(Prayer: Original Petition is filed under Section 34 of the Arbitration and Conciliation Act, 1996 to set aside the Award passed on 26.03.2018 and Supplementary Award passed on 18.05.2018 and to order costs to the Petitioner.)
1. The respondent in the arbitration is the Petitioner herein. The dispute arises out of a contract for the construction of a two lane concrete road connecting the main gate road and the west gate road within the premises of the Petitioner, Kamarajar Port Limited. The Respondent was the successful bidder pursuant to the tender and the total contract value was Rs.12,45,13,136/-. The period of contract was 18 months from the date of commencement, i.e. from 28.10.2014 to 27.04.2016. The Petitioner made recoveries from RA Bills 10 to 13 (final bill) in respect of alleged deficiency in quality. Meanwhile, a substantial portion of the work was completed on 26.04.2016. Shortly thereafter, by letters dated 02.05.2016, 04.06.2016 and 01.07.2016, the Petitioner insisted on conducting core tests and the Respondent refused on the ground that such tests were conducted satisfactorily during the execution period. In these circumstances, the Petitioner conducted the core tests and informed the Respondent by letter dated 22.11.2016 that the core tests established that there was deficiency in quality. Therefore, a dispute ensued and the Respondent invoked the arbitration clause by notice dated 12.08.2016. In the Arbitration, the Respondent made 12 claims towards payment of with held amounts, expenditure incurred in conducting core tests, additional work claims, release of performance of bank guarantee and interest claims. The Petitioner filed a statement of defence and a statement of counter claim. In the statement of counter claim, the Petitioner made 8 counter claims for an aggregate sum of Rs.13,62,12,146/-. Upon completion of pleadings, the learned Arbitrator framed 11 issues (Paragraph 7 of the Award). Thereafter, the Petitioner adduced oral evidence through its Resident Engineer but the Respondent did not adduce any oral evidence. The documentary evidence was in the form of Exhibits C-1 to C-50, as regards the Respondent, and Exhibits R-1 to R-103 as regards the Petitioner. Thereafter, the learned Arbitrator pronounced the Arbitral Award dated 26.03.2018 (the Award). In the said Award, the Petitioner was directed to pay a sum of Rs.1,43,18,479/- towards the amount retained in I.P.C. Nos.1 to 12 with interest thereon at 9% per annum from 08.02.2017 till the date of payment; a sum of Rs.1,00,000/- towards the expenses incurred by the Respondent for conducting core test with interest thereon at 9% per annum from 08.02.2017 till the date of payment; and a declaration was made that the performance bank guarantee for Rs.62,25,657/- is not liable to be enforced by the Petitioner and that the original bank guarantee shall be returned to the Central Bank of India, Egmore Branch, Chennai. All the other claims of the Respondent were rejected and all the counter claims of the Petitioner were also rejected.
2. Subsequently, both parties filed Applications under Section 33 of the Arbitration Act, whereby the Petitioner requested the Arbitral Tribunal to clarify as to whether the Respondent is bound to honour the agreement conditions and rectify the defects in work whereas the Respondent filed an Application claiming an additional sum of Rs.73,59,614/-. By Supplementary Award dated 18.05.2018, a further sum of Rs.66,90,000/- was directed to be paid by the Petitioner in respect of claim No.6 with interest thereon at 12% per annum from the date of Award. The said Awards are impugned herein under Section 34 of the Arbitration and Conciliation Act, 1996(the Arbitration Act).
3. I heard the learned Additional Solicitor General on behalf of the Petitioner and Mr.Amalraj, the learned counsel appearing on behalf of the Respondent.
4. The learned ASG submitted that the project pertains to the construction of a two lane concrete road within the premises of the Petitioner Port. He further submitted that the original contract period was 18 months from 24.10.2014 but the work was completed on 26.04.2016 after extension was granted. He further submitted that recoveries were made from IPC/RA Bills Nos.10,11 and 12 and from the final bill, namely, RA Bill 13. As to the reason for the deduction, he submitted that the concrete road was required to have a minimum compressive strength of 40 Mpa whereas, upon conducting core tests, it was found that it was consistently below 40 Mpa. In this connection, he referred to Ex.R-55(Pages 292 to 333 of additional Typed set 1), which is a series of core test certificates issued by the National Test House, Taramani, Chennai. By referring to these test certificates, which were issued in September 2016, he pointed out that none of the samples satisfied the requisite compressive strength. He also referred to the concrete core test results, which were submitted by the Highways Research Station, Chennai, on 04.10.2016 and pointed out that the said results (Ex.R-79 Pages 505 and 506 of Additional typed set Volume I) also show that the compressive strength is consistently much lower than the requisite 40 Mpa. After referring to the above test results, he referred to Paragraph 24 of the Award wherein the learned Arbitrator recorded as under:
“Though there is an attempt on the part of the Respondent to produce number of Exhibits to demonstrate its allegation of defect, it would be relevant and sufficient, if we examine the deposition of R.W.1 in this respect. It is also to be pointed out that till the claimant issued termination notice and approached the Hon’ble High Court, no such allegation emerged or alleged by Respondent and no action at all had been taken by the Respondent alleging violation of contractual stipulation or the work executed being sub-standard or defective.”
By referring to the above finding, the learned ASG submitted that the said finding was arrived at by completely disregarding Ex.R-55 and Ex.R79 which established beyond doubt that the work of the Respondent was defective. Therefore, he submitted that the Award of the learned Arbitrator is liable to be set aside.
5. In response, Mr.Amalraj, pointed out that the Respondent completed the work, substantially, within the contract period and that the minor, incomplete portion could not be completed on account of prevention by the Petitioner. In order to establish this submission, he referred to the completed construction programme. He also referred to the answers of RW-1 to questions 85 and 86 so as to establish that the road was opened to traffic in April 2016. He further referred to a letter from the Petitioner to M/s.Adani Ennore Container Terminal Private Limited on 02.07.2016(Page 33 of the Respondent type set of papers) to establish that the work front had not been cleared by the said Adani Ennore Container Terminal Private Limited and that the nil clearance of the work front was cited by the Respondent as a hindrance for the completion of work. In this connection, he also referred to the answer to questions 77 to 83 wherein RW-1 admitted that there were hindrances and the work was not completed because of such hindrances.
6. With regard to the allegation of the Petitioner that the work of the Respondent did not satisfy quality parameters, he contended that the said allegation is completely false. In order to corroborate the submission, he pointed out that 528 cube tests were carried out successfully, as evidenced by the results at pages 1 to 218 of Volume – III. He also pointed out that the said test results were counter signed not only by the contractor but also by the Project Management Consultant. According to the learned counsel, only three samples failed the cube test and that if the cube test results are unsuccessful, the contract envisages that core compression tests should be carried out. Consequently, he submitted that about 12 core compression tests were carried out and that the result thereof is contained in the test report dated 02.04.2016, which is at page 388 of Volume – III. By referring to the said test report, he pointed out that all the 12 samples fulfilled the requirement with regard to the core compressive strength. Consequently, he submitted that a letter dated 25.04.2016 (Page 347 of Volume – III) was submitted by the Respondent citing the successful core testing and requesting for the release of the balance 25% payment towards IPC No.2. He, thereafter, referred to the Award at Pages 88 and 89, wherein the issues are set out before turning to the findings at Pages 97 and 98 with regard to the requirements of the contract on the issue of quality testing. He pointed out as to how the Arbitral Tribunal set out the contractual requirements with regard to quality testing and, thereafter, recorded the finding at Paragraph 22 of the Award that Exhibit C-19 dated 26.04.2016 establishes that core testing was completed satisfactorily. He also pointed out as to how the learned Arbitrator adverted to the relevant cross examination of RW-1, in this regard, wherein RW-1 conceded that the cube test and core tests results during the contract period were satisfactory.
7. As regards the photographs that were produced by the Petitioner so as to establish that the work was defective, he submitted that the said photographs were taken immediately after the shuttering was removed and that, therefore, it conveys a distorted picture. In response to a question as to whether the contract contains a defect liability period, he submitted that the contract does stipulate a defect liability period of 12 months but the said defect liability period had expired.
8. By way of rejoinder submissions, the learned ASG submitted that the defect liability period, as per clause 22 of the agreement, is 12 months from the certified date of completion. He further submitted that the admitted position is that the Petitioner and the PMC insisted on conducting core tests during the defect liability period and that this is admitted by the Respondent in Paragraph 26 of the statement of claim. He also pointed out that the Petitioner made the request for the core tests during the said defect liability period because the test reports of the cube tests that were carried out on 23.12.2015 and 26.12.2015 were not satisfactory. By referring to paragraph 17(a) of the statement of defence, he pointed out that the PMC informed the Petitioner about the failed cube test by letter dated 30.12.2015 (Ex.R41). He also pointed out as to how the Managing Director of the Respondent misbehaved when the said letter dated 30.12.2015 was attempted to be served on him. He also referred to the subsequent letters dated 05.01.2016, 06.01.2016 and 08.01.2016 (Exs.R-43 to R-45) regarding discrepancies in quality. He also referred to clear copies of the photographs so as to establish that the workmanship of the Respondent was defective.
9. By way of a brief sur-rejoinder, the learned counsel for the Respondent submitted that it is the admitted position that the road is currently being put to use and that no defect rectification was actually carried out by the Petitioner. Consequently, he submitted, in conclusion, that no grounds have been made for interfering with the Award.
10. The records were examined and the oral submissions of both sides were considered carefully. The principal issue that is required to be determined is whether the work of the Respondent was defective and whether the Respondent was contractually obligated to attend to such defects. More importantly, it is necessary to examine whether the Award is liable to be interfered with under Section 34 of the Arbitration Act. In this case, it is the admitted position that the original contract period is 18 months from the date of commencement, namely, 24.10.2014. Accordingly, the original contract period would end in April 2016. It is also the admitted position that the contract contains a defect liability clause. The said defect liability clause reads as under:-
22. DEFECTS LIABILITY:
22.1 Defects Liability Period
The contractor shall be responsible to make good and remedy at his own expense within the period as may be stipulated by the Engineer, any defects which may develop or may be noticed before the expiry of the period i.e. twelve (12) months from the certified date of completion and intimation of which has been sent to the contractor within seven days of the expiry of the said period by a letter sent by hand delivery or by registered post.
22.2 Default of the contractor in compliance:
In case of default on the part of the contractor in carrying out such order, the Employer shall be entitled to employ and pay other persons to carry out the same and all expenses consequent thereon or incidentals thereto shall be borne by the contractor and shall be recoverable from him by the employer or may be deducted by the Employer from any moneys due or which may become due to the contractor. The Port also reserves the right, to encash the Bank guarantee deposited in the Port favour towards Performance Security Deposit for recovering the dues, claims, charges etc., payable to the Port by the Contractor.
22.3. Cost of Remedying Defects.
During the course of the execution of the contract, if any damage is caused to the Employer’s properties by the contractor, the same shall be rectified by the Contractor at his own cost of the satisfaction of the Engineer within a reasonable time as specified by the Engineer.
22.4. Contractor’s failure to carry out the rectification of damages caused to the Employer’s Property.
In case of default on the part of the Contractor in carrying out such rectification of damages to the Employer’s properties within a reasonable time, the Employer shall be entitled to employ and pay other persons to carry out the same and if such Work is work which, in the opinion of the Engineer, the Contractor was liable to do at his own cost under the Contract, then all costs consequent thereon or incidental thereto shall, after due consultation with the Contractor, be determined by the Engineer and shall be recoverable from the Contractor by the Engineer, and may be deducted by the Employer from any monies due or to become due to the Contractor and the Engineer shall notify the Contractor accordingly. The Port also reserves the right, to encash the Bank Guarantee deposited in the Port favour towards Performance Security Deposit for recovering the dues, claims, charges etc., payable to the Port by the Contractor.
11. From the above, it is evident that the defect liability period is a 12 month period from the certified date of completion. In this case, the work was completed in April 2016 except for a minor portion and the road appears to have been put to use thereafter. However, the completion certificate was not issued in view of the defective workmanship. Nevertheless, even if the defect liability period is reckoned from May 2016, it would extend up to 30.04.2017. Therefore, it is necessary to examine whether the defects were noticed by the Petitioner within the said period and whether the said defects were brought to the notice of the Respondent. The case of the Respondent is that the work was satisfactorily completed by April 2016 except with regard to the unavailable work front, for which the Respondent is not responsible. As regards quality, the submission is that 528 successful cube tests were carried out during the course of execution of work and that only 3 cube tests were not successful. It is also the case of the Respondent that the contract specifies the mechanism for dealing with unsuccessful cube tests by providing that, in such eventuality, core tests would be conducted. In this case, such core tests were also successfully conducted as evidenced by the core test results at page 338 of Volume – III. Therefore, it is the Respondent’s case that the alleged defects in quality are no more than an after thought. By contrast, the Petitioner’s case is that the defects in workmanship were noticed in December 2015, i.e. during the original contract period, and notified by the PMC to the Respondent. However, the Respondent refused to even receive the letter and further failed to rectify the defects. It is further contended that the Respondent was called upon to participate in the conduct of core tests in April 2016 and that the Respondent refused to cooperate. Therefore, the Petitioner was constrained to carry out such core tests independently. The results of the said core tests are the sheet anchor of the case of the Petitioner and the Petitioner has relied, mainly, on two exhibits, namely, Ex.R-55 series, which are the test certificates issued by the National Test House, Tharamani, Chennai(Pages 292 to 333 of Volume – I), and Exhibit R-79, which is at Page 505 of Volume – I. The latter test results have been provided by the Highways Research Station, Chennai. From the above documents, it is clear that the test results were published in September and October 2016 respectively. From the foregoing, it is clear that the tests were carried out during the defect liability period. It is also clear that this evidence was placed before the learned Arbitrator. However, the learned Arbitrator disregarded such evidence and decided the case entirely on the basis of the documentary evidence and the oral evidence of RW-1 with regard to the results of cube tests and core tests that were carried out during the contract period as opposed to the defect liability period. This is evident from a conjoint reading of paragraphs 22 and 24 of the Award. In fact, it becomes abundantly clear from the portion of paragraph 24, which is extracted at Paragraph 4 supra of this order, that the learned Arbitrator completely disregarded both Exs.R-55 and R-79. Instead, Ex.C19, i.e. the core test results dated 26.04.2016 and the oral evidence of RW-1 were relied upon.
12. Thus, it is clear that vital evidence was disregarded. In this case, such vital evidence goes to the root of the matter. Consequently, a case is made out to interfere with the Award both on the ground that the learned Arbitrator disregarded Clause 22 of the contract, namely, the defect liability clause and Exs.R55 and R79 and also the letters whereby the Respondent was called upon to participate in the core tests. In effect, a case is made out to set aside the Award for disregarding vital evidence and disregarding the contract. In the ASSOCIATE BUILDERS case, the Hon’ble Supreme Court held at Paragraph 31 that disregarding vital evidence would amount to a violation of public policy and in paragraph 42 of Ssyangyong Engineering & Construction Co. Ltd. v. NHAI 2019 SCC Online SC 677, it was held that it may not amount to a violation of pu
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blic policy under the amended legal regime but such an award would be patently illegal under Section 34(2A), which was introduced by the Arbitration and Conciliation (Amendment) Act, 2015. Given the fact that the Arbitral Award could be interfered with for patent illegality even after the amendments that were made with effect from 23.10.2015, I am of the view that this is a fit case for the exercise of jurisdiction under Section 34 of the Arbitration Act. 13. For the foregoing reasons, the Award dated 26.03.2018 and the Supplementary Award dated 18.05.2018 are liable to be set aside. Consequently, the amount deposited by the Petitioner pursuant to the interim order dated 30.08.2019 and 24.09.2019, along with interest accruals thereon, is liable be paid to the Petitioner. Notwithstanding the aforesaid conclusion, it is not possible to decide, in this Petition, whether the Petitioner incurred losses on account of the said defective work and, if so, the extent of such losses. The said alleged losses were the subject matter of the counter claims, which were rejected by the Arbitral Tribunal, as a consequence of allowing claims 1, 2, 6, 7 and 8. In the facts and circumstances of this case, severability cannot be resorted to so as to set aside the Awards in part and, therefore, the Award and Supplementary Award are liable to be set aside as a whole. Consequently, both parties are granted leave to initiate de novo arbitration proceedings, if so intended. If such proceedings are initiated, the party concerned would be entitled to the benefit of Section 14 of the Limitation Act, 1963 in respect of the time taken in the Arbitration Proceedings and in proceedings before this Court. 14. In the result, the Arbitration Award dated 26.03.2018 and Supplementary Award dated 18.05.2018 are hereby set aside subject to the above observations. No costs. Consequently, the connected Application is disposed of by directing that the sum deposited by the Petitioner pursuant to interim orders dated 30.08.2019 and 24.09.2019 be paid to the Petitioner along with interest accruals thereon.