Arbitrator Can Award Escalation For Employer-Caused Delay Without Contractual Clause: J&K High Court

On 29 August, the High Court of Jammu & Kashmir and Ladakh held that an Arbitrator can award escalation for delay attributable to the employer even when the contract does not contain a 'Price Escalation Clause'.

Justice Shahzad Azeem upheld an arbitral award of Rs. 21.19 lakh in favour of a contractor, finding that the Arbitrator had based the escalation award on the Department's default in supplying construction material and supported the finding with evidence. The Bench held:

“The absence of a Price Escalation Clause does not, on the Arbitrator's reasoning, bar revision where delay is attributable to the employer.”

The case arose from a contract that the J&K Lakes & Waterways Development Authority (LAWDA) awarded to Mohammad Amin Shah in December 2007 for constructing a sewer line along the Nigeen fringe. The contract, valued at Rs. 90.05 lakh, required completion within 180 days.

Disputes arose after LAWDA allegedly failed to supply the required reinforced cement concrete (RCC) spun pipes within the stipulated time. The contractor claimed that the resulting delay caused additional expenditure towards dewatering, idle labour and machinery, watch and ward, storage and escalation. Landowners subsequently raised objections concerning the land through which the sewer line was to pass, further affecting the work.

The contractor invoked arbitration, following which the Sole Arbitrator awarded Rs. 21,19,439 under various heads.

LAWDA challenged the award under Section 34 of the J&K Arbitration and Conciliation Act, 1997, which permits a Court to set aside an arbitral award on limited grounds. It principally contended that Clauses 21, 23 and 34 of the contract barred claims for idle charges, dewatering and escalation.

Clause 21 provided that no compensation would be payable where work was suspended or abandoned on the directions of the Authority. Clause 23 stipulated that nothing extra would be paid for dewatering, while Clause 34 made the contractor responsible for damage, theft or pilferage of departmental material.

The High Court, however, held that the Arbitrator had not ignored these clauses. Instead, he had interpreted them in the context of the Department's established defaults.

On escalation, Justice Azeem noted that the Arbitrator had rejected the contractor's larger claim and restricted escalation to 4%, relying on the All India Price Index recommendation made by LAWDA's own Assistant Executive Engineer. He described the quantification as conservative and noted that it was based on the Department's contemporaneous recommendation.

Relying on the Supreme Court's decisions in Assam State Electricity Board v. Buildworth Private Limited and K.N. Sathyapalan v. State of Kerala, the Court observed that where an employer's default causes delay and additional expenditure, an Arbitrator can award compensation for the resulting escalation even in the absence of an express escalation clause.

The Bench held that once the Arbitrator had jurisdiction to determine that the employer caused the delay, the Arbitrator could also compensate the contractor for the consequences of that delay, including an increase in prices.

It rejected LAWDA's contention that Clause 21 created an absolute bar. It noted that the clause applied where suspension or abandonment occurred “on the directions of this Authority”. In the present case, no such direction existed and the Arbitrator had found that the stoppage resulted from the Department's omissions.

Similarly, the Court held that Clause 23 could reasonably cover ordinary dewatering contemplated during execution of the work, rather than extraordinary pumping necessitated by the Department's prolonged failure to supply pipes.

On Clause 34, the it held that the provision specifically dealt with departmental material and could not be expanded into a general clause immunising LAWDA from liability for the contractor's own establishment, fire loss or watch-and-ward expenses.

The Bench also reiterated the narrow scope of judicial interference under Section 34. Justice Azeem observed that “the Court under Section 34 does not interpret the contract as a Court of first instance. Its function is supervisory.”

Further, the Court held that where an Arbitrator's interpretation of a contract represents a view that a fair-minded person could reasonably take, the Court cannot substitute its own interpretation merely because another view is possible. It observed that reappraisal of evidence falls outside the scope of Section 34, particularly where the Arbitrator has considered oral evidence, departmental communications and contemporaneous records.

The Bench also noted that the Arbitrator had relied on affidavits that survived cross-examination, expenditure particulars, departmental communications and statements of Departmental witnesses. It also noted that the award did not grant the contractor everything he had claimed. The Arbitrator restricted several heads, declined the claimed 15% compensation and limited escalation to 4%. It therefore rejected LAWDA's contention that the award amounted to a windfall merely because the contractor had completed only about 42% of the work.

Finding that the Arbitrator's conclusions were supported by oral and documentary evidence, and that the interpretation of Clauses 21, 23 and 34 constituted a possible and reasonable view, it found no patent illegality or conflict with public policy.

Accordingly, the High Court dismissed LAWDA's petition and upheld the arbitral award of Rs. 21,19,439 in favour of Mohammad Amin Shah.

Appearances: Mr Shakir Haqqani, Advocate with Mr Aasif Ahmad Wani, Advocate.