In their letter dated 11.1.2012, the Board of Directors had informed the members about the Contractor’s demand for ‘differential’ between the ‘base rate’ and the ‘market rate’ of the commodities (including cement, iron, wood, tiles, bricks etc), allegedly stipulated in the contract.
This demand of the contractor is patently illegal and unjustified in view of the clear terms of both the tender document and contract as a whole. If this demand is adhered to, the members would end up paying a sum more than twice the original bid.
Unfortunately, instead of resisting the illegal demand of the contractor, our directors are capitulating to it, for reasons best known to them. Through their aforementioned letter, the Board informs the members that they have already started an exercise to procure the commodities themselves from the open market. Needless to say, if the directors have done this, this is done without approval of the AGM (and the members) and at their own risk.
The letter informs us that the board has managed to arrange the specified items at “much lower rates” than quoted by the contractor. The fact goes that these “much lower rates” are slightly lower than the rates demanded by the contractor but astronomically higher than the quoted fixed base rates in the tender document.
Unsurprisingly, if this interpretation of the clause is accepted the total cost of the project would be more than doubled at the expense of the members while the contractor would get unjust enrichment.
As the members are legal experts themselves and are capable to understand the fineries of the contract, let us have a close look at the terms of the contract/ tender document, which run as under:
5.4.0 Price Escalation:
If the prices of materials (not being materials supplied or services rendered at fixed prices or fixed base rates of items in the tender by the Owner) and, or wages of labour required for execution of the work, increase, the contractor shall be compensated for such increase…………
The fact goes that for approximately all of the commodities including cement, iron, wood, tiles etc. etc. base rates are fixed in the tender document. In accordance with rider in clause 5.4.0, escalation is admissible only where ‘base rates’ are not fixed. Practically there are no significant items left where ‘base rate’ is not fixed in the tender document and therefore there is no question of any major escalation.
According to the tender document, we only have an option to procure any commodity from the open market, if available at a rate lower than the ‘base rate’, following which we are to deduct the money at ‘base rate’ from the cumulative contract bid of the contractor.
Here goes clause 5.3 of the Tender to that effect:
5.3 Issue of Materials by the Owner:
For execution of work under this contract, cement (PPC cement only) & Reinforcement steel shall be arranged by the contractor at rates approved by Owner and paid directly by the Owner. The Owner can also choose to purchase from his own sources the same if he wishes to at pre-specified recovery rate…….
i) The Contractor shall purchase reinforcement steel from Tata, SAIL, RINL. However, if feasible, the Owner may issue reinforcement steel by weights to the contractor for execution of works under thecontract at site or nearest Rail head/Depot.
We have already “approved the rates” proposed by the contractor in his tender bid. So contractor is bound to discount the bid at the rates so approved.That means that the directors could have purchased the cement, iron and other items only in the case the same were available in the open market at rates lower than those approved in the tender document, supply it to the contractor and deduct the cost at the higher approved rate, to the benefit of the members.
For example: Following are the rates so prescribed in the tender:
PPC Cement(Grade 53)Bag of50 kg.Rs. 200.00 (Two Hundred only)
TMT (Fe 500)Steel BarsM.T. Rs. 30,000.00 (Thirty ThousandOnly)
But now our directors want us to mis-read the clause to assume that we are under obligation to purchase these commodities at “market rate” and supply them to the contractor. This is an absurd interpretation of the clause as, it renders the very provision of 'base rate' in the tender, completely redundant. With this interpretation, the contract leads to an absurdity- i.e. if commodities were to be purchased by us at “market rate” then why the ‘base rate’ was prescribed at all in the tender? Why commodities were specified at all, with specifications of product quality etc.?
This mis-interpretation is devoid of all logic on yet another ground. If this version is accepted, the whole contract is immediately reduced to merely a labour/job contract. If we were to procure commodities at now prevalent market rates, then contractor is left only with a pure and simple job work contract. But the whole tender document speaks against it.
The salutary purpose of prescribing the “base rate” in a building contract is to protect the interest of the owner against escalations of the prices in building materials. The contractor though insulates himself against this escalation through separate advance contracts with the material suppliers.
The interpretation given by the contractor and conceded by our directors, for reasons best known to them, is not even intelligible and conceivable.
The members were right in not approving this proposal of the directors in the project meeting held on 21.1.2012 and the AGM held on 28.1.2012.
To our astonishment, we are informed that the directors have started to supply iron, cement etc. to the contractors by procuring the same at higher rates. If this is true, this is contrary to the terms of the tender, without consent and approval of the members and rather despite their opposition.
It is obvious that if this is put into effect, huge deposits of money paid by the members would stand siphoned off to the coffers of the contractor and would not be recoverable as even no “performance guarantee” etc. is obtained by the board from the contractor.
In the end, and at his best, if the contractor pleads an ambiguity or contradiction in some clause or clauses of the contract including his own bid, then he cannot derive any benefit out of the same in view of settled law on the point.
It must be understood by all of us, that in case board concedes to this apparently illegal demand of the contractor, the cost of project would have steep rise and incalculable damage would be done to the members. After consumption of all instalments in the “huge differential” between the rates, members would be left hardly with bare shell of the building structure and will have to pay additional costs for not only of furnishings of their individual apartments, but of the common facilities like club, swimming pool etc. at separate costs, which obviously would be no less than what they had actually paid by that time.
