Karnataka High Court
Navayuga Engineering Company vs Bangalore Metro Rail on 29 August, 2024
Author: K.Somashekar
Bench: K.Somashekar
1
R
IN THE HIGH COURT OF KARNATAKA AT BENGALURU
DATED THIS THE 29TH DAY OF AUGUST, 2024
PRESENT
THE HON'BLE MR JUSTICE K.SOMASHEKAR
AND
THE HON'BLE DR. JUSTICE CHILLAKUR SUMALATHA
COMMERCIAL APPEAL NO.136 OF 2022
CONNECTED WITH
COMMERCIAL APPEAL NO.171 OF 2022
IN COMAP NO.136/2022
BETWEEN:
NAVAYUGA ENGINEERING COMPANY
HAVING ITS OFFICE AT NO.379
ROAD NO.10, JUBILEE HILLS
HYDERABAD-500033
REPRESENTED BY ITS
AUTHORIZED SIGNATORY
MR A S R MURTHY.
...APPELLANT
(BY SRI. DHYAN CHINNAPPA AND SRI. C K NANDA KUMAR - SR.
COUNSELS FOR SRI. HIDAYATHULLA M H - ADVOCATE)
AND:
1. BANGALORE METRO RAIL
CORPORATION LIMITED
BMTC COMPLEX, 3RD FLOOR
K H ROAD, SHANTINAGAR
BENGALURU-560027
REPRESENTED BY ITS
MANAGING DIRECTOR.
2. SRI L V SREERANGARAJU
NO.537, "JESHTA" 3RD MAIN
HOSAKEREHALLI CROSS
BANASHANKARI 3RD STAGE
BENGALURU-560085.
2
3. SRI R RAJAMANI
FLAT NO.3, RAMPRIYA AE-172
11TH MAIN ROAD, ANNANAGAR
CHENNAI-600040.
4. SRI T D MANAMOHAN
NO.10, 'KAVERY'
THARALABALU ENCLAVE
NEAR YELAHANKA OLD TOWN
TRAFFIC POLICE STATION
YELAHANKA
BENGALURU-560084.
...RESPONDENTS
(BY SRI. S. SRIRANGA - SR. COUNSEL FOR SMT. SUMANA NAGANAND
- ADVOCATE FOR RESPONDENT NO.1; VIDE COURT ORFER DATED
14.03.2022, NOTICE TO RESPONDENTS NO.2 TO 4 IS DISPENSED
WITH)
THIS COMAP/COMMERCIAL APPEAL FILED UNDER SECTION
13(1A) OF THE COMMERCIAL COURTS ACT, 2015 R/W 37 OF
ARBITRATION AND CONCILIATION ACT- 1996, PRAYING TO SET
ASIDE THE IMPUGNED ORDER DATED 28.01.2022 PASSED BY THE
COURT OF LXXXIII-ADDITIONAL CITY CIVIL AND SESSIONS JUDGE
(COMMERCIAL COURT) AT BENGALURU IN COM.A.S.NO.228/2018 AND
RESTORE THE ARBITRAL AWARD DATED 16.08.2018 PASSED BY THE
ARBITRAL TRIBUNAL BY ALLOWING THE INSTANT APPEAL.
IN COMAP NO.171/2022
BETWEEN:
BENGALURU METRO RAIL
CORPORATION LIMITED
A COMPANY REGISTERED UNDER THE
COMPANIES ACT, 1956
HAVING ITS REGISTERED OFFICE AT
BMTC COMPLEX,3RD FLOOR
K H ROAD, SHANTINAGAR
3
BENGALURU - 560 027
REP. BY ITS MANAGING DIRECTOR.
...APPELLANT
(BY SRI. S. SRIRANGA - SR. COUNSEL FOR SMT. SUMANA NAGANAND
- ADVOCATE)
AND:
1. M/S NAVAYUGA ENGINEERING COMPANY
A COMPANY REGISTERED UNDER
THE COMPANIES ACT, 1956
HAVING ITS OFFICE AT: PLOT NO.379
ROAD NO.10, JUBILEE HILLS
HYDERABAD-500033
REPRESENTED BY ITS
AUTHORIZED REPRESENTATIVE.
2. SRI L V SREERANGARAJU
PRESIDING ARBITRATOR
NO.537, 'JESHTA', 3RD MAIN
HOSAKEREHALLI CROSS
BANASHANKARI 3RD STAGE
BENGALURU-560085.
3. SRI R RAJAMANI
ARBITRATOR
FLAT NO.3, 'RAMPRIYA' AE-172
11TH MAIN ROAD, ANNANAGAR
CHENNAI-600040.
4. SRI T D MANAMOHAN
ARBITRATOR
NO.10, "KAVERY"
THARALABALU ENCLAVE
NEAR YELAHANKA OLD TOWN
TRAFFIC POLICE STATION
BENGALURU-560084.
...RESPONDENTS
(BY SRI. DHYAN CHINNAPPA AND SRI. C K NANDA KUMAR -
SR. COUNSELS FOR SRI. HIDAYATHULLA M H - ADVOCATE FOR
RESPONDENT NO.1; VIDE COURT ORDER DATED 08.04.2022, NOTICE
TO RESPONDENTS NO.2 TO 4 IS DISPENSED WITH)
4
THIS COMAP/COMMERCIAL APPEAL FILED UNDER SECTION
13(1) OF THE COMMERCIAL COURTS ACT, 2015 R/W SECTION 37 OF
ARBITRATION AND CONCILIATION ACT- 1996, PRAYING TO SET
ASIDE THE IMPUGNED JUDGMENT AND DECREE DATED 28.01.2022
PASSED BY THE LEARNED LXXXIII-ADDL. CITY CIVIL & SESSIONS
JUDGE, BENGALURU (COMMERCIAL COURT), PARTLY SETTING ASIDE
THE ARBITRATION AWARD DATED 16.08.2018 PASSED BY THE
LEARNED ARBITRATOR AND CONSEQUENTLY, SET ASIDE THE
ARBITRAL AWARD DATED 16.08.2018 AND DISMISS THE
ARBITRATION PROCEEDINGS; AWARD COSTS TO THE APPELLANT
THROUGHOUT.
THESE COMAPs', HAVING BEEN RESERVED FOR ARGUMENTS ON
OTHER SIDE COMING ON FOR PRONOUNCEMENT THIS DAY,
K. SOMASHEKAR .J, DELIVERED THE FOLLOWING:
CORAM: THE HON'BLE MR JUSTICE K.SOMASHEKAR
AND
THE HON'BLE DR. JUSTICE CHILLAKUR SUMALATHA
CAV JUDGMENT
(PER: THE HON'BLE MR JUSTICE K.SOMASHEKAR) Since the judgment dated 28.01.2022 passed by the LXXXIII Addl. City Civil Judge, Bengaluru in Com.A.S.No.228/2018 is under challenge in both these appeals which have been filed by the respective appellants, these appeals are taken up for hearing together and are disposed of by this common judgment.
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2. Commercial Appeal 136/2022 is filed by the appellant / Navayuga Engineering Company, under Section 13(1A) of the Commercial Courts Act, 2015 read with Section 37 of the Arbitration and Conciliation Act, 1996 praying to set aside the impugned order dated 28.01.2022 passed by the Court of the LXXXIII Addl. City Civil and Sessions Judge (Commercial Court, CCH-84) at Bengaluru in Com.A.S.No.228/2018 and to restore the Arbitral Award dated 16.08.2018 passed by the Arbitral Tribunal by allowing the appeal.
3. Commercial Appeal 171/2022 is filed by the appellant / Bengaluru Metro Rail Corporation Ltd., under Section 13(1A) of the Commercial Courts Act, 2015 read with Section 37 of the Arbitration and Conciliation Act, 1996 (hereinafter referred to as 'the Act', for brevity), praying to set aside the impugned judgment and decree dated 28.01.2022 passed by the learned LXXXIII Addl. City Civil and Sessions Judge, Bengaluru (CCH-84) (Commercial Court), partly setting aside the Arbitral Award dated 16.08.2018 passed by the learned Arbitrator and consequently to set aside the Arbitral Award dated 16.08.2018 and to dismiss the arbitration proceedings.
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4. Heard the learned Senior Counsel Shri Dhyan Chinnappa and the learned Senior Counsel Shri C.K. Nanda Kumar, who are representing the learned counsel on record Shri Hidayathulla M.H. for the 'Navayuga Engineering Company', namely the appellant in Comap No.136/2022, and who are representing for the respondents in Comap No.171/2022. Further, we have also heard the learned Senior Counsel Shri S. Sriranga who is representing the learned counsel on record Smt. Sumana Naganand for the Bengaluru Metro Rail Corporation Limited, namely the appellant in Comap No.171/2022 and who are also representing the respondents in Comap No.136/2022. Further, we have perused the materials available on record including the synopsis of the arguments submitted by the respective counsel in the matters.
5. The parties shall hereinafter be referred to as per their ranks before the Commercial Court in Com.A.S.No.228/2018, for the sake of convenience.
6. The factual matrix of these appeals is as under: 7
M/s. Navayuga Engineering Company / Defendant No.1, is a public limited company registered under the Companies Act, 1956 engaged in construction activity through turnkey projects having a track record of completing large portion of Delhi Metro Project. Further, Bengaluru Metro Rail Corporation Limited (hereinafter referred to as 'the BMRCL', for brevity), is a special Purpose vehicle of the State of Karnataka and the Government of India, entrusted with the responsibility of providing metro services to Bengaluru City. It transpires that Navayuga Engineering Company / Defendant No.1, was awarded a contract by the Bengaluru Metro Rail Corporation Ltd. / plaintiff, for the construction of elevated structures on the Bengaluru Metro. However, disputes arose during the project, leading to arbitration by a Three-Member Tribunal. The Arbitral Tribunal by its Award dated 16.08.2018, awarded the Defendant No.1 / Navayuga Engineering Company, a sum of Rs. 122,76,50,323/-, along with interest at 12% per annum from the date of award till the date of payment, for various claims including claims 8 to 10. Claims 8 to 10 pertained to extra costs incurred by Defendant No.1 due to delays caused by the plaintiff / BMRCL and included both 8 principal amount of Rs.56,23,06,638/- and finance charges, totalling Rs. 66,53,43,685/-.
7. The plaintiff / BMRCL challenged the entire award under Section 34 of the Arbitration and Conciliation Act, 1996 before the Learned LXXXIII Additional City Civil and Sessions Judge, Bengaluru. While the learned LXXXIII Addl. City Civil Judge (hereinafter referred to as 'Commercial Court', for brevity) upheld most of the award, it has proceeded to set aside the finance charge component of Rs.40,01,02,173/- for claims 8 to 10, citing contravention of fundamental policy of Indian law and patent illegality.
8. The Defendant No.1 namely M/s. Navayuga Engineering Company, has appealed this decision by filing COMAP No.136/2022, arguing that the Commercial Court erred in setting aside the finance charges, as the Arbitral Award is well-reasoned and based on extensive evidence. The learned Senior Counsel Shri Dhyan Chinnappa and Shri C.K. Nanda Kumar appearing for the learned counsel Shri Hidayathulla M.H. for 'M/s. Navayuga Engineering Company' namely the first defendant, submit that the Commercial Court has failed to consider all contentions and 9 case laws submitted. Consequently, the Appellant / Defendant No.1 seeks to set aside the judgment dated 28.01.2022 of the Commercial Court concerning Claim Nos. 8 to 10 and to restore the Arbitral Award dated 16.08.2018.
9. It is the contention of the learned Senior Counsel that the Arbitral Tribunal awarded "finance charges," i.e., charges paid by the 1st defendant at actuals on an overdraft facility availed by it to finance the works during the extended period of the contract. The total amount awarded for Claim Nos.8 to 10 was Rs.65,18,97,122/-, of which the principal amount totaled to Rs.25,17,96,949/-. Further, the amount of Rs.40,01,02,173/- pertained to finance charges.
10. It is contended that the Commercial Court erred in setting aside the portion of the award concerning finance charges, totaling Rs. 40,01,02,173/-, relating to claims 8, 9, and
10. The decision of the Commercial Court was based on an incorrect interpretation of the evidence and exceeded the permissible scope of interference under Section 34 of the Arbitration and Conciliation Act. It is contended that the Arbitral Tribunal, after careful consideration of the pleadings, evidence, 10 and materials on record, has passed a well-reasoned award containing 311 pages. The Tribunal found that delays in project completion were attributable to the Respondent / BMRCL and that the Respondent's invocation of bank guarantees and forfeiture of retention money was arbitrary and illegal.
11. It is the contention of the learned Senior counsel that the claim of finance charges was a simple claim of interest which was on the basis of actual cost and losses incurred, which was a direct and fundamental consequence of the breach committed by the plaintiff / BMRCL and that the losses were proved by the 1st defendant / M/s. Navayuga Engineering Company, by producing all relevant material evidence in that regard. While on the one hand, the Commercial Court has rightly held that the Arbitral Award is an exhaustive discussion of facts, law, contractual terms and evidence and on findings of each of the issues, on the other hand, it has erroneously set aside part of the amounts granted in respect of Claims 8 to 10, which is wholly illegal. It is settled law that every error of law committed by the Arbitral Tribunal would not fall within the expression of 'patent illegality' and erroneous application of law cannot be characterized as patent illegality. The only way by which the Commercial Court could have reduced 11 the finance charges awarded by the Arbitral Tribunal, is by re- appreciating the evidence in the matter, which course of action is beyond the scope of the jurisdiction of the Commercial Court under Section 34 of the Arbitration and Conciliation Act, 1996. Hence, the Commercial Court could not have interfered with the findings of the Arbitral Tribunal.
12. It is the further contention of the learned Senior Counsel Shri Dhyan Chinnappa for appellant in COMAP No.136/2022, that finance charges are actually amounts paid to the Bank and hence, an actual loss that has occurred is what the appellant / 1st defendant was seeking reimbursement of. Interest on the other hand, is the time value of money, that is payable on amounts payable to the Bank. It is a matter of fact that only finance charges were claimed by the appellant / 1st defendant, while greater sums were paid by the appellant towards interest to the Bank, which were not claimed, since those claims were not permitted. It is contended that wherever the appellant had made a claim for interest simpliciter, the same was rejected by the Arbitrators and it is only where finance charges were actually incurred, the same was examined and 12 granted by the Arbitrators. The 1st defendant / Navayuga Engineering Company, provided evidence of actual finance charges incurred, including a CA certificate detailing the interest rate and total charges. The Commercial Court incorrectly characterized these finance charges as interest and erroneously applied a legal precedent that was not even pleaded by the 1st defendant.
13. It is their contention that the Commercial Court wrongly interfered with the Arbitral Tribunal's findings on finance charges for claims 8, 9, and 10, despite upholding similar findings for other claims. The 1st defendant asserts that the finance charges were a direct result of the BMRCL's delays and actions. Hence, the Arbitral Tribunal's award was based on a proper appreciation of the evidence. The learned Senior Counsel further contends that the Commercial Court exceeded its authority under Section 34 of the Act by re-evaluating the evidence and substituting its own interpretation of the contract for that of the Arbitral Tribunal. It is his contention that the Tribunal's award was a plausible interpretation of the facts and evidence and should not have been interfered with by the 13 Commercial Court. Hence, the learned Senior Counsel for the 1st defendant seeks to allow the appeal in COMAP No.136/2022 and thereby to set aside the impugned order dated 28.01.2022 passed by the Court of the LXXXIII Addl. City Civil and Sessions Judge, Bengaluru, in Com.A.S.No.228/2018 and to restore the original Arbitral Award dated 16.08.2018 passed by the Arbitral Tribunal.
14. Per contra, learned Senior Counsel Shri S. Sriranga appearing for Smt. Sumana Naganand for the plaintiff / Bengaluru Metro Rail Corporation Limited contends that the Commercial Court has failed to properly analyse and adjudicate the grounds raised under Section 34 of the Arbitration & Conciliation Act, 1996. Instead of independently assessing the evidence and arguments presented, the Court has primarily recapitulated the findings and reasoning of the Arbitral Tribunal, which approach of the Commercial Court is flawed, as proceedings under Section 34 of the Act are not intended to be a mere review of the arbitral award but necessitate a substantive evaluation of whether the award suffers from defects such as 14 illegality of fundamental policy of Indian law, or public interest concerns.
It is further contended that the Tribunal's award of "finance charges" goes against this statutory provision and the principles of contract law. The learned Counsel for the BMRCL further contended that the Commercial Court primarily relied on the Arbitral Tribunal's findings without conducting an independent assessment of the evidence and legal arguments presented by both parties, as Section 34 of Arbitration and Conciliation Act, requires a thorough examination of the factual matrix and legal submissions to determine whether the Arbitral Tribunal's conclusions were justified. By failing to conduct such an independent review, the Commercial Court deprived the BMRCL of a fair opportunity to challenge the Arbitral Tribunal's findings. It is his further contention that the Commercial Court's reasoning regarding finance charges was flawed. Further, the appellant / 1st defendant relies on Section 31 of the Arbitration & Conciliation Act, which restricts the Arbitral Tribunal's authority to award interest beyond what is agreed upon in the contract. 15
15. It is further contended that the arbitral award is patently illegal since the award exceeds the arbitrator's jurisdiction by granting finance charges in violation of contractual provisions of Clause 85.7 of the General Conditions of Contract (for short 'GCC'). There are specific instances which highlight errors such as awarding finance charges where interest was explicitly barred, as per settled law and contractual terms. In support of the same, the learned counsel relies on the following citations:
i) Delhi Airport Metro Express Pvt. Ltd. v. Delhi Metro Rail Corporation ((2022) 1 SCC 131))
ii) Union of India v. M/s Warsaw Engineers & Ors (COMAP No.25/2021) Relying on the above citations, the learned Senior Counsel for the BMRCL asserts that courts may intervene when an arbitral award is patently illegal. Further, he emphasizes that it is the duty of the Commercial Court to set aside awards that violate the fundamental policy of Indian law or contractual provisions, as outlined in Section 34 of the Arbitration and Conciliation Act, 1996. He has also cited instances where the Arbitral Tribunal 16 erred in awarding finance charges contrary to Clause 85.7 of the GCC.
16. Learned Senior Counsel Shri S. Sriranga also pointed out to five Rescissions which were considered by the Arbitral Tribunal and contended that the employer's action, i.e., BMRCL's action in respect of all the five Rescissions, were not wrongful and were legally sustainable.
17. In furtherance of his case, the learned Senior Counsel relies on the following citations:
1. Union of India V. Manraj Enterprises - before Hon'ble Supreme Court in Civil Appeal No.6592/2021, dated
18.11.2021
2. Garg Builders V. Bharat Heavy Electricals Limited reported in 2021 SCC Online SC 855
3. Reliance Cellulose Products Ltd. V. ONGC Ltd reported in (2018) 9 SCC 266 (paragraph 24)
4. Union of India Vs Ambica Construction reported in (2016) 6 SCC 36 (Paragraph 14)
5. Union of India Vs Bright Power Projects India Private Limited reported in (2015) 9 SCC 695 (Paragraph 11 to 15)
6. Union of India Vs Saraswat Trading Agency reported in (2009) 16 SCC 504 (Paragraph 33)
7. Ranjit Singh Vs State of Madhya Pradesh; (2013) 16 SCC 797 (Paragraph 27) 17
8. Shiv Kumar Sharma Vs Santosh Kumari; (2007) 8 SCC 600 (Paragraphs 21 and 22)
9. Dayal Singh and others Vs Union of India and others; (2003) 2 SCC 593 (Paragraph 31 to 33)
10. J.C.Bhudharaja V. Chairman, Orissa Mining Corporation Ltd & Anr. reported in (2008) 2 SCC 444 (paragraphs 30 to 33)
11. Dandasi Sahu V. State of Orissa reported in (1990) 1 SCC 2014 (paragraphs 16 and 17)
12. South Eastern Coal Fields Ltd. Vs. Murari Lal Agarwal reported in (2015) SCC Online CHH 597 (paragraphs 16 and
17)
13. State of Rajasthan & Anr. V Ferro Concrete Construction Co. reported in (2009) 12 SCC 1 (paragraphs 52 to 55)
14. Govt. of NCT of Delhi V. Ved Prakash Mehta & Anr. reported in ILR (2007) 1 Delhi 188 (paragraph 12)
15. S.V.Sundaram V. State of Karnataka & Others Civil Appeal No.8067/2019; DD-04-01.2024 (Paragraphs 6, 8, 9, 10, 11, 14, 15, 16, 28, 29, 30, 31,33,34,35,36,38,39, 40 and 42 to 44)
16. M/s. Larsel air conditioning and Refrigeration company v. Union of India & Others l Civil Appeal No. 3798/2023; DD 11.08.2023 (paragraphs 5, 13, 14, 15 and 16)
17. Project Director, BHAI v.M Hakeem l (2021) 9 SCC 1 ; (Paragraphs 2, 17, 18, 19, 20, 31, 32, 33, 34 and 48)
18. McDermott Internaionsl inc. v. Burn Statndard Co. Ltd., l (2006) 11 SCC 181 18
19. M/s Christy Friedgram Industry V. Department of Women and Child Development ; COMAP No.236/2021; DD 22.03.2022 ; (paragraph 18)
20. Union of India V. M/s Warsaw Engineers & Ors. (COMAP No.25/2021)
21. Superintending Engineer V. B. Subba Reddy reported in (1999) 4 SCC 423(paragraph 7)
22. Union of India V. Manraj Enterprises., reported in (2022) 2 SCC 331, Garg Builders V. Bharat Heavy Electricals Ltd., reported in 2021 SCC Online SC 855.
23. Hindustan Construction Company Limited and another vs. Union of India and others reported in 2019 SCC online SC 1520.
24. PAM Developments Private Limited vs. State of West Bengal reported in (2019) 8 SCC 112
25. Manish vs. Godawari Marathawada Irrigation Development Corporation reported in SLA(C) No.11760/2018 and SLA (C) No.11761/2018
18. The distinction between "finance charges" and "interest" is pivotal, with the former being improperly used to circumvent contractual bars on interest.
19. The reliance in the case of Superintending Engineer v. B. Subba Reddy (supra), underscores that naming an award differently, does not alter its substance or legality. It is the further contention of the BMRCL that the Arbitral Tribunal's 19 decision to award finance charges lacked basis in evidence, thus warranting interference under Section 34 of the Act. In this regard, he has referred to a reliance in the case of State of Rajasthan v. Ferro Concrete Construction Co. (supra), to support the contention that awards based on no evidence should be set aside.
20. It is the further contention of the learned Senior Counsel for the BMRCL that the arbitral award being modified by the Commercial Court, is legally untenable. Under Section 34 of the Arbitration and Conciliation Act, 1996, courts are empowered solely to set aside or uphold an arbitral award, with no authority to modify it. This position is reinforced by citing numerous precedents and established principles, as cited supra.
21. The learned Senior Counsel for the appellant contends that the grounds raised in the appeal under Section 34 of the Act were inadequately considered and addressed by the Commercial Court. Key arguments concerning the contract's provisions and public policy were crucial to the challenge against the arbitral award but were not discussed by the court. It is argued that finance charges were awarded by the Arbitral Tribunal despite specific contractual prohibitions (Clause 85.7 of the General 20 Conditions of Contract), rendering such awards illegal and contrary to principles of natural justice. The Tribunal overlooked these contractual restrictions and granted finance charges under a different guise, which is impermissible under Indian law.
22. It is contended as regards Claim Nos. 1-14 that, each specific claim made by the 1st defendant / Navayuga Engineering Company in the appeal pertains to errors allegedly committed by the Arbitral Tribunal in applying the terms of the contract (General Conditions of Contract and Special Conditions of Contract). Critical evidence (Ex. R-12, Ex. R-55) and contractual clauses governing extensions of time, price variations, and other contractually agreed-upon terms were purportedly ignored by the Tribunal. Emphasis is placed on several aspects of the arbitral award allegedly violating public policy and substantive law, such as the awarding of damages on a notional basis (Claim No. 6) and the grant of compensation contrary to contractual provisions (Claim Nos. 8-14). These violations are cited as grounds for setting aside the arbitral award under Section 34 of the Act. Learned Senior counsel for the BMRCL contended that the judgment of the Commercial Court is a non-speaking order, as it 21 failed to provide cogent reasons for its decision to partially uphold the arbitral award. This lack of reasoning is violation of the principles of natural justice, thereby impeding the BMRCL's right to a fair hearing.
23. Finally, it is contended by the learned Senior Counsel for the BMRCL, that the failure of the Commercial Court to consider these substantive arguments, warrants the exercise of appellate power under Section 37 of the Arbitration and Conciliation Act, 1996. This section allows the appellate court to set aside an arbitral award if it finds that the award is contrary to the law or public policy or if essential requirements of natural justice have been overlooked. Hence, the learned Senior Counsel Shri S. Sriranga for the plaintiff / BMRCL, seeks to allow the appeal in Com.A.171/2022 and thereby to set aside the impugned order dated 28.01.2022 passed by the Court of the LXXXIII Addl. City Civil and Sessions Judge, Bengaluru, in Com.A.S.No.228/2018 and also to set aside the Arbitral Award dated 16.08.2018 passed by the Arbitral Tribunal.
24. This is the actual background and so also contentions taken by the learned Senior Counsel for the appellant in Comap 22 No.136/2022 and so also the learned Senior Counsel for the appellant in COMAP No.171/2022. In order to consider the grounds urged, it is relevant to refer to the provision of Section 34 of the Arbitration and Conciliation Act, 1996, which reads thus:
"34. Application for setting aside arbitral award.--(1) Recourse to a Court against an arbitral award may be made only by an application for setting aside such award in accordance with sub-section (2) and sub-section (3).
(2) An arbitral award may be set aside by the Court only if--
(a) the party making the application 1[establishes on the basis of the record of the arbitral tribunal that]--
(i) a party was under some incapacity, or
(ii) the arbitration agreement is not valid under the law to which the parties have subjected it or, failing any indication thereon, under the law for the time being in force; or
(iii) the party making the application was not given proper notice of the appointment of an arbitrator or of the arbitral proceedings or was otherwise unable to present his case; or
(iv) the arbitral award deals with a dispute not contemplated by or not falling within the terms of the 23 submission to arbitration, or it contains decisions on matters beyond the scope of the submission to arbitration:
Provided that, if the decisions on matters submitted to arbitration can be separated from those not so submitted, only that part of the arbitral award which contains decisions on matters not submitted to arbitration may be set aside; or
(v) the composition of the arbitral tribunal or the arbitral procedure was not in accordance with the agreement of the parties, unless such agreement was in conflict with a provision of this Part from which the parties cannot derogate, or, failing such agreement, was not in accordance with this Part; or
(b) the Court finds that--
(i) the subject-matter of the dispute is not capable of settlement by arbitration under the law for the time being in force, or
(ii) the arbitral award is in conflict with the public policy of India.
2[Explanation 1.--For the avoidance of any doubt, it is clarified that an award is in conflict with the public policy of India, only if,--
(i) the making of the award was induced or affected by fraud or corruption or was in violation of section 75 or section 81; or 24
(ii) it is in contravention with the fundamental policy of Indian law; or
(iii) it is in conflict with the most basic notions of morality or justice.
Explanation 2.--For the avoidance of doubt, the test as to whether there is a contravention with the fundamental policy of Indian law shall not entail a review on the merits of the dispute.]
25. Further, Section 37 of the Arbitration and Conciliation Act, 1996 reads thus:
37. Appealable orders.--(1) 2[Notwithstanding anything contained in any other law for the time being in force, an appeal] shall lie from the following orders (and from no others) to the Court authorized by law to hear appeals from original decrees of the Court passing the order, namely:--
3[(a) refusing to refer the parties to arbitration under section 8;
(b) granting or refusing to grant any measure under section 9;
(c) setting aside or refusing to set aside an arbitral award under section 34.] (2) Appeal shall also lie to a court from an order of the arbitral tribunal--
(a) accepting the plea referred to in sub-section (2) or sub-section (3) of section 16; or 25
(b) granting or refusing to grant an interim measure under section 17.
(3) No second appeal shall lie from an order passed in appeal under this section, but nothing in this section shall affect or takeaway any right to appeal to the Supreme Court."
These two provisions have been referred in this matter keeping in view the contentious contentions made by the learned Senior Counsel for the parties as well as the scope of the said provision where the judgment and decree rendered by the Commercial Court in Com.A.S.No.228/2018.
26. In the impugned order, it is specifically observed by the Challenging Court that looking into the award rendered by the Arbitrators, the learned Arbitral Tribunal has considered all the documents exchanged between the parties and considered the provisions of the contract and referred to the oral evidence wherever it is necessary and given findings on each of the issues as discussed above, by assigning reasons. But looking to the entire award, it cannot be held that the award is based on surmises and conjectures, as contended. This is the observation 26 made in the impugned judgment and decree rendered by the Commercial Court which is under challenge in the appeals.
27. However, as regards the issues emerged in between the appellant and the respondent respectively for the party to the appeals, it is relevant to refer to the judgment rendered by the Hon'ble Supreme Court, in the case of DELHI AIRPORT METRO EXPRESS PRIVATE LIMITED vs. DELHI METRO RAIL CORPORATION LIMITED (2021 SCC ONLINE SC 695). In this reliance, the Hon'ble Supreme Court has addressed the issues and has interpreted Section 34 of the Act, while examining the validity of the arbitral award. The limited grounds available to courts for annulment of arbitral awards are well known to legally trained minds. However, the difficulty arises in applying the well-established principles for interference to the facts of each case that come up before the courts. There is a disturbing tendency of courts setting aside arbitral awards, after dissecting and reassessing factual aspects of the cases to come to a conclusion that the award needs intervention and thereafter, dubbing the award to be vitiated by either perversity or patent illegality, apart from the other grounds available for annulment of the award. This approach would lead to corrosion of the object 27 of the 1996 Act and the endeavours made to preserve the object, which is minimal judicial interference with arbitral awards. That apart, several judicial pronouncements of this Court would become a dead letter if arbitral awards are set aside by categorizing them as perverse or patently illegal without appreciating the counters of the said expressions. This reliance is considered by the Challenging Court where the proceeding has been initiated under Section 34 of the Arbitration and Conciliation Act, 1996 relating to the impugned judgment rendered in Com.A.S.No.228/2018.
28. On a perusal of the impugned judgment, it is relevant to state that the Arbitral Tribunal has considered the evidence which was led before it. This is not a case of no evidence or non- appreciation of evidence. There was sufficient evidence available and the same has been exhaustively considered.
29. However, keeping in view the contentious contentions made by the learned Senior Counsel for the respective appellant and respondent in both these appeals are concerned and dwelling in detail about the final arbitral award which is indicated in the matter of arbitration in respect of adjudication of disputes under contract Agreement No.BMRCL/VIA/E-W/R1/1 dated 15.02.2007 28 wherein three Arbitrators had taken up the issues relating to the claimant namely, Navayuga Engineering Company Ltd. And the respondent namely, BMRCL, it is seen that the claimant is a public limited company registered under the Companies Act, 1956. The respondent is a Special Purpose Vehicle of the State of Karnataka and the Government of India which is entrusted with the responsibility of providing metro services to Bengaluru City. Subsequent to the claimant becoming the successful bidder for the tender invited by the respondent and the respondent having issued Letter of Acceptance dated 20.01.2007, the parties had entered into a contract vide agreement dated 15.02.2007 for the work of construction of elevated structures between Ch.11200 to 17600 m (approx) excluding Station portions on Byappanahalli - Cricket Stadium (Reach R1) section of Bangalore Metro.
30. This final award consists in all 311 pages and the Arbitral Tribunal Members have exhaustively addressed the issues in between the claimant and the respondent by referring to the materials which had been facilitated for consideration of their grievance. Therefore, the Arbitral Tribunal heard the rival contentions of the parties. Primarily the delays are not 29 attributable to the claimants as held by the Arbitral Tribunal. Further, the contention of the respondents regarding the delays in completion have been dealt in detail while dealing with the extension of time. The respondent has considered the delay from 20.04.2009 upto 27.07.2010, the admitted completion date of work by the claimant. Even the Arbitral Tribunal heard the rival contentions of the parties in the rank of claimant and the respondents and observed that the observations and findings of the Arbitral Tribunal as regards Issue Nos.1, 2, 3, 4, 5 and 7, apply mutatis mutandis to the claim. It further held that the delays under the Contract were not attributable to the claimant, particularly keeping in view that the respondent was granted extension of time for completion of the work upto 31.07.2010 as per Exhibit C-32 dated 05.12.2008 and rescinded the work illegally during the extended period, prohibiting the claimant from completing the whole of the works due to wrongful, unjust and illegal rescissions made by the respondent. Be that as it may, the claimant has completed the works admittedly on 27.07.2010 within the extended period of contract upto 31.07.2010. Arbitral Tribunal also found that there are no 30 documents to substantiate this claim. In view of the same, the Arbitral Tribunal had rejected counter claim No.4.
31. The award is made for each of the issues, claims and counter claims as set out in their earlier paragraphs and accordingly, certain claims namely Claim Nos.1, 2, 5, 6, 8, 9, 10, 12, 13 and 14 of the claimant have been awarded and all the counter claims of the respondents were rejected. This final arbitral award was unanimously made at Bangalore. The same was challenged before the Challenging Court under Section 34 of the Arbitration and Conciliation Act, which was partly allowed, which has led the parties to challenge the same by way of these appeals.
32. On a careful perusal of the contentions put forth by the learned Senior Counsels Shri Dhyan Chinnappa and Shri C.K. Nanda Kumar for the 1st Defendant / Navayuga Engineering Company and the counter arguments advanced by the learned Senior Counsel Shri S. Sriranga for the BMRCL, being the respective parties in both these appeals, it is to be noticed that both these appeals challenge the judgment and decree dated 28.01.2022 passed by the LXXXIII Additional City Civil and 31 Sessions Judge, Bengaluru, by which the Arbitral Award dated 16.08.2018 passed by the Arbitral Tribunal was partially set aside by the Commercial Court. Given the common cause in both appeals, it is appropriate to consolidate these matters for a comprehensive resolution.
33. Navayuga Engineering Company Limited, a public limited company engaged in construction activities, was awarded a contract by Bengaluru Metro Rail Corporation Limited(BMRCL), a special purpose vehicle of the State of Karnataka and the Government of India, for constructing elevated structures on the Bengaluru Metro. Disputes arose during the project, leading to arbitration. The Arbitral Tribunal awarded the Appellant/1st defendant a sum of Rs. 122,76,50,323/- along with interest for various claims, including Claims 8 to 10, on 16.08.2018. These claims pertained to extra costs incurred due to delays caused by the Respondent/BMRCL. The Respondent challenged the award under Section 34 of the Arbitration and Conciliation Act, 1996, before the LXXXII-Additional City Civil and Sessions Judge, Bengaluru. While the judge upheld most of the award, the finance charge component of Rs. 40,01,02,173/- for Claims 8 to 32 10 was set aside, citing contravention of the fundamental policy of Indian law and patent illegality. Both parties now seek to appeal this decision.
34. The Arbitral Tribunal, constituted under the Arbitration and Conciliation Act, 1996, conducted a thorough examination of the evidence and contractual terms before issuing its award. The Tribunal's award, including the finance charges, was based on extensive evidence and a detailed appreciation of the facts. The Tribunal's findings should be given due deference unless there is a clear violation of public policy or fundamental principles of Indian law.
35. As regards the Arbitral Tribunal's Findings on Five Rescissions pointed out by the learned Senior Counsel Shri S. Sriranga, it is seen that the first rescission, dated 14/2/2009, covered the casting and launching of segments, casting and erecting parapets, and cable trough work from P1 to P26 and P117 to P154. Despite the revised completion date being 31/7/2010 and key date being 31/1/2010, the employer / BMRCL, rescinded the work prematurely on 14/2/2009. The employer had issued a notice on 21/12/2008 citing backlog 33 issues and another notice under clause 60.1 on 2/1/2009, to which the contractor / Navayuga Engineering Company responded on 8/1/2009 and later agreed to deploy additional resources. Nonetheless, the employer proceeded with the rescission without giving the mandatory 48 hours notice, violating contract requirements. Hence, the Tribunal was just in holding that the delays were attributable to the employer, not the contractor.
36. As regards Rescission No.2 dated 29/6/2009 which pertained to launching segments and erecting parapets and cable trough from P71 to P103, the contractor / Navayuga Engineering Company argued those practical difficulties, such as insufficient road width for gantry operations, hampered progress, and the employer / BMRCL was aware of these issues. Despite this, the employer issued a notice under clause 60 on 13/6/2009 and rescinded the work on 29/6/2009. The Tribunal concluded that the employer did not substantiate claims of work abandonment or unauthorized stoppage, noting that work was still in progress. The Tribunal has rightly determined that the employer did not properly consider the on-going work progress and unjustly issued the rescission.
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37. As regards Rescission No.3 dated 18/7/2009, which involved casting segments, parapets, and cable trough from P71 to P88, the employer cited significant shortfalls in casting segments and parapets as reasons for the rescission, but the contractor provided evidence that delays were due to the employer's actions. The Tribunal noted that the notice for this rescission followed immediately after the second rescission and did not provide the required 48 hours notice. Hence, the Tribunal was right in concluding that the BMRCL / employer's approach was not right and fair, highlighting that the alleged defaults did not occur after the first and second rescissions and thus, the third rescission lacked proper grounds.
38. As regards Rescission No.4 dated 1/2/2010, which concerned casting segments from P88 to P103, the employer cited the contractor's failure to submit a casting programme by 5/9/2009 as the reason for rescission. However, the contractor argued that on-going discussions and modifications to bulkhead designs delayed their ability to cast segments. The Tribunal found that the employer disregarded the integrated nature of the work and did not refer specific contract clauses to justify the 35 rescission. Hence, the Tribunal was justified in concluding that the employer / BMRCL, failed to consider the on-going modifications and discussions that impacted the contractor's ability to meet the schedule.
39. As regards Rescission No.5 dated 8/3/2010, which involved casting cable troughs, the contractor contended that delays in receiving necessary drawings, issued only on 22/3/2010, impeded their ability to complete the work. The employer claimed that the contractor failed to meet revised programme deadlines, necessitating rescission. The Tribunal noted that the delays were caused by the employer and that the rescission did not conform to the agreed contract provisions. The Tribunal was thus justified in holding that the employer's actions violated principles of natural justice.
40. Hence, the Tribunal was right in holding that the employer's actions in all five rescissions were wrongful, unjust, and not legally sustainable. Consequently, the Tribunal was just in rejecting the employer's claim that the contractor lacked the capacity to complete the work on time and ruled that claims related to rightful rescission under contractual clauses were invalid.
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41. It is to be noticed that under Section 34 of the Arbitration and Conciliation Act, this Court's role is limited to set aside awards that are in contravention of public policy or on patent illegality. The court is not empowered to reassess the merits of the case or substitute its interpretation of the contract for that of the Tribunal. The Commercial Court's decision to set aside the finance charges exceeded this limited scope, as it effectively re-evaluated the evidence and contractual terms, as enshrined in the case of SSANGYONG ENGINEERING AND CONSTRUCTION COMPANY LIMITED V. NATIONAL HIGH WAY AUTHORITY OF INDIA (NHAI) ((2019) 15 SCC 131))
42. The finance charges awarded by the Tribunal were a direct result of the delays caused by the Respondent / BMRCL, which had significant financial implications for the Appellant / 1st defendant. Denying these charges would undermine the principles of fairness and equity, as the Appellant incurred substantial costs due to the Respondent's actions. Upholding the Tribunal's award, including the finance charges, aligns with the fundamental policy of Indian law, which seeks to ensure justice and fairness in commercial transactions.
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43. The distinction between interest and finance charges is pivotal. While the contract may limit the award of interest, finance charges represent actual costs incurred by the Appellant / 1st defendant due to project delays. These charges are not merely interest under a different name but reflect the financial burden borne by the Appellant / 1st defendant. The Tribunal was within its rights to award these charges based on the evidence presented.
44. In the light of the above considerations, this Court finds that the learned LXXXIII Additional City Civil and Sessions Judge, Bengaluru, dated 28.01.2022, erred in setting aside the finance charges awarded by the Arbitral Tribunal. Hence, the Arbitral Award dated 16.08.2018 is hereby upheld in its entirety, including the finance charges. Hence, we proceed to pass the following:
ORDER
i) The Commercial Appeal No. 171/2022 preferred by the BMRCL is dismissed, while the Commercial Appeal No. 136/2022 preferred by Navayuga Engineering Company, is allowed. 38
ii) The judgment and decree dated 28.01.2022 passed by the LXXXIII Additional City Civil and Sessions Judge, Bengaluru, in COM.A.S.No.228/2018, is hereby set aside.
iii) As a consequence, the Arbitral Award dated 16.08.2018 is upheld in its entirety, including the finance charges.
Sd/-
(K.SOMASHEKAR) JUDGE Sd/-
(DR.CHILLAKUR SUMALATHA) JUDGE KS