IT Expressway Limited vs Ascent Engineers and Another

Vinod K. Sharma, J.—IT Expressway Limited/petitioner, a company registered under the Companies Act, has invoked Section 34 of the

Arbitration and Conciliation Act, 1996, to challenge the award dated 7.5.2011 passed by the Hon''ble Mr. Justice Doraiswamy Raju, Retired

Judge of Supreme Court of India. It is submitted, that the petitioner company is a subsidiary company of Tamil Nadu Road Development

Company Limited, a joint venture company of Tamil Nadu Industrial Development Corporation Limited and TIDEL Park Limited. The petitioner

company has improved and is maintaining the Rajiv Gandhi Salai Road (IT Corridor), commencing from Madhya Kailash Temple Junction on

Sardar Patel Road in South East of Chennai to Sirseri.

That the petitioner in the month of March, 2008, awarded a contract to Ascent Engineers for construction of Toll Plazas, at IT Corridor on

Nomination Basis, for total consideration of Rs. 7,52,84,343/- (Rupees Seven Crores Fifty Two Lakhs Eighty Four Thousand Three Hundred and

Forty Three only), as detailed here-under:

The parties entered into agreement dated 19.3.2008. Ascent Engineers was thereafter awarded additional works, like Container Office and

contract office at Rs. 93,97,000/- (Rupees Ninety Three Lakhs and Ninety Seven Thousand only). Thereafter on 20.5.2008, miscellaneous works

costing Rs. 2,47,11,000/- (Rupees Two Crores Forty Seven Lakhs and Eleven Thousand only) was also awarded.

The bills duly certified by the competent authorities of the petitioner company for a sum of Rs. 8,42,19,517/- (Rupees Eight Crores Forty Two

Lakhs Ninety Thousand Five Hundred and Seventeen only), were paid to the respondent, after deduction of applicable income tax and works

contract tax and retention money etc., in terms of Clause 6(j) of the Agreement dated 19.4.2008.

It is the case of petitioner, that the petitioner company incurred an expenditure of Rs. 11,44,57,308/- (Rupees Eleven Crores Forty Four Lakhs

Fifty Seven Thousand Three Hundred and Eight only) inclusive of payment of Rs. 8,42,19,517/- (Rupees Eight Crores Forty Two Lakhs Ninety

Thousand Five Hundred and Seventeen only) and supplied materials valued at Rs. 2,60,46,990/- (Rupees Two Crores Sixty Lakhs Forty Six

Thousand Nine Hundred and Ninety only). The TDS and WCT amounting to Rs. 41,90,801/- (Rupees Forty One Lakhs Ninety Thousand Eight

Hundred and One only) and retention amount of Rs. 23,80,544/- (Rupees Twenty Three Lakhs Eighty Thousand Five Hundred and Forty Four

only) was deducted.

That the State of Tamil Nadu advanced a sum of Rs. 21,50,00,000/- (Rupees Twenty One Crores and Fifty Lakhs only), beside grant of Rs.

32,50,00,000/- (Rupees Thirty Two Crores and Fifty Lakhs only). In addition, it took term loans from TUFIDCO, Indian Bank, Vijaya Bank etc.

The petitioner company also availed inter corporate loans from TIDCO as well as from TIDEL Park, the promoter company of Tamil Nadu Road

Development Company Limited.

It is further case of petitioner, that on 25.11.2008, the petitioner approached TIDCO for grant of Rs. 20,00,00,000/- (Rupees Twenty Crores

only) to meet its commitments and senior officers of TIDCO was deputed to inspect all books of accounts of Tamil Nadu Road Development

Company Limited/ITEL before sanctioning and disbursing the loan.

It is submitted that the officers of TIDCO found, that there was difference in the rates awarded by ITEL to Ascent Engineers leading to excess

cost. The decision was taken to work out exact quantum of loss, and committee was also constituted to go into this matter.

Ascent Engineers in the meantime filed application in January, 2010 for issuance of garnishee order against the Bankers of ITEL, i.e. Vijaya

Bank, Mount Road, Chennai, Indian Bank, Adyar, Shastri Nagar, Chennai and Axis Bank Limited, Adyar, Chennai, prohibiting them from paying

money to them to the extent of Rs. 2,90,00,000/- (Rupees Two Crores and Ninety Lakhs only).

It is submitted, that the committee in the meantime reported that the loss in view of the excess cost was assessed at Rs. 3,07,25,010/-(Rupees

Three Crores Seven Lakhs Twenty Five Thousand and Ten only). Counter was accordingly filed in the application moved by Ascent Engineers,

pointing out that the petitioner was contemplating legal action against some of its officials for the excess amount incurred towards construction of

the Toll Plazas.

Ascent Engineers filed a claim petition, claiming an amount due and payable under the contract, whereas the petitioner took the following

defense:

a) ITEL is justified in withholding a sum of Rs. 1,61,35,558/- being part of the excess cost to be recovered by ITEL from Ascent Engineers and

ITEL is entitled to adjust the said sum towards the excess cost.

(b) In terms of the contract agreement Ascent Engineers is not entitled for an alleged service tax component of Rs. 43,18,872/- as that ITEL is not

liable to reimburse any such Service Tax component either as of now or even if any liability is thrust on the claimant by tax authorities at any point

of time.

(c) ITEL is justified in invoking 2 Bank Guarantees (BG No. 6 of 2008 and BG No. 7 of 2008) and also retaining the proceeds arising out of

invocation for a sum of Rs. 37,64,220/- being part of the excess cost to be recovered by ITEL from Ascent Engineers and ITEL is entitled to

adjust the said sum towards the excess cost.

(a) In terms of the contract agreement, Ascent Engineers is not entitled for any interest on the amount withheld referred in (a) above.

(b) Ascent Engineers is not entitled for any cost of Arbitration as the Arbitration proceedings have been commenced with the condition that cost

thereof is to be shared mutually and the claimant is not entitled for any other relief.

A counter claim was also filed stating therein as under:

Ascent Engineers had derived an undue and/or illegal financial advantage/pecuniary benefit to the determent ITEL. ITEL, in total, had to recover a

sum of Rs. 3,07,25,010/- (Rupees three crores seven lakhs twenty five thousand and ten only) from Ascent Engineers. IT Expressway Ltd., had

withheld in aggregate a sum of Rs. 2,01,76,063/- (Rupees two crores one lakh seventy six thousand and sixty three only) as follows:

Towards the balance upto RA Bill-8 certified: Rs. 74,19,261

(a) Uncertified and unpaid RA Bill 9: Rs. 18,76,587

(c) 5 bills (others) certified; but unpaid: Rs. 47,35,451

(d) Towards retention monies: Rs. 23,80,544

(e) Towards 2 Bank Guarantees invoked: Rs. 37,64,220:

Total: Rs. 2,01,76,063

Subject to deduction of applicable taxes The above referred sum of Rs. 2,01,76,063/- is being withheld ITEL for the reasons elaborated in the

State of Defense (SOD). ITEL is yet to recover a sum of Rs. 1,05,48,947/- (Rupees one crore five lakhs forty eight thousand nine hundred and

forty seven only) from Ascent Engineers, being the part of excess cost already received by Ascent Engineers from ITEL.

The petitioner claimed a sum of Rs. 3,07,25,010/- (Rupees Three Crores Seven Lakhs Twenty Five Thousand and Ten only) by way of

counter claim, besides contesting the claim of the petitioner.

The Hon''ble Arbitrator passed an award. The operative part of which reads as under:

The background of events culminating in the execution of the contract in this case would show in unmistakable manner, that the parties,

competent to contract have for lawful consideration and with a lawful object have by mutual consent and will entered into the contract knowing

fully well the implications. It is not the case of any of the parties that the contract suffered any serious infirmity in law, nor is it their stand that there

had been any novation or alteration of the contract, by any mutual consent. It is an axiomatic principle of law that novation, recession or alteration

of a contract u/s 62 of the Indian Contract Act, 1872, can also be done with the agreement of both the parties to the contract. It is only both the

parties have to agree to substitute the original contract or rescind or alter and not by any one of the parties alone, unilaterally. In the decisio H.B.

Basavaraj (Dead) by LRs. and Another Vs. Canara Bank and Others, the Apex Court reiterated this basic principle of law by observing that

Section 62 of the Indian Contract Act only gives statutory form to the common law principle of novation, and the basic principle behind the

concept of novation is the substitution of a contract by a new one only through the consent of both the parties to the contract. It was also indicated

therein that such consent may be expressed in written agreements or implied from their actions or conduct.

So far as the present case is concerned, the agreed rates are incorporated in the written agreements between parties; not only there had been

no substitution of the same by any written agreement with mutual consent, but there is no scope for any implications as well since the very exercise

as stated above came to be unilaterally undertaken after the completion of the work by the claimant and that to not by the respondent on its own

but at the behest and advice of the TIDCO, a third party and stranger to the contract entered into between parties hereto with open eyes and full

knowledge, free will and mutual consent, as to the alleged excess costs or rates. This action of the respondent is impermissible in law and be it

Government or an agency of the Government, they cannot act contrary to law. It is beyond comprehension as to how the TIDCO could even

attempt to impose itself in the matter to give even an advice which tens to unsettle the inter se rights and obligations of parties governed by the

terms of the contract. All the more so, at a stage when the contract has been fully performed, by completing the works undertaken by the

respondent and above all at a stage even after putting the project to commercial use as well. The issue No. 1 is held against the respondent and in

favour of the claimant. Exhibit C-41 would even constitute an admission and thereby the respondent may even be considered to be stopped from

going behind the same and that too without any legal or valid basis to justify retracing of the stand.

So faras issue No. 2 is concerned, in the light of the findings on issue No. 1, and other conclusions arrived at as to the efficacy of the report,

supra, the reports Exhibits R-1 and R-2 cannot be given any credence and cannot in law be relied upon as constituting or providing any legal, valid

or acceptable basis to deprive the claimant of its rights in law to claim and be entitled to be paid at the rates agreed to between parties under the

written contracts entered into with mutual consent and free will. This issue is also held against the respondent and in favour of the claimant.

Issue No. 4: This issue concerns the legality and propriety of the action of the respondent in invoking the two Bank Guarantees, i.e. 6 of 2008

dated 9.4.2008 and 7 of 2008 dated 11.4.2008 for Rs. 26,33,230/- and Rs. 11,30,990/- respectively furnished by Corporation Bank, Mylapore

Branch, Chennai, which though was to expire on 30.6.2009 came to be got extended till 31.12.2009, to coincide with the defect liability period of

one year from the date of completion of the work, viz., 15.10.2008. Since the request of the respondent for further extension of Bank Guarantees

was declined by a letter dated 22.12.2009 stating that in as much as there was no complaint whatsoever in respect of any of the works that have

been executed and completed and performance guarantee period of one year also expired on 15.10.2009 or at any rate by 15.12.2009 (the date

on which one year period from Toll Plaza was put to commercial use), the respondent invoked the Bank Guarantees by writing a letter dated

24.12.2009 to the Bank. Apart from the fact that the reason for which the respondent invoked the two Bank Guarantees may not strictly be in

conformity with the object and purpose for which those Bank Guarantees were given, at any rate extended beyond 30.6.2009, in the light of the

findings on issue Nos. 1 and 2, rendered as above, holding that the respondent could not unilaterally alter the mutually agreed rates for execution of

the work, to the detriment of the claimant and also cannot claim from the claimant under the pretext of alleged excess cost, the invocation of the

Bank Guarantees and thereby holding the money of the claimant of a sum of Rs. 37,64,220/- was not warranted in law or justified on the facts and

circumstances of the case and the respondent is bound and liable in law to return and refund the same to the claimant, with interest as well.

So far as issue No. 6 is concerned, in the light of the findings rendered on issue Nos. 1 and 2, as above, and the fact that the respondent

cannot unilaterally alter the mutually agreed rates for the execution of the works, and the further fact that there is no claim or proof by the

respondent of any deficiencies in the quantities or qualities of works entrusted and executed, the respondent cannot claim any amount from the

claimant under the pretext or plea of an imaginary claim of excess cost and consequently, the respondent has no right in law or justification on facts

of the case on hand to withhold payments of the amounts raised by the bills for the work executed and retained without releasing the amount any

longer, and that to after the expiry of performance guarantee period. The adjustment of Rs. 23,80,554/- is unjustified and not sustainable under the

terms of the contract or any other provisions of law. The continued retention of the money lawfully due to the claimant is unwarranted and

unjustified both in law and on facts of the case. Consequently, the respondent is liable and duty bound to pay the claimant the sum of Rs.

1,61,35,558/- with interest, since the claimant have been unauthorisedly denied the use of the money entitled to them.

34(a) Issue No. 7 is threefold and pertains to the claim of interest at 18% from 19.12.2008, the date on which the amount became due, till date of

payment. The sum of Rs. 1,61,35,558/- is claimed with interest at the above rate. The sum of Rs. 37,64,220/- being the amount got by the

respondent by invoking the two Bank Guarantees, is sought to be recovered with interest at 18% from 31.12.2009. Since the question relating to

Service Tax has not been pressed, a decision on the claim relating to interest on it as in issue 7(b) is also rendered otiose.

(b) So far as issue Nos. 7(a) and 7(c) are concerned, the claimant seek interest at 18% from 19.12.2008, the date of Exhibit C-41 or at any rate

from 29.12.2008, the expiry of 10 days, being the cycle of payment as per Exhibit C10 dated 19.3.2008. So far as the claim for recovery of Rs.

37,64,220/-, the amount covered by the two Bank Guarantees invoked by the respondent is concerned, interest at 18% is claimed from

31.12.2009, the point of time when the guarantees were invoked and money recovered from the Bank on account of the claimant.

Be it the amount unauthorisedly withheld from the bills raised for the works executed and the retention money as well as the money recovered

by the respondent from the invocation of Bank Guarantees are concerned, there can be no serious dispute that to that extent the claimant, a

partnership firm, engaged in business ventures have not only been denied of the legitimate use of money to which it is entitled to in a profitable

manner but the respondent by withholding them, had the use of the same for its own purposes. Courts have uniformly upheld the claim of the

person/party denied of the use of the amounts lawfully due to them, for interest. Similarly, the deprivation of the sum covered by the two Bank

Guarantees also deserves to be treated on par, as the other amounts due but unauthorisedly not only deprived the claimant of the use but the

respondent had the use of it, for its own. Without mulcting this award with the volume of case law on the subject, it would be appropriate to advert

to at least two decisions, relevant for the case on hand. In Aditya Mass Communications (P) Ltd. Vs. A.P.S.R.T.C., , for unauthorized retention of

money to a person without the authority of law, the Apex Court granted interest at 12% per annum. In Clariant International Ltd. and Another Vs.

Securities and Exchange Board of India, the Apex Court observed that interest can be awarded not only in terms of an agreement or statutory

provision, but also be awarded by reason of usage or trade having the force of law or equitable consideration. It was also observed therein that

interest cannot be awarded by way of damages except in cases where money due is wrongfully withheld and there are equitable grounds and a

written demand has been made. It was also observed therein that in the absence of any agreement or statutory provision or a mercantile usage,

interest could be at the prevailing market rate. In this case, the contract did not provide specifically for payment of interest. The above principles

have also been reiterated and followed in C.K. Sasankan Vs. The Dhanalakshmi Bank Ltd., . The award of interest at 12% had been held to be

reasonable and just. In this case, not only the claimant has been deprived the use of money legitimately due to it but by putting the works executed

by the claimant the respondent had the benefit of putting the Toll Plaza in to commercial use by collecting toll from the vehicles from 15.12.2008.

Taking into account the overall facts and circumstances of the case and balancing the equities and rights of parties, the award of interest at 12%

per annum would be just, reasonable and sufficiently meet the ends of justice. Consequently, the claimant would be entitled to the recovery of the

sum of Rs. 1,61,35,558/- with interest at 12% per annum from 29.12.2008 till date of realization of the amount and for the recovery of Rs.

37,64,220/- with interest at 12% per annum from 31.12.2009 till date of realization of the amount.

Issue No. 8 relates to the entitlement or otherwise of the amounts claimed by the respondent as against the claimant by way of counter claim.

The counter claim dated 13.12.2010, is for a sum of Rs. 3,07,25,010/-. The same is based upon the report submitted by the Technical member of

the Committee constituted at the meeting of the Board of Directors of the respondent held on 6.10.2009 who has been examined as RW1 and the

report of the Committee (Exhibit R2). Internal page 4 of this report contains the process and methodology as to how the said amount has been

arrived at as probable excess cost (claimed to be the difference between the rates payable and paid to the claimant as agreed to under the

contracts mutually entered in to and the then prevailing market rates/derived rates). In the earlier part of the Award, it has been held that neither the

mutually agreed rates could be altered unilaterally to the detriment of a party to the contract by one party alone and that too after the works have

been executed, completed project taken over and started being put to use by collecting toll also. As notices supra, the works of the claimant were

said to have been completed as early as on 15.10.2008 and after execution of works was put into commercial use as and from 15.12.2008 and

Toll collection also commenced. The performance related defects liability period of one year also having expired, the exercise undertaken by the

respondent to determine the so called excess cost is opposed to the terms of the contract mutually agreed to an entered into between parties and

totally without the authority of Law and consequently unsustainable. Exhibit R-2 has no legal efficacy and cannot be relied upon as any valid basis

for saddling the claimant with liability for the sum claimed by way of counter-claim. The counter-claim has no basis in law and cannot also be

justified either under the terms of the contract or in equity. The counter claim has no merit of acceptance and is hereby ordered and shall stand

rejected.

Issue No. 9 relates to the question as to what reliefs the parties on either side are entitled to, including the order as to costs. For all the reasons

stated and the findings recorded on the various issues, as set out supra, there shall be an Award on the following terms:

(a) The claimant is entitled to recover a sum of Rs. 1,61,35,558/- as prayed for from the respondent with interest at 12% per annum from

29.12.2008, till date of realization;

(b) The claimant is entitled to recover a sum of Rs. 37,64,220/- as prayed fro from the respondent with interest at 12% per annum from

31.12.2009, till date of realization;

(c) The claimant is not entitled to recover any sum by way of Service Taxes from the respondent and so far as the alleged deduction of excess tax

and remittance is concerned, the claimant is entitled to vindicate its rights in accordance with law, as directed, supra;

(d) The respondent is not entitled to any amounts, claimed by way of counterclaims, and the counter claim shall stand rejected;

(e) So far as costs are concerned, having regard to the peculiar facts and circumstances of the case are concerned, each party shall bear their own

respective costs so far as these Arbitration Proceedings are concerned.

Learned counsel for the petitioner vehemently contends, that the award passed by the Hon''ble Arbitrator suffers from error apparent on the

face of record, as it is against the report of committee constituted by TIDCO, which recorded a positive finding after going through the matter in

detail, that the petitioner had entered into contract with respondent no. 1 at higher rate, which resulted in loss to the company. The Hon''ble

Arbitrator therefore should have accepted the report.

This contention on the face of it is misconceived. The Hon''ble Arbitrator rightly rejected the stand of petitioner, by giving good reasons for

rejecting to reject its stand. It is not disputed, that payment was made to the respondent as per the terms of the contract. It was for the petitioner to

see the rates before entering into the contract with the respondent. Therefore, once the contract was executed to the satisfaction of petitioner, and

petitioner had passed the bills, which were required to be paid to respondent no. 1. Merely because holding company of petitioner formed

different opinion and constituted committee to look into the matter without associating the respondent/Contractor, cannot be the ground to deny

payment to respondent no. 1 or recover the alleged loss, which was said to have been suffered by the petitioner.

The finding of the Hon''ble Arbitrator is based on well settled law, therefore, it cannot be said that the award suffers from error apparent on the

face of record. This plea otherwise also is not available u/s 34 of the Arbitration and Conciliation Act to challenge the award.

The other ground of challenge is that the Hon''ble Arbitrator had wrongly awarded interest. This plea also cannot be accepted. The Hon''ble

Arbitrator under the provisions of the Arbitration Act could grant interest upto 18%, as also under the Interest Act. The Hon''ble Arbitrator rightly

granted interest on principal, found to be payable to the party. The interest of 12% granted by the Hon''ble Arbitrator also cannot be said to be

excessive, which may call for interference by this Court in exercise of power u/s 34 of the Arbitration and Conciliation Act.

No further point was urged. Consequently, finding no merit in this petition, it is ordered to be dismissed. No costs.