Indian Oil Corporation Ltd. vs Lloyds Steel Industries
2009 Latest Caselaw 4177 Del

*            IN THE HIGH COURT OF DELHI AT NEW DELHI


                                                   Date of Reserve: August 31, 2009
                                                     Date of Order: October 15, 2009

+Arb. P. 151/2001
%                                                             15.10.2009
     Indian Oil Corporation Ltd.                       ...Petitioners
     Through: Mr. V.N. Koura with Ms. Pooja Aneja, Advocates

        Versus

        Lloyds Steel Industries                     ...Respondent
        Through: Mr. Amit S. Chadha, Sr. Advocate with Mr. Nikilesh Kr.,
        Advocates



        JUSTICE SHIV NARAYAN DHINGRA

1.      Whether reporters of local papers may be allowed to see the judgment?

2.      To be referred to the reporter or not?

3.      Whether judgment should be reported in Digest?


        JUDGMENT

1. This petition under Section 11(6) of the Arbitration & Conciliation Act,

1996 ("the Act", for short) has been made by the applicant/petitioner with a

prayer of appointing a sole arbitrator from amongst the penal of arbitrators

nominated by the applicant and mentioned in the petition to adjudicate the

disputes between the parties.

2. Facts in nutshell for deciding this petition are that the applicant

awarded a contract for the design, supply, fabrication, erection, stress

relieving, testing etc and associated civil, structural and electrical works of

five (5) Nos. Horton Spheres of size 12M Diameter for the applicant's Mathura

Refinery by issuing letter of acceptance of tender dated 21 st November 1994

to the respondent. The formal contract was signed between the parties on

Arb.P. 151/2001 Indian Oil Corp. Ltd. vs. Lloyds Steel Industries Page 1 Of 11 24th November 1994 for a total nominal value of Rs.10,29,73,770/-. The

Resident Construction Manager (RCM) of Engineers India Ltd (EIL) was

appointed as the Engineer-in-charge for the project. The contractual time

period for completion of work was 16 months from the date of issuance of

telegram on acceptance i.e. 7th October 1994.

3. The contention of petitioner/applicant is that the respondent showed

complete lack of interest for timely completion of work and even the

mobilization of resources at the job site was started after expiry of five

months from the awarding of work. The inadequate and tardy progress of

work continued right till scheduled completion date. Upon the expiry of the

contractual completion period, the respondent had failed to fabricate, erect or

install even a single Horton Sphere and had achieved a progress of hardly 5%

of the total scope of work. The respondent's failure to perform the contractual

work resulted into delay in other dependent works at the refinery and the

petitioner had to urgently procure two readymade bullets (spheres) to be

utilized for the storage of Propylene to fulfill its immediate need.

Consequently, the petitioner reduced the scope of work of respondent from 5

Horton to 3 Horton spheres and the respondent was to complete this altered

scope of work within eleven months from 28th November 1997 i.e. the date of

letter amending the work issued to respondent. The respondent failed to

accept the amendment issued by the petitioner and did not proceeded to

complete even the reduced scope of work with the result that the applicant

had no option but to exercise its powers under clause 7.0.1.0 of the general

conditions of contract which formed part of the contract; to terminate the

contract. Thus by letter dated 16th September 1998, the petitioner/applicant

terminated the contract of respondent. Thereafter, applicant awarded

Arb.P. 151/2001 Indian Oil Corp. Ltd. vs. Lloyds Steel Industries Page 2 Of 11 unfinished work left by respondent to GR Engineers Works Limited for a total

lumpsum value of Rs.11,70,00,000/- at the risk and costs of respondent in

view of clause 7.0.9.0 of GCC. It is stated that as a result of respondent's

breach, the petitioner suffered huge losses to the tune of Rs.8,31,86,544/-

partly towards the amount payable for the said work carried at the risk and

costs of respondent and partly towards liquated damages for delay,

supervisory and other charges. The applicant accordingly asked respondent

to make payment of Rs.5,31,86,544/- which respondent refused to /defaulted

and hence the disputes arose between the parties.

4. The arbitration clause as contained in the contract between the

applicant and respondent reads as under:

                  "9.0.0.0      ARBITRATION
                  9.0.1.0       Subject to the provisions of Clause 6.7.1.0 and
                                6.7.2.0 hereof, any dispute or difference between

the parties hereto arising out of any notified claim of the Contractor included in his final bill in accordance with the provisions of Clause 6.6.3.0 hereof and/or arising out of any amount claimed by the owner (whether or not the amount claimed by the owner or any part thereof shall have been deducted from the final bill of the contractor or any amount paid by the owner to the contractor in respect of the work) shall be referred to arbitration by a Sole Arbitrator selected by the contractor from a panel of three persons nominated by the General Manager."

5. It is submitted by petitioner/applicant that Deputy General Manager

vide its letter dated 1st January 2001 requested general manager of applicant

to nominate a panel of three persons so that respondent may chose one

person from among them as the arbitrator. The General Manager vide its

Arb.P. 151/2001 Indian Oil Corp. Ltd. vs. Lloyds Steel Industries Page 3 Of 11 letter dated 8th January 2001 nominated following three persons and asked

respondent/ contractor to select one of them as the sole arbitrator:-

1. Mr. Justice Jaspal Singh (retd.), Retd. Judge Delhi High Court

2. Mr. Justice S.B. Wad (retd.), Retd. Judge, Delhi High Court.

3. Mr. Justice S.S. Chadha (retd.), Retd. Judge, Delhi High Court.

6. The applicant thereafter requested respondent to appoint one from

among the above panel as sole arbitrator. The respondent however vide its

letter dated 15th January 2001 refused to appoint a sole arbitrator from

among the panel and disputed the liability towards the applicant. Thus, the

applicant has approached this Court by way of present application/ petition.

7. In reply to this application, the respondent submitted that the petition

was not maintainable as respondent filed a suit being no. 76 of 1997 arising

from an alleged breach pertaining to the same contract in respect of which

the applicant was seeking appointment of an arbitrator. The aforesaid suit

was filed by the respondent to seek injunction and other reliefs against the

applicant so as to restrain applicant from invoking two bank guarantees for

an amount of Rs.1.26 crore. The said suit was pending adjudication and in the

said application the applicant did not reserve its right to invoke arbitration

hence the present application was not maintainable.

8. It is further submitted by the respondent that applicant's invoking

arbitration clause was barred by limitation and therefore this Court has no

territorial jurisdiction to appoint an arbitrator. The execution of contract is not

disputed but it is submitted that before expiry of 16 months period for

Arb.P. 151/2001 Indian Oil Corp. Ltd. vs. Lloyds Steel Industries Page 4 Of 11 construction of five Horton Spheres, a joint meeting was held amongst the

representative of petitioner; its consultant Engineers India Limited and the

respondent on 30th November 1995 and the applicant unilaterally reduced the

scope of work from five Horton Spheres to three Horton Spheres and lot of

correspondence was exchanged between applicant and respondent on this

unauthorized reduction of scope of work. The applicant vide letter dated 26th

April 1996 had threatened termination of the contract. It is submitted that the

cause of action, if any, therefore accrued in 1996 and the application was

filed in May, 2000, thus it was beyond the period of limitation. The other

ground taken is that the respondent was a sick industrial company within the

meaning of Section 3(i)(o) of Sick Industrial Companies Act, 1985. The

respondent has filed a reference under Section 15 of SICA on 28 th June 2001

and the reference has been registered and became of registration of

reference no proceedings against respondent can lie except the proceedings

for appointment of an arbitrator.

9. It is also submitted by respondent that there was no arbitration

agreement inter se parties since by reduction of scope of work the earlier

contract between the parties came to an end and a new contract regarding

reduction of scope of work was executed in November-December, 1997 which

contained no arbitration agreement inter se parties. Thus, the present

application under the old contract containing arbitration clause was not

maintainable in respect of novated contract. It is further submitted that this

Court has no territorial jurisdiction to entertain the application since the

respondent resides outside the territory of this Court i.e. at Mumbai. The

other ground taken by respondent is that the application was not filed within

the stipulated period of 30 days of refusal on the part of respondent as

Arb.P. 151/2001 Indian Oil Corp. Ltd. vs. Lloyds Steel Industries Page 5 Of 11 provided under Section 11 of the Act. It is also one of the contentions in the

reply that the arbitrators nominated by the applicant did not have necessary

mechanical/ civil engineering qualification so as to do justice to the issue and

disputes arising between the parties. The disputes between the parties were

of complex nature involving detailed knowledge of mechanical and civil

engineering. Any adjudicator would require qualification of mechanical and

civil engineering in order to adjudicate the disputes between the parties. The

other contentions raised by respondent are on merits of the disputes which

this Court need not go into.

10. A perusal of pleadings of the previous suit filed by respondent against

plaintiff would show that the suit was in respect of bank guarantees issued by

respondent's bank in favour of plaintiff and the suit had nothing to do with

the disputes arising out of the contract. It is now settled law that a bank

guarantee constitutes an altogether different and independent contract

between the bank and the beneficiary and merely because plaintiff had filed a

suit with a prayer that the respondent should be restrained from invoking the

bank guarantee would not mean that the plaintiff is not entitled to invoke the

arbitration clause for adjudication of disputes between the parties arising out

of the main contract.

11. The plea taken by respondent that the contract stood revoked in

November-December, 1997 and there was no arbitration clause in the

novated contract is also a baseless plea. The original contract vide clause

2.5.1.0.1 provided that the scope of work could be altered or reduced by

respondent. Clause 2.5.1.0 reads as under:-

Arb.P. 151/2001 Indian Oil Corp. Ltd. vs. Lloyds Steel Industries Page 6 Of 11 "2.5.0.0 ALTERATION IN THE SCOPE OF WORK:

2.5.1.0 The owner may at any time(s) before or after the commencement of the work, by notice in writing issued to the Contractor, alter the scope of work by increasing or reducing the jobs required to be done by the Contractor or by adding thereto or omitting therefrom any specific job or operations or by substituting any existing jobs or operations with other jobs and or operations, or by requiring the Contractor to perform any extra works in or about the jobs site, and upon receipt of such notice the contractor shall execute the job(s) as required within the altered scope of work."

It is thus clear that merely because the applicant had reduced the

scope of work, the contract would not stand novated and it would be a

continuation of the old contract.

12. During arguments, learned counsel for respondent drew the attention

of the Court to the letter dated 28th November 1997 whereby the scope of

work was reduced. It is submitted that this offer was a conditional offer and

since respondent had not acceded to the condition imposed in the letter, no

concluded contract came into force in respect of reduced scope of work and

the original contract only can be considered by the Court to decide the issue

of limitation. He submitted that the originally disputes arose between the

parties in 1996, therefore, cause of action arose in 1996 and the present

application made in 2000 was beyond the period of limitation. The clause to

which attention of the Court was drawn by respondent, contained in the letter

dated 28th November 1997, reads as under:-

"6. Liquidated Damages:

If this letter is unconditionally and irrevocably accepted

Arb.P. 151/2001 Indian Oil Corp. Ltd. vs. Lloyds Steel Industries Page 7 Of 11 by you by signing and returning two copies hereof in token of your acceptance and by extending the validity of the Bank Guarantee as specified in Para 5(a) hereof, we shall not levy Liquidated Damages under the contract except after the expiry of the time of completion as specified in Para 3 thereof."

13. A perusal of letter of respondent dated 14th February 1997 would show

that after respondent had failed to achieve the progress in respect of

construction of 5 Horton Spheres at Mathura Refinery and the petitioner had

to procure two bullets urgently, talks were going on between the parties for

reduction of scope of work and vide this letter dated 12 th February 1997

respondent categorically gave its confirmation to execute the contract for the

balance three Horton Spheres within the timeframe of 11 months from the

date of communication including one month towards re-mobilization. In the

same letter, the respondent had sought confirmation of the applicant that it

should not impose liquidated damages provided under the contract and the

liquidated damages should now be applicable from the time of completion of

11 months from the date of letter. It is in this context that the respondent had

put this clause of liquidated damages. In fact vide letter dated 28th November

1997, the offer made by respondent for carrying out reduced scope of work

was accepted by the petitioner and the contract stood amended accordingly.

However, the petitioner also made its stand clear in respect of liquidated

damages in terms of above clause. Since the original contract itself provided

that the scope of work could be reduced by the applicant/petitioner, I

consider that vide letter dated 28th November 1997, no new contract was

sought to be brought into force but only the old contract was continued and

the petitioner /applicant made its stand clear regarding liquidated damages.

The plea taken by the petitioner that the earlier contract had come to an end

Arb.P. 151/2001 Indian Oil Corp. Ltd. vs. Lloyds Steel Industries Page 8 Of 11 and the cause of action arose only under the earlier contract in 1996

therefore is fallacious. The cause of action in this case in fact arose beyond

28th November 1997 when the respondent failed to carry out the work even

as per the amended scope of the work and the petitioner had to invoke the

risk purchase clause. The risk purchase clause under the contract reads as

under:-

"7.0.9.0. Upon termination of the Contract, the owner shall be entitled at the risk and expenses of the contractor by itself or through any independent contractor(s) or partly by itself and/or partly through independent contractor(s) to complete to its entirety the work as contemplated in the scope of work and to recover from the contractor in addition to any other amounts. Compensations of damages that the owner may in terms hereof otherwise be entitled to (including compensation within the provisions of Clause 4.4.0.0 and clause 7.0.7.0 hereof) the difference between the amounts as would have been payable to the contractor in respect of the work (calculated as provided for in Clause 6.2.1.0 hereof read with the associated provisions thereunder and Clause 6.3.1.0 hereof) and the amount actually expended by the owner for completion of the entire work as aforesaid together with 15% (fifteen per cent) thereof to cover owner's supervision charges, and in the event of the latter being in the excess former, the owner shall be entitled (without prejudice to any other mode of recovery available to the Owner) to recover the excess from the security deposit or any monies due to the contractor."

14. A perusal of this risk purchase clause coupled with the other provisions

of the contract would show that the applicant could have made the claim

Arb.P. 151/2001 Indian Oil Corp. Ltd. vs. Lloyds Steel Industries Page 9 Of 11 regarding damages suffered by it because of risk purchase, only after the

work under the risk purchase contract was completed and the applicant knew

as to how much it had to shell out more than the original contract. Thus,

under no circumstances, this application made by the applicant was barred

by limitation. The applicant invoked the arbitration clause soon after the

execution of the risk purchase order, as and when it learnt about the exact

quantum of damages due to risk purchase and other heads.

15. The other plea taken by the respondent that the respondent was a sick

company is also not tenable. Even the respondent has not placed on record

any order under SICA declaring the respondent company as sick or

considering the application of respondent for this purpose.

16. The plea of respondent that the present application could not have

been moved beyond 30 days of refusal of respondent to appoint an arbitrator

is a baseless plea. Section 11 does not specify a period of 30 days for making

an application before the Court. Thirty days period under Section 11(4) is a

period given to a party to appoint an arbitrator on receiving notice/ request

from the other party. After expiry of 30 days of the request, a right vests in

the other party to move the Court for appointment of an arbitrator. The

application for appointment of an arbitrator can be made within the period of

limitation as prescribed under Limitation Act and not within 30 days only.

17. It is not disputed by respondent that a dispute arose between the

parties which needs adjudication. The plea of respondent is that the arbitrator

nominated by the applicant/ petitioner were not having civil or mechanical

engineering qualifications and therefore they are not competent arbitrators.

Arb.P. 151/2001 Indian Oil Corp. Ltd. vs. Lloyds Steel Industries Page 10 Of 11 In this case no assessment of engineering or civil work is involved. In fact, the

claim of petitioner is in respect of risk purchase and supervisory charges etc.

because of a failure of respondent to perform its part of contract. Thus the

nature of claim does not call for any civil or mechanical engineering

knowledge.

18. I, therefore, consider that it is not necessary that the arbitrator

suggested by the petitioner/applicant should have knowledge of civil and

mechanical engineering. The application of the petitioner for appointment of

a sole arbitrator is allowed. I hereby appoint Shri V.S. Aggarwal, a retired

Judge of this Court, as the arbitrator in this matter. The petitioner shall place

its claim before the learned arbitrator within 30 days from today and the

learned arbitrator on receipt of claim from the petitioner/applicant shall act

upon the reference and shall endeavour to pass an award as early as

possible. The arbitrator shall fix his own fees considering the nature of work

involved.

19. The petition stands disposed of with above order.

October 15, 2009                                       SHIV NARAYAN DHINGRA J.
rd




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