Madras High Court
M/S.Chennai Metropolitan Water Supply ... vs Vishwa Infrastructures And Services ... on 28 November, 2024
Author: C.Saravanan
Bench: C.Saravanan
Arb.O.P.(Com.Div.) No.631 of 2022
IN THE HIGH COURT OF JUDICATURE AT MADRAS
Reserved On 28.03.2024
Pronounced On 28.11.2024
CORAM :
THE HONOURABLE MR.JUSTICE C.SARAVANAN
Arb.O.P.(Com.Div.) No.631 of 2022
and
Arb.O.A.No.591 of 2022
and
Arb.A.No.182 of 2022
and
A.No.5154 of 2022
M/s.Chennai Metropolitan Water Supply and
Sewerage Board,
Rep. by its Superintending Engineer (WT & T),
No.1, Pumping Station Road, Chintradripet,
Chennai – 600 002. ... Petitioner
vs.
1.Vishwa Infrastructures and Services Pvt. Ltd.,
Rep. by its Authorized Signatory,
Mr.Goverdhan Reddy Mettu,
No.175, Thirumalai Nagar, Ext.2,
Kolathur, Chennai – 600 099.
2.ICICI Bank Ltd.,
Rep. by its Branch Manager,
Commercial Building Level – 1,
West Wing, 1-11-256, Wall Street Plaza,
Begumpet, Hyderabad – 300 016. ... Respondents
_____________
https://www.mhc.tn.gov.in/judis
Page No. 1 of 82
Arb.O.P.(Com.Div.) No.631 of 2022
Prayer: Original Petition is filed under Section 34(2) of the Arbitration and
Conciliation Act, 1996, to set aside the Arbitral Award dated 06.04.2022,
passed by the learned Sole Arbitrator to the extent to which it is challenged and
direct the respondents to pay the costs.
For Petitioner : Mr.Gautham S.Raman
For R1 : Mr.P.J.Rishikesh
and Mr.Ami V.Kataria
For R2 : Mr.Shivakumar
and Mr.Suresh
COMMON ORDER
By this common order, the following applications and petitions filed by Chennai Metropolitan Water Supply and Sewerage Board are being disposed of:-
Sl. Application / Petitions No. Relief sought for No.
1. Arb.O.P.(Com.Division) To set aside Award dated 06.04.2022 passed No.631of 2022 by the Sole Arbitrator.
2. O.A.No.591 of 2022 in For issuance of a mandatory injunction to Arb.O.P.(Com.Division)N direct the 1st respondent (claimant) to renew o.631 of 2022. the Performance Bank Guarantee for a sum of Rs.79,36,000/- and to keep same alive until the disposition of O.P.(Com.Division) No. 631Of 2022.
3. Arb.A.No.182 of 2022 in To amend the prayer in O.A.No.591 of 2022 O.A.No.591 of 2022 in with the prayer for issuance of a mandatory Arb.O.P.(Com. injunction directing the first respondent to _____________ https://www.mhc.tn.gov.in/judis Page No. 2 of 82 Arb.O.P.(Com.Div.) No.631 of 2022 Division)No.631 of 2022. renew the Performance Bank Guarantee for a sum of Rs.79,36,000/- and keep the same alive pending disposal of Arb.O.P.(Com. Division)No.631of 2022.
4. Arb.A.No.5154 of 2022 in To stay the operation, implementation, Arb.O.P.(Com. enforcement and / or execution of the Division)No.631of 2022 impugned Award dated 06.04.2022, passed by the learned Arbitrator.
2. The Petitioner who is the award debtor before the Arbitral Tribunal has filed the present Original Petition to set aside the impugned Award dated 06.04.2022. The Operative Portion of the Impugned Award reads as under:-
“1.Order of Termination Dated 12.03.2019 (Ex.C9) issued by the1st Respondent is set aside.
2. The Claimant is entitled from the 1st Respondent the amounts of i. Rs. Rs.2,86,91,263/-under Claim-'B', ii. Rs. 1,04,00,877/- under Claim-'D', iii. Rs. 2,37,12,091.57/- under Claim-'E', iv. Rs. 21,00,000/-under Claim-'F', and v. Rs. 15,13,160/-under Claim No.'G'.
3. The Claimant is entitled to get the release of the Performance Bank Guarantee for a value of Rs. 79,36,000/-, from the 1st Respondent. The 1st Respondent has to release the PBG, within 15 days, from the date of receipt of this Award.
4. The other Claims viz., portion of the Claim No 'A' and 'C' are rejected.
5. The 1st Respondent is entitled to adjust the amount of Rs.1,93,39,500/-/- from the amounts payable to the Claimants.
6. The 1st Respondent's Counter Claim towards Risk and Costs is rejected. And interest on
7. After adjusting the above said amount of Rs. 1,93,39,500/- from the amounts awarded in favour of the Claimant, the balance _____________ https://www.mhc.tn.gov.in/judis Page No. 3 of 82 Arb.O.P.(Com.Div.) No.631 of 2022 awarded amount shall be paid to the Claimant, within 30 days from the date of receipt of this Award, failing which the Claimant is entitled to recover the amount of Rs., 4,70,77,891/-
with interest, at the rate of 12%, from the date of this Award, till the date of realisation.
8. As both the parties have succeeded with some claims failed in some claims and so there is no order as to the costs and they have to bear their own costs.”
3. The 2nd Respondent ICICI Bank was merely a formal party before the Arbitral Tribunal, who has been arrayed as the 2nd Respondent in this proceedings as well.
4. Vide the impugned Award dated 06.04.2022, the Arbitral Tribunal has partly allowed claim of the 1st Respondent for a sum of Rs.6,64,17,391.57. The Arbitral Tribunal has allowed a part of the counter claim of the Petitioner for a sum of Rs.1,93,39,500/- out of Rs.11,38,000,000/-. The aforesaid sum of Rs.1,93,39,500/- has been awarded towards the Balance Mobilization Advance paid to the 1st Respondent.
5. The Arbitral Tribunal has also directed the Petitioner to release the _____________ https://www.mhc.tn.gov.in/judis Page No. 4 of 82 Arb.O.P.(Com.Div.) No.631 of 2022 Performance Bank Guarantee furnished by the 1st Respondent for a sum of Rs.79,36,000/- within 15 days from the date of receipt of the Award. From the aforesaid amount awarded, the Petitioner was held entitled to adjust sum of Rs.1,93,39,500/- towards Mobilization Advance. The net amount to be paid by the Petitioner to the 1st Respondent under the impugned Award is Rs.4,70,77,891/-
6. The brief facts of the case are that the Petitioner herein was issued a Work Order dated 30.11.2012 to the 1st Respondent for supplying, laying, jointing, testing and commencing of 2nd Row of 2000 mm Notional Diameter Mild Steel Spirally Welded Pipes from Chembarabakkam Water Treatment Plant upto Poonamallee Bye Pass Road Junction near Saveetha Dental College via Poonamallee Bye Pass Road, Chennai through a National Competitive Bidding process.
7. After the Bid of the 1st Respondent was accepted, a contract was signed _____________ https://www.mhc.tn.gov.in/judis Page No. 5 of 82 Arb.O.P.(Com.Div.) No.631 of 2022 between them on 18.01.2013, which included an agreement, Letter of Acceptance, Notice to Proceed, Contact Data, General and Special Conditions of Contract, Drawings and Bill of Quantitites etc. The term of the contract was 18 months from 21.03.2013 upto 20.09.2014. The scope of the contract awarded are as follows:-
“1. Supplying of pipes of requisite specification, transportation to site, unloading and stacking for a length of 6500 metres.
2. Earthwork excavation, supplying, laying jointing, testing and commissioning of the mild steel pipes including welding, air testing and hydraulic testing of 6500 metres.
3. Manufacturing, supplying, lowering and laying of mild steel special fixtures etc. including transport to site.
4. Supplying and filling of sand bedding, refilling trenches with excavated earth.
5. Supplying, conveying, loading, unloading of CI double flanged sluice valves, air valves, scour valves and construction of RCC Chambers using M25 concrete.
6. Interconnection of 2000 ml MS Main with already laid 2000 mm MS main near Saveetha Dental College.”
8. The work was commenced on 21.03.2013. The scheduled date of completion was 20.09.2014 i.e., 18 months from the date of commencement of the work. On account of several factors, the period for completion was extended by 31 months by the Petitioner i.e., upto 30.04.2017.
_____________ https://www.mhc.tn.gov.in/judis Page No. 6 of 82 Arb.O.P.(Com.Div.) No.631 of 2022
9. The 1st Respondent had also furnished a Performance Bank Guarantee for a sum of Rs.79,36,000/- on 02.01.2013, which was initially valid till 31.01.2015. The said Performance Bank Guarantee was extended from time to time till 31.07.2019.
10. It appears that the 1st Respondent had sought for extension of times on six occasions to complete the work awarded, the last of which, expired on 30.04.2017. Thereafter, a further extension was sought by the 1st Respondent. However, it was not accepted by the Petitioner. The Petitioner thereafter issued a Show Cause Notice dated 14.09.2018 to the 1st Respondent.
11. Threatened by an imminent termination of contract, the 1st Respondent had earlier sought to appoint Mr. S.V. Pandiarajan, as the Adjudicator to resolve the dispute vide letter dated 18.09.2018. Thereafter, another letter was sent to the Petitioner in response to the Show Cause Notice dated 18.09.2018 for appointment of another Adjudicator as the former had expressed his unwillingness to act as an Adjudicator. _____________ https://www.mhc.tn.gov.in/judis Page No. 7 of 82 Arb.O.P.(Com.Div.) No.631 of 2022
12. Thereafter, the 1st Respondent approached this Court in O.A.No.1021 of 2018 under Section 9 of the Arbitration and Conciliation Act, 1996 for ad interim injunction to restrain the Petitioner from invoking the Performance Bank Guarantee furnished by the 1st Respondent.
13. This Court, vide order dated 29.01.2019 in O.A.No.1021 of 2018, granted an order of interim injunction and thus appointed Hon’ble Mr. Justice K.Govindarajan, since Retired, a former Judge of this High Court as the sole Arbitrator to resolve the dispute between the Petitioner and the 1st Respondent.
14. The first sitting of the Arbitral Tribunal was held on 11.03.2019. Thereafter, the 1st Respondent terminated the contract on 12.03.2019 which was received by the 1st Respondent on 18.03.2019. _____________ https://www.mhc.tn.gov.in/judis Page No. 8 of 82 Arb.O.P.(Com.Div.) No.631 of 2022
15. The 1st Respondent thereafter filed a claim petition before the Arbitral Tribunal on 30.05.2019 and a rejoinder to the counter filed by the Petitioner on various dates. Along with the counter, the 1st Respondent also made a counter claim on 05.07.2021.
16. In the claims filed before the Arbitral Tribunal, the 1st Respondent prayed for the following reliefs:-
1. To declare the termination as bad and non est in law and consequently, award loss of profits and damages to the tune of Rs.2,64,40,000/-
2. Unpaid RA Bill No.7 to the tune of Rs.2,21,08,642.42.
3. Laying charges to the tune of Rs.49,52,357.47.
4. Retention money withheld to the tune of Rs.1,04,00,877/-
5. Commissioning charges to the tune of Rs.2,37,12,091,57/-
6. Liquidated damages withheld from bills – Rs.21,00,000/-
7. Overhead charges to the tune of Rs.15,13,160/-
8. Return of Performance Bank Guarantee to the tune of Rs.79,36,000/-
9.Bank guarantee validity extension charges to the tune of Rs.2,14,240/-
17. In the counter-claims filed before the Arbitral Tribunal, the Petitioner _____________ https://www.mhc.tn.gov.in/judis Page No. 9 of 82 Arb.O.P.(Com.Div.) No.631 of 2022 prayed for the following reliefs:-
1.The Balance Mobilization Advance to be recovered from the Claimant of Rs.2,64,94,973/-
2.A sum of Rs.8.73 Crores towards risk and costs to complete the project works.
18. On behalf of the 1st Respondent Mr.Narasimhulu filed proof affidavit in lieu of Chief Examination on 12.11.2019 and marked Exhibits C.1 to C.71 before the Arbitral Tribunal. He was also subjected to cross-examination by the Petitioner herein. On behalf of the Petitioner, Mr.M.Murugesan, it's Executive Engineer, filed a proof affidavit in lieu of chief examination on 17.11.2021. He was examined as the sole witness of the Petitioner and marked Exhibits R.1 to R.8.
19. The Arbitral Tribunal framed the following issues :-
i. Whether the termination of the contract on 18.03.2017 was valid and sustainable?
ii. Who was responsible for the delay, either the 1st Respondent (Petitioner herein) or the claimant (1st Respondent herein)?
iii. Whether the claimant (1st Respondent herein) was entitled for the claims made?
_____________ https://www.mhc.tn.gov.in/judis Page No. 10 of 82 Arb.O.P.(Com.Div.) No.631 of 2022 iv. Whether the claimant (1st Respondent herein) was entitled for interest? If so, on what amount, for what period and at what rate?
v. Any other relief including the costs, the parties are entitled?
vi. Whether the 1st Respondent (Petitioner herein) was entitled for counter claims as claimed in the additional counter?
20. Details of claims of the 1st Respondent made before the Arbitral Tribunal and the amounts awarded by the Arbitral Tribunal are as under:-
Claims of the 1st respondent in Amount awarded in Rupees Rupees Claim A Towards loss of profit 1,64,40,000 -
and damages (+)1,00,00,000
respectively -----------------
= 2,64,40,000
-----------------
Claim B On account of unpaid 2,60,58,215.10* 2,86,91,263.00
RA Bills along with
interest
Claim C Towards laying charges 49,52,357.48 -
Claim D Towards retention 1,04,00,877.00 1,04,00,877.00
_____________
https://www.mhc.tn.gov.in/judis
Page No. 11 of 82
Arb.O.P.(Com.Div.) No.631 of 2022
Claims of the 1st respondent in Amount awarded in Rupees
Rupees
monies
Claim E Towards 2,37,12,091.57 2,37,12,091.57
commissioning charges
Claim F Towards liquidated 21,00,000.00 21,00,000.00
damages
Claim G Towards 15,13,160.00 15,13,160.00
reimbursement of
overhead expenses
between May 2017 and
May 2019
Claim H Towards return of 79,36,000
Performance Bank
Guarantee
Towards interest at
13.5% per annum
Towards costs of
arbitration and the
expenses
TOTAL 6,64,17,391.57
[Note* : As against a claim of Rs.2,21,08,642.42 claimed towards Running Account Bill 7.]
21. Details of counter-claims of the Petitioner made before the Arbitral Tribunal and the amounts awarded by the Arbitral Tribunal are as under:-
_____________ https://www.mhc.tn.gov.in/judis Page No. 12 of 82 Arb.O.P.(Com.Div.) No.631 of 2022 Counter-Claim made by the Petitioner in Rs. Amount awarded in Rs.
Counter- Balance 1,98,39,500 1,93,39,500
Claim No.1 Mobilization (+) 66,55,473 *
Advance -----------------
= 2,64,94,973
-----------------
Counter- Risks and Costs to 8,73,00,000
Claim No.2 complete the
contract
TOTAL 1,93,39,500
[Note* : Towards interest]
22. The Petitioner's counter claim for risk and cost Rs.8.73 Crores was rejected. However, the claim for refund of balance mobilisation advance of Rs.1,93,39,500/- was allowed and to be adjusted from the above referred sums awarded to the 1st Respondent.
23. After adjusting the above said amount of Rs.1,93,39,500/- paid towards Mobilisation Advance, the net balance amount payable to the 1st _____________ https://www.mhc.tn.gov.in/judis Page No. 13 of 82 Arb.O.P.(Com.Div.) No.631 of 2022 Respondent of Rs.4,70,77,891/- [Rs.6,64,17,391.57 – Rs.1,93,39,500/-] was directed to be paid by the Petitioner within 30 days from the date of the receipt of the Award, failing which, the 1st Respondent was entitled to recover the said amount along with 12% interest p.a. from the Petitioner.
Submissions on behalf of the Petitioner:-
24. The learned counsel for the Petitioner submitted that the impugned Award passed by the learned Arbitrator on 06.04.2022 is patently illegal, as it is based on no evidence and ignores vital evidence of the Petitioner as per the decision of the Hon'ble Supreme Court in Ssangyong Engg and Construction Co. Ltd. vs. National Highways Authority India, (2019) 15 SCC 131).
25. The learned counsel for the Petitioner further submitted that the primary reason for declaring the termination as bad in law is that work fronts of 870 metres was not made available to the 1st Respondent for pipe laying work.
It is submitted that the Arbitral Tribunal failed to consider that TNRDC permission that was accorded on 20.11.2017. It is further submitted that there _____________ https://www.mhc.tn.gov.in/judis Page No. 14 of 82 Arb.O.P.(Com.Div.) No.631 of 2022 were unhindered portions, where pipe laying work could be completed but was not completed.
26. It is submitted that the Arbitral Tribunal failed to consider Clause 21.1 of the Contract which states that if a site is partly handed over, the delay in handover cannot be treated as a compensation event.
27. It is further submitted that the contentions of the 1st Respondent that most of the sites comprising of 870 metres was on CMWSSB land and that an earlier contractor had already laid the pipeline on this stretch for 11 Kms has not been discussed in the Award.
28. It is submitted that the Arbitral Tribunal has neither considered nor discussed nor has given proper reasons in the impugned Award. Therefore, it is submitted that the impugned Award apart from suffering from patent illegality, is also a non-speaking Award, warranting interference at the hands of this _____________ https://www.mhc.tn.gov.in/judis Page No. 15 of 82 Arb.O.P.(Com.Div.) No.631 of 2022 Court.
29. The learned counsel further submitted that the Arbitral Tribunal has failed to consider the following documents, which would show that no work was carried on by the 1st Respondent from 06.08.2016 to 12.05.2017 [Ex.C-27, C-28, C-30 and C-33], yet the Arbitral Tribunal has awarded the amounts to the 1st Respondent.
30. It is submitted that the 1st Respondent vide various communications has specifically stated that no work has been carried on site from 06.08.2016 to 12.05.2017 based on the test conducted on the laid pipes, which was never denied by the 1st Respondent. The said documents as well as the contentions of the Petitioner was also never discussed in the impugned Award.
31. It is further submitted that from 19.12.2017, on various dates, the 1st Respondent himself called upon the Petitioner to mutually foreclose the contract and expressed inability to perform the obligation under the contract. It is _____________ https://www.mhc.tn.gov.in/judis Page No. 16 of 82 Arb.O.P.(Com.Div.) No.631 of 2022 submitted that there is no provision in the contract for such request to be entertained and further, these communications disclose that the 1st Respondent refused to perform it’s part of it’s obligations under the contract. It is submitted that the termination of the contract on account of refusal of the 1st Respondent to perform, can be deemed to be illegal. It is further submitted that such a finding is indeed contrary to Section 39 of the Indian Contract Act and the award is unconscionable.
32. The learned counsel for the Petitioner further submitted that the Arbitral Tribunal further committed an error since having held that the 1st Respondent himself could not complete the work within the contracted period and therefore, the initial delay was on the part of the 1st Respondent and that the 1st Respondent himself in 2015 failed to achieve two important milestones would show that the Petitioner herein was well within its right to terminate the contract.
33. It is further submitted that as per Section 28(3) of the Arbitration and _____________ https://www.mhc.tn.gov.in/judis Page No. 17 of 82 Arb.O.P.(Com.Div.) No.631 of 2022 Conciliation Act, 1996 the learned Arbitrator has to pass an Award only based on the contract and trade practices, however, in the present case, the said provision has been ignored by the Arbitral Tribunal.
34. The learned counsel for the Petitioner would further submit that admittedly, the security for the Mobilisation Advance had expired on 20.09.2017. As per clause 59, failure to maintain adequate security is also a fundamental breach of contract. Therefore, even on this score also, the termination of the contract could not be termed to be illegal. It is submitted that though failure to maintain security is not a reason as mentioned in the Termination Order, the Hon'ble Supreme Court in the case of Jugilal Kamalapat vs. Pratapmal Rameshway, (1978) 1 SCC 69, held that a opposite party can justify repudiation of contract on any ground, which existed at the time of termination.
35. The learned counsel for the Petitioner further submitted that the Arbitral Tribunal had permitted the Petitioner to file an additional affidavit _____________ https://www.mhc.tn.gov.in/judis Page No. 18 of 82 Arb.O.P.(Com.Div.) No.631 of 2022 pertaining to the certification of the various running account bills. Having permitted the Petitioner to file an additional affidavit and various documentary evidence, the contentions raised in the affidavit find no place in the Award. It is therefore submitted that the impugned award is therefore liable to be set aside.
36. It is further submitted that Running Account Bill No.7 was raised for work that was never executed by the 1st Respondent. In this connection the Petitioner referred to the averments raised in the affidavit in support of this contention. It is submitted that, indeed, even the examination of the 1st Respondent's witness in this regard, has not even been discussed in the impugned Award.
37. Therefore, in view of the above points raised against of payment of Running Account Bill No.7, merely relying on Paragraph 15 of the Additional Counter Statement, without any discussion on the above contentions with regard to Running Account Bill No.7, would show that the impugned Award is _____________ https://www.mhc.tn.gov.in/judis Page No. 19 of 82 Arb.O.P.(Com.Div.) No.631 of 2022 patently illegal, as it is based on no evidence and ignores vital evidence in support of the Petitioner. Therefore, the claim for payment of Running Account Bill No.7 ought to necessarily be set aside.
38. The learned counsel for the Petitioner submitted that, the Arbitral Tribunal having held that the 1st Respondent was also responsible for the delay, erred in holding that the Petitioner could not impose liquidated damages on the 1st Respondent. It is submitted tat the finding runs contrary to the terms of the Agreement, since the Petitioner has the right to impose Liquidated Damages on the 1st Respondent for the delay.
39. The learned counsel for the Petitioner also submitted that awarding repayment of commissioning charges is against public policy, since it is against the terms of the contract. It is submitted that the claim for laying charges was rejected on the basis that these amounts can be released only when the pipelines were successfully tested as per Clause 22.3 of the Contract Data and since the _____________ https://www.mhc.tn.gov.in/judis Page No. 20 of 82 Arb.O.P.(Com.Div.) No.631 of 2022 uncertified pipes of 472 metres are in bits and pieces, the same could never be tested.
40. It is submitted that the Commissioning Charges is on the same footing, as the Claims for laying charges, since Section 22.3 states that commissioning charges will be released only on successful commissioning of the pipeline. The same provisions of the contract data applies to both laying and commissioning, therefore, not relying on the contract data, but allowing the claim only on the basis that there is no denial that the commissioning charges were withheld is against the terms of the contract and public policy and therefore, the same deserves to be set aside.
41. It is submitted that the Arbitral Tribunal has incorrectly recorded the balance mobilization amount held by the 1st Respondent as Rs.1,93,39,500/- whereas the actual amount is Rs.1,98,39,500/-. It is further submitted that the advance paid to the 1st Respondent is charged interest at 13.5% p.a. as per the _____________ https://www.mhc.tn.gov.in/judis Page No. 21 of 82 Arb.O.P.(Com.Div.) No.631 of 2022 Conditions of Contract clause 51 r/w Contract date Clause 21. It is therefore submitted that the Arbitral Tribunal ought to have accorded interest payable on the balance mobilization amount as per the Agreement.
The submissions of the 1st Respondent:-
42. The learned counsel for the 1st Respondent submitted that it is a well- established proposition that an Award can be set aside only on the grounds of patent illegality and other extremely narrower grounds/scope as given under Section 34 of the Arbitration and Conciliation Act, 1996. In this regard, a reference was made to the following decisions of the Hon'ble Supreme Court:-
i. Associate Builders vs. Delhi Development Authority, (2015) 3 SCC 49 ii. Ssangyong Engg and Construction Co. Ltd. vs. National Highways Authority India, (2019) 15 SCC 131.
43. The learned counsel for the 1st Respondent further submitted that the Courts should not interfere with an Award merely because an alternative view on facts and interpretation of contract, is possible. In this regard, a reference _____________ https://www.mhc.tn.gov.in/judis Page No. 22 of 82 Arb.O.P.(Com.Div.) No.631 of 2022 was made to the decision of the Hon'ble Supreme Court in Dyna Technologies Private Ltd. vs. Crompton Greaves Ltd., (2019) 20 SCC 1.
44. The learned counsel for the 1st Respondent submitted that the Courts cannot undertake an independent assessment of the merits of the Award. In this regard, a reference was made to the decision of the Hon'ble Supreme Court in MMTC Ltd. vs. Vedanta Ltd., (2019) 4 SCC 163.
45. In support of the above submissions, the learned counsel for the 1st Respondent has also relied on the following judgments of the Hon'ble Supreme Court.
i. UHL Power Company Limited vs. State of Himachal Pradesh, (2022) 4 SCC 116.
ii. M/s.Larsen Air Conditioning and Refrigeration Company vs. Union of India & Ors. [Civil Appeal No(s). 3798 of 2023, dated 11.08.2023]
46. The learned counsel for the 1st Respondent further submitted that _____________ https://www.mhc.tn.gov.in/judis Page No. 23 of 82 Arb.O.P.(Com.Div.) No.631 of 2022 'Patent Illegality' can be invoked only if the Award is contrary to the substantial provisions of law or contrary to the terms of the contract or the terms of the agreement have been considered in such way that no fair minded or a reasonable person could do so or if the view taken by the Arbitrator was not even a possible view.
47. The learned counsel for the 1st Respondent further submitted that right from beginning, the Petitioner failed in its reciprocal obligation of handing over hindrance free site, which is in violation of Clauses 1 and 5 of Contract Data.
48. It is further submitted that vide Ex.C58A, letter dated 12.12.2012, a notice to commence the work was issued, and further vide Ex.C58B, letter was issued as though the site was handed over to the 1st Respondent/ claimant on 21.03.2013 . This remains only in paper, since in reality, the entire site was never handed over to the 1st Respondent.
_____________ https://www.mhc.tn.gov.in/judis Page No. 24 of 82 Arb.O.P.(Com.Div.) No.631 of 2022
49. It is submitted that, as on date of termination, the entire site was not handed over to the 1st Respondent and further, the entire site was occupied with hindrances and what was handed over was bits and pieces of land. Thus, the 1st Respondent was forced to accept the starting date of contract as 21.03.2013 and the date of completion as 20.09.2014 (18 months). That apart, the 1st Respondent/claimant faced various hindrances, which had an impact on the execution of work and hence, delayed the work considerably and the said delays are,
(i) Delay due to hindrances in the available small bits of site [Exs.C-2, C-59, C-61 and C-62 to C-64];
(ii) Delay due to piece meal handing over of site by the Petitioner and other external factors beyond the control of the 1st Respondent/claimant [Exs.C-14, C-17, C-19, C-23, C-25, C-26, C-32, C-34, C-62 to C-64];
(iii) Delay in providing Drawings [Exs.C-23, C-26, C-28, C- 31, C-32, C-34, C-49, C-50, C-51, C-52, C-62 and C-63];
(iv) Non-availability of work fronts [Exs.C-16, C-17, C-19, C-21, C-23, C-25, C-26, C-28, C-31, C-32, C-34 to C-37, C- 40, C-41, C-49 to C-53, C-61 to C-64, C-66 and C-67];
(v) Delay in making payment [Exs.C-16, C-17, C-24, C-26, _____________ https://www.mhc.tn.gov.in/judis Page No. 25 of 82 Arb.O.P.(Com.Div.) No.631 of 2022 C-28, C-29, C-31, C-32, C-34, C-36, C-37 and C-40];
(vi) Delay in obtaining third party permission and clearances [Exs.C-16, C-17, C-19, C-21, C-23, C-25, C-26, C-28, C-31, C-32, C-34 to C-37, C-49, C-50, C-52, C-53, C-62 and C-64 to C-67]; and
(vii) Other delays [Exs.C-14, C-21, C-32 and C-61].
50. It is further submitted that out of the total extent of 6500 meters, until July, 2017 (till extension of time was granted), the 1st Respondent/claimant was able to carry out 4744 meters and in the remaining extent of 1756 meters (6500 - 4744), the 1st Respondent was prevented from carrying out the work, since the said stretch of site was filled with hindrances and encroachments.
51. It is submitted that, despite being unable to provide encroachment free work front as stated supra, the Petitioner deliberately issued (Ex.C-5) Show Cause Notice dated 14.09.2018, threatened to terminate the contract and blacklist the 1st Respondent. Hence, the 1st Respondent was constrained to invoke the Arbitration Clause.
52. The learned counsel for the 1st Respondent submitted that, before the Arbitral Tirbunal, the Petitioner failed to establish as to under which grounds _____________ https://www.mhc.tn.gov.in/judis Page No. 26 of 82 Arb.O.P.(Com.Div.) No.631 of 2022 provided under Clause 59, the contract was terminated.
53. That apart, it is submitted that the Petitioner was unable to fulfill its reciprocal obligation of providing hindrance free and encroachment free work site for completion of work as pointed out by the 1st Respondent/claimant, vide Exs.C-49, C-50, C-62, C-63, C-66 and C-67. Further, with regard to consequential relief of damages and loss of profit, the same was dismissed.
54. The learned counsel for the 1st Respondent submitted that insofar as Claim - B, i.e., to award a sum of Rs.2,21.08,642.42/- along with Interest towards unpaid Running Account Bill No.7 is concerned, the Arbitral Tribunal allowed the same along with Interest, based on the admission made by the Petitioner and the defence taken by the Petitioner that the Running Account Bill No.7 was not paid, since the Engineer of the Petitioner did not certify the said bill, was negated by the Arbitral Tribunal based on Clauses 42 and 43 of GCC.
55. The learned counsel for the 1st Respondent submitted that insofar as _____________ https://www.mhc.tn.gov.in/judis Page No. 27 of 82 Arb.O.P.(Com.Div.) No.631 of 2022 Claim-C towards Laying Charges to the tune of Rs.49,52,357.47/- is concerned, the same was rejected by the Arbitral Tribunal and the same was not challenged by the 1st Respondent and hence, it was not a subject matter of challenge in the present Original Petition.
56. The learned counsel for the 1st Respondent submitted that insofar as Claim-D release of Retention Monies to the tune of Rs.1,04,00,877/- is concerned, the Aribitral Tribunal allowed the same based on Ex.C-44 and the fact that the Petitioner did not dispute to the quantum of amount.
57. It is further submitted that the stand taken by the Petitioner that since the 1st Respondent failed to complete the work, Retention Monies that were withheld was set aside by the Arbitral Tribunal based on Clause 48.2 & 48.3 of GCC.
58. The learned counsel for the 1st Respondent submitted that insofar as Claim - E towards withholding Commissioning Charges from Running _____________ https://www.mhc.tn.gov.in/judis Page No. 28 of 82 Arb.O.P.(Com.Div.) No.631 of 2022 Account Bill Nos.1 to 6 to the tune of Rs.2,37,12,091.57 is concerned, the Arbitral Tribunal allowed the same based on Ex.C-47 and the fact that the quantum of the said amount was not denied rather accepted by R.W.I in Question No. 91.
59. The learned counsel for the 1st Respondent submitted that insofar as Claim-F refund of Adhoc Penalty to the tune of Rs.21,00,000/- is concerned, the Arbitral Tribunal allowed the same, since no provision in the Contract to levy Adhoc Penalty and more so, since no loss pleaded or proved to show any legal injury suffered by the Petitioner.
60. The learned counsel for the 1st Respondent submitted that insofar as Claim-G towards Overheads to the tune of Rs.15,13,160/- is concerned, the same was allowed based on documentary evidence, i.e., Ex.C-69 series and further based on the fact that the same was not denied or disputed by the Petitioner.
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61. The learned counsel for the 1st Respondent submitted that insofar as Claim – H relating to return of Performance Bank Guarantee is concerned, the Arbitral Tribunal directed the Petitioner to release the said Performance Bank Guarantee, as contract was wrongfully terminated and therefore, the Peformance Bank Guarantee cannot be withheld forever and also the Petitioner did not establish that it can withheld the same. However, the claim for Bank Charges to keep the Peformance Bank Guarantee alive was dismissed.
62. The learned counsel for the 1st Respondent submitted that insofar as Counter Claim No.1 i.e., Rs.2,64,94,973/- towards Balance Mobilization Advance along with interest is concerned, the Arbitral Tribunal partly allowed the same i.e., the Return of Mobilization Advance was allowed. However, the interest was denied on the ground that the Petitioner was withholding more monies of the 1st Respondent and hence, the interest not payable.
63. The learned counsel for the 1st Respondent submitted that insofar as Counter Claim No.2 i.e., Rs.8.73 Crores towards Risk and Cost is concerned, _____________ https://www.mhc.tn.gov.in/judis Page No. 30 of 82 Arb.O.P.(Com.Div.) No.631 of 2022 the Arbitral Tribunal dismissed the same on the ground that R.W.1 in his cross- examination, admitted that the balance work alleged to have been not carried out by 1st Respondent even on the date of Award was pending in tender stage.
64. It is further submitted that since the Petitioner was found to have caused delay in handing over hindrance free and encroachment free site and termination being held to be void, the Petitioner cannot claim risk and cost. In essence, the Petitioner herein was directed to pay 1st Respondent Rs.4,70,77,891/- within 30 days from date of Award and on failure to pay the same, the 1st Respondent is entitled to interest at 12% from the date of the Award till the date of realization.
65. The learned counsel for the 1st Respondent further submitted that admittedly, the Petitioner failed to handover encroachment free site to the 1st _____________ https://www.mhc.tn.gov.in/judis Page No. 31 of 82 Arb.O.P.(Com.Div.) No.631 of 2022 Respondent. Further, the averment that the Arbitral Tribunal did not consider Clause 21.1 is misleading, since nowhere in the counter affidavit or additional counter affidavit, such pleadings were made. Further, the averment that 870 meters of site was filled with encroachment was based on no evidence is illegal, as the same was based on Ex.C-28, R.W.l's Deposition.
66. It is further submitted that the averment that the 1st Respondent had a duty to carry out the work even without work front until the contract was terminated and the failure of the Arbitral Tribunal to consider the same is misleading and without any basis, more so, when the Arbitral Tribunal has made a specific finding that the available site in bits and pieces was filled with encroachment.
67. The learned counsel for the 1st Respondent submitted that the Arbitral Tribunal erred in holding that the termination was illegal and bad. The said averment is erroneous on the ground that the Arbitral Tribunal after considering Clauses 59 and 60 and based documentary evidences and the well _____________ https://www.mhc.tn.gov.in/judis Page No. 32 of 82 Arb.O.P.(Com.Div.) No.631 of 2022 settled legal principles, held that the termination was bad, since the Petitioner failed to hand over encroachment free site and thus, failed to perform its reciprocal obligation.
68. The learned counsel for the 1st Respondent further submitted that the Arbitral Tribunal has rightly awarded refund of Retention Money, since the contract was wrongfully terminated and when it provides for refund of Retention Monies (Clause 48.2 & 48.3 of GCC), the same ought to be refunded.
69. The learned counsel for the 1st Respondent further submitted that the liquidated damages was dismissed based on procedural lapses and also based on the well settled principle of law.
70. The learned counsel for the 1st Respondent further submitted that the Arbitral Tribunal has allowed the Overhead Expenses based on Documentary Evidence (Ex.C-69 series).
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71. The learned counsel for the 1st Respondent further submitted that the averments made by the Petitioner that the Arbitral Tribunal rightly dismissed the Laying Charges under Clause 22.3 of Contract Data and under the same Clause, erred in allowing Commissioning Charges, is illegal, as the Arbitral Tribunal rightly held that while Laying Charges was to be released on completion of Hydraulic Test (which admittedly was not carried out), Commissioning Charges was payable on commissioning of entire Pipework and the 1st Respondent was prevented from completing and commissioning the contract due to non-availability and of encroachment free work site by Petitioner.
72. The learned counsel for the 1st Respondent further submitted that the averment of the Petitioner that Return of Performance Bank Guarantee was illegal, as the Arbitral Tribunal failed to consider that the 1st Respondent owes money to Petitioner, is illegal and the same was awarded based on no counter _____________ https://www.mhc.tn.gov.in/judis Page No. 34 of 82 Arb.O.P.(Com.Div.) No.631 of 2022 with regard to this claim and the fact that Performance Bank Guarantee cannot be withheld after termination of contract.
73. The learned counsel for the 1st Respondent further submitted that the averment of the Petitioner that the Arbitral Tribunal wrongfully allowed unpaid Running Account Bill No.7 without considering Ex.C-33 is illegal, since the Arbitral Tribunal has rightly considered the fact that the Petitioner admitted to the claim but only disputed to the quantum and further, justified 'no payment' on the ground that the said bill was not certified. The Arbitral Tribunal based on the admission of the Petitioner and R.Wl's admission and Ex.C-24, allowed the same.
74. The learned counsel for the 1st Respondent further submitted that the contention of the Petitioner that the impugned Award suffers from perversity and also runs contrary to the contractual conditions and factual position and the Award is based on no evidence is without any basis. _____________ https://www.mhc.tn.gov.in/judis Page No. 35 of 82 Arb.O.P.(Com.Div.) No.631 of 2022
75. The learned counsel for the 1st Respondent further submitted that as far as the ground raised by the Petitioner that the Arbitral Tribunal erroneously recorded wrong amount of Rs.1,93,39,500/- instead of Rs.1,98,39,500/- is concerned, the Petitioner ought to have pointed out such error on receipt of Award and got the Award corrected (Section 33 of Arbitration and Conciliation Act) and cannot raise the same as a ground for challenge. That apart, since after adjusting the Counter Claim against Claims, nothing remains due to the Petitioner, the question of granting interest does not arise.
76. The learned counsel for the 1st Respondent further submitted that the view taken by the Arbitral Tribunal was perfectly valid one and the Arbitral Tribunal applied its mind, perused and considered all the relevant clauses of the Agreement, took into account the surrounding circumstances, analyzed the documentary and oral evidence and ultimately, passed an Award.
77. It is further submitted that, in the present Award, which is the subject matter of the present Section 34 proceedings, it is important to note that the _____________ https://www.mhc.tn.gov.in/judis Page No. 36 of 82 Arb.O.P.(Com.Div.) No.631 of 2022 Arbitral Tribunal was called upon to interpret/analyze the contract, as it was their duty and primary responsibility to determine the terms of the agreement, which they have done so and rendered their findings. Presently, the Petitioner challenging the Award is only attempting to substitute their view and is expecting this Court to do so under Section 34 of the Arbitration and Conciliation Act, which is impermissible in law.
78. The learned counsel for the 1st Respondent further submitted that the Arbitral Tribunal was the highest fact-finding authority before whom the entire evidences and documents were available and has rendered a finding, which is perfectly valid. The Arbitral Tribunal has not rendered a finding, which can be termed as 'not a possible view' at all. It is to be seen that even if the Arbitrator's view is a plausible one, then, the Courts under Section 34 of the Arbitration and Conciliation Act, cannot interfere with the said Award.
79. The learned counsel for the 1st Respondent also submitted that while interpreting the terms of the contract, a view taken is such that, no reasonable _____________ https://www.mhc.tn.gov.in/judis Page No. 37 of 82 Arb.O.P.(Com.Div.) No.631 of 2022 person could have arrived at such decision, which would only then mean that the Award suffers from irrationality and perversity, which will warrant interference and therefore, prayed for dismissal of this Petition.
80. I have considered the submissions of the learned counsel for the Petitioner and the learned counsel for the 1st Respondent. I have also considered the records that have been produced before this Court and the case laws submitted on behalf of both the Petitioner and the 1st Respondent.
81. There is no doubt that the scope of interference to an Award, under Section 34 of the Arbitration and Conciliation Act, 1996 is limited and has now been settled by way of a catena of judgments of the Hon’ble Supreme Court.
82. This Court can neither sit as a Court of appeal or re-appreciate the evidence placed before the Arbitral Tribunal or substitute the finding of the Arbitral Tribunal with its own conclusion on facts or evidence.
83. The Hon’ble Supreme Court in The Project Director, NHAI V. M. _____________ https://www.mhc.tn.gov.in/judis Page No. 38 of 82 Arb.O.P.(Com.Div.) No.631 of 2022 Hakim, (2021) 9 SCC 1, held that the power to set aside an Arbitral Award under Section 34 of the Arbitration And Conciliation Act, 1996 does not include the authority to modify the Award.
84. It further held that an Award can be 'set aside' only on limited grounds as specified in Section 34 of the Act as it is not an appeal provision. It further held that an application under Section 34 for setting aside an Award does not entail any challenge on merits to an Award.
85. The Hon’ble Supreme Court in Ssangyong Engineering and Construction Co Ltd versus National Highway Authority of India, (2019) 15 SCC 131, has further held that an Award can be set aside on the ground of patent illegality under Section 34 (2-A) of the Arbitration and Conciliation Act, 1996 only where the illegality in the Award goes to the root of the matter.
86. It further held that erroneous application of law by an Arbitral Tribunal and the re-appreciation of evidence is also not available to a Court under Section 34 (2-A) of the Arbitration and Conciliation Act, 1996. _____________ https://www.mhc.tn.gov.in/judis Page No. 39 of 82 Arb.O.P.(Com.Div.) No.631 of 2022
87. The Court also held that the above ground is available only where the view taken by the Arbitral Tribunal is an impossible view while construing the contract between the parties or where the award of the tribunal lacks any reasons.
88. The Court also held that an award can be set aside only if an arbitrator/arbitral tribunal decide(s) the question beyond the contract or beyond the terms of reference or if the finding arrived by the Arbitral Tribunal is based on no evidence or ignoring vital evidence or is based on documents taken as evidence without notice to the parties.
89. In Patel Engineering Ltd Vs. NEEPCO, (2020) 7 SCC 167, the Hon’ble Supreme Court held that patent illegality as a ground for setting aside an award is available only if the decision of the arbitrator is found to be perverse or so irrational that no reasonable person would have arrived at the same or the construction of the contract is such that no fair or reasonable person would take _____________ https://www.mhc.tn.gov.in/judis Page No. 40 of 82 Arb.O.P.(Com.Div.) No.631 of 2022 or that the view of the arbitrator is not even a possible view.
90. In McDermott International Inc. v. Burn Standard Co. Ltd, (2006) 11 SCC 181, the Hon’ble Supreme Court held that while interpreting the terms of a contract, the conduct of parties and correspondences exchanged would also be relevant factors and it is well within the arbitrator's jurisdiction to consider the same.
91. In Sutlej Construction Ltd. v. UT of Chandigarh, (2018) 1 SCC 718, the Hon’ble Supreme Court has held that when the Award is a reasoned one and the view taken is plausible, re-appreciation of evidence is not allowed while dealing with the challenge to an Award under Section 34 of the Arbitration and Conciliation Act, 1996 for setting aside an Award. It further held that the proceedings challenging an Award cannot be treated as a First Appellate Court against a decree passed by a Trial Court.
92. In Sheladia Associates Inc. V. TN Road Sector Project II, Represented by its Project Director, 2019 SCC OnLine Mad 17883, this _____________ https://www.mhc.tn.gov.in/judis Page No. 41 of 82 Arb.O.P.(Com.Div.) No.631 of 2022 Court reminded itself of the Hodgkinson Principle which has been explained in the oft-quoted case of the Hon’ble Supreme Court in Associate Builders V. Delhi Development Authority, (2015) 3 SCC 49, wherein it was held that Hodgkinson Principle in simple terms means that the Arbitral Tribunal is the best judge with regard to quality and quantity of evidence before it. It further held that if there is no infraction of Section 28(3) of the Arbitration And Conciliation Act, 1996, the question of challenge on the grounds of public policy does not arise.
93. Keeping these broad principle, I shall now discuss the issues answered in the Impugned Award. The Arbitral Tribunal has awarded Claim- B, Claim-D, Claim-E, Claim-F, Claim-G and Claim-H* to the 1st Respondent under the following Heads:-
Claims Heads of claims of the 1st Amount awarded Respondent B On account of unpaid RA Bills Rs. 2,86,91,263.00 along with interest D Towards retention monies Rs. 1,04,00,877.00 E Towards commissioning charges Rs. 2,37,12,091.57 F Towards liquidated damages Rs. 21,00,000.00 _____________ https://www.mhc.tn.gov.in/judis Page No. 42 of 82 Arb.O.P.(Com.Div.) No.631 of 2022 Claims Heads of claims of the 1st Amount awarded Respondent G Towards reimbursement of Rs. 15,13,160.00 overhead expenses between May 2017 and May 2019 TOTAL Rs. 6,64,17,391.57 [Note* : The Arbitral Tribunal allowed Claim-H towards return of the Performance Bank Guarantee for Rs.79,36,000/- alone.]
94. From the above, a sum of Rs.1,93,39,500/- [as against Rs.1,98,39,500/-] granted towards the Counter Claim No.1 of the Petitioner towards Balance Mobilization Advance paid to the 1st Respondent, was set-off against the award amount of Rs.6,64,17,391.57/-awarded to the 1st Respondent. Thus, a net award amount in the Impugned Award is for Rs.4,70,77,891/- [6,64,17,391.57 - 1,93,39,500].
95. The Arbitral Tribunal has also awarded interest at the rate of 12% to the 1st Respondent if the Award amount of Rs.4,70,77,891/- is not paid within 30 days of receipt of the Award. Thus, in the Impugned Award, the Petitioner is bound to pay further interest at 12% on Claim-B, on the Award amount of Rs.4,70,77,891/- if the Impugned Award is not disturbed. _____________ https://www.mhc.tn.gov.in/judis Page No. 43 of 82 Arb.O.P.(Com.Div.) No.631 of 2022
96. It is evident from a reading of the pleadings before the Arbitral Tribunal, the documents that were marked as exhibits before the Arbitral Tribunal and the Impugned Award dated 06.04.2022, that Running Account Bills Nos.1 to 6 as also Running Accounting Bill No.7, pertains to the work purportedly completed by the 1st Respondent.
97. The status of work cited by the 1st Respondent in the Claim Statement filed before the Arbitral Tribunal is detailed as below:-
Work Completed Work to be performed
Pipe Laid 4744m Balance to be 1756m
Laid
Pipe Tested 4272m Balance to be 472m
Tested
Value of Work Rs.23.24 Crores Balance Work Rs.16.44 Crores done to be done
98. What has not been specifically stated both in the pleadings before the Arbitral Tribunal and in Impugned Award is that after deductions were made for a sum of Rs.21,00,000/- towards Liquidated Damages covered by Claim-F and Rs.1,04,00,877/- towards Retention Amount covered by Claim-D for the amount settled against Running Account Bill Nos. 1 to 6, some quantum of _____________ https://www.mhc.tn.gov.in/judis Page No. 44 of 82 Arb.O.P.(Com.Div.) No.631 of 2022 work was carried out by the 1st Respondent. This is clear from the reading of the Claim Statement of the 1stRespondent filed before the Arbitral Tribunal.
99. After the second last deduction was made for a sum of Rs.2,00,000/- on 06.01.2016 towards the liquidated damages out of total deduction of Rs.21,00,000/-, the 1st Respondent continued with the work after the Petitioner had given Extension of Time to complete the work till 30.04.2017. The 1st respondent had never protested or registered its protest with the petitioner for deduction made towards liquidated damages for Rs.21,00,000/-.
100. It appears that work was suspended between 06.08.2016 and 12.02.2017 as per the Counter Statement of the Petitioner filed before the Arbitral Tribunal. In the pleading before the Arbitral Tribunal, the Petitioner has also claimed that there was Nil progress after 12.05.2017 after the Petitioner decided to grant extension of time [EOT] pursuant to the Letter dated 26.04.2017.
101. Thus, by implication, it has to be construed that some quantum of _____________ https://www.mhc.tn.gov.in/judis Page No. 45 of 82 Arb.O.P.(Com.Div.) No.631 of 2022 work carried out by the 1st Respondent between 13.02.2017 and 11.05.2017. It is at this stage, the 1st Respondent vide its communication dated 26.04.2017 requested the Petitioner for further extension of time to complete the balance work from 30.04.2017 to 31.01.2018.
102. The Petitioner however, declined to grant further extensions of time to the 1st Respondent, as it had already granted six extensions of time in the past to the 1st Respondent. It is in this background on 11.12.2017, 19.12.2017 and on 21.12.2017, the 1st Respondent requested for ‘mutual closure’ of obligations under the contract and requested the Petitioner to settle the balance amount of Rs.2,21,08,642/- [Claim-B], purportedly due towards the work executed after adjustments were made to the payments made under Running Account Bills Nos.1 to 6 raised for a sum of Rs.21,03,00,000/-.
103. Since the Petitioner did not accede to the request of the 1st Respondent for further extension of time, the Petitioner issued Show Cause Notice dated 14.09.2018 to the 1st Respondent to terminate the contract. _____________ https://www.mhc.tn.gov.in/judis Page No. 46 of 82 Arb.O.P.(Com.Div.) No.631 of 2022
104. Threatened by an imminent invocation of Bank Guarantee furnished by the 1st Respondent towards Performance Bank Guarantee for Rs.79,36,000/- by the Petitioner, the 1st Respondent filed O.A.No. 1021 of 2018 under Section 9 of the Arbitration and the Conciliation Act, 1996, to restrain the Petitioner from invoking the aforesaid bank guarantee furnished by the 1st respondent to the Petitioner as a part of its obligation under the contract.
105. It is in this background, the learned Arbitrator was appointed and the Arbitral Tribunal was constituted to arbitrate the dispute between the Petitioner and the 1st Respondent. It is during this period, the Petitioner terminated the contract on 18.03.2019 and thereby foreclosed all the possibilities for the 1st Respondent to complete the balance of contracted work.
106. It is not clear how the learned Arbitrator could conclude the termination of the contract by the Petitioner as illegal, if the 1st Respondent itself by its communications dated 11.12.17, 19.12.2017, 18.01.2018, _____________ https://www.mhc.tn.gov.in/judis Page No. 47 of 82 Arb.O.P.(Com.Div.) No.631 of 2022 13.03.2018, 28.03.2018, 18.04.2018, 17.05.2018, 21.05.2018, 18.07.2018, 22.09.2018 and 29.09.2018 had requested for mutual foreclosure of the contract. It is clear that the termination of the contract by the petitioner was to put an end to the obligation under the contract which was what the 1st respondent requested.
107. If the request of the 1st Respondent in its communication dated 11.12.2017 was for a mere waiver of Rs.21,00,000/- which was earlier deducted towards Liquidated Damages against amount certified to be paid for Running Account Bill Nos.1 to 6, it remains to be explained as to how the aforesaid amount could have been awarded by the Arbitral Tribunal towards Claim-F.
108. It is not as if the 1st Respondent had questioned the deductions of Rs.21,00,000/- made by the Petitioner earlier towards Liquidated Damages as illegal or had registered it's protest when deductions were made by the Petitioner over a period of time starting from 28.10.2014 to 06.01.2016 and _____________ https://www.mhc.tn.gov.in/judis Page No. 48 of 82 Arb.O.P.(Com.Div.) No.631 of 2022 thereafter for a sum of Rs.3,00,000/-.
109. The 1st Respondent in its communication dated 19.12.2017 merely stated that the Petitioner had squeezed the cash flow of the 1stRespondent by not settling the bills towards Commissioning Charges [Claim-E] and by deducting amounts towards Retention Money [Claim-D].
110. If the 1st Respondent itself wanted to opt out of it’s obligations under the contract, it is not clear how the termination of the contract by the petitioner on 18.03.2019 during the pendency of the Arbitral proceedings pursuant to Show Cause Notice dated 14.09.2018 to terminate the contract with the 1st Respondent could be termed as “illegal”.
111. The Arbitral Tribunal should have examined the situation from the perspective of Section 37 & Section 39 of the Contract Act, 1872. For the sake of clarity, both Section 37 & Section 39 of the Indian Contract Act, 1872 are reproduced below:-
_____________ https://www.mhc.tn.gov.in/judis Page No. 49 of 82 Arb.O.P.(Com.Div.) No.631 of 2022 Section 37 of the Indian Contract Section 39 of the Indian Contract Act, 1872 Act, 1872 Obligations of the Parties to a Effect of Refusal of a Party to Contract Perform its Promise wholly The parties to a contract must either When a party to a contract has perform, or offer to perform, their refused to perform, or disabled respective promises, unless such himself from performing, his performance is dispensed with or promise in its entirety, the promisee excused under the provisions of this may put an end to the contract, Act, or of any other law. Promises unless he has signified, by words or bind the representatives of the conduct, his acquiescence in its promisors in case of the death of continuance.
such promisors before performance, unless a contrary Illustrations intention appears from the contract. (a) A, a singer, enters into a contract Illustrations with B, the manager of a theatre,
(a) A promises to deliver goods to to sing at his theatre two nights B on a certain day on payment in every week during the next of Rs.1,000/-. A dies before that two months, and B engages to day. A's representatives are pay her 100 rupees for each bound to deliver the goods to B, night's performance. On the and B is bound to pay sixth night A wifully absents Rs.1,000/- to A's herself from the theatre. B is at representatives. liberty to put an end to the
(b) A promises to paint a picture for contract.
B by a certain day, at a certain (b) A, a singer, enters into a contract price. A dies before the day. with B, the manager of a theatre, The contract cannot be enforced to sing at his theatre two night's either by A's representatives or in every week during the next by B. two months, and B engages to pay her at the rate of 100 rupees for each night. On the sixth night, A wilfully absents herself.
With the assent of B, A sings on the seventh night. B has _____________ https://www.mhc.tn.gov.in/judis Page No. 50 of 82 Arb.O.P.(Com.Div.) No.631 of 2022 Section 37 of the Indian Contract Section 39 of the Indian Contract Act, 1872 Act, 1872 signified his acquiescence in the continuance of the contract, and cannot now put an end to it, but is entitled to compensation for the damage sustained by him through A's failure to sing.
112. Section 37 of the Indian Contract Act, 1872 which deals with ‘Obligations of the Parties to a Contract’, states that parties to the contract must either perform or offer to perform their respective promises, unless such performance is dispensed with or excused under the provisions of the said Act, or of any other law.
113. Section 39 of the Contract Act, 1872 deals with the ‘effect of refusal of a party to perform its promise wholly’. As per Section 39 of the Contract Act, 1872, if a party to a contract has refused to perform, or disabled himself from performing, his promise in its entirety, the promisee can put an end to the contract, unless the promisee has signified, by words or conduct, his acquiescence in its continuance. In other words, the promisee is entitled to _____________ https://www.mhc.tn.gov.in/judis Page No. 51 of 82 Arb.O.P.(Com.Div.) No.631 of 2022 rescind the contract.
114. In this case, the 1st respondent had expressed its unwillingness to perform it obligation under the Contract and was looking for an exit route. The Petitioner was therefore entitled to terminate the contract, which it did. Therefore, the consequences under Section 64 of the Contract Act, 1872 awaits the parties. Under Section 64 of the Indian Contract Act, 1872, a person at whose option a contract is voidable rescinds it, the other party need not need not perform any promise contained therein in which he is promisor. Thus, the 1st respondent was not obliged to execute the balance work.
115. In fact, the party who rescinds the contract is bound to compensate the other person if it had received any benefit from the other party and restore such benefit as per Section 64 of the Indian Contract Act, 1872. Section 64 of the Indian Contract Act, 1872 which deals with the consequences of rescinding a contract voidable at the instance of a party reads as under :-
“64. Consequences of rescission of voidable contract.— When a person at whose option a contract is voidable _____________ https://www.mhc.tn.gov.in/judis Page No. 52 of 82 Arb.O.P.(Com.Div.) No.631 of 2022 rescinds it, the other party thereto need not perform any promise therein contained in which he is promisor. The party rescinding a voidable contract shall, if he have received any benefit thereunder from another party to such contract, restore such benefit, so far as may be, to the person from whom it was received.”
116. This aspect was not examined by the Arbitral Tribunal before it passed the impugned award. In ONGC Ltd. v. Saw Pipes Ltd. [(2003) 5 SCC 705 : AIR 2003 SC 2629] the Hon'ble Supreme Court held that the award which is, on the face of it, patently in violation of statutory provisions cannot be said to be in public interest. This ground is now statutorily available under Section 34 (2-A) of the Arbitration and Conciliation Act, 1996 from 2015.
117. It held that such award/judgment/decision is likely to adversely affect the administration of justice. Hence,the award could be set aside if it is patently illegal. Relevant portion of the decision reads as under :-
“31. Therefore, in our view, the phrase ‘public policy of India’ used in Section 34 in context is required to be given a wider meaning. It can be stated that the concept of public policy connotes some matter which concerns public good and the public interest. What is for public good or in public interest or what would be injurious or harmful to the public good or public interest has varied from time to time. However, the award which is, on the face of it, patently in violation of statutory provisions cannot _____________ https://www.mhc.tn.gov.in/judis Page No. 53 of 82 Arb.O.P.(Com.Div.) No.631 of 2022 be said to be in public interest. Such award/judgment/decision is likely to adversely affect the administration of justice. Hence, in our view in addition to narrower meaning given to the term ‘public policy’ in Renusagar case [Renusagar Power Co. Ltd. v. General Electric Co., 1994 Supp (1) SCC 644] it is required to be held that the award could be set aside if it is patently illegal. The result would be—award could be set aside if it is contrary to:
(a) fundamental policy of Indian law; or
(b) the interest of India; or
(c) justice or morality, or
(d) in addition, if it is patently illegal.
Illegality must go to the root of the matter and if the illegality is of trivial nature it cannot be held that award is against the public policy. Award could also be set aside if it is so unfair and unreasonable that it shocks the conscience of the court. Such award is opposed to public policy and is required to be adjudged void.”
118. In ONGC Ltd. v. Saw Pipes Ltd. [(2003) 5 SCC 705 : AIR 2003 SC 2629], the Hon'ble Supreme Court further held as follows:-
“74. In the result, it is held that:
(A)(1) The court can set aside the arbitral award under Section 34(2) of the Act if the party making the application furnishes proof that:
i. a party was under some incapacity, or ii. the arbitration agreement is not valid under the law to which the parties have subjected it or, failing any indication thereon, under the law for the time being in _____________ https://www.mhc.tn.gov.in/judis Page No. 54 of 82 Arb.O.P.(Com.Div.) No.631 of 2022 force; or iii. the party making the application was not given proper notice of the appointment of an arbitrator or of the arbitral proceedings or was otherwise unable to present his case; or iv. the arbitral award deals with a dispute not contemplated by or not falling within the terms of the submission to arbitration, or it contains decisions on matters beyond the scope of the submission to arbitration. (2) The court may set aside the award:
(i)(a) if the composition of the Arbitral Tribunal was not in accordance with the agreement of the parties,
(b) failing such agreement, the composition of the Arbitral Tribunal was not in accordance with Part I of the Act,
(ii) if the arbitral procedure was not in accordance with:
(a) the agreement of the parties, or
(b) failing such agreement, the arbitral procedure was not in accordance with Part I of the Act.
However, exception for setting aside the award on the ground of composition of Arbitral Tribunal or illegality of arbitral procedure is that the agreement should not be in conflict with the provisions of Part I of the Act from which parties cannot derogate.
(c) If the award passed by the Arbitral Tribunal is in contravention of the provisions of the Act or any other substantive law governing the parties or is against the terms of the contract.
(3) The award could be set aside if it is against the public policy of India, that is to say, if it is contrary to:
(a) fundamental policy of Indian law; or
(b) the interest of India; or _____________ https://www.mhc.tn.gov.in/judis Page No. 55 of 82 Arb.O.P.(Com.Div.) No.631 of 2022
(c) justice or morality; or
(d) if it is patently illegal.
(4) It could be challenged:
(a) as provided under Section 13(5); and
(b) Section 16(6) of the Act.
(B)(1) The impugned award requires to be set aside mainly on the grounds:
(i) there is specific stipulation in the agreement that the time and date of delivery of the goods was of the essence of the contract;
(ii) in case of failure to deliver the goods within the period fixed for such delivery in the schedule, ONGC was entitled to recover from the contractor liquidated damages as agreed;
(iii) it was also explicitly understood that the agreed liquidated damages were genuine pre-estimate of damages;
(iv) on the request of the respondent to extend the time-
limit for supply of goods, ONGC informed specifically that time was extended but stipulated liquidated damages as agreed would be recovered;
(v) liquidated damages for delay in supply of goods were to be recovered by paying authorities from the bills for payment of cost of material supplied by the contractor;
(vi) there is nothing on record to suggest that stipulation for recovering liquidated damages was by way of penalty or that the said sum was in any way unreasonable;
(vii) in certain contracts, it is impossible to assess the damages or prove the same. Such situation is taken care of by Sections 73 and 74 of the Contract Act and in the present case by specific terms of the contract.” _____________ https://www.mhc.tn.gov.in/judis Page No. 56 of 82 Arb.O.P.(Com.Div.) No.631 of 2022
119. In Associate Builders v. DDA, (2015) 3 SCC 49, the Hon'ble Supreme Court followed its decision in ONGC Ltd. v. Saw Pipes Ltd. [(2003) 5 SCC 705 : AIR 2003 SC 2629] and few other decisions. The Court extensively dealt with the expressions ‘public policy of India’ and ‘fundamental policy of Indian law’ under Section 34 of the Arbitration and Conciliation Act, 1996. Relevant portion from the decision of the Hon’ble Supreme Court is extracted as under:-
“17. It will be seen that none of the grounds contained in sub-section (2)(a) of Section 34 deal with the merits of the decision rendered by an arbitral award. It is only when we come to the award being in conflict with the public policy of India that the merits of an arbitral award are to be looked into under certain specified circumstances.
18. In Renusagar Power Co. Ltd. v. General Electric Co.
[Renusagar Power Co. Ltd. v. General Electric Co., 1994 Supp (1) SCC 644] , the Supreme Court construed Section 7(1)(b)(ii) of the Foreign Awards (Recognition and Enforcement) Act, 1961:
“7. Conditions for enforcement of foreign awards.— (1) A foreign award may not be enforced under this Act— ***
(b) if the Court dealing with the case is satisfied that— ***
(ii) the enforcement of the award will be contrary to the public policy.” In construing the expression “public policy” in the _____________ https://www.mhc.tn.gov.in/judis Page No. 57 of 82 Arb.O.P.(Com.Div.) No.631 of 2022 context of a foreign award, the Court held that an award contrary to
(i) The fundamental policy of Indian law,
(ii) The interest of India,
(iii) Justice or morality, would be set aside on the ground that it would be contrary to the public policy of India. It went on further to hold that a contravention of the provisions of the Foreign Exchange Regulation Act would be contrary to the public policy of India in that the statute is enacted for the national economic interest to ensure that the nation does not lose foreign exchange which is essential for the economic survival of the nation (see SCC p. 685, para 75). Equally, disregarding orders passed by the superior courts in India could also be a contravention of the fundamental policy of Indian law, but the recovery of compound interest on interest, being contrary to statute only, would not contravene any fundamental policy of Indian law (see SCC pp. 689 & 693, paras 85 & 95).
19. When it came to construing the expression “the public policy of India” contained in Section 34(2)(b)(ii) of the Arbitration Act, 1996, this Court in ONGC Ltd. v. Saw Pipes Ltd.[(2003) 5 SCC 705 : AIR 2003 SC 2629] held : (SCC pp. 727-28 & 744-45, paras 31 & 74) *Paragraphs 31 & 74 Already extracted above*
20. The judgment in ONGC Ltd. v. Saw Pipes Ltd. [(2003) 5 SCC 705 : AIR 2003 SC 2629] has been consistently followed till date.
***
27. Coming to each of the heads contained in Saw Pipes [(2003) 5 SCC 705 : AIR 2003 SC 2629] judgment, we will first deal with the head “fundamental policy of _____________ https://www.mhc.tn.gov.in/judis Page No. 58 of 82 Arb.O.P.(Com.Div.) No.631 of 2022 Indian law”. It has already been seen from Renusagar [Renusagar Power Co. Ltd. v. General Electric Co., 1994 Supp (1) SCC 644] judgment that violation of the Foreign Exchange Act and disregarding orders of superior courts in India would be regarded as being contrary to the fundamental policy of Indian law. To this it could be added that the binding effect of the judgment of a superior court being disregarded would be equally violative of the fundamental policy of Indian law.
28. In a recent judgment, ONGC Ltd. v Western Geco International Ltd. [(2014) 9 SCC 263 : (2014) 5 SCC (Civ) 12] , this Court added three other distinct and fundamental juristic principles which must be understood as a part and parcel of the fundamental policy of Indian law. The Court held : (SCC pp. 278- 80, paras 35 & 38-40) “35. What then would constitute the ‘fundamental policy of Indian law’ is the question. The decision in ONGC [(2003) 5 SCC 705 : AIR 2003 SC 2629] does not elaborate that aspect. Even so, the expression must, in our opinion, include all such fundamental principles as providing a basis for administration of justice and enforcement of law in this country. Without meaning to exhaustively enumerate the purport of the expression ‘fundamental policy of Indian law’, we may refer to three distinct and fundamental juristic principles that must necessarily be understood as a part and parcel of the fundamental policy of Indian law. The first and foremost is the principle that in every determination whether by a court or other authority that affects the rights of a citizen or leads to any _____________ https://www.mhc.tn.gov.in/judis Page No. 59 of 82 Arb.O.P.(Com.Div.) No.631 of 2022 civil consequences, the court or authority concerned is bound to adopt what is in legal parlance called a ‘judicial approach’ in the matter. The duty to adopt a judicial approach arises from the very nature of the power exercised by the court or the authority does not have to be separately or additionally enjoined upon the fora concerned. What must be remembered is that the importance of a judicial approach in judicial and quasi-judicial determination lies in the fact that so long as the court, tribunal or the authority exercising powers that affect the rights or obligations of the parties before them shows fidelity to judicial approach, they cannot act in an arbitrary, capricious or whimsical manner. Judicial approach ensures that the authority acts bona fide and deals with the subject in a fair, reasonable and objective manner and that its decision is not actuated by any extraneous consideration. Judicial approach in that sense acts as a check against flaws and faults that can render the decision of a court, tribunal or authority vulnerable to challenge.
***
38. Equally important and indeed fundamental to the policy of Indian law is the principle that a court and so also a quasi-judicial authority must, while determining the rights and obligations of parties before it, do so in accordance with the principles of natural justice. Besides the celebrated audi alteram partem rule one of the facets of the principles of natural justice _____________ https://www.mhc.tn.gov.in/judis Page No. 60 of 82 Arb.O.P.(Com.Div.) No.631 of 2022 is that the court/authority deciding the matter must apply its mind to the attendant facts and circumstances while taking a view one way or the other. Non-application of mind is a defect that is fatal to any adjudication. Application of mind is best demonstrated by disclosure of the mind and disclosure of mind is best done by recording reasons in support of the decision which the court or authority is taking. The requirement that an adjudicatory authority must apply its mind is, in that view, so deeply embedded in our jurisprudence that it can be described as a fundamental policy of Indian law.
39. No less important is the principle now recognised as a salutary juristic fundamental in administrative law that a decision which is perverse or so irrational that no reasonable person would have arrived at the same will not be sustained in a court of law. Perversity or irrationality of decisions is tested on the touchstone of Wednesbury [Associated Provincial Picture Houses Ltd. v. Wednesbury Corpn., (1948) 1 KB 223 : (1947) 2 All ER 680 (CA)] principle of reasonableness. Decisions that fall short of the standards of reasonableness are open to challenge in a court of law often in writ jurisdiction of the superior courts but no less in statutory processes wherever the same are available.
40. It is neither necessary nor proper for us to attempt an exhaustive enumeration of what would constitute the fundamental policy of Indian law nor is it possible to _____________ https://www.mhc.tn.gov.in/judis Page No. 61 of 82 Arb.O.P.(Com.Div.) No.631 of 2022 place the expression in the straitjacket of a definition. What is important in the context of the case at hand is that if on facts proved before them the arbitrators fail to draw an inference which ought to have been drawn or if they have drawn an inference which is on the face of it, untenable resulting in miscarriage of justice, the adjudication even when made by an Arbitral Tribunal that enjoys considerable latitude and play at the joints in making awards will be open to challenge and may be cast away or modified depending upon whether the offending part is or is not severable from the rest.”
29. It is clear that the juristic principle of a “judicial approach” demands that a decision be fair, reasonable and objective. On the obverse side, anything arbitrary and whimsical would obviously not be a determination which would either be fair, reasonable or objective.
***
33. It must clearly be understood that when a court is applying the “public policy” test to an arbitration award, it does not act as a court of appeal and consequently errors of fact cannot be corrected. A possible view by the arbitrator on facts has necessarily to pass muster as the arbitrator is the ultimate master of the quantity and quality of evidence to be relied upon when he delivers his arbitral award. Thus an award based on little evidence or on evidence which does not measure up in quality to a trained legal mind would not be held to be invalid on this score [Very often an arbitrator is a lay person not necessarily trained in law. Lord Mansfield, a famous English Judge, once advised a high military officer in _____________ https://www.mhc.tn.gov.in/judis Page No. 62 of 82 Arb.O.P.(Com.Div.) No.631 of 2022 Jamaica who needed to act as a Judge as follows:“General, you have a sound head, and a good heart; take courage and you will do very well, in your occupation, in a court of equity. My advice is, to make your decrees as your head and your heart dictate, to hear both sides patiently, to decide with firmness in the best manner you can; but be careful not to assign your reasons, since your determination may be substantially right, although your reasons may be very bad, or essentially wrong”.It is very important to bear this in mind when awards of lay arbitrators are challenged.] . Once it is found that the arbitrators approach is not arbitrary or capricious, then he is the last word on facts. In P.R. Shah, Shares & Stock Brokers (P) Ltd. v. B.H.H. Securities (P) Ltd. [(2012) 1 SCC 594 :
(2012) 1 SCC (Civ) 342] , this Court held : (SCC pp.
601-02, para 21) “21. A court does not sit in appeal over the award of an Arbitral Tribunal by reassessing or reappreciating the evidence. An award can be challenged only under the grounds mentioned in Section 34(2) of the Act. The Arbitral Tribunal has examined the facts and held that both the second respondent and the appellant are liable. The case as put forward by the first respondent has been accepted.
Even the minority view was that the second respondent was liable as claimed by the first respondent, but the appellant was not liable only on the ground that the arbitrators appointed by the Stock Exchange under Bye-
law 248, in a claim against a non-member, had no jurisdiction to decide a claim against another member. The finding of the majority is that the appellant did the transaction in the name of the second respondent and is _____________ https://www.mhc.tn.gov.in/judis Page No. 63 of 82 Arb.O.P.(Com.Div.) No.631 of 2022 therefore, liable along with the second respondent. Therefore, in the absence of any ground under Section 34(2) of the Act, it is not possible to re-examine the facts to find out whether a different decision can be arrived at.”
34. It is with this very important caveat that the two fundamental principles which form part of the fundamental policy of Indian law (that the arbitrator must have a judicial approach and that he must not act perversely) are to be understood.”
120. However, as mentioned above, in 2015, what was recognized by the Supreme Court in the above judgments of the Hon’ble Supreme Court was incorporated into the Arbitration and Conciliation Act, 1996 vide Amendment Act, 2015.
121. In Ssangyong Engg. & Construction Co. Ltd. v. NHAI, (2019) 15 SCC 131, the Hon'ble Supreme Court reiterated the principles regarding the scope of interference under Section 34 of the Arbitration and Conciliation Act, 1996 in the context of ‘public policy of India’ and ‘fundamental policy of Indian law’ after amendment to the Arbitration and Conciliation Act, 1996 in 2015. Relevant portion of the decision is extracted as under:-
_____________ https://www.mhc.tn.gov.in/judis Page No. 64 of 82 Arb.O.P.(Com.Div.) No.631 of 2022 “34. What is clear, therefore, is that the expression “public policy of India”, whether contained in Section 34 or in Section 48, would now mean the “fundamental policy of Indian law” as explained in paras 18 and 27 of Associate Builders [Associate Builders v. DDA, (2015) 3 SCC 49 : (2015) 2 SCC (Civ) 204] i.e. the fundamental policy of Indian law would be relegated to “Renusagar” understanding of this expression. This would necessarily mean that Western Geco [ONGC v. Western Geco International Ltd., (2014) 9 SCC 263 : (2014) 5 SCC (Civ) 12] expansion has been done away with. In short, Western Geco [ONGC v. Western Geco International Ltd., (2014) 9 SCC 263 : (2014) 5 SCC (Civ) 12] , as explained in paras 28 and 29 of Associate Builders [Associate Builders v. DDA, (2015) 3 SCC 49 : (2015) 2 SCC (Civ) 204] , would no longer obtain, as under the guise of interfering with an award on the ground that the arbitrator has not adopted a judicial approach, the Court's intervention would be on the merits of the award, which cannot be permitted post amendment. However, insofar as principles of natural justice are concerned, as contained in Sections 18 and 34(2)(a)(iii) of the 1996 Act, these continue to be grounds of challenge of an award, as is contained in para 30 of Associate Builders [Associate Builders v. DDA, (2015) 3 SCC 49 : (2015) 2 SCC (Civ) 204] .
35. It is important to notice that the ground for interference insofar as it concerns “interest of India” has since been deleted, and therefore, no longer obtains. Equally, the ground for interference on the basis that the award is in conflict with justice or morality is now to be understood as a conflict with the “most basic notions of morality or _____________ https://www.mhc.tn.gov.in/judis Page No. 65 of 82 Arb.O.P.(Com.Div.) No.631 of 2022 justice”. This again would be in line with paras 36 to 39 of Associate Builders [Associate Builders v. DDA, (2015) 3 SCC 49 : (2015) 2 SCC (Civ) 204] , as it is only such arbitral awards that shock the conscience of the court that can be set aside on this ground.
36. Thus, it is clear that public policy of India is now constricted to mean firstly, that a domestic award is contrary to the fundamental policy of Indian law, as understood in paras 18 and 27 of Associate Builders [Associate Builders v. DDA, (2015) 3 SCC 49 : (2015) 2 SCC (Civ) 204] , or secondly, that such award is against basic notions of justice or morality as understood in paras 36 to 39 of Associate Builders [Associate Builders v. DDA, (2015) 3 SCC 49 : (2015) 2 SCC (Civ) 204] . Explanation 2 to Section 34(2)(b)(ii) and Explanation 2 to Section 48(2)(b)(ii) was added by the Amendment Act only so that Western Geco [ONGC v. Western Geco International Ltd., (2014) 9 SCC 263 : (2014) 5 SCC (Civ) 12] , as understood in Associate Builders [Associate Builders v. DDA, (2015) 3 SCC 49 : (2015) 2 SCC (Civ) 204] , and paras 28 and 29 in particular, is now done away with.
37. Insofar as domestic awards made in India are concerned, an additional ground is now available under sub-section (2-A), added by the Amendment Act, 2015, to Section 34. Here, there must be patent illegality appearing on the face of the award, which refers to such illegality as goes to the root of the matter but which does not amount to mere erroneous application of the law. In short, what is not subsumed within “the fundamental policy of Indian law”, namely, the contravention of a statute not linked to public policy or public interest, cannot be brought in by the backdoor when it comes to setting aside an award on the ground of patent illegality.
_____________ https://www.mhc.tn.gov.in/judis Page No. 66 of 82 Arb.O.P.(Com.Div.) No.631 of 2022 ***
76. However, when it comes to the public policy of India, argument based upon “most basic notions of justice”, it is clear that this ground can be attracted only in very exceptional circumstances when the conscience of the Court is shocked by infraction of fundamental notions or principles of justice. It can be seen that the formula that was applied by the agreement continued to be applied till February 2013 — in short, it is not correct to say that the formula under the agreement could not be applied in view of the Ministry's change in the base indices from 1993-1994 to 2004-2005. Further, in order to apply a linking factor, a Circular, unilaterally issued by one party, cannot possibly bind the other party to the agreement without that other party's consent. Indeed, the Circular itself expressly stipulates that it cannot apply unless the contractors furnish an undertaking/affidavit that the price adjustment under the Circular is acceptable to them. We have seen how the appellant gave such undertaking only conditionally and without prejudice to its argument that the Circular does not and cannot apply. This being the case, it is clear that the majority award has created a new contract for the parties by applying the said unilateral Circular and by substituting a workable formula under the agreement by another formula dehors the agreement. This being the case, a fundamental principle of justice has been breached, namely, that a unilateral addition or alteration of a contract can never be foisted upon an unwilling party, nor can a party to the agreement be liable to perform a bargain not entered into with the other party. Clearly, such a course of conduct would be contrary to fundamental principles of justice as followed in this country, and shocks the conscience of this Court. However, we repeat that this ground is available only in _____________ https://www.mhc.tn.gov.in/judis Page No. 67 of 82 Arb.O.P.(Com.Div.) No.631 of 2022 very exceptional circumstances, such as the fact situation in the present case. Under no circumstance can any court interfere with an arbitral award on the ground that justice has not been done in the opinion of the Court. That would be an entry into the merits of the dispute which, as we have seen, is contrary to the ethos of Section 34 of the 1996 Act, as has been noted earlier in this judgment.”
122. The Arbitral Tribunal overlooked the provisions of the Contract Act, 1872 while passing the Impugned Award. Although ignoring vital provisions of the Contract Act, 1872 may not amount to contravention of the fundamental policy of Indian law warranting interference under Section 34 of the Arbitration and Conciliation Act, 1996, and an erroneous application of law is not available to set aside an Award under Sub-section (2-A) to Section 34 of the Arbitration and Conciliation Act, 1996 on the ground of patent illegality in view of Paragraph 37 Ssangyong(supra), yet if illegality goes to the root of the Award, the said Award can be set aside on the ground of patent illegality.
123. The facts on record indicate that the 1st Respondent had raised seven Running Account Bills out of which, 6 have been paid for after deductions. It appears that the total value of the Running Account Bill No.1 to Running _____________ https://www.mhc.tn.gov.in/judis Page No. 68 of 82 Arb.O.P.(Com.Div.) No.631 of 2022 Account Bill No.7 is Rs.23,24,00,000/-.
124. Though the total value of the Running Account Bill Nos.1 to 6 is not clearly stated, it appears to be Rs.21,03,00,000/- out of which, Rs.20,80,00,000/- was certified to be paid after deducting Rs.21,00,000/- towards Liquidated Damages [Claim-F], a further sum of Rs.1,04,00,877/- was withheld towards Retention Amount [Claim-D] as per the contract.
125. The total value of the Running Account Bill Nos.1 to 6 appears to be Rs.21,03,00,000/- out of which, Rs.20,80,00,000/- was certified to be paid after deducting Rs.21,00,000/-[Claim–F] towards Liquidated Damages.
126. A sum of Rs.1,04,00,877/- [Claim-D] was withheld out of Rs.20,80,00,000/- certified to be paid towards ‘Retention Amount’ as per the contract. Thus, an amount of Rs.19,75,99,123/- [Rs.21,03,00,000 – (Rs.21,00,000 + Rs.1,04,00,877)] was paid by the Petitioner to the 1st Respondent towards the Running Account Bills Nos. 1 to 6. _____________ https://www.mhc.tn.gov.in/judis Page No. 69 of 82 Arb.O.P.(Com.Div.) No.631 of 2022
127. The Arbitral Tribunal has rejected the Claim A for profit and loss and damages for a sum of Rs.2,64,40,000/-, despite holding that the termination of the contract was “illegal”. The Court is therefore not inclined to interfere with the findings of the Arbitral Tribunal with respect to Claim-A, having regard to the reasons stated therein and in absence of a challenge to the Award by the 1st respondent. If the Award is unintelligible, it is to be equated on part with an Award with no reason. Unintelligible awards are to be set aside, subject to party autonomy to do away with the reasoned award. Therefore, the courts are required to be careful while distinguishing between inadequacy of reasons in an award and unintelligible awards.
128. The Hon’ble Supreme Court in Dyna Technologies (P) Ltd. v. Crompton Greaves Ltd. (2019) 20 SCC 1, had discussed the scope of interference to an Award, under Section 34 of the Arbitration and Conciliation Act, 1996. The Court held that when the reasoning given in the Award are insufficient or illegible. Relevant portion of the said judgement is extracted as under:-
_____________ https://www.mhc.tn.gov.in/judis Page No. 70 of 82 Arb.O.P.(Com.Div.) No.631 of 2022 “33. It may be relevant to note Russell on Arbitration, 23rd Edn. (2007), wherein he notes that:
“If the Court can deduce from the award and the materials before it, which may include extracts from evidence and the transcript of hearing, the thrust of the tribunal's reasoning then no irregularity will be found…. Equally, the court should bear in mind that when considering awards produced by non-lawyer arbitrators, the court should look at the substance of such findings, rather than their form, and that one should approach a reading of the award in a fair, and not in an unduly literal way.”
34. The mandate under Section 31(3) of the Arbitration Act is to have reasoning which is intelligible and adequate and, which can in appropriate cases be even implied by the courts from a fair reading of the award and documents referred to thereunder, if the need be. The aforesaid provision does not require an elaborate judgment to be passed by the arbitrators having regard to the speedy resolution of dispute.
35. When we consider the requirement of a reasoned order, three characteristics of a reasoned order can be fathomed. They are: proper, intelligible and adequate.
If the reasonings in the order are improper, they reveal a flaw in the decision-making process. If the challenge to an award is based on impropriety or perversity in the reasoning, then it can be challenged strictly on the grounds provided under Section 34 of the Arbitration Act. If the challenge to an award is based on the ground that the same is unintelligible, the same would be equivalent of providing no reasons at all. Coming to the last aspect concerning the challenge on adequacy of reasons, the Court while exercising jurisdiction under Section 34 has to _____________ https://www.mhc.tn.gov.in/judis Page No. 71 of 82 Arb.O.P.(Com.Div.) No.631 of 2022 adjudicate the validity of such an award based on the degree of particularity of reasoning required having regard to the nature of issues falling for consideration. The degree of particularity cannot be stated in a precise manner as the same would depend on the complexity of the issue. Even if the Court comes to a conclusion that there were gaps in the reasoning for the conclusions reached by the Tribunal, the Court needs to have regard to the documents submitted by the parties and the contentions raised before the Tribunal so that awards with inadequate reasons are not set aside in casual and cavalier manner. On the other hand, ordinarily unintelligible awards are to be set aside, subject to party autonomy to do away with the reasoned award. Therefore, the courts are required to be careful while distinguishing between inadequacy of reasons in an award and unintelligible awards.”
129. As discussed in this Order, the Award though a readable Award, is unintelligible as it does not apply the elementary principle which govern the parties to a contract under the Indian Contract Act, 1876. Therefore, the Impugned Award granting relief to the 1st respondent would be contrary to Section 28(3) of the Arbitration and Conciliation Act, 1996. That apart, as per Clause 21.1 of the Contract entered into between the Petitioner and the 1st Respondent, the Petitioner was to give possession of all parts of the site to the 1st Respondent and any delay in effecting the same was not to be considered a _____________ https://www.mhc.tn.gov.in/judis Page No. 72 of 82 Arb.O.P.(Com.Div.) No.631 of 2022 compensation event. Clause 21.1 of the Contract reads as under :-
21. Possession of the Site 21.1 The Employer will give possession of all parts of the Site to the Contractor. However, if possession of a part is not given by the date stated in the Contract Data it cannot be taken as a reason for delay in start of the relevant activities and it will not be considered a Compensation Event.
130. The 1st Respondent could not have asked for damages under Section 73 of the Indian Contract Act, 1872, which it did. The Arbitral Tribunal has correctly rejected it, though it has erroneously held that there was an illegal termination of the contract by the Petitioner. As mentioned above, the 1st Respondent at best would have been entitled to compensation under Section 64 of the Indian Contract Act, 1872.
131. Thus, the conclusions arrived by the Arbitral Tribunal under Issue No.1, holding termination of the contract by the Petitioner as illegal is contrary to Section 28(3) of the Arbitration and Conciliation Act, 1996, and has resulted in patent illegality as per the principle laid down in Sangayong case (supra) of the Hon’ble Supreme Court.
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132. The Claim B was for a sum of Rs.2,21,08,642/- towards Running Account Bill No.7 dated 21.12.2017. However, the Arbitral Tribunal has awarded a sum of Rs.2,86,91,263/-. The aforesaid amount has been arrived by reckoning Claim B as Rs.2,60,58,215/- which is nothing but capitalizing of the principal amount of Rs.2,21,08,642/- to award a sum of 2,86,91,263/-. The only reason for awarding Claim B for towards Running Account Bill No.7 is that the Petitioner has not denied having received the Running Account Bill No.7 for a sum of Rs.2,21,08,642/-. The Petitioner has however denied its liability towards Running Account Bill No.7 for the sum of Rs.2,21,08,642/-.
133. Though the Arbitral Tribunal is the best judge with regard to quality and quantity of evidence before it, however, the 1st Respondent was awarded a sum of Rs.2,60,58,215/- [Rs.2,21,08,642 + interest at 13.5%] towards Claim B by awarding pendent lite interest at 9% per annum. The Arbitral Tribunal ought to have examined the Claim B in the light of Section 64 of the Indian Contract Act, 1872.
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134. The Arbitral Tribunal has also awarded interest at the rate of 12% to the 1st Respondent if the Award amount of Rs.4,70,77,891/- is not paid within 30 days of receipt of the Award. Thus, according to the Impugned Award, the Petitioner is bound to pay further interest at 12% on Claim-B, on the Award amount of Rs.4,70,77,891/-
135. The law on interest has been now been set at rest in the context of Arbitral Awards of the Arbitral Tribunal in UHL Power Co. Ltd. v. State of H.P. (2022) 4 SCC 116. The Hon'ble Supreme Court has held that where it was held that post-award interest can be granted by an arbitrator on the interest amount awarded and has observed as follows :-
“4. For declining payment of compound interest awarded by the learned sole arbitrator to UHL, the Division Bench relied on the decision of this Court in State of Haryana v. S.L. Arora & Co. [State of Haryana v. S.L. Arora & Co., (2010) 3 SCC 690 :
(2010) 1 SCC (Civ) 823] , wherein it was held that compound interest can be awarded only if there is a specific contract, or authority under a statute, for compounding of interest and that there is no general discretion vested in courts or tribunals to award _____________ https://www.mhc.tn.gov.in/judis Page No. 75 of 82 Arb.O.P.(Com.Div.) No.631 of 2022 compound interest. It was further held that in the absence of any provision for interest upon interest in the contract, the Arbitral Tribunals do not have the power to award interest upon interest, or compound interest, either for the pre-award period or for the post-award period.
5. By now, the aforesaid aspect has been set at rest by a three-Judge Bench of this Court in Hyder Consulting (UK) Ltd. v. State of Orissa [Hyder Consulting (UK) Ltd. v. State of Orissa, (2015) 2 SCC 189 : (2015) 2 SCC (Civ) 38] , that has overruled the verdict in S.L. Arora [State of Haryana v. S.L. Arora & Co., (2010) 3 SCC 690 :
(2010) 1 SCC (Civ) 823] . The majority view is that post-award interest can be granted by an arbitrator on the interest amount awarded. Writing for the majority, Bobde, J. (as his Lordship then was) has held thus : (Hyder Consulting case [Hyder Consulting (UK) Ltd. v. State of Orissa, (2015) 2 SCC 189 : (2015) 2 SCC (Civ) 38] , SCC p. 204, para 21) “21. In the result, I am of the view that S.L. Arora case [State of Haryana v.
S.L. Arora & Co., (2010) 3 SCC 690 :
(2010) 1 SCC (Civ) 823] is wrongly decided in that it holds that a sum directed to be paid by an Arbitral Tribunal and the reference to the award on the substantive claim does not refer to interest pendente lite awarded on the “sum directed to be paid upon award” and that in the absence of any provision of interest upon interest in the contract, the Arbitral Tribunal does not have the power to award interest upon interest, _____________ https://www.mhc.tn.gov.in/judis Page No. 76 of 82 Arb.O.P.(Com.Div.) No.631 of 2022 or compound interest either for the pre-
award period or for the post-award period. Parliament has the undoubted power to legislate on the subject and provide that the Arbitral Tribunal may award interest on the sum directed to be paid by the award, meaning a sum inclusive of principal sum adjudged and the interest, and this has been done by Parliament in plain language.”
136. While both simple and compound interest can be awarded by the Arbitral Tribunal, interest i.e., pre-claim interest, pendente lite interest and post award interest, cannot be awarded by capitalizing the principle amount and then compound it to further interest at usurious rates contrary to the terms of the Contract. That apart the Arbitral Tribunal has failed to note that a sum of Rs.2,60,58,215/- was not towards principle simpliciter. It was towards Principle + interest on the Principal Claim of Rs.2,21,08,642/- between 01.02.2018 and 30.05.2019.
137. Therefore, the Award of the Arbitral Tribunal awarding the amount towards unpaid Running Account Bill No.7 for a sum of Rs.2,60,58,215/- _____________ https://www.mhc.tn.gov.in/judis Page No. 77 of 82 Arb.O.P.(Com.Div.) No.631 of 2022 instead of Rs.2,21,08,642/- in the Impugned Award dated 06.04.2022 is to be held to be patently illegal in view of the decision of the Hon'ble Supreme Court decision in UHL Power Co. Ltd. (supra).
138. In this case, it is evident that the 1st respondent had staked their claim towards ‘Laying Charges’ under Claim-C for a sum of Rs.49,52,357/- and towards ‘Commissioning Charges’ under Claim-E for a sum of Rs.2,37,12,019.57/-.
139. However, after rejecting Claim-C towards ‘Laying Charges’ to the tune of Rs.49,52,357/-, the Arbitral Tribunal has granted Claim-E towards ‘Commissioning Charges’ for a sum of Rs.2,37,12,091.57/- . It is not clear how Claim-E towards ‘Commissioning Charges’ for a sum of Rs.2,37,12,091.57/- could be awarded as the ‘Commissioning charges’ are only payable only after the successful Laying and Commissioning of the pipeline by the 1st Respondent under the Contract. _____________ https://www.mhc.tn.gov.in/judis Page No. 78 of 82 Arb.O.P.(Com.Div.) No.631 of 2022
140. “Commissioning of the installation” would not arise in view of the termination of the contract by the petitioner CMWSSB on 18.03.2019 after Show Cause Notice dated 14.08.2019 was issued to the 1st respondent. Similarly, the question of awarding Rs.1,04,00,877/- towards Claim-D under ‘Retention Monies’ withheld for the work done would only arise if the entire work was completed. If the work was not completed, question of awarding ‘Retention Monies’ cannot be countenanced. Also, no reasoning was given for awarding the aforesaid amount by the Arbitral Tribunal in the Impugned Award dated 06.04.2022 other than simply accepting the submission of the 1st Respondent.
141. Since the project did not see completion in the hands of the 1st Respondent, these two amounts i.e., towards Claim-D for Retention Monies for Rs.1,04,00,877/- and Claim-E towards Commissioning Charges for a sum of Rs.2,37,12,091.57/-, could not have been awarded independently or towards damages.
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142. Therefore, after rejecting Claim-C towards ‘Laying Charges’ for a sum of Rs.49,52,357/- on the ground that there was no satisfactory completion of the Hydraulic Test, and the Arbitral Tribunal could not have awarded Claim- D towards ‘Retention Monies’ and Claim-E towards ‘Commissioning Charges’.
143. The other amount towards Claim-G for Overhead Charges to the tune of Rs.15,13,160/- and Claim-H towards Bank Guarantee for a sum of Rs.79,36,000/- and the bank guarantee validity extension charges borne by the 1st Respondent also cannot be questioned in view of the reasonings given in the Impugned Award dated 06.04.2022.
144. Likewise, the Court is not inclined to interfere with the reasoning of the Arbitral Tribunal regarding Counter Claim Nos.1 and 2. However, admittedly, it appears that a clerical mistake has crept in the Impugned Award dated 06.04.2022. The Arbitral Tribunal has inadvertently recorded the amount towards Counter Claim No.1 as Rs.1,93,39,500/- instead of Rs.1,98,39,500/-. This ought to have been rectified under Section 33 of the Arbitration and Conciliation Act, 1996. For the reasons stated above, the Impugned Award _____________ https://www.mhc.tn.gov.in/judis Page No. 80 of 82 Arb.O.P.(Com.Div.) No.631 of 2022 dated 06.04.2022 is liable to be set aside and is accordingly set-aside.
145. This Arbitration Original Petition is allowed with liberty to the parties to work out their remedies in the manner known to law. No cost. Connected Applications are closed.
28.11.2024 NCC : Yes/No Index : Yes/No Speaking Order / Non-Speaking Order smn2/arb C.SARAVANAN, J.
smn2/arb _____________ https://www.mhc.tn.gov.in/judis Page No. 81 of 82 Arb.O.P.(Com.Div.) No.631 of 2022 Arb.O.P.(Com.Div.) No.631 of 2022 and Arb.O.A.No.591 of 2022 and Arb.A.No.182 of 2022 and A.No.5154 of 2022 28.11.2024 _____________ https://www.mhc.tn.gov.in/judis Page No. 82 of 82