An undertaking given by a contractor not to charge more than a certain amount for additional work or escalation can operate as an estoppel against the contractor, preventing it from claiming any amount in excess of the specified amount.

1. The challenge to an arbitral award is on a short question. The State, with a petition littered with its trade mark errors, charges that the respondent contractor was not entitled to any money in excess of an increase of 15 per cent over the contract value, and since the contractor had unequivocally undertaken not to charge any amount over such additional figure of 15 per cent, the award is without basis. The State says that upon the arbitrator holding that the undertaking furnished by way of a letter dated April 17, 1998, did not amount to novation of the contract between the parties, he disregarded the effect of the undertaking. This, the State, asserts resulted in a grievous error of the kind that Section 34 of the Arbitration and Conciliation Act, 1996 permits to be corrected.

2. The contract was for the construction of one or more buildings by the contractor somewhere in Haldia. The State says that the contract was pursuant to a World Bank funded project undertaken by the State. The terms of the contract and its interpretation are not in dispute. Clause 38.2 of the contract provided that upto 15 per cent of the contract value could be allowed as permissible escalation by the concerned engineer; for any claim in excess of such amount the approval of the employer (the petitioner herein) had to be obtained.

3. By a letter dated September 23, 1997 the petitioner wrote to the contractor saying that if the contractor was not confident that the entire cost of the project could be restricted to within the contract value and the additional 15 per cent, the contractor should discontinue some parts of the work undertaken by it. The letter referred to the casting of the roof relating to the lift being abandoned and the further construction of the buildings at the rear portion not being continued above the first floor level. In January, 1998 the contractor wrote back saying that the contractor was confident that the additional expenses, over and above the contract price that would be incurred, would be less than the 15 per cent cap thereon. There are two further letters that are of relevance in the context, including the one written by the contractor on April 17, 1998. By such letter, the contractor said that the proposed total expenditure would be to the tune of Rs.3,20,55,233/-.

4. That implied that the total value of the work done would be within 115 per cent of the contract value since the contract price was Rs.2,79,87,225/- and the 15 per cent permissible additional amount worked out to Rs.41,98,083/-. The second paragraph of the letter is of significance:

“In this connection may we mention that due to non-availability of correct “Data” the exact amount of price adjustment on escalation could not be assessed as yet. However, we do hope that the total expenditure including the extra items and adjustments due to escalation will not exceed beyond (sic., beyond) 15% (fifteen percent) of the Bid price, we do however undertake that in the event of the total expenditure increases beyond 15% of the Bid price (fifteen per cent only) we shall have no claim on the same.”

5. The contractor signed off by hoping that such assurance or undertaking would meet with the petitioner’s requirement and the virtual closure order issued by the petitioner would be lifted.

6. It appears that the time available under the contract for completion of the work was to run out some time in July, 1998. Following a request from the contractor, the petitioner issued a letter on August 19, 1998 extending the tenure till October 6, 1998 on condition that such extension had to be read “in conjunction with the declaration given by you under your letter … dated 17.4.98 and by no means construe (sic., confers) any right on your part to deviate from your contractual obligations.”

7. It is not in dispute that the work was completed by November 20, 1998. By a letter dated January 25, 1999, the contractor claimed that notwithstanding the contractor’s understanding