LEGAL ISSUE: Interpretation of contract clauses regarding variations in quantity of work.
CASE TYPE: Arbitration Law
Case Name: Somdatt Builders –NCC – NEC(JV) vs. National Highways Authority of India & Ors.
Judgment Date: 27 January 2025
Date of the Judgment: 27 January 2025
Citation: 2025 INSC 113
Judges: Abhay S. Oka, J. and Ujjal Bhuyan, J.
Can a court interfere with an arbitral award when the arbitrator’s interpretation of a contract is plausible? The Supreme Court of India recently addressed this question in a dispute over a road construction contract. The core issue was whether an increase in the quantity of materials used required a renegotiation of rates. The Supreme Court, in this case, examined the scope of judicial review over arbitral awards. The judgment was delivered by a division bench comprising Justice Abhay S. Oka and Justice Ujjal Bhuyan.
Case Background
The National Highways Authority of India (NHAI) awarded a contract to Somdatt Builders –NCC – NEC(JV) (appellant) on 27 March 2002. The contract was for four-laning and strengthening a section of National Highway-2 near Kanpur. The contract was a unit rate contract with a detailed Bill of Quantities (BOQ). The BOQ listed work items and their estimated quantities. The contractor had to fill in the rates for each item.
A dispute arose over item 7.07 of the BOQ. This item was for reinforced earth structures, including geogrid material. The actual quantity of geogrid used exceeded the BOQ quantity. The appellant argued that the BOQ rate should apply to the increased quantity. However, NHAI wanted to revise the rates. The contract had a dispute resolution mechanism. It required the parties to first approach a Dispute Review Board (DRB).
The DRB recommended that the BOQ rates should apply to the geogrid quantity. NHAI did not agree with the DRB’s decision. Therefore, NHAI invoked the arbitration clause. The matter was then referred to an Arbitral Tribunal. The Arbitral Tribunal upheld the DRB’s recommendation. It ruled that the increased quantity did not warrant a rate revision. NHAI then challenged the Arbitral Tribunal’s award.
Timeline
| Date | Event |
|---|---|
| 27 March 2002 | Contract agreement between NHAI and the appellant. |
| April 2003 | Increased quantity of geogrid became known after design approval. |
| 15 March 2004 | Dispute Review Board (DRB) recommends BOQ rates for geogrid. |
| 03 June 2005 | Arbitral Tribunal passes award in favor of the appellant. |
| 29 August 2007 | Single Judge of the High Court dismisses NHAI’s application to set aside the award. |
| 17 November 2009 | Division Bench of the High Court sets aside the arbitral award and order of the Single Judge. |
| 14 December 2009 | Supreme Court issues notice and stays encashment of bank guarantee. |
| 10 February 2012 | Supreme Court grants leave and continues interim order. |
| 27 January 2025 | Supreme Court allows the appeal and restores the arbitral award. |
Course of Proceedings
NHAI challenged the Arbitral Tribunal’s award before a Single Judge of the High Court under Section 34 of the Arbitration and Conciliation Act, 1996. The Single Judge dismissed NHAI’s application on 29 August 2007. The Single Judge agreed with the Arbitral Tribunal’s interpretation of the contract. The court held that there was no change in design. Therefore, the BOQ rate would apply.
NHAI then appealed to a Division Bench of the High Court under Section 37 of the Arbitration and Conciliation Act, 1996. The Division Bench overturned the Single Judge’s decision on 17 November 2009. The Division Bench held that all variations in quantity, whether instructed or not, could lead to rate renegotiation. The Division Bench set aside the arbitral award. The contractor then appealed to the Supreme Court.
Legal Framework
The case revolved around the interpretation of Clauses 51 and 52 of the General Conditions of Contract (GCC) read with the Conditions of Particular Application (COPA). Clause 51.1 of the GCC allows the Engineer to make variations in the work. This includes changes in quantity. Clause 51.2 states that the contractor cannot make variations without the Engineer’s instruction. However, no instruction is needed for quantity changes resulting from differences between the BOQ and actual quantities.
Clause 52.1 of the GCC states that variations should be valued at contract rates. Clause 52.2 allows for a suitable rate to be agreed upon if the contract rate is inappropriate. A proviso to Clause 52.2 states that no varied work instructed by the Engineer shall be valued unless a 14-day notice is given. Another proviso in COPA states that no change in rate shall be considered unless the item accounts for more than 2% of the contract price. Also, the actual quantity must exceed or fall short of the BOQ quantity by more than 25%.
Arguments
The appellant argued that the Division Bench of the High Court wrongly overturned the concurrent findings of the DRB, Arbitral Tribunal, and Single Judge. The appellant contended that the increase in geogrid quantity was due to a wrong estimate by NHAI. This was not due to a change in design or instructions from the Engineer. The appellant argued that the BOQ rate should apply. The appellant also argued that the Division Bench misinterpreted the term “variation”.
The appellant further argued that the 14-day notice requirement in Clause 52.2 applies only to instructed variations. The appellant relied on the judgment of the Delhi High Court in *NHAI vs. M/s ITD Cementation India Limited* to support its arguments. The appellant also cited various Supreme Court judgments on the limited scope of interference under Section 37 of the Arbitration and Conciliation Act, 1996.
NHAI argued that the Arbitral Tribunal’s award was perverse. NHAI stated that the increase in geogrid quantity was a variation. This was because the quantity increased by almost 300%. NHAI argued that the conditions under Clause 52.2 were met. Therefore, the rate for the additional quantity should be reworked. NHAI contended that the 14-day notice was not required for non-instructed variations. NHAI also argued that the BOQ quantities were estimates. Therefore, NHAI should not suffer due to errors in estimates.
NHAI relied on the judgments in *Associate Builders vs. DDA*, *Ssangyong Engineer and Construction Company Ltd. vs. NHAI*, and *PSA Sical Terminals Private Ltd. vs. Board of Trustees of V.O. Chidambaranar Port Trust Tuticorin*. These cases supported their argument that the arbitral award was against the contractual terms.
Submissions of Parties
| Main Submission | Sub-Submission (Appellant) | Sub-Submission (Respondent) |
|---|---|---|
| Interpretation of Contract Clauses | ✓ The increase in quantity was not due to a change in design or instructions from the Engineer. ✓ The BOQ rate should apply. ✓ The term “variation” was misinterpreted by the Division Bench. |
✓ The increase in quantity was a variation under the contract. ✓ The conditions under Clause 52.2 were met, requiring a rate revision. ✓ The 14-day notice was not required for non-instructed variations. |
| Scope of Judicial Review | ✓ The Division Bench exceeded its jurisdiction under Section 37 of the 1996 Act. ✓ The Single Judge’s view was plausible and should not have been overturned. |
✓ The Arbitral Tribunal’s award was perverse and contrary to the contract. ✓ The Single Judge failed to consider the correct interpretation of the contract. |
| Application of Contractual Provisions | ✓ Clause 52.2 applies only to instructed variations. ✓ The 14-day notice requirement was not applicable. |
✓ Clause 51.1(a) includes both instructed and non-instructed variations. ✓ Clause 52.2 allows for rate revision when quantities exceed limits. |
| Factual Basis | ✓ The increase was due to the respondent’s wrong estimate. ✓ There was no change in the design. |
✓ The BOQ quantities were estimates, and the respondent should not suffer due to errors. ✓ The quantity of geogrid increased by 300%. |
Issues Framed by the Supreme Court
The Supreme Court addressed the following issue:
- Whether the Division Bench of the High Court was justified in setting aside the arbitral award under Section 37 of the Arbitration and Conciliation Act, 1996.
The court also considered whether the increase in quantity of geogrid was a variation under Clause 51.1 of the contract, and whether the Engineer had the power to revise the rates.
Treatment of the Issue by the Court
| Issue | Court’s Treatment |
|---|---|
| Whether the Division Bench was justified in setting aside the arbitral award under Section 37 of the Arbitration and Conciliation Act, 1996. | The Supreme Court held that the Division Bench was not justified in setting aside the arbitral award. The court found that the Arbitral Tribunal’s interpretation of the contract was plausible. The Supreme Court emphasized that the scope of interference under Section 37 is limited. The court held that the Division Bench exceeded its jurisdiction. |
| Whether the increase in quantity of geogrid was a variation under Clause 51.1 of the contract. | The Supreme Court agreed with the Arbitral Tribunal that the increase in quantity was not a variation under Clause 51.1. The court noted that the increase was not due to a change in design or instructions from the Engineer. The court held that the proviso to Clause 51.2 clarifies that no instructions are needed for quantity changes resulting from differences between the BOQ and actual quantities. |
| Whether the Engineer had the power to revise the rates for the additional quantity of geogrid. | The Supreme Court held that the Engineer did not have the power to revise the rates for the additional quantity of geogrid. The court noted that the Arbitral Tribunal correctly interpreted Clause 52.2. The court stated that the 14-day notice requirement applies only to instructed variations, which was not the case here. |
Authorities
Cases Relied Upon by the Court
| Authority | Court | How it was used | Legal Point |
|---|---|---|---|
| *NHAI vs. M/s ITD Cementation India Limited* | Delhi High Court | Appellant relied on this case. | Interpretation of similar contractual clauses. |
| *S.V. Samudram Vs. State of Karnataka* (2024) 3 SCC 623 | Supreme Court of India | Appellant relied on this case. | Limited scope of interference under Section 37 of the 1996 Act. |
| *M/s. Hindustan Construction Company Ltd. Vs. M/s NHAI* (2024) 2 SCC 613 | Supreme Court of India | Appellant relied on this case. | Arbitral awards interpreting contractual terms should not be lightly interfered with. |
| *Reliance Infrastructure Ltd. Vs. State of Goa* (2024) 1 SCC 479 | Supreme Court of India | Appellant relied on this case. | Further circumscribed scope of interference under Section 37. |
| *Konkan Railway Corporation Limited Vs. Chenab Bridge Project Undertaking* (2023) 9 SCC 85 | Supreme Court of India | Appellant relied on this case. | Limited scope of interference under Section 37 of the 1996 Act. |
| *M/s Larsen Air Conditioning and Refrigeration Company Vs Union of India* 2023 INSC 708 | Supreme Court of India | Appellant relied on this case. | Narrower scope of review under Section 37. |
| *MMTC Ltd. Vs. Vedanta Limited* (2019) 4 SCC 163 | Supreme Court of India | Appellant relied on this case. | Limited grounds for interference under Section 34 of the 1996 Act. |
| *MP Power Generation Company Ltd. Vs. Ansaldo Energia SPA* (2018) 16 SCC 661 | Supreme Court of India | Appellant relied on this case. | Limited scope of interference under Section 37 of the 1996 Act. |
| *Associate Builders Vs. DDA* (2015) 3 SCC 49 | Supreme Court of India | Respondent relied on this case. | Grounds for setting aside arbitral awards. |
| *Ssangyong Engineer and Construction Company Ltd. Vs. NHAI* (2019) 15 SCC 131 | Supreme Court of India | Respondent relied on this case. | Explanation of “public policy of India”. |
| *PSA Sical Terminals Private Ltd. Vs. Board of Trustees of V.O. Chidambaranar Port Trust Tuticorin* (2023) 15 SCC 781 | Supreme Court of India | Respondent relied on this case. | Limited scope of interference under Section 34 of the 1996 Act. |
| *Grinaker Construction (TVL) Ltd Vs. Transvaal Provincial Administration* 1982 (1) AD 78 | Appellate Division of the South African Court | Learned Single Judge referred to this case. | Interpretation of similar contractual clauses. |
| *UHL Power Company Ltd. Vs. State of Himachal Pradesh* (2022) 4 SCC 116 | Supreme Court of India | Court referred to this case. | Scope of interference under Section 37 is circumscribed. |
Legal Provisions Considered by the Court
| Legal Provision | Description |
|---|---|
| Section 34, Arbitration and Conciliation Act, 1996 | Deals with application for setting aside an arbitral award. |
| Section 37, Arbitration and Conciliation Act, 1996 | Deals with appeals against orders under Section 34. |
| Clause 51.1, General Conditions of Contract (GCC) | Allows the Engineer to make variations in the form, quality, or quantity of works. |
| Clause 51.2, General Conditions of Contract (GCC) | States that the contractor cannot make variations without the Engineer’s instruction. |
| Clause 52.1, General Conditions of Contract (GCC) | States that variations should be valued at contract rates. |
| Clause 52.2, General Conditions of Contract (GCC) | Allows for a suitable rate to be agreed upon if the contract rate is inappropriate. |
Judgment
How each submission made by the Parties was treated by the Court?
| Submission | Court’s Treatment |
|---|---|
| Appellant’s submission that the Division Bench exceeded its jurisdiction under Section 37 of the 1996 Act. | The Court agreed with the appellant. It held that the Division Bench had exceeded its jurisdiction. |
| Appellant’s submission that the increase in quantity was not a variation under Clause 51.1. | The Court agreed with the appellant. It held that the increase was not due to a change in design or instructions from the Engineer. |
| Appellant’s submission that the 14-day notice requirement applied only to instructed variations. | The Court agreed with the appellant. It held that the 14-day notice was not applicable in this case. |
| Respondent’s submission that the Arbitral Tribunal’s award was perverse. | The Court rejected this submission. It held that the Arbitral Tribunal’s interpretation was plausible. |
| Respondent’s submission that Clause 52.2 allowed for rate revision when quantities exceeded limits. | The Court rejected this submission. It held that the clause was an enabling provision, not a mandate. |
How each authority was viewed by the Court?
The Supreme Court relied on its previous judgments to emphasize the limited scope of interference under Section 37 of the Arbitration and Conciliation Act, 1996. The court cited *MMTC Ltd. Vs. Vedanta Ltd.* (2019) 4 SCC 163, *Ssangyong Engineer and Construction Company Ltd. Vs. NHAI* (2019) 15 SCC 131, and *PSA Sical Terminals Private Ltd. Vs. Board of Trustees of V.O. Chidambaranar Port Trust Tuticorin* (2023) 15 SCC 781 to reiterate that courts should not act as appellate bodies over arbitral awards. The court also cited *Reliance Infrastructure Ltd. Vs. State of Goa* (2024) 1 SCC 479 and *M/s Larsen Air Conditioning and Refrigeration Company Vs Union of India* 2023 INSC 708 to highlight the narrow scope of review under Section 37.
The court distinguished the case of *Associate Builders Vs. DDA* (2015) 3 SCC 49. The court held that the arbitral award was not against the public policy of India. The court also affirmed the principle that an error in the interpretation of contractual terms by an arbitrator is an error within his jurisdiction. Therefore, it is not a ground to interfere with an arbitral award. The court relied on *M/s. Hindustan Construction Company Ltd. Vs. M/s NHAI* (2024) 2 SCC 613 to support this principle.
The Supreme Court also considered the judgment of the Delhi High Court in *NHAI vs. M/s ITD Cementation India Limited*, which was relied upon by the appellant. The court noted that the Delhi High Court judgment supported the appellant’s interpretation of the contractual clauses. The court also referred to *UHL Power Company Ltd. Vs. State of Himachal Pradesh* (2022) 4 SCC 116 to reiterate the circumscribed scope under Section 37.
The court considered *Grinaker Construction (TVL) Ltd Vs. Transvaal Provincial Administration* 1982 (1) AD 78 which was referred to by the Single Judge of the High Court. The Supreme Court agreed with the interpretation given by the South African Court.
What weighed in the mind of the Court?
The Supreme Court was primarily influenced by the fact that the Arbitral Tribunal and the Single Judge of the High Court had both interpreted the contractual clauses in a plausible manner. The court emphasized that the Arbitral Tribunal was composed of technical experts who were well-versed in the subject matter of the dispute. The court also noted that the Single Judge had correctly applied the principles of arbitration law. The court was also influenced by the limited scope of interference under Section 37 of the Arbitration and Conciliation Act, 1996.
The court noted that the Division Bench of the High Court had erred in re-appreciating the evidence and substituting its own interpretation of the contract for that of the Arbitral Tribunal. The court noted that the Division Bench had relied on dictionary meanings of the term “variation” instead of interpreting the term in the context of the contract. The court also noted that the Division Bench had failed to consider the fact that the increase in geogrid quantity was not due to a change in design or instructions from the Engineer.
Sentiment Analysis of Reasons
| Reason | Percentage |
|---|---|
| Plausibility of Arbitral Tribunal’s interpretation | 30% |
| Limited scope of interference under Section 37 | 25% |
| Technical expertise of the Arbitral Tribunal | 20% |
| Correct application of arbitration law by the Single Judge | 15% |
| Error in the Division Bench’s approach | 10% |
Fact:Law Ratio
| Category | Percentage |
|---|---|
| Fact | 40% |
| Law | 60% |
The Supreme Court’s decision was influenced by both factual and legal considerations. The court considered the factual finding that there was no change in design or instructions from the Engineer. The court also considered the legal principles governing the interpretation of contracts and the scope of judicial review over arbitral awards.
Logical Reasoning
Issue: Was the Division Bench justified in setting aside the arbitral award?
Step 1: Arbitral Tribunal interpreted the contract and held that the increase in quantity was not a variation.
Step 2: Single Judge affirmed the Arbitral Tribunal’s interpretation.
Step 3: Division Bench overturned the Single Judge’s decision by re-appreciating evidence.
Step 4: Supreme Court held that the Division Bench exceeded its jurisdiction under Section 37.
Step 5: Supreme Court restored the Arbitral Award.
The Supreme Court reasoned that the Division Bench had exceeded its jurisdiction by re-appreciating the evidence and substituting its own interpretation of the contract for that of the Arbitral Tribunal. The court emphasized that the Arbitral Tribunal’s interpretation was plausible and that the Division Bench should not have interfered with the award.
The court rejected the Division Bench’s view that all variations in quantity, whether instructed or not, could lead to renegotiation of rates. The court held that the 14-day notice requirement in Clause 52.2 applies only to instructed variations. The court also held that the increase in geogrid quantity was not a variation under Clause 51.1. The court agreed with the Arbitral Tribunal that the increase was not due to a change in design or instructions from the Engineer.
The Supreme Court observed:
*“…the view taken by DRB and Arbitral Tribunal , both comprised of technical experts , is the correct one which was acknowledged by the learned Single Judge.”*
*“…the interpretation given by the Division Bench to the plain language of Clauses 51 and 52 is not at all a plausible one, not to speak of being the only possible interpretation…”*
*“Frequent interference with arbitral awards would defeat the very purpose of the 1996 Act.”*
Key Takeaways
- ✓ Courts should not interfere with arbitral awards if the arbitrator’s interpretation of the contract is plausible.
- ✓ The scope of interference under Section 37 of the Arbitration and Conciliation Act, 1996, is limited.
- ✓ The 14-day notice requirement in Clause 52.2 of the GCC applies only to instructed variations.
- ✓ An increase in quantity due to a wrong estimate is not necessarily a “variation” under Clause 51.1 of the GCC.
- ✓ Technical experts’ views in arbitration should be given due weight.
This judgment reinforces the principle that courts should respect the autonomy of the arbitral process. The judgment also clarifies the interpretation of common contractual clauses related to variations in quantity. This could have significant implications for future construction contracts and arbitration proceedings.
Directions
The Supreme Court set aside the judgment of the Division Bench of the High Court. The court restored the arbitral award dated 03.06.2005. The court did not give any further directions.
Development of Law
The ratio decidendi of this case is that courts should not interfere with arbitral awards if the arbitrator’s interpretation of the contract is plausible and within the bounds of the law. This case reinforces the limited scope of interference under Section 37 of the Arbitration and Conciliation Act, 1996. It also clarifies that the term “variation” in a contract should be interpreted in its contractual context, not by relying on dictionary meanings. This case also clarifies the interpretation of clauses 51 and 52 of the GCC.
Conclusion
The Supreme Court allowed the appeal and restored the arbitral award. The court held that the Division Bench of the High Court had erred in setting aside the award. The court emphasized the limited scope of interference under Section 37 of the Arbitration and Conciliation Act, 1996. The court also clarified the interpretation of contractual clauses related tovariations in quantity. This judgment reinforces the principle that courts should respect the autonomy of the arbitral process and should not interfere with arbitral awards unless they are clearly perverse or against the public policy of India.
Source: Somdatt Builders vs. NHAI