Supreme Court on Works Contract and Subsequent Legislation Clause - National Highways Authority of India v. M/S JSC Centrodorstroy

National Highways Authority of India v. M/S JSC Centrodorstroy

Civil Appeal No. 2529 of 2016

Facts

The present Case involves a dispute relating to the costs involved in a Works Contract. The Respondent was awarded the Contract on 12.03.2001 by the Appellant. The main bone of contention was Clause 14.3 and Clause 70.8 of the COPA (Conditions of Particular Application) which is stated hereunder:

“Clause 14.3 of “Instruction to Bidder”

All duties, taxes and other levies payable by the Contractor under the contract, or for any other cause, as of the date 28 days prior to the deadline for submission of bids, shall be included in the rates and prices and the total Bid Price submitted by the bidder.”

“Clause 70.8: Subsequent Legislation

If, after the date 28 days prior to the closing date for submission of bids for the Contract there are changes to any National or State Statute, Ordinance, Decree or other Law or any regulation or by-law of any local or other duly constituted authority or the introduction of any such State Statute, Ordinance, Decree, Law, regulation or by-law in India or States of India which causes additional or reduced cost to the Contractor, other than under the preceding Sub-Clauses of this clauses in the execution of the contract, such additional or reduced cost shall, after due consultation   with   the   Employer   and   the   Contractor,   be determined by the Engineer and shall be added to or deducted from   the   Contract   Price   and   the   Engineer   shall   notify   the Contractor   accordingly   with   a   copy   to   the   Employer. Notwithstanding the foregoing, such additional or reduced cost shall not be separately paid or credited if the same shall already have been taken into account in the indexing of any inputs to the   Price   Adjustment   Formulae   in   accordance   with   the provisions of Sub-Clauses 70.1 to 70.7 of this Clause.”

Arguments

The disputes pertaining to the additional costs incurred were taken before the Arbitral Tribunal. According to the Respondent, there were revisions in the rate of Service Tax with reference to the Insurance Policy from 5% to 10.30% over a period of time. Hence the Service Tax paid in excess of 5% was reimbursable by the Appellant under Clause 70.8 of COPA. Similarly, the Respondent contended that in terms of the Clause 10.1 of COPA, the Respondent was required to furnish Bank Guarantee by way of Performance Security and the Service Tax in relation to the Bank Guarantee as collected by the Bank had risen from 5% to 10.30% during the course of the contract. Hence the Respondent was entitled to be reimbursed by virtue of Clause 70.8 of COPA.

The Arbitral Tribunal accepted the aforesaid claims by its Award dated 28.02.2013 and ordered the Appellant to pay such sums to the Respondent. As per the Arbitral Tribunal, the additional costs as a result in revision of Service Tax were covered under Clause 70.8 of COPA. It also observed that Service Tax was not an input to the indices used in Prices Adjustment Formulae in Clause 70.3.

Proceedings before the Supreme Court

The Award passed was challenged under Section 34 of the Arbitration and Conciliation Act, 1996, whereby the Single Judge dismissed the Petition by Order dated 21.10.2013. An Appeal was preferred before the Division Bench of the High Court. However, the Division Bench affirmed the view taken by the Single Judge and dismissed the Appeal.

The matter came up before the Supreme Court where it was contended that only those claims which were constructional inputs alone would be eligible to be covered under Clause 70 of COPA and the facility of Bank Guarantee was optional. The Supreme Court rejected this argument and held that Bank Guarantee was a mandatory condition under Clause 10.1 and Clause 10.2. It further held that construction of the terms of a Contract is primarily for an Arbitrator or Arbitral Tribunal to decide and unless the Arbitrator or Arbitral Tribunal construes the contract in such a way that no fair minded or reasonable person could do, no interference by Court is called for.

In the instant case, it was observed by the Hon’ble Supreme Court that the view that the increase in rates of Service Tax in respect of Bank Guarantee and Insurance Premium is directly relatable to the terms of the Contract is certainly one of the possible views. Merely because different views are possible on same subject matter does not warrant interference by the Courts.

Opinion

I feel that the reasoning adopted by the Supreme Court is sound as some amount of leeway has to be given to the Private Contractors. Today the Governments are hell bent on initiating Recovery Proceedings against the Private Contractors for the most trivial issues and are never willing to pay back anything even when there is a fault on part of the Government. The High Courts also adopt different and divergent views in this respect. There is no uniformity in this respect. It is understandable that some degree of latitude is necessary to be given to the Government as it is the biggest litigant and has to fight each and every case to recover its money. However, this degree of latitude cannot be at the cost of the established legal principles or fair reasoning. The Order by the Supreme Court will certainly act as a guiding beacon for similar cases pending in the various High Courts.