While talking sense and taking the most pragmatic stand, the Calcutta High Court, in a most learned judgment titled Damodar Valley Corporation vs Reliance Infrastructure Limited (RIL) in Neutral Citation: 2023:CHC-OS:5117 in the exercise of its ordinary original civil jurisdiction that was reserved on August 9, 2023 and then finally pronounced on September 29, 2023 has upheld an arbitral award of Rs 1354 crores that was passed in favour of the Reliance Infrastructure Limited.
We must note that the award stemmed from the deal of RIL with Damodar Valley Corporation for constructing a thermal power plant. The Court said unequivocally that the Indian arbitration system required reform due to the increasing judicial interference at every stage of the process. It merits mentioning that the Single Judge Bench comprising of Hon’ble Justice Shekhar B Saraf very rightly underscored that, “Presently, it seems that arbitration system in India itself is finding it hard to bear the weight of the increasing judicial interference at every stage of the process. This not only impacts the viability of arbitration as a dispute resolution mechanism, but further demotes India’s standing as a business friendly destination in a globalised world.” No denying it.
At the very outset, this robust judgment authored by the Single Judge Bench comprising of Hon’ble Justice Shekhar B Saraf of Calcutta High Court sets the ball in motion by first and foremost putting forth in para 1 that “The award debtor Damodar Valley Corporation (hereinafter also referred to as the ‘petitioner’) has preferred this application being AP 40 of 2020 under Section 34 of the Arbitration & Conciliation Act, 1996 (hereinafter referred to as ‘the Act’) against the arbitral award dated December 21, 2019 passed by the arbitral tribunal comprising of Ganendra Narayan Ray (Presiding Arbitrator), Indrajit Chatterjee (Co-Arbitrator), and Ronojit Kumar Mitra (Co-Arbitrator). The award holder/claimant in the instant application is Reliance Infrastructure Limited (hereinafter also referred to as the ‘respondent’).”
To put things in perspective, the Bench, while dwelling on facts of the case, envisages in para 2 that “2.1 I have outlined the facts leading to the instant application below:-
2.1.1 The award debtor is a statutory corporation constituted under the provisions of the Damodar Valley Corporation Act, 1948. The award holder is a company within the meaning of the Companies Act, 2013.
2.1.2 A Notice Inviting Tender (NIT) was floated by the award debtor on May 18, 2007, as part of the process of international competitive bidding for the construction of Phase – 1 of a power plant comprising two units of 600 MW each near Raghunathpur in the district of Purulia, West Bengal.
2.1.3 Pre-bid meetings were held by and between the award debtor and various bidders, including the award holder. Eventually, the award holder remained the only surviving bidder and submitted a composite proposal/bid for the said work. The award debtor accepted the said bid of the award holder, and subsequently, a Letter of Acceptance (LoA) was issued by the award debtor on December 11, 2007. The total contract price, as stipulated, included a rupee component of INR 2271.70 crores (Rupees two thousand two hundred seventy-one crores and seventy lakhs only) and a Euro component of 271.895 million.
2.1.4 The date of commencement of work (‘Zero Date’) was slated to be December 14, 2007. Post the Zero Date, parties were to take certain steps towards the completion of the said project. Three Letters of Intent (LoIs) were issued to the respondent in respect of the said project – i) For the supply of indigenous equipment, ii) For the supply of foreign equipment (by Shanghai Electric Corporation, China), and iii) For the rendering of services in respect of the construction of the said power plant by the award holder.
2.1.5 Three detailed contracts in respect of the said power plant were executed between the award holder and the award debtor on December 6, 2008. The Zero date for both the Units was stipulated to be December 14, 2007, and the Completion Date for Unit No. 1 was stated to be November 14, 2010 and for Unit No. 2 to be February 14, 2011. It is to be noted that both the Units could not be completed within the stipulated period. During the period of construction, which continued beyond the stipulated period, applications were made by the respondent for extensions. The same was granted by the petitioner, without prejudice, for completion of its work. Finally, Unit No. 1 was handed over by the respondent on May 15, 2015, whereas Unit No. 2 was handed over on February 23, 2016.
2.1.6 The award holder requested for payment of the outstanding dues as well as the return of bank guarantees along with other consequential reliefs. In response, vide its letter dated February 3, 2017, the award debtor sought to levy Liquidated Damages on the award holder by attributing a delay of 468 days in completion of Unit No. 2 only.
2.1.7 By a letter dated April 3, 2017, the award holder requested the award debtor to nominate an adjudicator under Clause 6.1 of the General Conditions of Contract (‘GCC’) read with Clause 1 of the Special Conditions of the Contract (‘SCC’). An adjudicator was appointed, but the said adjudication process could not resolve the disputes between the parties. Subsequently, vide letter dated June 15, 2017, the award holder invoked arbitration in terms of Clause 6.2 of the GCC and nominated one arbitrator. The award debtor vide its letter dated July 12, 2017, also appointed one arbitrator and thereafter, the two arbitrators, so appointed, requested the Presiding Arbitrator to constitute the tribunal. The Presiding Arbitrator constituted the tribunal and intimated the constitution to the parties in a letter dated August 5, 2017.
2.1.8 Amongst the issues framed by the arbitral tribunal, the award holder did not press issue no. 22, 29, 31 to 33 in the arbitral proceedings. Similarly, the award debtor did not argue issue no. 5(e), 6(c) and 6(d). Hence, these issues were not dealt with by the arbitrators.
2.1.9 On December 21, 2019, the arbitral tribunal published the award wherein the following issues were awarded in favour of the award holder:-
a. In Issues No. 2 and 12 to 14, INR 137,18,67,733 and €13,791,641 with simple interest @ 10% p.a. from August 21, 2017, till the date of award was awarded in the favour of the claimant.
b. In Issue No. 15, INR 1,84,51,773.80 with simple interest @ 10% p.a. from February 20, 2017, till the date of award was awarded in favour of the claimant.
c. In Issue No. 16, INR 4,28,30,000 with simple interest @ 10% p.a. from November 11, 2016, till the date of award was awarded in favour of the claimant.
d. In Issue No. 17, INR 3,83,32,062.63 with simple interest @ 10% p.a. from February 20, 2017, till the date of award was awarded in the favour of the claimant.
e. In Issue No. 18, INR 12,00,000 with simple interest @ 10% p.a. from February 09, 2016, till the date of award was awarded in the favour of the claimant.
f. Issue No. 19, INR 6,10,000 with simple interest @ 10% p.a. from November 28, 2015, till the date of award was awarded in favour of the claimant.
g. In Issue No. 20, INR 28,12,832 with simple interest @ 10% p.a. from November 28, 2015, till the date of award was awarded in the favour of the claimant.
h. In Issue No. 21, INR 33,20,000 with simple interest @ 10% p.a. from November 28, 2015, till the date of award was awarded in the favour of the claimant.
i. In Issue No. 23, INR 12,04,88,400 with simple interest @ 10% p.a. from August 26, 2010, till the date of award was awarded in the favour of the claimant.
j. In Issue No. 24, INR 183,40,27,812 and €4,767,801.75 with simple interest @ 10% p.a. from August 23, 2017, till the date of award was awarded in favour of the claimant.
k. In Issue No. 25, INR 29,03,09,091.86 with simple interest @ 10% p.a. from August 23, 2017, till the date of award was awarded in the favour of the claimant.
l. In Issue No. 27, INR 126,10,84,834 and €9,750,000 with simple interest @ 10% p.a. from August 23, 2017, till the date of award was awarded in the favour of the claimant.
m. In Issue No. 28, INR 2,49,89,529 without any interest was awarded to the claimant.
n. In Issue No. 50, the petitioner was directed to release all the BGs of the Claimant within a month from the date of award. In default, simple interest @ 15% p.a. till realisation of the entire sum.
2.1.10 Only one counterclaim of the award debtor was allowed:-
a. In Issue No. 42, the award debtor was permitted to deduct a sum of INR 6,00,00,000 (Six crores only) from the amount payable by the award debtor to the award holder.”
As it turned out, the Bench enunciates in para 3 that, “Being aggrieved by the aforesaid arbitral award dated December 21, 2019 the award debtor filed this application on January 21, 2020 under Section 34 of the Act praying for setting aside of the entire award.”
Most significantly, the Bench propounds in para 34 that, “34.1 While penning down this judgment, apart from the legal and factual disputes raised in the instant is, I am also intrigued by the larger issues raised before me.
34.2 India is a developing country with increasing infrastructural needs, which are growing at an exponential rate. There is rampant construction to the point where every day, one sees a construction project popping up. With such growing demand, there is a significant rise in commercial disputes arising out of the contracts that form the bedrock of these projects. Being cognizant of the fact that the number of such commercial disputes seems to be escalating, arbitration has become the preferred forum of choice for parties to seek resolution. Arbitration has been envisaged as a mechanism of dispute resolution which is free from the clutches of redundancy, inefficiency, and delay that plague our litigation system. Having said that, presently, it seems that the arbitration process in India itself is finding it hard to bear the weight of the increasing judicial interference at every stage of the process. This not only impacts the viability of arbitration as a dispute resolution mechanism but further demotes India’s standing as a business-friendly destination in a globalised world. Such demotion can be seen in the World Bank’s Ease of Doing Business Report, published in 2020, where India was ranked 163rd vis-a-vis Enforcement of Contracts. To amend such a standing, there is a dire need for arbitration reform in India. This reform must not only reflect in the legislation itself but also in the mindset of all the stakeholders.
34.3 Courts are an important stakeholder in the arbitration process; however, they must be weary of unnecessary judicial interference at every stage of the arbitral process. For instance, in this Section 34 application before me, the petitioner attempted to evade the arbitral award dated December 21, 2019, on each possible avenue. While a party cannot be barred from raising any particular ground, I feel there needs to be a shift in the tendency of parties challenging an arbitral award to treat courts under Section 34 as an appellate forum. As expanded upon in this judgement, the arbitral tribunal is the sole competent judge of questions of facts and law between the parties. It is axiomatic that how a particular dispute has to be dealt with and adjudicated falls squarely within the arbitral tribunal’s domain. The above is particularly significant in disputes arising out of large construction contracts, where facts are often convoluted, issues involved are too complex, and amounts claimed are colossal. Whatever the arbitral tribunal’s approach to reach a particular conclusion on the issues raised, or the final award itself, the same cannot be and should never be interfered with by the courts under Section 34 of the Act unless there is severe infirmity or patent illegality involved. Such infirmity or patent illegality must be visible on the face of award, and courts cannot embark upon a deep journey in search of such infirmity or patent illegality.
34.4 While the petitioner before me raised a challenge to the entitlement of the respondent to the claim for damages itself, it more specifically challenged the method of quantification adopted by the arbitral tribunal. However, the arguments adopted by the petitioner failed to find favour before me. One needs to remember, that in absence of any specific contractual bar, a party cannot be estopped from availing the statutory right to damages available under Section 73 of the Indian Contract Act, 1872. Every contractual dispute is distinct, and therefore, the Legislature has not penned any specific method of quantifying the loss/damages suffered by a party at the receiving end of a contractual breach as each dispute involves its own complexities and intricacies. Keeping in mind the cardinal principle of party autonomy, parties entering a contract have been left at liberty to opt for any particular process/formula for arriving at the quantification of damages/loss in the event of breach. Such formula can either be fixed or dynamic. In the instant case, the contract between the parties envisaged 5per cent of liquidated damages payable by the respondent to the petitioner in case of any breach on the former’s part.
34.5 However, no provision/stipulation of damages in the event of breach on petitioner’s part were provided for by the contract. In such a case, if the employer itself breaches its contractual obligations, the contractor cannot be left hanging. The arbitral tribunal, although under a mandate to follow the specifics contained in the contract between the parties by virtue of the mandate contained under Section 28(3) of the Act, is also competent to chart its own course in the absence of any specific contractual stipulation. If a party has been held entitled to claim for damages, and no specific provision for arriving at the quantum of such damages is contained within the contractual provisions, the arbitral tribunal is competent to adopt any legally sound formula/procedure to arrive at such quantification of damages. So long as there is no infirmity or patent illegality in the arbitral tribunal’s decision, it is beyond the scope of challenge as envisaged under Section 34 of the Act.
34.6 I also feel compelled to put forth a pertinent concern that I faced while adjudicating the instant Section 34 application. While a party at the suffering end of a contractual breach can claim damages, there is a need to keep certain principles in mind while claiming such damages. As penned by Sanjiv Khanna, J. in Batliboi Environmental Engineers (supra), in no circumstance can a party be allowed to ‘thicken’ its claim for damages by raising irrelevant and nonessential claims. What a party did not lose, it cannot be allowed to recover. The same was the case with the claim for overheads involved in Issue No. 27 in the arbitral award dated December 21, 2019. It would be apt to point out that while the suffering party must be made whole by the party responsible for the contractual breach, it cannot be unjustly enriched. The penalty accorded for a particular contravention can never exceed the contravention itself, and what was never spent cannot be claimed back. Claims such as overheads, workforce expenses, etc., which can be too difficult to affix to a particular project/breach, need to be backed by compelling evidence and cannot be claimed on the back of vague certifications that are not buttressed by hard corroboration.”
All told, the Calcutta High Court has very rightly pointed out the clear writing on the wall: India is in dire need of major arbitration reform. The same must be undertaken and pursued so that it reaches its logical conclusion. The Court also rightly castigated judicial interference at every stage. It also rightly upheld the Rs 1354 crore award in favour of Reliance Infrastructure Limited.