SUPREME COURT HOLDS THAT HIGH COURT UNDER APPELLATE POWERS, CANNOT MAKE SUBSTITUTION OF FINDINGS CONTRARY TO THE PROPER FINDINGS OF ARBITRAL TRIBUNAL

A Two Bench of the Supreme Court comprising of Justice S. Ravindra Bhat, and Justice Aravind Kumar passed a Judgment dated 24.08.2023 in a recent case of M/s Hindustan Construction Company Limited Vs M/S National Highways Authority of India in Civil Appeal No. 4658 of 2023 and observed that the Division Bench of the High Court erred in making a substitution of findings contrary to the proper findings of the majority of the members of the Arbitral Tribunal.

Facts

(i) In the present case, one, M/s Hindustan Construction Company Limited, the Claimant Contractor-Appellant Company, was awarded a contract by one, M/s National Highways Authority of India (NHAI), the Respondent Company for construction of the Allahabad By-Pass Project of a road from 158 KM to 198 KM (except Ganga Bridge) in U.P. vide Agreement dated 02.06.2004 (Contract) with the following clauses:

(I) Clause 2.2

Item	Description		Unit	Est. Qty	Units Rate (INR)	Amount INR
Cl.-2.02	Construction of embankment with approved material complete as per Technical Specifications Clause 305 with all leads and lifts
	a)	With Soil	CuM[1]	1198000	102	122,196,000
	b)	With Pond Ash	CuM	3252000	252	819,504,000

(II) Clause 305.8: Measurements of Payment-

“Earth embankment/subgrade construction shall be measured separately by taking cross sections at intervals in the original position before the work starts and after its completion and computing the volumes of earthworks in cubic metres by the method of average end areas…….”

(III) Clause 305.2.2.3.3 of Additional Technical Specifications-

“Measurement for payment: Same as Clause 305.8 of MoRTH specifications.”

(IV) Clause 114.1 – For item rate contracts-

“For item rate contracts, the contract unit rates for different items of work shall be payment in full for completing the work to the requirements of the specifications including full compensation for all the operations detailed in the relevant sections of these specifications under “Rates”. In the absence of any directions to the contrary, the rates are to be considered as full inclusive rate for finished work covering all labour, materials, wastage…. Arising out of General Conditions of Contract.”.

(V) Clause 60.9: Interim Payment Certificate-

“The Engineer may by any Interim Payment Certificate make any correction or modification in any previous Interim Payment Certificate which has been issued by him, and shall have authority, if any work is not being carried out to his satisfaction, to omit or reduce the value of such work in any Interim Payment Certificate.”

(ii) Further, there was a Clause in the Contract that the Respondent Company has a Dispute Resolution Board (DRB) consisting of technical experts in the field, to which disputes will be first referred to. In the event that the parties to the Contract are not satisfied with the Resolution of DRB, then in terms of the Agreement, the aggrieved party can invoke the arbitration clause in the Contract.

(iii) However, upon completion of the Project, certain disputes arose between the parties with reference to different areas of the Contract. The controversy is that as per the Respondent Company, the rate per cubic metre has to be paid depending on the quantum of soil or pond ash used and as per the Appellant Company, there are two rates that operate in different situations, (i) if only soil is used, then sub clause (a) of Clause 2.2 would apply, (ii) if pond ash is used along with soil, then sub clause (b) of Clause 2.2 would apply and (iii) as per sub clause (b) of Clause 2.2, irrespective of the quantum of pond ash or soil used, the per cubic metre rate quoted against item (b) in the aforesaid Table has to be paid for the total quantity.

(iv) Thereafter the dispute was referred to DRB as per the terms of the Contract. The Respondent-NHAI was not satisfied with the opinion of DRB and hence, the Respondent invoked the Arbitration Clause and appointed three technical persons as Arbitrators (Arbitration Tribunal).

(v) The Arbitrators after considering the rival viewpoints and the materials before them, passed an Award dated 30.03.2010 in favor of the Appellant-Contractor, with unanimous decision on most of the issues, except one issue pertaining to ‘construction of embankment, where one of the Arbitrators passed a dissenting view.

(vi) Aggrieved by both the unanimous and dissenting opinion of the Arbitral Tribunal, the Respondent-NHAI filed objections before High Court of Delhi (High Court) under Section 34 of the Arbitration and Conciliation Act, 1996 (Application for setting aside arbitral awards) against the Award passed by the Arbitral Tribunal.

(vii) The Respondent’s Section 34 Application was dismissed and the Award was, thereby, upheld by the Single Judge Bench of the High Court, vide Order dated 30.11.2011. It was further observed that the Tribunal’s majority decision reflected a plausible and reasonable view that did not call for interference.

“26. As regards non-payment for, executed work of embankment which forms the subject matter of Disputes 2 and 4, this is purely a question of fact based on the measurement. There is no dispute in relation to the construction of the embankment that is covered under item 2. 02 (a) of the BOQ. In fact, NHAI has already paid HCC for the said construction. Clause 305.8 of the MORTHTS provides for measurement of the cross section of the embankment as one whole composite section and paid under item No.2.02(b). The decision of the majority members of the Arbitral Tribunal based on an analysis of the material before them was a possible view to take. Merely because another view as evidenced by the dissenting opinion is possible interference by this Court under Section 34 of the Act is not warranted. “

(viii) Aggrieved by the Order dated 30.11.2011 of the Single Judge Bench of the High Court, the Respondent Company-NHAI filed an Appeal before the Ld. Division Bench of the High Court (Division Bench) bearing FAO (OS) No. 48/2012 seeking setting aside of the said Order.

(ix) The Division Bench of the High Court, vide Order dated 08.11.2012, set aside the Order dated 30.11.2011 of the Single Judge Bench of the High Court and held that the Tribunal’s majority view and the Award were based on an implausible interpretation of the Contract. Hence, the Award was set aside. It was held, in the Order dated 08.11.2012 as follows:

“[..] On a conjoint reading of BOQ item No.2.02 and clause 305.8 of the technical specification, to us, it is clear that the cross sections have to be taken in respect of the different materials used, i.e. soil and pond ash. Pertinently, it is not the case of the respondents that the two are mixed into a mixture and then used. Soil and pond ash are used separately. Thus, the cross sections are to be taken at intervals. We cannot permit the respondent to contend that it is not possible to compute the volumes of the two materials in the cross section, when for 30 months both the appellant and the respondent were actually making measurements accordingly. The respondent itself made the IPCs and submitted for payments which were duly paid by the appellant. Such measurements were made on the basis of actual utilization of the two materials. We fail to appreciate how the arbitral tribunal could have come to a conclusion that the mode of measurement of the two items separately was not in accordance with the contract. The majority view, after having noticed the principles of consensus ad idem, seems to have failed to appreciate this vital issue.[..]”

Supreme Court Analysis

Aggrieved by the Division Bench of the High Court Order dated 08.11.2012 in FAO (OS) No. 48/2012 that set aside the Award, the Appellant-Contractor filed Civil Appeal No. 4658 of 2023 before the Hon’ble Supreme Court. The Apex Court passed a Judgment dated 24.08.2023 and made the following observations:

1) That the important clauses in the Contract as mentioned in the Table hereinabove, pertaining to measurement and payment for the pond ash embankment under BOQ item No. 2.02(b), are Clauses 305.8 and 305.2.2.3.3 of the Extra Technical Requirements, respectively. Further, the relevant stipulation for Contract rate units for different items in rate contracts is specified in Clause 114.1.

2) That the majority decision in the Award is as follows:

“i) It is contemplated in the contract to construct two types of embankments. One with the soil alone, and the second one with the combination of soil pond ash.

ii) The embankment with pond ash alone cannot be constructed, as the pond ash is susceptible for erosion. Hence, the soil cover is provided for protection of the embankment.

iii) The composite cross section of the embankment comprising of soil and pond ash together is as the collectively termed embankment construction with pond ash under BOQ item No. 2.02(b)

iv) The method of measurement to be adopted for payment for the embankment construction with soil or with pond ash is one and the same, which is by taking composite cross section as a whole of the embankment and determining the volume by average end area method.

v) The method of measurement adopted by the Engineer, where in, the area of the cross section has been bifurcated to account for area occupied by the soil and pond ash for determination of quantum of the embankment in two different items if contrary to the technical specification Clause 305.8.

vi) Clause 114.1 of MORTH specification specifically states that the rates are for the finished work in all respects. The pond ash embankment comprising of soil and pond ash is composite and complete finished item of work. It cannot be separated into two different items as having been done by the Engineer.

vii) The contention of the claimant that the whole cross section of the pond ash embankment shall be measured as one cross section for determination of the work under Item No. 2.02 (b) is fully supported by the contract conditions.”

3) That the members of the Tribunal, who dissented, inter alia, recorded a reading of the specifications as follows:

“…clearly shows that wherever soil is used it will be measured 2.02 (a) with whenever pond ash is used it will be measured under 2.02(b) with TS 305.2.2.3.

13.3.7 I agree with the view taken by the Engineer while rejecting claim, as the view of the Engineer is strictly as per contract/BOQ provision as in this particular Contract embankment with soil andpond ash appear under one item and are very conspicuously bifurcated for different materials.

13.3.8 · I analyse that claimant has flawed under and after thought to claim even soil as fly ash under item No.2.02 (b). of BOQ. 13.3.9 Thus I draw firm conclusion that the provision made in the BOQ item 2.02 (a) and 2.02 (b) are for different material i.e. 2.02 (a) is for soil and 2.02 (b)is for pond ash and is for type of material to be used in the respective items.

4) That in the present case, the Division Bench of the High Court, vide Order dated 08.11.2012, had held that the Tribunal’s majority views were based on an implausible interpretation of the Contract, hence, the Award was set aside by the Division Bench of the High Court. However, the Division Bench under its appellate powers, cannot substitute the Tribunal’s majority / unanimous views, so long as the view adopted by the majority was plausible. In the present case, the work was completed and the finished embankment was made of composite, compacted matter, comprising both soil and fly ash, as held by the majority decision of the Tribunal, hence, the Division Bench of the High Court ought not to have made a substitution of findings in its Order dated 08.11.2012, contrary to the majority views.

5) The Apex Court in State of UP v Allied Constructions, 2003 Supp (2) SCR 55 observed that decisions made by courts in matters that include reasons, particularly those that interpret contracts, should not be simply overturned. Thus, the Apex Court set aside the Order dated 08.11.2012 of the Division Bench of the High Court that had overturned the majority decision of the Tribunal which had properly interpreted the Contract.

Conclusion

Thus, based on the aforesaid observations, the Supreme Court allowed the Civil Appeal bearing C. A. No. 4658/2023 filed by the Appellant-Contractor and set aside the Order dated 08.11.2012 of the Division Bench of the High Court on the ground that the High Court erred in making a substitution of findings in its Order dated 08.11.2012, contrary to the decision / proper findings of the majority of the members of the Tribunal.

Further, the Apex Court directed the Respondent Company-NHAI to pay uniform interest on the amounts due, under the heads of ‘construction of embankment’, to the extent of 12% from the date of Award till the date of payment, within eight weeks.

K.Suneel Kumar Jaiswal

Associate

The Indian Lawyer

 

[1] Cubic Metre (CuM)