Construction Arbitration

Construction Arbitration — Issue 100

The Employer awarded a composite civil and electrical works contract to the Contractor for construction of a Hostel / Media Accommodation Block at Jawaharlal Nehru Stadium, New Delhi. During execution, several extra, substituted and deviated items were executed. The Contractor alleged that rates of extra/substituted items were arbitrarily reduced, substantial amounts were illegally withheld and bonus, overheads, bank guarantee charges and interest were wrongly denied. The disputes were referred to arbitration. The arbitral tribunal allowed some of the claims of the Contractor.

The Court upheld the findings of the arbitral tribunal holding that once quantities exceeded deviation limits the department could not unilaterally reduce agreement rates and if no revised rates were negotiated, agreement rates continued to apply. Since no notice was issued, reduction of rates by the department was illegal.

The Court upheld the arbitral tribunal’s conclusion that VAT and labour cess were already legally applicable and the Contractor was therefore entitled to reimbursement.

The Employer awarded to the Contractor the contract for strengthening and four-laning of NH-2 (Etawah Bypass, Uttar Pradesh). The contract was an item-rate contract governed by the FIDIC-based General Conditions of Contract (GCC). The project consisted of two phases i.e. widening of the existing carriageway and construction of a new four-lane highway.

During execution, the Employer substantially altered Phase-I by changing the design from left-hand side widening to concentric widening, and introducing additional works including three overpasses (ROBs). The Contractor contended that these changes drastically altered the character of the works, increased quantities beyond contractual variation limits, delayed execution, and entitled it to revised rates and compensation.

Disputes were first referred to the Engineer and upon rejection, arbitration was invoked. The arbitral tribunal concluded that specific delays under Phase-I occurring on account of hindrances on the site were attributable to the Employer.

The Employer contended that the arbitral tribunal’s award was contradictory since it concluded that the Contractor was also responsible for delay in completion of works, overhead charges were still allowed in favour of the Contractor.

In awarding compensation for overhead charges, the arbitral tribunal ignored the principle that merely spending time without any actual execution of works involved in the project will not entitle a Contractor to the overhead charges. Further, the finding of the arbitral tribunal was based on no evidence whatsoever, since no log books were supplied by the Contractor for machinery and equipment.

The Court upheld the finding of the arbitral tribunal that on account of drastic and belated variations which were ordered by the Employer, including a shift from LHS widening to concentric widening as well the addition of three overpasses in a 7 km stretch, the scope of work under the contract was substantially altered.

The Court concluded that where delay is attributable to both Employer and Contractor, compensation must be confined to Employer-caused delay. The Court upheld the majority arbitral award in its entirety.