Supreme Court directs equitable payment in construction dispute: Rajkamal Builders vs. Ahmedabad Municipal Corporation (2008)

Date of the Judgment: September 17, 2008

Judges: R.V. Raveendran, Lokeshwar Singh Panta

Can a contractor be left unpaid for an extended period due to disputes between statutory bodies? The Supreme Court of India addressed this issue in a case involving Rajkamal Builders and the Ahmedabad Municipal Corporation (AMC), concerning the construction of a bridge across the Sabarmati River. The core dispute revolved around who should bear the liability for additional costs incurred during the project. The bench, comprising Justices R.V. Raveendran and Lokeshwar Singh Panta, delivered the judgment.

Case Background

The Ahmedabad Municipal Corporation (AMC) initiated a project to construct a bridge over the Sabarmati River. To finance this project, AMC sought contributions from various entities, including Ahmedabad Electricity Company (AEC), Oil & Natural Gas Commission (ONGC), and Gujarat State Road Transport Corporation (GSRTC). The estimated cost was ₹11 crores, with the understanding that AMC, AEC, ONGC, and GSRTC would contribute ₹4 crores, ₹1 crore, ₹2 crores, and ₹4 crores, respectively.

It was further agreed that if the cost exceeded ₹11 crores, ONGC and AEC would bear the excess up to ₹1 crore in a 2:1 ratio. AMC appointed AEC as its agent for the construction, and the work was entrusted to Rajkamal Builders, the appellant in this case. The final construction cost amounted to ₹11,38,06,000, with the additional ₹38,06,000 borne by ONGC and AEC as per their agreement.

Timeline

Course of Proceedings

Following the construction, the contractor, Rajkamal Builders, raised disputes concerning their claims, amounting to ₹1,33,36,200. These disputes were then referred to arbitration, with AMC, AEC, ONGC, and GSRTC named as respondents. On June 15, 1999, the arbitrator awarded ₹20,14,860 to the contractor, stipulating that AMC and AEC should pay this amount with a 12% annual interest from the award date until the date of realization.

AEC, aggrieved by the award, filed an application in the City Civil Court, Ahmedabad, under Section 34 of the Arbitration and Conciliation Act, 1996. The City Civil Court, in its judgment dated September 15, 2003, upheld the award, directing the payment of ₹20,14,860 with 12% annual interest to the contractor. However, the trial court modified the liability, stating that AMC was not liable for any amount. Instead, it held AEC liable for one-third of the award amount (₹6,71,620 plus interest) and ONGC liable for two-thirds (₹13,43,240 plus interest).

ONGC, feeling aggrieved by this modification, appealed to the High Court of Gujarat, arguing that the court should not have shifted the liability from AMC to ONGC under Section 34 of the Arbitration and Conciliation Act, 1996. The High Court, in its judgment dated September 27, 2005, allowed the appeal, stating that ONGC could not be held liable for ₹13,43,240 with interest in modification of the arbitrator’s award. The High Court reasoned that the trial court could not have shifted the liability from AMC to ONGC, considering the nature of jurisdiction exercised under Section 34 of the Act and the inapplicability of Section 96 and Order 41 Rule 33 of the Civil Procedure Code.

Legal Framework

This case primarily revolves around the interpretation and application of Section 34 of the Arbitration and Conciliation Act, 1996, which deals with recourse against an arbitral award. The section allows a party to apply to a court to set aside an arbitral award under specific conditions. The High Court also considered the applicability of Section 96 and Order 41 Rule 33 of the Civil Procedure Code (CPC), which relate to the powers of the appellate court.

• Section 34, Arbitration and Conciliation Act, 1996: This section allows parties to challenge an arbitral award in court under certain conditions, such as invalidity of the arbitration agreement, lack of proper notice, or the award being beyond the scope of the submission to arbitration.

Arguments

The contractor’s primary submission was that they were not concerned with which entity, AMC or ONGC, paid the awarded amount, as long as they received it. The contractor’s grievance was that the High Court, in setting aside ONGC’s liability, should have explicitly directed AMC to pay the amount or restored the arbitrator’s original award in full. The contractor feared that the High Court’s judgment might be interpreted to allow AMC to dispute its liability to pay ₹13,43,240 with interest, given the absence of a specific directive to do so.

Issues Framed by the Supreme Court

1. Whether the High Court’s judgment, in setting aside the liability of ONGC, implied a restoration of the arbitrator’s original award, thereby requiring AMC to pay the outstanding amount.
2. How to resolve the dispute between AMC and ONGC regarding who should bear the liability, while ensuring the contractor receives the awarded amount without further delay.

Treatment of the Issue by the Court: “The following table demonstrates as to how the Court decided the issues”

Authorities

The court considered the following authority:

• ONGC vs. CCE-1995 Supp(4) SCC 541 [Supreme Court of India]: This case highlights the mechanism for amicable resolution of disputes between government departments and public sector undertakings through mutual negotiations or the High Powered Committee.

Judgment

What weighed in the mind of the Court?

The Court was primarily concerned with ensuring that the contractor received the payment due to them without further delay. The inter-se dispute between AMC and ONGC was secondary, and the Court used its powers under Article 142 to facilitate a swift resolution for the contractor while leaving the door open for AMC and ONGC to settle their dispute.

Key Takeaways

• Contractors should not suffer due to disputes between statutory bodies.
• Courts can use Article 142 to ensure equitable outcomes and prevent delays in justice.
• Statutory bodies should attempt to resolve disputes through negotiation or mediation before resorting to litigation.

Directions

The Supreme Court directed that:

• The amount due as per the award (₹13,43,240 with interest) shall be paid equally (50% each) by AMC and ONGC to the appellant-contractor within three months from the date of the judgment.
• AMC and ONGC shall each pay a sum of ₹10,000 as costs to the appellant contractor.
• AMC and ONGC shall endeavor to sort out the dispute between themselves as to who is liable, through negotiation or the High Powered Committee.

Development of Law

The judgment reinforces the principle that contractors should not be unduly delayed in receiving payments due to disputes between statutory bodies. It also highlights the Supreme Court’s willingness to use its powers under Article 142 of the Constitution to ensure equitable outcomes and facilitate quicker resolutions.

Conclusion

In the case of Rajkamal Builders vs. Ahmedabad Municipal Corporation, the Supreme Court directed AMC and ONGC to equally share the payment due to the contractor, Rajkamal Builders, thereby ensuring that the contractor was not adversely affected by the dispute between the two statutory bodies. The Court also encouraged AMC and ONGC to resolve their dispute through negotiation or mediation.