Madras High Court
Taqa Neyveli Power Company Private ... vs Nlc India Limited on 29 September, 2023
Author: Krishnan Ramasamy
Bench: Krishnan Ramasamy
Arb.O.P.(Com.Div.)Nos.444 of 2021 & 5 of 2022
IN THE HIGH COURT OF JUDICATURE AT MADRAS
RESERVED ON : 26.06.2023
PRONOUNCED ON : 29.09.2023
CORAM
THE HONOURABLE MR.JUSTICE KRISHNAN RAMASAMY
Arb.O.P.(Com.Div.)Nos.444 of 2021 & 5 of 2022 &
A.Nos.5444 & 3289 of 2022
Arb.O.P.(Com.Div.)No.444 of 2021
TAQA Neyveli Power Company Private Limited,
Presently at:
79, Kasturi Ave, MRC Nagar,
Raja Annamalai Puram,
Chennai - 600 028.
Formerly at:
4-D, Century Plaza, 560-560,
Mount Road, Chennai. ...Petitioner
vs.
NLC India Limited,
Presently at:
First Floor, No.8, Mayor Sathiyamurthy Road,
FSD, Egmore Complex of Food Corporation of India,
Chetpet, Chennai - 600 031.
Formerly at:
No.135, EVR Road,
Kilpauk, Chennai - 600 010. ... Respondent
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Arb.O.P.(Com.Div.)Nos.444 of 2021 & 5 of 2022
Prayer: Original Petition filed Under Section 34(2)(b)(ii) and 2-A of the
Arbitration and Conciliation Act, 1996 praying to set aside the award
dated 22.03.2021 (24.03.2021 was the date on which the award was
stamped) passed by the Arbitral Tribunal comprising of Hon'ble Mr.
Justice N.Santosh Hegde, Hon'ble Mr. Justice P.Gopinathan (Retd.) and
Hon'ble Mr. Justice Badar Durrez Ahmed (Retd.) (save and except
rejection of Respondent's counter claim towards payment of Fringe
Benefit Tax), uphold the minority award passed by Hon'ble Mr. Justice
Badar Durrez Ahmed (Retd.).
For Petitioner : Mr.Udaya Holla, Senior Counsel
Assisted by Mr.Sanjeev Kapoor
for Mr.Thriyambak J.Kannan
For Respondent : Mr.R.Yashod Vardhan, Senior Counsel
for Mr.Raghavendra Ross Divakar
and Ms.Anisha Gupta
for Mrs.Dua Associates
Arb.O.P.(Com.Div.)No.5 of 2022
NLC India Limited,
First Floor, No.8, Mayor Sathyamurthy Road,
FSD, Egmore Complex of Food Corporation of India,
Chetpet, Chennai - 600 031. ...Petitioner
vs.
TAQA Neyveli Power Company Private Limited,
(formerly known as ST-CMS Electric Company Private Limited)
79, Kasturi Avenue, MRC Nagar,
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Arb.O.P.(Com.Div.)Nos.444 of 2021 & 5 of 2022
RA Puram, Chennai - 600 028. ... Respondent
Prayer: Original Petition filed Under Section 34(2)(b)(ii) and 2-A of the
Arbitration and Conciliation Act, 1996 praying to
(a) set aside a part of the impugned award dated 22.03.2021
passed by the Hon'ble Arbitral Tribunal, insofar as it rejects the
petitioner's claim towards VAT on account of the downward revision of
price for the period April 2003-2006 and excess credit towards statutory
levies for the period 2009-2014.
(b) set aside a part of the impugned award dated 22.03.2021
passed by the Hon'ble Arbitral Tribunal, insofar as it rejects the
petitioner's claim towards pendente lite interest on the awarded claim
towards liquidated damages.
(c) allow this petition with costs.
For Petitioner : Mr.R.Yashod Vardhan, Senior Counsel
for Mr.Raghavendra Ross Divakar
and Ms.Anisha Gupta
for Mrs.Dua Associates
For Respondent : Mr.Udaya Holla, Senior Counsel
Assisted by Mr.Sanjeev Kapoor
for Mr.Thriyambak J.Kannan
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Arb.O.P.(Com.Div.)Nos.444 of 2021 & 5 of 2022
COMMON ORDER
TAQA Neyveli Power Company Private Limited has filed the Original Petition No.444 of 2021 to set aside the Arbitral Award dated 22.03.2021.
2. NLC India Limited has filed the Original Petition No.5 of 2022 aggrieved over the Arbitral Award dated 22.03.2021 insofar as rejecting the issue Nos.10 and 11 and rejecting its claim towards pendente lite interest.
3. For the sake of convenience, the parties are referred to as per their ranking before the Arbitral Tribunal, i.e., TAQA Neyveli Power Company Private Limited is referred as 'claimant' and NLC India Limited is referred as 'respondent'.
4. The case of the claimant in brief is as follows. Page 4 of 92 https://www.mhc.tn.gov.in/judis Arb.O.P.(Com.Div.)Nos.444 of 2021 & 5 of 2022 4.1. The claimant is a Special Purpose Vehicle (SPV) which was established for undertaking the construction and operation of a 250 Mega Watt power generating plant to be located at Neyveli, India (hereinafter referred as 'the Project').
4.2. The sole purpose of the project was to commit the capacity of the project and generate and supply electricity, exclusively, to the Tamil Nadu Generation and Distribution Corporation Limited (hereinafter referred as 'TANGEDCO').
4.3. The claimant and the TANGEDCO entered into the amended and restated Power Purchase Agreement on 20.11.1996 (hereinafter referred as 'PPA'). As per the terms of the PPA, the claimant is required to purchase lignite for the project exclusively from the respondent under the Fuel Supply Agreement (hereinafter referred as 'FSA'). The sale of lignite under the FSA and the use of the same to generate and sell electricity to the TANGEDCO is a single and composite transaction, and Page 5 of 92 https://www.mhc.tn.gov.in/judis Arb.O.P.(Com.Div.)Nos.444 of 2021 & 5 of 2022 that PPA and FSA are back to back Agreements, wherein, the claimant is acting as an intermediary between the TANGEDCO and the respondent.
4.4 In and around December 2015, due to the increase in price of lignite supplied by the respondent to the claimant, the Merit Order Ranking of the claimant was lowered. The Merit Order Ranking was introduced by the Tamil Nadu Electricity Regulatory Commission (hereinafter referred as 'TNERC') by issuing a Tariff Order. Under the Merit Order Ranking regime, TNERC places plants in the State of Tamil Nadu in the order of their variable cost with the cheapest plant placed at the highest level and the most expensive plant placed at the lowest level. In view of the lower ranking of the claimant's plant in the Merit Order Ranking, TANGEDCO lowered the dispatch to the project. This situation prevailed in the Financial Years 2015-16, 2016-17 and 2017-18, owing to which, the claimant was unable to purchase the quantum of lignite assured under the Annual Aggregate Quantity (hereinafter referred as 'AAQ').
Page 6 of 92 https://www.mhc.tn.gov.in/judis Arb.O.P.(Com.Div.)Nos.444 of 2021 & 5 of 2022 4.5. The reduction in the off-take of lignite was due to the operation of Tariff Order and Merit Order Ranking regime which constituted a 'Force Majeure event' under Article 11.1 (i) of the FSA. In terms of Article 11.3 (i) of the FSA, the quantity of lignite which the claimant was unable to lift due to operation of a 'Force Majeure event' had to be reduced from the AAQ. Therefore, the quantity of lignite not lifted by the claimant due to operation of a 'Force Majeure event' was a permitted variation / reduction from the AAQ under the FSA. Hence, the claimant could not be penalized for its failure to lift such a quantity.
4.6. The respondent deliberately ignored the 'Force Majeure event' affecting the claimant and unlawfully and de-hors the terms of the FSA, proceeded to impose punitive liquidated damages on the claimant for the shortfall in off-take of lignite. The respondent claimed liquidated damages of approximately Rs.4.74 crores for the Financial Year 2015-16, Rs.57.24 crores for the Financial Year 2016-17, Rs.54.18 crores for the Financial Year 2017-18. The liquidated damages claimed by the respondent for the Financial Year 2015- 16 has been unilaterally adjusted Page 7 of 92 https://www.mhc.tn.gov.in/judis Arb.O.P.(Com.Div.)Nos.444 of 2021 & 5 of 2022 by the respondent, under protest from the claimant. The respondent raised a demand for the liquidated damages for the Financial Years 2016- 17 and 2017-18 along with certain other frivolous claims, totaling to Rs.126.36 crores, vide letters dated 30.03.2018 and 05.04.2018. Under these circumstances, the claimant approached the Arbitral Tribunal.
5. The case of the respondent is as follows.
5.1. In the year 1992, the claimant approached the respondent and requested it to supply lignite and recycled water to one of its proposed power plants in Neyveli. The proposed power plant was to have a capacity of 250 MW and the supply of lignite and recycled water was to be on a long term basis.
5.2. Pursuant to various discussions and negotiations, a memorandum of Understanding dated 31.08.1992 was entered into between the claimant (formerly known as ST-CMS Electric Company Private Limited) and the respondent for the purpose of supply of lignite and recycled water to the claimant. It stated that this Memorandum of Page 8 of 92 https://www.mhc.tn.gov.in/judis Arb.O.P.(Com.Div.)Nos.444 of 2021 & 5 of 2022 Understanding culminated into the Fuel Supply Agreement (FSA) dated 29.04.1998, wherein the respondent had agreed to supply lignite from a mine operated by it, viz., 'MINE-IA' which mine would be dedicated for the supply of lignite to the claimant.
5.3. According to the respondent, at the relevant time, it operated 4 open cast lignite mines. The lignite supplied to the respondent's own thermal power stations are from all the mines except MINE-IA. As per the FSA, the respondent agreed to sell lignite from MINE-IA and the claimant agreed to accept delivery of lignite from MINE-IA exclusively from the respondent for a period of 30 years, commencing from 2001-02 to 2031-32.
5.4. In the year 2018, on account of claimant's failure to pay liquidated damages for the period 2016-17 and 2017-18, and certain other claims of the respondent, dispute arose between the claimant and the respondent.
Page 9 of 92 https://www.mhc.tn.gov.in/judis Arb.O.P.(Com.Div.)Nos.444 of 2021 & 5 of 2022 5.5. According to the respondent, the Tariff Order 2012 was admittedly introduced with effect from 2012 and Merit Order Ranking is not a 'Force Majeure event' under the FSA. In order to substantiate the same, the respondent contended as follows.
(a) The allegation of Force Majeure event is an afterthought.
(b) Tariff Order 2012 and Merit Order Ranking does not qualify a 'Force Majeure event' under Article 11.1 (i) of the FSA.
(c) Merit Order Ranking by itself, does not dictate the quantity of lignite lifted.
(d) Dispatch instructions of TANGEDCO and SLDC is not before the Tribunal.
(e) The claimant was aware about the Merit Order from the year 2005.
(f) Tariff order 2012 is not relevant to the present case.
(g) There is no drop in the Merit Order Ranking of claimant for the Financial Year 2015-16.
(h) Economic hardship is not a 'Force Majeure event' under the FSA.Page 10 of 92
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(i) Under the PPA, liquidated damages is not payable by the claimant for failure in accepting the nominated AAQ.
(j) The claimant failed to notify the respondent within 5 days from the date of 'Force Majeure event'.
(k) The claimant failed to intimate the revisions in AAQ. (1) The claimant failed to lift the minimum AAQ under the FSA for the Financial Year 2017-18.
(m) The claimant failed to mitigate the loss.
(n) Increase in price of lignite need not impact the Merit Order Ranking of the claimant.
In addition to the above, the respondent has also made certain counterclaims and contested the case before the Arbitral Tribunal.
6. The Tribunal after considering the oral and documentary evidence and also hearing the submissions on both sides, rejected the claim of the claimant. As far as the counterclaim of the respondent is concerned, the Tribunal has awarded liquidated damages along with Page 11 of 92 https://www.mhc.tn.gov.in/judis Arb.O.P.(Com.Div.)Nos.444 of 2021 & 5 of 2022 interest at the rate of 18% per annum from the date of award till the date of payment. While passing the Award, the Tribunal has also recorded that issue Nos.10 and 11 were not pressed by the respondent. Challenging the rejection of their claim, the claimant is before this Court by filing Original Petition No.444 of 2021. The respondent, aggrieved over the rejection of its claim under issue Nos.10 and 11 and rejection of their claim towards pendente lite interest, have approached this Court by filing Original Petition No.5 of 2022.
7. Mr.Udaya Holla, learned Senior Counsel appearing for the claimant has put forth the following contentions in support of the claimant's case.
7.1. According to the learned Senior Counsel, the Tribunal has ignored the material evidence produced by the claimant in support of the contention that PPA and FSA are interlinked. He also pointed out the various interlinkages between the PPA and the FSA, which are as follows.
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(i) Several clauses of the FSA make reference to the PPA including the definitions of 'Commercial Operation Date', 'Counter Guarantee', 'FCC' and 'PPA'.
(ii) Schedule VI to the FSA is bodily lifted from the Schedule 3 of the PPA.
(iii) Schedule VI to the FSA specifies that the contracted capacity with TANGEDCO under the PPA is 250 MW, while, 'Project' defined under the FSA is also 250 MW, which proves that the entire power output of the Project, for which, lignite is procured by the claimant under the FSA, has to be sold exclusively to TANGEDCO under PPA.
(iv) The PPA provides that the FSA has to be executed between the claimant and the respondent and approved by TANGEDCO, as a precondition to TANGEDCO procuring power from the claimant under the PPA.
(v) As set out above, under the PPA, the claimant is legally obligated to take into account, the information received from the TANGEDCO for nominating lignite under the FSA and refrain from making nominations in variation of TANGEDCO's demand. Therefore, Page 13 of 92 https://www.mhc.tn.gov.in/judis Arb.O.P.(Com.Div.)Nos.444 of 2021 & 5 of 2022 the claimant has to nominate lignite based on the notifications from the TANGEDCO.
(vi) The claimant has to make the entire capacity of its plant (i.e., 250 MW) available to TANGEDCO.
(vii) The claimant has to supply power in accordance with the TANGEDCO's dispatch instructions and the TANGEDCO can provide up to 365 dispatch instructions in a year.
(viii) The formula for calculating the variable charge of power supplied by the claimant to the TANGEDCO includes the price of lignite charged by the respondent (not any other third party). In other words, the cost of lignite charged by the respondent to the claimant is a pass through to TANGEDCO since cost of lignite is factored into the Tariff payable by TANGEDCO to the claimant. As such, an increase in the price of lignite (which constitutes 88% of the variable charge of power) by the respondent has a direct corresponding impact in increasing the variable charge of power produced by the claimant, thereby pushing it down in the Merit Order Ranking.
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(ix) The FSA was based on the PPA and finalized after interaction among the claimant, the respondent and the TANGEDCO. The respondent itself was keen that the terms of the FSA were in consonance with that of the PPA and therefore demanded to see a copy of the PPA before finalizing the FSA.
(x) Parties ensured that the terms of the PPA and FSA were in consonance since, (a) the claimant's ability to perform its obligations under the PPA was dependent on its rights under the FSA and vice- versa and (ii) the respondent wanted to be aware of the provisions of the PPA as it did not want to offer more rights and protections to the claimant under the FSA than what was required by the TANGEDCO under the PPA. As such, the respondent, the TANGEDCO and the claimant were heavily engaged in the negotiations of the FSA. Notably, the FSA was signed after the PPA was signed, and not vice versa. The PPA was executed on 20.11.1996 and the FSA was entered into between the parties on 29.04.1998.
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(xi) In several letters, the respondent has referred to the execution of the PPA, thereby, making it clear that it was always aware of the existence of the PPA and its interconnection with the FSA.
(xii) During the cross examination of RW1, in response to Q.188, the respondent's witness does not specifically deny that the respondent was aware of the PPA that was entered into between the claimant and the TANGEDCO at the time of execution of the FSA.
Therefore, he contended that though there were clear interlinkages between the FSA and the PPA, the Tribunal failed to consider this aspect in toto and rejected the claim of the claimant.
7.2. The next contention that was put forth by the learned Senior Counsel is that the Tribunal has erroneously held that there was no 'Force Majeure event' as the Merit Order governs electricity and not the supply of lignite. The definition of 'Force Majeure event' includes 'any law, order or ordinance of the Central or State Government that prohibits performance of the obligations hereunder'. The learned Senior Counsel would submit that the reduction in the dispatch to the project by Page 16 of 92 https://www.mhc.tn.gov.in/judis Arb.O.P.(Com.Div.)Nos.444 of 2021 & 5 of 2022 the TANGEDCO was obviously due to the reason that the Merit Order Ranking of the claimant was lowered. Therefore, according to him, the reduction in the off-take of lignite was due to the Merit Order Ranking regime introduced by the TNERC which constituted a 'Force Majeure event' under Article 11.1(i) of the FSA. Hence, he would strongly contend that the finding of the Tribunal that there was no 'Force Majeure event' is liable to be set aside.
7.3. The learned Senior Counsel would also stress upon the contention that the Tribunal without considering the claimant's pleading, material evidence and contractual provisions held that the claimant ought to have issued notice of 'Force Majeure' within 5 days. At this instant, he would point out that the notice of 'Force Majeure' can only be issued when TANGEDCO informs the claimant about the Merit Order Ranking leading to reduction in the power to be supplied by the claimant to the TANGEDCO, and not otherwise. In fact, for the Financial Years 2015-16 and 2016-17 notice was issued by the claimant to the respondent, the moment when TANGEDCO informed the claimant about the reduction in Page 17 of 92 https://www.mhc.tn.gov.in/judis Arb.O.P.(Com.Div.)Nos.444 of 2021 & 5 of 2022 the off-take of power. For the Financial Year 2017-18, notice of nomination of AAQ itself specified that the quantity being nominated is subject to the reduction in the off-take of power, which may take place on account of occurrence of 'Force Majeure event'.
7.4. The learned Senior Counsel submitted that the Tribunal without considering the submissions of the claimant and in contra to the provisions of the FSA, Tariff Orders issued by TNERC and PPA, held that the claimant failed to mitigate the losses that arose from the 'Force Majeure event'. While arriving at such a conclusion, the Tribunal has held that the claimant should have purchased the entire AAQ quantity, produced electricity and sold the excess electricity to third parties. Having failed to do so, the claimant failed to mitigate the losses from the 'Force Majeure event'. According to him, this conclusion ignores Article 2.3 (a) of the PPA, which specifically stipulates that the claimant can sell electricity to third parties only in case the TANGEDCO commits an event of default. It is nobody's case that the TANGEDCO has committed an event of default. Further, the understanding was always that the claimant Page 18 of 92 https://www.mhc.tn.gov.in/judis Arb.O.P.(Com.Div.)Nos.444 of 2021 & 5 of 2022 would sell its power exclusively to the TANGEDCO and not to third parties as evident from the letter dated 20.06.1994 written by the TANGEDCO to the Ministry of Power. Further, according to him, the finding of the Tribunal in Paragraph Nos.48 and 49 of the Arbitral Award that Regulation 4 of TNERC Regulations permits the claimant to sell power to third parties is not at all correct. Regulation 4 deals with the 'Tariff setting principles' and sub-regulation (vii) of Regulation 4 stipulates that generating companies shall be allowed to sell to other buyers without losing their claim on committed capacity charges. He would also rely upon the Paragraph No.33 of the Arbitral Award and submit that the Tribunal has taken into consideration that the PPA mandates (i) the claimant to commit its entire capacity of 250 MW to TANGEDCO, (ii) the claimant is bound to comply with the dispatch instructions and supply electricity to TANGEDCO in accordance with such instructions and (iii) there can be 365 such dispatch instructions in a year and such instructions can also vary from hour to hour. Therefore, he would submit that a cogent reading of the above facts would indicate that the claimant is bound to commit its entire capacity to TANGEDCO and Page 19 of 92 https://www.mhc.tn.gov.in/judis Arb.O.P.(Com.Div.)Nos.444 of 2021 & 5 of 2022 has a choice to sell electricity to third parties only if TANGEDCO commits an event of default. Since in the instant case, the TANGEDCO has not committed an event of default, the claimant could not have sold the electricity to third parties and thereby, could not have mitigated the losses that arose from the 'Force Majeure event'. The Tribunal by holding that the claimant ought to have mitigated the losses, ignored vital evidence and submissions on record.
7.5. The learned Senior Counsel would further submit that the Arbitral Award is contrary to the Fundamental Policy of Indian Law as the Tribunal has granted liquidated damages to the respondent without determining whether the respondent has in fact suffered any loss or not. His contention is that the Tribunal has not examined the heads of losses claimed by respondent at all. The respondent has sought to purportedly quantify and prove its losses, by claiming losses under the following heads:-
(i) Loss of profit - Rs.43.20 crores Page 20 of 92 https://www.mhc.tn.gov.in/judis Arb.O.P.(Com.Div.)Nos.444 of 2021 & 5 of 2022
(ii) Interest cost - Rs.30.82 crores
(iii) Transportation cost - Rs.14.06 crores
(iv) Loss of incentive charges - Rs.8.92 crores
(v) Expenses towards royalty, DMF, ST/GST - Rs. 21.52 crores
(vi) Expenses towards upkeep and maintenance of lignite - Rs.1.22 crores The learned Senior Counsel would submit that it is now settled by the Hon'ble Apex Court that under Section 74 of the Indian Contract Act, even when the contract contains a specific provision for liquidated damages in case of breach, the party claiming damages will have to prove that it has suffered a loss. Therefore, he would contend that though the respondent has quantified the losses under the above heads, it is its responsibility to prove the same. The methodology of calculation of liquidated damages agreed and determined in the Agreement is only for the purpose of determining the maximum quantity of liquidated damages. If the actual liquidated damages is below the upper limit, the claimant is liable to that extent only and for that purpose, the actual damages has to be quantified. Hence, the damages claimed by the respondent based on Page 21 of 92 https://www.mhc.tn.gov.in/judis Arb.O.P.(Com.Div.)Nos.444 of 2021 & 5 of 2022 the loss of profit, etc. is not acceptable. The liquidated damages awarded by the Tribunal is against the provisions of the Section 74 of the Indian Contract Act and also the law laid down by the Hon'ble Apex Court. According to him, in the present case, the question of liquidated damages would not at all arise for the simple reason that though lignite is a perishable goods, it can be sold to other persons immediately. Admittedly, the closing stock was below the minimum level that the respondent is supposed to maintain, which would clearly prove that the lignite claimed to be retained by the respondent due to the reason of non- supply to the claimant, has already been sold and the profit has also been encashed. Hence, there is no question of loss due to the non-lifting of lignite by the claimant. He would further contend that though it is the stand of the respondent that the same methodology of calculation of liquidated damages was followed during the Financial Years 2002-03 and 2005-06 as well, it could not be applied for the present case, since the liquidated damages paid for the Financial Year 2002-03 was related to supply of lignite during Stub Period and not the AAQ which is the subject matter of the present case. He would contend that all the above Page 22 of 92 https://www.mhc.tn.gov.in/judis Arb.O.P.(Com.Div.)Nos.444 of 2021 & 5 of 2022 aspects have not been considered with proper perspective by the Tribunal and therefore, the Award is liable to be set aside.
7.6. The learned Senior Counsel would further submit that the Tribunal's finding that the respondent is not required to mitigate its losses is contrary to the Fundamental Policy of Indian Law and is also contrary to the provisions of Sections 73 and 74 of the Indian Contract Act. In this regard, he referred to the Judgment of the Hon'ble Apex Court in the case of Murlidhar Chiranjilal vs. Harischandra Dwarkadas and Another reported in (1962) 1 SCR 653 and submitted that the mitigation of losses is an essential precondition for awarding damages. He would submit that, in the above case, Court has set aside the Arbitral Award where the Tribunal has not considered whether the party claiming damages has mitigated its losses or not. The relevant portion is extracted hereunder.
"The two principles on which damages in such cases are calculated are well settled. The first is that, as far as possible, he who has proved a breach of a bargain to supply what he contracted to get is to be placed, as far as money can do it, in as good a situation as if the contract had been performed; but this principle is qualified by a second, which imposes on a plaintiff the duty of taking all reasonable steps to mitigate the Page 23 of 92 https://www.mhc.tn.gov.in/judis Arb.O.P.(Com.Div.)Nos.444 of 2021 & 5 of 2022 loss consequent on the breach, and debars him from claiming any part of the damage which is due to his neglect to take such steps... These two principles also follow from the law as laid down in Section 73 read with the Explanation thereof." (emphasis supplied) Further he referred to the Judgment of the High Court of Bombay in the case of Pepsi Co. India Holding Pvt. Ltd. vs. Nishiland Park Limited reported in 2012 CLC 1021 and the Judgment of the High Court of New Delhi in the case of Delhi Development Authority vs. Krishna Construction Co. reported in 2011 SCC OnLine Del 4134 and submitted that the respective Courts have set aside the Arbitral Awards on the ground that the Arbitrators have not considered whether the party claiming losses attempted to mitigate the same. He has also referred to the Judgment of the Principle Seat of this Bench in the case of IJM-SCL JV vs. National Highway Authority of India reported in (2020) 3 Mad LJ 478 and the Judgment of the High Court of New Delhi in the case of NTPC v. WPIL reported in (2020) 266 DLT (CN) 7 and submitted that the Courts have upheld Arbitral Awards where claims were rejected on the ground that the party claiming losses did not prove that it attempted to mitigate the losses. He would therefore contend that though the Page 24 of 92 https://www.mhc.tn.gov.in/judis Arb.O.P.(Com.Div.)Nos.444 of 2021 & 5 of 2022 respondent had not made any attempt to mitigate the losses, the Tribunal awarded the liquidated damages and the same is liable to be set aside.
7.7. The learned Senior Counsel further pointed out that the Tribunal completely ignored the admitted fact that the respondent had charged an inflated pooled price for lignite which led to the claimant being lowered in the Merit Order Ranking and caused the shortfall in the off-take of lignite. The reason for lower Merit Order Ranking was that the price charged by the respondent was on the higher side. If the respondent had sold the lignite as per the guidelines without inflating the pooled price, the situation of 'Force Majeure event' would not have risen and the respondent was the only cause for all these present disputes.
Hence, the Award is liable to be set aside on this aspect also.
7.8. According to him, the Tribunal without considering the material evidence on record, rendered a finding that the liquidated damages for the Financial Year 2015-16 was not paid under protest, which is completely contrary to the stand of the claimant. He would Page 25 of 92 https://www.mhc.tn.gov.in/judis Arb.O.P.(Com.Div.)Nos.444 of 2021 & 5 of 2022 firmly contend that the liquidated damages for the Financial Year 2015- 16 was paid by the claimant only under protest. On the other hand, the Tribunal proceeded as if the liquidated damages for the Financial Year 2015-16 was admitted and awarded liquidated damages in the present dispute also. Therefore, the said finding is also liable to be set aside.
7.9. In addition to the above, the learned Senior Counsel would contend that Tribunal's finding on reliance on RW1's evidence is completely perverse and belies logic and that aspect of the Award is also liable to be set aside.
8. For all the above reasons, it is humbly prayed that the claimant's petition under Section 34 of the Arbitration Act be allowed and the Award dated 22.03.2021 passed by the Arbitral Tribunal be set aside.
9. The learned Senior Counsel in reply to the grounds made in Arb.O.P.No.5 of 2022 contended as follows.Page 26 of 92
https://www.mhc.tn.gov.in/judis Arb.O.P.(Com.Div.)Nos.444 of 2021 & 5 of 2022 9.1. The Tribunal rightly rejected the respondent's claim in respect of issue Nos.10 and 11 since during the oral arguments, the respondent, on its own had stated that, it would not press the claims made under those issues. Hence, the Award passes by the Tribunal, on this aspect need not be disturbed.
9.2. As far as the interest claim made by the respondent in Arb.O.P.No.5 of 2022 is concerned, the learned Senior Counsel would submit that it is settled law that an Arbitrator is empowered to grant interest only in terms of the provisions of the Contract and if there is an express barring of payment of interest under the Contract, no interest is to be awarded. In the present case, the FSA does not provide for payment of interest on liquidated damages. The FSA only provides for payment of interest on the amounts payable under monthly invoices for the lignite lifted. By awarding interest on liquidated damages, the Tribunal has travelled beyond the terms of Contract and rendered the Award patently illegal. He would contend that even assuming that the Tribunal is empowered to award interest for the post Award period, Page 27 of 92 https://www.mhc.tn.gov.in/judis Arb.O.P.(Com.Div.)Nos.444 of 2021 & 5 of 2022 awarding interest at the rate of 18% per annum is on the higher side and the Award is liable to be set aside on this aspect.
9.3. With regard to the respondent's claim of pendente lite interest for the Financial Years 2016-17 and 2017-18, the learned Senior Counsel would submit as follows.
(a) Grant of interest on the amount awarded under an Arbitral Award is discretionary in nature and the award-holder is not entitled to interest, pendente lite or otherwise as a matter of right under law. This is apparent from section 31 (7) of the Arbitration Act which provides that the Arbitral Tribunal may include interest on the sum for which the Award is made, for the whole or any part of the period between the date on which the cause of action arose and the date on which the award is made. Grant of pendente lite interest is therefore the discretion of the Arbitral Tribunal. In the present case, the Tribunal has exercised its discretion based on the facts of the case and rightly rejected the respondent's claim for pendente lite interest.Page 28 of 92
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(b) The FSA does not provide for grant of interest, pendente lite or otherwise, on claims of liquidated damages. Grant of interest is circumscribed by the terms of the Contract and the Tribunal can only award interest as per the terms of the Contract between the parties. In the present case, since the FSA does not permit grant of interest, the Tribunal cannot award the same.
(c) The respondent's reliance on Assam State Electricity Board vs. Buildworth Private Limited reported in (2017) 8 SCC 146 in support of its claim for pendente lite interest is misplaced for the following reasons.
(i) The Hon'ble Apex Court has held that the Arbitrator has the power to grant interest on a claim of liquidated damages from the date of the written notice in which such interest has been claimed. In the present case, admittedly, no written notice was issued by the respondent claiming interest on liquidated damages.
(ii) The Hon'ble Apex Court has further held that merely because the Arbitrator has the power to grant pendente lite interest, it does not Page 29 of 92 https://www.mhc.tn.gov.in/judis Arb.O.P.(Com.Div.)Nos.444 of 2021 & 5 of 2022 mean that the Arbitrator has to necessarily grant pendente lite interest. It is a matter of discretion to be exercised by the Arbitrator under the facts and circumstances of the case and keeping the ends of justice in mind. Therefore, in the present case, the Tribunal has in its discretion rejected the prayer for grant of pendente lite interest and no case has been made out by the respondent to warrant interference with the Tribunal's finding on the pendente lite interest.
9.4. In the above circumstances, the learned Senior Counsel submitted that the respondent's petition under Section 34 of the Arbitration Act ought to be rejected .
10. Per contra, Mr.R.Yashod Vardhan, learned Senior Counsel appearing for the respondent placed his arguments in detail as follows.
10.1. The learned Senior Counsel would contend that the most significant issue in the present case is whether the claimant could rely upon the PPA between the claimant and TANGEDCO or not. The Arbitral Tribunal, in detail, has dealt with the above issue and the Page 30 of 92 https://www.mhc.tn.gov.in/judis Arb.O.P.(Com.Div.)Nos.444 of 2021 & 5 of 2022 majority Award in Paragraph Nos.112 to 130 has also considered the petitioner's submissions including the various correspondences referred to, prior to the execution of the FSA. The Tribunal has held that the issue whether the claimant can rely upon the PPA or not is 'no more res integra', in light of the law laid down by the Hon'ble Apex Court in the case of M.R. Engineers & Contractors Pvt. Ltd. vs. Som Datt Builders reported in (2009) 7 SCC 696. The learned Senior Counsel would submit that, most importantly, the Award correctly holds that the Articles 6 and 7 of the FSA, which deal with the events of default and damages viz., liquidated damages for shortfall in off-take of lignite, and Article 11 of the FSA, which deals with 'Force Majeure event' have no references to the PPA, let alone the incorporation of the terms of the PPA. According to him, the Tribunal after considering all the aspects has come to the conclusion that the FSA and the PPA are not interlinked and therefore, that well considered, reasonable finding of the Tribunal ought not be disturbed.
Page 31 of 92 https://www.mhc.tn.gov.in/judis Arb.O.P.(Com.Div.)Nos.444 of 2021 & 5 of 2022 10.2. The learned Senior Counsel would submit that there was no 'Force Majeure event', under the FSA for the following reasons.
(a) Merit order dispatch and purchase of electricity on a least cost basis was prevalent since April 2005 under Regulation 75 of the TNERC Regulations, 2005.
(b) The respondent levied liquidated damages and raised a debit note on 08.04.2016 for a sum of Rs.4.73 crores for the Financial Year 2015-2016 and the same was not opposed by the claimant.
(c) The claimant for the first time vide letter dated 14.12.2016 alleged that, its inability to lift the nominated lignite for the Financial Year 2015-2016 was due to a 'Force Majeure event', i.e., the introduction of the Merit Order Ranking regime. Therefore, the allegation that Merit Order Ranking regime is a 'Force Majeure event' is an afterthought.
(d) The Hon'ble Apex Court in the case of Energy Watchdog vs. CERC reported in (2017) 14 SCC 80, has held that the provisions of 'Force Majeure event' are to be construed narrowly. Therefore, for the 'Force Majeure event' to be applicable under the FSA, the event should either wholly or partially prevent or delay the performance of the Page 32 of 92 https://www.mhc.tn.gov.in/judis Arb.O.P.(Com.Div.)Nos.444 of 2021 & 5 of 2022 claimant's obligations under the FSA. FSA is the relevant agreement and not the PPA, to which the respondent is not even a party.
(e) As per Article 5 of the FSA, the fundamental obligation of the parties is to 'buy and sell lignite' and this does not have anything to do with the 'sale and purchase of electricity'.
(f) The term 'in accordance with applicable law' under Article 5.1
(a) of the FSA is regarding the sale and purchase of lignite. Therefore, he would contend that there was no 'Force Majeure event' that prevented the claimant from performing its obligations under the FSA. The Tribunal has also rightly considered the same, and therefore, the finding of the Tribunal on this aspect need not be disturbed.
10.3. The learned Senior Counsel would further contend that the claimant did not take any effective step to mitigate the shortfall in the off-take of lignite. The Tribunal also considered this aspect and held that the claimant could have taken mitigating steps by reducing the cost of its electricity to be sold to TANGEDCO to compete with other generators of Page 33 of 92 https://www.mhc.tn.gov.in/judis Arb.O.P.(Com.Div.)Nos.444 of 2021 & 5 of 2022 electricity. Though reducing the cost of electricity might have caused economic hardship to the claimant, the same cannot be considered as a ground for invoking 'Force Majeure event'. Hence, the decision of the Tribunal that the petitioner failed to take steps to mitigate the shortfall in off-take of lignite need not be interfered with.
10.4. Apart from the above, he would contend that the claimant has also not followed the contractual conditions while alleging 'Force Majeure event'. As per Article 11.3 (a) of the FSA, the non-performing party is obligated to notify by way of notice to the other party within five business days of its inability to perform its obligations due to 'Force Majeure event'. However, the claimant failed to do so. This aspect was also well considered by the Tribunal and hence, needs no interference.
10.5. The failure of the buyer to accept the AAQ of lignite as specified is an event of default as per Article 6.1 (a) of the FSA. Admittedly, the claimant did not lift the nominated AAQ of lignite for three Financial Years i.e., 2015-16, 2016-17 and 2017-18, thereby, the claimant has committed a breach of Article 6.1 (a) of the FSA. As a Page 34 of 92 https://www.mhc.tn.gov.in/judis Arb.O.P.(Com.Div.)Nos.444 of 2021 & 5 of 2022 consequence to the breach of Article, the respondent is entitled to claim damages from the claimant.
10.6. The formula for determining the liquidated damages available under Article 7.1 (a) of the FSA is a genuine pre-estimate of the loss. The respondent issued debit notes (i) on 08.04.2016 for a sum of Rs.4.73 crores for the admitted shortfall in off-take of lignite for the year 2015-16, (ii) on 01.04.2017 for a sum of Rs.57.24 crores for the admitted shortfall in off-take of lignite for the year 2016-17 (iii) on 04.04.2018 for a sum of Rs.54.18 crores for the admitted shortfall in off-take of lignite for the year 2017-18. The Tribunal also, by majority, with the detailed reasons, held that the formula available in the Agreement for determining the liquidated damages is a genuine pre-estimate of the losses incurred by the respondent. The Tribunal further took into consideration the fact that the liquidated damages was levied by the respondent and paid by the claimant for shortfall in off-take of nominated lignite for the Financial Years 2002-03, 2003-04 and 2004-05. In Page 35 of 92 https://www.mhc.tn.gov.in/judis Arb.O.P.(Com.Div.)Nos.444 of 2021 & 5 of 2022 consideration of the above facts, the Tribunal concluded that the formula used is a genuine one and the said finding need not be interfered with.
10.7. The learned Senior Counsel would firmly content that the unlifted lignite was never sold or consumed until the completion of the Financial Year as alleged by the claimant. By holding the lignite, the respondent has incurred many losses and expenses and the same have also been proved by the respondent by way of relevant documentary evidence. It is pertinent to point out that the respondent has specifically pleaded and provided the details of loss. The Tribunal only after analyzing the oral and documentary evidence on record, has awarded liquidated damages to the respondent. It is not that the Tribunal has simply awarded lump sum liquidated damages based on the guidelines. According to the learned Senior Counsel, no double benefit was availed by the respondent for the unlifted quantity of lignite as alleged by the claimant. The sale of 85% of lignite by the respondent is not an excuse for the claimant to claim that the respondent did not suffer loss. He would contend that the respondent has obviously suffered loss and the Page 36 of 92 https://www.mhc.tn.gov.in/judis Arb.O.P.(Com.Div.)Nos.444 of 2021 & 5 of 2022 Award sufficiently quantifies the same and hence, it need not be disturbed.
10.8. The claimant has sought to rely upon the Corrigendum Order passed by the Central Electricity Regulatory Commission to allege that due to the truing-up of the price of lignite during the period 2014-2019, the respondent is liable to pay monies for refund of excess price of lignite and further the respondent has also charged an inflated pooled price. For these allegations, the learned Senior Counsel would submit that the pooled price of lignite charged by the respondent during the disputed period is based on MoC guidelines and Chartered Accountants Certificate and at no point of time, it deviated from the MoC guidelines. Therefore, the contention of the claimant that the respondent has charged inflated pooled price of lignite is unfounded and contrary to the procedure for the fixation of price under the Electricity Act, 2003 and Tariff Regulations. Therefore, he requested this Court to uphold the majority of award passed by the Tribunal and reject the view of the minority since the learned Senior Counsel appearing for the claimant has Page 37 of 92 https://www.mhc.tn.gov.in/judis Arb.O.P.(Com.Div.)Nos.444 of 2021 & 5 of 2022 exclusively relied upon the minority view and persuaded this Court to follow the same.
11. As far as Arb.O.P.No. 5 of 2022 is concerned, the learned Senior Counsel would submit that the Tribunal wrongly recorded that the issue Nos.10 and 11 were given by the respondent on merits. He would submit that since there was pendency of Tax proceedings to recover the statutory amount and the amount has not been crystallized, the respondent has submitted that it would not press the issue Nos.10 and 11 subject to the liberty being granted to the respondent to seek appropriate relief based on the outcome of the Tax proceedings. However, the Tribunal, at Paragraph No.104 of the majority award, has wrongly recorded that the respondent did not press the issue Nos.10 and 11 at the times of argument and the claims are being given up. He would contend that such a finding is wholly contrary to the stand of the respondent, who has specifically sought for a liberty to seek for that claim after the completion of Tax proceedings. Whether liberty has to be granted or not is to be decided on merits. However, the Tribunal proceeded to state that Page 38 of 92 https://www.mhc.tn.gov.in/judis Arb.O.P.(Com.Div.)Nos.444 of 2021 & 5 of 2022 those claims were given up. He would also contend that contrary to the law laid down by the Hon'ble Apex Court in the case of Assam State Electricity Board and others vs. Buildworth Pvt. Ltd. (cited supra), the Tribunal refused to grant interest from the date of claim till the date of Award. On the other hand, it relied on the law laid down by the Hon'ble Apex Court in the case of Union of India vs. Raman Iron Foundry reported in (1974) 2 SCC 231 which no longer holds good and granted interest only from the date of award till the date of payment. For these reasons, he would submit that the reliefs sought for in the Original Petition No.5 of 2022 has to be considered and to that extent alone the Award of the Tribunal may be set aside.
12. I have given due consideration for the submissions made by Mr.Udaya Holla, learned Senior Counsel appearing for the claimant as well as Mr.R.Yashod Vardhan, learned Senior Counsel appearing for the respondent and perused the materials available on record. I have also gone through the various Judgments placed before this Court. Page 39 of 92 https://www.mhc.tn.gov.in/judis Arb.O.P.(Com.Div.)Nos.444 of 2021 & 5 of 2022
13. In the present case, the following issues arises for consideration which are to be decided by this Court.
(i) Whether the PPA between the claimant and the TANGEDCO can be relied upon in the present proceedings?
(ii) Whether there is a 'Force Majeure event' occurred as contended by the claimant?
(iii) Whether the liquidated damages awarded by the Arbitral Tribunal is in accordance with the terms and conditions of the FSA?
(iv) Whether the respondent is liable to take mitigating steps to reduce its losses towards liquidated damages?
(v) Whether the Arbitral Tribunal has correctly recorded that the issue Nos.10 and 11 were 'given up' by the respondent on merits?
(vi) Whether the respondent is entitled for the interest on the liquidated damages from the date of claim till the date of award?
14. Issue No.1: Whether the PPA between the claimant and the TANGEDCO can be relied upon in the present proceedings? Page 40 of 92 https://www.mhc.tn.gov.in/judis Arb.O.P.(Com.Div.)Nos.444 of 2021 & 5 of 2022 14.1. The contention of the claimant is that since there are interlinkages between the PPA and the FSA, the PPA has to be relied upon in the present proceedings. On the other hand, the respondent contended that there is no interlinkage between the PPA and the FSA and hence, the PPA need not be relied upon in the present proceedings. The Tribunal has dealt with this aspect elaborately. For better appreciation of facts, the findings of the Tribunal in this regard is extracted hereunder.
"125. The subject matter under consideration in this issue is no more res integra. The Hon'ble Supreme Court in the case of M.R. Engineers & Contractors Pvt. Ltd., supra cited by the Respondent has laid down as follows in paragraphs 16 and 17 that:
"16. There is a difference between reference to another document in a contract and incorporation of another document in a contract, by reference. In the first case, the parties intend to adopt only specific portions or part of the referred document for the purposes of the contract. In the second case, the parties intend to incorporate the referred document in entirety, into the contract. Therefore when there is a reference to a document in a contract, the court has to consider whether the reference to the document is with the intention of incorporating the contents of that document in entirety into the contract, or with the intention of adopting or borrowing specific portions of the said document for application to the contract.
17. We will give a few instances of incorporation and mere reference to explain the position (illustrative and not exhaustive). If a contract refers to a document and Page 41 of 92 https://www.mhc.tn.gov.in/judis Arb.O.P.(Com.Div.)Nos.444 of 2021 & 5 of 2022 provides that the said document shall form part and parcel of the contract, or that all terms and conditions of the said document shall be read or treated as a part of the contract, or that the contract will be governed by the provisions of the said document, or that the terms and conditions of the said document shall be incorporated into the contract, the terms and conditions of the document in entirety will get bodily lifted and incorporated into the contract"
126. It is clear from the above dictum of the Apex Court that if the parties intended to incorporate the provisions of any corresponding or other contract into another contract, there should be a reference in the subsequent contract as to incorporating such of the provisions of the previous contract. Therefore, while considering whether such part of an earlier contract has to be read as a part of the subsequent contract, there should be sufficient material to establish that the parties to the document has intended that such portion of the earlier document should be incorporated in the later document clearly indicating the intention of the parties to so incorporate, without which a mere reference to an earlier document incorporation cannot be established.
127. In the instant case, there is no such incorporation of any of the provisions of the PPA in the FSA. There may be some reference to provisions of PPA in the FSA but that does not become part of FSA unless the parties had specifically intended to incorporate the FSA and there is reference to such incorporation in the FSA.
128. In view of the above law laid down by the Supreme Court, it is futile to contend that a mere reference to PPA in the FSA would not make the PPA a part of FSA, unless the intention is also clear in such incorporation. In the present case, there is a reference to PPA in the FSA, but there is no material in the FSA to conclude the parties has actually intended to incorporate the provisions of the PPA in the PSA. Therefore, it in futile to contend that provisions of the PPA to which Respondent is not a party can be construed as part of PSA also merely because there is a reference to PPA in the FSA.
Page 42 of 92 https://www.mhc.tn.gov.in/judis Arb.O.P.(Com.Div.)Nos.444 of 2021 & 5 of 2022 That apart, provisions of Article 6 of the FSA which refers to Events of Default and Article 7 of the FSA which refers to Damages or even the Article 11 of the FSA which refers to Force Majeure has no reference in the PPA which also indicates that the parties to the FSA has not intended to incorporate all or any provision of PPA in FSA.
129. Therefore, in view of the dictum of the Hon'ble Supreme Court and there being no incorporation of the agreed terms of the previous document in the FSA or PPA, it is not possible to accept the arguments of the Claimant."
From the above, it is seen that the Tribunal has examined the aspect of interlinkage between the PPA and the FSA and the applicability of PPA in the present proceedings in detail. The Tribunal based on the law laid down by the Hon'ble Apex Court held that if the parties intended to incorporate the provisions of any corresponding or other contract into another contract, there should be a reference in the subsequent contract as to the incorporation of such of the provisions of the previous contract and since in the instant case, only references have been made in some of the clauses and that there is no incorporation of the provisions of the PPA in the FSA either fully or partly, the PPA cannot be relied upon in the present proceedings.
Page 43 of 92 https://www.mhc.tn.gov.in/judis Arb.O.P.(Com.Div.)Nos.444 of 2021 & 5 of 2022 14.2. After a thorough analysis of the contention of the claimant and the respondent with regard to the interlinkage between the PPA and the FSA, this Court is able to trace out that only references are made about the PPA in the FSA to ensure the performance of the claimant with respective parties. As far as the respondent is concerned, the FSA was entered with the claimant with the sole objective to supply lignite to the claimant and since the entire production of power will be supplied to TANGEDCO, in order to prevent the claimant from any deviation of its obligations, some clauses of the PPA are only referred to in the FSA. As far as TANGEDCO is concerned, PPA was entered between TANGEDCO and the claimant. In the FSA, there is reference to PPA only to ensure that the agreed power would be supplied by the claimant from the lignite purchased from the respondent. Therefore, for ensuring the agreed power supply without any interruption by the claimant to the TANGEDCO, references of certain clauses of the PPA were made in the FSA.
14.3. When there is a reference of a contract into another contract, the Court has to consider whether the reference made out is with Page 44 of 92 https://www.mhc.tn.gov.in/judis Arb.O.P.(Com.Div.)Nos.444 of 2021 & 5 of 2022 reference to incorporating the contract in entirety or with the intention of adopting some specific portions of the contract for obligation of the contract. In the instant case, obviously, there was no incorporation of any of the provisions of the PPA in the FSA either in part or in toto. The Tribunal has elaborately discussed the aspect of interlinkage between the FSA and the PPA and the aspect of incorporation of the provisions of the PPA in the FSA and came to the conclusion that the provisions of PPA cannot be relied upon in the present proceedings. This finding of the Tribunal is also in consonance with the law laid down by the Hon'ble Apex Court in the case of M.R. Engineers & Contractors Pvt. Ltd. vs. Som Datt Builders (cited supra). In such circumstances, this Court does not find any merit in the contentions of the claimant and agrees with the finding of the Tribunal that the PPA between the claimant and the TANGEDCO cannot be relied upon in the present proceedings. Issue No.1 is answered accordingly.
15. Issue No.2: Whether there is a 'Force Majeure event' occurred as contended by the claimant?
Page 45 of 92 https://www.mhc.tn.gov.in/judis Arb.O.P.(Com.Div.)Nos.444 of 2021 & 5 of 2022 15.1. According to the claimant, there was a 'Force Majeure event' that prevented it from lifting the AAQ of lignite as agreed in the FSA. On the other hand, the respondent contended that there was no 'Force Majeure event' in the terms of the FSA, which prevented the claimant from performing its obligations. The Tribunal after analyzing the oral and documentary evidence, has passed a detailed award. At this juncture, it would be appropriate to extract the relevant portion of the Tribunal's Award hereunder.
"24.Following are the points urged by the Claimant in support of its contention Re-Issue No. 1:
(1) Shortfall in off-take of lignite is due to operation of a Force Majeure event; therefore, liquidated damages are not attracted;
(2) Where shortfall in off-take of lignite is due to Force Majeure (3) Shortfall of off-take of AAQ has been caused due to operation of Merit Order Dispatch regime which is a 'Force Majeure' under clause 11.1(i) of the Fuel Supply Agreement (4) The 'Merit Order Dispatch' regime, according to the Claimant, prevents it from complying with the obligations to lift the lignite under the Fuel Supply Agreement.
(5) Reduced generation of the project by TANGEDCO was due to operation of the Merit Order Dispatch regime and not for any reason attributable to the Claimant.
(6) Merit Order Ranking of the Claimant is not within its control.Page 46 of 92
https://www.mhc.tn.gov.in/judis Arb.O.P.(Com.Div.)Nos.444 of 2021 & 5 of 2022 (7) The Force Majeure circumstances are not a result of economic hardship as alleged by the Respondent. (8) Condition of notice of Force Majeure circumstances under clause 11.3(A) of the Fuel Supply Agreement are incapable and in any case have been complied with. (9) Condition of mitigation of Force Majeure event under clause 11.3(H) of Fuel Supply Agreement has been complied with.
(10) Claimant has no right to sell electricity to 3rd parties under PPA.
(11) Claimant has made reasonable efforts to mitigate the losses.
25. Similarly, I consider the following points raised by the Respondent required to be considered by this Tribunal:
(1) Tariff Order, 2012 and Merit Order Ranking is not a Force Majeure event under the Fuel Supply Agreement. (2) Tariff Order, 2012 and Merit Order Ranking does not qualify as Force Majeure event under Article 11.1(i) of the FSA (3) Merit Order Ranking by itself does not dictate the quantity of lignite lifted.
(4) Claimant was aware about the Merit Order from 2005.
(5) Economic hardship is not a Force Majeure event under the FSA.
(6) Claimant failed to notify the Respondent within 5 days from the date of purported Force Majeure event. (7) Failure of Claimant to intimate the revision in AAQ. (8) Claimant failed to mitigate the loss.
26. It is seen from the provisions of the Fuel Supply Agreement (FSA) [Article 5.2.(5)(c)] that, the Annual Aggregate Quantities (AAQ) means the sum of schedule quantities for the year, as revised pursuant to Article 5.2 (b) (i) and Article 5.2 (c). It states that in any one year, AAQ shall not exceed 1.90 Million Metric Tons (MMT) of lignite or be less than 1.15 Million Metric Tons (MMT) of lignite.
27. The FSA also provides the following condition Page 47 of 92 https://www.mhc.tn.gov.in/judis Arb.O.P.(Com.Div.)Nos.444 of 2021 & 5 of 2022 precedent to be established before the application of Force Majeure event:
(a) The buyer shall have the right to nominate AAQ that may vary from the scheduled quantities for such year, provided that such Annual Nomination shall be no more than 110%, and no less than 90% of the scheduled quantity (as revised pursuant to Article 5.2(b)(i) for that year).
(b) That the AAQ shall be notified to the seller in writing at last 90 days prior to the beginning of a year and shall specify the Buyer's monthly nominations of lignite for the year (the monthly nomination).
(c) That in the event the buyer desires the seller to deliver a quantity for a month which is less than the monthly nominations, the buyer shall deliver a Revised Quantity Notice to the seller informing the seller of the requested decrease in quantity, provided such Revised Quantity Notice is delivered at least 60 days prior to the first day for the month in which lignite is to be delivered.
(d) That revision of quantities under Article 5.2(d) (iii) shall not alter the obligation of the seller to sell, and the buyer to purchase the annual aggregate quantity.
(e) That the contract also provides the consequences of Events of Default as follows:
Buyer's Events of Default: Each of the following acts, failures and occurrences shall constitute a Buyer Event of Default:
(i) The failure of the Buyer to accept delivery of a quantity of lignite equal to the AAQ conforming to the specifications of Schedule 1 in any year.
(ii) The failure of Buyer to pay any amount due hereunder within thirty (30) days of the Due Date.
(iii)The failure of the Buyer to replenish the Letter of Credit within the period, and as required under Section 5.5 (c) (ii).
(iv) The failure of the Buyer to perform any other material obligation it may have under this Agreement, if the same shall not have been remedied within sixty (60) days of receipt by the Buyer of the Sellers' written notice of such default, unless and while the default Page 48 of 92 https://www.mhc.tn.gov.in/judis Arb.O.P.(Com.Div.)Nos.444 of 2021 & 5 of 2022 specified in such notice is the subject of pending dispute resolution under Article 10 hereof.
Seller's Events of Default: Each of the following acts, failures and occurrences shall constitute a Seller Event of Default:
(i) The failure of the Seller to deliver to the Buyer in any year the Annual Aggregate Quantity of the lignite conforming to the specifications of Schedule 1.
(ii) The failure of the Seller to perform any other material obligation it may have under the Agreement, if the same shall not have been remedied within sixty (60) days of receipt by the Seller of the Buyer's written notice of such default, unless and while the default specified in such notice is the subject of pending dispute resolution under Article 10 hereof.
(f) That the contract also provides Seller's remedies for Buyers events of default in Article 7.1 as also Buyer's remedies for Sellers event of default in Article 7.2 with limitation of liability.
(g) The contract has also provided a definition of Force Majeure in Article 11. The said definition read:
11.1 Definition 'Force Majeure' means any act or event which wholly or partially prevents or delays the performance of obligations arising under this Agreement if such act or event is not reasonably within the control of and not caused by the fault or negligence of the non-
performing party, and provided that such act or event is in one or more of the following categories:
(a) Flood, drought, lightning, earthquake, fire, explosion, major grid failure;
(b) Equipment failure resulting from an event of Force Majeure:
(c) Civil disturbance including riots, terrorism, rebellion, sabotage and communal clashes;
(d) Strikes not involving employees of the Seller;
(e) Strikes involving the employees of the Seller;
(f) Political bandhs i.e., political situation that results in a stoppage of work in the entire locality);
(g) Major equipment breakdown due to inherent defects in such equipment and which results in a total shut Page 49 of 92 https://www.mhc.tn.gov.in/judis Arb.O.P.(Com.Div.)Nos.444 of 2021 & 5 of 2022 down of lignite production from the Allocated Mine for a period of 10 or more consecutive days;
(h) Acts of God or the public enmity;
(i) Any law, order or ordinance of the Central or State Government that prohibits performance of the obligations hereunder;
(j) Failure of the concerned Governmental Agency to renew the Mining Lease in favour of the Seller; and
(k) The Seller's inability to gain vacant possession of lands acquired by GOTN for mining operations by the Seller, and which lands are intended to form part of Mine II, the Mine 1 expansion, and Mine IA. Any of the above events that affect any of the Seller's or the Buyer's sub-contractors under this Agreement shall be deemed a Force Majeure event of the Seller or the Buyer, as the case may be.
Provided that a Force Majeure event shall not include economic hardship, equipment failure or breakdown other than as specifically set forth above.
11.2 Burden of Proof In the event of the Parties are unable in good faith to agree that a Force Majeure event has occurred, the Parties shall resolve their dispute in accordance with the provisions of Article 10 thereof. The burden of proof as to whether a Force Majeure event as occurred shall be upon the Party claiming the Force Majeure event. 11.3 Effect of Force Majeure If either party is rendered wholly or partially unable to perform its obligations under this Agreement because of a force Majeure event, that party shall be excused from whatever performance is affected by the Force Majeure event to the extent so affected, provided that:
(a) The non-performing party within five business days after the occurrence of the inability to perform due to a Force Majeure provides written notice to the other party of the particulars of the occurrence, including an estimation of its expected duration and probable impact on the performance of its obligations hereunder, and continues to furnish timely regular reports with respect thereto during the period of Force Majeure;Page 50 of 92
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(b) The-performing party shall use all reasonable efforts to continue to perform its obligations hereunder and to correct or cure the event or condition excusing performance as soon as possible;
(c) The suspension of performance shall be of no grater scope and no longer duration than is reasonably necessitated by the Force Majeure event;
(d) The non-performance party shall provide the other party with prompt notice of the cessation of the Force Majeure event giving rise to the excuse from performance and shall promptly there upon resume performance hereunder:
(e) The non-performance of any obligation of either party that was required to be completed prior to the occurrence of the Force Majeure event shall not be excused as a result of such subsequent Force majeure event;
(f) 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;
(g) The Force Majeure event shall not relieve either party from its obligation to comply with the applicable Law.
(h) The non-performing party shall exercise all reasonable efforts to mitigate or limit damages to the other party;
(i) Quantities not delivered by the Seller and/or not accepted by the Buyer due to an event of Force Majeure shall reduce the Annual Aggregate Quantity by the same amount.
28. General principles of law applicable to invoke events of Force Majeure is also settled by various judicial pronouncements like, Energy Watchdog v. CERC and Others (2017) 14 SCC page 80; Satyabrata Ghose v. Mugneeram Bangur & co., AIR 1954 SC page 44; Alopi Parshad & Sons Ltd v. Union of India AIR 1960 SC page 588; Naihati Jute Mills Ltd v. Khyaliram Page 51 of 92 https://www.mhc.tn.gov.in/judis Arb.O.P.(Com.Div.)Nos.444 of 2021 & 5 of 2022 Jagannath AIR 1968 SC page 522; Sea Angel Case (2007) 2 Lloyd's Re 517 CA; Libepin vs. Richard Crispin &Company 1920 2 KB 714.
29. In Energy Watchdog case supra (latest of the judgment), the Hon'ble Supreme court has held:
(a) When a contract contains a Force Majeure clause which is attracted to the facts of the case, Section 32 of the Indian Contract Act, 1872 would apply and not Section 56 of the Indian Contract Act (See para 34)
(b) Force Majeure clauses are to be narrowly construed (See para 39)
(c) Fundamental basis of the contract must be dislodged due to the Force Majeure event (See paras 39, 42 and 47)
(d) Increase in price alone or any other economic hardship is not sufficient for a frustrating event (See paras 39, 40 and 47 and proviso to Article 11.1 of the FSA.
30. Chitty on Contract defines the term 'prevented as follows:
"Where one party seeks to invoke the protection clause which states that he is relieved of his liability if he is 'prevented' from carrying out his obligation under the contract and is unable to do so, he must show that the performance has become physically or legally impossible and not merely more difficult or unprofitable.... But the word 'prevented' has always to be interpreted in the context of a particular contract.
31. Hon'ble Supreme Court in Dhanaramji Gobindram v. Shamji Kalidas & Co., at paragraph 17held that "where reference is made to Force Majeure, the intention is to save the performing party from the consequences of anything over which he has no control".
32. From the definition of Force Majeure in the FSA, it is seen that the following mandatory requirements should be established before the events of Force Majeure could be applied to the facts of the case:
(1) Force Majeure has to be an act or event which wholly or partially prevents or delays the performance of obligations arising under this agreement (emphasis Page 52 of 92 https://www.mhc.tn.gov.in/judis Arb.O.P.(Com.Div.)Nos.444 of 2021 & 5 of 2022 supplied) if such act or event is not reasonably within the control of and not caused by the fault or negligence of the non-performing party.
(2) That a Force Majeure event shall not include Economic Hardship.
(3) A party should be rendered wholly or partially unable to perform its obligation under this agreement because of a Force Majeure event; provided that;
a. Non-performing party within five (5) business days after the occurrence of the inability to perform due to a Force Majeure event provides with notice to other party of the particulars of the occurrence.
b. Non-performing party shall use all reasonable efforts to continue to perform its obligations and to correct or cure the event or condition excusing performance as soon as possible.
33. Before I consider the application of the above principles to the facts of this case, certain undisputed facts existing in this case will have to be noted herein.
34. So far as the State of Tamil Nadu is concerned, concept of Merit Order Dispatch was not new and was in practice as 'Availability Based Tariff' (ABT) mechanism and TNERC Regulations, 2005 since 24.06.2005 which required the Distribution Licensee to procure power on Least Cost Basis and strictly on merit order Dispatch. Hence, it may not be open to the Claimant to contend that Merit Order Regime came into existence only in 2012.
35. The Tariff Order, 2012 was introduced with effect from 01.04.2012 and at that time Claimant did not inform the Respondent, the possibility of such system having an adverse effect on its capacity to lift the assured quantity of lignite as required under the contract in Article 11.3 (a).
36. It is to be noticed herein that, according to the Respondent, the present dispute relates to the period between 2015-16 to 2017-18 and during this period, even though the Claimant knew about the Merit Order Retime, still it nominated an AAQ of 1.83 MMT for 2015 and 2016 vide letter dated 16.12.2014, but failed to lift he said quantity at the end of the year i.e., Page 53 of 92 https://www.mhc.tn.gov.in/judis Arb.O.P.(Com.Div.)Nos.444 of 2021 & 5 of 2022 31.03.2016. Consequently, it is stated by the Respondent that under Article 7.1 of the FSA read with Article 5.2 (c) (iii), it levied Liquidated Damages (LD) and issued Debit. Note to the Claimant on 08.04.2016 for a sum of INR 4,73,92,453/- which was not opposed by the Claimant at that time.
37. It is stated that after more than 8 months from the receipt of Debit Note dated 08.04.2016 and after the said sum was adjusted towards respondent's dues, the claimant belatedly vide letter dated 14.12.2016 for the first time alleged that the reasons for shortfall in offtake of lignite for the period between 2015 and 2016, was due to Force Majeure event. But, even at the time no notice as required under Article 11.3 of the FSA was issued and no protest was lodged regarding the levy of liquidated damages.
38. It is to be noticed here that according to the law laid down by the Supreme Court, provisions of Force Majeure has to be construed narrowly (See Watchdog case supra).
39. It is seen from Article 11.1 of the FSA:
'Force Majeure' means any act or event which wholly or partially prevents or delays the performance of obligations arising under this agreement, if such act or event is not reasonable within the control of and not caused by the fault or negligence of the non-performing parties".
40. From the above it is seen that for a Force Majeure event to apply, the same should either wholly or partially prevent or delay the performance of obligations arising under the FSA and as per the judgment of the Supreme Court in Energy Watchdog case supra at para 39, 42 and 47 for a Force Majeure event to apply, the same should dislodge the fundamental basis of a contract. In the instant case, the fundamental basis of the FSA is the right of the parties to sell and purchase lignite as could be seen from Article 5 of the FSA and it had nothing to with sale and purchase of electricity as contemplated under the Merit Order Ranking Regime or Tariff Order of 2012 Page 54 of 92 https://www.mhc.tn.gov.in/judis Arb.O.P.(Com.Div.)Nos.444 of 2021 & 5 of 2022
41. The Force Majeure event which is pleaded by the Claimant in this case is the Tariff Order 2012 or the Merit Order Ranking Regime introduced by TANGEDCO, which according to the Claimant, ranked it below some other generators of electricity and consequently, the purchase of electricity by the TANGEDCO got reduced which in turn compelled it to reduce its intake of lignite from the Respondent contrary to the provisions of the FSA.
42. A perusal of Article 11 of the FSA shows that the Force Majeure should an act or event which affects the performance of obligation arising under this agreement. In reality, the Force Majeure event pleaded by the Claimant does not affect any of the obligations of the Claimant under the FSA. Therefore, the Force Majeure event pleaded by the Claimant being the Tariff Order of 2012 or merit order ranking regime of TANGEDCO cannot be considered as Force Majeure event in this case.
43. Apart from the above, as could be from the language of Article 11, there are other condition precedent which will have to be fulfilled before a party can claim the application of Force Majeure event.
44. Article 11.3(a) requires the non-performing party to issue a five (5) business days' notice after the occurrence of the inability to perform is obligations under the agreement (FSA) due to Force Majeure. In the instant case, the event of Force Majeure has in reality occurred at least from the year 2012 or when the TANGEDCO implemented the Merit Order Regime in 2015, therefore, it was obligatory for the Claimant to have issued a notice within five (5) business days of coming into force of the Tariff Order of 2012 or Merit Order Regime which according to the Claimant are the Force majeure event. But, admittedly the said 5 days' notice was not issued by the Claimant to the Respondent though an argument is put forward that a notice was issued on 16.08.2016, hence at the cost of repetition, it has to be stated that a 5 days' notice as required under 11.3(a) was not issued admittedly as require din Article 11.3(a).
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45.Consequence of the said failures is that the Claimant is not entitled to be excused of its default allegedly arising out of Force Majeure event. Therefore, in my opinion, on this ground of non-issuing of required mandatory notice under Article 11.3 (a), it has to be held that, the Claimant is not entitled to plead Force Majeure for being excused for its default of not lifting the assured quantity of lignite which is an admitted fact.
46. Apart from the findings given herein above, it is seen that another obligation of the Claimant arising under Article 11.3 (h) has also not been fulfilled by the Claimant for claiming exemption of the consequence of the Force Majeure. The said requirements read thus:
".......[h] The non-performing party shall exercise all reasonable efforts to mitigate or limit damages to the other party".
47. According to me, the following mitigating steps were available to the Claimant to seek to be excused for the non-performance of obligations under the FSA:
(a) The Claimant could have reduced is cost of electricity sold to TANGEDCO to compete with other generators of electricity so as to avoid the consequence of restricted purchase of electricity by TANGEDCO from it. In my opinion, it is always open to a business entity to reduce its cost to compete in the market.
(b) By such act, it might have suffered some economic hardship which is not a ground for invoking Force Majeure, but it could have escaped the rigor of LD.
48. Alternatively, the Claimant could have sold the excess electricity generated by it to 3rd parties. It is to be mentioned herein that, one of the arguments of the Claimant is that it could not have sold the excess electricity generated by it to 3rd parties because of restriction found in Pa. this argument, in my opinion, is wholly incorrect because under Regulation No.4 of the TNERC (Terms and Conditions of Determination of Tariff) Regulations, 2005, it is provided as follows;
"Generating companies shall be allowed to sell to other buyers without losing their claim on committed charges in case of under recovery of these charges from alternate sales".Page 56 of 92
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49. It is to be noted herein that the TNERC Regulations even as pleaded by the Claimant are the law and it overrides contractual provisions of the PPA. Therefore, the Claimant had an option of selling excess electricity generated by it to 3rd parties thereby mitigating its loss as well as the loss that the Respondent was likely to suffer because of its default in lifting the assured quantity of lignite. This failure of the Claimant is in violation of Article 11.3(h) which again is a mandatory requirement. Failure to do so, in my opinion violates the requirement of Article 11.3(h) of the FSA, which is a mandatory requirement.
50.Therefore, apart from the fact that, Force Majeure event does not apply to obligations of the Claimant under the FSA, the other mandatory requirement of Article 11.3(a) and (h) having not been complied with, the Claimant is not entitled to be excused of its default under Article 11.3 of the FSA.
51. Claimant has also pleaded that as per Article 11.3(1) of the FSA, it is seen that "(i) quantity not delivered by the seller and/or not accepted by the buyer due to an event of Force Majeure shall reduce the Annual Aggregate Quantity by the same amount", which according to it takes away the default under Article 6 of the FSA"1 Hence there is no violation of AAQ, consequently Respondent cannot recover Liquidated damages.
52. In my opinion, the provision of article 11.3(i) operates only when Force Majeure event is applicable. It is held herein above that the Force Majeure as contended by the Claimant do not apply to the facts of the. case. Hence, Clause (i) of Article 11.3 also do not apply. Hence, this argument has to fail.
53. On the basis of the above finding of mine, the arguments raised in support of this issue and reproduced herein above are answered as follows:
1. The shortfall in offtake of lignite is not due to the operation of Force Majeure event pleaded by the Claimant.
2. The steps in offtake of lignite does not automatically reduce the AAQ.Page 57 of 92
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3. The shortfall in offtake of AAQ is not due to the operation of Merit Order Dispatch Regime.
4. The Merit Order Dispatch Regime did not prevent the Claimant from complying with obligations to lift the lignite under the FSA.
5. The reduced offtake of electricity by the TANGEDCO was due to the operation of Merit Order Dispatch regime, but the same could not be considered as a Force Majeure event under the FSA to seek to be excused from Claimant's obligation of lifting Assured Quantity of lignite.
6. Merit Order Ranking of the Claimant was not within its control, but it had no effect on Claimant's obligation to lift the assured quantity of lignite.
7. Force Majeure circumstances pleaded by the Claimant are in reality Economic Hardships.
8. Condition of notice of Force Majeure under Article 11.3(a) of the FSA, are capable of being complied with, but the same was not done within the mandatory period.
9. Condition of mitigation of Force Majeure event under Article 11.3(h) of the FSA has not been complied with by the Claimant.
10. Claimant has a right under the Regulations of TNERC to sell excess electricity to 3rd parties.
11. Claimant has not made reasonable efforts to mitigate the losses.
54. Therefore, Issue No.1 is held against the Claimant holding that the Claimant has failed to prove the shortfall in offtake of nominated quantity of lignite was caused by the operation of Tariff Order 2012 and Merit Order Ranking Regime and that inability of TANGEDCO to adequately offtake power from the project which constituted a Force Majeure event, hence does not attract liability of Liquidated Damages under the provisions of Fuel Supply Agreement (FSA)." 15.2. The contention of the claimant is that since Merit Order Ranking was introduced by the TNERC, there was a 'Force Majeure Page 58 of 92 https://www.mhc.tn.gov.in/judis Arb.O.P.(Com.Div.)Nos.444 of 2021 & 5 of 2022 event' that prevented it from performing its obligations. According to the claimant, TNERC has been issuing the Merit Order Ranking from time to time and based on that only, TANGEDCO purchases the power. Merit Order Ranking will be determined by the Authorities based on various factors, one such factors is the price of the lignite. Due to the increase in the price of lignite supplied by the respondent to the claimant, Merit Order Ranking of the claimant was lowered. Therefore, the claimant contends that since the Merit Order Ranking of the claimant was lowered, the TANGEDCO lowered the dispatch to the Project, which resulted, in a 'Force Majeure event' and the claimant was unable to supply power to TANGEDCO and lift the AAQ of lignite as per the terms of FSA. Thus, the claimant submitted that since there was 'Force Majeure event', the claimant is not liable to pay any liquidated damages to the respondent.
15.3. This Court perused the findings of the Tribunal and oral and documentary evidence placed before this Court on this aspect. The claimant contends that its Merit Order Ranking got lowered and therefore, TANGEDCO lowered its dispatch to the Project, which Page 59 of 92 https://www.mhc.tn.gov.in/judis Arb.O.P.(Com.Div.)Nos.444 of 2021 & 5 of 2022 resulted in 'Force Majeure event' preventing the claimant from performing its obligations. However, this Court is of the view that the claimant could have supplied the power to the TANGEDCO at a lower price and nothing prevented the claimant from lifting lignite and supplying the power to TANGEDCO. The consequence will be lowering the profit. Thus, the lower Merit Order Ranking will not affect the claimant if it is willing to supply power at a lower price. When the other supplier of power was able to supply power to the TANGEDCO at a lesser price, this Court is unable to understand why the claimant was not in a position to supply the same at a competitive price. Obviously, the claimant was not willing to supply the power at a lower price i.e., the claimant was unwilling to accept the lower profit, which is purely a business decision of the claimant. If suppose, the claimant had chosen to supply power at a lower price and accepted the lower profit, then there is no question of 'Force Majeure event' as contended by the claimant. The claimant with a view to receive high profit, refused to sell the power at a lower price. When the other supplier was asked to supply power to the TANGEDCO, the claimant cannot claim that there was a 'Force Majeure Page 60 of 92 https://www.mhc.tn.gov.in/judis Arb.O.P.(Com.Div.)Nos.444 of 2021 & 5 of 2022 event'. If at all, there was any such event, it is for all but not exclusively for the claimant alone. Thus, keeping all these aspects in mind, based on oral and documentary evidence and after thorough analysis of the evidence, the Tribunal had come to the conclusion that there was no such 'Force Majeure event'. Such being circumstance of the case, this Court also does not find any 'Force Majeure event', which prevented the claimant from performing its obligations.
15.4 The definition of 'Force Majeure event' under Article 11.1 (i) of the FSA includes, "any law, order or ordinance of the Central or State Government that prohibits performance of the obligations hereunder". In the instant case, admittedly, there is no law, order or ordinance by the Central or State Government, which completely prevented the claimant from performing its obligations. It is also nobody's case that TANGEDCO was prevented from purchasing power from the claimant. Since the claimant has quoted higher price, its bid was rejected. This could in no way be considered as 'Force Majeure event' in terms of the Article 11.1 (i) of the FSA.
Page 61 of 92 https://www.mhc.tn.gov.in/judis Arb.O.P.(Com.Div.)Nos.444 of 2021 & 5 of 2022 15.5. Furthermore, as concluded in the Issue No.1, the PPA between the claimant and the TANGEDCO cannot be interlinked and relied upon in the present proceedings. Hence, the claimant cannot make a claim that since TANGEDCO lowered its dispatch, it was unable to lift the AAQ of lignite.
15.6. Whether or not to quote lower price / competitive price is purely a business decision of the claimant. The claimant having chosen not to quote the competitive price to supply power to TANGEDCO, cannot make a claim that it was unable to lift the AAQ of lignite due to 'Force Majeure event'. Its inability to quote the competitive price can never be considered as a ''Force Majeure event' in terms of the FSA. The Tribunal, after extensively, taking into consideration the materials available on record and the law laid down by the Hon'ble Apex Court, arrived at a well reasoned finding. This Court also agrees with the decision of the Tribunal and finds that there is no 'Force Majeure event' as contended by the claimant. Issue No.2 is answered accordingly. Page 62 of 92 https://www.mhc.tn.gov.in/judis Arb.O.P.(Com.Div.)Nos.444 of 2021 & 5 of 2022
16. Issue No.3: Whether the liquidated damages awarded by the Arbitral Tribunal is in accordance with the terms and conditions of the FSA?
16.1. Since this Court found that there was no 'Force Majeure event', the respondent is certainly entitled for liquidated damages in terms of the provisions of the contract. Now, let me examine whether the Tribunal has determined the liquidated damages in accordance with the provisions of the contract and the law laid down by the Hon'ble Apex Court. At this juncture, this Court feels that it would be apposite to extract the relevant portions of the award on this aspect hereunder.
"89. Relevant part of article 6 and 7 of FSA read thus:
"6.1 Buyer's Event of Default Each of the following acts, failures and occurrences shall constitute a Buyer Event of Default:
(a) The failure of the Buyer to accept delivery of a quantity of lignite equal to the AAQ conforming to the specifications of Schedule 1 in any year.
6.2 Seller's Events of Default:
Each of the following acts, failures and occurrences shall constitute a Seller Event of Default:
(a) The failure of the Seller to deliver to the Buyer in any year the Annual Aggregate Quantity of the lignite conforming to the specifications of Schedule 1".
Article 7: Damages "7.1 Seller's Remedies for Buyer's Events of Default: Page 63 of 92
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a) In the event of Buyer Event of Default under Article 6.1(a) in any year, the Buyer shall be liable to pay liquidated damages to the Seller, to be determined as follows:
LD's = Price x Shortfall x
Multiplier
Where
LD's = The liquidated damages
payable by the Buyer to the
Seller;
Price = The Base Price;
Shortfall = The number of metric tons
by which the quantity of
lignite purchased by Buyer
was less than 100% of the
Annual Aggregate
Quantity (as defined in
Article5.2© for the year;
and
Multiplier = A number of determined as
follows:
Where the actual quantity The Multiplier shall
purchased in the year is equal equal:
to the following percentage of
the Annual Aggregate Quantity
Less than 100%, at least 82.5% 0.17
Less than 82.5%, at least 65% 0.46
Less than 65% 0.54
90. At this stage it should be noted that the Hon'ble Supreme Court has held that before applying the provisions of the liquidated damages in a contract to the facts of the case, the adjudicating authority should be satisfied that the formula adopted in such a contract Page 64 of 92 https://www.mhc.tn.gov.in/judis Arb.O.P.(Com.Div.)Nos.444 of 2021 & 5 of 2022 is a genuine pre- estimate of losses suffered by a party to the contract. In addition to the above it is also held that the party pleading for Liquidated Damages should prove the loss if it is possible to be proved.
Therefore, I will first consider whether the Liquidated Damage Formula found in Article 6 and 7 can be held to be a genuine pre- estimate of losses or not. It is seen from the formula found in Article 7 of the FSA that the Liquidated Damages will have to be calculated on the basis of price x shortfall x multiplier, where price is the base price and the shortfall is the actual quantity of shortfall due to the default in lifting of the lignite by the defaulting party multiplied by the applicable multiplier in the said Article which is as follows:
Where the actual quantity The Multiplier shall purchased in the year is equal equal:
to the following percentage of the Annual Aggregate Quantity Less than 100%, at least 82.5% 0.17 Less than 82.5%, at least 65% 0.46 Less than 65% 0.54 Multiplier referred to above, in my opinion refers to the loss suffered by the concerned party under the head:
a) Loss of Interest
b) Loss of Royalty
c) Loss due to cost of transportation
d) Loss of incentive charges
e) Loss on account of maintaining the un-lifted lignite etc Since all those items referred to, like the price, shortfall are in the actual and the multiplier, in my opinion, being reasonable because it accommodates other shortfalls not named in the formula above same cannot be considered as unreasonable more so taking into consideration the facts like the nature of business involved, investment required, limited area of operation of the business concerned and the fact that both the Page 65 of 92 https://www.mhc.tn.gov.in/judis Arb.O.P.(Com.Div.)Nos.444 of 2021 & 5 of 2022 parties involved in the said business being in equal in status and the fact that the formula referred to in Article 7 are equally applicable to both the contracting parties, the formula in my opinion is a reasonable one. That apart, it is to be noted that even though FSA was entered into by the parties to these proceedings as far back as on 29.04.1998 none of the parties have questioned genuineness of the formula until the initiation of the present proceeding, which shows that the parties have acquired to the formula of calculating Liquidated Damages as per Article 7. In that background, I find that the above formula is genuine and reasonable.
In the above background, I hold that the formula found in Article 7 of FSA in this case for determining the Liquidated Damages is not in terrorem or unreasonable or a penalty. Consequently, I hold that the said formula is a genuine pre-estimate of losses that may be suffered by a party to the FSA.
The above finding by itself would not be sufficient to uphold the quantum of liquidated damages claimed by the Respondent in this case because of another dictum of the Hon'ble Supreme Court referred to hereinabove i.e., wherever it is possible to prove the actual loss in a claim for Liquidated Damages, such loss has to be established before the adjudicating authority by the party claiming such Liquidated Damages.
In the present proceedings, apart from pleading that Liquidated Damages to be computed is a genuine pre estimate of losses, the Respondent has also alternatively contended that on the facts and circumstances of this case, by the non-lifting of assured quantity oflignite, it has suffered loss and to establish the actual loss, the Respondent has produced before the Tribunal, materials to justify the same.
Therefore, I will now consider whether the Respondent has established its claim for Liquidated Damages by way evidence applicable to this case or not.
In my opinion the loss that is contemplated for establishing Liquidated Damages in the FSA is the value of the un-lifted lignite calculated at the base price Page 66 of 92 https://www.mhc.tn.gov.in/judis Arb.O.P.(Com.Div.)Nos.444 of 2021 & 5 of 2022 multiplied by the multiplier mentioned in the said Article.
It is the contention of the Claimant herein that the Respondent has mined lignite equal to 85% of its mine's capacity and has sold the entire quantity so mined to third parties or has consumed the same in its generating units, hence has not suffered any loss by the non-lifting of the assured quantity of lignite in a given year by the Claimant. In support of this contention, it has relied on the answer given by RW1,witness for the Respondent, who according to the Claimant has admitted that the Respondent has sold or utilized mineral mined by it from Mine 1A which is a dedicated Mine to the Claimant. Therefore, it contends that all the minerals transferred from Mine 1A by the Respondent to other stockyard are actually sold to third parties or consumed by itself at a rate which included the profit (ROE) of 15.5%. Therefore, the Respondent has not suffered any loss by the non-lifting of assured quantity of lignite by the Claimant for the given years. The Respondent has denied the suggestion that the non- lifted quantity of lignite were either sold or consumed by itself.
Under Article 5.1(i) of the FSA, it is seen that it is open to the Respondent to sell excess lignite produced from Mine 1A to third party without affecting assured supply to the Claimant. Therefore, merely because a part of the lignite produced by Mine 1A is found to be sold to third party or consumed by the Respondent itself in a relevant year does not establish that the Respondent has sold even the un-lifted quantity of lignite or consume the same thereby not suffering any loss unless there is specific evidence to prove the same.
The quantity of lignite produced, consumed or sold during a relevant year is reflected in the Table 3 produced by the Respondent before this Tribunal which prima facie shows the stock that was available for relevant year and the stock in hand at the end of the relevant year. In the extract of the stock register identified as Tables 3 produced by the Respondent in these proceedings (correctness of these entries is Page 67 of 92 https://www.mhc.tn.gov.in/judis Arb.O.P.(Com.Div.)Nos.444 of 2021 & 5 of 2022 questioned by the Claimant which will be discussed subsequently hereinafter. At this stage, these entries are taken for consideration only for the purpose of the argument that all lignite mined by the Claimant from Mine 1A has been either consumed by the Respondent or is sold in the relevant year).
It is the argument of the Claimant that the entire lignite mined from Mine 1A has been sold or consumed by the Respondent thereby there is no stock of lignite left behind unused for those years so as to cause any loss to the Respondent.
A perusal of the entries in Table 3 referred to hereinabove, shows the following:
-The opening stock in Mine 1A for the year FY 2015-16 was 0.78 MMT.
AAQ nominated by the Claimant for that year was 1.83 MMT.
Closing stock with the Respondent for that year was 0.97 MMT It is to be noticed herein that it is an admitted fact that for the FY 2015-16 un-lifted quantity of assured lignite by the Claimant was 0.21 MMT. From the above entries and admitted facts it is clear that for the FY 2015-16 Respondent was left at the end of the year a lignite stock of 0.97 MMT out of which it can be held that the Claimant was responsible for not lifting 0.21 MMT. Similar is the position in regard to FY 2016-17 and FY 2017-18 wherein closing stock was more than the un- lifted lignite by the Claimant indicating that the quantity of shortfall in the off-take by the Claimant was not sold or consumed by the Respondent and the same remained to be stock in hand. This is of course, subject to the entries in those tables being genuine. It is to be noted herein that the Claimant has contended during the arguments that RW1, the witness of the Respondent has admitted that un-lifted lignite was either sold or consumed by the Respondent. Assuming such admission is there from RW1, I am of the opinion that oral evidence contrary to documentary evidence cannot be accepted. That apart, Claimant itself has stated in its written submission at page 108 Page 68 of 92 https://www.mhc.tn.gov.in/judis Arb.O.P.(Com.Div.)Nos.444 of 2021 & 5 of 2022 that RW1 has prevaricated and has no respect for truth meaning thereby RWI's evidence cannot be believed. If that be so, the evidence of RW1 on which the Claimant has placed reliance for the purpose of the above argument, also cannot be believed.
In my opinion, in reality what RW1 has actually stated is that minerals from Mine 1A has been sold or consumed by the Respondent which is permissible as per Article 5.1(i) of the FSA. He has nowhere stated that there was no stock left as reflected in Table B series produced by the Respondent. Even assuming that RW1 has stated something beneficial to the Claimant, same cannot be accepted in view of the documentary evidence available on record and referred to herein above. I will now consider the documentary evidence produced by the Respondent identified as C series can be believed or not.
As mentioned above, the entries in both the set of documents are derived from the documents maintained by the Respondent while the Respondent relies on Table B series, the Claimant relies documents C series produced by it.
The Claimant in its objection to the entries in Table 3 series has contended that the said entries cannot be believed because they are not genuine and also that the same are not admissible in evidence. It is to be noted that apart from the allegation that the said entries cannot be believed, no other material is produced by the Claimant to establish that the entries in the Tables produced by the Respondent are not genuine. While considering the above objection of the Claimant, it has to be noticed that under Section 19 of the Arbitration and Conciliation Act, the Civil Procedure Code (CPC) and Evidence Act are not applicable to arbitral proceedings. Therefore, it is open to the Tribunal to accept any agreed procedure suggested by the parties. In this case, parties have not proposed any such agreed procedure. In such circumstances, it is open to the Tribunal to follow a procedure in the interest of justice without violating the principles of natural justice. That is exactly what this Tribunal has Page 69 of 92 https://www.mhc.tn.gov.in/judis Arb.O.P.(Com.Div.)Nos.444 of 2021 & 5 of 2022 done in this proceeding in regard to documents produced by both the parties which was very often at different pages of the proceedings, and at no stage any objection to has been taken by any side against the production of documents or as to the contents of the documents which is evident from the following notings of the proceedings dated 12/13 December 2019 by the Tribunal which reads as follows:
"The Respondent has produced certain documents along with the memo for the inspection of the Claimant. Claimant has inspected the same. It is also submitted that Claimant has asked for production of annual action plan (AAP) (complete set for the disputed period), which has been furnished by the Respondent. The claimant has also asked for the production of stock statement for the disputed period, same has also been produced by the Respondent"
It is to be noted herein that the production of the above documents, was on the date when examination of RW1 had concluded and the arguments were to start. It is also to be noticed that, these documents were produced at the instance of the Claimant and the said documents have been inspected by the Claimant. The documents so produced are Annual Action Plan and Stock Statement (complete set for the disputed period) and after inspection of all these documents, no objection was raised for the production of the said document. Per contra, the Claimant itself has relied on those documents, which is evident from the statement it has made in its written submissions which reads thus:
"250. Pursuant to the Claimant's application, when the Tribunal was about to pass orders to produce the documents sought by the Claimant, the Respondent informed that it would produce the copy of the documents sought for and finally produced the stock dispatch details for the entire disputed period which clearly demonstrated that the Respondent has in fact sold / consumed more than 85% of production capacity of Mine 1A in the disputed period and not suffered any loss on account of un-lifted quantity of lignite."Page 70 of 92
https://www.mhc.tn.gov.in/judis Arb.O.P.(Com.Div.)Nos.444 of 2021 & 5 of 2022 (Emphasis supplied) (Para 250 page 98 of Claimant written submissions) From the above statement made by the Claimant, it is clear that whatever the Claimant wanted was produced by the Respondent though belatedly and same was on record when no objection was taken. Therefore, even the argument that certain relevant documents like stock registers have not been produced by the Respondent, does not survive any further.
It is to be noted herein that even according to the Claimant, most of the entries in documents C series are actually taken from the documents so produced by the Respondent and the Respondent has also contended that the entries in Tables 3 to 11 produced by it are also taken from entries found in stock register and other documents produced by it.
The very fact that claimant itself sought to rely upon the entries made by the respondent in the documents produced by it in C series, establishes the fact that entries found in the documents produced by the Respondent has been accepted by the Claimant. Hence, the same can be relied upon.
I will now consider the documents C series produced by the claimant. As mentioned above, these entries in C series document are also derived from the documents maintained by the Respondent, but the Respondent contends that said documents do not in any way assist this tribunal in arriving at a just conclusion because none of the above documents really show what was the opening stock and closing stock of mineral from Mine 1A. It is further contended that in the absence of any such material to show that at the end of the year respondent had no stock at least equivalent to the un- lifted quantity of lignite for that year, it is not possible for the tribunal to come to a just conclusion that the mineral un-lifted by the claimant was either sold or consumed by the Respondent as contended by the Claimant.
I find force in the argument of the respondent that in the absence of entries to show opening stock of lignite and the closing stock of lignite for the relevant year, it is not Page 71 of 92 https://www.mhc.tn.gov.in/judis Arb.O.P.(Com.Div.)Nos.444 of 2021 & 5 of 2022 possible to hold that the quantity of un-lifted lignite was either sold or consumed by the Respondent. Therefore, it has to be held from the material on record that the Respondent did not sell or consumed the un-lifted lignite by the claimant in the relevant year so as to deny the right to collect liquidated damages under the FSA. However, there is force in the contention of the Claimant that over and above the liquidated damages payable under Article 7 of the FSA respondent cannot separately claim amount reflecting the loss suffered by it under the head loss of interest, royalty, cost of transportation, loss of incentive charges, loss on account of maintaining the un-lifted lignite etc because they are already included in the formula found in Article 7.
In my opinion, the above argument of the Claimant has force. From the reading of Article 7 it is seen that the parties have agreed that while calculating Liquidated Damages, factors to be taken into account are only the quantum of un-lifted lignite, base price and applicable multiplier indicated in that Article which in my opinion includes the loss purported to have been suffered by the Respondent, like loss of interest, royalty, cost of transportation, loss of incentive charges, loss on account of maintaining the un-lifted lignite. Hence, any amount referable to the above heads of loss, cannot be taken into consideration while calculating the loss for the purpose of Liquidated Damages and the said Damages can only be the figure that can be arrived at on the basis of price x shortfall x multiplier contemplated in Article 7 of the FSA.
Hence, Issue No.8 is answered accordingly." The Arbitral Tribunal being fact finding Authority, found that the formula adopted for calculating the liquidated damages is very genuine and that the respondent is entitled for the liquidated damages under the heads loss Page 72 of 92 https://www.mhc.tn.gov.in/judis Arb.O.P.(Com.Div.)Nos.444 of 2021 & 5 of 2022 of interest, loss of royalty, loss due to transportation, loss of incentive charges and loss on account of maintaining unlifted lignite.
16.2. It is to be noted that the respondent has claimed liquidated damages for the Financial Years 2002-2003, 2003-2004 and 2015-2016 and based on the same formula, liquidated damages were paid by the claimant. However, the claimant's contention is that for the Financial Year 2015-16, liquidated damages was paid under protest. Be that as it may, the respondent has determined the liquidated damages only by using the formula agreed under terms of the FSA. As far as the claim of the liquidated damages for the Financial Years 2002-03 and 2003-04 is concerned, the claimant paid the same without any objection.
16.3. As far as the liquidated damages awarded by the Tribunal is concerned, it has to be determined only as per the formula provided in the FSA. No doubt, the liquidated damages cannot exceed beyond the limit prescribed in the FSA. It is the duty of the respondent to prove that it has incurred losses, etc. by way of producing valid documentary evidence. In this regard, very many documents have been produced by Page 73 of 92 https://www.mhc.tn.gov.in/judis Arb.O.P.(Com.Div.)Nos.444 of 2021 & 5 of 2022 the respondent. It is not that, simply, without any material evidence, the liquidated damages came to be determined by the Tribunal.
16.4. The main contention of the claimant is that the quantity of the unlifted lignite was sold by the respondent before the completion of the Financial Year and therefore, the question of liquidated damages does not arise. However, the respondent firmly contended that the unlifted quantity was not sold, but retained. Even assuming that the claimant's contention is true and the unlifted quantity of lignite was sold by the respondent before the completion of the Financial Year, it will not preclude the respondent from claiming liquidated damages. This is because, the production of lignite for the purpose of sale and profit for a particular year would be pre-determined and accordingly, the respondent would produce the lignite and sell the same to the parties as agreed and also in the open market.
16.5. For instance, if the pre-determined production of lignite is assumed to be 1 lakh ton and the supply agreed to the claimant is 20,000 tons, then, the remaining 80,000 tons would be sold to other buyers. The Page 74 of 92 https://www.mhc.tn.gov.in/judis Arb.O.P.(Com.Div.)Nos.444 of 2021 & 5 of 2022 respondent, in a particular year, would obviously get the estimated profit by selling 80,000 tons of lignite to other buyers and as well as from the 20,000 tons of lignite supplied to the claimant. If the claimant has not lifted the agreed quantity, then automatically, 20,000 tons of lignite would either be retained or the production of that quantity of lignite might be stopped, which would ultimately result in loss of profit, etc. to the respondent. Therefore, either way, the respondent will suffer loss of profit. The same analogy would apply to the present case also. Even if the respondent has sold the unlifted lignite in the open market, still it would incur loss to the extent of its reduction of sale of lignite from its estimated / projected sale to persons other than the claimant.
16.6. The Tribunal had elaborately dealt with the aspects of losses, expenses and cost incurred due to the reason of unlifting of lignite by the claimant. The respondent has also filed documentary evidence showing the extent of loss incurred by it. It is settled law that in every case of breach of contract, the person aggrieved by the breach is not required to prove the actual loss or damages suffered by him before he can claim a Page 75 of 92 https://www.mhc.tn.gov.in/judis Arb.O.P.(Com.Div.)Nos.444 of 2021 & 5 of 2022 decree and the Court is competent to award reasonable compensation in case of breach, even if, no actual damages is proved to have been suffered in consequence of the breach of contract. But the expression 'whether or not actual damages or loss is proved to have been caused thereby' stated under Section 74 of the Indian Contract Act is intended to cover different classes of contracts which would come before the Courts. In case of breach of some contracts, it may be impossible for the Courts to assess compensation arising from breach, while in other cases compensation can be calculated in accordance with established rules. Whether the Court is entitled to assess the compensation, the sum named by the parties, if it be regarded as a genuine pre-estimate, may be taken into consideration as the measure of reasonable compensation, but not if the sum named is in the nature of a penalty. Where loss in terms of money can be determined, the party claiming compensation must prove the loss suffered by him. In the present case, it is not the case of the respondent that it is claiming without any proof. The respondent made a claim to the extent of losses, expenses and cost incurred by it due to the reason of unlifting of lignite by the claimant. The Arbitral Tribunal being Page 76 of 92 https://www.mhc.tn.gov.in/judis Arb.O.P.(Com.Div.)Nos.444 of 2021 & 5 of 2022 the fact finding Authority has elaborately dealt with this aspect and came to the conclusion that the losses, expenses and cost incurred by the respondent have been proved by virtue of oral and documentary evidence. The Section 74 of the Indian Contract Act permits the Court to award compensation in the event if the actual damages was not proved. However, in the present case, the actual damages have been proved by the respondent before the Tribunal and accordingly, the Tribunal awarded the liquidated damages. At this juncture, it would be apposite to extract the relevant portion of the Judgment of the Hon'ble Apex Court in the case of Maula Bux vs. Union of India reported in (1969) 2 SCC 554 hereunder.
"6. Counsel for the Union, however, urged that in the present case Rs. 10,000/- in respect of the potato contract and Rs. 8,500 in respect of the poultry contract were genuine preestimates of damages which the Union was likely to suffer as a result of breach of contract, and the plaintiff was not entitled to any relief against forfeiture. Reliance in support of this contention was placed upon the expression (used in s. 74 of the Contract Act), "the party complaining of the breach is entitled, whether or not actual damage or loss is proved to have been caused there by, to receive from the party who has broken the contract reasonable compensation".
It is true that in every case of breach of contract the person aggrieved by the breach is not required to prove actual loss or damage suffered by him before he can Page 77 of 92 https://www.mhc.tn.gov.in/judis Arb.O.P.(Com.Div.)Nos.444 of 2021 & 5 of 2022 claim a decree, and the Court is competent to award reasonable compensation in case of breach even if no actual damage is proved to have been suffered in consequence of the breach of contract. But the expression "whether or not actual damage or loss is proved to have been caused thereby" is intended to cover different classes of contracts which come before the Courts. In case of breach of some contracts it may be impossible for the Court to assess compensation arising from breach, while in other cases compensation can be calculated in accordance with established rules. Where the Court is unable to assess the compensation, the sum named by the parties if it be regarded as a genuine pre-estimate may be taken into consideration as the measure of reasonable compensation, but not if the sum named is in the nature of a penalty. Where loss in terms of money can be determined, the party claiming compensation must prove the loss suffered by him.
7. In the present case, it was possible for the Government of India to lead evidence to prove the rates at which potatoes, poultry, eggs and fish were purchased by them when the plaintiff failed to deliver "regularly and fully" the quantities stipulated under the terms of the contracts and after the contracts were terminated. They could have proved the rates at which they had to be purchased and also the other incidental charges incurred by them in procuring the goods contracted for. But no such attempt was made." The law laid down by the Hon'ble Apex Court in the above case will be squarely applicable to the facts of the present case. On this aspect, it would also be appropriate to extract the relevant portion of the Judgment of the of the Hon'ble Apex Court in the case of Kailash Nath Associates Page 78 of 92 https://www.mhc.tn.gov.in/judis Arb.O.P.(Com.Div.)Nos.444 of 2021 & 5 of 2022 vs. Delhi Development Authority reported in (2015) 4 SCC 136 hereunder.
"43. On a conspectus of the above authorities, the law on compensation for breach of contract under Section 74 can be stated to be as follows:-
1. Where a sum is named in a contract as a liquidated amount payable by way of damages, the party complaining of a breach can receive as reasonable compensation such liquidated amount only if it is a genuine pre-estimate of damages fixed by both parties and found to be such by the Court. In other cases, where a sum is named in a contract as a liquidated amount payable by way of damages, only reasonable compensation can be awarded not exceeding the amount so stated. Similarly, in cases where the amount fixed is in the nature of penalty, only reasonable compensation can be awarded not exceeding the penalty so stated. In both cases, the liquidated amount or penalty is the upper limit beyond which the Court cannot grant reasonable compensation.
2. Reasonable compensation will be fixed on well known principles that are applicable to the law of contract, which are to be found inter alia in Section 73 of the Contract Act.
3. Since Section 74 awards reasonable compensation for damage or loss caused by a breach of contract, damage or loss caused is a sine qua non for the applicability of the Section.
4. The Section applies whether a person is a plaintiff or a defendant in a suit.
5. The sum spoken of may already be paid or be payable in future.
6. The expression “whether or not actual damage or loss is proved to have been caused thereby” means that where it is possible to prove actual damage or loss, such proof is not dispensed with. It is only in cases where damage or loss is difficult or impossible to prove that the liquidated amount named in the contract, if a Page 79 of 92 https://www.mhc.tn.gov.in/judis Arb.O.P.(Com.Div.)Nos.444 of 2021 & 5 of 2022 genuine pre-estimate of damage or loss, can be awarded."
In view of such laws laid down by the Hon'ble Apex Court in the above Judgments, this Court does not find any patent illegality as contended by the claimant to interfere with the finding of the Tribunal. Thus, the liquidated damages awarded by the Arbitrary Tribunal is in accordance with the terms and conditions of the FSA. Accordingly, Issue No.3 is answered.
17. Issue No.4: Whether the respondent is liable to take mitigating steps to reduce its losses towards liquidated damages?
17.1. In view of the answers to the issue Nos.1, 2 and 3, this Court is of the considered view that even if any steps are taken by the respondent to mitigate its losses, still it would incur loss. In the present case, losses incurred by the respondent cannot be mitigated even if it has sold the unlifted quantities due to the reason that still to the extent of unlifted quantity sold, the respondent has to retain its production as a Page 80 of 92 https://www.mhc.tn.gov.in/judis Arb.O.P.(Com.Div.)Nos.444 of 2021 & 5 of 2022 stock since the sale of the respondent is only restricted to the extent of that particular year's projection. Ultimately, the damages of the respondent cannot be mitigated. Therefore, the finding of the Tribunal on this aspect is also well considered and need not be interfered with. Issue No.4 is answered accordingly.
18. Issue No.5: Whether the Arbitral Tribunal has correctly recorded that the issue Nos.10 and 11 were 'given up' by the respondent on merits?
18.1. Before answering the issue, it is necessary to extract the Issue Nos.10 and 11 framed by the Tribunal below.
"Issue 10: Whether the respondent is entitled to payment towards its counterclaim with respect to 'Excess credit given towards statutory levies for the period 2009-2014' and if so, what is the amount to be paid?
Issue 11: Whether the respondent is entitled to payment towards its counterclaim with respect to 'Unilateral deduction by the claimant in downward Rate Revision Arrears towards VAT for the period 2003-2006' and if so, what is the amount to be paid?"
Further the finding the Tribunal on this aspect is also extracted hereunder.
Page 81 of 92 https://www.mhc.tn.gov.in/judis Arb.O.P.(Com.Div.)Nos.444 of 2021 & 5 of 2022
105. The above issues have not been pressed by the respondent at the time of arguments and the same is given up. Hence, above issues are not considered by the Tribunal."
A perusal of the above above finding of the Tribunal would show that the Issue Nos.10 and 11 have been not pressed by the respondent at the time of arguments and hence, the same were recorded to be given up. However, the submission of the respondent is that since the proceedings were pending before the Tax Authorities and the payment would also not be crystallized, they made a submission before the Tribunal to not press the Issue Nos.10 and 11 with a liberty to seek appropriate relief based on the outcome of the Tax proceedings.
18.2. In this regard, this Court is of the considered view that, undoubtedly, at the time of making the claim, the claim itself was not crystallized, since the issue was pending before the Tax Authorities. Though the respondent submitted that they have sought for liberty while not pressing those claims, the Tribunal has not dealt with the aspect of liberty and no finding was given on the same. This Court is of the Page 82 of 92 https://www.mhc.tn.gov.in/judis Arb.O.P.(Com.Div.)Nos.444 of 2021 & 5 of 2022 opinion that at the time of the making the claim, the claim itself was not crystallized. Thus, there was no necessity for the Tribunal to grant any liberty. The question of whether or not to grant the liberty would arise only when the claim was crystallized. Be that as it may, liberty not being granted by the Tribunal is no way a bar to the respondent to make its claim once the Tax Proceedings attain finality. As such, liberty is always available for the respondent to make any claims in future against the claimant in accordance with the law, once the same is crystallized and attained finality. Issue No.5 is answered accordingly.
19. Issue No.6: Whether the respondent is entitled for the interest on the liquidated damages from the date of claim till the date of award?
19.1. In order to answer this issue, the issue No.15 framed by the Tribunal and its finding on that aspect is extracted here under.
"Issue No.15 Whether either party is entitled to interest and at what rate?
131. In a matter like this, where damages or the quantum of loss are not admitted, interest becomes payable only after the same is adjudicated (See: Union vs. Raman Iron Foundry - (1974) 2 SCC 231); Green Hill Exports vs. Coffee Board ILR 2001 Karnataka Page 83 of 92 https://www.mhc.tn.gov.in/judis Arb.O.P.(Com.Div.)Nos.444 of 2021 & 5 of 2022 2950; Iron and Hardware (India) Co. vs. Firm Shyamlal and Bros.
132. Therefore, interest claimed under this head is payable only from the date of the Award."
The Tribunal has awarded interest at the rate of 18% per annum from the date of award till the date of payment.
19.2. The contention of the claimant is that awarding exorbitant interest at the rate of 18% per annum is totally against the law laid down by the Hon'ble Apex Court. On the other hand, according to the respondent, the Tribunal erroneously relied on the Judgment of the Hon'ble Apex Court in the case of Union of India vs. Raman Iron Foundry (cited supra), which no longer holds good after the commencement of the Interest Act, and granted interest only from the date of award till the date of payment. The respondent relied upon the decision of the Hon'ble Apex Court in the case of Assam State Electricity Board and others vs. Buildworth Pvt. Ltd. (cited supra) and contended that interest on damages can be claimed from the date of written notice. Page 84 of 92 https://www.mhc.tn.gov.in/judis Arb.O.P.(Com.Div.)Nos.444 of 2021 & 5 of 2022 19.3. For the purpose of awarding interest, there must be a specific claim from the respondent. In the present case, the respondent issued debit note towards liquidated damages for the Financial Year 2016-17 on 01.04.2018 and for the Financial Year 2017-18 on 04.04.2018. Thus, the respondent is entitled for interest at the rate of 12% per annum from the date of debit note till the date of award. In a similar circumstance, the Hon'ble Apex Court in the case of Assam State Electricity Board and others vs. Buildworth Pvt. Ltd. (cited supra) held that the interest can be awarded by the Court / Arbitrator prior to the arbitration proceedings also i.e., from the date of debit note till the date of award. The relevant portion of the said Judgment is extracted hereunder.
"21. Learned counsel appearing on behalf of the Board, however, submitted that a claim for damages gets quantified upon an adjudication by the arbitrator. Hence, it was submitted that no interest could be awarded prior to the date of the award. Even this aspect of the matter is, in our view, no longer res integra. The arbitrator has power to grant interest on damages under Section 3(1)(b) of the Interest Act, 1978, from the date mentioned in this regard in a written notice claiming such interest. The position which prevailed prior to the Interest Act, 1978 (to the effect that interest on damages would be payable only after ascertainment of damages) has undergone a change after the enactment of the Act. Interest on damages could be Page 85 of 92 https://www.mhc.tn.gov.in/judis Arb.O.P.(Com.Div.)Nos.444 of 2021 & 5 of 2022 claimed from the date of the written notice as contemplated in the law. This aspect of the matter has been set at rest in a decision of this Court in State of Rajasthan Vs. Ferro (2009) 12 SCC 1 Concrete Construction Pvt. Ltd. . The appellant in that case raised a similar contention that in regard to claims in the nature of damages (as contrasted with ascertained sums due) interest would become payable only on quantification and hence the award of interest prior to the date of the arbitral award was contrary to law. Answering this submission, this Court held as follows :
“62. It is no doubt true that the position of law earlier was that in regard to award of damages, interest was not payable before quantification by a court. This was on the assumption that insofar as damages are concerned, there is no liability till determination of the quantum of damages. We may refer to a decision of the Bombay High Court in Iron & Hardware (India) Co. v. FirmShamlal & Bros. [AIR 1954 Bom 423] , where Chagla, C.J., speaking for the Bench, stated the principle thus: (AIR pp. 425-26, para 7) “7. … In my opinion it would not be true to say that a person who commits a breach of the contract incurs any pecuniary liability, nor would it be true to say that the other party to the contract who complains of the breach has any amount due to him from the other party. As already stated, the only right which he has is the right to go to a court of law and recover damages. Now, damages are the compensation which a court of law gives to a party for the injury which he has sustained. But, and this is most important to note, he does not get damages or compensation by reason of any existing obligation on the part of the person who has committed the breach. He gets compensation as a result of the fiat of the court. Therefore, no pecuniary liability arises till the court has determined that the party complaining of the breach is entitled to damages. Therefore, when damages are assessed, it would not be true to say that what the court is doing is ascertaining a pecuniary liability which already existed. The Court in the first place must decide that the defendant is liable and then Page 86 of 92 https://www.mhc.tn.gov.in/judis Arb.O.P.(Com.Div.)Nos.444 of 2021 & 5 of 2022 it proceeds to assess what that liability is. But till that determination there is no liability at all upon the defendant.”
63. The legal position, however, underwent a change after the enactment of the Interest Act, 1978. Sub-
section (1) of Section 3 of the said Act provided that a court (as also an arbitrator) can in any proceedings for recovery of any debt or damages, if it thinks fit, allow interest to the person entitled to the debt or damages at a rate not exceeding the current rate of interest, for the whole or part of the following period, that is to say, — “3. (1)(a) if the proceedings relate to a debt payable by virtue of a written instrument at a certain time, then, from the date when the debt is payable to the date of institution of the proceedings;
(b) if the proceedings do not relate to any such debt, then, from the date mentioned in this regard in a written notice given by the person entitled or the person making the claim to the person liable that interest will be claimed, to the date of institution of the proceedings:”
64. Sub-section (3) of Section 3 made it clear that nothing in that section shall apply to any debt or damages upon which interest is payable as of right, by virtue of any agreement; or to any debt or damages upon which payment of interest is barred, by virtue of an express agreement. The said sub-section also made it clear that nothing in that section shall empower the court to award interest upon interest. Section 5 of the said Act provides that nothing in the said Act shall affect the provisions of Section 34 of the Code of Civil Procedure, 1908.
65. The position regarding award of interest after the Interest Act, 1978 came into force, can be stated thus:
(a) Where a provision has been made in any contract, for interest on any debt or damages, interest shall be paid in accordance with such contract.
(b) Where payment of interest on any debt or damages is expressly barred by the contract, no interest shall be awarded.
(c) Where there is no express bar in the contract and where there is also no provision for payment of interest Page 87 of 92 https://www.mhc.tn.gov.in/judis Arb.O.P.(Com.Div.)Nos.444 of 2021 & 5 of 2022 then the principles of Section 3 of the Interest Act will apply in regard to the pre-suit or pre-reference period and consequently interest will be payable:
(i) where the proceedings relate to a debt (ascertained sum) payable by virtue of a written instrument at a certain time, then from the date when the debt is payable to the date of institution of the proceedings;
(ii) where the proceedings is for recovery of damages or for recovery of a debt which is not payable at a certain time, then from the date mentioned in a written notice given by the person making a claim to the person liable for the claim that interest will be claimed, to date of institution of proceedings.
(d) Payment of interest pendente lite (date of institution of proceedings to date of decree) and future interest (from the date of decree to date of payment) shall not be governed by the provisions of the Interest Act, 1978 but by the provisions of Section 34 of the Code of Civil Procedure, 1908 or the provisions of the law governing arbitration as the case may be.
66. Therefore, even in regard to the claims for damages, interest can be awarded for a (sic period) prior to the date of ascertainment or quantification thereof if (a) the contract specifically provides for such payment from the date provided in the contract; or (b) a written demand had been made for payment of interest on the amount claimed as damages before initiation of action, from the date mentioned in the notice of demand (that is from the date of demand or any future date mentioned therein). In regard to claims for ascertained sums due, interest will be due from the date when they became due. In the present case, interest has been awarded only from 3-9- 1990, the date of the petition under Section 20 of the Act for appointment of arbitrator. We find no reason to alter the date of commencement of interest.”
22. The judgments on the point have been considered in a decision of three Judges of this Court in Union of India Vs. Ambica Construction 2016(6) SCC 36 in the context of a bar of jurisdiction to award interest for the period of the pendency of the arbitration under the 1940 Act if there is an express bar under the contract. Page 88 of 92 https://www.mhc.tn.gov.in/judis Arb.O.P.(Com.Div.)Nos.444 of 2021 & 5 of 2022 The decision notes and affirms the powers of the arbitrator to award interest in the absence of a specific power or prohibition contained in the contract.
23. The contract in the present case contains no bar or prohibition against the award of interest. However, it has been submitted on behalf of the Board that the claimant was paid a sum of Rs 9,16,825/- towards escalation, which was the amount contemplated under Clause 2.3.1 of the Contract. However, as we have noted, this provision in the contract was correctly held by the arbitrator to apply only during the scheduled term of the contract and not in respect of the extended period. The respondent in its initial demands dated 7 March 1986 and 23 April 1986 made claims on account of price escalation and submitted a consolidated bill on 9 June 1986. On 20 April 1987 the claimant addressed a legal notice, claiming a sum of Rs 10,73,416/- together with interest at the rate of 18 per cent per annum. In the circumstances upon the issuance of the above notice, the claimant was clearly entitled to claim interest with effect from 20 April 1987. The High Court was hence in error in setting aside the award of interest.
24. In our view, having regard to what is stated above, claimant is entitled to interest on the sum awarded from 20 April 1987 to 31 December 1997 and thereafter from the date of the decree of the trial Court until payment or realisation. The rate of interest is, however, modified to 12 per cent per annum, in respect of both the above periods."
Therefore, this Court is inclined to award interest to the respondent on the liquidated damages at the rate of 12% per annum from the date of debit note till the date of award. Furthermore, the interest awarded by the Tribunal at the rate of 18% per annum is on the higher side. Even in Page 89 of 92 https://www.mhc.tn.gov.in/judis Arb.O.P.(Com.Div.)Nos.444 of 2021 & 5 of 2022 the case of Assam State Electricity Board and others vs. Buildworth Pvt. Ltd. (cited supra), the Apex Court has modified the interest from 18% per annum to 12% per annum. Therefore, it is necessary to modify the interest awarded by the Tribunal. In the result, the respondent is entitled for interest at the rate of 12% per annum on the liquidated damages from the date of debit note till the date of award. The Award of interest at the rate of 18% per annum from the date of award till the date of realization stands reduced to 12% per annum. The Award of the Tribunal is modified to the above extent.
20. In the result,
(i) The Arbitration Original Petition No.444 of 2022 is dismissed in all aspects excluding to the extent of modification of interest from 18% per annum to 12% per annum.
(ii) The Arbitration Original Petition No.5 of 2022 is allowed to the extent of awarding of interest at the rate of 12% per annum from the date of debit note till the date of award and as answered to Issue No.5 above.
(iii) All other aspects of the Award are hereby confirmed. Page 90 of 92 https://www.mhc.tn.gov.in/judis Arb.O.P.(Com.Div.)Nos.444 of 2021 & 5 of 2022
(iv) Consequently, the connected Applications are closed.
29.09.2023 NCC:Yes/No Index:Yes/No Speaking/Non-Speaking order mbi KRISHNAN RAMASAMY, J.
mbi Pre-Delivery Order in Arb.O.P.(Com.Div.)Nos.444 of 2021 & 5 of 2022 Page 91 of 92 https://www.mhc.tn.gov.in/judis Arb.O.P.(Com.Div.)Nos.444 of 2021 & 5 of 2022 29.09.2023 Page 92 of 92 https://www.mhc.tn.gov.in/judis