M/S. ORIENTAL STRUCTURAL ENGINEER PVT. LTD. v. THE SECRETARY, PUBLIC WORKS DEPARTMENT GOVERNMENT OF KERALA

## **IN THE HIGH COURT OF KERALA AT ERNAKULAM** ## **PRESENT** ## **THE HONOURABLE MR. JUSTICE P.B.SURESH KUMAR** ## **&** **THE HONOURABLE MRS. JUSTICE C.S. SUDHA** **MONDAY, THE 6[TH] DAY OF JUNE 2022 / 16TH JYAISHTA, 1944** ## **ARB.A NO. 50 OF 2015** **AGAINST THE ORDER DTD 5/2/2015 IN OP(ARB) 418/2011 OF II ADDITIONAL DISTRICT** **COURT, ERNAKULAM** ## **APPELLANT/PETITIONER:** **M/S.ORIENTAL STRUCTURAL ENGINEER PVT. LTD. 21, COMMERCIAL COMPLEX, MALCHA MARG, DIPLOMATIC ENCLAVE, NEW DELHI-110 021.** **BY ADVS. SRI.K.L.VARGHESE (SR.) SMT.SANTHA VARGHESE SRI.RAHUL VARGHESE SRI.RANJITH VARGHESE** ## **RESPONDENT/RESPONDENT:** **THE SECRETARY, PUBLIC WORKS DEPARTMENT GOVERNMENT OF KERALA, THIRUVANANTHAPURAM. BY ADV.SRI.K.V.MANOJ KUMAR, Sr GOVERNMENT PLEADER** **THIS ARBITRATION APPEALS HAVING COME UP FOR FINAL HEARING ON** **06.06.2022, THE COURT ON THE SAME DAY DELIVERED THE FOLLOWING:** **-2-** ## **Arb. Appeal No.50/2015** ## **P.B. SURESH KUMAR & C.S. SUDHA, JJ.** **-------------------------------------------------Arb. Appeal No.50 of 2015** **------------------------------------------Dated this the 6[th] day of June, 2022** ## **J U D G M E N T** ## **C.S.Sudha, J.** This appeal filed under Section 37 of the Arbitration and Conciliation Act, 1996 ('the Act', for short) is against the order dated 05/02/2015 in O.P.(Arbitration) No.418/2011 of the Additional District Judge–II, District Court, Ernakulam. 2. The appellant is the petitioner in the aforesaid O.P. (Arbitration) and the claimant/contractor in the arbitral proceedings. The respondent herein is the respondent in the said proceedings. The parties in this appeal will be referred to as described in the arbitral proceedings. 3. The claimant/contractor was awarded the contract for the work of " _KSTP–Phase I – Upgradation of State Highway from Muvattupuzha – Thodupuzha and Muvattupuzha – Angamali_ ”, relating to **-3-** ## **Arb. Appeal No.50/2015** which the parties entered into a contract agreement dated 07/11/2002. The letter of acceptance was issued on 01/10/2002. The work was agreed to be completed within a period of 24 months, which period was thereafter extended. The work was completed on 31/01/2007. Clause 67 of the Conditions of Particular Application (CoPA) of the contract agreement sets out the procedure to be followed in case, disputes arose between the parties during the course of execution of the works. Several disputes arose between the parties. Disputes no.11 and 12 pertain to refund of deduction of 1% of the value of work effected towards Workers’ Labour Welfare Fund Dispute and compensation for not effecting the change in foreign currency proportion respectively. The disputes were referred to the Dispute Review Board (DRB) as per Clause 67.1 of CoPA. However, the DRB could not make its recommendation within the period of 56 days provided for in CoPA and hence arbitration was initiated by the claimant. Pursuant to Clause 67.3 of CoPA, the claimant and the respondent appointed one Arbitrator each. The said two Arbitrators appointed a third Arbitrator as the Presiding Arbitrator. ## **Arb. Appeal No.50/2015** **-4-** 4. In the present appeal we are concerned with dispute no.12 alone. Dispute No.12 is pertaining to payment of additional costs stated to have been incurred by the claimant on account of continued delay on the part of the respondent/Employer in changing the currency proportion for payment in accordance with the provisions of Sub-Clause 72.4 of the General Conditions of Contract (GCC). The claimant put up a claim for reimbursement of additional cost of ₹ 83,98,228/- towards loss stated to have been sustained due to the failure of the respondent/Employer to change the proportion of foreign currency from 24% to 2% as recommended by the Engineer for the period from 01/04/2004 to 31/02/2005 and also pay further amount in the changed proportion for all payments effected after 01/01/2006. 4.1. According to the claimant, the currency requirement was estimated based on the situation at the time of Tender on 14/06/2002. Thereafter the foreign currency requirement got reduced and it was assessed as 2% as against the 24% quoted in the Tender. Clause 36.1 of CoPA encourages the claimant to use as far as possible materials produced in India so that foreign currency requirement is reduced to the minimum. **-5-** ## **Arb. Appeal No.50/2015** Therefore, while organizing the procurement during the course of execution of works, the claimant was guided by the encouragement contained in Clause 36.1 in minimizing imports. As a result, the requirement of foreign currency came down drastically to 2% in the place of 24%. The Engineer recommended to the respondent/Employer to accept this change as per the agreement reached on 02/11/2004. In order to effect this change, it was necessary to execute a Supplementary Agreement and so as directed, the claimant submitted a draft of the same. The respondent did not agree to the change as the same would cause financial loss to them and hence change in foreign currency proportion was not effected. 4.2. As per Clause 72.4 of CoPA, it was obligatory on the part of the respondent/Employer to agree to the change in proportion of the currency. Due to refusal by the respondent to change the currency proportion, the claimant was paid the dollar component at spot rates prevailing at the time of payment, which according to the claimant has caused considerable loss to them. As the value of dollar depreciated, the payments received for 24% of the value of the contract is much less than the eligible amount as per the revised proportion, contended the claimant. ## **Arb. Appeal No.50/2015** **-6-** 5. The respondent/Employer on the other hand contended that as per Clause 72.4, the currency proportion could be amended by mutual agreement only. Here there has been no such agreement and so no Supplementary Agreement was executed between the parties changing the proportion from 24% to 2%. As long as such an agreement has not been executed, the proportion as requested by the claimant cannot be changed. The respondent had issued the necessary Customs Duty Exemption Certificate and so the claimant could have imported the necessary materials and taken advantage of the fall in spot value of dollar. The original proportion of 24% quoted is a contractual term and the same can be changed by mutual agreement only. As per the terms of CoPA, it is not mandatory or obligatory for the respondent to agree for a change in foreign currency proportion. The claimant in their bid had quoted the rate as ₹49.30/- per dollar, though the rate at the time of the Tender was much lower. This was accepted by the respondent also. As the claimant had taken a business decision, the loss if any sustained by them on this account cannot be recovered from the respondent. There has been no breach of the terms of the contract as alleged by the claimant. Moreover, the claimant has ## **Arb. Appeal No.50/2015** **-7-** undertaken not to raise any claim(s) against the Employer after 31/10/2005 in lieu of the waiver of liquidated damages by the latter when extension of time as requested by the former was granted. Hence the respondent contended that the claim was not maintainable. 6. The Arbitral Tribunal (AT) consisting of 3 members were unable to arrive at a consensus. The impugned Award signed by the majority Arbitrators, rejected the claim of the claimant relating to dispute No.12. The AT found that in the absence of a mutual agreement entered into between the parties consenting to change the currency proportion, the claim made would not be maintainable. According to the AT, as per the terms of the contract, the respondent/Employer has the option to agree or not to agree to the change of proportion. So, the claimant/contractor cannot insist on execution of a Supplementary Agreement. As the parties never agreed to change the currency proportion as alleged by the claimant, the AT found that the claimant was not entitled to the amount claimed. 7. The dissenting note by one Arbitrator is in favour of the claimant. In the light of Clauses 36.1 and 72.4 of CoPA, the minority held ## **Arb. Appeal No.50/2015** **-8-** that the refusal to execute a Supplementary Agreement is in breach of the contract conditions and hence allowed the claim. 8. Aggrieved, the claimant/contractor took up the matter under Section 34 of the Act before the District Court, Ernakulam. The Court affirmed the Award of the AT and hence, the present appeal. 9. Heard Sri.Ranjith Varghese and Sri.Rahul Varghese, the learned counsel for the appellant and Sri.K.V.Manoj Kumar, the learned Senior Government Pleader for the respondent. 10. In the appeal memorandum, it is contended that the claim for compensation due to refusal of the respondent to change the foreign currency proportion despite fulfillment of all the prerequisites under the contract and payment effected by the respondent based on spot rates, is contrary to the terms of the contract. According to the claimant, they had envisaged import of certain supplies from foreign sources, including bitumen from Iraq and Iran. While quoting the Tender, they had envisaged 24% of the payment to be in foreign currency, that is, US Dollars (USD) and 76% in Indian Currency (INR). Sub-Clause 36.1 of CoPA encourages **-9-** ## **Arb. Appeal No.50/2015** the claimant to use materials from supply sources within India. To facilitate such change in currency proportions, Sub-Clause 72.4 was inserted for effecting amendment to Clause 72 in case substantial change in currency proportion occurred. Due to the Iraq war, there was drastic change in the source of supply, as a result of which that currency proportion required to be changed. In accordance with Sub-Clauses 36.1 and 72.4, the claimant notified the respondent of the change of source of supply to 98.5% INR and 1.5% US Dollars. The respondent’s Engineer convinced of the need to change the proportion, recommended for such change to the Employer. However, despite fulfilling the prerequisites under Clause 72.4, the respondent failed to effect any change in the currency proportion, resulting in huge loss to the claimant. The respondent resorted to payment of reduced amount by a wrong method of calculation, not recognized under the Agreement, thus obtaining unjust enrichment at the expense of the claimant. The findings in the Award that it is the prerogative of the respondent to decide whether to effect change in the Agreement and that any incidental gain to the respondent and incidental loss to the claimant have to be borne by the parties, are clearly against the express terms of the ## **Arb. Appeal No.50/2015** **==> picture [21 x 9] intentionally omitted <==** contract, particularly Clauses 36.1 and 72.4 and the conduct of the parties. Consequently, the Award to that extent is against the terms of Agreement between the parties, trade practice under Section 28(3) of the Act and the substantive law of the land. The findings of the AT, confirmed by the District Court, is without proper application of mind. The Court below failed to note the object of Clause 36.1 as well as the change in currency proportions as per the mandate in Clause 72.4. Hence the impugned order is liable to be set aside, contends the claimant/appellant. 11. _Per contra,_ the respondent supports the impugned Award and submitted that there is no infirmity whatsoever in the same. The AT, according to the respondent, is perfectly right in rejecting the claim of the claimant. The respondent has also raised a contention that the claim is not maintainable in the light of the terms in the Supplementary Agreement executed between the parties on 08/01/2007, when the respondent/Employer granted extension of time for the execution of the work by the claimant. ## **Arb. Appeal No.50/2015** **-11-** 12. The argument of the respondent that the claim itself is not maintainable, has already been considered and rejected by us in the connected appeals, namely, Arb. Appeal Nos.1 of 2017 and 26 of 2017 and so the same is not being repeated here. In this appeal, we would only be considering the question whether the AT is right or justified in passing the impugned Award. 13. The relevance of a dissenting opinion has been laid down by the Hon'ble Supreme Court in **Dakshin Haryana Bijli Vitaran Nigam Ltd. v. M/s. Navigant Technologies Pvt. Ltd., AIR 2021 SC 2493** . It has been held that the findings/opinions/views of the Minority Tribunal is not an Award, but only a dissenting view and the same does not form part of the Award. Such dissenting view/opinion cannot be made the basis of a proceeding under Section 34 or under Section 36 for its enforcement. But it can be relied upon by the party seeking to set aside the Award to buttress his submissions in the proceedings under Section 34. The claimant/contractor thus referring to the dissenting view, submitted that their claim is substantiated by the view taken by the Minority in the dissenting view. ## **Arb. Appeal No.50/2015** ## **-12-** 14. The dispute involved is regarding the interpretation of Sub-Clause 72.4 of CoPA, which reads- _“Sub-Clause 72.4 The foreign and local currency portions of Substantial Changes the balance of the Contract Price_ _**shall be** in Currency_ _**amended by agreement** between the Requirements Employer and the Contractor to reflect any substantial changes in the expected foreign and local currency requirements of the Contractor during the execution of the Works, provided that,_ _a) the Contractor shall inform the Employer and the Engineer whenever any such substantial change may occur, or_ _b) the Engineer may recommend a review of such expected requirements if in his judgement there is evidence of a change in the country of origin of materials, Plant or services to be provided under the Contract which should result in any substantial change of such expected requirements.”_ (Emphasis supplied) Therefore, when a change occurred in the proportion of the requirement of foreign and local currency, it was obligatory on the part of the parties to enter into an agreement, provided either of the conditions, that is, the requirement under (a) or (b) provided in the said Sub-Clause, was satisfied. ## **Arb. Appeal No.50/2015** **-13-** The expression used in the aforesaid Sub-Clause is “ _shall be amended by agreement_ ” which would mean that once the conditions stipulated therein are complied with, it was obligatory for the employer to amend the foreign and local currency proportion in the agreement from effecting payment of the balance contract price. ## 15. Clause 36.1 of CoPA reads – _“Quality of 36.1 All materials, Plant and workmanship Materials. Plant. shall be: Supplies and (a) of the respective kinds described in the Workmanship_ _(a) of the respective kinds described in the Contract and in accordance with the Engineer's instructions, and_ _(b) subjected from time to time to such tests as the Engineer may require at the place of manufacture. fabrication or preparation, or on the Site or at such other place or places as may be specified in the Contract, or at all or any of such places._ _The Contractor shall provide such assistance, labour, electricity, fuels, stores, apparatus and instruments as are normally required for examining, measuring and testing any materials or Plant and shall supply samples of materials. before incorporation in the Works, for testing as may be selected and required by the Engineer._ _The Contractor is encouraged, to the extent practicable and reasonable, to use_ ## **Arb. Appeal No.50/2015** ## **-14-** _materials. Contractor's Equipment, Plant and supplies from sources within the country of the Employer, as stipulated in the Appendix to Bid.”_ 16. According to the claimant, they were persuaded, encouraged and guided by Clause 36.1 during the course of execution of works. In organizing the procurement during the course of execution of works, they were guided by the encouragement contained in Clause 36.1 to minimize the imports. As a result of this attempt, the requirement of foreign currency came down drastically. Hence _vide_ letter dated 08/05/2004, they requested for an amendment of the percentage payable in foreign currency so as to make the revised Indian Currency component to be 98.5% and US Dollar component to be 1.5% with effect from IPC No.5 onwards, i.e., for the scope of works executed from April onwards. The fact that the foreign currency component came down, pursuant to which a request had been made by the claimant to change the currency proportion, is not disputed by the respondent. 17. We refer to the ‘ _Summary of payment currencies of the bid for KSTP-III’_ given in the Appendix to the Bid which reads – ## **Arb. Appeal No.50/2015** ## **-15-** ## _“_ _**Summary of payment currencies of the bid for KSTP-III**_ |_Name of currency_|_A_<br>_Amount of_<br>_currency_|_B_<br>_Rate of_<br>_exchange_<br>_(local_<br>_currency per_<br>_unit of_<br>_foreign_<br>_currency)_|_C_<br>_Local currency_<br>_equivalent to_<br>_C_<br>_A x B_|_D_<br>_Percentage of_<br>_Bid Price_<br>_100 x_<br>_Bid Price_| |---|---|---|---|---| |_Local currency_|_705,964,000/-_|_1.00_|_705,964,000/-_|_76/-_| |_Foreign currency #1_<br>_(US Dollar)_|_45, 22, 028,397/-_|_49.30_|_222,936,000/-_|_24/-_| |_Foreign currency #2_||||| |_Foreign currency #3_||||| |_Net Bid Price_|||_928,900,000/-_|_100.00_| |_Provisional sums_<br>_expressed in local_<br>_currency_||||| |_Total Bid Price_|||_928,900,000/-_|| 18. Ext.C2/07 letter dated 02/11/2004 of the Engineer to the ## claimant/contractor which is not disputed reads- “ _At the above meeting, it was agreed between the Employer and Contractor that in future the foreign currency portion of the all payments to the Contractor would be only 2%._ _As per Clause 72.1 of the Contract, the rate of exchange of currency shall be as per the Contract rate (Rs.49.3 = 1.0 USD)_ ## **Arb. Appeal No.50/2015** ## **-16-** _shall not change. This rate is at Contractor's risk. The portion of the USD requirement to be paid to the Contractor in INR will be converted to USD at Contract rate and the USD sum paid in INR at the current rate of exchange._ _Please prepare a supplementary agreement to enact this decision as per Clause 72.4.”_ ## To this letter, the claimant gave Ext.C2/08 reply dated 08/11/2004, which reads - _“With reference to your letter No.309/RBW/TL/04/206 dated 2[nd] November 2004, enclosed please find a Supplementary Agreement prepared on Rs.100/- stamp paper, as per Clause 72.4, for favour of obtaining the signature of the Chief Executive Officer, KSTP, Trivandrum, so that the Supplementary Agreement becomes effective.”_ ## This is replied to by the Engineer _vide_ Ext.C2/09 letter dated 16/11/2004, ## which reads - _“The decision taken in the meeting held with the Chief Executive on 2/11/04 was conveyed vide this office letter No.309/RBW/TL/04/206 dated 2/11/04. It is noticed that the draft supplementary agreement prepared in the stamp paper by you is not in accordance with the above and therefore returned herewith. You may redraft the supplementary agreement and_ ## **Arb. Appeal No.50/2015** **==> picture [21 x 9] intentionally omitted <==** _send to this office for vetting and only after that the same need be typed in the stamp paper, which will avoid unnecessary wastage of stamp paper.”_ The decision to pay at the spot rate is apparently against Sub-Clause 72.4 of CoPA. There is no provision for adopting the said method. When a Supplementary Agreement has not been executed as contemplated under the aforesaid Sub-Clause pursuant to a change in the proportion of currencies required, the parties can be governed only by the proportion quoted in the Bid, referred to herein above, which even according to the respondent is the contractual term or provision. Sub-Clause 60.4 of CoPA says that payments to the Contractor by the Employer shall be made in the currencies in which the Contract Price is payable into a bank account or accounts nominated by the Contractor. The method of computation adopted by the respondent for 22% has not been provided for by any of the terms of the contract. Further, the respondent/Employer does not also dispute the fact that loss has been caused to claimant/Contractor on account of the payments effected otherwise than in terms of the original agreement or the proposed supplementary agreement. Therefore, the finding of the majority ## **Arb. Appeal No.50/2015** ## **-18-** in the impugned Award is apparently against the provisions of Section 28(3) of the Act, which says that while deciding and making an award, the AT shall, in all cases, take into account the terms of the contract and trade usages applicable to the transaction. 19. We have gone through the dissenting view of the minority also. In the dissenting view it has been held that as per Clause 72.4 of CoPA, when a change in the currency proportion was necessitated, it was mandatory for the parties to have executed a Supplementary Agreement. The amendment brought by the respondent/Employer to Clause 36.1 of CoPA by adding a paragraph to the effect that the contractor is encouraged to take steps to minimise imports was taken into account. It was noticed that since the project is a World Bank aided Project, the Employer had adopted the FIDIC conditions in the GCC while preparing the bid document. It was also noticed that the Employer had been very particular in adopting the very same FIDIC Conditions, and in that endeavour they had even given the address of FIDIC, Secretariat at Switzerland from where the copies of the FIDIC conditions of contract could be obtained by the bidders. The Employer had amended Clause 36.1 CoPA by adding a ## **Arb. Appeal No.50/2015** ## **-19-** paragraph by which the contractor was encouraged, to the extent possible and reasonable, to use materials, contractor's equipment, plant and supplies from sources within the country of the Employer as stipulated in the Appendix to the Bid. When the said amendment to Clause 36.1 was incorporated in CoPA, it was noticed that the said change would necessitate change in foreign currency requirements during the execution of the work. However, Clauses 72.1, 72.2 and 72.3 of the standard FIDIC Conditions dealing with foreign currency, did not contemplate any change in the foreign currency requirement during the execution of the work. Therefore, the Employer introduced a new Sub-Clause, that is, 72.4 in CoPA, as per which, the foreign and local currency portion of the balance of the contract price was required to be amended by an agreement between the Employer and the Contractor to reflect any substantial change in the expected foreign and local currency requirements of the contractor during the execution of works, provided the contractor informed the Employer and Engineer whenever any such substantial change occurred or the Engineer could recommend a review of such expected requirement if in his judgment, there is evidence of a change in the country of origin of materials, plant, or ## **Arb. Appeal No.50/2015** **==> picture [21 x 9] intentionally omitted <==** services to be provided under the contract, which would result in any substantial change of such expected requirement. The Minority also took note of Sub-Clause 36.1 and said that the claimant could not be blamed for acting in accordance with the same. Exts.C2/07 to C2/09, which are not disputed were also taken into consideration and it was held that, the fact that the Engineer had agreed to 2% foreign currency requirement has been established and the dispute between the parties was only in respect of the mode as to how the 2% foreign currency component had to be paid. As per Appendix to Bid, 45,22,028,397 USD corresponding to 24% of the contract price had been quoted. So, when 24% foreign currency component changed to 2%, the corresponding USD and not INR was required to be paid to the contractor. Sub-Clause 60.4 also stipulates payments to be made in the currency in which the contract price is payable. It was also held that the Engineer who issued Ext.C2/07 had the authority to do so as contemplated in Sub-Clause 2.1(b) of the Agreement, for which he did not require the specific approval of the Employer. Hence it was concluded that a binding agreement for change in foreign currency requirement came into existence on 02/11/2004 by issuance of Ext.C2/07. It was also noticed that the Chief ## **Arb. Appeal No.50/2015** **==> picture [21 x 9] intentionally omitted <==** Engineer KSTP had confirmed in the Minutes of a review meeting that the input of the contractor had been 100% indigenous. Hence refusal of the respondent/Employer to change the currency proportion was found to be in breach of the contract conditions, as the parties were under a contractual obligation to enter into a Supplementary Agreement in pursuance of SubClause 72.4 of CoPA. Finding so, the minority opined that the claim of the contractor for compensation is _bonafide_ . 20. The minority dissenting view though appears to be the correct view, cannot be enforced under Section 36 or challenged under Section 34 as held in **Dakshin Haryana Bijli Vitaran Nigam Ltd.** ( _Supra_ ). It is true that the Hon'ble Supreme Court in **Ssangyong** ## **Engineering and Construction Co. Ltd. v. National Highway Authority** **of India, AIR 2019 SC 5041** , had accepted the minority dissenting view and held it to be in terms of the contract between the parties and hence to do complete justice between the parties, upheld the same. However, that was in exercise of its power under Art.142 of the Constitution of India, which we do not have. ## **Arb. Appeal No.50/2015** **==> picture [21 x 9] intentionally omitted <==** 21. As the impugned Award is against the terms of the Agreement entered into between the parties, the court below was wrong in not exercising its jurisdiction under Section 34 to set aside the same. Hence, we do so. In the result, the appeal is allowed with costs. The impugned order of the court below and the Award are set aside. Interlocutory applications if any pending, shall stand disposed of. Sd/- **P.B.SURESH KUMAR JUDGE** Sd/- **C.S. SUDHA JUDGE** akv/ami