Delhi High Court
Krr Infra Projects Pvt. Ltd. vs Union Of India on 12 March, 2018
Author: Navin Chawla
Bench: Navin Chawla
$~31
* IN THE HIGH COURT OF DELHI AT NEW DELHI
Date of decision: 12th March, 2018
+ O.M.P. (COMM) 87/2018
KRR INFRA PROJECTS PVT. LTD. ..... Petitioner
Through: Ms.Padma Priya, Mr.Abhishek
Choudhary, Advs.
versus
UNION OF INDIA ..... Respondent
Through: Mr.Ruchir Mishra, Mr.M.K.Tiwari,
Advs.
CORAM:
HON'BLE MR. JUSTICE NAVIN CHAWLA
NAVIN CHAWLA, J. (Oral)
1. Issue notice. Mr.Ruchir Mishra, Advocate accepts notice on behalf of the respondent. Counsel for the respondent waives his right to file a reply to the petition and submits that the petition can be heard on the basis of the record that has been filed with the petition.
2. Counsel for the respondent submits that having checked the records, he does not deny that the Impugned Award was served on the petitioner only on 8th November, 2017. Accordingly, the present petition would be within the period of limitation as provided under Section 34(3) of the Arbitration and Conciliation Act, 1996.
3. This petition under Section 34 of the Arbitration and Conciliation Act, 1996, has been filed by the petitioner challenging OMP(COMM) 87/2018 page 1 the Arbitral Award dated 5th July, 2017 passed by the Sole Arbitrator awarding certain claims in favour of the respondent along with interest.
4. The disputes between the parties arose out of the failure of the petitioner to complete the work of 'construction of dwelling units including allied services for Officers, JCOs/OR RRC Line, OD Line, Rasponja, Hasting Line, Dakshnishwar at Kolkata awarded by the respondent in favour of the petitioner vide Agreement dated 31.01.2011. The petitioner having delayed the completion of the work, the agreement was terminated by the respondent on 31st May, 2013. Upon such termination of the agreement, the respondent proceeded to award the balance work to M/s K.Tech Engineer Builders Co. Pvt. Ltd. at the risk and cost of the petitioner on 29th August, 2014.
5. The respondent raised the following claims before the Arbitrator:
"78. Revised Amount of Claim No.1. The Claimant vide letter No. 81974/MAP/PH-11/PKG-19/1 (B)/ARB/72/E8 dated 15 Jun 17 submitted revised amount of Claim No. 1 as under:
(a) Final Bill amount : Rs.54,67,59,241.52(-)
(ii) Encashment of Performance Guarantee : Rs.3,24,50,000.00(+)
(iii) Press Advertisment Charges : Rs.13,134.00(-)
(iv) Compensation For Less Tech Staff/Engr : Rs.71,33,067.00(-)
(v) Delay in submission of CPM Chart : Rs.16,96,000.00(-)
(vi) Expenditure on preparation of Final Bill : Rs.10,000.00 (-)
(vii) CILQ Charges : Rs.11,44,96,200.00(-) TOTAL : Rs.63,76,57,642.52(-) OMP(COMM) 87/2018 page 2
6. The petitioner was proceeded ex parte by the Sole Arbitrator as it failed to appear before the Arbitrator in spite of several notices.
7. The first contention raised by the counsel for the petitioner is that at the inception of the arbitration proceedings, the petitioner had challenged the authority of the Sole Arbitrator to proceed with the arbitration as the Arbitrator was an officer of the respondent/Armed Forces. She submits that in terms of Section 13(3) of the Act, the Arbitrator is mandated to decide on such objection first before proceeding with the arbitration. She submits that in the present case, the Arbitrator did not decide the objection raised by the petitioner during the arbitration proceedings, but decided the same only with the Impugned Award. She submits that this itself is a ground for setting aside the Impugned Award.
8. On the other hand, counsel for the respondent draws my attention to the summary of various proceedings before the Arbitrator as recorded in the Impugned Award itself. He submits that the petitioner was playing hide and seek with the Arbitrator inasmuch as it appeared once and then thereafter chose not to appear. He further submits that the objection raised by the petitioner was vague in nature and, in fact, contrary to Clause 60 of the General Conditions of Contract by which the petitioner had given its consent to appointment of a serving officer as an Arbitrator for adjudicating the disputes between the parties. He submits (and it is denied by the counsel for the petitioner) that as the arbitration proceedings had commenced prior to coming into force of the Arbitration and Conciliation OMP(COMM) 87/2018 page 3 (Amendment) Act, 2015, the law as prevailing then would be applicable. He submits that prior to the amendment of the Act, even a serving officer could be appointed as an Arbitrator, provided he had not dealt with the subject matter of the dispute. He submits that the petitioner never raised any objection on this ground and in fact, the Arbitrator, in paragraph 9 of the Impugned Award, has categorically recorded that he had no interest in the dispute nor had he dealt with the case earlier in his official capacity before entering upon the reference of the dispute.
9. I have considered the submissions made by the counsels for the parties. Though it is correct that the Arbitrator should decide on the objection raised by the party to the dispute with respect to his authority, before proceeding further with the arbitration proceedings, however, in the present case, it is seen that the challenge to the authority of the Arbitrator was only on the ground that he is a serving officer of the respondent/Armed Forces and as such is ineligible to continue as an Arbitrator. It is also noticed that prior to the appointment of the Sole Arbitrator who has passed the Impugned Award, another Arbitrator had been appointed by the respondent. Similar objection to such appointment had been taken by the petitioner, however, the said Arbitrator had also proceeded with the proceedings before resigning from his position as an Arbitrator on 29th February, 2016. The present Arbitrator was appointed by the respondent on 27th May, 2016 and he gave his consent to such appointment on 21st June, 2016 calling upon the parties to file their respective pleadings. The petitioner raised an objection against his OMP(COMM) 87/2018 page 4 appointment vide letter dated 5th October, 2016, however, forwarded their memo of appearance on 18th October, 2016 to the Arbitrator. Thereafter, on the statement of claim being filed by the respondent, the petitioner also sought a direction from the Arbitrator for the respondent to supply a number of documents listed in the Statement of Claim. Such direction was issued by the Arbitrator on 28 th October, 2016. Thereafter, though the petitioner did not appear before the Arbitrator, it again sent an authorization in favour of one Mr.K.Anil Kumar Reddy, Director of the petitioner to appear before the Arbitrator. It also made a request for supply of further documents vide letter dated 19th November, 2016 so as to enable it to proceed further in the arbitration proceedings. Finally, in its letter dated 23rd November, 2016, the petitioner again raised an objection about the authority of the Arbitrator to act as such as he was an 'ex employee' with the Armed Forces. Though, this letter is not on record, the Arbitrator has reproduced some portion of the same in paragraph 19 of the Impugned Award. The letter had stated that the petitioner would be challenging the authority of the Arbitrator before an 'appropriate Forum'. On being asked whether any petition challenging the authority of the Arbitrator to proceed with the arbitration proceedings had been filed by the petitioner in any Court or otherwise, counsel for the petitioner submits that no such proceedings were filed by the petitioner. As noted above, the petitioner also chose to remain absent from the arbitration proceedings without any justified cause.
10. In view of the above, merely because the Arbitrator did not pass OMP(COMM) 87/2018 page 5 a formal order rejecting the challenge made by the petitioner to his authority to continue as an Arbitrator, it cannot be said that he committed an illegality which would vitiate the arbitration proceedings making the Impugned Award liable to be set aside in these proceedings on that ground alone. I may only reiterate that the law as prevailing prior to the amendment to the Act was that even a serving officer can act as an Arbitrator provided he has not dealt with the subject matter of the dispute. In Indian Oil Corporation Ltd. vs. Raja Transport Private Limited (2009) 8 SCC 520, Supreme Court reiterated the then prevailing law on this issue as under:-
"13. Arbitration is a binding voluntary alternative dispute resolution process by a private forum chosen by the parties. It is quite common for Governments, statutory corporations and public sector undertakings while entering into contracts, to provide for settlement of disputes by arbitration, and further provide that the arbitrator will be one of its senior officers. If a party, with open eyes and full knowledge and comprehension of the said provision enters into a contract with a Government/statutory corporation/public sector undertaking containing an arbitration agreement providing that one of its Secretaries/Directors shall be the arbitrators, he cannot subsequently turn around and contend that he is agreeable for settlement of the disputes by arbitration, but not by the named arbitrator who is an employee of the other party.
14. No party can say he will be bound by only one part of the agreement and not the other part, unless such other part is impossible of performance or is void being contrary to the provisions of the Act, and such part is severable from the remaining part of the agreement. The arbitration clause is a package which may provide for what disputes are arbitrable, at what stage the disputes are arbitrable, who should be the arbitrator, what should be the venue, what law would govern the parties, etc. A party to the contract cannot claim the benefit OMP(COMM) 87/2018 page 6 of arbitration under the arbitration clause, but ignore the appointment procedure relating to the named arbitrator contained in the arbitration clause.
15. It is now well settled by a series of decisions of this Court that arbitration agreements in government contracts providing that an employee of the Department (usually a high official unconnected with the work or the contract) will be the arbitrator, are neither void nor unenforceable. xxxxxx
30. We find no bar under the new Act, for an arbitration agreement providing for an employee of a Government/statutory corporation/public sector undertaking (which is a party to the contract), acting as an arbitrator. Section 11(8) of the Act requires the Chief Justice or his designate, in appointing an arbitrator, to have due regard to:
"11. (8)(a) any qualifications required of the arbitrator by the agreement of the parties; and
(b) other considerations as are likely to secure the appointment of an independent and impartial arbitrator."
31. Section 12(1) requires an arbitrator, when approached in connection with his possible appointment, to disclose in writing any circumstances likely to give rise to justifiable doubts as to his independence or impartiality. Section 12(3) enables the arbitrator being challenged if
(i) the circumstances give rise to justifiable doubts as to his independence or impartiality, or
(ii) he does not possess the qualifications agreed to by the parties.
32. Section 18 requires the arbitrator to treat the parties with equality (that is to say without bias) and give each party full opportunity to present his case. Nothing in Sections 11, 12, 18 or other provision of the Act suggests that any provision in an arbitration agreement, naming the arbitrator will be invalid if OMP(COMM) 87/2018 page 7 such named arbitrator is an employee of one of the parties to the arbitration agreement.
33. Sub-section (2) of Section 11 provides that parties are free to agree upon a procedure for appointment of arbitrator(s). Sub-section (6) provides that where a party fails to act, as required under the procedure prescribed, the Chief Justice or his designate can take necessary measures. Sub-section (8) gives the discretion to the Chief Justice/his designate to choose an arbitrator suited to meet the requirements of a particular case. The said power is in no way intended to nullify a specific term of arbitration agreement naming a particular person as arbitrator. The power under sub-section (8) is intended to be used keeping in view the terms of the arbitration agreement.
34. The fact that the named arbitrator is an employee of one of the parties is not ipso facto a ground to raise a presumption of bias or partiality or lack of independence on his part. There can however be a justifiable apprehension about the independence or impartiality of an employee arbitrator, if such person was the controlling or dealing authority in regard to the subject contract or if he is a direct subordinate (as contrasted from an officer of an inferior rank in some other Department) to the officer whose decision is the subject-matter of the dispute.
35. Where however the named arbitrator though a senior officer of the Government/statutory body/government company, had nothing to do with the execution of the subject contract, there can be no justification for anyone doubting his independence or impartiality, in the absence of any specific evidence. Therefore, senior officer(s) (usually Heads of Department or equivalent) of a Government/statutory corporation/public sector undertaking, not associated with the contract, are considered to be independent and impartial and are not barred from functioning as arbitrators merely because their employer is a party to the contract.
OMP(COMM) 87/2018 page 8
36. The position may be different where the person named as the arbitrator is an employee of a company or body or individual other than the State and its instrumentalities. For example, if the Director of a private company (which is a party to the arbitration agreement), is named as the arbitrator there may be a valid and reasonable apprehension of bias in view of his position and interest, and he may be unsuitable to act as an arbitrator in an arbitration involving his company. If any circumstance exists to create a reasonable apprehension about the impartiality or independence of the agreed or named arbitrator, then the court has the discretion not to appoint such a person.
37. Subject to the said clarifications, we hold that a person being an employee of one of the parties (which is the State or its instrumentality) cannot per se be a bar to his acting as an arbitrator. Accordingly, the answer to the first question is that the learned Chief Justice was not justified in his assumption of bias."
11. On being asked if the petitioner had any knowledge of the Arbitrator having dealt with the subject matter of the dispute, the counsel for the petitioner submits that the petitioner has no such knowledge. On the other hand, there is a categorical denial by the Arbitrator as recorded in paragraph 9 of the Impugned Award on this aspect. Therefore, I find no merit in the objection raised by the petitioner on this ground.
12. The second contention raised by the counsel for the petitioner is that the arbitrator has awarded the amounts in favour of the respondent without seeking any proof of the same. She submits that though the agreement between the parties empowered the respondent to complete the work at the risk and consequence of the petitioner, the OMP(COMM) 87/2018 page 9 Arbitrator should have scrutinized the terms of the agreement between the respondent and M/s K-Tech Engineer Builders Co. Pvt. Ltd. to find out and determine whether any additional work had been granted in favour of the new contractor and as to whether the work awarded in favour of the new contractor was indeed the balance work that had remained to be executed by the petitioner. Counsel for the petitioner further submits that there were various other documents that were relevant for the purposes of adjudicating the claim of the respondent, however, they find no mention in the Impugned Award. These documents should also have been considered by the Arbitrator before passing the Impugned Award.
13. I am unable to agree with the submission made by the counsel for the petitioner. The Arbitrator in the Impugned Award records that the respondent has filed before it the agreement between the respondent and the petitioner as also the contract awarded in favour of M/s K-Tech Engineer Builders Co. Pvt. Ltd. As the petitioner had remained ex parte before the Arbitrator and even a response to the Statement of Claim had not been filed by it, there was no dispute before the Arbitrator that the agreement as awarded in favour of the new contractor is not for the balance work that had remained unexecuted by the petitioner. In absence of such a dispute being raised, it was not for the Arbitrator to have himself assumed such a dispute and to scrutinize the evidence as if to find loopholes in the same or to conduct a fishing and roving enquiry. Once the respondent had made a submission that the agreement executed by it with the new contractor was for the balance work and such assertion remained OMP(COMM) 87/2018 page 10 unchallenged, the Arbitrator was entitled to pass an award on the basis of this submission, especially when the two contracts had been duly proved before the Arbitrator.
15. It is further contended by the counsel for the petitioner that in the present case, there is a duplication of amounts awarded in favour of the respondent by the Arbitrator. She submits that on the one hand, the Arbitrator has awarded compensation @10% of the agreement amount equalling to Rs.6,48,77,451.99 while adjudicating Claim No.1(a) as Liquidated Damages, at the same time, the Arbitrator had also awarded an amount of Rs.11,44,96,200/- in favour of the respondent as damages on the ground that the respondent had suffered this loss due to failure of the petitioner to timely complete the project of construction of the flats.
16. Counsel for the respondent, on the other hand, submits that the two claims are distinct and, therefore, there is no question of any duplication of the amounts awarded in favour of the respondent.
17. As far as this objection is concerned, I agree with the counsel for the petitioner. The damages in form of 'Cash in lieu of Quarter (CILQ)' have been awarded in favour of the respondent under claim no. 1(j) for the period of delay in schedule date completion of the flats in the agreement with the petitioner and the schedule date of completion in the contract with the new contractor, that is for the period between 1st March, 2013 to 6th November, 2016. This, therefore, is clearly the actual damages suffered by the respondent due to delay in completion of the work. On the other hand, while granting claim no.1(a), an amount of Rs.6,48,77,451.99 has also been OMP(COMM) 87/2018 page 11 awarded in favour of the respondent as liquidated damages.
18. Section 74 of the Indian Contract Act, 1872 provides as under:-
"74. Compensation for breach of contract where penalty stipulated for:- 34 When a contract has been broken, if a sum is named in the contract as the amount to be paid in case of such breach, or if the contract contains any other stipulation by way of penalty, the party complaining of the breach is entitled, whether or not actual damage or loss is proved to have been caused thereby, to receive from the party who has broken the contract reasonable compensation not exceeding the amount so named or, as the case may be, the penalty stipulated for. Explanation.-- A stipulation for increased interest from the date of default may be a stipulation by way of penalty."
(emphasis supplied)
19. As the contract provides for imposition of liquidated damages, the Arbitrator can award reasonable compensation in favour of the respondent not exceeding the amount so mentioned. The effect of Section 74 of the Indian Contract Act on the claim of damages has been discussed in detail by the Supreme Court in its judgment of Kailash Nath Associates vs. Delhi Development Authority And Another, (2015) 4 SCC 136, wherein after discussing various prior judgments of the Supreme Court on Section 74 of the Contract Act, the Supreme Court has held as under:-
"43. On a conspectus of the above authorities, the law on compensation for breach of contract under Section 74 can be stated to be as follows:
43.1 Where a sum is named in a contract as a liquidated amount payable by way of damages, the party complaining of a breach can receive as reasonable OMP(COMM) 87/2018 page 12 compensation such liquidated amount only if it is a genuine pre-estimate of damages fixed by both parties and found to be such by the court. In other cases, where a sum is named in a contract as a liquidated amount payable by way of damages, only reasonable compensation can be awarded not exceeding the amount so stated. Similarly, in cases where the amount fixed is in the nature of penalty, only reasonable compensation can be awarded not exceeding the penalty so stated. In both cases, the liquidated amount or penalty is the upper limit beyond which the court cannot grant reasonable compensation.
43.2 Reasonable compensation will be fixed on well-
known principles that are applicable to the law of contract, which are to be found inter alia in Section 73 of the Contract Act.
43.3 Since Section 74 awards reasonable compensation for damage or loss caused by a breach of contract, damage or loss caused is a sine qua non for the applicability of the section.
43.4 The section applies whether a person is a plaintiff or a defendant in a suit.
43.5 The sum spoken of may already be paid or be payable in future.
43.6 The expression "whether or not actual damage or loss is proved to have been caused thereby" means that where it is possible to prove actual damage or loss, such proof is not dispensed with. It is only in cases where damage or loss is difficult or impossible to prove that the liquidated amount named in the contract, if a genuine pre-estimate of damage or loss, can be awarded.
43.7 Section 74 will apply to cases of forfeiture of earnest money under a contract. Where, however, forfeiture takes place under the terms and conditions of a public auction before agreement is reached, Section 74 would have not application"
(emphasis supplied)
20. In view of the above, the respondent was only entitled to the liquidated damages as have been granted in its favour under its claim OMP(COMM) 87/2018 page 13 no.1(a) and not the damages actually suffered by it and as claimed under claim no. 1(j) in addition to the Liquidated Damages.
16. It is to be noted that claim made under claim no.1(j) was the amount paid by the respondent to its officers who are not allotted Government accommodation. It was the claim of the respondent that due to delay in construction of the flats in question, it had to continue paying the CILQ to its officers between 1st March, 2013 (that is the original date of completion of the work) and 6th November, 2016 (that is the stipulated date of completion of the work as mentioned in the contract with the subsequent contractor). This clearly was, therefore, damage suffered by the respondent, however, as the contract between the petitioner and the respondent provided for liquidated damages, the respondent could not have been held entitled to any amount in excess of the same and in any case not in addition to the same and the Award of claim no. 1(j) cannot be sustained.
21. It is further contented by the counsel for the petitioner that the Arbitrator has wrongly awarded damages for the delay in submission of Critical Part Method (CPM) chart. She submits that as the amount awarded is in form of liquidated damages / penalty, the same could not have been awarded without proof of actual loss suffered by the respondent due to such delay. I am unable to agree with the said submission. Clause 3.11.2 of the agreement provides that any delay on part of the contractor to submit the CPM Network Diagram shall attract a penalty as provided therein. Before the Arbitrator, there was no dispute raised with respect to such delay in submitting CPM Network Diagram. Nor was an objection raised that the amount OMP(COMM) 87/2018 page 14 mentioned in clause 3.1.2 is in form of penalty and not liquidated damages or is unreasonable. In absence of such assertions, the Arbitrator has rightly awarded the said amount in favour of the respondent. I place reliance on the judgment in Kailash Nath Associates (supra). I, therefore, find no merit in the objection against the award of the amount in favour of the respondent under Claim no.1(g).
22. It is lastly contended by the counsel for the petitioner that the amounts awarded in favour of the respondent being in form of damages, interest prior to the date of the award could not have been granted in favour of the respondent. This submission of the petitioner cannot be accepted as the Arbitrator has clearly recorded cogent reasons for award of such interest and from the dates that he has awarded such interest in favour of the respondent. I may only quote from paragraphs 103 and 104 of the Impugned Award as under:-
"103. I find that the Claimant vide their letter No.81974/MAP/PH-II /PKG-19/1/B/585/E8 dated 08 Sep 14 has asked the Respondent to deposit a sum of Rs.37.70 Crores through MRO as the risk and cost amount and had also stated in their letter that this amount is approximate and may change and final amount of recovery shall be known after completion of the risk and cost contract. The Claimant vide letter No. 81974/MAP/PH-II/PKG-19/1(B)/ARB/36/EB dated 16 Aug 16 submitted their SOC to me wherein the amount of this claim No. 1 has been intimated to the Respondent and the Sole Arbitrator as Rs 55,74,80,379.92 and the Claimant has accordingly claimed interest @18% per annum on this amount from the date of intimation to the Respondent to deposit the risk and cost amount to the date of the award. This amount was further revised to Rs.63,76,57,642.52 and I, after having considered circumstances of the case have finally awarded a OMP(COMM) 87/2018 page 15 sum of Rs. 63,65,81,178.32 against this claim. Interest on this amount therefore becomes due on the date on which this amount has been claimed for first time i.e. on 16 Aug 16 and not from the date on which the previously calculated amount i.e. Rs.37.70 Crores was intimated to the Respondent i.e. 08 Sep 14.
104. Interest is not a fixed scenario but changes with time. Hon'ble Supreme Court in case of IT Expressway Limited versus Ancent Engineers 2013 Arb WLJ 695 has held 12% interest per annum as reasonable. I have examined the circumstances leading to this claim and in the light of above analysis, I award following interest to the Claimant UOI on their claims:-
(a) Pendent elite Interest. The Claimant has claimed an interest of 18% per annum on an amount of Rs. 55,74,80,379.92 (amount of original claim No. 1 of Claimant SOC), from the date of intimation to Respondent to deposit the money up to date of award. I find that the Claimant vide their letter dated 08 Sep 2014 (Exhibit GC-47) had intimated to the Respondent to deposit the risk and cost amount The Claimant had asked for deposition of an amount of Rs.37,70,00,000.00 and stated that this is an approximate amount and that the exact amount of recovery shall be known after completion of risk and cost contract. In view of the various submissions of the Claimant, my findings above, case laws relied upon as also the revised claim No.1. I direct the Respondent to pay simple interest @12% per annum on the amount of Rs.37,70,00,000.00 from 08 Sep 2014 to 26 May 16 (day prior to date of my appointment) and simple interest @12% per annum on the amount awarded against revised claim No.1 i.e. Rs.63,65,81,178.32 from 27 May 16 (date of my appointment) to the date of this award, in favour of the Claimant
(b) Future Interest. I allow a time of 90 days to the Respondent, to pay to the Claimant the amounts set out as awards by me in favour of the. Claimant, failing which, the OMP(COMM) 87/2018 page 16 Respondent shall also pay to the Claimant, simple interest @12% per annum on these amounts for the period to be reckoned from the day after the date of this award to the date on which the actual payment is made."
23. I, therefore, find no merit in the said objection of the petitioner.
24. In view of the above, the present petition is allowed only to the limited extent of setting aside the award of Claim no.1(j) in favour of the respondent and the consequential interest thereon, while upholding the remaining amounts awarded in the Impugned Award in favour of the respondent. There shall be no order as to costs.
NAVIN CHAWLA, J
MARCH 12, 2018
RN
OMP(COMM) 87/2018 page 17