IMPORTANT POINT
If the employer is permitted in law to make variations upwards and downwards - even if it be upto a limit beyond which market rates become payable - then the interpretation of the clause must be one which balances the rights of both parties.

Headnote:(i) Arbitration Act, 1940-Section setting aside of award-Ground that arbitrator committed error in construction of clause in agreement and acted without jurisdiction-Plus or minus clause in contract i.e. variation clause-Contract providing that employer could entrust work upto plus/minus 25 and contractor would have to execute same without extra payment or higher rate-If value of variation exceeded 25 of contract price higher rate permitted-Construction of variation clause-Employers stand that 25 to be arrived at by taking into account not overall increase in work i.e. adding up increase in work and deducting therefrom decreases in work-Contractors stand that 25 was to be computed by adding up total variations, both involving increase in work and decrease in work-Arbitrator interpreting variation clause as contended by contractor-Variation clause understood and interpreted by arbitrator reasonably-Construction not vitiated by any serious error of law-If employer is permitted in law to make variation upwards and downwards then interpretation of clause must be one which balances rights of both parties.
       The variation (+) clause in contract permitted increase or decrease permitted increase or decrease in the work upto 25 of the contract price. As to what should happen if the value of the variations exceeded 25 of the contract price was stated in Annexure R attached to the letter of the appellant dated 22.1.85 by which the general and special conditions were modified. It permitted higher rates to be paid if the "variation is + 25 (plus/minus, twenty five percent) of the contract price". The contention of the employer was that exception clause was applicable only to the net difference between the increases and decreases and if it works out to more than 25 of the contract value, then rates can be revised. For example if the contract value is Rs. 50 lakhs, the increases are of a value of Rs. 15 lakhs and the reductions are of a value of Rs. 10 lakhs, the net difference according to the appellant, in the overall contract value is only Rs. 5 lakhs and being 10 of Rs. 50 lakhs, there can be no escalation in rates. The contractor s case was that one has to add up the total variations both plus and minus and hence, in the above example, the value of total variation, both plus and minus amounts to Rs. 25 lakhs which works out to more than 25 ( in fact 50 ) of the contract price and the enhanced rates will be applicable.
       Held : The construction put on this escalation clause by the contractor is proper one. On that basis, this case would come within the exception and there was no error of jurisdiction on the part of the arbitrator. (Para 21)
       The point raises certain important issues concerning integrity of the contract. The concept of variation of the question of work is no doubt a common feature of works contracts. This is because in contracts relating to major works, the estimates of work at the time the tenders are invited can only be approximate. Under the general law of contracts, once the contract is entered into, any clause giving absolute power to one party to override or modify the terms of the contract at his sweet will or to cancel the contract - even if the opposite party is not in breach, - will amount to interfering with the integrity of the contract. There is thus good reason as to why, in modern works contract, a limitation upto 20 (now 25 ) has been put on this power of alteration, both plus and minus. Such a limitation upto 20 or 25 is now imposed under clause 12A of the StandardTerms of CPWD Contracts. (Paras 22, 23 and 24)
       When a contractor bids in a contract, he has to offer reasonable rates for the works which are both difficult to perform and other works which are not that difficult to perform. Every contractor tries to balance his rates in such a manner that the employer may consider his offer reasonable. In that process the contractor tries to get a reasonable margin of profit by balancing the more difficult (and less profitable items) and the less difficult (and more profitable items). His bid is, normally, a package. If the employer is permitted in law to make variations upwards and downwards - even if it be upto a limit beyond which market rates become payable - then the interpretation of the clause must be one which balances the rights of both parties. For example, if the plus and minus variations go beyond 25 and are made in a manner increasing the less profitable items and decreasing the more profitable items, and if the net result of the contract is to be the basis, as contended by the appellant, then it may work out that the contractor could be made to perform a substantially new contract on the same contracted rates. In fact, if the said reasoning of the appellant is accepted and if, in a given case, the value of the increases in unprofitable items is 50 of the contract value and the value of the reductions of the remaining more profitable items is 50 of the contract value, it could still be contended for the appellant that the net variation was nil, even though that was a situation where the contract had been substantially modified and was almost a different contract from the one stipulated. Such an unreasonable construction is to be avoided and was rightly avoided by the arbitrator. (Para 29)
       The additions and decreases in work are, in our opinion, therefore both independent for the purpose of finding out the + 25 variation and have to be pooled together. The arbitrator was right in thinking that the case fell within the exception. Obviously, he must have felt that the plus and minus variations are more than 25 and that the contract rates are no longer binding. His construction of the clause appears to be rational and just and cannot be said to be unreasonable. In the result, the interpretation put on the clause by the arbitrator appears to us to be quite reasonable and very plausible and it cannot therefore be said that the award is vitiated by any error of law affecting his jurisdiction. In fact, the learned District judge found that the total variation - both upwards and downwards was more than 100 of the contract price. The abovesaid clause "+ 25 " was understood by the arbitrator in a reasonable manner as being applicable to a case where the value of the sum total of the additions and deletions exceeded 25 of the contract price. That construction, in our view, cannot be said to be vitiated by any serious error of law. The following are our reasons. (Paras 28, 30 and 31)
       (ii) Arbitration Act, 1940-Section 30-Setting aside of award-Ground that arbitrator exceeded jurisdiction-Escalation clause in contract-Arbitrator awarding 50 of claim of contractor-Non-speaking award-Probe into mental process of arbitrator not permissible-Merely because increase was at a flat rate award cannot be faulted with. (Paras 32 to 35)
       (iii) Contracts-Works contract-Variation, (+) plus/minus, clause in contract-Interpretation of-If employer is permitted under law to make variations upwards and downwards, then interpretation of clause must be one which balances rights of both parties. (Paras 22 to 29)

JUDGMENT

M. Jagannadha Rao, J.-This appeal, which arises out of an award passed under the Indian Arbitration Act, 1940 concerns the interpretation of a variation clause in the contract which allows the appellant, the National Fertilizers Ltd., to issue directions to the contractor varying the extent of the contract work, both upwards and downwards upto 25 . Question is whether (as contended by the appellant) the said 25 is to be arrived at by taking into account the net overall increase in the work i.e. by adding up the increases in work and deducting therefrom the decreases in work or whether (as contended for the respondent-contractor) the 25 was to be computed by adding up the total variations, both involving the increase in the work and the decrease in the work. The importance of the point is that if the variations exceed 25 of the contract price, the contractor is not confined to the contract rates but can claim market rates.

2. The disputes were referred to arbitration and the arbitrator gave a non-speaking award. The arbitrator s award was set aside by the learned District Judge on the ground that the reference was bad. He, however, gave alternative findings accepting the conclusions in the award. As the learned District Judge held the reference was bad, he set aside the award. The contractor appealed to the High Court which by its judgment in Civil Misc. (First) Appeal No.211 of 1991 dates 18.10.94 held the reference was valid and allowed the appeal and directed the award be made Rule of Court. It is against the said judgment that this appeal is preferred.

3. The facts of the case are as follows. Quotations were called by the appellant for works amounting to Rs. 3,39,88,000. It appears that the respondent submitted his quotation which was opened on 12.9.84. His tender was accepted. But, instead of giving him the entire contract, the appellant awarded only 48 of the work of Rs. 3,39,88,000 amounting to Rs. 1,52,94,235, by letter dated 5.11.84. Part I of the work was upto Rs. 94,34,323 and Part II was upto Rs. 94,34,323. Subsequently, letter of intent was issued on 5/6.11.84 and then a work order was issued on 22.1.85. The said letter dated 22.1.85 of the appellant contained the + 25 clause which permitted rates higher than the contract rates to be paid, as an exception. It stated as follows :

"The contract price has been arrived at on the basis of your quoted rates in your tender and the enclosed schedule of quantities, your quoted rates shall hold good for a variation of + 25 (plus/minus twenty five percent) of the contract price stated in this work order, beyond which your quoted rates will be suitably revised subject to mutual agreement."

4. It appears the site was not made available on time and there were lot of disputes between the parties. There was correspondence between the appellant and respondent. The appellant varied the works both upwards and downwards. As, according to the contractor, the sum total of variations went above 25 of the contract value, the contractor asked for higher rates in his letters dated 20.11.86, 8.12.86 and 9.12.86. The final bill was submitted by the contractor on 9.12.86 for Rs. 85,98,705 as detailed in the Annexure A thereto. This plea for extra rates was rejected on 31.12.86 by the appellant stating that the + 25 clause applied to the overall net increase. The letter stated :

"……. no enhancement is justified unless the total contract value of the work has increased or decreased by 25 . Enhancement of rates is therefore not on account of any increase or decrease in the quantity of individual items…….on completion of the entire work, it is excepted that there will not be any variation in the contract value within the limits of + 25 ."

The letter also blamed the contractor for delay in the work.

5. It is not denied that the original date of completion was 30.6.86 and was extended upto 30.10.86. The to

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2000 Supreme(SC) 1657

IMPORTANT POINTIf the employer is permitted in law to make variations upwards and downwards - even if it be upto a limit beyond which market rates become payable - then the interpretation of the clause must be one which balances the rights of both parties.

Cases Referred (10)

IMPORTANT POINT
If the employer is permitted in law to make variations upwards and downwards - even if it be upto a limit beyond which market rates become payable - then the interpretation of the clause must be one which balances the rights of both parties.