Introduction
In Somdatt Builders-NCC-NEC (JV) v. National Highways Authority of India (Civil Appeal No. 2058 of 2012, decided on 27 January 2025), the Supreme Court decisively reaffirmed the principles limiting judicial interference with arbitral awards under Sections 34 and 37 of the Arbitration and Conciliation Act, 1996. The case turned on the Engineer’s authority to revise contract rates when the executed quantity exceeded the Bill of Quantities (BOQ), and whether such changes constituted “variations” under contract law. The Court restored an award passed by a technically expert arbitral tribunal and overturned the Division Bench’s expansive interference under Section 37, setting a binding precedent for the interpretation of variation clauses in construction contracts.
1. Factual Background and Procedural History
The dispute stemmed from a 2002 construction contract between Somdatt Builders-NCC-NEC (a joint venture) and NHAI for four-laning and strengthening a highway stretch near Kanpur, Uttar Pradesh. The project included building reinforced earth (RE) walls. Item No. 7.07 of the BOQ, specifically sub-item (ii) for “geogrid”, saw quantities exceed estimated figures due to faulty projections at the bidding stage.
Somdatt claimed that the increased quantity did not arise from any variation or instruction but resulted from errors in BOQ estimation. The Engineer initially accepted the BOQ rate for the full quantity, but a subsequent change in stance by NHAI prompted the matter to go before the Dispute Review Board (DRB), which ruled in the contractor’s favour. The DRB held that no variation under Clause 51.1 had occurred, and the BOQ rate should apply.
The matter was referred to arbitration. A three-member arbitral tribunal of technical experts upheld the DRB’s decision. NHAI’s Section 34 challenge was dismissed by a Single Judge of the Delhi High Court. However, on appeal under Section 37, a Division Bench reversed the award, prompting the contractor to appeal to the Supreme Court.
2. Identification of Legal Issues
The Supreme Court addressed the following legal issues:
- Whether an increase in quantity beyond BOQ constitutes a “variation” under Clause 51.1 of the contract.
- Whether Clause 52.2 empowers the Engineer to revise contract rates for such excess quantities.
- Whether the arbitral award, which denied the Engineer’s power to renegotiate rates, was perverse or illegal.
- Whether the Division Bench exceeded its jurisdiction under Section 37 in setting aside the arbitral award.
3. Arguments of the Parties
Appellant (Somdatt Builders-NCC-NEC JV)
- The geogrid quantity increase was due to NHAI’s initial estimation error—not an instructed variation.
- The RE wall design remained unchanged; thus, Clause 52.2 and its 14-day notice requirement did not apply.
- DRB, arbitral tribunal, and Single Judge had all concurrently held that the BOQ rate applied.
- The Division Bench wrongly substituted its own interpretation, ignoring the limited scope of Section 37.
Respondent (NHAI)
- Cited Clauses 51 and 52 to argue that quantity increases beyond 25% constitute a variation requiring rate revision.
- Emphasized that both instructed and uninstructed variations fall under Clause 52.2.
- Asserted that applying BOQ rates to a 300% increase was against public policy and commercially unreasonable.
- Defended the Division Bench’s reliance on dictionary meanings of “variation” to expand interpretative scope.
4. Court’s Analysis and Reasoning
a. Interpretation of Clauses 51 and 52
The Court held that Clause 51.1 covers only “instructed” variations initiated by the Engineer. Clause 51.2’s proviso clarifies that natural increases in BOQ quantities—without Engineer instructions—do not constitute instructed variations. Therefore, Clause 52.2, which enables rate revision only for instructed variations (subject to 14-day notice), did not apply.
b. Findings of Fact by DRB and Arbitral Tribunal
The Court upheld factual findings that:
- There was no change in design.
- The increase in geogrid was to match BOQ-listed RCC facia panels.
- The contract was item-rate-based and contemplated fluctuations in quantities.
The arbitral tribunal rightly concluded that:
“If ultimate quantity exceeds the BOQ quantity, it will be an automatic change and shall be paid at BOQ rate in such type of measurement contracts.”
c. Improper Expansion of Section 37 Review
The Court reproached the Division Bench for:
- Reinterpreting contractual terms through dictionary meanings.
- Ignoring concurrent findings by DRB, Arbitral Tribunal, and Single Judge.
- Violating settled principles that appellate courts under Section 37 have even more limited scope than Section 34.
Quoting MMTC Ltd. v. Vedanta Ltd., the Court stressed that:
“Section 37 cannot travel beyond the restrictions laid down under Section 34. The court cannot undertake an independent assessment of the merits of the award.”
d. Clarification of Public Policy and Patent Illegality
The Court reiterated that mere disagreement with the tribunal’s reasoning does not render an award contrary to public policy. The award must be shockingly perverse or fundamentally unjust—criteria not met here.
5. Final Conclusion and Holding
The Supreme Court:
- Set aside the Division Bench’s order dated 17.11.2009.
- Restored the arbitral award dated 03.06.2005.
- Held that automatic increases in BOQ quantities do not empower the Engineer to revise contract rates unless supported by instructed variations.
- Emphasized judicial deference to expert arbitration decisions under the Arbitration Act.
FAQs:
1. What is an “instructed variation” in a construction contract?
An instructed variation is a change in contract work—such as form, quantity, or design—formally directed by the Engineer. It allows rate renegotiation under Clause 51 of FIDIC-based contracts.
2. Can BOQ quantities be revised unilaterally by the Engineer?
No. Increases in quantities due to estimation errors or automatic measurement do not give the Engineer authority to revise rates unless a formal instruction under Clause 51 is issued.
3. What is the difference between Sections 34 and 37 of the Arbitration Act?
Section 34 allows limited court review to set aside arbitral awards on narrow grounds. Section 37 permits appeals only against orders under Section 34 and has even narrower scope.
4. When can courts interfere with an arbitral award on public policy grounds?
Only if the award is patently illegal, arbitrary, or shocks the conscience of the court. Mere disagreement or alternate interpretations do not suffice.
5. Are estimated BOQ quantities binding in an item-rate contract?
No. Such quantities are provisional. Contractors are entitled to payment at BOQ rates for actual quantities unless the increase results from an instructed variation.
Stay informed with insights that matter. Follow us for more updates on key legal developments.
Disclaimer
The content provided here is for general information only; it does not constitute legal advice. Reading them does not create a lawyer-client relationship, and Mahendra Bhavsar & Co. disclaims all liability for actions taken or omitted based on this content. Always obtain advice from qualified counsel for your specific circumstances. © Mahendra Bhavsar & Co.