Interpretation of Price Adjustment aka Price Escalation/Variation Clause

Judicial Review of Arbitration Award:

The main reason because of which the NHAI lost in those proceedings was that two possible interpretations could be given to the clause in question and, therefore, the recourse taken by the Arbitral Tribunal by adopting one particular interpretation was not required to be interfered with. SLP against that was dismissed. In a situation like this, this Court would not have undertaken further exercise in the matter. However, another Arbitral Tribunal in the case of M/s. Ssangyong Engineering and Construction Co. Ltd. has accepted the other view, which goes in favour of the NHAI. It leads to an anomalous situation. The NHAI has entered into multiple contracts with different parties containing the same clauses of price variation. Once we find that Arbitral Tribunals are taking different views, and the view taken in favour of the NHAI is also one of the possible interpretations, the effect thereof would be to uphold both kinds of awards even when they are conflicting in nature in respect of the same contractual provision. It may not be appropriate to countenance such a situation which needs to be remedied. Therefore, under this peculiar situation, we deem it proper to go into the exercise of interpreting the said clause so that there is a uniformity in the approach of the Arbitral Tribunals dealing with this particular dispute and a sense of certainty is attached in the outcomes.

Multiple conflicting arbitration award.

If one takes into consideration the theory that one applies the principle mechanically i.e. that a plausible view is not to be interfered with, then it may lead to very anomalous situation. In such an eventuality, view taken by a particular Arbitral Tribunal in favour of the Contractor would be upheld as plausible view. Likewise, the Court will have to uphold the view taken by a particular Arbitral Tribunal in favour of NHAI as well, as a plausible view. Therefore, the purpose is to avoid such a situation which cannot be permitted as it would result in upholding both kinds of arbitral awards interpreting the same clause, whether they go in favour of the employer or they go in favour of the contractor. When the exercise is done keeping in view these considerations and outcome thereof is not determined, interest of justice would also demand that this result has to be applied to the pending cases, which have not attained finality. Therefore, in these peculiar circumstances, we hold that the principle of issue estoppel will apply only in those cases where matters have attained finality and no judicial proceedings are pending. In all those cases, including the present one, where awards are challenged on this particular aspect, this judgment will govern the outcome.

Calculation of Price Adjustment Clause:

if we consider the aim of price escalation formula as compensation to either party for rise/fall in prices of various components, all material used in a particular IPC must be subjected to the formula, Negative figure implies that this material has been extracted from works completed earlier. This is physically not possible unless works are ordered to be demolished at the cost of the contractor and payments made earlier are to be recovered. This is certainly not the present case. That apart, if flexible pavement work (which is the case of IPC-12 as bitumen percentage is high) bitumen consumption varies from 4 to 5% by weight and the balance is other material like aggregate etc. how can we consider the material as negative and what would happen of price if this material goes down. Would we give additional benefit to the contractor as the percentage has become negative and the contractor would get increase in price variation as the quantity is negative and price has gone down. This makes the price variation formulate unrealistic as the contractor would get credit instead of debit when the price goes down. This would be an absurd situation.

Yet another way to look at the formula is that component like Labour, POL, plant/machinery, cement, steel, bitumen and other material are each a percentage or part of R which is based on BOQ rates which in turn are based on base costs 28 days prior to the last date of submission of bid. Obviously, the percentage of various component must also be based on values pertinent to BOQ rates.

It must also be noted that the claimant is getting price adjustment for current rates in the third portion of the formula (B1–B0) where B1 is the price 28 days before the IPC and B0 is the price 28 days before submission of bid. Therefore, the claimant is getting compensated for procuring items at higher rates when the price is rising.”

Held that while applying price adjustment formula for calculating the price adjustment of bitumen, it is the base rate which is to be applied and not the current rate.

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