Holding

The escalation award under the arbitration award applies only to the contractor's tendered rates for work and does not extend to material costs supplied by the department, so the respondent is not entitled to the additional 25% on those materials.

Summary

The Himachal Pradesh Nagar Vikas Pradhikaran (appellant) entered into a construction contract with Mis. Aggarwal & Co. (respondent). An arbitrator awarded the respondent a 25% increase over tendered rates for work completed after the stipulated date due to delay caused by the Executive Engineer. The appellant deducted the cost of cement and steel supplied by the department, arguing that the escalation award did not cover material costs not procured by the contractor, and paid Rs 4,99,307. The respondent claimed an additional Rs 5,81,421, invoking Section 47 CPC, but the High Court overruled the objection and ordered payment. On appeal, the Supreme Court held that the escalation award pertained only to the contractor’s tendered rates for work, not to raw‑material costs supplied by the department, and therefore the respondent was not entitled to the extra amount. The Court set aside the High Court order and allowed the appeal without costs.

Issues considered

Whether the 25% escalation award granted by the arbitrator applies to the cost of cement and steel supplied by the department rather than procured by the contractor.
Whether the High Court was correct in directing payment of the additional amount despite the appellant's objection under Section 47 of the CPC.

Legislation cited

Code of Civil Procedure, 1908s. 47

Subjects

arbitration awardescalation clauseconstruction contractmaterial costCivil Procedure CodeSection 47 CPCaward enforcementdelayaward finality

Judgment

A HIMACHAL PRADESH NAGAR VIKAS PRADHIKARAN
v.
MIS. AGGARWAL & CO.

JANUARY 27, 1997

B [K. RAMASWAMY AND G.T. NANAVATI, JJ.] •
Conttact-Execution of-Escalatio11 charges 011 material-Claimed by
contractor'-He/d : Not e11titled to in view of the fact that the mate1ials were
not procured by the Contractor, but were supplied by the Depmtment and the
C cost of mate1ials w01ked out.

P.M. Paul v. Union of India, [1989] Supp. 1 SCC 368, referred to.

CIVIL APPELLATE JURISDICTION : Civil Appeal No. 635 of
1997.
D
From the Judgment and Order dated 2.5.96 of the Himachal Pradesh
High Court in O.M.P. No. 626/93 in Ex. P. No. 27 of 1993.

Rajesh Srivastava, Ujwal Banerjee and H.K. Puri for the Appellant.
E S.B. Upadhyay for the Respondent.

The following Order of the Court was delivered :

Leave granted.
F
This appeal by special leave arises from the judgment and order
dated May 2, 1996 of the Himachal Pradesh High Court Passed in O.M.P.
No. 626/93 in Ex. P. No. 27/1993. The admitted facts are that the respon-
dent had entered into an agreement with the appellant to execute certain
works pursuant to which there was a dispute which was referred to the
G Arbitrator, on directions of the High Court. The Arbitrator in the award
dated April 25, 1992 stated as under ;

"After considering whole matter submitted to me by both the
parties, both verbally and in writing I have come to this conclusions
H that delay lies on that part of the respondent-Executive Engineer.
582
~·.
'
H.P. NAGAR VIKAS PRADHIKARAN v. AGGARWAL & CO. 583

It is awarded that the plaintiffs shall be paid by the respondent- A
Executive Engineer an increase of 25% over and above their
tendered rates for all works executed by them after the stipulated
'• date of completion i.e. 21.5.89."

The award was made rule of the Court. In implementation of the
award, the appellant worked out the details, as mentioned in the letter No. B
SDA(D)-Acctt-7/93-644-47 dated November 12, 1993 which reads as
under:

"With reference to your letter No. AV/SIM/804-93-94 dated
5.10.1993, I am enclosing herewith a cheque bearing No. 807801 C
dated 12.11.1993 amounting to Rs. 4,99,307 on account of payment
of award announced by the Director which has been made as rule
of court by the Hon'ble H.P. High Court. The details of the
awarded amounts and recoveries due to be made from you are as
under:
Gross amount of the work done after
D
11th R/A Bill i.e. after 21.5.1989 onwards
upto 26th RIA Bill) Rs. 69,78,354.00
Less cost of material i.e. Cement/Steel
supplied by the SDA on which there
has been no increase in the issue E
rates. (-) Rs. 23,25,685.00
Net amount Rs. 46,52,669.00
25% increase of Rs. 46,52669/0 as
awarded by the Arbitrator. Rs. 11,63,167.00 F
'Less 2% I.= Tax on 23,263 on
Rs. 11,63,167 12% S.C. on
1.-Tax Rs. 2,792.00 (-) Rs. 26,055.00
Total Rs. 26,055.00 Rs.11,37,112.00
G
With held on account of recoveries
due to be made from you against
agreement No. 52 of 1987.88. (-) Rs. 6,37,805.00
. Net payable Rs. 4,99,307.00
Please send stamped receipt. H
{
'
584 SUPREME COURT REPORTS [1997] 1 s. C.R.

A Yours faithfully, r-
(Executive Engineer (D),
v
Shimla Development Authority,
Kasumpti, Shirnla-9".

B It is seen from the contents of the letter that the appellant has
deducted only the cost of the material, i.e., cement and steel supplied by
the SDA on which there has been no increase in the issue. rates. After ,#

working out of the details, a sum of Rs. 4,99,307 became due to the
respondent. The appellant calculated the amount actually due and payable
c to the respondent under the award less the income-tax and surcharge etc.
and the balance amount came to be paid. But when the respondent claimed
a further sum of Rs. 5,81,421, the appellant objected thereto under section
47 of the CPC. The High Court over-ruled the objection and directed
payment thereof. Thus, this appeal by special leave.
D
It is submitted by Shri H.K. Puri, learned counsel for the appellant "'
that the enhancement of 25% is relatable to the tendered rates for the
works excuted by the respondent and does not relate to the rates of raw •
materials supplied by the appellant. He also submitted that cement and
'
~

E steel were supplied by the Department at the schedule rates in spite of the
delay in execution of the contract. Thus, escalation in price of raw materials
supplied by the appellant the entire burden was borne by the appellant
and, therefore, no extra payment could have been intended to be made
under the award in respect of those items. Therefore, the High Court was
in
not right in directing payment thereof. We find force the contention. It
F is contended by Shri Upadhyay, learned counsel for the respondent, that
...
when the Arbitrator recorded finding that delay in execution was on
account of the !aches on the part of the Executive Engineer and awarded
15% more'than the agreed normal rate, as per the contract and the award
having been allowed to become final, it is not open to the appellant to deny
G 25% escalation charges for the period. In other words, it amounts to
interference with the award which has attained finality. In support thereof,
the learned counsel relied upon paragraph 12 of the judgrnent in P.M. Paul
>-
v. Union of India, [1989] Supp. 1 SCC 368. Therein, the question was
whether the contractor was entitled to escalated rates due to delay in {
H execution of the award on the part of the Department. As seen, there is '
H.P. NAGAR VIKAS PRADHIKARAN v. AGGARWAL & CO. 585

no dispute on the proposition that when the award has been made award- A
ing escalation charges, necessarily the increased raies of the cost of secur-
ing the material for performance of the contract are required to be
.. . compensated by paying the amount to the extent of the escalated charges .
It is seen that under Clause 10 of the contract, the appellant was required
to supply the material at the rates prevailing as on the date of the execution B
and it was entitled to deduct the same from the amounts payable after the
execution of the contract. In other words, when the iron and cement were
supplied, during the relevant period, even after the expiry of the year for
which th~ award came to be made, necessarily it included the increase in .
rates. It is stated that they did not charge increased rates but the rates
prevailing as on the dates and the ·amount worked out come to Rs.
c
23.25.785. The respondent is not entitled to 25% of the escalated costs in
that behalf. The very object of awarding escalated cost was that the
contractor had secured the material from the open market at the price
prevailing at the relevant time and used the same for execution of the work.
In view of the fact that iron and cement were not procured by the D
respondent during the extended time and actual price for which they were
supplied has been worked out, as detailed earlier, the respondent is not
entitled to 25% more on that material supplied by the Department itself.
Under these circumstances, the High Court was clearly in error in directing
payment of the said amount. E
The appeal is, accordingly, allowed but in the circumstances without
costs.

G.N. Appeal allowed.