Rajasthan High Court - Jaipur
Raj Rajya Vidyut Utpadan Nigam Ltd vs Parsa Kente Collieries Ltd on 28 February, 2018
Bench: Mohammad Rafiq, Alok Sharma
(1 of 64) [CMA-3785/2017]
HIGH COURT OF JUDICATURE FOR RAJASTHAN
BENCH AT JAIPUR
D.B. Civil Miscellaneous Appeal No.3785/2017
Rajasthan Rajya Vidyut Utpadan Nigam Ltd., Registered Office At
Vidyut Bhawan, Janpath Jyoti Nagar Jaipur 302 005.
----Appellant
Versus
Parsa Kente Collieries Ltd., Registered Office At 6F-32 Mahima
Triniti Plot No.05 Swej Farm New Sanganer Road, Sodala Jaipur.
----Respondent
Advocates who appeared in this case:-
For Appellant(s) : Mr. Gopal Subramanium, Senior
Counsel, associated with Mr. Kartik
Seth, Mr. Jayavardhan Singh and Mr.
Parikshit Singh, Deputy Government
Counsel
For Respondent(s) : Mr. Dushyant Dave, Senior Counsel
and Mr. R.N. Mathur, Senior Counsel,
associated with Mr. Anuroop Singhi,
Mr. Saurabh Jain and Mr. Salil Sinha
HON'BLE MR. JUSTICE MOHAMMAD RAFIQ
HON'BLE MR. JUSTICE ALOK SHARMA
Judgment
//Reportable//
Per Hon'ble Mr. Justice Mohammad Rafiq:
28/02/2018
This appeal under Section 37 of the Arbitration and
Conciliation Act, 1996, filed by Rajasthan Rajya Vidyut Utpadan
Nigam Limited, seeks to challenge the judgment of the
Commercial Court (Additional District & Sessions Judge No.1),
Jaipur Metropolitan, dated 13.04.2017 in Arbitration Objection
Case No.51/2016, thereby dismissing the objections filed by the
(2 of 64) [CMA-3785/2017]
appellant under Section 34 of the Arbitration and Conciliation Act,
1996, to the Arbitral Award dated 27.05.2015.
Rajasthan Rajya Vidyut Utpadan Nigam Limited (for short,
'the RVUNL'), the appellant herein, is a power generating company
within the meaning of Section 2(8) of the Electricity Act, 2003. It
is owned by the State of Rajasthan. The appellant floated a tender
in March, 2006 to select firms/consortium of firms/collaborator
firms for entering into with a Joint Venture Agreement so as to
form a joint venture company for undertaking the coal block
development, mining of coal and arranging its transportation and
delivery to the appellant's Thermal Power Stations at Chhabra
Phase-II and Kalisindh in the State of Rajasthan. Pursuant thereto,
one Adani Enterprises Limited submitted its bid on 12.05.2006 and
emerged as the L1 bidder. A Letter of Intent was resultantly issued
to it on 23.10.2006. It was thereafter that the Government of
India, vide their letter dated 19/25.06.2007 allocated Parsa East
and Kanta Basan coal blocks located in the State of Chhattisgarh
to the appellant to enable it to meet the coal requirement for its
thermal power projects. A joint venture agreement was executed
between the appellant and Adani Enterprises Limited, pursuant to
which the respondent-company, namely, Parsa Kente Collieries
Limited (for short, 'the PKCL') was incorporated as a joint venture
company. While the appellant had 26% share in that company, the
majority share holding being at 74%, was retained by Adani
Enterprises Limited. The appellant and the respondent thereupon
executed an agreement on 16.07.2008 for development of coal
block, mining of coal and arranging for transportation and delivery
of coal. In June, 2009, the Central Government formulated a policy
(3 of 64) [CMA-3785/2017]
of 'Go' and 'No Go' and declared the Parsa Kente and Kanta Basan
coal blocks as a 'No Go' area. On 29.07.2009, the respondent
entered a Coal Mining Services Agreement with Adani Mining
Private Limited (for short, 'AMPL'). It may be significant to note
that the appellant-company is not a party thereto. The Ministry of
Coal, Government of India, issued guidelines for preparation of a
Mine Closure Plan. The said guidelines required, inter alia, the
mining company to open an Escrow Account with any Scheduled
Bank. The appellant under intimation to the respondent and its
acceptance opened an Escrow Account on 12.07.2012 in
conformity with the guidelines of Ministry of Coal dated
27.08.2009 with the Coal Controller Organization and United Bank
of India as the beneficiary. As per the Coal Mining and Delivery
Agreement (for short, 'CMDA') between the appellant and the
respondent, the coal supply was to commence at the earliest
within 42 months, or within forty-eight months from the date of
allotment of coal blocks i.e. by or on 25.06.2011--a clause for
extending the commencement was however provided for. The
Chhattisgarh Environment Conservation Board, while approving
the consent to operate on 31.12.2012, allowed the respondent to
commence mining activities and supply of coal. The Respondent
commenced coal supply to the appellant on 25.03.2013. The
respondent on 30.8.2011 informed the appellant of the delay in
the commencement of coal supply, inter alia owing to delay in
receiving forest clearances and vide their letters dated 30.11.2011
and 2.3.2012 requested to invoke the Force Majeure events in the
agreement and extend the date of commencement. The appellant
acceded to request and recognized existence of Force Majeure
events extending the date of commencement to 25.3.2013. The
(4 of 64) [CMA-3785/2017]
new scheduled commencement date of coal supply and that no
penalty would be levied on the respondents for any delay in supply
in the light of force majeure events, had been accepted by both
parties. The respondent, however vide letter dated 27.11.2013,
requested the appellant that the commencement date of coal
supply yet be considered as 25.06.2011. However, this request of
the respondent was rejected by the appellant vide their letter
dated 27.11.2013.
Certain disputes having arisen between the parties, the
respondent invoked Clause 10.2 of the CMDA dated 25-6-2011
and sought arbitration. The parties then appointed a retired
honourable Judge of this Court as the Sole Arbitrator. Based on the
pleadings of the parties, following issues were framed by the
learned Sole Arbitrator:-
i. Whether, in terms of the CMDA, 25.06.2011 was to be
considered as the fixed date of commencement of coal
supply?
ii. Whether Royalty and Stowing Excise Duty ("SED") as
applicable on he fixed dated were liable to be frozen
for the purposes of the CMDA?
iii. Whether 'Basic Price' was liable to be calculated by
considering 25.06.2011 as the fixed date and whether
further increase in Royalty and SED would become
payable as per actual with effect from 25.06.2012?
iv. Whether, in terms of the CMDA, Financial Year 2011-12
was the 'Zero Year' for the purposes of applying Price
Adjustment?
v. Whether the appellant had taken 25.03.2013 as the
commencement date (of coal supply) in contravention
of the CMDA?
vi. Whether the appellant was the sole beneficiary of all
mining activities carried out by the
respondent/claimant under the CMDA?
vii. Whether there was a shortfall in offtake of coal by
appellant during FY 2013-14 in contravention of the
CMDA?
viii. If the answer to Issue vii was in the affirmative,
whether the appellant was liable to reimburse the
respondent/claimant and/or its sub-contractors for the
(5 of 64) [CMA-3785/2017]
expenses incurred in achieving the output to the extent
of shortfall in offtakes?
ix. Whether the appellant was liable to deposit the Mine
Closure Cost in terms of the Escrow Agreement?
x. Whether the respondent/claimant had any privity of
contract qua the Escrow Agreement between the
respondent and the Government of India?
xi. If the answer to issue no.x was in the negative,
whether depositing of Mine Closure Coast by the
respondent/claimant was covered by the 'Scope of
Work' under the CMDA?
xii. Whether the appellant had breached the CMDA by
deducting monies from the bills of the
respondent/claimant on the pretext of deductions
towards deposits for mine closure costs?
xiii. Whether the construction of a railway siding at
Mamalpur was covered within the 'Scope of Work'
under the CMDA?
xiv. If the answer to issue No. xiii was in the negative,
whether the appellant was liable to reimburse the
respondent/claimant and/or its sub-contractors for
expense incurred in construction of the railway siding
at Kamalpur?
The respondent-claimant (hereinafter 'claimant') and the
appellant-non claimant (hereinafter 'appellant') laid their evidence
before the Sole Arbitrator on affidavits and produced certain
documents. The Sole Arbitrator passed the award on 27.05.2015.
With regard to the first claim based on escalation of base price of
coal, under the price adjustment clause of the CMDA, the Sole
Arbitrator held that as per the appellant's letter dated 30.11.2011,
the Force Majeure events were treated as admitted and the delay
in the commencement date for the supply of coal was not the
claimant's account. Instead it was mutually agreed upon. And
hence, the extended date of commencement was of no event for
operation of the price adjustment clause. The claimant was
entitled to price adjustment in the basic price of coal as per the
formula in the CMDA, which had to be applied, in the facts of the
case, taking 25.06.2011 as the date of commencement-forty eight
(6 of 64) [CMA-3785/2017]
months following allocation of coal block as the basis, the Financial
Year 2011-12 as the Zero Year and escalation 2013-14 onwards
after subtracting royalty and stowing excise duty therefrom as
provided. With regard to the second claim, the Sole Arbitrator inter
alia held that the respondent was entitled to Rs.78 crores towards
fixed costs and the losses incurred due to the failure of the
appellant to off-take requisite quantities of coal in time as per the
scheduled dates. In regard to the third claim, it was held by the
Sole Arbitrator that it was for the appellant to open an Escrow
Account since the stage of closing any mine or part of it had not
yet arrived, and therefore deductions carried out by the appellant
from the running bills of the respondent for coal supplied on that
count were unjust, premature and contrary to the CMDA. The third
claim was thus decided in favour of the respondent. The fourth
claim with regard to construction of railway siding was however
rejected. The final award was thus passed.
Aggrieved by the aforesaid award dated 27-5-2015, the
appellant filed objections under Section 34 of the Arbitration and
Conciliation Act, 1996, raising multiple grounds for setting it aside.
The Commercial Judge, however, vide impugned judgment dated
13.04.2017, dismissed all the objections of the appellant. Hence
this appeal.
We have heard Mr. Gopal Subramanium, Senior Counsel for
the appellant and Mr. Dushyant Dave, Senior Counsel for the
respondent.
Mr. Gopal Subramanium, submitted that the Commercial Court failed to appreciate that the impugned award is patently illegal, irrational and opposed to the public policy of India. The (7 of 64) [CMA-3785/2017] findings of the Sole Arbitrator are incompatible with and stand in complete contravention of the contractual clauses in the CMDA binding on both parties. It was submitted that in fact it is clear in the light of unambiguous contractual clauses that the findings of the Sole Arbitrator are so unreasonable, which no person of ordinary prudence could have arrived at. It was contended that the term 'Commencement Date' was defined in the Agreement to have the same the meaning as given to it in Clause 4.5.1, which stipulated that the delivery of coal was to commence within forty eight months from the date of allotment of coal blocks (25.06.07). Even though the Claimant was to use its best efforts to commence delivery of Coal within forty two months from the date of allotment of the coal blocks though no penalty was to be applicable if the Claimant did not commence delivery of Coal within forty two months from the date of allotment of coal blocks. The penalties were to be applicable only if the delivery of Coal did not commence within forty eight months from the date of allotment of coal blocks (25-6-2007). Clause 4.5.3 provided that the Commencement Date was the essence of the contract, Clause 4.5.2 of the CMDA further provided that in the event the Company was unable to perform its obligations under Clause 3.2 by the required date under Clause 4.5.1 because of any default by the appellant of its obligation under the agreement, or force majure event, the commencement date shall be suitably extended. Thus it is evident that the said commencement date was not written in stone, was variable between 42 and 48 months and further for reason of Force Majeure events, could be further extended. It was submitted that such commencement date as provided and when (8 of 64) [CMA-3785/2017] extended, was to be the essence of the contract. And both the parties mutually decided that owing to the delay in obtaining forest clearances (18 months) and in finalizing road transportation (3 months) which constituted force majeure circumstances, the date of commencement warranted being extended to 25-3-2013.
Mr. Gopal Subramanium, argued that the CMDA did not even remotely envisage a deemed commencement date different from the one actually extended by mutual agreement of the parties by resort to the terms of the CMDA itself. It was submitted that the term 'commencement date' is not notional and has been defined in the agreement to be the date on which the actual supply of coal began. It was submitted that the expression "...within forty eight months..." in Clause 4.5.1 of the CMDA makes it clear that 25.06.2011 was not a fixed and unalterable date; coal supply could have begun before the said date as well. This is clear equally from the expression "...the Company shall use its best efforts to commence delivery of Coal within forty two (42) Months from the date of allotment of Coal Blocks...". The 'commencement date' was thus evidently not immutable and capable of alteration provided Force Majeure conditions for the same, as stipulated under the Agreement, obtained. The claimant vide their letter dated 30.08.2011, had made an unequivocal request to the appellant seeking extension of the commencement date under Clause 4.5.2 of the Agreement, requesting that it be extended by 18 months, with effect from June, 2011 i.e. Commencement Date be revised to December, 2012. The Board of Directors of the appellant, in its 228th Meeting held on 27.08.2013, accepted the respondent's (9 of 64) [CMA-3785/2017] request for extension of the commencement date and resolved that 25.03.2013 be thence considered as the new Scheduled Commencement Date--while also clarifying that no penalty on the claimant-M/s PKCL would be leviable. Reference in particular was made by Mr. Gopal Subramanium to para 29 of the Statement of Claim to submit that the claimant categorically admit that in the event of Force Majeure circumstances, the commencement date could be suitably extended.
On the issue of the operation of price adjustment clause 5.4.3 of the CMDA Mr. Gopal Subramanium, submitted that the claimant was entitled to an escalation in the base price of coal each operating year provided that the first escalation was to occur only after completion of 12 months from the commencement date. Reference was made to the definition of the 'Operating Year', which means the financial year and includes the period from the commencement date to the following March 31; each period thereafter from April 01 to the following March 31, and with respect to the Operating Year in which the termination or expiry of the agreement occurs, the period from April 01 immediately preceding the date of such termination or expiry to the date of such termination or expiry. Thus theoretically, submitted Mr. Gopal Subramanium if coal supply had indeed commenced, as initially expected, at least on 25.06.2011, and the said commencement date were operative, the first Operating Year would have been 25.06.2011 to 31.03.2012. However, since the coal supply admittedly commenced only on 25.03.2013--and the commencement date was so mutually extended, the first Operating Year was and ought to have been taken by the Sole (10 of 64) [CMA-3785/2017] Arbitrator as 1.4.2013 to 31.3.2014. Under the CMDA, the basic price of coal was to be adjusted only after the completion of 12 months from the Commencement Date. It thus follows that if 25.06.2011 had been the Commencement Date--which was not, the first price escalation would have been from financial year 2013-14. However where the Commencement Date was in fact agreed and indeed was 25.03.2013, the first price escalation would only occur as per the contract terms only in the financial year 2014-15. Mr. Gopal Subramanium submitted that hence, there was no question of price escalation in the base price of coal for Financial Year 2013-14 and yet it was awarded as a perversity, on a gross oversight and circumvention of the terms of the CMDA. Consequently the finding recorded by the Sole Arbitrator and upheld by the Commercial Court that the respondent was entitled to an escalation in basic price of coal effective 01.04.2013 is against "public policy".
In his arguments, Mr. Gopal Subramanium laid great emphasis on the point that the appellant in the present case was not merely advocating an alternative interpretation of the relevant clauses of the CMDA over the one adopted by the Sole Arbitrator, but the relevant clauses of the CMDA only allowed for one possible interpretation as advanced in this appeal. The interpretation of the Sole Arbitrator was wholly incompatible with the terms of the CMDA and hence unsustainable, unconscionable, grossly arbitrary and thus in conflict with the public policy of India. Mr. Gopal Subramanium relied on judgments of the Supreme Court in Oil & Natural Gas Corporation Ltd. Vs. Saw Pipes Ltd. - (2003) 5 SCC 705, Hindustan Zinc. Ltd. Vs. Friends Coal Carbonisation - (2006) (11 of 64) [CMA-3785/2017] 4 SCC 445, McDermott International Inc. v. Burn Standard Co. Ltd.
- (2006) 11 SCC 181. Delhi Development Authority Vs. R.S. Sharma and Co., (2008) 13 SCC 80 and Associate Builders Vs. Delhi Development Authority - (2015) 3 SCC 49.
Mr. Gopal Subramanium submitted that the Sole Arbitrator and the Commercial Court also failed to appreciate that the parties had accepted the extended commencement date for reason of Force Majeure and only that date and not any other, was relevant for the application of the price adjustment clause. It was contended that the claimant on the one hand could not take the benefit of an extended commencement date under the Force Majeure clause in escaping penalty and on the other cull out a prior date on purported harmonious and reasonable construction of the CMDA for benefiting from the price adjustment clause. The claimant cannot be allowed to approbate and reprobate. It was submitted that this would follow on the doctrine of estoppel. Reliance in support of this argument was placed on the judgment of the Supreme Court in C. Beepathumma & Others Vs. V.S. Kadambolithaya & Others - AIR 1965 SC 241, and New Bihar Biri Leaves Co. & Ors. Vs. State of Bihar & Ors., (1981) 1 SCC 537 and it was contended that the Sole Arbitrator and Commercial Judge have both committed a patent illegality in contrarily and recklessly finding 25.06.2011 to be the Commencement Date de hors the terms of the contract and admitted facts on record that it was 25- 3-2013 and then allowing the claimant's claim for price adjustment on that foundation. Such a finding for multiple reasons set out in the arguments is liable to be set aside.
(12 of 64) [CMA-3785/2017] Mr. Gopal Subramanium, then submitted on the second claim for damages based on fixed costs, the Sole Arbitrator in Para 21- 23 of the Award held that since the appellant failed to off-take the requisite quantities of coal ready to ship as scheduled, for a period of 107 days i.e. from 26.08.2013 to 02.12.2013, it had defaulted under Clause 8.2(iii) of the Agreement and therefore a case for compensatory damages to the claimant had been made out under Section 73 of the Indian Contract Act, 1872. Mr. Gopal Subramanium however emphatically submitted that yet there is however no reasoning in the Award as was mandatory under Section 31(3) of the Act of 1996 as to the manner and evidences on which the respondent satisfied the elements of Section 73 of the Act of 1872. The claim for damages on account of fixed cost only rested on an alleged loss of approximately Rs.78 crores suffered not directly by the claimant but by a third party "AMPL" with which the respondent had entered into a Coal Mining Services Agreement on 29.07.2009. The loss claimed by the claimant was the purported loss incurred by the AMPL, with whom the appellant had no relation and/ or privity of contract. The appellant's obligations were/ are strictly limited within the CMDA dated 16-7- 2008 and to compensate the respondent claimant for loss of its sub contractor was not one. The appellant in its legal capacity was/ is not concerned with any sub-contract made by the respondent. AMPL was a stranger to the Coal Mining Development Agreement dated 16-7-2008. It was submitted that thus both the Sole Arbitrator and the Commercial Judge dismissing the appellant's objections on claim No.2 of the award under Section 34 of the Act of 1996 acted in breach of substantive law of India.
(13 of 64) [CMA-3785/2017] They could not have relied upon CW1/72, which was a mere certificate from a Chartered Accountant of AMPL and purported to be a statement of losses of Rs.77.39 Crore allegedly incurred by AMPL. It was submitted that the Sole Arbitrator has unconscionably awarded a huge sum towards fixed costs loss of Rs.78 crore to the respondent on that basis alone. Strangely, the figure towards alleged loss on account of fixed costs has been assumed by the Sole Arbitrator on the respondent-claimant's ipse dixit. It was submitted the Sole Arbitrator overlooked Clause 8.3(iv) (remedies for breach/termination) which clearly provided that neither party would be liable for indirect or consequential losses arising as a result of their breach of the Agreement unless so specifically otherwise provided in the Agreement--yet nothing from the CMDA dated 16.7.2008 was pointed out to the Sole Arbitrator to justify award of damages of Rs.78 crores to respondent claimant for the purported losses of AMPL under their agreement dated 29.7.2009. It was submitted that in the absence of any discussion of evidence and any reasoning on the manner of computing damages, no case for award of damages was at all made out under Section 73 of the Indian Contract Act, 1872. Mr. Gopal Subramanium submitted that the Sole Arbitrator as well as Commercial Judge therefore exercised their jurisdiction recklessly in doing so. Such a conclusion is wholly unreasonable, perverse, unconscionable and contrary to the CMDA. The award dated 27-5- 2015 and the judgment of the court below are in the facts of the case contrary to substantive laws of India as applicable and mandated under Section 28(1)(a) of the Act of 1996.
(14 of 64) [CMA-3785/2017] On the claim awarded with regard to the Escrow Account, Mr. Gopal Subramanium submitted that the Ministry of Coal, Government of India, had issued guidelines for preparation of the Mine Closure Plan only on 27.08.2009. These guidelines required, inter alia, the mining company to open an Escrow Account with any Scheduled Bank. The Appellant opened an Escrow Account on 12.07.2012 and executed an Escrow Agreement with the Coal Controller Organization (CCO) and United Bank of India. Reference is made to the letter dated 06.06.2012 addressed by the appellant to respondent-claimant, wherein it was stated that the appellant RVUNL would open and maintain 'Escrow Account' with the CCO in a scheduled commercial Bank subject to the condition that amount deposited as per approved mine closure plan (10 MTPA) shall be recovered from immediate next payment of the coal bill of the respondent claimant raised towards dispatches of coal. The respondent claimant, by its letter dated 09.06.2012, consented to the condition and agreed that the amount deposited into the Escrow account be recovered by the appellant from immediate next payment of the coal bills raised towards dispatches of coal. This was in any event within the definition of "Scope of Work" in Clause 3.2.1 of the CMDA which provided that all expenses incurred for the works shall be borne by the respondent Claimant, submitted Mr. Gopal Subramanium. The Sole Arbitrator has thus on this issue recorded a perverse findings contrary to the respondent claimant's acceptance as also the terms of the CMDA and awarded to it a refund of deductions made for deposit in the Escrow account.
(15 of 64) [CMA-3785/2017] Mr. Gopal Subramanium submitted that the Sole Arbitrator on all the three claims thus arrived at wholly unreasonable and unconscionable conclusions which no prudent person on the material on record, factual and legal, could have. Conditions of the underlying CMDA have been recklessly overlooked hence the award dated 27.5.2015 as also the order dated 13.4.2017 passed by the court below dismissing the appellant's objection thereto be set-aside. Reliance was placed on the judgment of the Supreme Court in Oil and Natural Gas Corporation Ltd. Vs. Western Geco International Ltd.,- (2014) 9 SCC 263 in support of the submissions. Mr. Gopal Subramanium to emphasis the huge financial impact of a wholly perverse, patently illegal and award vitiated by complete non application of mind contended that impact of the award and the judgment of the Commercial Court has over the long run financial ramification of about Rs.955 crore on the public exchequer to the obvious unfair detriment of the public which would bear the costs through higher tariffs if the award were allowed to stand. It was submitted that the concept of public policy as envisaged in ONGC Vs. Saw Pipes, supra, was neither appreciated by the Sole Arbitrator nor by the Commercial Judge. He submitted that the impact of the award passed by Sole Arbitrator and the order of Commercial Court could have only been determined ex-post-facto and hence the PWC report dated 09.10.2017 titled 'Assessment of Potential Financial Impact on RVUNL Considering an Advance Escalation on Mining Fees', now filed before this Court, ought to be considered.
(16 of 64) [CMA-3785/2017] Per contra, Mr. Dushyant Dave, Senior Counsel appearing for the respondent submitted that in view of the findings of fact recorded, and conclusions arrived at by the Sole Arbitrator in his award on the three claims to the respondent claimant's benefit, which the Commercial Court on objections thereto found no good ground to annul, there is no legally permissible ground for interference in this appeal under Section 37 of the Act of 1996. Mr. Dushyant Dave submitted that the Sole Arbitrator acting within his power to interpret the CMDA dated 25-6-2011 was justified in holding 25.06.2011 as the commencement date, as specifically provided for in CMDA, 2011-12 as the Zero Year and based thereon granting first escalation to the respondent company on the basic price of coal effective 1.4.2013. Reasons within Section 31(3) of the Act of 1996 have been assigned for the said conclusion on interpretation of the relevant clauses of CMDA. Relying on the judgment of the Supreme Court in Quality Manufacturing Vs. Central Warehousing Corporation - (2009) 5 SCC 142, Mr. Dushyant Dave submitted that the court's jurisdiction over the award under Section 37 of the Act is not appellate though it is so qua the order on an application under Section 34 of the Act of 1996 and it cannot reassess or re-appreciate the evidence or examine the sufficiency or otherwise of the evidence on which the award is based. Relying on the judgment of the Supreme Court in SAIL Vs. Gupta Brother Steel Tubes Limited - (2009) 10 SCC 63, Mr. Dushyant Dave, the learned Senior Counsel submitted that even where an Arbitrator makes an error relating to interpretation of the contract, though he did not in the instant case, his conclusions thereon are not amenable to correction by Courts (17 of 64) [CMA-3785/2017] either under Section 34 or other Section Section 37 of the Act of 1996.
Referring to the Apex Court's judgment in Associate Builders Vs. Delhi Development Authority - (2015) 3 SCC 49, it was submitted by Mr. Dushyant Dave that in the said case the judgment of the Division Bench of the High Court was set-aside by the Apex Court and the award passed was restored holding that the High Court exceeded its jurisdiction in interfering with the plausible view of the Arbitrator on facts and his interpretation of the terms of the contract. It was submitted that the Sole Arbitrator in the present case on a harmonious construction has taken a plausible just and fair interpretation of various Clauses of the CMDA to hold that the application for the price adjustment clause with 25-3-2011 as the date of commencement was the intention of the parties to the CMDA. This Court cannot exercise its power of annulment of the award on the mere askance of the appellant. To buttress his submissions, Mr. Dushyant Dave placed reliance on the judgment of the Supreme Court in McDermott International Inc. Vs. Burn Standard Co. Ltd. - (2006) 11 SCC 181 and National Highways Authority of India Vs. ITD Cementation India Ltd., - (2015) 14 SCC 21.
Mr. Dushyant Dave further submitted that the findings recorded by the Sole Arbitrator as upheld by the Commercial Court in respect to the price adjustment clause are perfectly just and reasonable and do not require any interference. The conclusion recorded by the Sole Arbitrator is unexceptional and does not in any manner violate the terms of the contract. It was submitted that clause 5.1.1 of the CMDA categorically provided that in (18 of 64) [CMA-3785/2017] consideration of the services to be undertaken by the respondent, performance of the Works and Delivery of the Coal to the Delivery Points, and Joint Venture Agreement, the appellant RVUNL shall pay the contract price per MT to the company duly adjusted as per the provisions of Clause 5.4. That contract price entailed multiple functions of the respondent company with reference to the Clause 3.2.1 of the CMDA whereunder the company was to carry out all works from identification of techno-economically viable coal blocks to coal mining and delivering coal to the appellant RVUNL's Thermal Power Stations. All expenses incurred for all the works were be borne by the company, including all expenses in relation to the cost of acquisition of land/lease of land; fees and arranging all clearances, reports and licenses for the term of the agreement and all charges incurred for arranging mining data, geological data and reports and no expenses/ liabilities was to be borne/ shared by the appellant RVUNL at any stage. Clause 3.2.2 contains various other obligations of the respondent company. After performing all these obligations only, the respondent/claimant could actually mine the coal, wash it and transport it to the designated power stations as per scheduled quantities. The actual delivery / supply of coal to the appellant was thus the last part/ mile of the obligation of the respondent claimant under the contract. Mr. Dushyant Dave submitted that Clause 5.1.1 provides for contract price for discharge of all the obligations, services and activities and cannot and need not be confined to mere delivery of coal. It is this contract price which is required to be duly adjusted under Clause 5.4. The contract price under Clause 5.1.2 was total delivery price per metric tonne of coal at the delivery point not (19 of 64) [CMA-3785/2017] exceeding the ceiling price determined in accordance with Clause 5.3, but the price being charged and paid under the contract was not simply related to mere delivery of coal, though the contract for supply of coal was instead indivisible. Yet services and delivery were two constituents of the contracted basic price of coal. Clause 5.2.2 of CMDA provides that for the first Operating Year, the basic price, as outlined in Clause 5.1.2(a)(i), shall be the quoted price of Rs.958.50 per MT inclusive of stowing excise duty and royalty prevailing on the date of commencement of coal supplies and which was to remain frozen during the first year. The basic price of coal thus clearly related to both the components of services rendered and supply of coal, submitted Mr. Dushyant Dave. The price adjustment, on the quoted rate after the first year was to be calculated (after deducting the amount of SED and royalty) with reference to the date of commencement following 48 months of the allotment of coal block i.e. 25-6-2007- as provided for in the contract. Harmonious construction in this context should be made of Clause 5.4.3 when it provides for price escalation and was to inexorably operate forty eight months following 25-6-2007--even where the commencement date was extended, since it was in the instant case, for reason of force majeure circumstance to 25-3- 2013 as even though actual delivery of coal did not take place, the underlying perpetory services were underway and being performed.
Mr. Dushyant Dave, submitted that the Financial Year as defined in the CMDA assumes great significance for price adjustment and the extended commencement date is subsumed or/and becomes subservient to the Financial Year for the purpose (20 of 64) [CMA-3785/2017] of calculating price adjustment/ escalation in the basic price of coal under the CMDA. He submitted that therefore Clause 5.4.3 categorically provides basic price to be adjusted for each Operating Year and the formula only relates to the manner of calculation of escalated price with reference to the wholesale price index for commodity at the end of various periods or consumer price index. The proviso thereto simply stipulates that the effect of escalation price adjustment be only given in the second year of the operations i.e. 2013-14. The Sole Arbitrator, as also the Commercial Court therefore rightly held that the respondent claimant was entitled to price adjustment, after a year's hiatus from the commencement dated 25-3-2011 effective the financial year 2013-14. His conclusions are based on a harmonious and therefore plausible interpretation of the various Clauses of the Contract which cannot and ought not to be interfered with. Looked at from the point of equity and fairness also, the interpretation of the Sole Arbitrator is just and reasonable, submitted Mr Dushyant Duve, as a price adjustment clause ordinarily equalizes inflationary impact on money value with the running of time alone without much more. He submitted that the respondent claimant commenced the work under the CMDA in the year 2008 and pursued various operations vigorously and ultimately commenced supply of coal from the extended date of commencement i.e. 25.03.2013. The extended commencement date for supply of coal was admittedly not on account of the respondent claimant's breach/ failings but an outcome of factors beyond its control as recognized in acceptance of the force majeure circumstances by the appellant. Yet all along during the period preceeding actual (21 of 64) [CMA-3785/2017] supply of coal, other components of the CMDA were being performed and costs in respect thereto affected by inflationary trends which were to be equalized by the price adjustment clause with reference to 25-6-2011 as the commencement date, as has been rightly done by the Sole Arbitrator.
Mr. Dushyant Dave emphatically submitted that if the interpretation of Force Majeure Clause, as the appellant advocates, is accepted, as being limited only to safeguarding the respondent claimant from penalties otherwise leviable under the CMDA even while denying the reason d'etre of the price adjustment clause during the period covered by the Force Majeure event, the respondent claimant would suffer losses without any breach of the CMDA attributable to it. He submitted that in Clause 7 of the CMDA where reference is made to Force Majeure, the intention is to save the parties to the contract from the consequences of anything over which they have no control. Mr. Dushyant Dave submitted that Clause 7.3 of the CMDA deals with the effect of Force Majeure, which in its sub-clause (v) provides that the occurrence of an event of Force Majeure shall not relieve either party from its obligations to any payment hereunder for performance rendered during the period of Force Majeures, and that neither of the parties shall be liable for any claim for any loss, damage or compensation whatsoever arising out of any failure to carry out terms of the agreement to the extent such failure has been caused or constituted by an event of Force Majeure. Mr. Dushyant Dave contended that following the letters of the respondent claimant, the appellant RVUNL recognized a Force Majeure situation vide its letter dated 13.11.2011. That being the (22 of 64) [CMA-3785/2017] position, in view of the express provisions of Clauses 7.1 and 7.3 of CMDA, acceptance of the interpretation placed by the appellant RUVNL on Clause 5.4.3 regarding price escalation with reference to the extended date of commencement i.e. 25.3.2013 would inflict on the respondent claimant the unwarranted consequences of denial of the benefit of price adjustment when otherwise due in terms of a harmonious and purposeful construction of the CMDA agreement. Mr. Dushyant Dave submitted that in the instant case, the respondent claimant is not claiming damages or compensation nor have they been so awarded. What the Sole Arbitrator has instead awarded is the price adjustment, which the respondent Company was entitled to the intervening factor of Force Majeure circumstances not operating to its detriment.
Mr. Dushyant Dave then submitted, on an abstraction, that if what was argued on behalf of the appellant - price adjustment with reference to the extended date of commencement, no matter the intervening force majeure, is accepted, it could result in disastrous consequences. He questioned that, if the delay in commencement of the coal supply were to be ten years for reason of force majeure, could the appellant still assert that price adjustment should not be given for the 11 th year, irrespective of the fact that in the meantime the wholesale price index and consumer price index may have steeply gone up. The converse of deflation, though very unlikely, may also have occurred with its uneatable consequences. Mr. Dushyant Dave submitted that commercial contracts must be construed, not on theoretical clinical literal interpretations but as men of common prudence in the market would do, to keep the contracting parties equally balanced.
(23 of 64) [CMA-3785/2017] As they should be in the instant case as when the CMDA was signed both the claimant and the respondent were fully conscious of the considerations and consequences of the price adjustment clause and that understanding must be given full and necessary effect. It was submitted that price adjustment/fluctuation is also explained in "Chitty on Contracts" Thirteenth edition, Vol-II Specific Contracts-Chapter 37, Para 165 and 167, and according thereto, the price adjustment clause operates irrespective of all constituents of the contracted work being carried out. Mr. Dushyant Dave submitted that hence in the instant case the appellant is not justified in contending that the respondent was bound to supply coal in the year 2014-2015 at the rate of coal in the year 2011-2012 even though, apart from the actual supply of coal commencing 25-6-2013, other underlying work/ services for supply of coal were underway. This argument of the appellant shows an unreasonable and unfair approach, Mr. Dushyant Dave submitted because of the fact that as per their interpretation of the CMDA, price adjustment has to be dependent on the actual date of supply of coal alone without regard to rendering of other essential services under the contract prior thereto. Such logic of the appellant would lead to absurdity and arbitrary fixation of price of coal. Mr. Dushyant Dave submitted, again by way of hypothetical illustration, that if the supply of coal would have started on 20.05.2011 and the supplies were made till the year 2014 and if thereafter the supplies would have discontinued due to a Force Majeure Event for a period of ten years, in such a situation, applying the logic of the appellants, the respondent would have been liable to supply coal in the year 2024 at the rate (24 of 64) [CMA-3785/2017] of the year 2014. This could never be a reasonable construction of the terms of the CMDA and the logic underlying it must be jettisoned, submitted Mr. Dushyant Dave. In order therefore to give full effect to the Force Majeure Clause, it is necessary, Mr. Dushyant Dave submitted that the respondent should not be burdened with a denial of price adjustment for the year 2013-2014 as would follow from the payment of basic price of coal at the rate of Rs.958/- per MT (including of taxes) for the period 2014-2015, with 2013-14 being treated as Zero Year. To eschew that unjustness and to reasonably construe the CMDA wholistically, the respondent claimant has rightly been held entitled to the basic price of Rs.958/- after excluding royalty and stowing excise duty and price adjustment for the period 2013-2014 (with 2011-2012 being treated as the Zero Year under the CMDA). Interpretation/ construction of various Clauses of the CMDA by learned Sole Arbitrator in the award being a reasonable and possible interpretation, and upheld by the trial court rejecting the Section 34 objections, it cannot be negated on the appellant's appeal thereagainst under Section 37 of the Act of 1996. Reliance has been placed on the pronouncement on Lord Steyn in Mannai Investment Co. Ltd. Vs. Eagle Star Life Assurance Co. Ltd. - WLR (1997) 945. Reliance in support of the contention was placed by Mr. Dushyant Dave also on judgment of the Supreme Court in Dharanjamal Gobindram Vs. Shamji Kalidas & Co. (1961) 3 SCR 1020.
Mr. Dushyant Dave further submitted that Clause 8.2 of the CMDA provides that if the RVUNL was unable or unwilling to accept coal deliveries on the commencement date or as per the delivery (25 of 64) [CMA-3785/2017] schedule, it would be taken as an event of its default only curable within 60 days. The appellant RVUNL in their letters dated 18.11.2013, 13.12.2013 and 17.02.2014 have categorically admitted their inability to off-take requisite coal deliveries during the Financial Year 2013-14 resulting in the event of their default. The respondent claimant was therefore forced to slow down all mining operations resulting in financial loss to it in incurring fixed costs from maintaining the coal block in an operational yet sub optimal condition. Further due to the environmental hazard of spontaneous consumption posed by un-lifted coal, all activities related to mining and dispatch of coal accrued additional costs to the respondent as mining activity requires huge mobilization of resources, equipment and manpower, which cannot be put off/ on as if a switch. The appellant was duly informed by the respondent claimant vide letters dated 22.08.2013, 31.10.2013, 02.12.2013, 04.01.2014 and 26.04.2014 about the said idle fixed costs and the default by appellant in not taking coal deliveries in breach of its contractual obligations. On such request, the appellant, vide letters dated 18.11.2013 and 17.02.2014, admitted to their inability to off-take requisite amount of coal to which they were contractually obliged and further admitted that it had thereafter obtained permission from the Ministry of Coal for utilizing the coal deliveries in its other TPS. Mr. Dushyant Dave further submitted, the appellant being both consignor and consignee of the coal mined by the respondent Company, it was mandatory for it to apply for rakes to the Indian Railways. The said exercise was delayed by the appellant intentionally as the linked-TPS were not ready to take coal supply, which also resulted in reduced intake of (26 of 64) [CMA-3785/2017] mined coal other than scheduled. The respondent claimant on its part could not have sold the ready coal to third parties as such sales were prohibited under the applicable law i.e. Clause 4.5.4 of the CMDA. It was submitted that on the admitted fact of the appellant's inability to lift mined coal ready for dispatch as per its contractual obligations the Sole Arbitrator rightly compensated the respondent claimant for fixed costs incurred and duly proved by a chartered accountant's certificate which was not even denied or contested by the appellant.
Mr. Dushyant Dave submitted that award of fixed costs damages is a finding based on appreciation of facts and evidence, and was within the sole domain of the Sole Arbitrator. That finding of fact cannot in objections to the award or in an appeal aggrieved from the dismissal of such objections by the court below be re- appreciated. The respondent claimant in the statement of claim from para 49 to 76 had given out detailed information on account of fixed costs. In order to substantiate the said fixed costs wasted to appellant RVUNL's account, the respondent produced a certificate issued by the Chartered Accountant of AMPL certifying the loss of Rs.77.39 crores to it towards administration expenses, depreciation expenses, financial charges, manpower expenses and operational expenses during the Financial Year 2013-14 and chargeable to the respondent claimant and hence reimbursable by the appellant RVUNL occasioned as it was by its default. Relying on the judgment of the Supreme Court in Sudarsan Trading Co. Vs. Govt. of Kerala - (1989) 2 SCC 38, Mr. Dushyant Dave submitted that whether a particular amount was liable to be paid or damages liable to be sustained, was a decision within the sole competence (27 of 64) [CMA-3785/2017] of the Arbitrator. It was submitted AMPL cannot be taken to be a stranger as its appointment as mining contractor was approved on 30-3-2009 by the Board on the respondent claimant of which the Chairman of the appellant was a part as member. And in any event the appointment of mining contractor was not prohibited by any term of the CMDA. It was submitted that in the facts obtaining the court below rightly dismissed the appellant's objections under Section 34 of the Act of 1996 on that score and no ground to interfere in appeal obtains.
As regards the Escrow Account, Mr. Dushyant Dave submitted that the Ministry of Coal issued guidelines dated 27.08.2009, wherein it mandated opening of Escrow Account by the Mine owner allotted coal blocks for the purposes of mines closure plan. The appellant being the mine owner was therefore obliged to open the said account as per Clause 3.3 (d) of the CMDA. The Sole Arbitrator has fairly evaluated the issue and given a reasoned award which has been not interfered with by the court below for good reason. No interference in appeal is warranted, Mr. Dushyant Dave submitted. Reliance in support of the argument was placed on the judgment of the Supreme Court in Dugar Tea Industries (P) Ltd. Vs. State of Assam - (2016) 9 SCC 519. Reference was also made to the judgment of the Apex Court in Oil & Natural Gas Company Ltd. Vs. Saw Pipes Ltd. - (2003) 5 SCC 705 wherein it was held that the illegality set up to challenge an arbitral award must be patent and go to the root of the matter and not be of a trivial nature. Mr. Dushyaant Dave submitted that in the facts of the case the award in respect of the escrow amount deductions unlawfully made by the appellant from moneys due on account of (28 of 64) [CMA-3785/2017] coal supplies cannot warrant interference on the ground advanced of being against public policy.
Lastly, Mr. Dushyant Dave submitted that the appellant for the first time has sought to introduce additional document filed on 27.11.2017, during the pendency of this appeal, which is a report of PWC dated 09.10.2017 to support its contention that if the award were to stand, it would entail serious loss of public revenues and adversely impinge upon the tariff for supply of electricity to the general public. The said report, apart from being inadmissible in evidence, Mr. Dushyant Dave submitted, cannot be relied and introduced in the appeal under Section 37 of the Act as if the jurisdiction of this Court is appellate/ revisional vis-a-vis the award passed by the Sole Arbitrator. A new document set up for the first time before this Court, more so after rejection of the objection to the award under Section 34 of the Act by the Commercial Court, cannot be even considered in law it was submitted. And in any event such a report can not be verified independently and PWC in its certification relied upon by the appellant has absolved itself of the certificate's evidentiary value in its disclaimer to the report that it was prepared for internal consumption of the appellant and may not be used anywhere without prior consent of PWC.
We have given our thoughtful consideration to rival submissions, perused the material on record and the cited precedents.
The Sole Arbitrator divided the various claims made by the respondent into four parts. The first pertained to when the price adjustment was admissible to the respondent Company, the (29 of 64) [CMA-3785/2017] second being damages on account of fixed costs the respondent company claimed and was entitled to, the third to Escrow Account deductions and the fourth was with regard to the construction of railway siding. While the first three of these four have been awarded in favour of the claimant, that in respect of the fourth, the claim has been rejected.
In order to better appreciate the issues involved in this appeal, we deem it necessary to reproduce the definitions of different terminologies and relevant clauses of the CMDA, are as under:-
Definitions:-
"Adjusted Price" shall mean the adjusted price of Coal arrived at in accordance with Clause 5.
"Applicable Laws" means any law, rule, regulation, ordinance, order, code, treaty, judgment, decree, injunction, permit or decision of any central, state or local government, authority, agency, court, regulatory body or other body having jurisdiction over the matter in question, as in effect from time to time."
"Basic Price" shall mean the basic price paid for the Coal which shall be calculated in accordance with Clause 5.2.
"Commencement Date" shall have the meaning given to in Clause 4.5.1.
"Contract Price" shall mean the price per MT agreed for the Coal which shall b e determined in accordance with Clause 5.
"Force Majeure" shall have the meaning ascribed to it in Clause 7.
"Joint Venture Agreement" shall have the meaning given to it in Recital G. "Operating Year" means, the Financial Year and includes the period from the Commencement Date to the following March 31; each period thereafter from April 01 to the following March 31, and with respect to the Operating Year in which the termination or expiry of this Agreement occurs, the period from April 01 (30 of 64) [CMA-3785/2017] immediately preceding the date of such termination or expiry to the date of such termination or expiry.
"Works" shall mean the scope of work to be undertaken by the Company as detailed in Clause 3.
Main Clauses:-
1.2.9 Different parts of this Agreement are to be taken as mutually explanatory and supplementary to each other and if there is any inconsistency between or among the parts of this Agreement except as specifically provided for in the Agreement, they shall be interpreted in a harmonious manner so as to give effect to each part;
3.1.1 RVUNL hereby appoints the Company as the sole and exclusive contractor for performing the works.
RVUNL shall not, during the Term of this Agreement, undertake the work by itself or employ.
3.2 Obligations of the Company 3.2.1 Scope of Work The Company shall perform the Scope of Work and undertake the obligations set out herein below (the "Works").
The Scope of Work of the Company would be to carry out all works from identification of techno-economically viable coal blocks to Coal mining and delivering Coal to RVUNL's Thermal Power Stations. All expenses incurred for the Works shall be borne by the Company, including all expenses in relation to the cost of acquisition of land/lease of land; fees and arranging all clearances, reports and licenses for the Term of the Agreement and all charges incurred for arranging mining data, geological data and reports and no expenses/liabilities shall be borne/shared by RVUNL at any stage.
3.2.4 Transportation and handling from pithead to RVUNL Thermal Power Stations The Company shall:
(a) Arrange for transportation of Coal from Mines/washery to the Delivery Points by rail on "Freight Paid" basis;
(b) Arrange for booking of rakes and payment of Railway Freight Charges to the Railways before dispatch. The Company shall ensure that no consignment shall be dispatched without payment of Railway. Freight Charges. If any shipment of Coal is dispatched to the Delivery (31 of 64) [CMA-3785/2017] Points on a "Freight to Pay' basis, the surcharge and interest (if any) payable to Railways by RVUNL shall be borne by the Company;
3.3 Obligations of RVUNL RVUNL shall perform and undertake obligations set out below. RVNL Shall:
(b) Authorize the company to take all required actions and make payments on its behalf as its agent as required by applicable laws in relation to the scope of work, provided that RVUNL shall have no obligation or liability for, and will not be required to bear, such payments.
4.1.3 At lest sixty (60) days before any operating year, RVUNL shall intimate the company of the quantity of coal to be supplied in such operating year with break up of quantities of coal to be delivered to each of the Thermal Power Stations in each quarter of the operating year. Provided that the quarterly quantity of coal to be delivered shall not be more or less than 10% (ten percent) of the contracted quantity prorated quarterly. 4.1.4 Al least thirty (30) days before the beginning of any quarter, RVUNL shall intimate the company of the required quantity of coal to be supplied in each month of the quarter ("Delivery Schedule"). Provided that the monthly quantity of coal shall not be more or less than 10% (ten percent) of the quantity intimated for the said quarter, prorated monthly.
4.5 Commencement Date 4.5.1 The delivery of coal shall commence within forty eight (48) months from the date of allotment of coal blocks (25.06.2007).
4.5.2 In the event that the company is unable/prevented from performing its obligations under clause 3.2 by the required date under clause 4.5.1 above because of:
(b) a force majeure event.
4.5.3 The commencement date is of essence to the contract.
5.1 Contract Price 5.1.1 In consideration of the services to be undertaken by the company, performance of the wroks and delivery of the coal to the delivery/points, and the joint venture agreement, RVUNL shall pay the contract price per MT (32 of 64) [CMA-3785/2017] to the company duly adjusted as per the provisions of clause 5.4 ("Adjusted Price").
5.2.1 For Coal of grades A to C During any operating year and any time when there is a change in the SECL notified price, the base price for coal which in the 'as mined' condition, without beneficiation, meets the specification and definition of SECL grades A, B, or C as prevailing on the effective date thereof, shall be the pithead price of A, B, C grade coal as published in the price list of SECL on the date of supply less the percentage discount set out therein below:
Grade of Coal Discount
Grade 'A' 40%
Grade 'B' 35%
Grade 'C' 20%
5.3.5 The price of coal shall always be lower than the relevant CIL price and at no state the same shall exceed the relevant CIL price.
5.4 Price Adjustments 5.4.3 Escalation in Price The Basic Price as set out in Clause 5.2.2 shall be adjusted each Operating Year as per the following formula:
P1=Po/100 {15+50 * WP1/WPo+35 *CP1/Cpo} Wherein:
Po = Quoted Price per MT minus [1.29(SED+royalty)} P1 = Price payable after first year of commencement of the coal supply as adjusted in accordance with the escalation clause.
Wpo = Whole-Sale Price Index for all commodities at the end of zero year from the date of commencement of the coal supply from the coal block through captive mining.
WP1 = Whole-Sale Price Index for all commodities at the end of first year from commencement of coal supply from the coal block through captive mining.
(33 of 64) [CMA-3785/2017] Cpo = Consumer Price Index at the end of zero year from the date of commencement of the coal supply from the coal block through captive mining.
CP1 = Consumer Price Index at the end of first year from commencement of coal supply from the coal block through captive mining.
Quoted price is for the coal for which 1.29 times 'F' grade raw coal will be consumed. Further for achieving 30% Ash (ADB), the yield of 77.5% has been considered as per beneficiation contract. This criteria has been adopted while working out ceiling price.
Provided that the first escalation in Basic Price shall occur only after the completion of twelve (12) months from the Commencement Date.
Similar escalation clause shall be applicable for subsequent years.
For the purpose of above formula, the date of delivery shall be the date on which the consignment of the Grades of Coal lower than C for which the JV Company shall arrange Beneficiation/Washing of coal or part thereof is dispatched.
7.1 Event of Force Majeure For the purposes of this agreement, force majeure means any event or circumstance which is beyond the reasonable control of the party claiming force majure (the "Affected Party") and adversely and directly renders the performance by the party of while or part of its obligations under the agreement impossible. Where performance is affected for part of the affected party's obligations under the agreement, such affected party shall not be relieved of the performance of that part of its obligations which is not so rendered affected subjected to this clause 7. Force majeure shall include the following:-
(A) xxxxxxx
(i) xxxxxxx
(ii) xxxxxxx
a) xxxxxxxx
b) Any failure by a Government Agency to grant or renew any license, permit or clearance within reasonable time (other than for cause) after application having been duly made.
c) xxxxxxxx
(34 of 64) [CMA-3785/2017]
7.3 Effect of force majeure
If either party is rendered wholly or partially unable to perform its obligation under this agreement because of a force majeure event, that party shall be excused from performance of the agreement to the extent it is affected by the force majeure event and neither party shall be liable for any claim for any loss, damage or compensation whatsoever arising out of any failure to carry out the terms of the agreement to the extent such failure has been caused or constituted by an event of force majeure provided:
(i) xxxxxxx
(ii) xxxxxxx
(iii) xxxxxx
(iv) xxxxxx
(v) The occurrence of an event of force majeure shall not relieve either party from its obligations to make any payment hereunder for performance rendered prior to the occurrence of force majeure or for partial performance hereunder during periods of force majeure.
(vi) xxxxxxx
(vii) If a force majeure event continues for a prolonged period of 30 (thirty) days and as a result of such force majeure RVUNL is not able to take delivery of the coal, the company may dispose of coal in accordance with clause 4.5.4.
8.1 Company Event of Default A Company Event of Default ("Company Event of Default") under this Agreement shall exist upon the occurrence of any one or more of the following events:
(i) xxxxxxx
(ii) Commencement date is delayed six (6) months beyond the period specified under clause 4.5.1 subject to such event not being caused by a default of RVUNL or an event for force majeure.
(iii) xxxxxxx
(iv) xxxxxxx 8.2 RVUNL Events of Default An RVUNL event of default ("RVUNL Event of Default") under this Agreement shall exist upon the occurrence of any one or more of the following events:
(35 of 64) [CMA-3785/2017]
(i) xxxxxxx
(ii) xxxxxxx
(iii) Inability or unwillingness to accept Coal deliveries on the Commencement Date or as per the Delivery Schedule and such default is not cured within sixty (60) days.
At the outset we may state that PWC report dated 9-10-2017 filed along with documents before this court on 27-11-2017 is of no event for evaluating the legality and validity of the award dated 27-5-2015 and the order dated 13-4-2017 passed by the court below dismissing appellant's objections under Section 34 of the Act of 1996. What has to be considered by this court in this appeal under Section 37 of the Act of 1996 is the legality and validity of the award dated 27-5-2015 one way or the other within the scope of Section 34 of the Act of 1996. Financial consequences, whatever and whichever way, will follow determination of appeal on merits.
The first claim pertains to escalation of basic price of coal. The appellant's argument is that the claimant could not avail the benefit of Force Majeure circumstances and also at the same time, demand price escalation for the same period as a person cannot be allowed to approbate and reprobate. This argument however is not available to the appellant in the facts of the present case as escalation of the basic price of coal each Operating Year in Clause 5.4.1 of the CMDA cannot be described as "any loss, damage or compensation" envisaged in Clause 7.3 relating to Force Majeure Events. These two clauses of the CMDA operate in different spheres entirely. 'Escalation of price' is regulated by a separate Clause 5.4.1, and understood in common parlance, is neither 'any (36 of 64) [CMA-3785/2017] loss' or 'damage' nor even a 'compensation'. It is adjustment of price influenced by monetary effects such as increase/ decrease in wholesale price index, consumer price index, and other similar matters affecting the value of money and the necessity for its equalisation.
Mr. Gopal Subramanium however rightly submitted that the Sole Arbitrator interpreted and applied the clause relating to price adjustment in a manner incompatible with the terms of the clauses of the CMDA. The price adjustment under the CMDA was to be arrived at only according to Clause 5. Its sub-clause 5.1.1 inter alia provides that in consideration of the services to be undertaken by the Company, performance of the Works and Delivery of the Coal to the Delivery, Points, and the Joint Venture Agreement, the RVUNL shall pay the Contract Price per MT to the Company duly adjusted as per the provisions of clause 5.4 ("Adjusted Price"), which in turn is dependent on the answer to the question as to what was the "Commencement Date" of supply of the coal was. Clause 4.5.1 of the CMDA indicates that the delivery of Coal shall commence within forty eight (48) months from the date of allotment of Coal Blocks (25.06.07) even though the respondent claimant could commence delivery of Coal earlier; within forty two (42) months from the date of allotment of the Coal Blocks (25-6- 2007). Penalties however were to be applicable only if the delivery of Coal did not commence within 48 months of the said date. Clause 4.5.2 of the Agreement however provided that in the event that the Company was unable/prevented from performing its (37 of 64) [CMA-3785/2017] obligations under Clause 3.2 by the required date under Clause 4.5.1 because of (a) any default by RVUNL of its obligations under this Agreement; or (b) a Force Majeure Event, the Commencement Date would be suitably extended. Indeed, Clause 4.5.3 of the CMDA provided that the Commencement Date was the essence of the Contract. Yet when the commencement date was extended, that extended date was to be the essence of contract. The Commencement Date in the present case, as per the provision of Clause 4.5.2, was admittedly extended by a period of 18 months from 25-6-2011 and was revised to 25.03.2013. We are of the view on the facts on record that the "Commencement Date" for the purposes of the CMDA was 25-3-2013 by mutual agreement and admittedly the coal supply under the CMDA only then started.
We may at this juncture refer to Clause 1.2.9 of CMDA, which has been heavily relied by both the learned Sole Arbitrator and the Commercial Court in justifying the interpretation of the commencement date of supply of coal as 25-3-2011 for applying the price adjustment clause. This Clause inter alia provides that different parts of this Agreement are to be taken as mutually explanatory and supplementary to each other and if there is any inconsistency between or among the parts of this Agreement, except as specifically provided for in the Agreement, they shall be interpreted in a harmonious manner so as to give effect to each part. We are however of the view that clause 1.2.9 of the CMDA does not entail holding that while construing a particular Clause of an Agreement, another Clause can, in the name of harmonious interpretation, be given a complete go bye--as if cannabilised.
(38 of 64) [CMA-3785/2017] Keeping that principle in view, we have to answer whether adjustment and consequential escalation of basic price of coal can be completely delinked from the actual and extended commencement date of the supply of coal. We do not think so for reasons set out above and hold that the commencement date under the CMDA being 25-3-2013, the price adjustment clause was to be applied with reference thereto.
Clause 5.4.3 of the CMDA provides for escalation in price and stipulates that the basic price as set out in Clause 5.2.2 shall be adjusted each Operating Year as per the formula given therein. A careful reading of the formula, extracted in Clause 5.4.3 supra, would indicate in all its components that actual commencement of coal supply has to be taken as the basis for computation of the escalated basic price subject to it being applied "only after the completion of twelve (12) months from the Commencement Date." The proviso aforesaid thus makes it amply clear that the first escalation in the basic price of coal was to occur only after the completion of twelve months from the Commencement Date-- which necessarily is the extended dated as per clause 4.5.2. It cannot therefore be still argued that the escalated basic price of coal had to be arrived at on the basis of the date of commencement i.e. 25-3-2011 overlooking the extended commencement dated 25-3-2013. No doubt, Clause 4.5.3 under the CMDA makes the commencement date as the essence of the contract, but since the commencement dated was suitably extended, the essence of contract provision in the CMDA would attract only thereto. An alternative construction of the (39 of 64) [CMA-3785/2017] commencement date being the essence of contract would be muddled with the commencement date as extended being 25-3- 2013 while the commencement date for the "essence of contract"
would be 25-3-2011. That could by no stretch of imagination be a harmonious construction of contract which the respondent claimant seeks. We are therefore of the considered view that where the commencement dated was extended, there is no reason why such extended date and the component of actual supply of coal an integral component of the price adjustment clause formula, should not be taken as the basis for escalation of basic price of coal. And price adjustment was indeed so granted to the claimant by the appellant.
Coming now to the argument of Mr. Dushyant Dave on the illustration that if the delay in the commencement of coal supply had been ten years, the price adjustment clause could not be made operative in the eleventh year irrespective of the fact that the price index and consumer price index in the meantime had moved sharply, the argument is merely hypothetical and unmoored to the CMDA. So is Mr. Dushyant Dave's other interrogative illustration that if supply of coal had started in 2011 and work continued till 2014 and thereafter the supply disrupted/ discontinued due to Force Majeure Event for a period of ten years, would the respondent still be liable to supply the coal at the rate of the year 2014 in 2024. In this context it would be relevant to note that the price adjustment clause in the CMDA provides that once it became operative, it was to be applied every subsequent year (see clause 5.4). Further the right to price adjustment from a particular (40 of 64) [CMA-3785/2017] date has to be construed firmly embedded in the relevant clauses of the CMDA i.e. Clause 4.5 regarding commencement date, Clause 5.1 regarding contract price, Clause 5.2 regarding calculation of basic price and Clause 5.4 regarding price adjustments and in particular Clause 5.4.3 regarding escalation of price. These clauses have to be construed on the basis of what they actually stipulated therein and not on hypothetical situations.
The CMDA provided for the date of commencement while reckoning for it being extended. It then consciously provided for the manner of price adjustment with reference to commencement of supply of coal and also provided that adjustment of basic price of coal would occur only after completion of 12 months from the commencement date. The arithmetic of the escalation clause itself is based on commencement of the coal supply. The parties having consciously consented to all these clauses in the form engrafted in the CMDA, bound themselves irrevocably of the consequences.
Resultantly the first escalation in the basic price of coal under the price escalation clause would occur only 12 months after the actual commencement of coal supply. Mr. Gopal Subramaniyam is right in contending that the appellant is not seeking that this court takes an alternative interpretation of the relevant clause of the CMDA over the Arbitrator's to the appellant's benefit. Instead the appellant's case is that there was/ is only one possible construction of the CMDA on the price adjustment/ escalation clause, i.e. it would operate 12 months following the date of actual commencement of coal supply. In holding to the contrary both the learned Sole Arbitrator and the court below have resorted to an interpretation incompatible with the clauses of the CMDA and so (41 of 64) [CMA-3785/2017] having overlooked the terms of the CMDA in adjudicating rights thereunder, have acted contrary to public policy rendering the award on the issue liable to be set aside.
The Supreme Court in ONGC Vs. Saw Pipes Ltd., supra, held that the court will set aside an arbitral award under Section 34(2) of the Act if it is against the terms of the contract. In para 13 of the aforesaid report the Apex Court formulated the question for its consideration whether the award can be set aside, if the Arbitral Tribunal has not followed the mandatory procedure prescribed under Sections 24, 28 or 31(3) of the Act of 1996, which affects the rights of the parties. As per sub-section (3) of Section 28 of the Act of 1996, the Arbitral Tribunal is required to decide the dispute in accordance with the terms of the contract and also take into account the usages of the trade applicable to the transaction.
A question was posed whether an award could be interfered with if the Arbitral Tribunal ignores the terms of the contract or usages of the trade applicable to the transaction. Para 15 of the report contains the answer to the question, which is that if the award is contrary to the substantive provisions of law or the provisions of the Act or against the terms of the contract, it would be patently illegal, and could be interfered with under Section 34. As to what meaning could be assigned to the phrase "Public Policy of India" in the context of clause (ii) of sub-section (2)(b) of Section 34, in para 31 it was held as under:-
"31. Therefore, in our view, the phrase 'Public Policy of India' used in Section 34 in context is required to be given a wider meaning. It can be stated that the concept of public policy connotes some matter which (42 of 64) [CMA-3785/2017] concerns public good and the public interest. What is for public good or in public interest or what would be injurious or harmful to the public good or public interest has varied from time to time. However, the award which is, on the face of it, patently in violation of statutory provisions cannot be said to be in public interest. Such award/judgment/decision is likely to adversely affect the administration of justice. Hence, in our view in addition to narrower meaning given to the term 'public policy' in Renusagar's case (supra), it is required to be held that the award could be set aside if it is patently illegal. Result would be - award could be set aside if it is contrary to: -
(a) fundamental policy of Indian law; or
(b) the interest of India; or
(c) justice or morality, or
(d) in addition, if it is patently illegal.
Illegality must go to the root of the matter and if the illegality is of trivial nature it cannot be held that award is against the public policy. Award could also be set aside if it is so unfair and unreasonable that it shocks the conscience of the Court. Such award is opposed to public policy and is required to be adjudged void." The Apex Court in Hindustan Zinc Ltd. Vs. Friends Coal Carbonisation - (2006) 4 SCC 445, while following Oil and Natural Gas Corporation Ltd. Vs. Saw Paipes Ltd., supra, held that an award contrary to the terms of the contract, would be in the crosshair of Section 28(3) of the Act of 1996 and hence patently illegal, rendering it liable to interference by the Court under Section 34 (2) of the Act. In Para 14 of the said report, it was held as under:-
"The question, therefore, which requires consideration is whether the award could be set aside, if the Arbitral Tribunal has not followed the mandatory procedure prescribed under Sections 24, 28 or 31(3), which affects the rights of the parties. Under sub-section (1)(a) of Section 28 there is a mandate to the Arbitral Tribunal to decide the dispute in accordance with the substantive law for the time being in force in India. Admittedly, substantive law would include the Indian Contract Act, the Transfer of Property Act and other such laws in force. Suppose, if the award is passed in violation of the provisions of the Transfer of Property Act or in violation (43 of 64) [CMA-3785/2017] of the Indian Contract Act, the question would be whether such award could be set aside. Similarly, under sub-section (3), the Arbitral Tribunal is directed to decide the dispute in accordance with the terms of the contract and also after taking into account the usage of the trade applicable to the transaction. If the Arbitral Tribunal ignores the terms of the contract or usage of the trade applicable to the transaction, whether the said award could be interfered. Similarly, if the award is a non- speaking one and is in violation of Section 31(3), can such award be set aside? In our view, reading Section 34 conjointly with other provisions of the Act, it appears that the legislative intent could not be that if the award is in contravention of the provisions of the Act, still however, it couldn't be set aside by the court. If it is held that such award could not be interfered, it would be contrary to the basic concept of justice. If the Arbitral Tribunal has not followed the mandatory procedure prescribed under the Act, it would mean that it has acted beyond its jurisdiction and thereby the award would be patently illegal which could be set aside under Section 34."
This very principle was propounded by the Supreme Court in McDermott International Inc., supra, wherein, in para 59 and 112 of the report, it was held as under:-
"59. Such patent illegality, however, must go to the root of the matter. The public policy violation, indisputably, should be so unfair and unreasonable as to shock the conscience of the court. Where the Arbitrator, however, has gone contrary to or beyond the expressed law of the contract or granted relief in the matter not in dispute would come within the purview of Section 34 of the Act. However, we would consider the applicability of the aforementioned principles while noticing the merit of the matter.
.........
112. It is trite that the terms of the contract can be express or implied. The conduct of the parties would also be a relevant factor in the matter of construction of a contract. The construction of the contract agreement, is within the jurisdiction of the arbitrators having regard to the wide nature, scope and ambit of the arbitration agreement and they cannot, be said to have misdirected themselves in passing the award by taking into consideration the conduct of the parties. It is also trite that correspondences exchanged by the parties are required to be taken into consideration for the purpose of construction of a contract. Interpretation of a (44 of 64) [CMA-3785/2017] contract is a matter for the arbitrator to determine, even if it gives rise to determination of a question of law. (See Pure Helium India (P) Ltd. v. ONGC (2003) 8 SCC 593, and D.D. Sharma v. Union of India, (2004) 5 SCC 325."
The Apex Court in Delhi Development Authority Vs. R.S. Sharma and Co., dealt with a case where there was an agreement between the Delhi Development Authority and the company for carrying different works of development at a particular place in Delhi according to the terms and conditions of the contract, one of which was that the rates quoted by the contractor shall hold good irrespective of the source from which the material are brought so long as they conform to the specifications. There was no specific clause in the terms of agreement for extra cartage for bringing stones from elsewhere. The contractor claimed extra rate of cartage over and above the contractual rate contending that he had brought the aggregate stone from Nooh in the State of Haryana to Delhi. It was held by the Supreme Court that there was nothing on record to show that the appellant DDA insisted upon bringing aggregate stone only from 'Nooh'. In view of the fact that the terms and conditions of the contract were binding on the parties, the award of extra cartage in favour of the claimant by the Sole Arbitrator was an error on the face of the record and was also contrary to the terms of the agreement. The Supreme Court held that it was open to the court on objections to an award to consider whether the award was against the specific terms of contract and if so, interfere with it on the ground that it is patently illegal and hence opposed to the public policy of India. This judgment thus clearly shows that regardless of the consequences if the parties (45 of 64) [CMA-3785/2017] had agreed to certain terms and conditions in the contract, such conditions would be binding on them.
In Associate Builders Vs. Delhi Development Authority, the Apex Court in para 42.3 of the report observed that third subhead of patent illegality is really a contravention of Section 28(3) of the Arbitration Act, which provides that in all cases, the Arbitral Tribunal must decide in accordance with the terms of the contract in a reasonable manner. The court held that no doubt if the Arbitrator construes a term of contract in a reasonable manner, the award cannot be set aside at the instance of a party aggrieved thereof. The Apex Court however held that where the Arbitrator construes the contract in such a way that it could be said to be not fair minded and reasonable to a person of ordinary prudence, so the award would open to being challenged as being set aside under the "contrary to public policy" clause.
The Apex Court in Centrotrade Minerals & Metals Inc. v. Hindustan Copper Ltd. - (2006) 11 SCC 245, while dealing with an identical question, held as under:-
"103. Such patent illegality, however, must go to the root of the matter. The public policy, indisputably, should be unfair and unreasonable so as to shock the conscience of the court. Where the arbitrator, however, has gone contrary to or beyond the expressed law of the contract or granted relief in the matter not in dispute would come within the purview of Section 34 of the Act."
The Apex Court in Rajasthan State Mines & Minerals Ltd. Vs. Eastern Engineering Enterprises and Another - (1999) 9 SCC 283, albeit in a case arising out of the Arbitration Act, 1940, held that "It is settled law that the arbitrator is the creature of the contract between the parties and hence if he ignores the specific terms of the contract, it would be a question of jurisdictional error which (46 of 64) [CMA-3785/2017] could be corrected by the Court for that limited purpose. For deciding whether the arbitrator has exceeded his jurisdiction reference to the terms of the contract is a must." In para 30 of the report, it was further held the question would be whether arbitrator will have authority or jurisdiction to grant damages or compensation in the teeth of a stipulation providing that no escalation would be granted and that contractor would only be entitled to payment of composite rate as mentioned and no other or further payment of any kind or item whatsoever, shall be due and payable by the company to the contractor. It was held that "the rates wherever fixed are binding during the currency of the agreement irrespective of any fall or rise in the cost of the work covered by the contract or for any other reason or on any account or any other ground whatsoever." (underlying ours) In Satyanarayana Construction Company Vs. Union of India and Others - (2011) 15 SCC 101, challenge was made to the judgment of the High Court, which had modified the award in part in regard to four different claims and upheld the objections of the Union of India to that extent. It was argued that the Arbitrator while awarding rate of Rs.210 per cubic metre for the work relating to cutting the earth and sectioning to profile, had given valid reasons. In doing so, the Arbitrator took into consideration the relevant aspects in awarding higher rate for that work than the rate agreed to between the parties under the contract. In those facts, while dismissing the appeal, the Supreme Court in Para 11 of the report held as under:-
"11. Thus, as per the contract, the contractor was to be paid for cutting the earth and sectioning to profile, etc. (47 of 64) [CMA-3785/2017] @ Rs.110 per cubic metre. There may be some merit in the contention of Mr. Tandale that the contractor was required to spend huge amount on the rock blasting work but, in our view, once the rate had been fixed in the contract for a particular work, the contractor was not entitled to claim additional amount merely because he had to spend more for carrying out such work. The whole exercise undertaken by the arbitrator in determining the rate for the work at Serial No.3 of Schedule A was beyond his competence and authority. It was not open to the arbitrator to rewrite the terms of the contract and award the contractor a higher rate for the work for which rate was already fixed in the contract. The arbitrator having exceeded his authority and power, the High Court cannot be said to have committed any error in upsetting the award passed by the arbitrator with regard to Claim 4." (emphasis supplied) Aside of the clauses of the CMDA on the price adjustment for coal supplied, escalation in general is a concept of trade which proceeds on the assumption that the sale of goods can fetch price only when they are actually sold and supplied. When there is no supply, there can be no sale. Absent sale, no escalation can be claimed. In the instant case actual supply had not begun on 25.06.2011 contrary to what was even initially but not immutably envisaged in the CMDA. The CMDA itself reckoned for dates of commencement being other than 25-6-2011 (forty eight months for award of coal block on 25-6-2007) in providing for earlier commencement in 42 months following the award of the coal block forty eight months from 25-6-2007 or a date extended beyond 48 months inter alia for force majure reason. Not fixed in stone, date of commencement of the first Operating Year was contemplated or can be visualised for the purpose of Clause 5.2.2 read with Clause
5.4.3 of the CMDA. And on that theoretical basis 2011-2012 could not be treated as Zero Year for the purpose of applying price escalation, thereby allowing for the price adjustment with effect (48 of 64) [CMA-3785/2017] from 01.04.2013 onwards, even notionally, as done by the Sole Arbitrator. In fact, 25.03.2013 being the date on which the supply of coal actually commenced, and was so agreed to between the parties, that date has to be necessarily taken as the new scheduled commencement date of coal supply. The first price escalation would therefore in terms of price adjustment clause come into effect from 01.04.2014 of CMDA with 2013-2014 as the Zero Year.
The Apex Court in Delta International Ltd. Vs. Shyam Sundar Ganeriwalla and Another - (1999) 4 SCC 545, in para 14 of the report, held that it cannot be disputed that for construction of a contract, it is settled law that the intention of the parties is to be gathered from the words used in the agreement. If the words are unambiguous and are used after full understanding of their meaning by experts, it would be difficult to gather an intention different from the language used in the agreement. If upon a reading of the document as a whole, it can fairly be deduced from the words actually used therein that the parties had agreed on a particular term, there is nothing in law which prevents them from setting up that term in the event of a dispute. Further, in construing a contract, the Court must look at the words used in the contract unless they are such that one may suspect that they do not convey the intention correctly. If the words are clear, there is very little the court can do about it. In arbitration proceedings, the arbitral tribunal is required to decide the dispute in accordance with the terms of the contract. That enunciation now finds statutory recognition under Section 28(3) of the Act of 1996.
(49 of 64) [CMA-3785/2017] It is also trite that the Arbitral Tribunal cannot award any claim on the basis of equity contrary to the terms of the contract, for equity has no role to play in contractual disputes which are governed by the terms of the contract. The Supreme Court in Larson and Toubro Limited Vs. Mohan Lal Harbans Lal Bhayana - (2015) 2 SCC 461, held that "the legal position which is contractually defined between the parties by way of written agreements" is not altered by equity. The Supreme Court in M/s. Sharma & Associates Contractors Pvt. Ltd. Vs. Progressive Constructions Ltd. - (2017) 5 SCC 743, albeit a matter arising out of award passed by the Arbitrator under the Arbitration Act of 1940 on dispute pertaining to escalation clause, held that "...arbitrator is a creature of contract between the parties and if he ignores the specific term of the contract, it would be a question of jurisdictional error which can be corrected by the Court." Their Lordships further held that "...in a matter of contract where the parties have to stick to be governed by the provisions of the contract entered into between them, equity has no role to play"
and that "as the contract between appellant and respondent deals only with escalation, appellant has to be satisfied with the same."
We are of the considered view that argument advanced on behalf of the respondent-claimant to justify on consideration of equity 25.06.2011 being treated as the commencement date of coal supply even though it admittedly was 25-3-2013 is therefore liable to be rejected. The Sole Arbitrator and the court below have acted without jurisdiction in so holding and their conclusions in respect to claim No.1 are vitiated with patent illegality and hence are contrary to public policy.
(50 of 64) [CMA-3785/2017] Adverting now to claim no.2 regarding fixed costs, the Sole Arbitrator has allowed the claim of the respondent claimant under this head and the appellant has been required to pay an amount of Rs.78 crore to the claimant-respondent towards the fixed costs incurred but wasted on account of reduced off-take of coal vis-a- vis scheduled quantity for lack of its readiness. As per the finding recorded by the Sole Arbitrator in this respect, even after commencement of the supplies from 25.03.2013, within the first month the appellant itself by letter dated 29.04.2013 had asked the respondent claimant to stop further loading for 15 days in view of its stacking problems. The respondent claimant then indicated the quantities that it proposed to supply from July, 2013 to March, 2014. It was on 29.07.2013 that the respondent claimant sought bifurcation of quantities of washed coal to be delivered to the appellant at each of the thermal power stations. As per further finding recorded by the Sole Arbitrator, the appellant had not even applied for allocation of rakes though the respondent claimant had duly cautioned the appellant thereabout on 2.12.2013. The Sole Arbitrator held that thus it was a case of failure/ inability on the part of the appellant to off-take the requisite quantity of coal as per the delivery schedule and 60 days beyond. The delay thus was 107 days, from 26.08.2013 to 02.12.2013. That the Sole Arbitrator held was a default of the terms of Clause 8.3(iii) of the CMDA. 59 rakes were supplied in 69 days. Indeed, on facts, breach on the appellant's failure to take delivery of coal as scheduled may be made out, yet the award of Rs.78 crores as damages on that count does not disclose the basis on which the damages, necessarily compensatory in nature, were computed on (51 of 64) [CMA-3785/2017] invoking Section 73 of the Contract Act. The only foundation of this award appears to mechanically lie in para 72 of the claim petition where it was pleaded that since the claimant had a back to back arrangement with AMPL under the agreement dated 29-7- 2009 for the extraction of coal, the ultimate liability to bear costs and resultant damages to AMPL for reason of non-lifting of coal as per the delivery schedule under CMDA fell upon the claimant of which AMPL, vide letter dated 03.04.2014, had apprised the claimant stating that as of 31.03.2014, the quantity of washed coal received by the respondent was only 9.19 lakh MT, leaving substantial scheduled quantity washed coal not being lifted by the respondent, which translated into a fixed cost of Rs.78 crores, as incurred. The Sole Arbitrator has sought to compensate the respondent claimant for the loss a third party, AMPL, in its contract with the respondent claimant. And if we still go deeper to find out the basis for this computation, it is found in para 73 of the affidavit filed on behalf of the respondent claimant, where it has been stated that the aforesaid amount claimed as damages had been verified by certificate dated 29.07.2014 issued by Parikh Mehta and Associates, Chartered Accountants of the AMPL, which read thus:-
"We have verified the books of accounts of the company Adani Mining Pvt Ltd, its agreements and other information and explanations given to us. We have relied upon these details and explanations given to us and on the basis of our verification we certify that Adani Mining Pvt Ltd has incurred proportionate fixed cost of Rs.77.39 crores towards administration expenses, depreciation expenses, financial charges, manpower expenses and operation expenses during the Financial Year 2013-14. This proportion is taken as shortfall in quantity off take against contracted quantity in the agreement.
(52 of 64) [CMA-3785/2017] This certificate is issued on specific request of the company. We owe no financial or other liability in respect of this certicate to anyone except our client."
(underlining ours) We are of the considered view, that the award to claim No.2 is unreasoned as it evidently does not at all discuss the detailing of the amount of Rs.78 crores as generally verified by the AMPL's Chartered Accountant. Besides admittedly, the appellant-RVUNL was not a party to the Coal Mining Services Agreement dated 29.07.2009, which the respondent claimant entered with the AMPL. No finding has been recorded by the Sole Arbitrator as to how the appellant-RVUNL was liable to reimburse the respondent claimant under the CMDA which was before him for the losses its sub contractor AMPL suffered in a transaction with it. Nothing has been discussed and no reason set out by the Sole Arbitrator as to the method and manner of the quantification of the amount of Rs.78 crore, as damages awarded to the claimant for AMPL's fixed costs solely relying on the certificate by AMPL's Chartered Accountant. Aside of the aforesaid, the Chartered Accountant's certificate is quite cryptic and clearly issued on AMPL's askance. Besides the certificate also comes with a disclaimer i.e. "This certificate is issued on specific request of the company." To top it all, while the certificate is for Rs.77.39 crore, and not Rs.78 crore, the Sole Arbitrator has rounded it off (which he could not in law do) not to Rs.77 crore, reckoning for .39 but to Rs.78 crores.
The Supreme Court in Bareilly Electricity Supply Company Ltd. Vs. Workmen and Others - (1971) 2 SCC 617, held that when a document is produced in a Court or a Tribunal the questions that (53 of 64) [CMA-3785/2017] naturally arise is, is it a genuine document, what are its contents and are the statements contained therein true? If a letter or other document is produced to establish some fact which is relevant to the enquiry the writer must be produced or his affidavit in respect thereof be filed and opportunity afforded to the opposite party who challenges the facts stated therein. Both these aspects are in accordance with the principles of natural justice as also in accordance with the procedure under Order XIX Civil Procedure Code and the Evidence Act. No doubt in the arbitral proceedings, the provisions of the Code of Civil Procedure and the Evidence Act are not applicable in view of Section 19(1) of the Act of 1996. But they are not foreign on principles incorporated therein. The jurisdiction of the Sole Arbitrator is not at large and he is not free of the restraints of justness, fairness and reasonableness. In the present case, the Sole Arbitrator has not at all discussed the contents of the certificate issued by the Chartered Accountants firm Parikh Mehta & Associates, relied by the claimant-respondent and has not discussed and analysed the method and manner of quantification of the amount of Rs.78 crore. He has simply accepted the ipse dixit of the AMPL's Chartered Accountant and on that basis straightaway proceeded to award Rs.78 crore as the compensation to the respondent claimant under Section 73 of the Contract Act.
The Supreme Court in Kailash Nath Associates Vs. Delhi Development Authority - (2015) 4 SCC 136, has held that damage or loss under Section 73 of the Contract Act is a sine qua non for payment of compensation for breach of contract. Even under (54 of 64) [CMA-3785/2017] Section 74 of the Contract Act, it was held that proof of loss is not dispensed with. And it is only in cases where damage or loss is difficult or impossible to prove that the court is empowered to award the liquidated amount where set out in the contract, ensuring it is a genuine pre-estimate of damage or loss or reasonable compensation for such loss or damage.
We are conscious of the fact that respondent claimant in support of Claim No.2 with regard to fixed costs has produced certain material to show the inability of the appellant to off-take the coal in scheduled quantity resulting into accumulation thereof and resultant incidental incurrence of costs it. But that alone cannot by itself prove the quantum of loss caused to the respondent-claimant. Such material in the shape of correspondence exchanged between the respondent-claimant and AMPL cannot in law afford any basis for quantification of the damages allowable in term of Section 73 and 74 of the Contract Act against the appellant RVUNL. All that was produced in evidence as proof of loss to AMPL was a certificate by their Chartered Accountant. Award on Claim No.2 as passed by the Sole Arbitrator and upheld by the court below is thus to our minds wholly perverse, vitiated by non-application of mind and hence objections thereagainst liable to be upheld. The court below in rejecting the appellant's objection in this regard failed to exercise its jurisdiction. For the reasons set out hereinabove, the award on claim No.2 is liable to be set aside. It is so.
(55 of 64) [CMA-3785/2017] It may be noted at this stage that in the Arbitration Act of 1940, the Court, after setting aside the award, also had the power to remand the matter to the arbitrator. However, no such power is available in the Act of 1996. Reference may be made to recent judgment of the Apex Court in Kinnari Mullick & Another Vs. Ghanshyam Das Damani - AIR 2017 SC 2785 holding so. In the aforesaid case the Apex Court was dealing with a challenge to judgment of the Division Bench of the High Court, which while applying the provisions of Section 34(4) of the Act, remitted the award to the arbitrator with the direction that he must assign the reasons to support it and thereafter hearing the parties to the dispute publish fresh award in accordance with law, without being influenced by his earlier award, which had already been set aside by the Single Bench. The Apex Court in so holding relied on following observations in McDermott International Inc., supra:
"8. ....Parliament has not conferred any power of remand to the Court to remit the matter to the arbitral tribunal except to adjourn the proceedings as provided under sub-section (4) of Section 34 of the Act. The object of sub-section (4) of Section 34 of the Act is to give an opportunity to the arbitral tribunal to resume the arbitral proceedings or to enable it to take such other action which will eliminate the grounds for setting aside the arbitral award."
The Apex Court then held that the limited discretion available to the Court under Section 34(4) to remand an award can be exercised only upon a written application made in that behalf by a party to the arbitration proceedings and such power could not be exercised by deferring the proceedings under Sec.34 of the Act of 1996 and by extension 37 of the said Act. Moreover, before the setting aside of the award, if the party to the arbitration proceedings fails to apply to the Court to defer the proceedings (56 of 64) [CMA-3785/2017] pending before it, for necessary steps before the Arbitrator to rectify an apparent deficiency in the award, then it is not open to the party to move an application later under Section 34(4) of the Act. This for the reason that consequent to disposal of the main proceedings under Section 34 of the Act by the Court, the court would become functus officio. In fact, the Apex Court in McDermott International Inc., supra, held that a departure was made in the Act of 1996, so far as the jurisdiction of the court to set aside an arbitral award is concerned vis-a-vis the earlier Act. Whereas under Section 30 and 33 of the 1940 Act, the power of the court was wider, the 1996 Act made provision for the supervisory role of courts, for the review of the arbitral award with reference to Section 34 therein only to ensure fairness. It was held that resultantly the Court cannot correct errors of the arbitrators and can only quash the award leaving the parties free to begin the arbitration again if so desired. We wish to make this observation here limited only to the award on claim No.2 regarding Fixed Costs as it is liable to be set aside for being unreasoned and in the crosshairs of Section 31(3) of the Act of 1996.
The third claim, which the learned Sole Arbitrator has allowed and the court below refused to set aside under its impugned order dated 13-4-2017, is with regard to the deductions from moneys due to the claimant for coal supplied for deposit in Escrow Account. After signing of CMDA on 25-6-2007, the Ministry of Coal issued guidelines for Mine Closure Plan vide notification dated 27.08.2009, Clause 6(i) of which cast an obligation on the mining company to open an Escrow Account with any Scheduled Bank, (57 of 64) [CMA-3785/2017] with the Coal Controller Organisation (CCO) as the exclusive beneficiary. The appellant opened the Escrow Account by executing the Escrow Agreement on 12.07.2012 with the CCO as an exclusive beneficiary and indisputably, prior thereto the appellant under a letter dated 06.06.2012 to the respondent informed it that it would open and maintain the Escrow Account with the CCO subject to the condition that the amount deposited as per the approved mine closure plan would be recovered from the immediate next payment of the coal bills of the claimant- respondent raised towards dispatches of the coal from the coal blocks. It is not in dispute that the respondent vide letter dated 09.06.2012 consented to that condition and agreed that the appellant would be entitled to recover the amount so deposited in the Escrow Account from the immediate next payment of the coal bills towards the dispatches of the coal. The respondent thus was estopped from resiling from the acceptance of the condition set out by the appellant in their letter dated 6-6-2012. Further in any event the scope of work as defined under clause 3.2.1 of the CMDA also clearly makes the respondent company liable for all costs in the mining of coal activity. The costs towards mine closure would per force be covered to the respondent company account. Despite the undertaking by the respondent and the plain terms of clause, the learned Sole Arbitrator granted the claimant's prayer in terms of Clause F of the amended claim by holding that such an undertaking was subject to the terms and conditions of the agreement, and the actual failure on the part of the claimant in completing a Mine Closure Activity. And since the stage of closing any mining or any part of it had not yet arrived, the deduction (58 of 64) [CMA-3785/2017] carried out by the appellant on that count was unjustified and arbitrary and also as premature, held the Sole Arbitrator and liable to be refunded to the claimant. This finding of the learned Sole Arbitrator is also based on a complete misreading of the guidelines
--which were mandatory in nature. Clause 6 of the guidelines dated 07.01.2013, provides that an amount upto 80% of the total deposited amount including the interest accrued in the Escrow Account may be released every five years in line with the periodic examination of the closure plan as per Clause 3.1 of the Annexure of the Guidelines. The amount released would be equal to the expenditure incurred on the progressive mine closure in past five years or 80%, whichever is less. The Sole Arbitrator has in the circumstances also overlooked the claimant's acceptance of the appellant's letter for deductions of amount deposited in the Escrow account from its running bills for supply of coal, recorded a perverse finding on the purported ground that the stage of closing any mine and/or part thereof had not arrived and therefore the deductions towards the Escrow account could not be made. The Sole Arbitrator also lost sight of Clause 3.2.1 of CMDA which clearly states that all expenses incurred for the Works shall be borne by the Company and therefore no expenses/liability could have been fastened on the appellant. Besides, the condition contained in the appellant's letter dated 06.06.2012 and accepted by the respondent claimant in its letter dated 9-6-2012 is quite categorical and could be interpreted only in one way to the appellant's benefit. The respondents having given a written consent to the appellant would by their conduct aside of everything else be estopped from going back upon that stand in (59 of 64) [CMA-3785/2017] view of the provisions of Section 115 of the Evidence Act. Oddly both the Sole Arbitrator and the court below overlooked clinching evidence as also the terms of the contract and the nature of deposit in the Escrow account mandatorily required under the Government's announced policy circular to award claim No.3 to the respondent claimant. So did the court below in upholding the award dated 27-5-2015 on that count.
The Apex Court in J.G. Engineers (P) Ltd. v. Union of India - (2011) 5 SCC 758, after revisiting of its previous decisions, held as under:-
"27. Interpreting the said provisions, this Court in ONGC Ltd. v. Saw Pipes Ltd. (2003) 5 SCC 705 held that a court can set aside an award under Section 34(2)(b)(ii) of the Act, as being in conflict with the public policy of India, if it is (a) contrary to the fundamental policy of Indian law; or (b) contrary to the interests of India; or
(c) contrary to justice or morality; or (d) patently illegal.
This Court explained that to hold an award to be opposed to public policy, the patent illegality should go to the very root of the matter and not a trivial illegality. It is also observed that an award could be set aside if it is so unfair and unreasonable that it shocks the conscience of the court, as then it would be opposed to public policy."
In ONGC Ltd. v. Western Geco International Limited, supra, the Apex Court added three other principals as to what would constitute the "fundamental policy of Indian law" and held that the decision in ONGC Ltd. v. Saw Pipes Ltd., supra, does not elaborate that aspect. Even so, the expression must include all such fundamental principles as providing a basis for administration of justice and enforcement of law in this country. In para 35 of the report, it was observed by the Supreme Court,
35. What then would constitute the 'fundamental policy of Indian law' is the question. The decision in ONGC [(2003) 5 SCC 705 : AIR 2003 SC 2629] does not (60 of 64) [CMA-3785/2017] elaborate that aspect. Even so, the expression must, in our opinion, include all such fundamental principles as providing a basis for administration of justice and enforcement of law in this country. Without meaning to exhaustively enumerate the purport of the expression 'fundamental policy of Indian law', we may refer to three distinct and fundamental juristic principles that must necessarily be understood as a part and parcel of the fundamental policy of Indian law. The first and foremost is the principle that in every determination whether by a court or other authority that affects the rights of a citizen or leads to any civil consequences, the court or authority concerned is bound to adopt what is in legal parlance called a 'judicial approach' in the matter. The duty to adopt a judicial approach arises from the very nature of the power exercised by the court or the authority does not have to be separately or additionally enjoined upon the fora concerned. What must be remembered is that the importance of a judicial approach in judicial and quasi- judicial determination lies in the fact that so long as the court, tribunal or the authority exercising powers that affect the rights or obligations of the parties before them shows fidelity to judicial approach, they cannot act in an arbitrary, capricious or whimsical manner. Judicial approach ensures that the authority acts bona fide and deals with the subject in a fair, reasonable and objective manner and that its decision is not actuated by any extraneous consideration. Judicial approach in that sense acts as a check against flaws and faults that can render the decision of a court, tribunal or authority vulnerable to challenge."
The Apex Court in ONGC Ltd. v. Saw Pipes Ltd., supra, held that the principle that a court and so also a quasi-judicial authority must, while determining the rights and obligations of parties before it, do so in accordance with the principles of natural justice and apply its mind to attendant facts and circumstances. Non- application of mind is a defect that is fatal to any adjudication. The relevant discussion in para 38, 39 and 40 of the report, is reproduced here as under:-
38. Equally important and indeed fundamental to the policy of Indian law is the principle that a court and so also a quasi-
judicial authority must, while determining the rights and obligations of parties before it, do so in accordance with the principles of natural justice. Besides the celebrated audi alteram partemrule one of the facets of the principles of (61 of 64) [CMA-3785/2017] natural justice is that the court/authority deciding the matter must apply its mind to the attendant facts and circumstances while taking a view one way or the other. Non- application of mind is a defect that is fatal to any adjudication. Application of mind is best demonstrated by disclosure of the mind and disclosure of mind is best done by recording reasons in support of the decision which the court or authority is taking. The requirement that an adjudicatory authority must apply its mind is, in that view, so deeply embedded in our jurisprudence that it can be described as a fundamental policy of Indian law.
39. No less important is the principle now recognised as a salutary juristic fundamental in administrative law that a decision which is perverse or so irrational that no reasonable person would have arrived at the same will not be sustained in a court of law. Perversity or irrationality of decisions is tested on the touchstone of Wednesbury [Associated Provincial Picture Houses Ltd. v. Wednesbury Corpn., (1948) 1 KB 223 :
(1947) 2 All ER 680 (CA)] principle of reasonableness.
Decisions that fall short of the standards of reasonableness are open to challenge in a court of law often in writ jurisdiction of the superior courts but no less in statutory processes wherever the same are available.
40. It is neither necessary nor proper for us to attempt an exhaustive enumeration of what would constitute the fundamental policy of Indian law nor is it possible to place the expression in the straitjacket of a definition. What is important in the context of the case at hand is that if on facts proved before them the arbitrators fail to draw an inference which ought to have been drawn or if they have drawn an inference which is on the face of it, untenable resulting in miscarriage of justice, the adjudication even when made by an Arbitral Tribunal that enjoys considerable latitude and play at the joints in making awards will be open to challenge and may be cast away or modified depending upon whether the offending part is or is not severable from the rest."
It is thus well settled that non-application of mind is a defect that is fatal to any adjudication--including by an Arbitrator, under the Act of 1996. Another important principle now recognized as a salutary juristic fundamental in law administrative as also otherwise is that a decision which is perverse or so irrational that no reasonable person would have arrived at on the material/ evidence on record will not be sustained in a court of law--no matter what the nature of proceedings. A decision of the Arbitral Tribunal based on a finding which is not supported by any evidence or taking into account irrelevant material or ignoring vital evidence (62 of 64) [CMA-3785/2017] and the plain terms of the contract under which it is required to adjudicate a dispute has inter alia to be necessarily castigated as a perverse decision. The Supreme Court in Kuldeep Singh Vs. Commissioner of Police - (1999) 2 SCC 10, has similarly held. So too in Excise and Taxation Officer-cum-Assessing Authority v. Gopi Nath & Sons - 1992 Supp (2) SCC 312.
The fundamental principles which form part of 'fundamental policy of law in India' for testing the validity of arbitral award are well stated. They are that the Arbitrator must have a judicial approach and that he must not act perversely. An award which shocks the conscience of the court also is liable to be upturned. 'Patent illegality' inter alia includes contravention of substantive law of India. That would without question include a contravention of Arbitrartion Act itself and its mandate under Section 28(3) requiring taking into account the terms of the contract on which the dispute arises before the Abitrator as also Section 31(3) mandating a reasoned award unless agreed to the contrary to the parties before the Arbitrator. A reasoned award would entail a stated and clear connect between the conclusion arrived at and the material before the Arbitrator.
In the present case, the award dated 27-5-2015 passed by the Sole Arbitrator not only suffers for one, from patent illegality, which goes to the root of the matter. The Sole Arbitrator in arriving at his finding, especially on the first claim, has acted evidently contrary to and in a manner incompatible with the terms of the contract and the plain language of the relevant covenants as to price adjustment in the base price of coal supplied. As the Sole Arbitrator has taken a view completely incompatible with the (63 of 64) [CMA-3785/2017] terms of the contract, there is no force in the contention of Mr. Dushyant Dave that the conclusion of the Sole Arbitrator was based on a mere beneficial construction of the contract which lay wholly within his jurisdiction and does not warrant interference for that reason. The arbitral award on claim No.2 relating to fixed costs is unsustainable not only for the reason that it was passed without regard--but also contrary to the principles which underlie award of damages as set out in Section 73 and 74 of the Contract Act--the substantive law of India for award of damages. That had to be necessarily reckoned for under Section 28(3) of the Act of 1996. Rs.78 crores have been awarded despite no evidence of any probative worth regarding damages on record and was oddly founded on a contract between the claimant and a third party AMPL with which the appellant had no privity of contract. The award towards the refund of deductions made on account of deposits made in the Escrow account in favour of the CCO is wholly unconscionable and patently illegal as it overlooks the claimant's own acceptance on the issue in its letter dated 9-6- 2012 in response to the appellant's letter dated 6-6-2012. Also the claimant's obligation on this count under clause 3.2 of the CMDA relating to scope of work whereunder all expenses (which would necessarily include expenses mandated by law/ government's directives), in the mining operations/ activities were to be to the account of the respondent claimant and no part on that count chargeable to the appellant. Public policy cannot allow for adjudications contrary to terms of the contract and admissions of a litigating party. The award dated 27-5-2015 on claim No.3 is thus liable to be set aside. It is so. The court below in dismissing the appellant's objections to the award dated 27-5-2015 has failed to (64 of 64) [CMA-3785/2017] exercise jurisdiction vested in it to interfere with the awards under the Act of 1996 for reasons which having been fully made out and adverted to earlier--all within the scope of Section 34 of the Act of 1996.
The upshot of the aforesaid discussion is that both, the award dated 27-5-2015 of the Sole Arbitrator and the order dated 13-4-2017 passed by the Commercial Court (Additional District Judge No.1 Jaipur Metropolitan) refusing interference therewith, are liable to be set aside. They are so and would stand set aside. The appeal is accordingly allowed.
(ALOK SHARMA),J (MOHAMMAD RAFIQ),J //Jaiman//