Delhi High Court
M/S National Highways Authority ... vs M/S Oriental Pathways (Nagpur) ... on 24 May, 2016
Author: Gita Mittal
*IN THE HIGH COURT OF DELHI AT NEW DELHI
+ FAO(OS) 464/2015 and CM No.15464/2015
Reserved on : 17th May, 2016
Date of Decision : 24thMay, 2016
M/S NATIONAL HIGHWAYS
AUTHORITY OF INDIA ..... Appellant
Through: Mr.Ravi Gupta, Sr. Advocate with
Ms.Madhu Sweta and Mr.Saurabh
Bindal, Advocates
versus
M/S ORIENTAL PATHWAYS
(NAGPUR) PVT LTD ..... Respondent
Through: Mr.Anil Airi, Sr. Advocate with
Mr.Ravi Kishan Chandna,
Mr.Aman Madan and Mr.Ishan
Khanna, Advocates
CORAM:
HON'BLE MS. JUSTICE GITA MITTAL
HON'BLE MR. JUSTICE I.S.MEHTA
JUDGMENT
GITA MITTAL, J.
1. This appeal is yet another unwarranted challenge to an order
deciding NHAI's objections (under Section 34 of the Arbitration
and Conciliation Act, 1996) against an arbitral award against it. In
the present case, the learned Single Judge has be the impugned
order dated 6th of May 2015 rejected OMP No.1112/2014 being the
objections of the National Highways Authority of India (hereinafter
referred to as "NHAI") under Section 34 of the Arbitration &
Conciliation Act, 1996, to the arbitral award dated 19th May, 2014.
2. The arbitral award was rendered in arbitration relating to a
Concession Agreement dated 10th March, 2006 for the
"Improvement, Operation and Maintenance including
Strengthening and Widening of existing 2 lane Road to 4 lane Road
dual carriage way from Km 50.000 to Km 100.00 of NH 6
(Kondhaii -Talegaon Section) in the State of Maharashtra on BOT
basis".
3. Inasmuch as, the appellant has pressed challenged only to the
award and the order relating to dispute Nos.(ii) & (iii), we confine
our consideration only to the limited challenge pressed before us.
4. For the sake of convenience, we set down hereunder the
dispute Nos.(ii) & (iii) as were pressed before the Arbitral
Tribunal:
"(ii) Dispute pertaining to the delay in securing
Environmental Clearances for the subject and the
consequent requirement of extension of the
Concession Period.
(iii). Dispute pertaining to the delay in notification
of Toll Fees for use of the Project Highway and the
consequent requirement of extension of the
Concession Period."
5. Before examining the challenge, we may note a few essential
dates relevant for the present consideration, which are as follows:-
"30.06.2005 : Bid submission date.
10.03.2006 : Date of Signing of Concession
Agreement.
06.09.2006 : Due date of Financial Close
(Financial Close - to be
obtained within 180 days of
signing of Concession
Agreement).
06.09.2006 : Appointed Date (= 180 days
from the signing of CA -
deemed to be date of
Commencement of Concession
Period)
30 months :Construction period, (Appointed
date to COD) (OPNL/OSEPL
completed the work in 18
months).
05.03.2009 :Schedule Completion date.
18.03.2008 :Actual COD (Commercial
Operations date of the project)
20 yrs : Concession Period
(commencing from appointed
date i.e. 06.09.2006).
05.09.2026 : Scheduled Concession Period -
End date."
The above schedule shows that the date of financial close
and the appointed date which was deemed to be the date of
commencement of the concession period were the same under the
contract.
6. Mr.Ravi Gupta, learned Senior Counsel for the appellant has
extensively taken us through several terms of the contract on the
aspect as to whose responsibility is to get the environmental
clearances. Obligations of the NHAI have been stipulated under
Chapter X of the Concession Agreement. Under Clause 10.1 (xvi),
it was the obligation of the NHAI to "obtain all necessary
environmental clearances/permissions in respect of the
Environmental Clearances". It is also an admitted position before
us that under Clause 4.1(c), all Central Government clearances and
permits including those relating to environmental protection and
conservation from the Ministry of Environment and Forest should
have been granted to the concessionaire i.e. the respondent.
7. Mr.Ravi Gupta, learned Senior Counsel has submitted
before us that the obligation under sub-clause (b), (c) & (d) of
Clause 4.1 of the Concession Agreement was that of the NHAI. We
find that it is so stipulated under Clause 4.3 of the Agreement.
8. As per Clause 4.1, these clearances and permissions were
conditions precedent which had to be fulfilled on or before the
financial close. The expression "Financial Close" has been defined
as the date on which the Financing Documents providing for
funding by the Senior Lenders have become effective and the
Concessionaire has immediate access to such funding under the
Financing Documents.
As noted above, 6th September, 2006 was stipulated as the
due date of financial close in the present case. However, the NHAI
has obtained environmental clearances only on 27th December,
2006 and, therefore, delayed the same by a period of 112 days.
9. The challenge before us revolves around the admitted
inability of the NHAI to obtain financial clearances as stipulated
under the contract. The Learned Single Judge as well as the
Arbitral Tribunal have noted that by a letter dated 5 th September,
2006, the respondent had informed the NHAI that its senior lenders
were insisting on prior environmental clearance before executing
the relevant financing documents for disbursal of funding. The
respondent, therefore, submitted that NHAI's failure to obtain
environmental clearances was a "material breach" of the
Concession Agreement, which did have "material adverse effect".
It was further their case throughout that although it was able to
complete the project in 18 months, however, had the environmental
clearances been obtained within time the lenders could have
released the funds earlier and the project would have been
completed by it within 15 months instead of the 18 month period.
10. In this regard, for the sake of clarity we extract the definition
of expression "Material Breach" and "Material Adverse Effect" as
stated by the parties in the Concession Agreement itself, which
read as under :
"Material Breach" means a breach by either
Party of any of its obligations in this Agreement
which shall be deemed to have a Material Adverse
Effect on the Project and which it shall have failed
to cure within the Cure Period.
"Material Adverse Effect" means material
adverse effect of any act or event on the ability of
either Party to perform any of its obligations under
and in accordance with the provisions of this
Agreement."
11. Inasmuch as the submissions of the appellant have revolved
on the description of the Force Majeure in the contract, we also set
down hereunder the relevant portion of the Force Majeure Events
under the agreement between the parties :
"XXIX. Force Majeure
29.1 Force Majeure Event: As used in this
Agreement, a Force Majeure Event shall mean
occurrence in India of any or all of Non Political
Event, Indirect Political Event and/or Political
Event as defined in Clauses 29.2, 29.3 and 29.4
respectively hereinafter which prevent the Party
claiming Force Majeure (the "Affected Party")
from performing its obligations under this
Agreement and which act or event is (i) beyond the
reasonable control and not arising out of the fault
of the Affected Party, (ii) the Affected Party has
been unable to overcome such act or event by the
exercise of due diligence and reasonable efforts,
skill and care, including through expenditure of
reasonable sums of money and (iii) has a Material
Adverse Effect on the Project.
29.2 Non Political Force Majeure Events: For
purposes of Clause 29.1 Non-Political Events shall
mean one or more of the following acts or events:-
XXX XXX XXX
(v) Any judgment or order of any court of
competent jurisdiction or statutory authority in
India made against the Concessionaire in any
proceedings for reasons other than failure of the
Concessionaire to comply with any Applicable Law
or Applicable Permits or on account of breach
thereof, or of any contract, or enforcement of this
Agreement or exercise of any of its rights under this
Agreement by NHAI; or
(vi) Any event or circumstance of a nature
analogous to any of the foregoing."
12. Mr.Ravi Gupta, learned Senior Counsel has also drawn our
attention to the following extract of Clause 29.4 :
"29.4 Political Force Majeure Events: For
purposes of Clause 29.1, Political Event shall
mean one or more of the following acts or events
by or on account GOI, NHAI, GOM or any other
Governmental Agency:
(i) XXX XXX XXX
(ii) XXX XXX XXX
(iii) unlawful or unauthorised or without
jurisdiction revocation of, or refusal to review or
grant without valid cause any consent or approval
required by the Concessionaire or any of the
Contractors to perform their respective obligations
under the Project Agreements (other than a
consent the obtaining of which is Condition
Precedent) provided that such delay, modification,
denial, refusal or revocation did not result from
the Concessionaire's or any Contractor's inability
or failure to comply with any condition relating to
grant, maintenance or renewal of such consents or
permits."
13. Learned Senior Counsels for both sides have placed reliance
on the following extract of Clause 29.6 :-
"29.6 Effect of Force Majeure Event after
Financial Close: Upon occurrence of any Force
Majeure Event after Financial Close, the following
shall apply:
(a) There shall be no Termination of this
Agreement except as provided in Clause 29.8;
(b) Where the Force Majeure Event occurs
before COD, the dates set forth in the Project
Completion Schedule, and the Concession Period
shall be extended by the period for which such
Force Majeure Event shall subsist;
(c ) Where a Force Majeure Event occurs after
COD, the Concessionaire shall continue to make
all reasonable efforts to collect Fees, but if he is
unable to collect Fees during the subsistence of
such Force Majeure Event, the Concession Period
shall be extended by the period for which
collection of Fees remains suspended on account
thereof; and
(d) Costs arising out of or concerning such
Force Majeure Event shall be borne in accordance
with the provisions of Clause 29.7.
14. We may also extract the relevant terms of the contract
relating to compensation under Chapter 31.2, which reads as
under:-
"XXXI. COMPENSATION FOR BREACH OF
AGREEMENT
31.2 In the event of NHAI being in material
default of this Agreement and such default is cured
before Termination, NHAI shall pay to the
Concessionaire as compensation all direct
additional costs suffered or incurred by the
Concessionaire arising out of such material
default by NHAI, in one lumpsum within 30 (thirty)
days of receiving the demand or at NHAI's option
in 3 (three) equal semi-annual instalments with
interest @ SBI PLR plus 2% (two per cent)."
15. Before us, the NHAI has challenged the Arbitral Award and
the judgment of the learned Single Judge contending that the only
event for grant of extension of the period Concession Agreement
was stipulated under Clauses 29.6 (b) & (c) in the eventuality of a
Force Majeure Event occurring before the COD or after the COD.
The submission is that in the Arbitral Award the Arbitrators have
concluded that NHAI was in material breach of the agreement and
have proceeded to grant extension of the Concession Agreement
under Clause 31.2 which is completely impermissible. The
submission is that under Clause 31.2, only the monetary amount
could have been granted.
16. It is additionally urged that despite the delay in obtaining the
environmental clearance, the respondent had failed to make out any
case of material breach and they were also not entitled to monetary
damage under Clause 31.2. In support of this submission, it is
urged that the respondent had commenced work on the project even
before the grant of environmental clearances and that, the very fact.
NHAI would submit that the very fact that the concessionaire was
able to complete the project within a period of 18 months, instead
of the stipulated 30 months.
17. Mr.Ravi Gupta, learned Senior Counsel would also state that
consequently, the delay in obtaining environmental clearances
could not be characterized as "material breach" having a "material
adverse effect" for this reason. It is also the submission of Mr.Ravi
Gupta that no costs enured to the respondent as it completed the
project in 18 months instead of permissible 30 months. It is
submitted that consequently, there was no loss at all which was
liable to be compensated. It is further submitted that Clause 31.2
spelt out that even if it could be held that there was "material
breach" of the agreement, in such eventuality the concessionaire
was only required to pay monetary compensation and that the
Arbitral Tribunal could not have granted extension of concession
period by three months. It is submitted that extension of the
concession period under the Agreement is contemplated only under
Clause 29.6(b) and (C) which is relateable only to the occurrence
of a Force Majeure Event which was not so in the present case.
18. In this regard our attention is drawn to para Nos.2.13 to 2.16
of the claims made by the claimant before the Arbitral Tribunal
which read as under :
"Material Breach
02.13: It is evident from the above that the
Concession Period and the rights of the
Concessionaire to perform are subject to fulfilment
of the terms and conditions by the parties.
Environmental clearance is a condition precedent
that is required under Clauses 4.1 and 10.1 to
have been obtained by NHAI well before
Financial Close. NHAI's failure to do so is a
Material Breach of the Concession Agreement,
having a Material Adverse Effect as detailed
herein below.
Additional Cost
02.14: As a result of the delay in securing
Environmental Clearance, the following
additional cost implications have arisen:
a) Increase in cost of capital to the
Concessionaire due to environmental
clearance delay impeding disbursal of
funds b lenders;
b) Delayed commencement of the works
causing additional overheads costs
(including towards financing, guarantees,
insurances etc.) to the Concessionaire;
c) Idling costs of site overheads including
salaries of staff and workmen, plant &
machinery etc. and uncompensated
corporate overheads and loss of profit due
to delays faced by the EPF Contractor;
d) Additional cost of acceleration for timely
completion, towards increased resource
deployment;
02.15: As a result of the continuing delay in
obtaining the necessary environmental clearance
by NHAI, we have been deprived of access to
funds from Lenders for proceeding further with
the works. We have on our part taken the risk and
contributed the equity component of the
financing and we have exhausted such amounts
towards the pre-construction activities, utilities,
relocation, obstructions removal and advances to
EPC Contractor for capital expenditure and other
construction activities in the Project Highway.
Until the environmental clearance was secured by
NHAI resulting in access to funds from Lenders,
the cash flow constraint continued to cripple the
progress, for no fault of ours.
02.16: The delay in obtaining the environmental
clearance affected the commencement schedule
by a corresponding period. During this period of
delay, interest rates went up and cement and
diesel prices went up, without commensurate
increase in toll growth. The costs to the
Concessionaire increased disproportionately
higher than the projected revenues, causing an
adverse effect on the economic viability of the
Concession. Since we are not responsible for the
delay in, securing environmental clearance, the
consequent additional costs as above are due for
compensation to us."
(Emphasis supplied)
19. Mr.Ravi Gupta, learned Senior Counsel has also drawn our
attention to the following prayer made by the respondent contractor
before the Arbitral Tribunal:-
"Prayer for Award by the Arbitral Tribunal
02:26 We hereby pray and request the Arbitral
Tribunal to kindly consider the submissions made
hereinabove in the context of the relevant Contract
provisions and award payment as below by the
NHAI to us :
a. That the Appointed Date, signifying the
commencement of the Concession Period be
reckoned as 27th December 2006 instead of 6th
September 2006. That the Concession Period be
considered accordingly thereafter, re-setting the
end of the Concession Period by 112 days on this
account;
b. That the additional costs incurred by us on
account of the delay in obtaining environmental
clearance be compensated to us;
c. That the additional grant to compensate the
erosion of revenue gains due to delayed start of the
Concession Period be paid to us;
d. That interest on the additional cost and
additional grant as requested above be paid to us
from the dates they became due i.e. 6th September
2006 till the date of payment, @ SBI PLR plus two
per cent, as enshrined in the Concession
Agreement."
20. Let us firstly examine the following reasoning of the Arbitral
Tribunal on this claim of the respondent in para Nos.25.02 to
25.13:
"25.02: Clause 10.1 (xvi) read with Clause 4.1 of
the Concession Agreement mandates that
Respondent shall obtain the environmental
clearance on or before the financial close. There
is documentary evidence and even the Respondent
has also admitted that there was delay in
obtaining the environmental clearance. This
clearly evidences, that Respondent has not
discharged its obligation to provide
environmental clearance on or before the
financial close and thus, breached the provisions
of the Concession Agreement. However, the
Respondent is contending that this delay will not
constitute any material breach of contract as
there was no adverse effect on the progress of the
work.
25.03: The Clause 1.1 of the Concession
Agreement defines material breach as a breach by
either Party of any of its obligation in this
Agreement which shall be deemed to have a
Material Adverse effect on the Project and which
it shall have failed to cure within the Cure Period.
25.04: Compensation for breach of agreement is
governed by Clause 31.2 which states that in the
event of NHAI being in material default of this
agreement and such default is cured before
termination, NHAI shall pay to the Concessioner
as compensation all direct additional cost
suffered or incurred by the Concessioner arising
out of such material default by NHAI.
25.05: AT has observed that Claimant was
unable to get access to lender's fund till
obtaining of environmental clearance; this
indeed had adversely affected on the ability of
the performance of the Claimant. Under no
circumstances, we can assume that non-access of
funds will not affect the performance of the
Contractor. In view of the above, we are of the
considered opinion that delay in obtaining
environmental clearance is a material breach of
the contract by the Respondent and it could
cause material adverse effect on the ability of the
contractor's performance.
25.06: From Exhibit CD-05 (Page 464) it is
evident that the lender (Canara Bank) has
intimated to the Respondent that "The Debt
funds are available for disbursement as per the
financing documents, subject to fulfilment of
NHAI's obligation to satisfy Condition
Precedent 4.1 (c) of the Concession Agreement".
Clause 4.1(c) is a condition precedent for
obtaining environmental clearance by NHAI on
or before financial closure.
25.07: The facts brought on record prove that
there was a delay of 112 days in obtaining the
environmental clearance by NHAI, due to which
the Claimant was not in a position to have access
to debt funds in view of the specific condition put
by the lender. The Claimant is contending that
they would have been able to complete the project
within 15 months duration, if there had been no
delay in obtaining the Environmental clearance.
25.08: The Respondent has not controverted this
agreement of the Claimant. However, the
Respondent has only contended that the progress
achieved in the initial period from September,
2006 to January, 2007 was within the Claimant's
planned progress.
25.09: The Claimant contends that by using their
equity in the initial period they were in a position
to achieve the progress as planned, but when the
debt funds were available they completed the
work in 18 months against a planned period of
30 months. The Claimant further contend that if
there had been no delay in obtaining
environmental clearance and if they had excess
to the debt funds from day one, they would have
completed the work within 15 months. There is
no counter to this contention by the Respondent.
25.10: AT finds that there is substance in the
contention of the Claimant. As such the Claimant
has been subjected to a delay of three months in
completion of the project, because of delay in
obtaining the environmental clearance by the
Respondent."
(Emphasis by us)
21. Having held on admitted, undisputed facts that the NHAI
was in material breach of the Concession Agreement, we now
come to the examination of appropriate relief by the Arbitral
Tribunal in para 25.11 and thereafter of the Award which reads as
under :
"25.11: Clause 31.2 of the Concession
Agreement, a well as Section 73 of the Indian
Contract Act, which is a basic law, recognize that
the compensation is to be given for the
loss/damage incurred by the injured party
wherever there is breach of Contract by other
party. The best mode of compensation is by way
of putting the injured party (Claimant) in the
same position as if there had been no breach of
contract. The Claimant would have been entitled
to collection of toll for additional three months if
there had been no delay in obtaining the
environmental clearance. So Claimant would be
compensated appropriately if the Concession
period is extended by three months. As such, in
facts, and circumstances of the case, AT orders
for extension of concession period by three
months on this count.
25.12: The Claimant had deposited Rs.8.12 lacs
to various Govt. departments as per the
instructions of the Respondent, though said
amount was to be borne by the Respondent as per
provision of Clause 10.1 (xiv), which clearly
provides that Respondent had to bear all the
expenses as per the demand note raised by
various Govt. agencies in respect of
environmental clearances, etc. The Respondent
has also not denied the above deposition of the
amount of the Claimant.
25.13: AT is of the view that the Claimant is
entitled for the refund of Rs.8.12 lacs paid by the
Claimant to the appropriate authority for
obtaining the Environmental clearance along with
the interest at SBI PLR + 2% as provided in the
Concession Agreement for the delayed payments.
At present the PLR as fixed and published, by the
State Bank of India, is 12.25%. Therefore,
allowable interest will be 12.25+ 2.00 = 14.25.
Interest so worked out is Rs.5,86,425.00 from dt.
25.04.2009 till the date of this award. (1850
days). Respondent is directed to pay the awarded
sum of Rs.13,98,475.00 (Rs.8,12,000.00 +
Rs.5,86,425.00) within 90 days of publishing of
this award. In case, awarded sum is not paid with
90 days, Claimant is entitled to future interest @
SBI PLR + 2% p.a. on the awarded sum from the
date of award till actual payment."
(Emphasis by us)
22. The parameters within which a Court shall examine the
objections to an Arbitral Tribunal have been laid down by the
Supreme Court in its pronouncement reported as 2015 (3) SCC 49
Associate Builders vs. Delhi Development Authority inter-alia on
the following terms:-
"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.
XXX XXX XXX
31. The third juristic principle is that a decision
which is perverse or so irrational that no
reasonable person would have arrived at the same
is important and requires some degree of
explanation. It is settled law that where-
(i) a finding is based on no evidence, or
(ii) an Arbitral Tribunal takes into account
something irrelevant to the decision which it
arrives at; or
(iii) ignores vital evidence in arriving at its
decision, such decision would necessarily be
perverse.
32. A good working test of perversity is contained
in two judgments. In H.B. Gandhi, Excise and
Taxation Officer-cum-Assessing Authority v. Gopi
Nath & Sons, it was held: (SCC p. 317, para 7)
"7. ...... It is, no doubt, true that if a finding
of fact is arrived at by ignoring or excluding
relevant material or by taking into
consideration irrelevant material or if the
finding so outrageously defies logic as to
suffer from the vice of irrationality incurring
the blame of being perverse, then, the
finding is rendered infirm in law.
"In Kuldeep Singh v. Commr. of Police, it
was held: (SCC p.14, para 10)
"10. A broad distinction has, therefore, to
be maintained between the decisions which
are perverse and those which are not. If a
decision is arrived at on no evidence or
evidence which is thoroughly unreliable and
no reasonable person would act upon it, the
order would be perverse. But if there is
some evidence on record which is
acceptable and which could be relied upon,
howsoever compendious it may be, the
conclusions would not be treated as
perverse and the findings would not be
interfered with."
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 score1 .
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., 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 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."
XXX XXX XXX
42. In the 1996 Act, this principle is substituted by
the 'patent illegality' principle which, in turn,
contains three sub heads:
42.1. (a) A contravention of the substantive law of
India would result in the death knell of an arbitral
award. This must be understood in the sense that
such illegality must go to the root of the matter and
cannot be of a trivial nature. This again is a really
a contravention of Section 28(1)(a) of the Act,
which reads as under:
"28. Rules applicable to substance of
dispute.--(1) Where the place of arbitration
is situated in India--
(a) in an arbitration other than an
international commercial arbitration, the
arbitral tribunal shall decide the dispute
submitted to arbitration in accordance with
the substantive law for the time being in
force in India;"
42.2. (b) A contravention of the Arbitration Act
itself would be regarded as a patent illegality- for
example if an arbitrator gives no reasons for an
award in contravention of section 31(3) of the Act,
such award will be liable to be set aside.
42.3. (c) Equally, the third sub-head of patent
illegality is really a contravention of Section 28 (3)
of the Arbitration Act, which reads as under:
"28. Rules applicable to substance of
dispute.--(1)-(2)
(3) In all cases, the arbitral tribunal shall
decide in accordance with the terms of the
contract and shall take into account the
usages of the trade applicable to the
transaction."
This last contravention must be understood
with a caveat. An arbitral tribunal must
decide in accordance with the terms of the
contract, but if an arbitrator construes a
term of the contract in a reasonable manner,
it will not mean that the award can be set
aside on this ground. Construction of the
terms of a contract is primarily for an
arbitrator to decide unless the arbitrator
construes the contract in such a way that it
could be said to be something that no fair
minded or reasonable person could do.
43. In McDermott International Inc. v. Burn
Standard Co. Ltd., this Court held as under: (SCC
pp. 225-26, paras 112-13)
"112. It is trite that the terms of the contract can
be express or implied. The conduct of the parties
would also be a relevant factor in the matter of
construction of a contract. The construction of the
contract agreement is within the jurisdiction of the
arbitrators having regard to the wide nature,
scope and ambit of the arbitration agreement and
they cannot be said to have misdirected themselves
in passing the award by taking into consideration
the conduct of the parties. It is also trite that
correspondences exchanged by the parties are
required to be taken into consideration for the
purpose of construction of a contract.
Interpretation of a contract is a matter for the
arbitrator to determine, even if it gives rise to
determination of a question of law. (See Pure
Helium India (P) Ltd. v. Oil and Natural Gas
Commission and D.D. Sharma v. Union of India].
113. Once, thus, it is held that the arbitrator
had the jurisdiction, no further question
shall be raised and the court will not
exercise its jurisdiction unless it is found
that there exists any bar on the face of the
award."
XXX XXX XXX
48. The Division Bench while considering claims
9, 10, 11 and 15 found fault with the application of
Hudson's formula which was set out by the learned
Arbitrator in order to arrive at the claim made
under these heads. The Division Bench said that it
was not possible for an Arbitrator to mechanically
apply a certain formula however well understood
in the trade. This itself is going outside the
jurisdiction to set aside an award under Section 34
in as much as in McDermott case, it was held:
(SCC pp.222-24, paras 104-06)
"104. It is not in dispute that MII had
examined one Mr D.J. Parson to prove the
said claim. The said witness calculated the
increased overheads and loss of profit on the
basis of the formula laid down in a manual
published by the Mechanical Contractors
Association of America entitled "Change
Orders, Overtime, Productivity" commonly
known as the Emden Formula. The said
formula is said to be widely accepted in
construction contracts for computing
increased overheads and loss of profit. Mr D.J.
Parson is said to have brought out the
additional project management cost at US$
1,109,500. We may at this juncture notice the
different formulas applicable in this behalf.
(a) Hudson Formula: In Hudson's Building
and Engineering Contracts, Hudson
Formula is stated in the following terms:
'Contract head office × Contract sum × Period of
Overhead and profit Contract period delay'
percentage
In the Hudson Formula, the head office overhead
percentage is taken from the contract. Although the
Hudson Formula has received judicial support in
many cases, it has been criticised principally
because it adopts the head office overhead
percentage from the contract as the factor for
calculating the costs, and this may bear little or no
relation to the actual head office costs of the
contractor.
(b) Emden Formula: In Emden's Building
Contracts and Practice, the Emden
Formula is stated in the following terms:
Head office overhead × Contract sum × Period
and profit of delay
100 Contract period
Using the Emden Formula, the head office
overhead percentage is arrived at by dividing the
total overhead cost and profit of the contractor's
organisation as a whole by the total turnover. This
formula has the advantage of using the
contractor's actual head office overhead and profit
percentage rather than those contained in the
contract. This formula has been widely applied
and has received judicial support in a number of
cases including Norwest Holst Construction Ltd. v.
Coop. Wholesale Society Ltd., Beechwood
Development Co. (Scotland) Ltd. v. Mitchell and
Harvey Shopfitters Ltd. v. Adi Ltd.
(c) Eichleay Formula: The Eichleay Formula was
evolved in America and derives its name from a
case heard by the Armed Services Board of
Contract Appeals, Eichleay Corporation. It is
applied in the following manner:
'Step 1
Contract billings × Total overhead = Overhead
Total billings for for contract allocable
contract period period the contract
Step 2
Allocable overhead = Daily overhead rate
Total days of contract
Step 3
Daily contract × Number of = Amount of
overhead rate days of delay unabsorbed
overhead'
This formula is used where it is not possible to
prove loss of opportunity and the claim is based on
actual cost. It can be seen from the formula that
the total head office overhead during the contract
period is first determined by comparing the value
of work carried out in the contract period for the
project with the value of work carried out by the
contractor as a whole for the contract period. A
share of head office overheads for the contractor is
allocated in the same ratio and expressed as a
lump sum to the particular contract. The amount of
head office overhead allocated to the particular
contract is then expressed as a weekly amount by
dividing it by the contract period. The period of
delay is then multiplied by the weekly amount to
give the total sum claimed. The Eichleay Formula
is regarded by the Federal Circuit Courts of
America as the exclusive means for compensating
a contractor for overhead expenses.
105. Before us several American decisions
have been referred to by Mr. Dipankar Gupta
in aid of his submission that the Emden
Formula has since been widely accepted by
the American courts being Nicon Inc. v.
United States, Gladwynne Construction Co. v.
Mayor and City Council of Baltimore and
Charles G. William Construction Inc. v.
White.
106. We do not intend to delve deep into the
matter as it is an accepted position that
different formulae can be applied in different
circumstances and the question as to whether
damages should be computed by taking
recourse to one or the other formula, having
regard to the facts and circumstances of a
particular case, would eminently fall within
the domain of the arbitrator."
XXX XXX XXX
52. It is most unfortunate that the Division Bench
did not advert to this crucial document at all. This
document shows not only t hat the Division Bench
was wholly incorrect in its conclusion that the
contractor has tried to pull the wool over the eyes
over the DDA but it should also have realized that
the DDA itself has stated that the work has been
carried out generally to its satisfaction barring
some extremely minor defects which are capable of
rectification. It is clear, therefore, that the Division
Bench obviously exceeded its jurisdiction in
interfering with a pure finding of fact forgetting
that the Arbitrator is the sole Judge of the quantity
and quality of evidence before him and
unnecessarily bringing in facts which were neither
pleaded nor proved and ignoring the vital
completion certificate granted by the DDA itself.
The Division Bench also went wrong in stating that
as the work completed was only to the extent of Rs.
62,84,845/-, Hudson's formula should have been
applied taking this figure into account and not the
entire contract value of Rs.87,66,678/- into
account.
XXX XXX XXX
56. Here again, the Division Bench has interfered
wrongly with the arbitral award on several counts.
It had no business to enter into a pure question of
fact to set aside the Arbitrator for having applied a
formula of 20 months instead of 25 months.
Though this would inure in favour of the appellant,
it is clear that the appellant did not file any cross
objection on this score. Also, it is extremely
curious that the Division Bench found that an
adjustment would have to be made with claims
awarded under Claims 2, 3 and 4 which are
entirely separate and independent claims and have
nothing to do with Claims 12 and 13. The formula
then applied by the Division Bench was that it
would itself do "rough and ready justice". We are
at a complete loss to understand how this can be
done by any court under the jurisdiction exercised
under Section 34 of the Arbitration Act. As has
been held above, the expression "justice" when it
comes to setting aside an award under the public
policy ground can only mean that an award shocks
the conscience of the court. It cannot possibly
include what the court thinks is unjust on the facts
of a case for which it then seeks to substitute its
view for the Arbitrator's view and does what it
considers to be "justice". With great respect to the
Division Bench, the whole approach to setting
aside arbitral awards is incorrect. The Division
Bench has lost sight of the fact that it is not a first
appellate court and cannot interfere with errors of
fact."
23. The Learned Single Judge has additionally construed that the
failure to obtain the environmental clearances was beyond the
reasonable control of either of the parties and was also covered
under Clause 29.2(6) which defined "any event or circumstance of
a nature analogous to any of the foregoing as a Force Majeure
Event". The learned Single Judge has also held that delay in
obtaining environmental clearances was beyond the reasonable
control of either of the parties and, therefore, was covered under
Clause 29.2.
According to the learned Single Judge, under Clause 29.6(c)
where a Force Majeure Event occurs after the commercial operation
date, the concession period shall stand extended during the
subsistence of such force majeure event. Consequently the learned
Single Judge found no error committed by the Arbitral Tribunal in
granting the relief to the respondent.
24. It is submitted by Mr. Ravi Gupta, learned senior counsel
appearing for the appellant that once a specific formula is
mentioned as compensation which is to be awarded upon
happening of a specific contingency, the Arbitrator cannot adopt
any other. It is submitted that extension of the period could be
granted only for the Force Majeure event. It is submitted that the
Award has to be set aside as it was not so in the present case.
25. We find that neither was there any contest to the
respondent's claim that if the environmental clearances had been
obtained as scheduled, the project would have been completed
within 15 months or the fact that the respondent would have access
to the debt funds also, if the environmental clearances had been
obtained on time. Before us the NHAI also does not dispute that
obtaining environmental clearances was its responsibility and that
there was a delay of 112 days in obtaining the same. The Arbitral
Tribunal has concluded that if the permission had been obtained in
time, the respondent would have been able to collect toll for
additional three months, as it would have completed the
construction that much in advance. The learned Single Judge has
also noted that the respondent was only seeking entitlement to
additional costs during the period of delay inasmuch as interest
rates as well as cement and diesel rates went up without any
commensurate increase in the toll growth.
26. It is at this point that NHAI asserts its challenge to para
25.11 of the Award.
27. Para 25.11 has to be read as a whole. We are of the view that
NHAI is unnecessarily quibbling with words and attempting to
create issue a non-existent when none exists.
28. The Arbitral Tribunal has clearly concluded that the NHAI
was in material breach of the agreement entitling the respondent to
compensation by virtue of Clause 31.2. Having so concluded the
Arbitral Tribunal was required to find appropriate method for
computation of this compensation.
29. In Clause 25.11 of the Award, the Tribunal has adopted the
mode of putting the claimant i.e. the respondent before us in the
same position that it would have occupied, if there had been no
breach. The Arbitral Tribunal has thereafter derived the formula for
doing so by holding that the amount equivalent to 3 months of toll
collection would be adequate compensation for the claimant.
Having so concluded, the Tribunal has merely couched its decision
for such compensation as the toll equivalent to extension of
concession period by three months on this count.
30. The Learned Single Judge has observed that there was no
patent illegality in the conclusions arrived at by the Arbitral
Tribunal. It is also held that the Arbitral Tribunal has applied the
applicable law. It was not the NHAI's objection before the learned
Single Judge that the Arbitral Tribunal had overlooked any
evidence on record or any provision of the concessional agreement.
It has also been held that the view taken by the Arbitral Tribunal
was a plausible view.
31. The findings of the Arbitral Tribunal upheld by the learned
Single Judge are based on evidence and relevant material placed
before the Arbitral Tribunal. It is not the NHAI's case that the
Arbitral Tribunal has ignored any vital evidence. There is no
challenge to the construction of the terms of the contract which the
Arbitral Tribunal has done that the same is not in the manner in
which a reasonable and fair person would do. The NHAI has also
not urged that the arbitrators have gone beyond the nature, scope
and ambit of the arbitration agreement or that the Award is
contrary to law or opposed to public policy.
32. It is not disputed before us that for the period of 112 days,
the delay which would have enured to the respondent was a
substantial amount and that such delay has caused material adverse
loss to the respondent. The Tribunal has carefully construed all
relevant facts and circumstances. In fact the real impact of the
award is that the respondent has been held entitled to the earnings
of the toll for the period of three months. Simply because the
Arbitrator has used the expression "concession period is extended
by 3 months", does not change the nature of the award. The award
is undeniably that of compensation under Clause 31.2. The Arbitral
Tribunal has merely computed the same as an amount equivalent to
the toll of three months.
33. To this extent we differ with the reasoning of the learned
Single Judge, who appears to have overlooked the expression used
by the Arbitrator in para 25.11 where the Tribunal refers "best
mode of compensation" and goes ahead to arrive at the above mode
of computing the compensation. We are therefore, unable to argue
with the learned Single Judge that the respondent has been awarded
extension of contract under Clause 31.2 of the Concession
Agreement.
34. It is trite that it is open to the Arbitrator to adopt any
reasonable formula for arriving at the computation of the
compensation. In this regard, reference may be made to the
pronouncement of the Supreme Court in 2015 3 SCC 49, Associate
Builders v. Delhi Development Authority extracted above.
In para 43 of the judgment, the Supreme Court has held that
the construction of the contract by the Arbitrator is also within the
jurisdiction of the Arbitrator. It is trite law that such construction
is clearly beyond the scope of consideration by the Court while
considering objections under Section 34 of the Arbitration and
Conciliation Act, 1996.
In paragraph 56 of the judgment, the Supreme Court has held
that the adoption and application of a formula by an Arbitrator is a
pure question of fact. Clearly, the same is beyond the purview of
objections under Section 34 of the Arbitration and Conciliation
Act.
35. In view of the above statement of law, the objections of
NHAI to the Arbitral Award were clearly beyond the scope and
purview of Section 34 of the Arbitration and Conciliation Act and
have been rightly rejected by the learned Single Judge.
36. We note that during the course of hearing, we had repeatedly
queried NHAI if it would be satisfied if the direction was modified
to read as an award of money equivalent to computed as average of
the entire concession period multiplied for 112 days. This was not
acceptable to NHAI.
37. Despite the well settled position in law, NHAI has dragged
the respondent into this clearly unwarranted litigation. The appeal
is completely devoid of factual or legal merit which renders the
NHAI for punitive costs. The payment of the award amount by
NHAI to the respondent has also been unreasonably delayed. This
litigation falls squarely within the meaning of the expression in
Commercial Courts, Commercial Division and Commercial
Appellate Division of High Courts Act, 2015.
38. The appeal is consequently, dismissed and NHAI is liable to
be burdened with heavy costs which is quantified at `5,00,000/-.
Therefore, while dismissing the present appeal, it is directed that
the NHAI shall pay costs of `5,00,000/- to the respondent.
GITA MITTAL
(JUDGE)
I.S.MEHTA
(JUDGE)
MAY 24, 2016/km
