parties. At times, general conditions, special conditions, technical specifications and provisions in BoQ are contradictory even within a contract. A change in one area/part of contract may have repercussions on some other terms/aspects in the contract, which should also be suitably modified. For instance, when modifications are made in general specifications to suit a particular project, corresponding changes have to be made in the description of the item in the BoQ or when a general condition of contract (GCC) in a contract is modified through a special condition, other relevant GCCs or instructions to bidders (ITB) also have to be modified to obviate differing interpretations based on inconsistencies in different parts of the contract. The contract draft, generally prepared by junior officials should be studied by a team of experienced senior officials or arbitrators empanelled by the concerned organisation familiar with different situations experienced in the past who can detect the areas prone to different interpretations leading to disputes and make the draft harmonious. Ideally, there should be a special cell comprising personnel experienced in contract management/operations to scrutinise and whet every contract in the organisation before issue to bidders. Lack of proper guidelines and set procedures for implementing a project can also lead to disputes and, consequently, arbitration. In an organisation that does not have its own permanent staff cadre and where most of the staff is drawn on deputation from other government departments and public-sector organisations, different members of staff follow their own procedures and practices, leading to disputes and numerous arbitration cases.

Ideal tribunal structure: Ideally in engineering contracts, the tribunal should have senior/experienced engineers and architects from respective disciplines like buildings, bridges, roads, ports, irrigation, etc. However, there should be no bar if a party prefers to nominate an engineer from other disciplines or a retired judge. Individuals with an open mind who can understand other members’ views without having rigid preconceived notions would be ideal candidates for a tribunal.

Protracted arbitral proceedings: Cases get prolonged for various reasons. Often the claimant and the respondent themselves are responsible as they dilly-dally on various issues like appointment of arbitrators, questioning of arbitrators’ jurisdiction, submission of claims, defence, documentary evidences and extension/adjournments on some ground or the other. If arbitration has been invoked midway through a project, the contractor may delay the case hoping to complete the project and revising his claim amount to the final amount to avoid going for arbitration for the balance amount. Parties unnecessarily question the arbitrators’ jurisdiction and this alone takes up considerable time. To prevent such procrastination, a time limit should be stipulated for each activity in some procedural instructions, if not in the Act. In a few cases, arbitrators too cause the delay as they are busy handling too many cases and unable to spare the time. There should be a restriction on the number of cases an arbitrator can take up at a time-generally it should not be more than five. Arbitrators themselves should make a conscious decision in this regard and communicate the same to the party appointing them who should also keep this in mind for considering alternatives if necessary. In some organisations, in case of a DRB, there is an inherent system that discourages members from handling more than two cases at a time. The members are paid a monthly retainer and a sitting fee. But if they take more than two cases, they are not paid the retainer. Providing cash incentives to arbitrators for completing a case within a certain time span can also help speed up the proceedings. But this will only be effective if the party defaulting/delaying in its submissions is also penalised for the delay on its part.

Making the DRB effective: As of now the DRB’s recommendations are often not accepted and it is taken only as a forum to create evidence prior to arbitration, more so among government departments. As the responsibility of accepting or rejecting DRB’s recommendations often rests with one or two officers, they feel safer to reject those decisions that are not in the department’s favour, so as to obviate audit or vigilance objections. But if this responsibility is entrusted to an empowered committee within the organisation with senior officers from the engineering, administrative or financial branches as members to take a logical and positive view, the DRB’s decisions may be more readily accepted. Such a committee can also hold discussions with DRB members or outside experts, if necessary, and even with the other party to arrive at a mutual settlement. This practice as of now is more prevalent in the private sector and even the arbitration award is often used as an instrument to reach an amicable settlement instead of taking recourse to lengthy legal proceedings in courts.

SN Mane

The details of this case have been provided by SN Mane, Former Additional Director General, Border Roads Organisation (BRO), who since his retirement in 1995 has been involved in arbitration. He has been nominated as arbitrator, co-arbitrator and as Chairman of arbitration tribunals as well as dispute review expert and member of the Dispute Review Board in several cases. He is an empanelled arbitrator of the Indian Council of Arbitration, FICCI Arbitrators and Conciliators Tribunal, Institution of Engineers (India), National Highways Authority of India, Indian Roads Congress, and Ministry of Shipping, Road Transport and Highways.

A civil engineering graduate from University of Pune, Mane worked for about three years with Public Works Department (PWD) - Mumbai, Bhilai Steel Project and Chambal Hydel Project in Madhya Pradesh. In 1961 he joined BRO as Assistant Executive Engineer and rose up to become Additional Director General in 1992 responsible for overall management of resources with special thrust on bridging, mechanisation and logistics. During his tenure in BRO, Mane dealt with several construction projects all over India including Jammu & Kashmir, Himachal Pradesh, Andaman & Nicobar, Mizoram and Maharashtra, as well as Bhutan. After retirement, he has been involved as a engineering consultant for several bridges, roads and national and state highways including the Mumbai-Pune Expressway, Golden Quadrilateral and North-South corridor of National Highways Authority of India. Mane has won several awards for his meritorious service including the Vishisht Seva Medal (VSM) in 1993, Ati Vishisht Seva Medal (AVSM) in 1994, Bharat Gaurav (1997) and Maharashtra Gaurav in 2001. Mane is based in Pune.

Contact SN Mane on Mobile: (0) 94220 04818 or E-mail: snmane@hotmail.com

Janaki Krishnamoorthi presents the 19th in a series of case studies referred for arbitration A government agency entered into a contract with a private construction company in December 2000 to widen and strengthen the existing lanes and carriageway of a section of the National Highways in Eastern India. While the work was in progress, disputes rose on several issues that were first referred to the Disputes Review Board (DRB) as per the terms of contract. However, as the recommendations of the DRB were unacceptable, the matter was referred for arbitration. The construction company (contractor) first submitted three claims; and while the hearing was nearing completion, submitted five more claims. After discussion it was mutually agreed that the award for the first set of claims would be declared and then the new claims would be taken up and a separate award would be announced. In the first arbitral hearing, there were no counterclaims from the government agency or respondent, though in the second they raised four counterclaims. Contractor’s claims In all, the contractor submitted eight claims, three of which were dealt in the first arbitration proceedings and the balance in the second. The claims were largely for payment/non-payment for various work carried out by the contractor like removal of roots of trees, sand filling in pits, refilling of trenches and foundations of structures, embankment construction, provision for pre-moulded filter joints in culverts, minor bridges and underpasses, and wrongful extension of DLP by respondent. Three of the claims from the two awards are briefly enumerated below: Non-payment for removal of roots of trees with girth above 300 mm Amount claimed: Rs 14,34,011 Amount awarded: Rs 13,51,747The contractor pointed out that the BoQ (bill of quantities) provided for cutting of trees and removal of stumps/roots under two different items. The first one was for clearing and grubbing including cutting of trees and removal of roots/ stumps of trees up to 300 mm girth and removal of only stumps of trees of girth above 300 mm. The second provisional item included cutting of trees with the removal of stumps of trees above 300 mm girth and refilling of pits. During execution, the work to be carried out under the provisional item was removed from the scope of the contractor’s work and entrusted with another agency who, however did not complete the work. According to the contractor, the employer, who was also acting as engineer then, asked the claimant to remove the stumps and roots left behind by the other agency and - as this work was not a part of the BoQ-agreed to treat it as a variation item and pay for it at an agreed rate in a meeting. Subsequently, the engineer appointed by the employer rejected the claim. On the other hand, the respondent contended that the removal of stumps and roots of trees above 300 mm girth was covered in the contract and hence it was not a variation item. The respondent further maintained that as per the supplementary technical specifications (STS) of the contract, removal of stumps of trees over 300 mm girth was similar to removal of signboards and their foundations because roots were nothing but foundations of stumps. The arbitral tribunal observed that as the contractor executed a portion of work (removal of stumps/roots and refilling of pits) out of the provisional item of BoQ that was entrusted to another agency, it must be treated as a varied item. The tribunal also observed that the general technical specifications (GTS) and STS covered only the removal of ‘stumps’ of trees of above 300 mm girth and ‘roots’ of trees of above 300 mm girth was omitted, though it was included for trees below 300 mm girth in the specifications. Hence, the tribunal ruled that as the bid documents were drafted by the employer, the rule of contra proferentum (that says that if words of a contract are ambiguous, they should be interpreted against the drafter of the contract) would be in favour of the contractor. The tribunal also did not accept the employer’s argument that removal of stumps of trees with roots was akin to removal of signboards, pointing out that signboards do not grow like tree roots in size and shape in all directions over a period of time. Further, the engineer’s own definition of stump indicated in a letter includes only the portion of tree trunk above ground level and below ground level and the root ball. Hence, the tribunal concluded that roots were a different entity and that the roots of trees/stumps of above 300 mm girth had to be treated separately. Based on the above observations, the tribunal concluded that the cost of removal of roots and refilling of pits for trees above 300 mm girth was payable separately to the contractor. It awarded Rs 13,51,747 including interest at 10 per cent per annum for the applicable period. Non-payment of refilling of trenches of foundations of structures with approved foreign material Amount claimed: Rs 4,125,039 Amount awarded: Rs 2,628,151Trenches excavated for foundations of structures have to be filled up to original ground level with suitable soil around the foundations/portions of structures constructed below ground level. As per the BoQ, this work was incidental to excavation if refilling was done with suitable excavated material. But if adequate suitable excavated material was not available and the refilling was done with approved foreign material, the work was payable. The contractor was accordingly paid up to a certain stage and then the engineer began rejecting payments and recommended deduction to adjust payments made earlier in this regard. The respondent contended that the work of refilling trenches up to original ground level with suitable earth around the foundations and below the ground level with suitable excavated materials or with approval foreign material was incidental to excavation for foundation under the BoQ. The provisions of refilling trenches with approved materials were superfluous and they were not to be operated. Hence, the error committed by the engineer in certification of earlier payments was rectified. The tribunal pointed out that on the contractor’s representation, the samples of excavated material were collected jointly and sent to IIT - Kharagpur by the engineer and the test results indicated that the material was not suitable. Thereafter, on further representation by the contractor the engineer expressed doubts on the collection of samples and on the certification done earlier. The tribunal noted that the engineer’s behaviour raised doubts about his performance and impartiality and opined that the stand taken by the engineer was untenable. The tribunal also declined to accept the respondent’s contention that the BoQ provisions on refilling trenches with approved materials were superfluous and non-operative. “If this was the intention of the employer, inclusion of such provisions would mean misleading the bidders to believe that refilling with foreign material would be paid separately without any intention of doing so,” observed the tribunal and added that as the bid documents with such ambiguous clauses were drafted by the employer, the verdict would again go in favour of the contractor by rule of contra proferentum. The tribunal then worked out the amount payable to the contractor considering various factors like total suitable quantity of excavation, how much of it was used for refilling of trenches and embankment construction, and how much foreign material was used as against BoQ specifications that the entire suitable quantity from the structure’s excavation should be used for trench filling. The tribunal also worked out the price variation amount and granted interest at 10 per cent per annum for the applicable period. The tribunal thus awarded Rs 2,066,719 as cost of work, Rs 229,489 as price variation amount, and Rs 331,943 as interest, adding up to Rs 2,628,151. Payment for provision of 20 mm pre-moulded filter joints in retaining walls Amount claimed: Rs 136,969 Amount awarded : NilThe contractor contended that there was no provision for expansion joints in the contract and it should be treated as a varied item and paid accordingly. This was, however, turned down by the engineer stating that no rate was provided for it in the BoQ. The tribunal noted that the provision of joints in the retaining wall was included in technical specifications and in the relevant drawing contrary to the contractor’s statement. However, no rate for this item was provided in the BoQ and the preamble to the BoQ clearly stated, “Where no items are provided, the cost shall be deemed to be distributed among the rates and prices entered for related items of work.” Hence, the tribunal ruled that no separate payment was necessary for this work. In a nutshell Project: Widening and strengthening a section of National Highways Location: Eastern India Parties in dispute: Government agency and construction companyArbitration invoked: By construction company in two parts resulting in two separate hearings and awardsArbitral tribunal: SN Mane, Presiding Arbitrator, and two co-arbitrators (civil engineers) nominated by respondent and claimantFirst award declared: November 2006Second award declared: July 2007 SN Mane shares his views on… Reasons behind disputes: The majority of the disputes stem from defective drafting of contracts, leading to different interpretations by different parties. At times, general conditions, special conditions, technical specifications and provisions in BoQ are contradictory even within a contract. A change in one area/part of contract may have repercussions on some other terms/aspects in the contract, which should also be suitably modified. For instance, when modifications are made in general specifications to suit a particular project, corresponding changes have to be made in the description of the item in the BoQ or when a general condition of contract (GCC) in a contract is modified through a special condition, other relevant GCCs or instructions to bidders (ITB) also have to be modified to obviate differing interpretations based on inconsistencies in different parts of the contract. The contract draft, generally prepared by junior officials should be studied by a team of experienced senior officials or arbitrators empanelled by the concerned organisation familiar with different situations experienced in the past who can detect the areas prone to different interpretations leading to disputes and make the draft harmonious. Ideally, there should be a special cell comprising personnel experienced in contract management/operations to scrutinise and whet every contract in the organisation before issue to bidders. Lack of proper guidelines and set procedures for implementing a project can also lead to disputes and, consequently, arbitration. In an organisation that does not have its own permanent staff cadre and where most of the staff is drawn on deputation from other government departments and public-sector organisations, different members of staff follow their own procedures and practices, leading to disputes and numerous arbitration cases. Ideal tribunal structure: Ideally in engineering contracts, the tribunal should have senior/experienced engineers and architects from respective disciplines like buildings, bridges, roads, ports, irrigation, etc. However, there should be no bar if a party prefers to nominate an engineer from other disciplines or a retired judge. Individuals with an open mind who can understand other members’ views without having rigid preconceived notions would be ideal candidates for a tribunal. Protracted arbitral proceedings: Cases get prolonged for various reasons. Often the claimant and the respondent themselves are responsible as they dilly-dally on various issues like appointment of arbitrators, questioning of arbitrators’ jurisdiction, submission of claims, defence, documentary evidences and extension/adjournments on some ground or the other. If arbitration has been invoked midway through a project, the contractor may delay the case hoping to complete the project and revising his claim amount to the final amount to avoid going for arbitration for the balance amount. Parties unnecessarily question the arbitrators’ jurisdiction and this alone takes up considerable time. To prevent such procrastination, a time limit should be stipulated for each activity in some procedural instructions, if not in the Act. In a few cases, arbitrators too cause the delay as they are busy handling too many cases and unable to spare the time. There should be a restriction on the number of cases an arbitrator can take up at a time-generally it should not be more than five. Arbitrators themselves should make a conscious decision in this regard and communicate the same to the party appointing them who should also keep this in mind for considering alternatives if necessary. In some organisations, in case of a DRB, there is an inherent system that discourages members from handling more than two cases at a time. The members are paid a monthly retainer and a sitting fee. But if they take more than two cases, they are not paid the retainer. Providing cash incentives to arbitrators for completing a case within a certain time span can also help speed up the proceedings. But this will only be effective if the party defaulting/delaying in its submissions is also penalised for the delay on its part. Making the DRB effective: As of now the DRB’s recommendations are often not accepted and it is taken only as a forum to create evidence prior to arbitration, more so among government departments. As the responsibility of accepting or rejecting DRB’s recommendations often rests with one or two officers, they feel safer to reject those decisions that are not in the department’s favour, so as to obviate audit or vigilance objections. But if this responsibility is entrusted to an empowered committee within the organisation with senior officers from the engineering, administrative or financial branches as members to take a logical and positive view, the DRB’s decisions may be more readily accepted. Such a committee can also hold discussions with DRB members or outside experts, if necessary, and even with the other party to arrive at a mutual settlement. This practice as of now is more prevalent in the private sector and even the arbitration award is often used as an instrument to reach an amicable settlement instead of taking recourse to lengthy legal proceedings in courts. SN Mane The details of this case have been provided by SN Mane, Former Additional Director General, Border Roads Organisation (BRO), who since his retirement in 1995 has been involved in arbitration. He has been nominated as arbitrator, co-arbitrator and as Chairman of arbitration tribunals as well as dispute review expert and member of the Dispute Review Board in several cases. He is an empanelled arbitrator of the Indian Council of Arbitration, FICCI Arbitrators and Conciliators Tribunal, Institution of Engineers (India), National Highways Authority of India, Indian Roads Congress, and Ministry of Shipping, Road Transport and Highways. A civil engineering graduate from University of Pune, Mane worked for about three years with Public Works Department (PWD) - Mumbai, Bhilai Steel Project and Chambal Hydel Project in Madhya Pradesh. In 1961 he joined BRO as Assistant Executive Engineer and rose up to become Additional Director General in 1992 responsible for overall management of resources with special thrust on bridging, mechanisation and logistics. During his tenure in BRO, Mane dealt with several construction projects all over India including Jammu & Kashmir, Himachal Pradesh, Andaman & Nicobar, Mizoram and Maharashtra, as well as Bhutan. After retirement, he has been involved as a engineering consultant for several bridges, roads and national and state highways including the Mumbai-Pune Expressway, Golden Quadrilateral and North-South corridor of National Highways Authority of India. Mane has won several awards for his meritorious service including the Vishisht Seva Medal (VSM) in 1993, Ati Vishisht Seva Medal (AVSM) in 1994, Bharat Gaurav (1997) and Maharashtra Gaurav in 2001. Mane is based in Pune. Contact SN Mane on Mobile: (0) 94220 04818 or E-mail: snmane@hotmail.com