ANALYSIS OF CLAUSE 10CC CPWD CONTRACTS

 2020-05-18

 ARBITRATION

 By: bhupeshnarula

This clause is different from the clause 10 C. For the clauses i.e. 10 C and 10 CC are for

reimbursement of the expenditure which was not anticipated by the contractor at the time

of offering his bid but he was compelled to think as the same was the cost of

material/labour or both. The other elements of profit, overheads, damages, loss of profit

and tools and plants etc. are not covered in the ambit of this clause. Moreover it is a

mandate of clause 10 C that the reimbursement will be made to the contractor by the

Department only for the reason due to statutory increase in price of material or labour but

not for the general market increase. Meaning thereby the risk of rising general market is

not taken by the Department but only the risk of extra expenditure due to statutory

increase is taken by the Department. It is also necessary for operation of clause 10 C that

the contractor must have necessarily incur the expenditure due to the statutory increase in

price for which he had to maintain his accounts and the same can be inspected by the

Department, if desired. In case there is a statutory increase in price but the contractor has

not paid for the same, he will not be reimbursed for that.

On the contrary the clause 10 CC is different. This clause guarantees the contractor that in

case there is any increase in material or fuel or labour the contractor is insured by the

Department. As a matter of precaution and to avoid any misuse of ambiguity the

Department has laid down a formula i.e. the increase shall be calculated on the basis of

indexes irrespective of the actual expenditure incurred by the contractor due to increase in

price. It is to underscore that the work done is reduced by 15% for computation of increase

under this clause. Infact the 15% is the element of overhead and profit for which the

contractor is not entitle for any reason whatsoever and therefore 85% amount of work

done is considered. The language employed in this clause indicates that claims under this

Clause would include not only these statutory increases mentioned in the clause 10 C, but

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also all other increases. The words an "increase as a direct result of the coming into force

of any fresh law or statutory rule or order" found in the immediately preceding clause, is

conspicuous by its absence. Quite obviously, claims predicated under the umbrella of

'statutory increases' would be placed under 10C and not under 10CC although they would

be payable even under clause because 10 CC because of its generality.

It is also noteworthy that Clause 10CC applies to contracts stretching beyond six months. It

is axiomatic that the longer the duration of a contract the greater is the possibility of

uncertainty of escalations in prices. Whilst the Contractor may be in a position to anticipate

or take into account any increase in prices in the short duration of six months into the

future, expectedly he would not be able to foresee escalations beyond that period and

take them into account with any precession.

On a conjoint reading of Clauses 10C and 10CC, while the statutory increase of price/wages

can always be treated as having been factored into the contract, other increases would be

claimable only if the contract period stretches beyond six months. On a reasonable

understanding of these Clauses, they permit a claim on account of statutory

increases/decreases at any time of the Contract, and permit claims under all heads, if the

contract period spreads beyond six months. Non statutory claims are excluded where the

contract duration is less than six months.

There is a minor difference in this clause and the claim of damages. This clause

encompasses within its fold a part of increase in prices of certain materials and a part of

increase in wages of labour. It excludes from consideration of Overheads both on site and

off site; Loss of Profit during the extended period of contract; Idle machinery; Idle

Centering and shuttering, scaffolding etc. and T & P.

In one of the cases the division bench of the High Court held that in case this clause is

available in the agreement that in that case the arbitrator is not allowed to adopt any firm

are different from the set out under this clause of the agreement for payment of escalation

beyond the stipulated date of completion. In other words it was decided that the

contractor is not entitle to charge market rate for the period beyond the agreed date of

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completion in existence of this clause or otherwise is not allowed to use any other index

for any other formula to compute price escalation amount. This ratio was also followed in

various other cases up to 2007.

This case was applicable in earlier agreements when it was submitted that this clause is

operated within the extended date of completion as well as for the period for which the

contract was validly extended under clause 5 without any action under clause 2 of the

agreement but now the CPWD has made amendment in general clauses and it has been

inserted that the escalation under this clause is payable only for the stipulated of the

agreement and thereafter the clause is not payable whether the contract was validly

extended under clause 5 or not.

Now the question is whether this provision is illegal in the eyes of law or not?

The main point of consideration is that earlier the escalation was payable for the extended

period in case the time is extended validly under clause 5 without any action under clause

2 but thereafter a barrier had been imposed by the Department. It clearly means that

either there was mistake in earlier times or there is a mistake at present. The law of natural

Justice states that the Department is no justified to deny the escalation for the extended

period if the work is delayed due to the reasons attributable to the Department. Such a

stipulation by the Department was against the provision of law and unconscionable. No

contractor has approached to the court of law against this stipulation and it is my strong

belief that the Hon'ble court will decide against the Department. The similar circumstances

were discussed by the Hon'ble Supreme Court of India in the case of Brijo Nath Ganguly

that the court cannot take any action against such illegal acts by any party unless and until

there are called upon to do so. If an aggrieved party approaches court of law that court

must strike down an unfair and unreasonable contract or an unfair and unreasonable

clause in the contract entered into between the parties who are not equal in bargaining

powers. The true picture is in this case is that there is a big inequality of bargaining power

and great disparity in the economic and of the contracting parties. The inequality is the

result of circumstances whether of the creation of the parties are not. The weaker party in

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this case is dependent for the means of his livelihood only upon the terms imposed by the

stronger party or go without them. In other words the weaker party has no choice but to

give his consent to the contract in the prescribed or the standard form and to accept the

set of rules and the part of contract drafted by the stronger party whether there is any

unfair, unreasonable or unconsciously clause in the contract. But the high court has held in

a case in 2010 that if it is written that it would not be applicable after SDOC then the

Formula of 10CC cannot be used in for the purpose of computing escalation due to breach

of contract on the part of the department and, thereafter, this illegal and unjustified

provision has also been withdrawn by CPWD and at present this clause is applicable for the

extended period also but with certain limitations.

After great thinking on the subject what we are able to see on the flip side of the coin also

seems to be relevant. Let us go to the root of the concept of escalation. It says that a

contractor while offering his bid can anticipate the rise in the market for a certain limited

period say up to 6 months but not for any longer period due to various changes like

environmental, political, economical, government policies and so on. The legislature are

assumed that the element of profit at the rate of 15% is enough to meet the changes for a

period up to 6 months but for more than six months of the Department assures that the

contractor that Mr. Contractor, don't afraid, we are a stronger party and we are ready to

take care of any unprecedentedly change in the economic scenario. The Department is

also shrewd while interpreting such provision because the department know that in case

the contractor is not secured then he would consider the element of profit considerably

high and therefore it is better to providing assurance of safety. Now the question is why

the Department has imposed a deadline that we will not pay anything beyond the

stipulated date of completion. In my opinion this provision is in the benefit of the weaker

party and more justified in the law is understood correctly. In case the work is delayed or

prolonged after the stipulated date of completion the delay may be either attributable to

the contractor or to the Department. In case the delay is attributable to the contractor and

certainly he should not be allowed to take benefit of his own wrong which is the basic law.

Secondly if the delay is attributable to the Department and the Department is not ready to

pay the escalation amount than it means that the Department is taking benefit of their
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own wrong due to their better bargaining position and disparity in the economic distance

between the parties. No. In fact the weaker party has two options firstly he can refuse to

execute the work further and claim loss of profit/profitability under section 55, 73 and 74

of the Indian Contract Act-1872 or otherwise he may enter into a new contract meaning

thereby the weaker party may demand for the prevailing market rate at the time of

execution of work after the stipulated date of completion considering the judgment of U

Kashyap in 1999. In our opinion the second option is much better because while offering

his bid the contractor is offered their bid depending on the competition in the market

provided that there is no illegal cartel formation, and in such case the percentage of profit

is bound to be considered low to avail the contract. Now in this case when the delay is

attributable to the Department the contractor is free to charge the prevailing market rates.

Now one more question arises what is the meaning of prevailing market rates. This is a

great controversy in this terminology. In our opinion which shall be best suited and

uncontroversial is that the Department prepares justification before award of tender

taking the market rates for different elements to be used in the various items in the tender

and that may be the true definition of market rate. Now the prevailing market rates should

be computed in the similar fashion at the time of execution of the work. But in order to

avoid any controversy or intricacy at a later date the weaker party is advised to come to the

prevailing market rates of his own and intimate to the Department. Incase the Department

give their consent (this is not believable in general) then you are safe, in case the

Department for any negotiation then go for it. But as per practical observation the attitude

of the officers in the government departments is so lackadaisical that they do not reply the

letters and then you have won a lottery. But it should be kept in mind that the demand of

prevailing market rates should be ethical and supported with open analyses of rates

alongwith justifications of rates of the various elements whether with quotations or visit

rate list circulated by the Department, if any. In the nutshell the meaning of the article is

that the weaker party may be economically weaker than the Department but they are not

supposed to be weaker in the knowledge of law.

Now we may cite the gist of various Cases on this clause as decided by various courts.

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1.         Formula of 10CC can be adopted for calculation of damages under Section 73.

2.         Escalation under clause 10CC is payable even if compensation has been levied since

the Department could not show any precedent where it was held once compensation

levied, it ousted clause 10CC.

3.         It is now settled law that where in a contract it is provided that the period of

contract can be increased conditionally or unconditionally, the time is not the essence of

the contract and the period so increased is to be considered as the period of contract.

4.         In a very interesting case, the plea of the contractor was that the base index is to be

on an average of indices of three months earlier to a month in which the tender was

received whereas the plea of the Department was that the base index is an index for the

month in which tender was received. The arbitrator was convinced with the plea of the

contractor which was finally upheld by the High Court in 2012.

5.         In yet another important case in 1996, the escalation of barred under agreement.

The scope of work was increased and there were various villages on the part of the

contract. It was held by the Supreme Court that it is wrong to say that the contractor is not

entitled to higher rates under the terms of the agreement, only because the same has

been barred under the agreement.

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6.         In yet another case, the arbitrator decided that the department was responsible for

delay and allowed escalation which will be on view of the contract as per the Department.

The Supreme Court rejected the argument of the Department on the ground that once the

Arbitrator had the jurisdiction to find that there was delay in the execution of the contract

due to the conduct of the Department, it was liable for the consequences of the delay,

namely, increase in price. The award of Arbitrator was, thus, held to be valid.

7.         In yet another case, the honorable court has observed that "The exclusion clause

like clause 10(c) of the contract in question had come up for discussion in various

judgments. In Chitley on Contract 24th Edition, paras 813 to 816 and the book "Building

Contract" 4th Edition page 140 analyses the legal position with regard to importance of

such exclusion clauses. It can be culled out from the observations made in these books

that where there is a fundamental breach or a breach of a fundamental term which breach

is accepted by the innocent party, the exclusion clause cannot be relied on in respect of the

said breach occasioning the acceptance of the repudiation or in respect of breaches

occurring thereafter. If the innocent party does not accept the breach so as to bring the

contract to an end, but affirms the contract, it is a question of construction whether the

clause can be relied on. It was held that normally the clause cannot be relied on if

performance is totally different from that which the contract contemplates.”

8.         In one more case, the similar clause of a contract came up for consideration before

the court and a similar contention was raised on the basis of these clauses that it was not

open to the arbitrator to award a general increase in price and that at best he could award

damage if the builders were able to prove it to his satisfaction. There was a non-speaking

award which came up for consideration in that case. The arbitrator had awarded

compensation which was not in assonance compensation with the said exclusion clause of

the contract. The grant of damages v/as upheld, in the said case also, the delay had

occurred in completing the contract because possession of the site was not given in time

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and there had taken place delay in supply of drawings and some other reasons which was

attributable to the employer and it was held that damages could be awarded in such a

case. It was held that it there was increase in performance of the work because of the

breach of the contract on the part of the contract breaker the measure of damages will be

the compensation to cover up the increase of expense or additional cost of execution. This

is the loss suffered by the builders.

9.         In yet another case a contention was raised that in view of exclusion clause 9, 11

and 63 of the conditions of the contract, the contractor was not entitle to any

compensation even if the delay in the execution of contract was caused for the reason of

default on the part of the Government. This contention was negativated. It was held that

such provision as attempt to deprive the contractor of the right to claim the damages will

be strictly construed against the employer because such a clause will have calamitous

consequences for the contractor and he will have no remedy anywhere, however

outrageous the conduct or behavior of the employer may be, however interminable the

delay. It was further laid down that most unusual circumstances which give rise to claim

was delay in giving the possession of the site to the contractor or suspension of the work

caused by some act or omission of the employer, and a consequent increase of expense in

the performance of the works. It was held that the work contractor will be entitled for the

delay caused notwithstanding that an extension of time for completion has been granted

in respect of such delay. Reliance was placed for this view on observations appearing in

Emden and Gill's Building Contracts and Practice, 7th edition page 272 and Halsbury Laws

of England, 4th edition volume 4 para 1281 page 653.

10.       In yet another case interpretation of exclusion clause 9 of the general conditions of

the contract and clause 3.1 of the special conditions of the contract came up for

consideration. The court held that question of construction of contract generally speaking

is question of law and arbitrator is a domestic tribunal appointed by the parties, his

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decision, right or wrong, is binding on the parties and erroneous decision of arbitrator on a

question of law does not vitiate the award unless the error appears on the face of the

award.

11.       In yet another case, a similar clause 10(c) appearing in this contract came up for

consideration in. There also a delay had taken place in executing the contract which was

attributable to Union of India. It was submitted before the Court that in view of clause

10(c), the arbitrator could not award damages on the general principles or on the principle

of quantum meruit. The quantum meruit principle applies for awarding compensation for

the work done or services rendered when no price is fixed in the contract in respect of the

same. While holding it that the said concept of quantum meruit was not strictly applicable

it was held that arbitrator was justified in granting the compensation on the basis of

general principles of law of damages despite there being exclusion clause 10(c) appearing

in the contract.

12.       In yet another case it has been laid down that if the arbitrator acts in contravention

of the clear, obvious terms of the main contract which deals with the rights and obligations

of the parties, such action would be without jurisdiction.

13.       In yet another case, it was observed that it is question of interpretation in this case

as to whether the exclusion clause 10(c) of the contract could mean that even if there had

occurred breaches of the contract on the part of the employer which resulted in delay in

completion of the contract, even then the contractor would not be entitled to general

damages due to price escalation occurring during this period. It is true that if a particular

finding of the arbitrator is in total contradiction with the stipulated conditions of the

contract, then it can be said that an error of law had occurred which is apparent on the

face of the award which vitiates such finding in the award. But in the present case, it is a
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moot point whether clause 10(c) would totally debar the claim of the petitioner for

damages on account of breach of contract taking place on the part of the Department and

arbitrator, if had interpreted the said clause in a particular manner, it cannot be said that

the said finding of the arbitrator is in contradiction with the clause in the contract so as to

make his finding illegal on the face of it.

14.       In yet another case, it was observed that for the prolonged period of the contract,

where the contractor is not at fault, the Arbitrator can give escalation beyond what is

provided in the contract. Once escalation beyond the formula provided in the contract is

restricted to the original period of the contract, and does not prevent the contractor from

claiming market rates, then similarly the fixed price remains fixed only for the original

period of the contract and for the prolonged period escalation at actual can be awarded to

the contractor.

15.       A peculiar and very interesting case decided in 1996 is to be understood for this

clause. In this case the time of execution or six months but due to certain extra items that

time was extended to 7 months. The contractor claimed that the Department framed a

defective estimate on lower side due to which the necessity of extra work which was

compulsory the required within the scope of work but not anticipated at the time of

framing of estimates. The plea of the contractor was that, had the Department rightly

anticipated the work the estimate would have been far more amount and accordingly the

stipulated time of completion of work would be more than six months on pro rata basis

and in that case he would be entitled to claim the increase under this clause. The plea of

the contractor was accepted by the court. But, other contractor in a different case was not

allowed escalation by the arbitrator on the same grounds. In this case, the court again

upheld the view of the arbitrator. The important point to be seen is that there seems to be

contrary decisions by the same court, but it is not so. In fact, the view of the court is that if

the view taken by the arbitrator is plausible, the court cannot substitute its own view. In

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other words, it is upon the arbitrator to allow or disallow the claim and court has no power

to interfere in the decision made by the arbitrator rather in favour of the contractor or

against the contractor. This observation implies that had the Arbitrator allowed this claim

for payment of escalation under clause 10CC, the Court would not have found the fault

with it.

16.       In yet another case, the contention of the contractor was that with respect to certain

works, DDA paid part rates and not the entire rates. The issue was whether escalation is to

be granted as per the part rates or the complete rates as mentioned under the contract.

Surely, part rate payments are only on account payments and actual escalation has to be

on the contractual rate. This was so held by the Arbitrator and I do not find any fault with

the reasoning of the Arbitrator. The challenge with respect to this claim accordingly fails.

17. In yet another case, the contention of department was that as per the contract, this

clause will not apply because the original period of contract was for less than 12 months

which was not rejected because, though originally the contract was for a period of 10

months, but it was not disputed that this contract was extended for a much longer period

than the original contractual period. The Arbitrator has disallowed any escalation during

the original period of the contract and has given escalation only for the extended period of

the contract on account of the increased rates. This approach of the Arbitrator therefore,

cannot be faulted with and consequently, the objection with regard to this claim was not

found sustainable.

18. In yet another case it was observed that the Delhi Development Authority cannot be

judge of its own case, and, in any case, mere act of granting extension of time, would not

eliminate a claim which had to be looked into, adjudicated upon and decided as to whether

any extra cost and expenditure have been incurred in terms of the contract.
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19.       In yet another case it was observed that once there is breach of the contract and

there is no specific clause in the agreement delaying with such a situation, the provisions

of Indian Contracts Act comes into play. The Court observed that Clause 10CC takes care of

only compensation on account of escalation of prices of material and wages for the

employees and other staff, whereas compensation on account of delay either in giving site

or issuing material etc. is distinct. In the instant case, the contractor has to be

compensated for keeping its entire establishment ready for the execution of the contract.

It is more so where time is of the essence of the contract.

20.       In yet another case it was observed that the statement of monthly allotments of

flats were available before the Arbitrator and the respondent found that the petitioner has

to spend some months in this process and is liable to be compensated for the same. The

Court added that this portion of the award does not call for any interference.

21.       In yet another case it was observed that ordinarily the parties would be bound by

the terms agreed upon in the contract, but in the event of one of the party to the contract

which has a great bearing on the work to be executed by the other party, the Arbitrator is

vested with the Authority to compensate the second party for the extra cost incurred by

him as a result of the failure of the first party to live upto its obligations. That is the

distinguished feature of the case of this nature and M/s Alopi Prasad’s case and also Patel

Engineering case. The said principle was recognized by this Court to fix responsibility of

delay in construction of building and the repercussions of such delay. Based on the

findings of the Learned Judge this court gave its approval to the excess amount awarded

by the arbitrator on account of increase in price of materials and cost of labour and

transport during the extended period of the contract even in absence of the escalation

clause.

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22.       We also wish to refer to one more case in detail which is very interesting related to

clause 10CC and the same is as under:

Escalation on account of less/under payment under Clause 10(cc) = Rs. 16,01,007.53

It is the case of the plaintiff that the formula should be worked in a manner where the

gross work is to be multiplied by 85% to work out the escalation. To the same should be

added the secured amount and thereafter 75% of the same should be taken as the pre-

determined share of escalation of material. From this amount should be deducted the cost

of the material supplied.

On the other hand, it is the contention of the learned Counsel for the defendants that the

formula has to be worked as it is and if what the plaintiff claims is accepted, it would

amount to altering the formula. It is stated that the methodology for working out the

formula is that the gross work should be multiplied by 85% and thereafter secured amount

added. From the total of this, material supplied should be deducted first and it is only

thereafter 75% should be taken as the pre-determined escalation of material. Naturally the

labour escalation would be 25%.

In the nutshell, the difference is that whereas the plaintiff seeks to substract the cost of

material supplied after working out the pre-determined amount of 75% towards escalation

of material, the defendants, on the other hand, seek to deduct the material supplied first

before calculating 75% of the pre-determined escalation of the material cost. The two

modes of calculations give rise to different results and that is the reason why the total is

varying on the basis of the two different methodologies of calculations.

The bedrock of the submission of the learned Counsel for the plaintiff is that since the

component of the cost of material supplied is related to the escalation in respect of

material, it is only from that component of the escalation of material that the material

supplied should be deducted as in the alternative it would imply that the deduction of

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material supplied would have an impact even on the 25% pre-determined escalation of

labour and would even reduce the same.

The two modes of calculations are explained hereinafter as an illustration to explain the

rival contentions:

               Defendants' calculation

               As per DDA, the rate of material and labour are as under:

               Assume the work done as            = 100

85% of work done = 100 x 85/100     = 85

Deduct cost of material (say)       = 30

[(85 - 30 = 55) is the work done for 10 c.c.)

Escalation for material = 55 x 75/100  = 41.25

Escalation for labour   = 55 x 25/100  = 13.75

                        ----------------------

                        TOTAL            55.00

                        ----------------------

Plaintiff's calculation

Assume the work done as       = 100

85% of work done = 100 x 85/100    =  85

work done for escalation of

material      = 85 x 75/100        = 63.75

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Less cost of material              = 30.00

33.75

Work done for escalation

of labour = 85 x 25/100            = 21.25

------------------------------------------

TOTAL                                55.00

------------------------------------------

Note: Pre determined ratio for material and labour is 75% and 25% respectively as per

agreement.

In the mode of calculation of the plaintiff, the escalation for labour works out more and

since the revision of wages has been more, the net impact is more beneficial to the

plaintiff.

Learned Counsel for the plaintiff contended that a contract must be worked out in its true

letter and spirit. The work consisted of two components vis-a-vis material and labour. The

percentage of these components were pre-determined by the defendants at 75% for

material and 25% for labour. The 75% component fixed for material includes the cost of

material issued by the defendants at fixed rates. No escalation is payable on this material

and, therefore, the deduction of material supplied can be made only after bifurcating the

component of material and labour from the total work done for escalation.

Learned Counsel for the plaintiff further submitted that the mode and manner of

calculation suggested by the plaintiff is what was adopted by the arbitrator and approved

by the Court in P.C. Sharma and Co. v. Delhi Development Authority MANU/DE/0413/1997 :

AIR1997Delhi1786 . In para 12 of the judgment, the reasoning of the arbitrator, in what is

really the case of the plaintiff herein, has been given in the following manner:

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The claimant in support of their claim has submitted detailed calculations vide Annexure I,

statements 1 to 18. A perusal of these calculations shows that the claimants have applied

the pre-determined percentage of labour and material before subtracting the cost of

material issued by the department from 85% of the value of work done. The respondents

during oral hearings argued that as per provisions of Clause 10CC of the agreement, the

cost of materials issued by the department at fixed rate has to be deducted from 85%

value of the work done before applying the pre-determined percentages of material and

labour in the work and that they had done their calculations accordingly.

The work consists of two components viz. material and labour. The percentages of these

components as pre-determined by respondents are 75% for material and 25% for labour.

The 75% component fixed for materials includes the cost of materials issued by

respondents at fixed rates. No escalation is payable on this material. However, in handing

and incorporating these materials in work, labour is engaged and utilised and escalation

on this labour cost is to be paid. The calculations for escalation payments as ad opted by

respondents result in denying this admissible escalation on labour. At the same time,

escalation on materials gets accounted for on the higher side. This discrepancy is

eliminated in the calculations submitted by claimants.

If the value of work done is considered as 'X' and the cost of material issued by

respondents recoverable at fixed cost is taken as 'Y', the value of work done on which

escalation is payable as per respondents calculations, works out to

(i) For materials Part = 0/6375 X - 0.75y

(ii) For labour part = 0.2125 X ? 0.25y

Clause 10CC lays stress that full cost of materials issued by department should be

deducted from 85% value of work done. While as per (i) and (ii) above, through full cost of

materials is getting deducted yet 75% is being deducted from materials part and 25%  part

= 0.2125X

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In above (iii) above full value of material issued by the respondents at fixed cost (y) is

getting deducted from the material element of work and no deduction for material issued

is occurring in labour element.

It thus clear that in the spirit of Clause 10(cc), the calculations as submitted by claimants

are more rational and to the point compared to respondents calculations. I consider the

claim as just and fully established and award to claimants a sum of Rs. 2,28,082 for this

claim as per details furnished by claimants in Annexure I to the statement of facts of the

claimants.

The challenge to the aforesaid, as made by the DDA, has been rejected in the following

terms “The Arbitrator, it could be seen, had only taken for calculation the formula in the

Clause 10cc and he has only amplified the contents of the formula and has arrived at the

figure. I do not find any substance in the argument of the learned Counsel for the DDA that

the Arbitrator has gone beyond the formula in Clause 10(cc). therefore, I confirm the award

on this claim.

Learned Counsel for the plaintiff has also referred to an award passed by Justice (Retd.)

P.K. Bahri dated 13.12.1997 in P.C. Sharma and Co. v. DDA where a similar view has been

taken.

Learned Counsel for the defendants, on the other hand, contended that once the

escalation Clause incorporates a particular formula, the formula must be adhered to in

strict sense since that is the agreed method for grant of escalation. Learned Counsel, thus,

relied upon the observations made in Salwan Construction Co. v. Union of India

MANU/DE/0062/1977 where it has been held that an escalator is an index and can be a

convenient measure of damages. Such given escalator can be adopted by the court as a

true measure of damages if it is available at hand.

Learned Counsel for the defendants emphasised by reference to the judgment of the Apex

Court in Delhi Development Authority v. Durga Chand Kaushish MANU/SC/0329/1973 :

[1974]1SCR535 that in construing the document one must have regard, not to the

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presumed intention of the parties, but to the meaning of the words they have used. It

would be useful to extract the relevant paragraphs, being Nos. 19 and 20, which are as

under:

Both sides have relied upon certain passages in Odgers' 'Construction of Deeds and

Statutes' (5th ed. 1967). There (at pages 28-29), the First General Rule of Interpretation

formulated is: ?The meaning of the document or of a particular part of it is thereforee to

be sought for in the document itself.? That is, undoubtedly, the primary rule of

construction to which Sections 90 to 94 of the Indian Evidence Act give statutory

recognition and effect, with certain exceptions contained in Sections 95 to 98 of the Act. Of

course, 'the document' means 'the document' read as a whole and not piecemeal.

The rule stated above follows logically from the Literal Rule of Construction which, unless

its application produces absurd results, must be resorted to first. This is clear from the

following passages cited in Odgers' short book under the First Rule of Interpretation set

out above:

Lord Wensleydale, in Monypenny v. Monypenny (1861) 9 HLC 114 said:

the question is not hat the parties to a deed may have intended to do by entering into that

deed, but what Is the meaning of the words used in that deed: a most important

distinction in all cases of construction and the disregard of which often leads to erroneous

conclusions.

Brett. LJ in Re Meredith ex. P. Chick (1879) 11 Ch. D. 731 observed:

I am disposed to follow the rule of construction which was laid down by Lord Denman and

Baron Parke. They said that in construing instruments you must have regard, not to the

presumed intention of the parties, but to the meaning of the words which they have used.

Learned Counsel for the defendants further contended that interestingly the plaint, as

originally filed, did not contain what the plaintiff now claims. This claim is based on an

amendment. The plaintiff amended only claim (i) and did not amend claims (h) and (j).

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Learned Counsel, thus, contended that merely because the component of the present

claim would become high by reason of the mode and manner of calculation of the plaintiff,

it would not give a right to the plaintiff to adopt the said methodology. Not only that, it was

contended that the claim is also contrary to the legal notice sent by the plaintiff.

On the basis of the submissions of the learned Counsel for the parties, the plea put-forth

by the plaintiff at first blush appears to have merit. This is so since the principle which

underlines it is that the impact of any grant of escalation on the material supplied by the

defendants should be deducted only from the escalation in respect of the material. This is

so since the amount is being deducted on account of the fact that the escalation and

material cost would not be to the debit of the plaintiff as it is the defendants who had

supplied the material.

However, on giving a deeper thought to the matter, the aforesaid plea of the plaintiff

cannot be accepted. It cannot be lost sight of the fact that Clause 10(cc) para 2 stipulates

that the cost of the work on which escalation will be payable shall be reckoned as 85% of

the cost of work as per the bills, running or final bill 'the value of material supplied under

Clause 10 of this contract or service rendered at fixed charges as per Clause 34 of this

contract' proposed to be recovered from the particular bill would be deducted before the

amount of compensation for escalation is worked out. The basic concept, thus, is that

where the material is supplied by the defendants or service rendered at fixed charges of

labour, the plaintiff should naturally get the escalation. No doubt it was open to the

defendants to have provided in the Clause that this amount should be separately deducted

in the formulas. This is, however, not known how the formula has been worded. In the

present case there is no fixed charged labour provided but that would not make a

difference to the working of the formula. Para 4 of Clause 10(cc) states that the

compensation of escalation 'shall be worked out as per formula given below.' The 'W' in the

formula states that it is the cost of the work done worked out as indicated, in sub-para (ii)

above. Thus, 'W' has to be worked out only as per sub-para (ii). On the other hand, if the

contention of the plaintiff was to be accepted, then this 'W' would not be worked out in the

manner as given in the formula. The 'W' is the same in the formula for escalation of

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material in para-4 and for the escalation of labour in para 6. In the methodology of the

plaintiff, the 'W' would be different for the escalation in material cost as compared to the

'W' in the escalation for labour cost. So, this would be contrary to the stipulation in the

contract where even in respect of the escalation of labour, 'W' is stated to be the value of

work done worked out as indicated in sub-para (ii).

The parties in their wisdom have specified a formula where the methodology of working

out of 'W' is same both for escalation of material as well as for escalation of labour. The 'W'

has to be worked out strictly as per para 2 of Clause 10(cc). If this is done, the defendants

have correctly worked out the amount payable to the plaintiff as escalation under Clause

10 (cc).

In support of this plea, one can but not refer to the words of Lord Wensleydale, in

Monypenny v. Monypenny (supra) that the question is not of the parties intended to do by

entering into the contract but what is the meaning of the words used in the contract. Any

disregard to this principle would lead to erroneous conclusions. A liberal construction has

to be applied in considering such instruments. We must have regard not to presume intent

of the parties, but to the meaning of the words that have been used, as held by the Apex

Court in Delhi Development Authority v. Durga Chand Kaushish (supra). In a different

context where the question was whether the escalation should be given only as per Clause

10(cc) or some other methodology, it has been held in Bedi Construction Co. v. DDA and

Anr. CS(OS) 2822/1994, decided on 10.11.2005 that once the formula of Clause 10(cc)

forms part of the agreement and it is agreed upon, no other methodology will be adopted

for the said purpose. These observations have been relied upon by this Court in Pt. Munshi

Ram and Associates (P) Ltd. v. DDA MANU/DE/8062/2006 : 128(2006)DLT619 . The

judgment in P.C. Sharma and Co. (supra) was only considering an award passed by an

arbitrator. The learned single Judge did not deem it appropriate to take another view in

view of the interpretation put-forth by the learned arbitrator. There is no discussion in the

judgment in respect of the interpretation of the Clause and, thus, the said judgment can

hardly be said to be of any binding nature.

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In view of the aforesaid, there is no option but to reject the claim of the plaintiff in this

behalf.

In the nutshell, it can be summarized that:

a.         Cost index is not a true representation of building escalation

b.         Escalation under clause 10CC is payable even if it is barred under the contract, but

there must be breach has been committed by the Department.

c.         Escalation under clause 10CC cannot be denied even if levy of compensation has

been imposed.

d.         The arbitrator has full powers to use any formula for allowing escalation due to

breach of contract on the part of the Department, including the formula under clause 10

CC

e.         Escalation beyond Stipulated Period cannot be denied even if it is banned but there

must be breach of contract on the part of the Department.

f.          Section 73 of the Indian contract act-1872 is the main weapon for claiming

escalation for the prolonged period, and the arbitrator has full powers for the same. The

court is also has difficulty to reverse the award of the arbitrator.

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g.         Fixed price contract (the contract without escalation clause) is applicable only for the

fixed period and if there is a breach of contract on the part of the Department, the

Department cannot deny escalation to the contractor. It may be specifically noted that 10C

is only a reimbursement requested to be increased and it is not escalation payable due to

breach of contract as per section 73 of the contract.

h.         It may be clearly understood that the claim of all types of damages due to

prolongation of contract are not covered under clause 10 CC at the different. Claim of

damages are covered under section 73 and 74 Of Indian Contract Act-1872. The Section 55

of the Indian Contract Act-1872 is also very important for operations Of Section 73 and 74

of Indian Contract Act.

i.          This clause does not either forbid the contractor from making a claim nor does the

same provide for any formula or mechanism for determination of compensation on

account of factors other than those that are specifically mentioned in the clause. This

would necessarily mean that if in addition to increase in the prices of materials and stores

and wages of labour required for execution of the work, the contractor suffers any

damages on any other account as for instance on account of idle plants and machinery,

scaffolding etc. or on account of blocked capital resulting in loss of profit or staff either

posted on the work site or otherwise, he can make a suitable claim for payment on that

account. Any such claim arising out of a breach of the agreement executed between the

parties can be examined and awarded by the arbitrator depending on the evidence that

the contractor may adduce to prove any such loss.

j.          10CC is also payable on claim of RIS made wrongly and the claim of work done but

not paid.

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k.         10CC is also payable on watch and ward charges under supplementary agreement.

l.          Escalation is a normal incident arising out of gap of time in this inflationary age in

performing any contract

The relevant cases decided by various courts are:

1. DDA Vs SS Jailtley 2001(1) ALR 289,

2. Madhok Consttn. Vs. UOI 1998 ALR 280(1),

3. Kishan Chand Vs. UOI 1999(3) ALR 201,

4. Jagat Ram Trehan Vs DDA 2003(2) ALR 110,

5. NDR Israni Vs DDA 1989(2) ALR 249,

6. NDR Israni Vs DDA IA no. 3282/201 CS(OS) no. 2488/2000 decided on 28.10.2005

7. SS Jailtley Vs DDA ALR 2000(1)-660,

8. Kailash Nath & Associates vs NDMC 2002(3) ALR-631,

9. PC Sharma vs. DDA ALR 2006 p-403

10.Delhi development authority versus Hindustan construction Corp (2002 (1) ALR 98

11.Bharat Builders Vs. Respondent:  Delhi Development Authority MANU/DE/3451/2009

12. Jagat Ram Trehan  Vs. Delhi Development Authority MANU/DE/3080/2009

13.DDA v. Navbharat Construction 159 (2009) DLT 520

14. Nangia Construction Pvt. Ltd. Vs. Rail India Technical and Economic

Services MANU/DE/3052/2009

15. Kanishka Builders Vs. Delhi Development Authority and Anr. MANU/DE/2958/2009

16. M.L. Mahajan v. Delhi Development Authority reported in MANU/DE/1267/2010

17.B.N. Kharbanda And Son vs Delhi Development Authority on 7/2/2006

18.M/s Bedi Construction V/s DDA & Another, decided on 10.11.2005.

19.P.C. Sharma & Co. V/s DDA

20.Krishna Construction Company vs. Delhi Development Authority.

21.Puran Chand Nangia vs. Delhi Development Authority MANU/DE/1001/2006

22.Vishal Engineer vs. Delhi Development Authority

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 23.Kailash Nath & Associates vs New Delhi Municipal Committee 2002 (3) ARBLR 631

Delhi.

24.K.R. Builders Private Limited Vs.  Delhi Development Authority and Anr 

MANU/DE/8616/2007

25.K. N. Sathyapalan Vs. Vs. State of Kerala JT2006(10)SC 615

26.Food Corporation of India v. Joginderpal Mohinderpal and Anr. MANU/SC/0182/1989

27.N.P.C.C. Ltd. Vs. Jyoti Sarup Mittal Engineers, Contractors and Builders 

MANU/DE/0143/2007

28. P.C.  Sharma & Co. Vs. DDA MANU/DE/0413/1997

29.Kamal Kumar Vs.: Airport Authority of India  MANU/DE/0508/1998

30.DDA Vs. Naraindas R. Israni  MANU/DE/9106/2007

31.DDA v. U. Kashyap 1991 (1) ALR 88

32.Associate Engineering v. Government of Andhra Pradesh and Anr. 1991 (2) ALR 180.

33.Sanyukt Nirmata Vs. Delhi Development Authority MANU/DE/0406/1997

34.Associate Builders vs Delhi Development Authority on 25 November, 2014 (Supreme

Court)

35.M/S. Harcharan Dass Gupta vs Delhi Development Authority on 11 March, 2014

36.P.M Paul vs Union of India, AIR 1989 SC 1034

37.M/s Tarapore and Co., vs Cochin Shipyard Ltd, AIR 1984 SC 1072

38.Paragon Constructions (India) ... vs Union Of India (Uoi) And Anr. on 17 January,

2008,

39.Anurodh Constructions v. DDA

40.Union  of India  v. Shyama  Charan Agarwala

41.K.R. Ravindran v. State of Kerala

42.Union Of India And Anr. vs Nangia Construction (India) Pvt. on 2 November, 2001

43.Express Engineering & ... vs Delhi Development Authority on 4 October, 1994

44.Heera Singh vs State Of Rajasthan And Ors. on 13 April, 2007

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The last but not least is that Section 28(3) of Arbitration Act is very important and to be

always kept in mind during entire arbitration proceedings, if required. This section says

that “In all cases the arbitral tribunal shall decide in accordance with the terms of the

contract and shall take into account the usages of the trade applicable to the transaction.”

Finally readers are informed that the above comments are purely based on study of

various legal points and there is still huge scope for understanding this clause and the

above information is very less for this clause and it needs much more. We have done huge

and in depth study on this clause including the entitlement of market rates for prolonged

period etc. which we shall try to mention in our future blogs. Readers are welcome for

personal discussion in detail for further clarification, if they feel so.

With regards

From Icon of humanity team

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