Bangalore District Court
Karnataka Urban Infrastructure vs Hubballi-Dharward Water Supply ... on 20 February, 2023
1
Com.A.P.No.03/2022
In the Court of LXXXIV Addl. City Civil and Sessions
Judge (CCH-85) Commercial Court, Bengaluru
Dated this the 20th day of February 2023
Present: Smt.H.R.Radha B.A.L., LL.M.
LXXXIV Addl. City Civil and Sessions Judge,
(CCH-85) Commercial Court, Bengaluru
Com.A.P.No.03/2022
Petitioners 1. Karnataka Urban Infrastructure
Development and Finance Corp. having
its office at No.22, 17th F Cross, Old
Madras Road, Indiranagar, Bengaluru -
560038
2. Hubballi-Dharwad Municipal
Corporation having its office at
Sir.Siddappa Kambli Road, Hubballi -
580028
(By Sri.Udaya Holla, Sr. Counsel for
Sri.Aditya Prasad, Adv.)
Vs
Respondents 1. Hubballi-Dharward Water Supply Project
Ltd., a company incorporated under the
Companies Act, 2013, having its
registered office at A5, Navin's Presidium,
103, Nelson Manickam Road, Aminjikarai,
Chennai - 600029, rep. by its authorized
representative Mr.R.R.Kamath
2. IL & FS Water Ltd., a company
incorporated under the Companies Act,
1956 having its registered office at A5,
Navin's Presidium, 103, Nelson Manickam
Road, Aminjikarai, Chennai - 600029, rep.
by its authorized representative
Mr.R.R.Kamath
(By Sri.T.Srinivasa Murthy for
Sri.Nitin Ramesh, Advocates)
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Com.A.P.No.03/2022
3. Justice N. Santhosh Hegde, Former
Judge, Supreme Court of India, Apartment
No.34-B, II Floor, Embassy Palace
Apartments, 1/16, Cunningham Road,
Bengaluru - 560052
4. Justice R.V.Raveendran, Former Judge,
Supreme Court of India, No.8/2, Krishna
Road, Basavanagudi, Bengaluru - 560004
5. Justice N.Kumar, Former Judge, High
Court of Karnataka, Guja Apartment,
No.101, Ground Floor, Skyline Golden Ray
Apartment, K.P.Poornachandra Road,
Kempegowda Nagar, Bengaluru - 560019
Date of Institution 03.01.2022
U/s 34 of the Arbitration and
Nature of the petition
Conciliation Act, 1996
Date on which judgment 20.02.2023
pronounced
Total Duration Years Months Days
01 01 17
LXXXIV Addl. City Civil and Sessions Judge
(CCH-85) Commercial Court, Bengaluru
JUDGMENT
This petition U/s 34 of the Arbitration and Conciliation Act, 1996 ('the Act' for short) is filed by the respondents in the matter of arbitration of disputes between Hubbali- Dharwad water Supply Project Ltd. & Anr. Vs Karnataka 3 Com.A.P.No.03/2022 Urban Infrastructure Development and Finance Corporation & Anr., for setting aside the arbitral award dated 21.09.2021 passed by the respondents 3 to 5 herein constituting the Arbitral Tribunal ('the AT' for short).
2. The parties are referred as per their original rank before the AT for clarity.
3. Brief facts leading to filing of the petition are that the respondents and the consortium of Ranhill utilities Sdn. Bhd (Malaysia), Z & AP Antonaropoulos, SA (Greece) and IL & FS Water Ltd, the 2nd claimant ('JV consortium' for short) entered into an agreement dated 15.04.2016 ('the Agreement' for short) to provide cost effective and sustained up-scaling of continuous pressurized water supply, operation and maintenance and management of water supply system in Huballi - Dharward cities. The 1 st claimant was appointed as a Special Purpose Vehicle for carrying out the obligations of the JV consortium under the Agreement. The contract term of was divided into three phases, (i) Start up period of one year; (ii) Transition period of three years; and (iii) Sustaining period of eight years. During the start up period the 1st claimant submitted two 4 Com.A.P.No.03/2022 draft Service Improvement Plans ('SIP' for short) which not only exceeded the Capital Expenditure Limit ('CAPEX' for short) under the Agreement but also required modification of the the transition period. The respondents issued notice to correct in terms of Clause 20.4, but the 1 st claimant failed to comply with the demand, as such the respondents terminated the Agreement by issuing notice dated 05.10.2018. For resolution of the disputes that arose during the start up period by arbitration, the claimants and the respondents appointed one Arbitrator each in terms of Clause 27 of the Agreement and they in turn appointed the Presiding Arbitrator on 07.12.2017.
4. Alleging default on the respondents' part and the same resulting in loss to the 1st claimant, the Operator under the agreement, the claimants submitted the claim for damages of Rs.27,63,32,113/- with additional interest towards start up period fees or Rs.48,88,92,363/- with interest towards pending fee and expenses; Rs.24,24,00,000/- towards increased cost due to delay in implementation of the project; Rs.18,54,55,081/- towards loss of expected fees; Rs.179,66,10,250/- with interest for wrongful termination of the Agreement; Rs.100,80,05,882/- 5
Com.A.P.No.03/2022 for loss of expected fee due to early termination and loss of annual profit on account of the Agreement becoming impossible to perform over 12 years period or Rs.100,80,05,882/- towards loss of expected fee due to early termination and loss of expected profit at 15% p.a. or Rs.136,36,00,000/- towards loss due to wrongful termination and Rs.11,55,60,250/- for expenses incurred, interest at 18% p.a from 15.04.2016, cost and expenses of arbitration.
5. The respondents filed the statement of defence denying breach on their part and raised counter claim for Rs.15.78 Crore towards liquidated damages and refund of money already paid; Rs.748.01 Crore towards cost overrun due to delay in moving to transition period or Rs.1206.34 Crore towards cost overrun due to termination of the contract and rebidding; Rs.100 Crore as damages for loss of reputation and goodwill in addition to legal expenses with interest at 24% p.a. contending that the claimants committed breach of the Agreement by failing to perform the obligations and to rectify the short comings pointed out in the notice to correct dated 07.09.2017; and also sought changes in the terms of the Agreement as well as its scope. In spite of their attempts to settle the dispute amicably, the 6 Com.A.P.No.03/2022 claimants were not willing to proceed with the project and therefore, the Agreement was terminated by issuing notice dated 05.10.2018.
6. After recording oral and documentary evidence of the parties and on hearing both sides, the AT passed the impugned award on 21.09.2021 allowing the claim in part directing the respondents to pay to the following amounts to the 1st claimant and rejected the counter claim in toto:
(a) Rs.11,51,33,592/- towards start up period fees;
(b) Rs.1,05,03,968/- towards interest upto 05.10.2018;
(c) Rs.3,06,24,318/- towards interest at 9% p.a. on Rs.11,51,33,592/- from 06.10.2018 upto the date of award.
(d) Further interest at 9% p.a. on the aggregate amount of Rs.15,62,91,878/- from the date of the award.
7. Aggrieved by the same, the respondents have filed this petition on the ground that the conclusions of the AT are contrary to the evidence on record, admissions of Cw2, reports of the Expert Reviewer and Technical Advisor and the terms of the Agreement. Awarding of Rs.2,66,37,063/- towards set up cost is without any basis. The claimants had 7 Com.A.P.No.03/2022 not furnished Bank Guarantee within 15 days from the Effective Date (15.05.2016) for the respondents to release 50% of the set up cost and no evidence was adduced by the claimants with regard to acquiring any asset in terms of Clause 19 for executing the project. Upon termination of the Agreement, no asset is handed over to them by the claimants in terms of Clauses 24.1 and 24.4.1. The findings of the AT that the Topographic Survey was complete and the 1st claimant had taken steps to rectify the deficiencies is contrary to the evidence on record; and Cw2's admission that hardly 25% of the customer survey was complete and Topographic Survey was incomplete; that they did not rectify the same despite the Expert Reviewer and Technical Auditor repeatedly opining that the survey was incomplete is completely ignored by the AT.
7(a). The evidence of the respondents' witnesses including the Expert Reviewer that the 1st claimant failed to carryout the surveys and other works in terms of the Agreement during the start up period and also Cw2's admission that Pipeline Infrastructure Asset Condition Assessment was not carried out by them, is brushed aside by the AT to award Rs.1,61,06,513/- towards the same. Even the SIP submitted 8 Com.A.P.No.03/2022 by the 1st claimant was incomplete and the Expert Reviewer's evidence to that effect is not considered by the AT. Interim Expert Reviewer was appointed by them as required under the Agreement. Though the 1 st claimant never claimed that its work was hindered because of the delay in appointing the Expert Reviewer and Technical Auditor; and no evidence was let in to that effect. On the other hand ample evidence was placed on record with regard to delay on the part of the 1 st claimant to appoint General Manager, Operations Manager and Finance Manager and the lead partner 'Ranhill' failing to appoint six key Operator Personnel as required under the Agreement. Therefore, the findings that there was delay on their part in appointing the Expert Reviewer and Technical Auditor, is without any basis and awarding of Rs.17,74,22,478/- on such count should be set aside.
7(b). That in the presence of the Expert Reviewer's evidence, Technical Auditor's report that the start up period was not completed, as the draft SIP was incomplete and the admission of Cw2 that they had not complied with various obligations during the start up period, the AT's conclusion that they did not take over to commence the transition 9 Com.A.P.No.03/2022 period activities is perverse. The 1st claimant sought extension of transition period to five years from the initially agreed three years and the same amounted to modifying the terms of the Agreement. They had to make payment only if the 1st claimant were to fulfill the obligations under the Agreement in terms of Clause 23.1. Contrary to the same as well as Clause 12.1(c) r/w Schedule 12A1 and Cw2's admission that their reports were incomplete, the AT has erroneously concluded that there is nothing like 'Agreed SIP' and awarded Rs.11,51,33,592/- as start up period fee, even though Rs.16.40 Crore was already paid. The deficiencies pointed out by the Technical Auditor and Expert Reviewer with regard to the draft SIP are wrongly held in favour the 1st claimant and to hold that the terms of contract was substantially complied. The same cannot be sustained in view of the Expert Reviewer's evidence, Cw2's admission that the draft SIP was incomplete. 7(c). Further, as per Clause 13.8.1 interest was payable for the delay in payment only during the transition period and sustaining period activities, not during the start up period. The AT has awarded interest in favour of the claimants against the terms of the agreement and ignoring the 10 Com.A.P.No.03/2022 evidence with regard to the 1 st claimant failing to carry out the obligations as stipulated under Schedule 12. The 1 st claimant spent more than 2.5 years on the start up period activities, but failed to fulfill its obligations. As such they were entitled to liquidated damages in terms of the Agreement. But the AT denied the counter claim for liquidated damages just because the same was not levied during the subsistence of the contract. Likewise, without any justification, the AT refused to grant refund of the amount already paid. Even according to the claimants additional sum of over Rs.200 crore was required for carrying out the project work, but the AT rejected the counter claim for the same. When the agreed dollar conversion rate under the agreement was Rs.66.74 per dollar, the AT has considered the same at Rs.67/- per dollar. In view of the notification dated 17.03.2012 issued by the Govt. of India exempting tax on service provided to the Govt. or local authority by way of erection, construction, maintenance, repair, alterations, renovations or restoration of pipeline conduit or plant for drinking water supply, water treatment, sewage treatment or disposal etc. and the failure of the claimants' to prove payment of service tax on the 11 Com.A.P.No.03/2022 amounts already received, the AT should have deducted the service tax from the amount awarded towards the first claim. The AT lacked jurisdiction to entertain the claimants violated Clause 27.2 r/w Schedule 21 of the Agreement and there the impugned award should be set aside.
8. The claimants have filed the statement of objections contending that the challenge to an arbitral award is limited to the grounds U/s 34 of the Act and scope for judicial intervention is minimal. While deciding an application U/s 34 of the Act, the court should refrain from appreciation and reappreciation of matters of fact; arbitral award can be held to be patently illegal only if it is contrary to the substantive provisions of law, provisions of the Act or the terms of contract. Construction of contract is primarily for the AT to decide and unless the terms of contract are construed unreasonably, the impugned award cannot be set aside as being patently illegal. This court cannot enter upon merits of the dispute and re-arguing the entire dispute is not permissible U/s 34 of the Act. The respondents have not made out any of the grounds U/s 34(2) and the AT has delivered the award after extensive and detailed arbitration proceedings. The frame work of the Agreement was the 12 Com.A.P.No.03/2022 subject matter of the dispute and interpretation of the contract cannot be done U/s 34 of the Act; AT has analyzed in detail their submissions with regard to appointment of key operator personnel to conclude that delay in appointment of such personnel or their lack of qualification / experience did not affect the service in any manner. There was delay of more than six months in appointing an Expert Reviewer. The Agreement did not provide for appointment of an interim Expert Reviewer and therefore his appointment on 15.02.2017 was of no consequence. 8(a). That the issues between the parties with regard to survey etc., request for change of CAPEX etc., are considered and appreciated by the AT on the basis of evidence. Relevant clauses of the agreement are examined while awarding Rs.2,66,37,063/- towards set up cost; releasing of 90% of the amount towards 50% set up cost by the 1st respondent by letter dated 07.10.2017 is also taken into account. They were justified in requesting for amendment to the agreement but the respondents openly ignored the clause providing for such amendment subject to mutual agreement. In paras 123 and 124 of the award, the AT has carefully examined the Clauses in the Agreement 13 Com.A.P.No.03/2022 and also the evidence to conclude that the respondents are liable to pay 75% of SIP fee. Interest is awarded considering unreasonable delay in making payments. Awarding of reasonable interest is within the domain of the AT and the counter claim for liquidated damages was rightly rejected; and the respondents had not levied the same in the first notice to correct and no date was specified for levying the liquidated damages. The respondents did not file an application U/s 16 of the Act questioning the jurisdiction of the AT or pressed their objections with regard to the same during the arbitration proceedings. Even the question of service tax was not raised and Notification dated 17.03.2012 was not produced before the AT. There was novation of Agreement as the JV consortium was replaced with the SPV. The lead partner's participation would have been crucial during the transition period due to experience in operations and management; and the start up period which was dedicated for design, studies and surveys. The respondents have failed to establish any infirmity or irregularity in the impugned award and therefore, the petition should be dismissed.
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9. Heard arguments; perused the written arguments by both sides as well as the arbitration records.
10. Sri.Udaya Holla, the learned Senior counsel appearing for Sri.Adithya Prasad for the respondents/petitioners has relied upon the following judgments:
(a) Paras 10, 29, 31, 35, 38 and 41 Oil and Natural Gas Corporation Ltd. Vs Western Geco International Ltd.
reported in (2014) 9 SCC 263 where it is held that the arbitrator must have judicial approach and cannot act arbitrarily or capriciously; award ignoring crucial evidence and drawing of wrong inference, perversity and irrationality are grounds for inference as application of mind is fundamental policy of Indian law;
(b) Paras 24 to 26 in State of Chhattisgarh & Anr. Vs SAL Udyog (P) Ltd. reported in (2022) 2 SCC 275 where it is held that an award not in accordance with contract is in gross contravention of Sec.28(3) of the Act; failure to decide the dispute in terms of contract and finding based on no evidence or the award which ignores vital evidence to arrive at a decision amounts to patent illegality;
(c) Paras 18, 27, 31, 32 and 36 in Associate Builders Vs DDA reported in (2015) 3 SCC 49 where it is clarified that if an award is against the interest of India, justice or morality and disregards the 15 Com.A.P.No.03/2022 orders passed by the superior courts will be in contravention of the fundamental policy of Indian law and the public policy;
(d) Para 29 Delhi Airport Metro Express Pvt. Ltd. Vs Delhi Metro Rail Corporation Ltd. reported in (2022) 1 SCC 131;
Para 41 in Ssangyog Engineering Construction Co. Ltd. Vs NHAI reported in (2019) 15 SCC 131; and Paras 14, 31 to 33 in South East Asia Marine Engineering and Constructions Ltd. (SEAMEC Ltd.) Vs Oil India Ltd.
reported in (2020) 5 SCC 164;
Para 11.2 in Parsa Kente Collieries Ltd. Vs Rajasthan Rajya Vidyut Utpadan Nigam Ltd. reported in (2019) 7 SCC 236 where it is held that the conclusions of the arbitrator based on no evidence or arrived at by ignoring vital evidence is held to be perverse and set aside on the ground of patent illegality
(e) Para 49 in Project Director NHAI Vs M.Hakeem & Anr. reported in (2021) 9 SCC 1, where award based on irrelevant factors/material is held to be perverse.
(f) Paras 10 and 16 in Union of India Vs Manraj Enterprises reported in (2022) 2 SCC 331 holding that the arbitrator cannot award interest contrary to the terms of the agreement/contract between the parties. 16
Com.A.P.No.03/2022
(g) Para 21 in State of Orissa & Ors. Vs Tata Sponge Iron Ltd. reported in (2007) 8 SCC 189 wherein it is reiterated that an exemption notification must be liberally construed.
(h) Para 21 in Assistant Commissioner (CT) LTU & Anr. Vs Amara Raja Batteries Ltd. reported in (2009) 8 SCC 209 wherein it is clarified that an exemption notification should be given a literary (sic literal) meaning. Recourse to other principles or cannons of interpretation or statute should be resorted to only in the event the same give rise to anomaly or absurdity. The exemption notification must be construed having regard to the purpose and object it seeks to achieve when the government sought to increase in industrial development in the state such a benevolent act on the part of the State should be given full effect unless there exist any statutory interdict.
11. Sri.T.Srinivasa Murthy for Sri.Nitin Ramesh for the claimants/respondents relies upon the following judgments in support of his arguments on the scope of Section 34 of the Act:
(a) Para 33 and 56 in Associate Builders Vs DDA reported in (2015) 3 SCC 49 ;
Para 9.1 in Parsa Kente Collieries Ltd.
Vs Rajasthan Rajya Vidyut Utpadan 17 Com.A.P.No.03/2022 Nigam Ltd. reported in (2019) 7 SCC 236;
Para 29 Delhi Airport Metro Express Pvt. Ltd. Vs Delhi Metro Rail Corporation Ltd. reported in (2022) 1 SCC 131;
Paras 38 and 41 in Ssangyog Engineering Construction Co. Ltd.
Vs NHAI reported in (2019) 15 SCC 131 Para 21 in P.R.Shah Vs B.H.H.Securities reported in (2012) 1 SCC 594 Para 25 in Dyna Technologies (P) Ltd.
Vs Crompton Greaves Ltd. reported in (2019) 20 SCC 1 and
(b) Krishi Upaj Mandi Samiti, New Mandi Yard, Alwar Vs Commissioner of Central Excise and Service Tax, Alwar reported in (2022) 5 SCC 62 for the proposition that the exemption notification should not be liberally construed.
12. In reply, the learned Senior counsel submits that the AT was bound to take judicial notice of the notification but exempted payment of service tax in respect of the work undertaken by the claimants under the Agreement; and if any judgment or award or order is passed ignoring the statutory provisions and the judgment of the superior 18 Com.A.P.No.03/2022 courts, it will be per incurium relying on the following judgments:
(i) Para 8 in Indian Oil Corporation Vs Muncipal Corporation & Anrs.
reported in (1995) 4 SCC 96, a case where the High Court of Mandhya Pradesh took a different view of Sec.138(b) of Madhya Pradesh Muncipal Corporation Act (annual value of building) when the matter was no more res integra and concluded by the Hon'ble Supreme Court in Municipal Corporation Vs Rathnaprabha reported in (1976) 4 SCC 622, placing reliance on some other decision on a similar provision in some other statute applicable in other states wherein there was no non obstante clause as in the case of Madhya Pradesh Municipal Corporation Act. Under such circumstances it is made clear that earlier decisions of the Hon'ble Supreme Court cannot be overruled even by a co-
equal bench.
(ii) Para 16 to 28 in National Insurance Co.Ltd. Vs Pranay Sethi & Ors.
reported in (2017) 16 SCC 680 & Para 15 in Y.Seetharama Holla & Anr.
Vs Gopala Rao reported in AIR 1985 KAR 219, where dealing with the question of bindingness of prior co-
ordinate bench judgment, it is held that the doctrine of binding precedent is of utmost importance in the administration of judicial system. It promotes certainty and consistency in judicial decisions. 19
Com.A.P.No.03/2022 Judicial consistency promotes confidence in the system. Discipline demanded by a precedent or disqualification or diminution of a decision on the application of the per incurium rule is of great importance, since without it, certainty of law, consistency of rulings and comity of courts would become a costly casualty. A decision or judgment can be per incurium if any provision in a statute, rule or regulation which is not brought to the notice of the court. A decision or judgment can also be per incurium if it is not possible to reconcile its ratio with that of a previously pronounced judgment of a co-equal or larger bench. There can be no scintilla of doubt that an earlier decision of co-equal bench binds the Bench of same strength.
13. In light of the grounds urged and the rival contentions of the parties, the points that arise for the consideration are:
1. Whether the respondents/ petitioners establish that the Arbitral Tribunal lacked jurisdiction?
2. Whether the respondents/ petitioners establish that the Arbitral Tribunal has awarded start up period fee and interest in favour of the claimants ignoring the vital evidence on record and also the terms of the Agreement?20
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3. Whether the respondents/ petitioners have made out the grounds U/s 34(2) and 34(2A) of the Act for setting aside the impugned award, as prayed?
4. What order?
14. My findings on the above points are:
Point No.1: In the negative Point No.2: In the affirmative Point No.3: In the affirmative Point No.4: As per the final order for following REASONS
15. Before taking up the points for consideration for discussion, it is necessary to understand the scope of Sec.34 of the Act as enunciated in the judgments relied upon by both sides.
16. Arbitral award can be set aside only on the grounds provided U/Sec.34 of the Act, as enunciated in the various judgments relied upon by both sides; AT is the ultimate master of the quantity and quality of evidence to be relied upon; a possible view taken by the AT on facts has necessarily to pass muster as it is the last word on facts. Construction of the terms of contract is primarily for the AT to decide. When the terms of the contract are reasonably 21 Com.A.P.No.03/2022 interpreted, the award cannot be interfered with U/s 34 of the Act. Every error of law committed by the AT will not fall within the meaning of patent illegality and the courts are prohibited from reappreciating facts and evidence and from substituting the AT's view with its own. But when the AT fails to decide in accordance with terms of contract governing parties, it amounts to gross contravention of Sec.28(3) of the Act and a patent illegality.
17. Undisputed facts of the case as emerging from the records are -
(a) The respondents invited global bid for cost effective and sustainable up-scaling of 24x7 pressurized water supply in the twin cities of Hubballi-Dharwad. On accepting the bid of JV consortium, the Agreement came to be entered into. The 1st claimant was incorporated as the SPV by the JV consortium to carryout their obligations under the Agreement. The project was to be executed in three phases viz., Start Up period of 12 months from 15.05.2016 being the effective date; Transition Period of 3 years from the close of the start up period and Sustaining period.
(b) During the Start Up period, the claimants were required to carry out various assessments 22 Com.A.P.No.03/2022 such as Environmental and Social assessment, conduct surveys like Customer Survey, Topographic Survey etc., as set out in Schedule 5 and submit reports; prepare and submit Transition Handover Plan (THP), Comprehensive Assessment Plan (CAP), Advance Procurement Plan (APP), Operation and Management Plan (O&M Plan), Service Improvement Plan (SIP). And in this period, they were entitled for Set Up Cost for mobilizing men and material to carryout their obligation under the agreement. SIP fee was also payable during this period towards Customer Survey, Topography Survey, Pipeline Asset Condition Assessment Survey; and payments were to be made as set out in Schedule 12.
(c). The respondents had to appoint an independent Expert Reviewer and a Technical Auditor within 90 days and 180 days from the effective date respectively but, the appointments were made on 26.04.2017 and 29.08.2017. The claimants too had to appoint six Key Operator Personnel with academic qualification and experience as set out in Schedule 8 within 3 days from the effective date but only two persons were appointed as Key Operator Personnel.
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(d). The claimants carried out surveys, assessments and submitted two draft SIPs, one in June 2017 and the other in February 2018. The 2nd draft SIP required enhancement of the CAPEX limit and extension of transition period from 3 years to 5 years. The respondents issued notice to correct in terms of clause 20.4 and thereafter, terminated the Agreement by issuing notice dated 05.10.2018.
18. Point No.1: The learned Senior Counsel appearing for the respondents, drawing attention to Clause 27.2 r/w with Schedule 21 of the Agreement providing for reference to adjudicator before commencing arbitration proceedings, argues that the claimants did not comply with the said Clause and therefore, the AT lacked jurisdiction.
19. Per contra, the learned counsel for the claimants argues that the respondents cannot agitate this, as they did not press the objection with regard to AT's jurisdiction, during arbitration proceedings and no application U/s 16 of the Act was ever filed or raised this issue in the written arguments filed in the arbitration proceedings. 24
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20. From Clause 27 it is seen that the parties had agreed to make best efforts to resolve the disputes promptly, equitably and in good faith, in consultation with the Technical Auditor and the Expert Reviewer; and to provide each other, reasonable access to all non privileged records, information and data pertaining to any dispute, during normal business hours.
21. Further, within 60 days from the effective date the claimants and the respondents had to prepare a list of candidates with professional qualification and attributes as set out in Schedule 21 and to appoint an adjudicator from the said list within 90 days from the effective date (Clause 27.2.1). Only such disputes which could not be resolved through amicable settlement was to be referred to the adjudicator and resolution by arbitration could be resorted to only in respect the disputes that remained unresolved by adjudication (Clause 27.3).
22. It is not the case of the respondents that a list of candidates to be chosen as adjudicator was prepared within 60 days from the effective date or that an an adjudicator was appointed from that list within 90 days from the 25 Com.A.P.No.03/2022 effective date in terms of clause 27.2.1. And as seen from 23 of the impugned award it was the respondents' who contended that the attempt to reach amicable settlement failed as the claimants were unwilling.
23. As per Clause 27.3.2, the arbitration panel was agreed to be constituted with three arbitrators, of whom one each to be selected by the 2nd respondent and the Operator and the 3rd arbitrator to be appointed by the two arbitrators so selected. The records reveal that the 1 st claimant had addressed a letter stating that the list of adjudicators was not prepared as required under the agreement.
24. On 30.09.2017, the claimants intimated the respondents about appointing the 4th respondent herein as their arbitrator. It is relevant to note here that the respondents did not reply to the same registering their objections, if any or insisting for dispute resolution by adjudication before proceeding with arbitration. But, the 5 th respondent herein was appointed as the arbitrator from their side and the same was intimated to the claimants by letter dated 16.11.2017.
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25. In the above circumstances, the respondents by conduct, appear to have waived the requirement of referring the dispute to Adjudicator in terms of Clause 27.2.1. Therefore, there is no merit in the challenge to AT's jurisdiction and the reference to arbitration cannot be said to be premature as held in Demerara Distilleries (P) Ltd. Vs Demerara Distilleries Ltd. reported in (2015) 13 SCC
610. The point for consideration is answered accordingly in the negative.
26. Point No.2: The AT has awarded 100% Set Up Cost, 100% cost towards survey, 75% of SIP Fee with interest holding that there was breach on the respondents' part as they did not appoint the Expert Reviewer and Technical Auditor within 90 days and 180 days respectively from the effective date and failed to pay the claimants' bills in time.
27. The respondents' challenge to awarding of Set Up Cost, cost towards Survey, SIP Fee, interest and rejection of counter claim etc., are considered separately in the succeeding paras in view of the directions issued by the Division Bench of our Hon'ble High Court in Union of India Vs M/s Warsaw Engineers & Anr. [COMAP No.25/2021 27 Com.A.P.No.03/2022 dated 17.04.2021 (DB)].
28. SET UP COST:
Assailing the findings leading to awarding of 100% Set Up Cost, it is argued by Sri.Udaya Holla that the lead partner Ranhill quoted Rs.2,66,30,745/- in the bid document as Set up cost and the respondents had released 90% out of 50% being the 1st installment under schedule 12, though the claimants did not furnish Bank Guarantee within 15 days from the Effective Date for releasing this payment. To claim the balance amount the claimants had to establish acquisition of assets/equipments/vehicles etc. for executing the contract work. The Technical Auditor's report was to the effect that no asset was acquired by the claimants for the said purpose. Nor was any asset, equipment handed over to the respondents in terms of Clause 24.1 and 24.4.1. Without evidence regarding acquisition of assets by the claimant such as audited accounts in terms of Clause 19.1 the AT awarded Rs.2,66,37,063/- towards set up cost by unreasonably interpreting the Clauses in the agreement to conclude that there is nothing like Agreed SIP and ignoring Clause 3.4.1.28
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29. Per Contra, Sri.T.Srinivasa Murthy appearing for the claimants argues that the respondents never sought return of the assets either in the counter claim or during the arguments. In paras 33, 34, 58 to 61, 113, 115 and 116 of the award the AT has considered in detail the claim for Set up Cost; and concluded that the requirement of furnishing Bank guarantee was waived as the respondents made part payment of the invoices without insisting for the same. Since the findings of the AT are based on appreciation of evidence and facts, this court cannot interfere with the same by re-appreciating the evidence.
30. The findings of the AT with regard to part payment of the invoices amounts to waiver of the requirement to furnish Bank Guarantee for the release of 50% of the Set up Cost is based on appreciation of facts and evidence, the same, as rightly argued by the learned counsel for the claimants, cannot be interfered with U/s 34 of the Act.
31. The question for consideration is whether awarding of the Set Up Cost, Pipe Asset Condition Assessment Fee, Topography Survey Fee, Customer Survey Fee and Fee for preparation of SIP, is based on evidence and in terms of the 29 Com.A.P.No.03/2022 Agreement?
32. SET UP COST:
As seen from Schedule 12 coupled with Bid document, Rs.2,49,80,634.69 was quoted as Set up Cost by the lead partner to cover one time cost of staff mobilization, office equipment (computers, software, printers and furniture), operational equipment (flow meters, loggers etc.) necessary for diagnosis of the system, vehicles, etc. to move to transition; and it was to be paid in installments as below to enable the claimants to carry out their obligations under the Agreement, during the start up period:
Cost per item Payment terms
A1 Set Up Cost 50% of the Set up Cost will be paid within 15
days of the Effective Date against Bank
Guarantee *
25% of the Set up Cost will be paid within six months of Effective Date and The remaining 25% of of the Set up Cost will be paid on submission of the agreed SIP * The BG shall be released on achievement of 50% progress and confirmation by the TA
33. Clause 5 of the Agreement makes it obligatory for the claimants to procure all materials, equipments, supplies, of the standard of Bureau of Indian Standards (BIS) / International Standards Organization (ISO) and Clause 13.5.1 requires them to submit invoices for fixed fee every 30 Com.A.P.No.03/2022 month/ performance fee every quarter etc., to the Technical Auditor for review and recommendation with evidence to support its statement.
34. Clause 19 requires the claimants to maintain books of accounts recording all receipts, income, expenditure, payments, assets and liabilities in accordance with the Agreement, good industry practice and the applicable laws; to provide two copies of balance sheet, cashflow statement, profit and loss account along with statutory auditor's report, summarized information on O&M expenses, works contract cost, Set up Cost, SIP fee, SOP fee etc.
35. In para 33 of the award, the AT refers to clauses 13.2.1 and payments to which the claimants are entitled to, as set out in Schedule 12. In para 34, detailed break up of Start up period cost as set out in the lead partner's bid document is extracted to note that when the agreed exchange rate per USD was Rs.66.7445, the claimants had submitted the invoices for Rs.2,66,37,063/- at rate of Rs.67 per USD.
36. In para 61 of the award, the AT makes reference to the observations of the Technical Auditor with regard to the claimants not producing documents to establish 31 Com.A.P.No.03/2022 procurement of office equipment, operational equipment etc., and the same was required to evaluate and certify. Para 113 of the award makes a reference to the payments already received by the claimants to be Rs.16,40,66,237/-.
37. Regarding the third installment of remaining 25% payable on submission of Agreed SIP, the AT has concluded that the same was payable on submission of SIP; the claimants had submitted two draft SIP and there is nothing like an Agreed SIP. The respondents can either agree with the draft SIP submitted or to terminate the contract and having terminated the contract they are liable to pay the entire Set up Cost.
38. It is not in dispute that the 1 st claimant was an SPV incorporated by the JV consortium to undertake implementation of the project in accordance with the Agreement including planning, study, survey, investigation, design, detailed engineering, procurement, management and overseeing the construction and rehabilitation works as well as operation, maintenance and management of the water supply system to provide water to the customers in the service area; bulk supply arrangements within and 32 Com.A.P.No.03/2022 outside the service area as specified in Schedule 3 of the Agreement r/w definition of "Services" under Clause 1 of the Agreement.
39. During the Start Up Period, the 2 nd respondent was responsible only to provide water supply services and to collect charges in the service area and operate, maintain and repair the facilities and to grant access to the claimants to all facilities to study the management, operation and maintenance of water supply system and to carry out Comprehensive Assessment, in order to prepare the draft Service Improvement Plan (SIP) and Advance Procurement Plan (APP) and to carry out pre-transition activities. The facilities in the service area was required to be handed over to the claimants prior to the transition period, in accordance with Transition Handover Plan (THP) as per Clause 3.2.
40. During this Period, the 1st claimant was responsible for preparing THP, Comprehensive Assessment, SIP, Operation and Maintenance Plan (O&MP), APP and other activities (Clause 3 r/w Schedule 5 of the Agreement); to submit the draft SIP and draft O&M Plan to the respondents and the Expert Reviewer not later than 270 days from the Effective 33 Com.A.P.No.03/2022 Date. On review by the Expert Reviewer only if there were no comments or suggestions, it would be treated as Agreed SIP under Clause 3.4.
41. According to Cw1, the first draft SIP was submitted on 15.02.2017 i.e., on the 270th day from the effective date and the Interim Expert Reviewer provided some comments on the IIP submitted in January 2017; that IIP forms a part of the SIP. The interim Expert Reviewer is admitted to have attended the review meeting held on 23.02.2017 and 26.02.2017 and had discussion with the claimants' team at his office in the month of March 2017.
42. Thus, when the claimants met the interim Expert Reviewer in connection with IIP in March 2017 and he even attended review meeting in February 2017, it is clear that the Interim Expert Reviewer was in place as on the date of submission of first draft SIP on 15.02.2017 and it is pertinent to note that the claimants' do not dispute the interim Expert Reviewer was not a qualified person.
43. Cw1 also admits that the first draft was rightly found to be incomplete by the Expert Reviewer who came on board on 26.04.2017. The lacunae were communicated to 34 Com.A.P.No.03/2022 the claimants by Ex.C35 and R50 and long before that the Expert Reviewer was appointed. In the first draft SIP, the transition period was mentioned as 4 years and in the second draft SIP it was mentioned as 5 years, where as the agreed transition period under Ex.C1/R1 was 3 years.
44. Cw1 has admitted in unequivocal terms that the respondents informed the claimants bout both the draft SIPs being incomplete; and the first step is the approval of the SIP. Cw2 too states that the Expert Reviewer gave review reports Ex.R69 and R70 (Ex.C191) with copy to the claimants. Even in the 2nd report, the Expert reviewer had opined that the comments in the earlier report was not resolved and a lot of other data was missing. He too admits that the approval of the SIP by the respondents has to be in consultation with the Expert Reviewer and a third draft SIP was submitted during the pendency of the arbitration proceedings.
45. The breakup of Set up Cost as claimed by the claimants and the dates on which the same fell due finds a mention in para 114. Thus the above paras relied upon by the claimants to sustain awarding of the Set up Cost do not 35 Com.A.P.No.03/2022 deal with the evidence on record. Paras 115 and 116 too do not deal with the evidence adduced by the claimants with regard to incurring expenses during the start up period for acquiring equipment, assets etc. for carrying out their obligations under the Agreement in terms of Clause 19, such as audited accounts.
46. Cw2's evidence would reveal that they had sub contracted the work of condition assessment of civil structures (reservoir) to M/s Structcare Project, condition assessment of water treatment plant M/s San Engineering, condition assessment of electro mechanical equipments to M/s Sunshubh Renewables, condition assessment existing distribution network in Nehrunagar, Hubbali to M/s TWIC, condition assessment of existing distribution network in Police Head Quarters Dharwad to M/s Core Cabronex Ltd., the Topography Survey to Pune based M/s Chetak Engineers etc.
47. It is not the claimants' case that they had produced vouchers etc. evidencing payment to the sub-contractors for mobilizing staff, office equipment like computers, printers and furniture and operational equipment like flow meters, 36 Com.A.P.No.03/2022 loggers and vehicles. Even the impugned award, as discussed earlier, does not reveal claimants' producing documents to in support the claim for Set Up Cost.
48. In the above circumstances, the finding of the AT that the first and second payment of the Set up Cost is not dependent on the claimants furnishing any particulars to the respondents is contrary to the Agreement and with regard to the third installment, the finding that there is nothing like an Agreed SIP is not only contrary to the admissions of the claimants' witnesses Cw1 and Cw2 but also contrary to Clause 3.4.1 of the Agreement.
49. CUSTOMER SURVEY:
The AT has awarded Rs.95,72,170/- towards Customer Survey fee in favour of the claimants; Ex.C47 and C44 are the invoices for the same. Challenging the same, the learned Senior counsel for the respondents argues that the lead partner's quote of Rs.95,68,973/- towards customer survey fee was also payable in installment as set out in Schedule 12 and the AT has failed to consider the admissions of Cw2, the reports of independent Technical Auditor and Expert Reviewer that hardly 50% of Customer 37 Com.A.P.No.03/2022 Survey was completed by the claimants.
50. Per contra, the learned counsel appearing for the claimants argues that the AT has extensively analyzed the evidence with regard to Customer Survey including the short comings indicated by the Technical Auditor and the subsequent joint verification in paras 49, 59 to 63, 80 to 84 and 88 of the award. The AT has also relied on the cross examination of the witnesses and documents with respect to conduct of Customer Survey to come to the conclusion that the claimants had completed survey of 1.90 lakh households as against total target of 2.23 lakh households. The mismatch of data was later sorted out and it is not a case of non completion of the survey and therefore, the findings of the Arbitral Tribunal based on appreciation of evidence cannot be found fault with.
51. Schedule 12 relating to payment of Customer Survey fee is extracted here below for convenience:
Cost Item Payment Terms A2 Customer Survey In four equal installments on completion of 25%,
50% and 75% of baseline estimates of number of customers: last installment payable on completion of the survey certified by the Technical Auditor. 38
Com.A.P.No.03/2022 and 100% was the milestone, as per Schedule 11, for planning, detailed design, procurement, project management utility systems installation, commissioning, testing and commencing operations of the customer database.
52. Further, the claimants had to undertake door to door survey of all customers whether connected to the network or not and obtain all details in regard to location, name, address, mobile and landline telephone numbers, number of resident members, status of billing and metering, economic status/ socio-economic classification of households, availability of water connection, water supply schedule and actual timing, estimated consumption levels, alternate water supply arrangements, method of disposal of wastewater [Schedule 5 (4.1 and 4.2)].
53. The Customer Survey included key details of all customers in the category of general residential holdings (independent housing, group housing connections and apartments), urban households, government housing, non domestic, commercial, institutional, religious places, industrial and fire services and other category of customers residing in the service area. The output from the Customer 39 Com.A.P.No.03/2022 survey had to be sufficient to validate and improve the existing billing data and to integrate the customer data into the GIS based customer management system.
54. As per the agreed terms, SIP had to include details of customer connections, bulk water supply connections, illegal connections, commercial practices including billing and connections for further planning of infrastructure improvement and service delivery improvement.
55. As discussed in Para 47 of the award the minutes of the meeting Ex.C24 relating to the review meeting held on 26.02.2017 records about the claimants conducting survey of 1.90 lakh households when the total target was 2.23 lakh households. In para 61 refers to Technical Auditor's observation with regard to mismatch in most of the information furnished by the 1st claimant. Rw1 also spoke about it and also to the effect that though the results of the Customer Survey was incorrect, the claimants were reluctant to rectify the same.
56. The Technical Auditor too has submitted the report to the effect that out of 227613 customers having water connection/water meter and RR number, Customer Survey 40 Com.A.P.No.03/2022 report covered only 129106 connections and out of this only 50% of data matched with actual RR numbers. Even according to Cw2, customer data collection was sub contracted to different agencies and RR number did not match with the names of the persons having the water connection; many of the address of the customers in the survey report did not match with the actual address during the joint verification held on 30.10.2017 by the claimants and the Technical Auditor.
57. The letter dated 06.12.2017 of [EGIS India Consulting Engineers Pvt. Ltd.] discloses that during joint verification most of the information furnished by the claimants in the Customer Survey data was mismatching and the claimants failed to furnish the relevant records for having carried out the survey in P1P1, P1P2 and demo zones as instructed during the meeting held on 16.07.2017.
58. Even the comprehensive assessment report clearly indicates that the Customer Survey was incomplete. Therefore, I am of the opinion that the findings of the AT in paras 117 and 118 that the joint verification was undertaken and the Customer Survey data was matching, is 41 Com.A.P.No.03/2022 contrary to the evidence on record. Further awarding 100% of the claim for customer survey fee when survey was complete only to the extent of 50% is contrary to the terms of the Agreement.
59. TOPOGRAPHY SURVEY:
Challenging the award of Rs.1,30,44,236/- towards Topography Survey, it is argued on behalf of the respondents that the same is contrary to the evidence on record; the deficiencies pointed out by the Technical Auditor have been ignored by the AT and the conclusion that the claimants had taken steps to rectify the deficiencies is based no evidence.
60. Per contra, it is canvassed on behalf of the claimants that para 47, 61, 63, 71, 80 to 84 of the award deal with the documentary evidence on Topography Survey and in para 85, cross examination of the Expert Reviewer on this aspect is discussed. Based on the evidence on record, the AT has recorded its finding in para 19 and 20, that the respondents did call upon claimants to take over the project and enter into transition period even before approving the SIP and without the Technical Auditor certifying the Topography 42 Com.A.P.No.03/2022 Survey and that it would show that the survey was substantially complete.
61. The bid Schedule shows that Rs.1,30,33,576/- was quoted for Topography Survey by the lead partner and as per Schedule 12 this was payable in four equal installments on completion of 25%, 50% and 75% of the baseline estimates of Geographical Survey and the last installment on completion of the survey, certified by the Technical Auditor. Code No.2 of Schedule 1, Table 1 prescribes 100% milestone for Topographical Survey map and Digital elevation Model of the Survey area.
62. As seen from para 3.1 of Schedule 5, the claimants had to undertake a detailed Topography Survey covering the entire service area and existing infrastructure from the source to the customer including those area within the service area that are not provided with water supply. Such survey data had to be sufficient to develop the SIP during the Start Up period and to provide for development of a comprehensive Geographical Information System (GIS) during the transition period.
43
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63. As per para 3.2 of Schedule 5, the Topography survey was bound to capture all key elevations with Geo reference and all physical features such as roads, culverts, drains, nalas, electrical transformers, trees, existing valve chambers, sewer manholes and any other relevant features which would affect installation and maintenance of existing and/or new pipelines, pumping stations, service reservoirs. The output from this survey was to be based on real on ground fresh survey using Total Station Equipment and GPS etc. and not by mere updating the available maps by desktop digitization methods.
64. Even according to Cw2, the claimants were required to furnish comprehensive assessment report including the Topography and Infrastructure Survey Report. Comprehensive customer survey report, Topography survey and infrastructure survey report was absolutely necessary for preparing the SIP.
65. The evidence discussed by the AT shows that the Topographic Survey was completed in November 2016 and the Expert Reviewer, during June 2017 observed that the same was incomplete and several parameters to be 44 Com.A.P.No.03/2022 gathered from such survey was missing. As such it was opined that there was a need for conducting Topography Survey using high accuracy instruments like Global Positioning System (GPS) and total station equipment.
66. Cw2's evidence during cross examination would show that no resurvey was conducted after the Expert Reviewer made the above observations in June 2017 and non compliance was noted in the second report of the Expert Reviewer, submitted in March 2018. Though it is stated to have been resubmitted as Annexure to CAR, Cw2's answer to question No.168 amply demonstrates that the claimants took no steps to rectify the deficiencies but updated the output of survey by incorporating the Expert Reviewer's comments. Thus, the AT has ignored the vital evidence on record to conclude that the claimants had taken steps to rectify the deficiencies and Topography Survey was complete.
67. PIPELINE ASSET CONDITION ASSESSMENT:
For Pipeline Asset Condition Assessment, the lead partner's quote was Rs.1,60,76,753/-; and Schedule 12 provides for its payment in three installments viz., (i) 25% 45 Com.A.P.No.03/2022 on completion of Condition Assessment Design, (ii) 50% on submission draft Condition Assessment Report and (iii) remaining 25% on acceptance of Condition Assessment Report.
68. The AT, by considering the Expert Reviewer's observation with regard to reasonableness of the claimants' estimation, at the time of reviewing the second draft SIP, has awarded Rs.1,61,06,513/- towards Pipeline Asset Condition Assessment Cost as claimed.
69. Schedule 5 required the claimants to carry out a comprehensive assessment of the existing water sources, system assets and service delivery arrangements in the service area, including but not limited to assessing the condition and performance of existing assets such as raw water intake, water treatment works, treated water pumping and transmission means, service reservoirs and water distribution system; and this was to form the basis for SIP. As per Schedule 19 of the Agreement, condition assessment of distribution networks and service pipes was mandatory.
46
Com.A.P.No.03/2022
70. Cw2 admits that the system assets includes pipes and his evidence demonstrates that the assessment of hydraulic capacity of the network included assessment of pipe size, pipe length, pipe valves including the hydraulic network model. The hydraulic network model included pipe network analysis, assessment of pipeline, their length, size, capacity etc; and the hydraulic capacity of the network was assessed from hydraulic network models. Further, in order to build hydraulic network model of the existing network, survey and assessment of pipe size, length and pipe valves and capacity is necessary and this could be carried out only by survey using appropriate methodology.
71. It is seen from the records that the respondents completed the network pipes work for providing 24x7 water supply to 20km demo zone area in the year 2008 and drawings pertaining to the same was with them. The entire project area was 202 Sq.kms with water connections of over 1,36,000 and by letter dated 13.12.2017 the respondents brought to the notice of the claimants about non fulfillment of obligations pertaining to Pipe Condition Assessment. 47
Com.A.P.No.03/2022
72. That apart, when Cw2 has admitted in clear terms that the Pipe Condition Assessment was not undertaken by the claimants during during start up period, awarding of the amount towards the said work is contrary to the Agreement. The claimants' argument that the above amounts were awarded based on appreciation of evidence and cannot be interfered with, therefore, merits no consideration.
73. INTEREST:
Sri.Holla argues that the AT being a creature of Contract has to act within the four corners thereof and cannot travel beyond the contract or rewrite its terms; and the AT has rewritten the contract by awarding interest though not provided for under the Agreement.
74. Per contra, the learned counsel for the respondents argues that the claim for compound interest was rejected and simple interest was granted after considering in detail the contentions urged and the relevant clauses in the Agreement; and there is nothing to strict the discretion of the AT to grant pre and post award interest. In support of the same, he relies upon the judgment in Morgan Securities and Credits Pvt. Ltd. Vs Videocon 48 Com.A.P.No.03/2022 Industries Ltd. reported in 2022 SCC Online 1127.
75. Clause 13.8.1 of the Agreement is what the AT has extracted in the award and relied upon to award interest. This provides for interest for the delay in payment of contract management fee / Utility Systems, in excess of 30 days at base rate of SBI, calculated weekly. But, Clause 13.7.1 r/w Schedule 12 shows that Contract Management Fee/Utility Systems Fee are to be paid during the Transition Period and not, Start Up Period.
76. When the parties consciously entered into Agreement, agreeing that interest is payable only on Contract Management Fee and Utility systems Fee which are payable during transition period as per Clause 13.7.1, the findings of the AT that the claimants are entitled to simple interest at the prescribed rate from the expiry of one month from the submission of Bills to the date of termination, is contrary to the terms of the Agreement.
77. In Morgan Securities and Credits Pvt. Ltd. case relied upon by the claimants, the Hon'ble Supreme Court was considering the issue "whether the phrase 'unless the award otherwise directs' in Section 31(7)(b) of the Act 49 Com.A.P.No.03/2022 provides the arbitrator the discretion to determine only the rate of interest or both the rate of interest and the 'sum' it must be paid against and not the question whether interest can be awarded even in the absence of Agreement between the parties.
78. However, the Hon'ble Supreme Court, in the case of Union of India VS Manraj Enterprises reported in (2022) 2 SCC 331, has made it clear that if there is no agreement to pay interest, the arbitrator cannot award the same by exercising discretion or to do justice. In the said view of the matter and considering that the Agreement does not provide for interest on delayed payments during the Start Up Period, I am of the opinion that awarding of interest by the AT is contrary to the Agreement.
79. SIP PREPARATION FEE:
In the lead partners bid schedule cost of preparation of SIP was quoted at Rs.23,58,67,985/- where as the claim was for Rs.23,65,63,304/-. The AT has awarded 75% amounting to Rs.17,74,22,478/- holding that the claimants had substantially complied with all the activities set out in Schedule 5 and taken up the key activities during the start 50 Com.A.P.No.03/2022 up period to complete the work. Else, the respondents would not have called upon them to take over the operation and enter into transition period.
80. The AT has concluded that there was breach on the respondents' part in not appointing the Expert Reviewer and Technical Auditor within the stipulated time and this substantially contributed to the deficiencies in the claimants' work which could otherwise have been avoided. The AT has denied balance 25% on the ground that the SIP is not approved and the said payment was subject to approval.
81. Sri.Holla appearing for the respondents argues that the SIP ought to have been based on surveys and CAR, but the same was incomplete. The Expert Reviewer's evidence with regard to incomplete surveys and reports of the claimants, availability of interim Expert Reviewer, an equally competent person to review the work of the claimant till such time the Expert Reviewer was appointed, are completely ignored by the AT.
82. Further, it was for the lead partner to appoint six key operator personnel with experience and qualification as set 51 Com.A.P.No.03/2022 out in Schedule 8 of the Agreement within three days of the Effective Date and to furnish the list to the respondents. But the same was not done. The progress in the work was affected by it and not because of any delay in appointing the Expert Reviewer or the Technical Auditor.
83. Per contra, learned counsel for the claimants argues that there was delay of nine month in appointing the Expert Reviewer and more than nine months in appointing the Technical Auditor. The finding of the AT that the appointment of interim Expert Reviewer on 15.02.2017 did not comply with the requirement of appointing the Expert Reviewer and there was no provision for appointing interim Expert Reviewer, is nothing but reasonable interpretation of the contract. On account of such delay first draft SIP prepared without guidance came to be rejected for lack of detailed estimates and the findings of the AT in this behalf should not be interfered with.
84. Even according to Cw2, the claimants did not complete the surveys and submitted in complete reports resulting in non acceptance of the draft SIP by the respondent. The records reveal that a third draft SIP was 52 Com.A.P.No.03/2022 submitted by the claimants during the arbitration proceedings. However, having regard to Schedule 12 prescribing payment of 75% of the amount on submission of draft SIP, award of the same by the AT cannot be said to be opposed to the terms of the Agreement or the evidence on record, as sought to be argued by the respondents.
85. REJECTION OF COUNTER CLAIM:
The learned Senior counsel for the respondents vehemently assails the observations of the AT with regard to delay in appointment of the Expert Reviewer and the Technical Auditor has no basis. It was not the claimants' case that delay in appointment of the Expert Reviewer and Technical Auditor hindered their work. On the other hand, the claimants failure to appoint Key Operator Personnel materially affected the progress of the work and amounted to breach of the terms of Agreement. The finding that the claimants broadly satisfied the obligations during start up period is perverse and contrary to Cw2's admission that the claimants had not complied with various obligations during the said period.53
Com.A.P.No.03/2022
86. It is also argued that, the AT has travelled beyond the contract in concluding that the claimants were justified in requesting for increase in the duration of Transition Period from 3 to 5 years and that it did not amount to breach of contract. As per Clause 23.1, the claimants were entitled to payments only in the event of fulfilling their obligations and the delay in execution of the work is attributable to the claimants. As such the respondents were entitled to liquidated damages in terms of Clause 3.7.1. But failure to notice the same resulted in denial of liquidated damages based on erroneous conclusion that it was not levied during the subsistence of contract. Further, the vital evidence of Cw2 that additional Rs.200 Crores was required for completing the work is also ignored by the AT.
87. Sri.Holla, placing reliance on Notification No.12/2012 dated 17.03.2012 submits that when the Govt. of India has exempted tax on services provided to government/local authority and the same includes erection, construction, maintenance, repair, alteration, renovation or restoration of pipeline conduit or plant for drinking water supply, water treatment, sewage treatment or disposal etc. and the claimants failed to furnish proof of payment of service tax 54 Com.A.P.No.03/2022 on the amounts already paid, ought to have reduced Rs.1,50,17,425/- from the amount awarded and deducted Rs.2,13,99,944/- in respect of the payments already made.
88. Per contra, the learned counsel for the claimants argues that the findings of the AT with regard to role of Expert Reviewer and Technical Auditor, how they could have helped the claimants to achieve maximum progress during the Star up period, if appointed within the stipulated time, are all matter of evidence and interpretation of clauses in the Agreement. Unless, such interpretation is found to be palpably unreasonable and erroneous, this court should not interfered with the findings of the AT. Even the counter claim for liquidated damages has been extensively dealt with by the AT; and the respondents are trying to introduce new case without raising the issue of service tax before the AT. This Notification did not apply to the planning stage of the water projects at its commencement but it applied to the projects that were under construction and already in use. The Transition Period could commence only if the parties agreed on investment amount - CAPEX and Utility System Envelope, the SIP and terms of transition and therefore, the AT has rightly concluded that the claimants 55 Com.A.P.No.03/2022 were justified in seeking extension of Transition Period and suggesting amendment to CAPEX Envelope.
89. Even at the cost of repetition it is released to note that, during the Start Up period the claimants had to undertake key activities like preparation of THP for taking over the operation and maintenance of the facilities immediately on conclusion of the said period; preparation of a comprehensive assessment of capacity, condition and performance of existing infrastructure and service delivery arrangements; preparation and implementation of APP detailing the pre-transition activity; preparation of SIP describing how they will improve the infrastructure and service delivery in a cost effective and sustainable manner to meet service standards; preparation of operation and maintenance plan; preparation of environmental and social assessment including plan for SIP in line with environmental code of practice of the Agreement; obtaining relevant permits that they needed to take over the operation and maintenance of facilities and to implement APP; preparation of communication plan, detailing the communication activities to be undertaken during the start up and transition periods and implementation of start up period activities. 56
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90. The Expert Reviewer, as per Clause 17, was an independent third party to be appointed by the respondents to perform the role as enlisted in Schedule 15. He was required to provide service to all parties under the Operations agreement during the start up and transition period in relation to THP, APP, O&M plan, the SIP, to review the draft of the same and to provide professional assessment of reasonableness of the draft in terms of meeting the contract objectives. He was expected to work in collaboration with the parties to bring them to agreed SIP, O&M plan, THP and APP. Therefore, as per the terms of the Agreement, Expert Reviewer was not expected to work along with the claimants in the preparation of various reports but it was for the claimants to do the ground work and submit the same for the review of Expert Reviewer [Schedule 5].
91. The Technical Auditor is also an independent third party to monitor compliance of the obligations under the Agreement by the claimants. During the start up period, he was required to participate in review meetings of SIP, APP and THP, to provide comments from the perspective of plan monitoring, to provide assistance to Expert Reviewer for 57 Com.A.P.No.03/2022 undertaking field verification and to ensure that all design work fully complies with the relevant standards; to assist the respondents to approve location of critical measurement points proposed by the claimants in the distribution network; scrutinize the invoices raised by the claimants or the works contractor for the work done and recommend to the respondents.
92. The Agreement speaks about the claimants obligation to maintain six key personnel during the start up and transition period as set out in Schedule 8 i.e. General Manager, Operations Manager, Finance Manager, DMA/Leakage Manager, Capital Works Manager, Customer Service Manager, within three business days from the Effective Date and to provide the list to the respondents including the names of members of the transition team (Clause 3.3.1).
93. The General Manager was to required to have proven experience in managing water utility, to provide continuous water supply including all managerial, technical, financial and commercial matters covering planning, operation and maintenance of water supply services as well as 58 Com.A.P.No.03/2022 management and implementation of major water supply service improvement capital program .
94. The Operations Manager was required to have experience in, operation and maintenance of water supply service delivery from source to tap and proven skills in the area of water production planning and demand management; water distribution planning and service delivery; non revenue water control; customer management and public relations; human resource management; management information system; and standard operating procedures and emergency response.
95. The Finance Manager was required to have experience in water and other utility financial management with demonstrated experience in financial planning and preparation of budgets; business planning, forecasting and regular financial monitoring; procurement and investment planning; financial management and cost control; tax planning and compliance; public finance and statutory compliance.
96. DMA/Leak Manager was required to have experience in design and implementation of leakage reduction schemes 59 Com.A.P.No.03/2022 and experience of working in water supply sector of any developing country with proven experience and skill in continuous water audit program, development and implementation of non revenue water reduction program; IWA methodology of assessing water loss and economic level of leakage; developing and updating water loss reduction strategy; flow and pressure management; data logging and processing, management and monitoring; appropriate technology for leak detection; and robust leak repair practices and response time.
97. The capital works manager was to implement annual capital works program in water supply infrastructure improvement work including organization and management of the site supervision team, contract administration, cost control, quality assurance and quality control, approval of construction procedures and materials.
98. The Customer Service Manager was required to have practical experience as commercial manager of any public utility services preferably water supply, electricity or gas services with demonstrated experience in customer service management; providing new connection and managing 60 Com.A.P.No.03/2022 existing connections; meter reading, data management and processing; preparation and delivery of bills; revenue collection and debt management; customer call and complaint management; public relations and communications; target setting and forecasting.
99. From the evidence adduced by the claimants, it is seen that certain Mr.Musa held two positions as General Manager and Operations Manager; Ms.Mitra was the Financial Manager but she was replaced with another person. Though Mr.Matheen did not have minimum required qualification, he was initially appointed as the General Manager just because he happened to participate in a number of meetings in that capacity. The respondents even addressed letters questioning the qualification of Mr.Musa.
100. Even according to Cw2, the objective of appointment of key operator personnel was to fulfill the requirements under Schedule 5 of the Agreement. Therefore it was for the key operator personnel to guide the claimants in fulfilling the requirements under Schedule 5 of the Agreement. The Expert Reviewer and the Technical Auditor's role would commence only thereafter and they had to review and 61 Com.A.P.No.03/2022 provide comments on the various plans prepared and submitted by the claimants. The delay in appointment of Expert Reviewer and Technical Auditor therefore, cannot be taken advantage by the claimants and to this extent, the AT has interpreted the terms of the Agreement unreasonably.
101. Likewise, from the letters addressed by the respondents calling upon the claimants to rectify the defects in the survey reports and produced before the AT, it is noticed that the respondents had cautioned the claimants with regard to liquidated damages if they failed to comply with the demand and the terms of the Agreement. Therefore, the finding that liquidated damages was not insisted upon during the subsistence of the contract is contrary to the documentary evidence on record.
102. In para 155 of the award the AT has discussed at length that the draft SIP was not approved and the respondents terminated the contract by notice dated 05.10.2018 because they could not reach consensus on the investment amount; and the CAPEX and Utility System Envelope in the draft SIP exceeded the limit prescribed under the agreement; that there was disagreement with 62 Com.A.P.No.03/2022 regard to conditions relating to transition.
103. The respondents relies upon various judgments in support of the argument that Exemption Notification should be liberally construed and has produced Notification 12/12 dated 17.03.2012 whereby the Govt. of India has exempted the services provided to Govt. or local authority by way of erection, construction, maintenance, repair, alteration, renovation or restoration of pipeline, conduit or plant for drinking water supply, water treatment and sewerage treatment or disposal from the whole of the service tax leviable under Sec.66B of the Finance Act.
104. No doubt, the contract was for erection, repair and maintenance etc. of the pipeline for drinking water supply but as rightly argued by the learned counsel for the claimants, they were still at the stage of providing consultancy services and not moved into the stage of erection, construction, maintenance etc.
105. That apart, this issue was not even brought up by the respondents either during arbitration proceedings or arguments. Under such circumstances and having regard to the ratio in Delhi Airport Metro Pvt. Ltd. case cited 63 Com.A.P.No.03/2022 supra, that every error of law by the AT would not fall within the expression "patent illegality", I am of the opinion that there is no merit in the respondents' arguments in this behalf.
106. In para 156 all the relevant clauses are considered by the AT with regard to termination notice under Clause 21.1.1, clause 20.4 enabling the respondents to seek compensation for overrun cost due to breach committed by the claimants together with clauses 3.4.4, 3.4.8 and 3.8.5 to conclude that clause 20.4 should be read with clause 3; that if the claimants failed to complete the start up period work, the respondents could complete the same at the risk and cost of the claimants. Considering that the agreement was not terminated for failure of the claimants to perform the obligations during start up period, the AT has concluded that the respondents are not entitled for overrun cost. This in my considered opinion cannot be interfered with as the respondents have failed to demonstrate that such interpretation is erroneous and unreasonable.
107. For the foregoing reasons, I am of the considered opinion that the findings of the AT in arriving at the 64 Com.A.P.No.03/2022 conclusion to award Set Up Cost, customer survey fee, Topography Survey Fee, Pipeline Asset Condition Assessment Fee and denying liquidated damages to the respondents are contrary to the terms of contract and the evidence on record. More so, when there is no evidence to justify the claim of Set Up Cost. Likewise, awarding of interest is also contrary to the Agreement. The point for consideration is therefore answered in the affirmative.
108. Point No.3: From the discussion on Point No.2, it is clear that awarding of Set Up Cost is based on no evidence and contrary to the Agreement. Similarly, the conclusions of the AT resulting in granting the claim for Pipeline Asset Condition Assessment Fee, Topography Survey Fee and Customer Survey Fee, are arrived at by ignoring vital evidence as also the terms of contract. It is well established that an award not in accordance with the contract is in gross contravention of Sec.28(3) of the Act. Therefore, I am of the opinion that the impugned award is liable to be set aside U/s 34 of the Act, as prayed.
109. Point No.4: In the result, I pass the following: 65
Com.A.P.No.03/2022 ORDER The petition U/Sec.34 of the Arbitration and Conciliation Act is allowed.
The arbitral award dated
21.09.2021 in the matter of
arbitration of disputes between
Hubbali-Dharwad water Supply
Project Ltd. & Anr. Vs Karnataka
Urban Infrastructure Development
and Finance Corporation & Anr.,
passed by the respondents 3 to 5 is
hereby set aside.
Issue copy of the judgment to
the parties through e-mail as
provided U/o XX Rule 1 of CPC, if
email ID is furnished.
(Dictated to the stenographer, transcribed and typed by her, corrected and then pronounced by me in the open court on this the 20th day of February 2023) (H.R.Radha) LXXXIV Addl. City Civil and Sessions Judge, (CCH-85 Commercial Court) Bengaluru