Paragraph numbers below are the court’s original numbering, recovered from the source text.
25. We have given our serious consideration to the respective submissions of the counsel for the parties. First and foremost aspect which is to be kept in mind is that the issue relates to price adjustment and such an adjustment can be made in respect of various components which are used in the contract. The contractual provisions specifically deal with adjustment for labour component, cement, steel etc. These components are seven in numbers which may undergo price adjustment during the period when the contract is in progress, depending upon the market conditions, namely, increase or decrease in market prices of these components from time to time. The very nature of this price adjustment suggests that such variation would have relevance with the price which was indicated in respect of these components at the time of submitting the tender by the successful contractor and, in that sense, it can have reference only to the base price. The formula which is provided for working out the price adjustment has to be examined in this hue.
26. In the aforesaid circumstances, there appears to be some force in the submission of NHAI that formula indicates the base price which has to be taken for the purposes of working out the price adjustment. After all, what is the purpose of giving price adjustment? The clause relating to price adjustment indicates that certain components which go into the execution of the projects like labour component, cement component, steel component, plant and machinery and spares component, bitumen component etc. may not remain static insofar as their price is concerned. There is a possibility that from the date when the price of these components was quoted by the contractor in his bid, there may be increase or decrease in the said price from time to time during the execution of the contract. It is for this reason, clause relating to price 6 (2009) 5 SCC 313 NATIONAL HIGHWAY AUTHORITY OF INDIA v. M/S. PROGRESSIVEMVR (JV) [A. K. SIKRI, J.] adjustment is provided so as to give effect to the rise or fall in the costs to the contractor. To this adjustment formula for working out the cost, at the time of execution of the contract, is provided. This adjustment which has to be arrived at, naturally, has to be in comparison with the base price that was stated by the contractor. Thus, even from the commonsense point of view, it is the base price which has to be kept in mind while working the price adjustment. However, we are not resting our decision on this common sense approach as the final outcome has to depend on the formula provided in the contract; being a contractual term.
27. In the present case, we find that the intention in the formula as well is to keep in mind the base cost while arriving at the price adjustment. There are few reasons which drive us to take this opinion.
28. Clause 70.3 (xi) deals with percentages on various components that will govern the price adjustment. Insofar as labour, plant and machinery and spares, and POL (Petrol, Oil and Lubricants) are concerned, there is a fixed percentage prescribed, i.e., 20%, 20% and 10% respectively. However, with regard to the other three components, namely, bitumen, cement and steel variable percentage is mentioned which has to be calculated. Seventh component is ‘Other Material’. Insofar as this component is concerned, it is the balance percentage, after percentage of bitumen, cement and steel is arrived at, as it mentions “50 – (x+y+z)” percentage. From this, one can infer that normally the combined percentages of x, y and z has to be less than 50%. However, when the current cost is taken into consideration while working the formula, the percentages of x, y and z far exceed 50% which would make the percentage of other materials in the negative. Such a negative aspect has to be avoided. Mr. Patwalia, learned senior counsel for the NHAI was able to successfully demonstrate it by giving various live examples.
29. We may point out that submission of the learned counsel for respondents was that when such an eventuality happens, the adjustment of “other materials” can be in the negative, i.e., by reducing the price of the other material in giving the adjustment so that total remains 100%. It is difficult to accept this suggested mode. What is important is that insofar as other materials are concerned, the inputs thereof would be negligible as compared to bitumen, cement and steel and, therefore, even if their price is reduced to offset the negative elements, that would be substantially less than the gain which would accrue to the contractors by giving higher cost adjustment for the aforesaid three components. Moreover, such a result cannot be countenanced by giving negative adjustment in the price of “other material” even when, as a matter of fact, prices of other material had also gone up. That could not have been the intention while laying down the formulae. As mentioned above, the word “actual” in the note under sub-clause 703(xi) of COPA relates to the percentage and not to the cost. The percentage x, y, z are mentioned to ensure that the contractor is compensated realistically on the actual material used each IPC. Therefore, it seems more logical and proper to adopt the base cost of material while working out the price adjustment.
30. We may mention here that when the dispute was raised, as per the provisions contained in the contract, in the first instance, it was referred to the Dispute Review Board (DRB) which went into the issue in detail and discussed the issue, inter alia, in the following manner: “…d) The present dispute is what rate for the material i.e. bitumen, cement and steel is to be considered in arriving at the actual percentage of cost of the respective material used in the work in the IPC of that month. The Contractor’s plea is that it should be current material cost of the material consumed in that month while the Employer’s view is that it should be the base price. e) In support of his arguments, the Contractor says that base price is not specified in the Contract. The Contractor plea that the base rates are not specified in the tender is not correct as sub-clause 70.5 of COPA clearly states that ‘the base cost indices or prices shall be those prevailing in the previous month prior to the closing date for submission of Bids.’ Further, sub-clause 70.3(v) for price adjustment of bitumen component of the work reads as under: Vb = 0.85 x Pb x RI x (B1 – Bg) 100 Bo In this formula to work out Vb i.e. increase or decrease in the cost of work during the month under consideration, due to change in the rates for bitumen, Bo has been defined as ‘the average official retail price of bitumen at the IOC refinery Mathura on the day 28 days prior to the date of submission of bids. Obviously, this is the initial price or base price of bitumen. In all the relevant NATIONAL HIGHWAY AUTHORITY OF INDIA v. M/S. PROGRESSIVEMVR (JV) [A. K. SIKRI, J.] IPCs value of Bo has been taken by the contractor as the retail price of bitumen on the day 28 days prior to the date of submission of bid which is base price only. f) The Contract specified for calculation x, y and z factors every month. The intention is to permit price adjustment based on actual consumption of respective materials issued in execution of work in the particular month if they are fixed at tender stage only just like labour and POL etc., the price adjustment is to be allowed irrespective of whether the item is executed or not which is not realistic. Hence in this Contract, the price adjustment is linked to the actual usage of material viz. cement, steel and bitumen. g) BOQ rates have been quoted based on the cost of materials at the time of bidding. Therefore, in working out the actual percentage of cost of any specific material in the BOQ cost, rates of material applicable to the same datum period for BOQ costs i.e. base period is only logical and justified. h) The weightage factor x, y and z for these materials have two basic parameters namely their cost and cost of work done. In order to ascertain the actual percentage of cost of these materials in an IPC, cost of material has to be on the same basis as adopted in cost of work done. As the cost of work done is based on base cost of materials, it is therefore natural that the cost of these materials incorporated in the work should be calculated on the base cost only. Calculating the cost of these materials on actual procurement price is not justified and would go against the terms and conditions of the Contract word ‘actual’ in the note under sub-clause 70.3(xi) 8 COPA relates to percentage and not to the cost.”
31. The DAB thereafter worked out the formula in the following manner: “x, y, z percentages are to be worked out as per provisions note below sub-clause 70.3(ix). Thus, p (x,y,z) percentages Cost of material consumed during the month ————————————————— x 100 Work done in that month as per IPC Quantity of material consumed during the month x Rate of material = ———————————————————— x 100 Work done The Contractor has quoted rates in the tender based on base rates of material and IPC is based on BOQ rates quoted by the contractor on base rates of material. Therefore for working out actual percentage of cost of material of bitumen, cement and steel used in execution of work as per the IPC for the month, base rate of material can only be used as per the provisions of contract in order to arrive at actual percentage, numerator and denominator is based on BOQ rates determined on base rates. The numerator should also be based on base rates. This is why rate of material in numerator should be rate of material at the time of bid. This is a fixed rate and not variable as claimed by the contractor. The contract provision is quite clear in this regard and there is no ambiguity.”
32. It also pointed out that if the current cost of material is adopted, instead of base cost as claimed by the contractor, price adjustment will be paid twice. One due to increase in percentage factor (x, y and z) due to use of current rate instead of base rates and second due to application of price adjustment factor b1-bo/ bo. It also demonstrated, by giving examples, that when the base rate is adopted, the price adjustment was quote proximate with the prevailing price which compensated the contractor realistically. On the other hand, on adoption of current rate, the calculation of price adjustment was almost three times the amount of increase in cost of bitumen incurred by the contractor.
33. We are quite in agreement with the aforesaid analysis carried out by the DRB.
34. As mentioned above, the majority Award has held that even the intention of the parties was to take into consideration the current cost. For this purpose it had taken into consideration the manner in which IPC payments were made. However, we find here, though unfortunately, that there was no consistent practice. Sometimes the payments were made on the basis of current cost and sometimes on the basis of base cost. May be different officers understood the formula in a different manner which resulted in the aforesaid varied approach. However, when it came to the knowledge of the Authorities at appropriate NATIONAL HIGHWAY AUTHORITY OF INDIA v. M/S. PROGRESSIVEMVR (JV) [A. K. SIKRI, J.] level, directions were given to pass the IPC keeping in view only the base rate. Therefore, no such intention of the parties can be discerned, which became the basis of the majority award. On the other hand, as far as dissenting award is concerned it has pointed out the lacunae which would arise if the contention of the contractors is accepted, in the following manner: “13. We now proceed to scrutinise IPC-12 for the months of November and December, 2008 to highlight lacunae in the argument/rational, as given by the claimant. The table below given original details of percentage of cement, steel, bitumen and other material which have been accepted by with parties and certified by the Engineer percentages are based on base prices 28 days before the last date of submission of bid. IPC-12 Month Cement Steel Bitumen Other Material Total (a) Nov 2008 5.14% 5.22% 15.81% 23.83% 50% (b) Dec2008 2.06% 2.44% 14.53% 30.96% 50% In the method now adopted by the claimant, as part of their claim, the above details get changed as under. IPC-12 Month Cement Steel Bitumen Other Material Total (c) Nov 2008 9.52% 10.21% 50.82% (-) 20.55% 50% (d) Dec2008 3.71% 4.78% 55.35% (-) 13.84% 50% The above details are based on modified claim which were submitted by the claimant when the proceeding were in progress. These were accepted by the AT as per section 23(3) of the Arbitration and Conciliation Act, 1996. In their original claim submitted by the claimant, the percentage of bitumen was adjusted to ensure that total of Pb, Pc, Ps do not exceed 50% and other material was made zero. This made the percentage of bitumen hypothetical and factually incorrect. In their revised submissions, the percentage of bitumen is as per their calculations and consequently the percentage of “other material” has been made negative. Now, if we consider the aim of price escalation formula as compensation to either party for rise/fall in prices of various components, all material used in a particular IPC must be subjected to the formula, Negative figure implies that this material has been extracted from works completed earlier. This is physically not possible unless works are ordered to be demolished at the cost of the contractor and payments made earlier are to be recovered. This is certainly not the present case. That apart, if flexible pavement work (which is the case of IPC-12 as bitumen percentage is high) bitumen consumption varies from 4 to 5% by weight and the balance is other material like aggregate etc. how can we consider the material as negative and what would happen of price if this material goes down. Would we give additional benefit to the contractor as the percentage has become negative and the contractor would get increase in price variation as the quantity is negative and price has gone down. This makes the price variation formulate unrealistic as the contractor would get credit instead of debit when the price goes down. This would be an absurd situation. Yet another way to look at the formula is that component like Labour, POL, plant/machinery, cement, steel, bitumen and other material are each a percentage or part of R which is based on BOQ rates which in turn are based on base costs 28 days prior to the last date of submission of bid. Obviously, the percentage of various component must also be based on values pertinent to BOQ rates. It must also be noted that the claimant is getting price adjustment for current rates in the third portion of the formula (B1–B0) where B1 is the price 28 days before the IPC and B0 is the price 28 days before submission of bid. Therefore, the claimant is getting compensated for procuring items at higher rates when the price is rising.”
35. We find due rationale in the aforesaid approach. As a result, we hold that while applying price adjustment formula for calculating the price adjustment of bitumen, it is the base rate which is to be applied and not the current rate.
36. Having arrived at the aforesaid finding, now we need to determine the outcome of these cases.
37. Once we interpret the formula in the manner indicated above, the necessary consequences would be to hold that the Arbitral Tribunal(s) did not decide the cases with the correct application of the formula and NATIONAL HIGHWAY AUTHORITY OF INDIA v. M/S. PROGRESSIVEMVR (JV) [A. K. SIKRI, J.] further that the claim for price adjustment in respect of bitumen laid by the contractors was not correct. Therefore, it can be held that the Award(s) are contrary to the contractual terms. At the same time, this outcome poses a dilemma inasmuch as in these cases, the Arbitral Tribunal has taken a particular view and when this was a plausible view, keeping in mind the parameters of judicial review of the Court in exercise of powers under Section 34 of the Act, normally the Court would not interfere with such Awards. However, as already indicated above, such a situation has arisen because of conflicting Awards given by the Arbitral Tribunals themselves, which has provoked this Court to take a final view in the matter, necessitated by the aforesaid reason. If one takes into consideration the theory that one applies the principle mechanically i.e. that a plausible view is not to be interfered with, then it may lead to very anomalous situation. In such an eventuality, view taken by a particular Arbitral Tribunal in favour of the Contractor would be upheld as plausible view. Likewise, the Court will have to uphold the view taken by a particular Arbitral Tribunal in favour of NHAI as well, as a plausible view. Therefore, the purpose is to avoid such a situation which cannot be permitted as it would result in upholding both kinds of arbitral awards interpreting the same clause, whether they go in favour of the employer or they go in favour of the contractor. When the exercise is done keeping in view these considerations and outcome thereof is not determined, interest of justice would also demand that this result has to be applied to the pending cases, which have not attained finality. Therefore, in these peculiar circumstances, we hold that the principle of issue estoppel will apply only in those cases where matters have attained finality and no judicial proceedings are pending. In all those cases, including the present one, where awards are challenged on this particular aspect, this judgment will govern the outcome. As a consequence, all these appeals are allowed thereby setting aside the impugned judgment and also the award given by the Arbitral Tribunal on the claim pertaining to price adjustment of bitumen. There shall, however, be no order as to cost. Divya Pandey Appeals allowed.